Cisco Continues Evolution Into Software

Sep.27.12 | About: Cisco Systems, (CSCO)

Cisco (NASDAQ:CSCO) has made its third software purchase so far this year, picking up ThinkSmart Technologies for an undisclosed sum. Previously, it paid $5 billion for an Israeli video software company, NDS, and bought Virtuata, which specializes in security for virtual machines.

What is going on? The simple answer is that the company is trying to create value-add for hardware that is becoming commoditized. But this also means the company is looking to create a new kind of sale aimed at a new kind of customer.

Take ThinkSmart. ISPs and telephone companies can't be the buyers here. This makes the most sense for shopping malls, shopping centers, and maybe for companies building out ISP networks on what the Brits call "High Streets." The output is supposed to be reports, delivered in real time, that can give a retailer hints on how to increase sales or adjust staffing levels. Nothing wrong with that, but is Cisco's sales force up to it?

Obviously they need to be, because as noted this is part of a series of moves by the company as it evolves from a networking hardware company into a software-and-hardware play. What is interesting is that these moves hold the promise of Cisco prospering in the after-market created by rival hardware makers' sales.

The question investors need to ask is whether this can make up for the margin compression and commoditization happening across Cisco's traditional product line. I personally find that doubtful. But if you think it just might work, consider some options on the buy side for November or February, after its next two earnings announcements.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.