Is Cisco Systems, Inc. (CSCO) Strengthening Its Position in the Security Software Market?

The network and communications industry has undergone a complete transformation to emerge as the one of the most evolving and innovation-driven industries. This change was brought about by unparalleled growth in high speed mobile internet, especially for wireless data and video.

With the launch of the mobile broadband technology, many new service areas were introduced with huge growth potential. They include IPTV, collaboration and cloud computing, video conferencing and mobile payments, and many more.

The usage of mobile broadband heavily depends on the internet, which gives rise to another concern — cyber security. This is a rising concern for many users as more and more data is uploaded on the internet via cloud computing.

To be able to offer a complete package of expert level security service, Cisco Systems, Inc. (NASDAQ:CSCO) acquired Sourcefire, Inc. (NASDAQ:FIRE) to enhance its service portfolio in areas where the company was not up to the mark.

The synergistic benefits expected from the acquisition

Cisco Systems, Inc. (NASDAQ:CSCO) has recently taken over Sourcefire, Inc. (NASDAQ:FIRE), a leader in providing intelligent cyber security solutions. Sourcefire perfectly fits into Cisco Systems, Inc. (NASDAQ:CSCO)’s overall strategic vision for security. Cisco’s security sales had dropped 4% in the previous quarter. This acquisition provides Cisco an opportunity to increase its market share in the intrusion prevention system (IPS) segment. The services provided by Sourcefire, Inc. (NASDAQ:FIRE), the market leader in IPS, are expected to experience rapid growth in demand as reports of major hacking incidents put governments and enterprises on alert.

The high growth expected in this area is expected to add significantly to Cisco Systems, Inc. (NASDAQ:CSCO)’s revenue and margins by speeding up the delivery of Cisco Systems, Inc. (NASDAQ:CSCO)’s security strategy of defending, discovering, and remedying the most critical threats. It will also enable the company to provide continuous and pervasive advanced threat protection.

The resulting impact on financials

Sourcefire’s revenue has grown at a CAGR of 31% in the last five years. However, the company’s margins are very low at 2.2%. Margins are currently depressed as Sourcefire is a technology driven growth company, and is currently investing heavily in research and development activity. Its margins are expected to revert to its industry average of 10.2% by 2015.

Sourcefire is expected to grow 25% in the upcoming year. This is expected to raise the company’s revenue to $278.9 million in 2013. Net income is estimated to be $10.32 million in 2013, assuming the net profit margin will grow from 2.2% in 2012 to 10.2% in 2015. This acquisition is expected to add $0.016 cash flow from operations on a per share basis to Cisco Systems, Inc. (NASDAQ:CSCO)’s cash from operations of $1.65, in 2013.

This industry is in its high growth phase, with the demand increasing at a fast pace year on year. Therefore, it is expected that earnings per share and cash flows will rise further in the future.