Cisco Fortifies Shift From Hardware -- WSJ

By Rachael King Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 24, 2017).

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Cisco Systems Inc. said Monday it will pay $1.73 billion to acquire BroadSoft Inc., a maker of cloud-based communications software, as the networking giant steers further away from its legacy hardware and into sales of software and services.

The deal would help Cisco increase its recurring revenue from subscription-based services, which Chief Executive Chuck Robbins has said is core to its growth strategy.

Increasingly, software and services are driving value in providing corporate technology, while hardware, such as Cisco's routers and switches, face pricing pressures due to commoditization.

"BroadSoft has been a visionary in the idea that all collaboration technologies are going to move to the cloud," said Rowan Trollope, senior vice president of Cisco's Applications Business Group, which includes subscription-based software and services.

As of Friday's close, BroadSoft's shares had gained 31% for the year, while Cisco was up 13%. In afternoon trading Monday, BroadSoft was ahead 1.6% at $54.75, with Cisco rising 0.9% to $34.54.

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Cisco is paying $55 in cash for each of BroadSoft's 31.5 million shares outstanding. The deal, which had been rumored since late August, is expected to close in the first quarter of 2018.

BroadSoft, based in Gaithersburg, Md., makes a software product that combines video, voice, messaging, screen sharing, file sharing and conferencing in an application accessed online. It also makes communications software for call centers and team collaboration that workers can access online.

BroadSoft has been growing at about 20% a year over the past few years, but its subscription business has been growing at about twice that rate, BroadSoft CEO Michael Tessler said in an interview. Almost half of BroadSoft's revenue comes from recurring software and subscriptions.

Although Cisco's revenue declined 4% in the most recent quarter compared with a year earlier, revenue related to recurring software and subscriptions rose by half, good for 31% of the company's total take.

Cisco also is creating cloud-based subscription services to help customers manage its own networking hardware. "Our objective is to continue moving to cloud-managed solutions across our entire enterprise networking portfolio," Mr. Robbins said on a call with securities analysts in June.

Over a five-year period, subscription-based services can deliver 20% more revenue than simply selling perpetual, or permanent, software, Mr. Robbins told analysts at the time.

BroadSoft is the seventh company Cisco has acquired this year, and the second largest after its $3.7 billion deal to buy AppDynamics, a maker of software that helps companies monitor the performance of their applications in the cloud.

Cisco plans to pay for the deal with cash held in the U.S. While the company has more than $70 billion in cash on its balance sheet, most is held overseas. At the end of the most recent quarter, the company had about $3 billion in cash in the U.S.

Write to Rachael King at rachael.king@wsj.com

(END) Dow Jones Newswires

October 24, 2017 02:47 ET (06:47 GMT)