The Unified Communications and Collaboration (UCC) market is expected to experience strong growth as enterprises of all sizes look to improve productivity and enable remote and mobile employees. According to an IDC survey in 2017, 37% of organizations currently use UCC solutions, while 21% intend to deploy a UCC system within one year. While on-premises UCC solutions are currently the most popular type of deployment, we expect cloud/hosted UCC deployments to experience the strongest growth as more organizations look to reduce capital costs, improve application performance and gain the ability to scale up quickly if needed.

Unified Communications and Collaboration is a platform that takes various methods used for conferencing, such as text messaging, audio, video and virtual white boards and makes them available through a single interface which can be accessed by both desktop and mobile device users. According to IDC, the worldwide UCC market is expected to grow at a 10.6% CAGR between 2016 and 2021, reaching $49.6 billion. We expect Cisco and Microsoft will continue to benefit from the overall growth in the UCC market. According to an IDC survey, 25% of respondents were using a Microsoft solution while 22.1% used Cisco.

One of the fastest areas of growth is in the mobile UCC market, which is expected to expand at a 17.6% CAGR between 2016 and 2021, reaching roughly $2 billion. The workforce is shifting away from the traditional office setting as enterprises embrace employee mobility. According to IDC, mobile workers are expected to comprise 72% of the U.S. workforce by 2019. Enterprises that provide mobility solutions to employees and support them with enhanced collaboration tools stand to reap substantial benefits over traditional employers. According to a study published by Stanford University in 2015, enterprises that offered remote work options reduced employee turnover by roughly 50%. In addition, according to the Harvard Business Review, 87% of remote workers feel more connected through the use of video conferencing tools, while a separate 2015 report from ConnectSolutions concluded that 30% of remote employees reported being able to accomplish more in less time.

Premises-based solutions are expected to grow at a 4.5% CAGR between 2016 and 2021, while cloud/hosted solutions are projected to expand at a 14.8% CAGR. According to IDC, by 2021, cloud/hosted solutions will account for 65.6% of the total UCC market. The growth in this market should be driven by a number of factors, including: enterprises looking to shift to a monthly subscription model as opposed to purchasing and managing networking equipment, and building acceptance of public clouds among businesses reliant on high levels of security (financial institutions and governments). We think established companies like Microsoft (MSFT 70 ***) and Cisco (CSCO 32 ***) will benefit from this growth, given they offer both on-premises and cloud/hosted solutions, and have large existing customer bases, but we note increased competition in the cloud space from smaller companies like 8X8 (EGHT 15 NR) and Fuze, as well as larger companies like Alphabet (GOOGL 979 ****) and Nokia (NOK 6 ****).

Cisco designs, manufactures, and sells Internet Protocol (IP) based networking and other products related to the communications and information technology industry worldwide. Cisco's Collaboration portfolio (9% of total Apr-Q sales) integrates voice, video, data and mobile applications on fixed and mobile networks across a wide range of devices/endpoints and related IT equipment such as mobile phones, tablets, and desktop and laptop computers. Cisco's products combine software, hardware and networking, with delivery in the cloud, on premises, or in a hybrid solution. Notable products include the conferencing platform WebEx and business messaging service Spark. Despite our positive view of Cisco's position in the UCC market, our hold opinion reflects challenges in its two largest segments: switching (29% of total Apr-Q sales) and service (26%).

Microsoft develops, licenses and supports a wide range of software products, services and devices. Microsoft's UCC solution, known as Skype for Business, is part of the Productivity and Business Processes segment (36% of Mar-Q sales). Skype for Business, formerly known as Microsoft Lync, combines instant messaging, peer-to-peer VoIP and video, web conferencing capabilities, and enterprise voice in a single user interface. This software can either be on premises, running on a variety of partner hardware platforms, or based in a cloud or hybrid environment. By leveraging its large Windows operating system install base, Microsoft has been able to quickly gain share in the UCC market. Our hold opinion reflects our expectation that near-term growth will be restrained by Microsoft's considerable exposure to the declining PC market.

Nokia offers mobile networking solutions, such as hardware, software and services for telecommunications operators, enterprises, and related markets. Nokia gained additional exposure to the UCC market with its acquisition of Alcatel-Lucent, which closed in January 2016. Its Rapport Enterprise Communications solution is designed to replace legacy systems, transforming them into open, hybrid cloud-based applications. In addition, it offers a variety of products under the OpenTouch name, aimed at the mobility market. While Nokia lags behind market leaders Microsoft and Cisco, we think the combination of Alcatel-Lucent and Nokia provides the end-to-end solutions needed to compete effectively in the UCC market.

iShares Global Tech ETF (IXN 133 Overweight) offers exposure to large-cap tech stocks around the world. MSFT and CSCO are among its top-10 holdings and Nokia is also inside. The ETF has a 0.47% expense ratio and has approximately 75% of its assets in US stocks.

Potential risks to our thesis include lower spending on UCC solutions by enterprises and increased pricing pressure on subscription services due to competition.