Reviving The Fortune Of Its Security Business Will Be Key To Cisco’s Revenue Growth

Cisco (NASDAQ: CSCO) is transitioning from a business model that focuses on hardware products to one that is software-based. The company’s focus is to sell more software and subscription-based offerings which have a higher margin than its traditional hardware product offerings. However, a prolonged slowdown in service-provider spending has weighed on the company’s performance over the recent quarters, and we expect the company to have a difficult FY 2020 (ending July). That said, Cisco’s Security business has significant scope for growth in the near future, and it will be necessary for the company to shake-off this segment’s poor performance over recent years to grow its top line.

Cisco’s infrastructure platforms business, which makes revenue from the sale of core networking technologies of switching, routing, data center products, and wireless, is expected to contribute $29 billion to Cisco’s 2020 revenues, making up 56% of the company’s $51 billion in revenues for 2020. The contribution of Infrastructure Platforms is more than double that of its Services business, which provides technical consulting and support services. The Services business is expected to add $1.15 billion between 2016 and 2020, making up nearly 47% of the incremental revenue growth over the same period. Trefis highlights trends in Cisco’s Revenues over the years, along with our expectations for 2020 in an interactive dashboard, key elements of which are discussed below.

How Has Cisco’s Historical Revenue Trended?

• Cisco has added $3.90 billion in total revenue since 2017 at an average annual rate of 4%, led by a steady increase across all operating divisions.
• Infrastructure Platforms has been the largest growth driver, contributing well over $2.4 billion to total incremental revenues.
• However, the company’s Network Security & Other segment has struggled, losing nearly $350 million in total revenues over 2017-2019.
• Going forward, we expect Cisco’s revenues to decrease by 0.8% in 2020 because of a 4% y-o-y decline in the infrastructure platforms business.

A Detailed Look At Changes in Cisco’s Revenues over the years:

#1. Cisco’s Product Revenues Are Likely To Witness A Marginal Decline In FY 2020

• Cisco’s product business includes infrastructure platforms, applications, and network security & other divisions.
• Cisco’s product division has accounted for nearly 75% of the company’s revenues over the last few years. The infrastructure platform has been the largest segment making up almost 57% of the company’s total revenues.
• The segment has added nearly $2.4 billion to Cisco’s total revenues since 2017, accounting for nearly two-thirds of the company’s incremental revenue growth, led by a steady increase across the switching and routing portfolio partially offset by weakness in the service provider market.
• However, we expect the segment’s revenue to decline by 4% to $29 billion in FY 2020 due to lower demand for routing and switching products, driven by continued weakness in the service provider market.
• Nevertheless, Cisco’s security and other product division is likely to achieve steady growth, partially offsetting the weak performance of infrastructure platform performance on the company’s top-line.
• Security & other products division’s revenues are likely to reverse the declining trend seen over recent years to grow in the high single-digits. This growth will likely be driven by strong sales of identity and access, advanced threat security, and unified threat management products.

#2. Services Division To Add about $500 million to total revenues in FY’2020

• Cisco’s Services segment has achieved steady growth in the last few years, with revenues increasing from $12.3 billion in 2017 to nearly $12.9 billion in 2019, driven by an increase in software and solution support offerings.
• We expect this segment to continue its steady growth, with revenues increasing at an average annual rate of 4% to $13.4 billion in 2020.
• Moreover, as the company continues to sell more software and subscription-based offerings, the demand for the company’s services offerings should also increase.
• The contribution of the services segment to Cisco’s revenues has remained around 25%, and we expect the segment’s share to remain constant around its current levels.

Per Trefis estimates, Cisco’s valuation is around $51 per share, which is roughly 10% ahead of the current market price. You can also access all our interactive analysis for Cisco’s stock here.

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