It turns out software-defined networking (SDN) and white box switching haven’t destroyed Cisco, but software seems to be providing stable margins and sales for the company, according to at least one analyst.
When VMware acquired Nicira in 2012, many took it as a sign that the SDN and white box eras were imminent, and that Cisco’s gross margins could drop into the 50 percent range, writes analyst Simon Leopold of Raymond James. However, over the course of fiscal 2016, Cisco’s gross margins improved to almost 64 percent with an operating margin at or above 30 percent.
Leopold, who rates Cisco an “outperform,” concludes that further progress into the software transition could stimulate further improvement. He raised his target price on Cisco to $34 from $32; Cisco shares were down 1 percent at $31.35 today.
In July, David Goeckeler rose to the position of senior vice president and general manager of the networking and security business group of Cisco, overseeing half of the company’s sales. Goeckeler has helped the company move into software-based security, which provides recurring revenue as opposed to hardware refreshes that occur every three to five years.
According to Leopold, Cisco has identified that over 50 percent of security revenue comes from software, so it is no surprise that Goeckeler decided to go in this direction.
Further, in the last two years, Cisco has made 20 acquisitions, 17 of which were software oriented. Cisco interprets the value of these deals collectively reaching near $10 billion.
Of course, the transition to software is not without its price. Last month, Cisco announced layoffs of 5,500, mostly targeting lower-growth product areas.