In his research note today, RBC Capital Markets Managing Director, Mark Sue, dropped the following tidbit:
"Cisco's salesforce is now compensated on profit contributions, not just bookings, driving incentive to improve GMs (61.9%). Mix from UCS and set-top-boxes will weigh on margins yet Cisco is working proactively to improve its software contribution. Internally, Cisco is rethinking its business more towards a recurring revenue model with a clear software transition yet to come."
"Product gross margins have declined from as high as ~70% in 2003 to 60.4% in the last quarter. While some of that decline has come from competitive pressures, we believe that product mix may be the largest contributing factor to the decline. However, looking ahead, we believe that total gross margins may see some stability. We acknowledge that product gross margins may be an issue as UCS becomes a large part of revenues from Cisco, reaching $1.6B run rate in the last quarter. However, Cisco's focus on a software strategy combined with increased services contributions may stabilize overall gross margins in the near to mid-term. We expect that Cisco may outline its software strategy in more detail in the future. We believe that while software revenues are small compared to the rest of the business, because of the high margin profile of software revenues, incrementally it should stabilize margins."
