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.
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.
