Cisco Systems open to much larger acquisitions
Company seeks to speed up move away from reliance on selling switches and routers
Cisco Systems will consider making much larger strategic acquisitions as it seeks to accelerate the move away from its traditional reliance on selling switches and routers, Chuck Robbins, chief executive, said on Wednesday.
“We’re open to any acquisitions that fuel our strategic growth,” Mr Robbins said in an interview with the FT. Asked if that meant much bigger deals than Cisco had mounted before, he said he was “not ruling anything out”.
Acquisitions have come back on to the agenda at Cisco as Mr Robbins, who took over as chief executive a year and a half ago, has tried to shift its business model towards higher-margin and more consistent software and subscriptions. Last month he announced the networking equipment company’s biggest purchase in five years with the $3.7bn acquisition of AppDynamics, whose software is used by businesses to monitor the performance of their digital applications and services.
Mr Robbins’ comments also reflect a renewed focus on big acquisitions in tech as some of the industry’s biggest players anticipate a change in US tax law that would make it easier to tap large overseas cash hoards. Applying a lower tax rate to repatriated cash is one idea being considered in Washington to encourage companies to invest more in the US.
Cisco had nearly $61bn in foreign cash and investments at the end of last year, out of total liquid reserves of $71bn. However, it has also borrowed heavily against its overseas hoard, leaving its net cash position at $36bn.
If US tax law is relaxed to make it cheaper to repatriate the money, Mr Robbins said the cash would be used to accelerate the company’s strategic transformation, and to reward shareholders. His comments echo those of Apple chief financial officer Luca Maestri, who said this week that the iPhone maker would look to return more cash to shareholders if tax rules changed.
The comments highlight a looming divergence between the tech companies and the Trump administration, which has made investment in US manufacturing jobs a priority. Tech executives such as Mr Maestri have pointed out that the supply chain for many electronics products is centred outside the US, making it hard to bring significant manufacturing operations back to the country.
The weight of Cisco’s traditional, hardware-centric business model was evident from its latest quarterly earnings on Wednesday. It reported a 2 per cent decline in revenues from the year before as sales of routers and switches fell by 10 per cent and 4 per cent, respectively.
However, Mr Robbins also pointed to the latest earnings as evidence that the company’s shift towards more consistent sources of revenue such as software and subscriptions was accelerating.
Revenues from recurring sources — rather than one-off sales — rose to 31 per cent, from 26 per cent six quarters ago, while subscription agreements now account for 10 per cent of product revenues, up from 6 per cent in the same period.
The company’s after-tax profits dropped by 25 per cent in the latest quarter, as price declines and a shift towards a less profitable product mix confirmed Wall Street’s expectations of a downbeat earnings report. Cisco reported revenue of $11.6bn and pro forma earnings per share of 57 cents, compared to the 56 cents analysts had forecast. Based on formal GAAP accounting rules, Cisco’s earnings per share fell by 24 per cent, to 47 cents.