Why Radcom Would Make Sense as Takeout Target for Cisco

March 6, 2015 • Analysis • Tags: ,

Tech giant Cisco (CSCO) has turned M&A efforts toward software to keep gross margins greater than peers. Cisco is primarily targeting developers of security, data-analysis and collaboration tools, as well as cloud related technology, CEO John Chambers said in an interview last month. Chambers used the following explanation to describe his acquisitions target, “A young company with around 100 engineers and a new product that my customers are telling me to buy.” Cisco is in the market for small-mid size software makers and Radcom could be a potential target. With the wrap up of Mobile World Congress in Barcelona, which both companies and many others attended, expect M&A activity to pick up in the dynamic environment.

Does Radcom Fit the Bill?

Strong Margins & Profitable

As we’ve explained in prior Radcom reports, margins are one of the company’s strengths. Reported Q4 2014 gross margins were 75%, FY 2014 71% and management expects 75%+ in the long term. This is due to the focus on software and the high margined profile of their leading product, MaveriQ.

One of Chambers’ concerns with the target market is the high valuation placed on software tech companies, many being unprofitable. With Radcom this isn’t a worry. The company reported profitable 2014 operations and should be seeing net margins of 25-30%. Analysts are expecting 2015 EPS to come in at $0.62, valuing Radcom at a 16.5x forward P/E. That’s a bargain considering Radcom’s double digit top line growth and high margins.

Mobility Analytics Software

At Mobile World Congress, Cisco introduced Mobility IQ, a new cloud-hosted mobility analytics solution that provides network, user, application and device knowledge across Wi-Fi, 3G and LTE networks. Traditionally, service providers have had access to data in their networks; however this data becomes limited as services are scaled.

Cisco Mobility IQ Uses

Although Cisco is targeting multiple industries, one of Mobility IQ’s focuses is to assist mobile service providers with monitoring the patterns of users. Similarly, Radcom’s MaveriQ serves the same function. MaveriQ monitors multiple services that network service providers offer to maximize customer experience through data insights. While some may view this as competition, I believe Radcom’s diverse customer base is attractive for US players such as Cisco.

Complementary Customer Base

geography revenue breakdown

The majority of Radcom’s revenues are generated outside of North America, with large operations in South America and Asia. To compare, approximately 52% of Cisco’s top line is from American operations. There’s minimal overlap between the two which would be appealing to Cisco.

As mentioned above, with the wrap up of Mobile World Congress I expect M&A activity to pick up. Large players such as Oracle, Cisco and IBM need to continuously innovate to keep their market leading positions. All three have proven to be aggressive acquirers in the past. I used Cisco as the potential acquirer because they made the most sense, but wouldn’t be surprised to see Radcom taken out by the other players. The company is too small to stand alone, but offers a compelling add-on to a larger pipeline.

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