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Switching Remains Cisco’s Most Valuable Business

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Cisco’s Switching business contributes 40% to the company’s overall revenues

In the previous part of this series, we discussed how the data center business is becoming the main growth business for Cisco (CSCO). However, Cisco’s bread-and-butter business, Switching, remains the company’s most valuable business. As the chart below shows, the Switching business contributed about 40% to Cisco’s revenues in fiscal 2Q15. This business also showed a healthy year-over-year revenue growth rate of 11% compared to Cisco’s overall revenue growth of 7%.

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The main reason for this growth was the continued momentum of the business’s Nexus ACI portfolio of switches. ACI is a data center networking architecture designed to deliver business and other applications to end users in a cost-effective way. ACI comprises Cisco’s Nexus 9000 switches, a policy model, and an application policy infrastructure controller (or APIC).

Switching business benefiting from Cisco’s ACI initiative

Cisco built the ACI initiative based on technology developed by Insieme Networks. Cisco acquired Insieme to focus on the important SDN trend. “SDN” is a popular term used to signify the transition from a hardware-centric approach for networking to a virtualized network environment designed to enable flexible, application-driven customization of network infrastructures. By leveraging Insieme’s technology, Cisco successfully partnered with companies such as IBM (IBM), Microsoft (MSFT), and SAP (SAP).

Cisco is not alone in leveraging the SDN trend. VMware (VMW) bought SDN vendor Nicira for a valuation of $1.26 billion in 2012. After completing this acquisition, VMware named its SDN platform “NSX.” The platform leveraged Nicira’s technology. Juniper Networks (JNPR) similarly bought SDN vendor Contrail and launched an SDN controller named “OpenContrail.”

If you’re bullish about Cisco’s prospects in the SDN market, you could invest in the PowerShares QQQ Trust, Series 1 (QQQ). QQQ invests about 3% of its holdings in Cisco.

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