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Technology Stocks : Cisco Systems, Inc. (CSCO)
CSCO 47.57+1.7%3:41 PM EDT

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From: Eric9/22/2023 9:06:48 AM
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MW By buying Splunk, Cisco is closer to becoming a software company

8:23 AM ET 9/22/23 | MarketWatch

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By Therese Poletti

Cisco's plan for 50% of its revenue to come from software by fiscal 2025 is still on track

With Cisco Systems Inc.'s pending acquisition of Splunk Inc., the networking giant is making another major step toward becoming a software company.

On Thursday, Cisco (CSCO) said it was buying Splunk (SPLK) in a deal valued at about $28 billion, or $157 a share in cash, for the cloud-security company. The match had been speculated about for years, and Cisco has been on a buying binge this year, as it seeks to grow with more security and software offerings.

"Together, we will become one of the largest software companies globally," Cisco Chief Executive Chuck Robbins said on a conference call with analysts early Thursday. "The combination of Cisco and Splunk further enhances and accelerates our strategy to securely connect to make everything possible."

Cisco's shares fell nearly 4% on Thursday, while Splunk soared nearly 25%.

Upon closing sometime next year, Cisco said it expects the deal will add an additional $4 billion in annual recurring revenue and will drive more software sales. In fiscal 2023, ended Jan. 31, Splunk reported $3.674 billion in revenue, up 18% from the year-earlier period. That growth rate will also help boost Cisco's overall revenue growth, which the company forecast at an anemic 2% for fiscal 2024.

Also read: Here's why Cisco may want to close the Splunk deal sooner rather than later

Citi analyst Atif Malik pointed out that the company's prior target of 50% of revenue coming from software by fiscal 2025 is still intact. For fiscal 2023, Cisco said it had $17 billion in software revenue, out of total revenue of $57 billion. In past years, Cisco has increased its software revenue through networking subscriptions combined with new routers, and has continued with other subscription-based products to enable recurring revenue, as opposed to sales of networking hardware that have no recurring revenue.

Another factor playing a role in the deal is artificial intelligence, which Cisco told analysts it plans to layer on top of data. Malik noted that the combination with Splunk will enable Cisco to have "a security operations-center intelligence, AI products, as well as a policy AI product, which when combined will be timely given the emergence of Gen AI."

While Cisco potentially acquiring Splunk has been bandied about for years, it's likely that the big push in the enterprise market toward more artificial intelligence was one big factor in finally moving the companies together. Whatever the actual driver, investors for the most part were pleased that Cisco is getting more software in its portfolio, especially security-focused software.

-Therese Poletti
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