Presidio Execs: Cisco Software Subscription Push Creates Great Managed Services Opportunities

Presidio leaders said the decision by vendors like Cisco to bifurcate the hardware and software licensing around a single product could result in a services windfall.

"We do look at it as an opportunity because it's a way for us to create 'as-a-Service' models with our customers for their private infrastructure on which they're buying this hardware plus software," Paul Fletcher, Presidio's CFO, told Wall Street analysts Thursday. "It actually creates a greater managed services opportunity for us."

The arrangement should generate more opportunities for the New York-based company, No. 21 on the 2017 CRN Solution Provider 500, to sell managed services, adoption services, and consumption monitoring services to end users, according to Fletcher.  

[Related: Presidio Snags Ex-Dimension Data North America President For Regional Leadership Role]

Clients will need to obtain the software subscription to unlock the desired features within the Cisco hardware they purchased, Fletcher said, especially since the newer features are coming out in that way. Presidio will also benefit from the setup long-term since it's expected to smooth out some of the revenue streams around refresh cycles, according to Fletcher.

In the old days, Fletcher said end users could choose to keep their routing and switching assets in the closet for however long they liked without ever renewing or refreshing them. But now, at a bare minimum, customers will be required to refresh the software licensing every three years.  

"It's somewhat ingenious from the manufacturer's standpoint," Fletcher said.    

Presidio has seen an uptick in revenue coming from software subscriptions as customers get more comfortable consuming those services separate from hardware, according to CEO Bob Cagnazzi. This has boosted Presidio's gross margin dollars, Cagnazzi said, but served as a headwind to its top-line revenue.  

The solution provider is also seeing customers who early on moved aggressively into public cloud start to make investments in private and multi-cloud, Cagnazzi said. Having a foothold in several different types of cloud will help these end users balance performance, economics, compliance and security issues, according to Cagnazzi.

Margins on public cloud deals are usually a couple of hundred basis points lower than private cloud setups, Fletcher said. However, the public cloud agreements can be as large as $10 billion on a yearly basis, according to Fletcher, and those companies don't necessitate establishing a relationship and managing instances, performance, consumption, and adoption.

From a compute standpoint, Cagnazzi said Cisco UCS has long been Presidio's primary platform for complex projects or multi-cloud environments. But this year, Cagnazzi said the solution provider sees really strong growth around the Dell and HP platforms.  

Sales for the quarter ended June 30 tumbled to $729.3 million, down 3.3 percent from $753.9 million the year prior. That missed Seeking Alpha's projection of $733.2 million.

Net income improved to $10.4 million, or 11 cents per share, up from a net loss of $7.4 million, or 10 cents per share, a year earlier. On a pro forma basis, net income jumped to $30.6 million, or 32 cents per diluted share, up 30.8 percent from $23.4 million, or 25 cents per diluted share, last year. That was in-line with Seeking Alpha's estimate.

For all of fiscal 2017, revenue jumped to $2.82 billion, up 3.8 percent from $2.71 billion the year prior. Net income, meanwhile, rose to $4.4 million, or 5 cents diluted per share, up from a net loss of $3.4 million, or 5 cents per diluted share, last year.

Presidio's stock was down $1.15 (8.24%) to $12.80 in after-hours trading Thursday. The solution provider began trading as a public company on March 10 after its IPO raised $233 million from investors.

Digital infrastructure revenue in the quarter plummeted to $496.9 million, down 11.7 percent from $563 million last year due to lower revenue generated by government clients, particularly in the federal government. The change in software subscriptions delivery and the associated net revenue treatment also negatively impacted revenue growth.

Cloud revenue, meanwhile, jumped to $134 million, up 11.9 percent from $119.8 million a year ago thanks to strong demand around multi-cloud and IT transformation, converged and hyper-converged infrastructure, data center modernization, and associated services.

Security revenue skyrocketed to $98.4 million, up 38.4 percent from $71.1 million last year as a result of customers looking to stay ahead of increasingly complex cybersecurity threats. Cisco accounted for 67 percent of Presidio's purchases from manufacturers in fiscal 2017, while Dell and Palo Alto Networks comprised 9 percent and 2 percent of the company's purchases last year, respectively.    

For the coming year, Presidio said it expects pro forma diluted earnings per share to grow in the high single-digit range on revenue growth of 5.5 percent. The company said it expects continued strong execution in the security and cloud solution areas.  

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