Cisco shifting to a software model

More products to be delivered via subscription and licensing

Cisco CEO Chuck Robbins

In addition to the company’s innovation strategy bend, some of the topics Cisco CEO Chuck Robbins discussed with us last week after the company’s Q1 earnings were Cisco’s increasing software revenue, the potential impact of the Dell/EMC merger, and the economic climate expected in Q2 and beyond. Software is becoming a larger mix of Cisco’s overall revenue thanks to more product offerings being delivered “as-a-service” from the cloud, and the company’s enterprise license agreements -- a single agreement that covers the purchase of software and subscription licenses for Cisco network infrastructure.

Software and subscription product deferred revenue – revenue not yet earned from goods and services owed to the customer -- was up 36% in Cisco’s fiscal Q1, which ended in October.

Those product lines that lend themselves to the SaaS model are moving to it, Robbins said. Currently, collaboration – including WebEx – security, and networking-as-a-service through Meraki are cloud-based offerings. If there is customer demand to move a Cisco product to subscription- or cloud-based purchase, the company will do so, Robbins said.

As Cisco’s core product lines of routers and switches become more programmable through software, there may be an opportunity to deliver them through licensing or subscription arrangements as well, Robbins said.

“We could take APIC (the controller for Cisco’s Application Centric Infrastructure SDN) and offer a cloud policy solution,” Robbins said. “On our core platforms, you’ll see us look to make those offers in the next year or two.”

ELAs and cloud-based control of voice and video endpoints have helped boost Cisco’s collaboration business and deferred revenue. In Q1, collaboration grew deferred revenue 18% while actual revenue grew 17%. WebEx grew revenue over 23%. Security deferred revenue grew 31%, thanks to next-generation firewall and threat defense software sold to over 200,000 firewall customers. And Meraki grew revenue over 60%.

“As we deliver more of our portfolio in software and cloud models, we are driving consistent double-digit growth in deferred revenue,” Robbins said during Cisco’s Q1 earnings call last week. Added CFO Kelly Kramer on the same call, “we do see the transition to subscription revenue accelerating.”

Another accelerating transition might be Cisco's alliance with storage titan EMC. Does Robbins see any headwinds from the Dell/EMC merger, which unites a Cisco IT competitor with a Cisco IT partner that’s becoming more of a competitor?

“Right now, we are having discussions around how we continue to maintain our (EMC) partnership, particularly in light of the VCE” converged IT infrastructure joint venture between Cisco, EMC and VMware. “We think there’s some synergy in how we create more secure environments for our customers. We’re looking at it as though we will continue to find areas to partner. That’s the positioning for both sides at this point and until something changes, that’s the way we’re going to look at it.”

Cisco's also looking at a challenging economic environment in which it is "executing well," Robbins said a few times during the Q1 earnings call. That challenging environment prompted the company to forecast Q2 revenue and earnings below Wall Street expectations, causing the stock to dip.

Nonetheless, Robbins says Cisco is still experiencing positive growth as many multinational corporations are forecasting negative growth. In Q2, he sees Cisco’s security business returning to mid-teens growth from the 7% it posted in Q1; E-Rate funding for schools and libraries starting back up; and recent acquisitions and partnerships beginning to pay dividends in the second half of Cisco’s fiscal 2016.

Robbins said routing will also return to growth next quarter after dropping 8% in Q1 due to timing issues with some big deals.

“We had solid order growth, but the timing of transactions relative to shipments didn’t work,” Robbins said.

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