Cisco Focuses On Service Providers And Software With Intucell Acquisition

by Trefis Team
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Quick Take

  • Cisco completes Intucell’s acquisition, which will help Cisco position itself better to mobile carriers as well as bolster its software capabilities
  • The acquisition also helps Cisco tap the carriers’ need for more efficient networks as data demand explodes
  • The recent spate of acquisitions suggest a growing focus on software rather than hardware, which faces the risks of commoditization

Cisco (NASDAQ:CSCO) recently announced that it has completed the acquisition of Intucell, an Israeli startup that specializes in the development of network management software solutions. Of particular interest to Cisco is Intucell’s self-optimizing network (SON) technology that helps wireless service providers decrease congestion on their network and improve quality of service for subscribers. The software modifies the network automatically and dynamically allocates resources according to real-time changing demands, thereby helping carriers extract the most out of their existing infrastructure and limited spectrum resources. AT&T (NYSE:T), the second largest wireless carrier in the U.S. and one of Intucell’s first customers, has already deployed the technology throughout its nationwide footprint.

At the heart of this acquisition is Cisco’s bid to add more software-oriented capabilities to its portfolio of networking products and thwart the risk of SDNs (Software-Defined Networks) commoditizing hardware completely. In addition, we see it as an attempt to win back share in the service provider market where its lead over competitors such as  Juniper Networks (NYSE:JNPR) isn’t as commanding as in the enterprise market. Cisco’s focus on service providers has been increasing of late, as evidenced by several of its recent acquisitions such as NDS, BroadHop, Cariden and ClearAccess made over the past year. (see Cisco’s NDS Acquisition Taps Video Demand To Boost Network Equipment Business)

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Carriers need scalable, efficient networks

With data demands burgeoning, mobile carriers in the U.S. are increasingly looking to make their networks more spectrum-efficient and put their limited network resources to best use without having to increase CapEx spend. The proliferation of smartphones is already causing mobile data traffic to grow exponentially, and the advent of high-speed LTE networks is likely to feed the appetite for mobile data consumption even further. Mobile data traffic grew 70% in 2012 and is expected to grow at a CAGR of about 65% over the next five years, according to a recent Cisco VNI report. [1] Despite some lingering macroeconomic concerns, the broader transition to mobile continues to be strong and software-based networking solutions that allow service providers to manage this huge traffic efficiently are only going to increase in importance in the coming years.

Intucell’s acquisition shows that Cisco is looking to tap this market and improve its relationship with carriers by adding such valuable network management solutions to its product portfolio. AT&T’s deployment of Intucell’s technologies and the resultant 15% reduction in network congestion and improvement in call retainability is a sign of Intucell’s value within carrier networks. [2] Cisco hopes that the increased service provider focus helps it gain more ground in the core and edge routing segments where rivals Juniper and Alcatel Lucent have substantial market shares.

Restructuring has returned Cisco’s focus

The spate of recent acquisitions together with Cisco’s recent decision to sell its home networking Linksys division shows that the company is focusing more on the software side of networks than the hardware, which is increasingly getting commoditized. It is also a good sign that the recent restructuring initiatives have helped it regain focus on its core networking areas as against its earlier ambitions of diversifying into 30 new businesses. The restructuring has led to job cuts in areas that are not Cisco’s core focus but has also improved margins and made the organization leaner and more efficient as a result.

We believe the company is heading in the right direction since the restructuring not only allows it to innovate faster and actively take part in M&A deals that help it target new trends, but also streamlines its businesses around its core networking products that contribute almost 40% to our estimated $26.50 fair value for Cisco. In line with this view, Cisco’s stock has climbed close to 35% in the past seven months and is trading around 20% below our price estimate.

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Notes:
  1. Global Mobile Data Traffic Forecast Update, 2012–2017, Cisco, February 6th, 2013 []
  2. Self-Optimizing Network Helps Improve AT&T Network, AT&T Press Release []
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  • commented 1 years ago
  • tags: IBM CSCO JNPR
  • Thank you,
    The information you shared is very informative.