December 7, 2012 / 5:03 PM / in 6 years

Cisco bets on software and services for mid-term growth

NEW YORK (Reuters) - Cisco Systems laid out its mid-term growth strategy on Friday, betting on increased demand for software, services and security as it strives to become the world’s leading information technology company.

Cisco, whose business roots in routers and switches that move Internet traffic still generate about 50 percent of its revenue, has been steadily expanding its other offerings including data centers, network security and video conferencing.

In five years Cisco plans to double revenue from software, which is currently at $6 billion, Chief Executive John Chambers said at the company’s annual analyst day in New York, saying the growth will be mostly organic but will include some acquisitions.

Chambers is banking on Cisco’s expertise in networking, which he says enables developments such as cloud computing, data centers and applications and eventually the concept of the “Internet of things,” which foresees the connection of everything from traffic lights to medical devices to the power grid.

Chambers and Cisco’s chief financial officer, Frank Calderoni, reiterated the company’s target of 5-7 percent compound annual revenue growth in three to five years. Revenue was $46.1 billion in 2012.

ZK Research analyst Zeus Kerravala said Cisco has a “good shot” at becoming a broad IT company, but it hardly offered any surprises, especially in light of the revenue outlook.

“I think it makes them a boring company because the number is easily achievable, but in this macro it’s better than what HP or Dell are putting their shareholders through,” he said, referring to HP’s accounting scandal and Dell’s struggles with a declining PC market.

“The big question for Cisco shareholders is can they keep their margins,” Kerravala said, but added that “the threat of margins has been out there for several years and they have always managed to weather the storm.”

Cisco said its operating margin will remain in the high 20s. In 2012 was 28 percent.

Shares of Cisco were down 1.1 percent at $19.27 near midday.

Calderoni said he expects Cisco’s cloud and unified data center business to post 20-26 percent compound annual growth in that time frame. In 2012 revenue was $1 billion.

In mobility he said the compound growth rate will be 14-17 percent. The business in 2012 had revenue of $3 billion.

“Our wireless growth has been significant,” Calderoni said, adding that Cisco had benefited from the growing demand for WiFi and small cells that help offload traffic from networks.

In security, Calderoni said, the growth rate will be 5-7 percent in three to five years. Cisco, which has seen rivals take market share in the security business, generated $1 billion in revenue in that division in 2012.

On growth in emerging markets, Chambers said the company has done well in the top five emerging markets but has work to do in others.

“The challenge was the No. 6 through 20,” Chambers said.

Its emerging markets business generated $9 billion revenue in 2012. In three to five years that will grow at a 7-13 percent compound annual rate, Calderoni said.

Lastly, Calderoni said, Cisco is aiming for 6-9 percent compound annual growth rate in its video business, which generated $8 billion this year.

Reporting By Nicola Leske; Editing by Leslie Adler

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