Looking to the Future With Acquisitions & Services

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

2012 was a big year for Cisco (NASDAQ: CSCO) in terms of its acquisitions, executive changes, and competitive performance. The company made substantive progress in its transition process from a mere networking company to a complete IT solutions company. It recently held an analyst day conference to share its strategies for the future. During the conference it also launched its global marketing campaign 'Tomorrow Starts Here' on a huge scale that would specify its plans to become number one IT player in the world. This $100 million campaign replaces its older tag line 'The Human Network' and highlights the importance of internet in everything we do. The shift revolves around the Cloud and mobile technology, and the opportunities for Cisco from this.

Cisco was very aggressive on its M&A strategy in 2012 to enable it to handle the various technology shifts in a better way. Its two main acquisitions were Cloupia and Meraki that were focused on expanding its base in Cloud based offerings. The company is undertaking more acquisitions to further enhance its current competencies in networking segments. More recently, Cisco acquired Cariden Technologies for ~$141 million that provides software and network planning to ISPs. With this acquisition, Cisco will be benefiting from SDN (software defined networking) offerings from Cariden for its core service provider customers. It will also include Cariden's worthy experience in capacity planning and management tools for IP/MPLS networks. It will be merged with the company's Service Provider Networking Group and is expected to close by mid of 2013.

With the SDN market witnessing new threats, this acquisition will help Cisco to sustain its leading position. Let us now talk about the other players on how they are planning their strategies in the SDN market to remain competitive to Cisco.

Juniper Networks (NYSE: JNPR) with its high-performance network solutions, is one of the strongest rivals to Cisco. On the same lines of Cisco, Juniper also acquired a SDN firm Contrail Systems for ~$176 million. Contrail focuses on Enterprise based SDN controllers and will surely enhance Juniper's portfolio of solutions. Following this acquisition, the company is expected to release various distributed controllers for SDN in 2013. SDN as a technology is gaining importance among the Enterprises in comparison to routers and switches as it is more flexible and cost effective. Therefore, Juniper is looking at targeting a larger base of customers with this acquisition. All the major players in the SDN market are looking out for start-ups to enhance their portfolios. Another strong competitor to Cisco, VMware (NYSE: VMW) was the one which actually fuelled the competition in the SDN market with its acquisition of Nicira in mid of 2012. Via this deal, VMware aimed at reducing the hardware costs for the companies with a more efficient way to manage networks. The company is planning to launch a SDN solution which will provide greater flexibility to the Enterprises. It will allow working with virtualization platforms from other vendors as well. Enterprises are currently looking for such offerings which are more flexible and are able to cope up with the changing applications and services. In such a scenario VMware's solutions would be a great hit and is expected to come to the market by mid-2013.

Coming back to Cisco, I am placing my confidence on the two below mentioned aspects which will generate better revenues for the company.

Planned Acquisition - The acquisitions strategy of Cisco will continue at an accelerated pace in the future as well. Cisco is trying to adopt various new technologies to keep up with the emerging trends. The company recently announced its plan to buy BroadHop which provides policy management solutions. BroadHop provides its services to around 90 telecom wire-line and mobile operator networks. It will be integrated with Cisco's Service Provider Mobility division and will enhance the company's capabilities which can be merged with its ONE (Open Network Environment) architecture and UCS server.

Services Segment - Cisco is gaining heavily from its services segment as it has become a major part of its revenue in the last 5-6 years. It has shown a growth of ~31% during this period and continues to be a high priority segment in 2013. Looking at the charts given below, we can see that how the services segment has grown over the years. Cisco is currently looking at improving its quality of services for its customers. I feel the service segment will contribute ~30% to the revenues in the next 1-2 years. Also its gross margins are higher than the company's products segment which would lead to higher profitability for the company. On the other hand its products gross margin has declined over the time which was overall offset by the services gross margin. 

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Overall, I believe the company will continue to venture into new areas with higher growth potential to complement its existing core segments. I am looking at a top-line growth of somewhere around 7% in the next 3-5 years. Another favorable aspect for the investors is that Cisco generates ~40% of its FCF domestically and returns at least 50% to its shareholders every year. Over the last six years, the company has successfully returned ~$7 billion to its shareholders via both dividends and buybacks. And, I expect that trend to continue and recommend buying this stock



ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own

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