Cisco (NASDAQ:CSCO), which competes with Juniper (NYSE:JNPR) in the router and switch hardware business, also makes a significant amount of money by providing troubleshooting and maintenance services to its hardware customers. We estimate that 18% of the $24 Trefis price estimate for Cisco’s stock comes from its Network Services business.
Services Help Customers
Cisco’s hardware customers, primarily businesses and internet service providers, often do not wish to devote in-house resources to fixing and upgrading their networks. Instead, they prefer that network equipment manufacturers, like Cisco and Juniper, maintain and upgrade their systems for them. This saves them the hassle of devoting time and resources to non-core activities.
Services Depend on Hardware
Cisco’s network services business depends directly on its equipment (router, switch) sales. The more switches and routers Cisco is able to sell, the more maintenance and troubleshooting services it can provide to its customers.
Historically Network Services revenues (as % of network equipment revenues) has remained range-bound around 22% to 23%, which is comparable to its competitor Juniper.
Global IP Traffic Growth Will Drive Network Services Revenues
Demand for Cisco’s router and switch hardware is driven by the amount of data traffic that businesses must handle. We expect that global IP data traffic will continue to grow at a rapid pace which will keep demand for Cisco’s network equipment and network services high. Cisco estimates that global IP traffic will grow at an annualized rate of about 40% over the next 4 years with video constituting nearly 60% of all consumer data on the internet by 2013.
You can modify our forecast above to see how Cisco’s stock could be impacted if the ratio of network services revenue to network equipment revenue were to increase as a result of higher data traffic increasing the complexity and maintenance requirements of future networks.
For additional analysis and forecasts, here is our complete model for Cisco’s stock.
Disclosure: No positions