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Cisco Aims to Transition to Recurring Revenue Sources

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31% of revenue is recurring

Cisco (CSCO) is transitioning its business model to rely more on software sales and recurring revenues. It’s been a fairly long journey and the management recently said it is making tremendous progress in this transition. But the runway for Cisco to cover before it can take off is still long.

The company said 31% of its total revenue in fiscal 4Q17 (June quarter) came from recurring sources, implying an increase of 4.0% from the year-ago quarter. Additionally, Cisco now generates 51% of its software sales through subscriptions, a recurring revenue source.

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Revenue down 4%

Cisco reported total revenue of more than $12.1 billion for 4Q17, down 4% from a year ago but slightly above the consensus estimate of $12.1 billion. The company posted adjusted EPS (earnings per share) of $0.61, down from $0.63 a year ago but in line with the consensus estimate.

Cisco relies on the sale of data center switching and routing gears for the bulk of its revenues. It said switching and next-generation routing sales fell 9% to $5.3 billion in 4Q17. This drop speaks to the continuing challenge in the networking gear market where competition has intensified as some customers have resorted to building their own network systems. Cisco competes with Juniper (JNPR) and Arista (ANET) in this market.

Cisco in service push

Despite the tough competition, Cisco believes that innovation will help it stand out from the crowd. The company is also looking to the services market to offset the weakness in its core hardware division. Service sales rose 1.0% to $3.1 billion in the latest quarter. Cisco’s push into software and services is seeing competition from the likes of FireEye (FEYE) and Check Point (CHKP).

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