Cisco Extends Network Services With Axiom Acquisition
In a press release last week, Cisco (NASDAQ:CSCO) announced plans to acquire service fulfillment software assets and integrate the associated employees of a United Kingdom subsidiary (formerly Axiom Systems) of the Finnish parent company Comptel Corp. Cisco will pay approximately $31 million in cash for the acquisition, which is expected to close in the third quarter of calendar year 2011 subject to standard closing conditions. [1] Cisco Systems is a leading provider of IP-based networking and other products and competes with players like Juniper Networks (NYSE:JNPR), Hewlett-Packard (NYSE:HPQ), Alcatel-Lucent (NYSE:ALU) and F5 Networks.
Cisco mentioned that the integrated software offering will help deliver higher value to the service provider marketplace. We estimate that Network Services make up nearly 16% of our $19.80 Trefis price estimate for Cisco’s stock, which is about 30% above the current market price.
About Network Services
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Normally, both enterprises and service providers–the two main categories of network customers–either do not have sufficient expertise or simply do not wish to devote enough resources to maintain the networks themselves. Instead, they prefer that the network manufacturers maintain and upgrade their systems for them. This saves them the hassle of devoting time and resources to non-core activities.
Often, network manufacturers offer time-bound contracts for their maintenance services, which typically begin from the time the networks are sold to the customers. These contracts can be (and normally are) periodically renewed and service terms (and costs) renegotiated. Annual service segment revenues (as a proportion of product segment revenues) have been increased from 20-25% over the last five as Cisco has constantly improved on its service offerings.
How Axiom Adds Value to Cisco’s Network Services
The deal with Axiom Systems will help Cisco extend its network and service management technologies across its next-generation Internet Protocol (IP) network platforms. AXIOSS software will also enhance Cisco Prime, a unified network management solution for enterprises and service providers by adding automated ordering to the platform which will allow operators to automate the management of network services. This will indeed enable service providers to launch new video, data, mobility and cloud services at a faster pace. [2]
If Cisco is able to implement a marked improvement in the services that it provides to its customer after the acquisition, services revenue could go up as a percentage of products revenue due to higher value add and result in potential upside to our $19.80 Trefis price estimate for Cisco.
You can modify the chart above to see how changes in Cisco services revenue as a percentage of products revenue impact the firm’s stock price.
See our full analysis of Cisco.
Notes:- Cisco Announces Intent to Acquire AXIOSS Software Assets, Cisco [↩]
- Cisco to Acquire Axiom Systems, Zacks.com [↩]