Editor’s note: In its latest earnings report, Cisco services revenue grew for 54th consecutive quarter as the company focuses on Security, IoT and collaboration efforts to expand portfolio. Kelly Lesiczka, Research Analyst at Technology Business Research, offers insight into the latest report of the tech giant, which operates one of its largest campuses in Research Triangle Park.
HAMPTON, N.H. – A continuing transition to becoming software and subscription based provider will benefit revenue as i Cisco will provide management and end-to-end transformation services opportunities.
Cisco’s corporate revenue declined 2.6% year-to-year to $12.4 billion in 3Q16, while Cisco Services revenue grew for the 54th consecutive quarter, increasing 7.5% year-to-year, to $3.1 billion. Cisco Services contributes 24.7% of total Cisco revenues, improving 230 basis points from 22.4% in 3Q15, driven by renewals and attached services around digital transformation initiatives as well as increased collaboration efforts with IBM and Salesforce. Expanding innovation efforts and partner network will enable Cisco to develop automation capabilities with industry focused security services. Services deferred revenue also grew 7.6 % year-to-year to $10.4 billion in 3Q16, supported by the product and subscription business.
Cisco services gross margin was 65.1% in 3Q16, improving 20 basis points from the year-ago quarter. Total Cisco Systems headcount was relatively static, a 0.4% change from 71,063 in 3Q15 to 72,385 in 3Q16 with acquisitions canceled out by ongoing workforce restructuring as it transitions to a software and subscription based model. TBR expects Cisco to continue developing its cloud, digital, analytics and IoT capabilities as it focuses on innovation and increasing acquisition activity (e.g. CloudLock, Inc., ContainerX Inc., Heroik Labs, Inc.) to expand its cloud and software portfolio resulting in implementation and management services opportunities.
Expanding Cisco’s cloud professional services capabilities will improve Cisco’s position to support clients’ cloud adoption
With increasing cloud adoption by businesses, in September Cisco expanded its Advanced Services segment with three new Cloud Professional Services – Multi-cloud management and orchestration for Cisco Cloud Center; Cloud Acceleration services and IT transformation services for DevOps. The Cloud Professional Services help business customers reduce complexity and optimize their multi-cloud environments. TBR believes Cisco is on target with the launch of its Cloud Professional Services.
According to TBR’s Cloud Professional Services Market Forecast 2015-2020 Update, the cloud professional services market is slated to surpass the $60 billion mark in 2020 as continued “add to cart” cloud “as a Service” workload adoption drives integration and ongoing managed services opportunities. Systems integration will provide the largest vendor opportunity through 2020, as customers increasingly require integration of their hybrid IT and multi-cloud assets to allow for the sharing of data across applications, platforms and infrastructure.
While introducing cloud-related consulting, systems integration, application development and maintenance and managed services is a necessity for Cisco to compete for cloud adoption opportunities, TBR does not expect the company to significantly expand revenue share of such services. Instead, Cisco will drive a majority of services revenue from technical support, which accounted for an estimated over 75% of services revenue in 3Q16.
Cisco and Ericsson expand the scope of their partnership to address enterprise and public sector clients’ infrastructure transformation
Cisco continues to use partnerships to cost-effectively augments its services capabilities and deliver transformative solutions to drive business outcomes for its extended client base. One year after the signing of its partnership, in November Cisco and Ericsson announced the next phase of their activities to offer joint solutions to enterprise and public sector clients, expanding the initial work with service provider clients, and address demand for solutions in transportation, Smart City, utilities and the web segment.
On the services side, the partnership remains the same, with Cisco delivering the bulk of infrastructure and IP competence and Ericsson offering its scale and skills in systems integration and managed services. With approximately 60 joint deals won during the past year, TBR expects Cisco Services to benefit at the revenue and profitability side. Cisco Services will expand its work and revenues in areas such as networks, enterprises, datacenter, cloud and security and in countries, such as Brazil, which is a newly added region for joint activities.
Utilizing Ericsson’s sales and services professionals instead of adding more employees is a quick and cost-effective way for Cisco (Nasdaq: CSCO) to capture network modernization opportunities and expand its global reach.
(C) TBR
