Cisco Systems, Inc. (NASDAQ:CSCO) Reexamining Its Business Model

Cisco Systems, Inc. (NASDAQ:CSCO) has announced reexamining its business model to adapt to new changes brought by the COVID-19 pandemic. During its Q4 and year-end conference call, the company’s CEO Chuck Robbins laid out the company’s transformative plan. Chuck said, going forward, the company intends to rely more on selling products as services.

“We’re even looking at how we deliver our traditional networking hardware as a service over time,” he told analysts. And he said much of it will be available by the end of the calendar year,” said Chuck. He noted that Cisco intends to offer most of its portfolio as services through investment in cloud collaboration, cloud security, healthcare, and key enhancements for education among other industries. The company will also make significant investments in the future of work, increased enterprise automation, and application insights and analytics.

Cisco customers consuming its technology as a service

Cisco’s move is similar to those taken by leading competitors like Lenovo, Dell, and HPE. According to the Chuck, Cisco’s new strategy is motivated by the fact that many of its customers prefer consuming its technology as a service. He said the company will work with customers on the structure of the new services so as to help them navigate the multi-cloud ecosystems.

Results for FY2020

For the FY2020, Cisco reported 51% of its revenue from services and software. The impressive revenue stream from its service business is motivating to shift its business direction into services. Under the new strategy, the company says two-thirds of its software will be sold as a subscription.

For the first quarter of 2020, the company reported $12.2 billion in revenue, representing a 9% drop compared to the first quarter of 2019. In addition, annual revenue dropped by 5% to $49.3 billion. Cisco reported a service gross margin of 68.7%, a product gross margin of 61.2%, and total gross margin of 63.2%.

The company completed the divestiture of the Service Provider Video Software Solutions (SPVSS) business in Q2 2019. The CEO noted that by the end of fiscal 2020, the company achieved its goal of generating more than half of its revenue from software and services.