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Cisco (CSCO) continues to make progress with its shift from hardware to software and businesses with recurring revenue. The company's soft guidance on Wednesday, however, suggests the changes are not coming fast enough to offset challenges the networking giant faces, and raises the question of whether Cisco could make a large acquisition to speed things up. 

Total revenue for the fiscal third quarter was $11.9 billion, down 1%, but topping forecasts. Cisco expects revenue to decline 4% to 6% in the fourth quarter, a larger drop than investors expected.

"People could handle a 1% or 2% year-over-year drop," Edward Jones analyst Dave Heger said. "The guidance for a 4% to 6% drop broke out of what the recent trend has been."

Cisco is managing the mature switching and routing business while it develops growth businesses. "A lot of investors fear a sudden drop off in that core part of the business," Heger said.

Businesses with recurring revenue made up 31% of our total revenue from recurring offers, up from 29% a year ago. Cisco is building up its growth businesses, but not fast enough.

"While the performance is encouraging, the transformation could take multiple years to play out and Cisco could look to make a more transformative acquisition to help accelerate the pace," BMO Capital Markets analyst Tim Long wrote in a report on fiscal third-quarter earnings.

Cisco's priorities include the Internet of things and apps, security, the cloud, data center and analytics, and network technology.

Cisco closed the $3.7 billion purchase of network and application monitoring company AppDynamics in the quarter and also announced the $610 million acquisition of networking technology company Viptella and the $125 million acquisition of artificial intelligence platform MindMeld.

"These acquisitions support our goal of offering customers extraordinary value through a combination of organic and inorganic innovation, and they are aligned to our strategy of investing to drive long-term growth and helping us transition to more recurring software and subscription revenue," CEO Chuck Robbins said during the Wednesday earnings call.

Cisco could look for technology it could infuse into its networking business, Heger suggested. "Anything that could further position them for this move towards more of a virtualized networking or software-defined networking," he said.

The Internet of things is another possibility. Cisco acquired IoT platform Jasper for $1.4 billion last year, and Heger suggested that the company could shop around for companies with analytics capabilities that it could apply to the burgeoning array of networked devices. "A lot of the value in the Internet of things lies in being able to crunch and analyze the data that is coming in from devices," he said.

Cisco could have more resources to make acquisitions if the Trump administration can follow through on its planned tax breaks for corporations. The company would fare especially well in a tax holiday on offshore cash, which Trump recently talked up.

Editors' pick: Originally published May 18.

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