Zoom Investors Should Pay Attention to Cisco's Latest Acquisition

Cisco (NASDAQ: CSCO) recently agreed to buy BabbleLabs, a California-based firm that uses artificial intelligence to eliminate background noises and enhance voices in videos, for an undisclosed sum.

Cisco plans to integrate BabbleLabs' technology into its Webex video conferencing platform, and claims the acquisition furthers its "commitment to deliver an exceptional video meeting experience from anywhere and on any device." It expects to close the acquisition by the end of the quarter.

Cisco's takeover of this small start-up won't significantly boost its revenue, but it indicates the tech giant remains committed to competing against Zoom Video Communications (NASDAQ: ZM) -- the high-growth video conferencing company which was, ironically, founded by one of Webex's original employees -- and other players in the growing market. Let's take a closer look at why Webex matters to Cisco, how it's expanding that ecosystem, and whether or not Zoom's investors should be concerned.

A woman uses Zoom's video chat software.

Image source: Zoom Video.

Why is Cisco expanding Webex?

Cisco acquired Webex back in 2007, then bundled its services with its other collaboration platforms -- including its unified communications tools, contact centers, video conferencing products, and collaboration endpoint tools like business IP phones, headsets, and corporate "huddle spaces."

Cisco doesn't disclose its revenue from Webex and its other collaboration services separately. Instead, it's bundled with its other software services in its applications division, which generated $5.57 billion in revenue, or 11% of Cisco's top line, in fiscal 2020.

A young woman takes a video call on her laptop.

Image source: Getty Images.

Cisco's application revenue declined 4% during the year, as weaker demand for its unified communications and endpoints solutions offset the growth of Webex, its Internet of Things (IoT) software, and AppDynamics -- the application and business software monitoring company it acquired in 2017.

Back in March, Cisco announced that daily meeting volumes on Webex had more than doubled since the start of the month, and had risen 2.5 times since February. That growth, which coincided with a similar spike in meetings at Zoom, indicated more people were using video conferencing services during the COVID-19 pandemic.

In May, Cisco stated Webex's meeting volumes had tripled since February. During last quarter's conference call in August, CEO Chuck Robbins said Webex generated "double-digit growth as businesses, governments, educators, and frontline workers everywhere have embraced remote work." Robbins expects Webex's "momentum to continue" as it converts more free trial users to paid subscriptions.

In short, expanding Webex can strengthen Cisco's applications division, and that growth can offset the slowdown in its core infrastructure platforms business -- which is struggling with soft demand for its routers, switches, and other networking devices amid the global slowdown.

Why does BabbleLabs matter to Cisco?

Based on a recent global survey it conducted, Cisco found that 98% of workers experienced "frustration from distractions during video meetings when working from home," and noted two of the top five frustrations involved background noise.

Therefore, Cisco clearly sees an opportunity to improve Webex with BabbleLabs' tools and lock in more users. However, the acquisition should also be considered a defensive move against Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google, which launched AI-powered noise-canceling features for Google Meet in June, and Zoom, which launched a similar feature in early August.

Why should Zoom investors keep an eye on Webex?

Zoom's investors, which have already watched the stock surge more than 330% this year, probably aren't too concerned about Webex, Meet, or other competitors.

After all, Zoom's revenue surged 88% last year and soared another 169% annually in the first quarter throughout the COVID-19 shutdowns. Those jaw-dropping growth rates suggest there's plenty of room for all these video meeting platforms to expand without trampling each other.

However, Zoom could struggle to maintain that momentum after the pandemic passes, and its ongoing security issues could push users toward more experienced tech giants like Cisco and Google. If Zoom's growth decelerates as Cisco, Google, and other competitors upgrade their video conferencing platforms, it could struggle to justify its stock's frothy forward P/E ratio of over 230.

The key takeaway

Cisco's Webex probably won't crush Zoom anytime soon, but Zoom's investors should be mindful of the tech giant's latest moves. Cisco has acquired dozens of companies in recent years, and it still held $29.4 billion in cash, cash equivalents, and investments last quarter -- which gives its plenty of ways to strengthen Webex's position against Zoom.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Cisco Systems. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Zoom Video Communications. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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