What Cisco Really Gets With the Acquisition of BroadSoft

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Cisco Systems Inc. (NASDAQ: CSCO) is no stranger to making acquisitions. Most of its acquisitions have tended to be smaller private companies that have established or promising technologies and often come with deep patent portfolios. Some of Cisco’s acquisitions end up being deals in which it acquires other public companies. Now Cisco will pay $1.7 billion to acquire BroadSoft Inc. (NASDAQ: BSFT).

This deal has a total all-in value of about $1.9 billion if you factor in BroadSoft’s debt. The company is a cloud-based communications software provider. Cisco has now made more than 200 acquisitions in total.

Investors are going to wonder exactly what Cisco gets with this acquisition. After all, a $1.7 billion deal for a company already generating stable revenues may not move the needle that much for Cisco’s $170 billion market cap.

BroadSoft has unified communications software, combining voice, video, messaging, screen sharing, file sharing and conferencing all within one application. The company also offers call center and team collaboration software.

What matters here is that Cisco is continuing to migrate away from its old legacy hardware sales, becoming a company that still sells industry-dominating hardware with solid margins but supplemented by more and more revenues tied to software and services.

Cisco has been plagued by slow revenue growth in recent years, and its fiscal 2017 (ended in July) had revenues of $48.0 billion, compared with $49.2 billion in the prior year. BroadSoft’s 2016 revenues of $341 million were actually up more than 100% from its 2012 revenues, and analysts in the Thomson Reuters universe have a consensus estimate of almost $500 million in revenue in 2019.

If BroadSoft grows as expected, or if it manages to grow more under Cisco’s salesforce, it will help Cisco’s quest to have recurring revenues from subscription-based services. Cisco may still be a major player in routers and servers for data centers and for enterprises of all sizes, but the reality is that much of Cisco’s legacy hardware business has become quite commoditized. Cisco’s total revenue has been in decline, and analysts in the Thomson Reuters universe are calling for only about 4% revenue growth in total from 2017 to 2019.

Where Cisco is increasing its sales is in is in deferred revenues tied to recurring software and subscription sales. This part of Cisco represents about 31% of total revenues, and the company may be on the path to that becoming the bulk of its sales down the road. While BroadSoft was shown to be Cisco’s seventh acquisition of 2017 alone, its largest deal of the year has been its $3.7 billion agreement to buy AppDynamics.

Cisco shares were up 0.7% at $34.48 on Monday morning, just shy of a 52-week high of $34.60. Its consensus analyst price target from Thomson Reuters is $35.73.