At 12% of the top line, collaboration is Cisco Systems, Inc's (NASDAQ:CSCO) third largest business after switching and routing. The segment is important to Cisco’s push to generate recurring revenue. SVP Rowan Trollope told us that half of Cisco’s $3.6bn annual recurring product revenue comes from collaboration and that the business is half software and half hardware (phones, videoconferencing systems). UBS models collaboration revenue growth of 4% over the next three years, but think there could be upside from further share gains in private branch exchange (PBX) and incremental revenue from Cisco Spark. UBS believes Spark success is not captured in Street models.
Half the $4.5bn collaboration business is exposed to growth markets (video and Web conferencing) with the other half declining (PBX and telephones). Cisco has offset legacy market declines through share gains while growing in Web conferencing. Gartner ranks Cisco a leader in five collaboration categories. UBS recently wrote Cisco should position itself as the intelligent connectivity company. Cisco’s collaboration products connect people while networking connects devices.
UBS believes Spark should be a multi-billion dollar business. Spark is sold as a service rather than as a perpetual license. Spark Board is a $5,000 device that combines all conference room needs into a single iPad-like screen on the wall powered by the cloud. Only one in 20 rooms has modern video conferencing technology, creating a large TAM. Trollope argues that what differentiates Spark relative to Slack and Microsoft Teams is that Spark is real-time technology. UBS’s recent VAR survey indicated solid early traction. Ingram Micro started selling Spark on April 17 and Cisco has inked partnerships with Apple, Salesforce, and IBM.
UBS’s price target of $37 is based on 15x its F17E earnings, in-line with peers. Cisco looks especially inexpensive at an EV/FCF of 10x vs. many peers at 13-15x; repatriation of cash may be especially important for Cisco.