Yahoo Finance A Closer Look at This Cisco Growth Driver
Networking giant Cisco Systems (NASDAQ: CSCO) is in dire need of a big catalyst to kick-start its growth. The company has struggled to boost its top line in a meaningful manner over the past couple of years, and its bet on the Internet of Things (IoT) doesn't seem to be delivering meaningful results.
But India is one market where Cisco finally seems to be gaining traction. It hit $1 billion in revenue in India a couple of years ago, and seems poised to double that number in the near future. This isn't surprising, as Cisco India President Sameer Garde points out that the Indian business has been growing at an annual pace of 14% to 15% over the past four years.
This makes India one of Cisco's brightest growth hot spots given the challenges that it has been facing on the global front. Of course, India is still a small market for Cisco considering its trailing-12-month revenue of nearly $49 billion, but it looks all set to play a bigger role in driving the networking giant's top and bottom lines. Here's why.
Image source: Cisco.
Software is big business for Cisco India
Software supplies a third of Cisco's global revenue, but in India, its contribution is 40%. More importantly, the company is witnessing a transition to subscription-based licenses from perpetual licenses, which used to account for 50%-52% of the company's software sales in the country.
Perpetual licensing is the traditional model wherein the customer buys the license up front and uses the software indefinitely. Subscription-based licenses, on the other hand, allow customers to eliminate the capital costs needed for an up front payment, and make monthly or annual payments instead. A company selling subscription licenses is assured of a predictable revenue stream as long as the subscription is active, and also has opportunities to cross-sell upgrades.
As such, Cisco's India business could play a key role in driving its profitability on a global basis. It costs less to service subscription customers, and it is easier to sell them new upgrades instead of going out and acquiring new customers, which leads to lower customer acquisition costs.
The more important thing to note is that Cisco's software business in India has a lot of room to run higher thanks to the country's push toward digitization and the company's focus on small and medium-sized businesses (SMBs). According to Cisco, there are more than 50 million SMBs operating in India, accounting for 37.5% of GDP. These businesses are big opportunities for the company to boost sales.
SMBs could be big for Cisco India
According to Cisco, 70% of Indian SMBs are still operating offline. The networking giant believes that digitization could help these SMBs double their profits, and the company is helping them get online through the Cisco Start platform. Cisco Start bundles a bunch of features, ranging from collaboration tools to cybersecurity, and can help an SMB get online in just a few minutes at a low annual cost of just $70 per user.
Cisco is aggressively pushing this platform, believing that it can triple its SMB customer base in India over the next three years to 90,000 customers. By comparison, the company had around 30,000 SMB customers in India in 2017, having added 5,000 new ones during the year.
So Cisco expects a massive boom in its SMB customer count in the next few years in India, which should have a meaningful impact on its finances. Assuming that Cisco manages to triple its SMB customer base in India over the next three years, adding 60,000 new customers, its revenue from this segment could increase big time.
And if Cisco's clients opt for more features, they will end up paying higher subscriptions and amplify the company's revenue. So SMBs could give Cisco India a sizable boost in the coming years, though this is just one of the avenues the company is trying to tap.
More opportunities
The company is also trying its hand in several other areas, such as digital education, smart cities, and intent-based networking as it tries to take advantage of the country's move toward digitization.
As such, India could give Cisco a much-needed catalyst to accelerate its growth and make up for the challenges it faces globally.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
