Cisco’s CEO John Chambers reaffirmed his vows to grow the company’s revenues at a 5 to 7 per cent annual clip, but in a surprising new way.He wants to lean on Cisco’s software and services businesses for that growth.
These are not two areas that Cisco is known for.
Cisco’s revenue was $46.1 billion in 2012 and it still makes half of its money from routers and switches, the hardware that runs corporate and telecom networks.
But, in five years Chambers wants Cisco’s revenue from software to double from its current $6 billion, he told attendees at its annual analyst day in New York, Reuters reports.
Chambers says he’ll consider some acquisitions to fuel the growth, but he’s not just going to buy his way there. Existing products will need to grow, too, including software that helps run corporate networks, to manage corporate videos and even social media software and collaboration software.
Cisco will have to beef up its position in software because the network is itself becoming software.
An up-and-coming technology called software-defined networking is spurring the creation of a host of new startups. One in particular, Nicira, was just acquired for $1.26 billion acquisition by VMware, a former Cisco partner that’s increasingly becoming a competitor.
SDN won’t get rid of the need for Cisco’s core products, routers and switches. But it will let companies buy fewer of them, and to buy less-expensive versions, with fewer built-in features. That’s because most of those features would be moved to software, perhaps from a startup or VMware.
SDN is a threat to Cisco’s high profit margins. In 2012 operating margins were 28 per cent, Reuters reports.
Another area targeted for growth is services, where Cisco is hired to help its customers build networks, data centres, and other big projects.
It makes a lot of sense for Cisco to want to increase its presence in other high-margin areas like software and services. That would make Cisco more of an all-around IT player, like IBM and HP. Dell, too, is trying to transform itself in this manner.
Plus, investors need to see a path of growth for the network gear giant. The stock has been hovering at or below about $20 for about two years.
There’s one more change Cisco is planning to make—at the top. Chambers is kicking off this five-year plan, but someone else is going to have to pick up and run with the ball before it’s all the way through. In the fall, he said that he plans to stay on as CEO two to four more years.
However, Chambers has previously announced long-term retirement plans, only to push off the date.