Editor’s note: After reviewing Cisco’s latest financial results, Technology Business Research Analyst Patrick Filkins says the networking giant is likely to accelerate mergers and acquisitions in an attempt to counter declining hardware sales. Cisco has a major campus in RTP.

HAMPTON, N.H. – Lower investment in Cisco’s ICT hardware products will hinder top-line growth going forward.

Revenue growth in Cisco’s secondary segments (Collaboration, Security and Wireless) was offset by lower network and data center infrastructure sales, driving an overall 2% year-to-year revenue decline, excluding the CPE business.

While Cisco is partially offsetting its weaker ICT business by making software– and– cloud- based acquisitions, if 4Q16 financial results persist, Cisco is likely to sustain or even accelerate its M&A cadence. TBR believes Cisco is well-positioned to make additional acquisitions due to more than $70 billion in cash and short-term investments, and which would become easier if a Trump administration eases one-time cash repatriation penalties.

With the ICT hardware market expected to contract over the long-term, predominantly due to disruption from NFV and SDN, Cisco will balance M&A with cost-cutting initiatives, such as layoffs and the discontinuation of non-strategic programs, such as Intercloud.

Adding AppDynamics to its portfolio significantly broadens Cisco’s applications credentials

Cisco announced its intent to acquire San Francisco-based cloud pure play AppDynamics just ahead of AppDynamics’ planned initial public offering in January. Cisco plans to buy the company for $3.7 billion, nearly double that of the company’s latest valuation of $1.9 billion. From a strategic perspective, the acquisition supports Cisco’s objective to derive a higher percentage of revenue from recurring software and services sales as the network hardware market is forecasted to contract over the long term.

Acquiring AppDynamics quickly adds domain expertise in application performance management (APM), underscoring Cisco’s goal to expand its overall networking value proposition. AppDynamics’ strengths are a natural extension of Cisco’s flagship SDN framework, Application Centric Infrastructure (ACI).

While ACI is integrated within Cisco’s Nexus switches, Cisco is likely to similarly bake in AppDynamics’ solution with hardware, and offer the software as a standalone offering. In both instances, Cisco is pushing further up the software stack to evolve from its traditional networking core competency, which TBR believes is a necessary path to redefine its role in the market.

Cisco plans to sunset Intercloud, shifting its focus to helping customers build, migrate and manage cloud connections

Cisco will discontinue Intercloud in March 2017, signaling the end to a $1+ billion program which launched in 2014. Intercloud was envisioned as an alternative cloud service delivery model to large cloud providers, such as Amazon Web Services (AWS) and Microsoft, by connecting public cloud networks globally, but customer buy-in did not reach the level to which Cisco, and its customers, could profitably sustain the program.

Instead, Cisco (Nasdaq: CSCO) will refocus on building and managing hybrid IT infrastructure, more in line with its traditional role as a components supplier. TBR believes the move is necessary as AWS, Microsoft, Google and other large cloud providers accrue a leading share of the public cloud market, nullifying the demand for Intercloud. Based on recent acquisitions (Cliqr, CloudLock and ContainerX), Cisco is shifting its focus to helping customers build private clouds, manage and integrate applications and support hybrid cloud management.

By helping customers navigate the complexity associated with hybrid, multi-cloud implementations, TBR believes Cisco can regain momentum and carve out a leading role as hybrid cloud adoption accelerates. With nearly $3 billion spent on acquisitions in 2016, Cisco is likely to further supplement its revamped cloud strategy with additional acquisitions in 2017.

(C) TBR