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Cisco Calls on Broadsoft, Bolsters Cloud

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Cisco Calls on Broadsoft, Bolsters Cloud
    

By: -
28 Oct 2017
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As analysts, we are fortunate to attend yearly conferences hosted by the largest technology vendors in the world. These conferences provide a detailed and focused summary of each vendor’s progress over the last 12 months, and plans for the next 12. Bombshells, truth be told, are rare – new features, leadership changes maybe, but we’re rarely surprised by breaking news.

So, imagine our surprise when the news broke that “Cisco intends to acquire BroadSoft” a mere 2 hours before the 2017 BroadSoft Connections conference. Mike Tessler, BroadSoft’s CEO, kicked off with this gem: “Hello, good morning everyone, before we get started I’d like to let you know that Cisco has announced its intent to acquire us. Now ... on with the conference!”

Yes, we knew BroadSoft was on the trade block – the company announced it was exploring a sale in late August. And yes, we expected Cisco was one of several big and logical suitors. But no, we did not expect a Cisco acquisition – or any acquisition – was pending as both vendors did a fantastic job at keeping the news under wraps. While the bombshell wasn’t that surprising in total, its timing certainly made for an interesting conference – imagine sitting through BroadSoft roadmap reviews and feature updates that might-or-might-not be rendered moot if-and-when the deal closes.

In any case, the details of this announcement are covered in Cisco’s related press release and summary presentation. Deal highlights:

  • Cisco announced its intent to acquire BroadSoft for $55 a share, or around $1.9B including debt.
  • The deal is expected to close Q1 ’18, pending regulatory and BroadSoft shareholder approval.
  • Mike Tessler noted that he expects to stay on post-acquisition, reporting to Rowan Trollope.

Analysis of this deal requires more room than our blog provides, so we’ll be publishing a Market Impact research note over the coming week. For now, here is a Tree Top Summary of our primary observations:

Cisco benefits: What’s not to like about acquiring the market-leading hosted UC provider? Cisco’s key benefits of this acquisition include:

  • 18M / 50% / 20% - 18 million licensed users, 50% share of the hosted IP voice market, and 20% year-over-year growth. To be fair, BroadSoft’s growth rate is starting to slow as mature markets like NA begin to reach saturation. However, Cisco has a few obvious opportunities to re-invigorate this growth and keep the party going.
  • 80% / 20% - we estimate 80% of BroadSoft’s 18M users work for SMBs with less than 250 employees – and only 20% have purchased BroadSoft Collaboration. This poses a material opportunity for Cisco to A) upsell WebEx and/or Spark to 14.5M users, and B) crack the up-market-code, selling a BroadSoft-powered, Cisco-branded experience into the mid-market.
  • Device Opportunity – Cisco already ships more desk phones than any other vendor. On the other hand, most BroadSoft users are picking up a Polycom or other vendor’s handset when they answer the phone. On the video front, we’d expect to see a tighter integration between Cisco’s video ecosystem and BroadSoft platforms – Spark Boards, room endpoints, and executive video solutions serving as video endpoints for BroadSoft customers. We could expect a quick shift from the Logitech-powered UC One Conference Room endpoint, perhaps replaced by a Spark Room Kit or similar solution.
    In both cases, I’m quite sure the acquisition due diligence included some potential upside in Cisco device sales.
  • Multitenant Channel Friendly Platform – BroadSoft’s BroadWorks platform fits the service provider model perfectly. It is a true multitenant platform, allowing for rapid provisioning of new customers and users. Its commercial model is attractive for most providers, generating profit for customers of all sizes. And it’s highly reliable: “My BroadWorks platform is the most reliable piece of tech in my portfolio” is a common partner quote.
    BroadSoft’s platform solves a material gap in Cisco’s current UC portfolio. Cisco’s hosted HCS platform serves a sweet spot of 500-2500 seat customers – go bigger, and the cost to implement makes the commercials wonky; go smaller, and the platform becomes too expensive. And Cisco’s current base is heavily weighted towards the large enterprise, consisting primarily of on-prem CUCM users – this acquisition provides Cisco with a scalable and viable platform to catch a growing percent of prem-to-cloud migrations.
  • Channel Partner Expansion – we’re talking girth here. While Cisco boasts over 100 HCS partners, BroadSoft’s trending over 600 partners. Most HCS partners are also selling BroadSoft into the smaller market – however, many are encroaching on Cisco’s HCS position as they push the platform further up market. This is a great defensive move by Cisco, who can now enable their partners to sell the right solution into their chosen market. And of course, the 500 additional BroadSoft partners represent an upsell opportunity for Cisco to quickly bundle WebEx / Spark / Video / Etc. with existing BroadSoft packages.

BroadSoft benefits: Aside from Mike Tessler’s inevitable (and well deserved) new Porsche, BroadSoft’s key benefits include:

  • Brand Recognition - overnight, BroadSoft’s lack of end-customer brand recognition has been effectively solved. BroadSoft’s success in the channel has come at the expense of brand recognition; in response, the company launched a Powered by BroadSoft campaign, intended to increase end-customer awareness. While the company promotes the campaign as successful, we think it will be difficult to convince their existing channel to expose the brand, especially those partners who have built the most success with their own brand. Cisco, by comparison, has a very successful, but stringent set of branding requirements. Although they will need to be cautious not to rock the partner boat, I’m confident they can leverage the Cisco brand where they need it – primarily in the mid-enterprise hosted UC market.
    After all, “No one ever got fired for buying Cisco” is a much better tagline than “BroadWho?”. 
  • Enterprise Applications – BroadSoft’s success in the SMB space is likely to blame for the company’s slow development of enterprise-class collaboration and UC services. This market has historically low demand for more advanced UC features, focusing primarily on hosted telephony services. While BroadSoft has closed the feature gap over the last 2 years, and now ticks the key collaboration boxes with its UC One and Team One applications, the company’s “attach rate” of UC-to-voice users is relatively small – we estimate sub 20%. Compare this to Cisco’s ~50% attach rate of Jabber and Spark to its licensed voice users. Add WebEx to the mix, and Cisco’s obviously the more trusted enterprise application provider. Mind you, there is no guarantee that Spark and WebEx will subsume all of BroadSoft’s application set at a platform level – but it would make sense for Cisco to leverage its trusted brand on whatever the final rationalized application set happens to be.

If there are any risks on our radar, they concern questions around potential channel conflict. BroadSoft’s decision to focus 100% on the channel has ensured no channel conflict. However, this has come at the expense of brand recognition and per-seat revenues. I can’t help but think Cisco sees an opportunity to leverage its direct sales force to address both of these issues – and it would likely crush it if and when they go down the direct path. Of course, they’ll need to tread lightly here if they do.

At Connections, I asked Rowan Trollope how Cisco would reassure the BroadSoft partner community on this topic. Rowan downplayed the risk, noting “we won’t change our current partner strategy”. Instead, he focused on a gap in the mid-size enterprise UCaaS market – a gap that neither Cisco, nor BroadSoft, nor anyone else is effectively serving. The opportunity for Cisco is to leverage BroadSoft’s scalable and trusted platform, adding Cisco’s trusted brand and enterprise-ready feature set to deliver the mid-market goods. We can see the overlapping partner community selling both Cisco and BroadSoft leading the charge here – although we can also see a quiet opportunity for a few direct sales of Cisco’s new and improved BroadCloud offer in a few cases.

Overall, the announcement was met with positive approval from the analyst community. At face value, this is a Cloud (BSFT)-meets-On Prem UC (CSCO) mashup, with both vendors serving opposite ends of the business market (SMB vs. Large Enterprise). Obvious questions around application rationalization won’t be hard to answer given time, and the net-effect looks positive for both vendors, their customers, and their channel partners – with some modicum of risk. The biggest losers here are likely a limited number of BroadSoft equipment partners, and perhaps the competition that faces a new market-leading juggernaut.

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