Pursuit of Recurring Revenue & Three Views of the Cloud: Page 2 of 5

 

Much has been said and written about Cisco’s acquisition of BroadSoft, which closed in early 2018. At the recent BroadSoft Connections event, Cisco provided some clarity on the combined companies’ roadmap and product and service offerings. However, we think there must be some additional serious debates going on within Cisco about increasing the MRR from the Webex group.

 

Consider that BroadSoft’s BroadWorks software, which is usually installed and run by service providers, has approximately 44% share in the cloud-based telephony market. BroadWorks isn’t sold under a SaaS model but rather a typical perpetual software licensing model in which BroadSoft makes telephony and UC software that it sells to service providers. These service providers then offer BroadWorks-based UCaaS services from their own clouds. The MRR goes to these service providers.

 

Now consider the tremendous valuations given to cloud-based telephony providers. RingCentral, with about 2.8% of the cloud telephony market, has an astounding market cap of $6.8 billon. Similarly, 8x8, with about 2.0% of the cloud telephony market, has a market cap of $1.8 billion.

 

 

These market valuations create tremendous incentive for Cisco to host BroadWorks itself and offer it as a service, as opposed to selling it as software under perpetual licensing. If we were to simply average the valuations of RingCentral and 8x8 on a market share basis, and apply this valuation to BroadSoft, it would make BroadSoft running under a true SaaS business model worth about $70 billion. With the 13% market share held by Cisco Hosted Collaboration Service (HCS), it is not hard to imagine a scenario in which Cisco hosts all its HCS-based and BroadWorks-based telephony services. In such a scenario, this hosted UCaaS services business would be worth about $100 billion. Add this to Cisco’s existing $212.7 billion market cap, and Cisco’s worth tops $300 billion -- that’s not a figure shareholders and executives can ignore. Furthermore, given the current market valuations for MRR streams, as many of the approximately 100 million on-premises end users -- as reported by Cisco -- move to cloud, the company’s market cap would skyrocket if Cisco hosted the telephony services itself.

 

Although Cisco has said it will continue to offer BroadWorks to its service provider customers, we believe the financial drivers are so strong that Cisco will, over the next four to five years, take this business and convert it primarily to a cloud-based services offering within its Webex division. Cisco has two nascent MRR/SaaS telephony offerings: BroadCloud, which is a Cisco-hosted version of BroadWorks that service providers can private label; and Webex Calling, which is a Cisco-branded hosted solution also based on BroadWorks (see related post, “The Market Impact of Cisco’s BroadSoft Acquisition”).

 

We predict that in the mid-2019 timeframe Cisco will begin promoting these MRR-generating SaaS offerings with all the marketing muscle the company possesses. To make either successful in the enterprise space, Cisco will need to enable something like Microsoft’s Direct Routing, which allows a company to use its existing PSTN trunking service or a service provider to offer SIP trunks.