Cisco Systems, Inc. (CSCO) Earnings Call Transcript & Summary

I think we'll get started here right on time to make use of everybody's time. I'm Meta Marshall. I head up the networking group here at Morgan Stanley. We have Sachin Gupta, SVP from the Enterprise Networking Group at Cisco here with us today, and we're delighted. So I'm going to read some disclosures. I think Sachin is going to read a brief disclosure, and then we'll kind of jump into questions. So please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at morganstanley.com/researchdisclosures or at the research desk.

And I'll just say that I'll be making forward-looking statements that are subject to the risks and uncertainties that you can read more about in our 10-K and 10-Q filings.

Great. So I appreciate you being here today. Working on the leadership team of Enterprise Networking, like let's maybe just start with what you see as kind of the biggest Cisco customer networking needs today.

The biggest needs from networking are actually driven based on the problems that they're trying to solve for their end users, for their businesses. And those can be: I'm trying to transform the workplace experience. It's all about mobility. It's about being able to bring all kinds of devices on and provide the best experience. At the same time, deliver the best security. And then on the other end of it is cloud. So you've got people and things moving, but you've also got applications and data that can now sit in many public cloud providers or be SaaS applications or still be in your private data center. So in this environment, you've moved from quite a static world to a very dynamic mobile world, both on the user side and the application side. And in this moment, the old ways of networking, which could have been manual box by box, more hardware fixed driven don't quite work anymore. So what they're looking for is, how can I automate this infrastructure, reimagine it, automate it? How can I get analytics and data out of it to better deliver security, better deliver the best experience? And then how can I ensure secure access, policy-based access, for all things that are connecting inside my infrastructure as well as all the way to the cloud?

Okay. Got it. And I mean, Cisco has a long pedigree of the kind of core hardware networking solutions that you kind of spoke about. But where have you guys been able to kind of augment that portfolio organically to provide these more dynamic solutions as well as inorganically?

Yes. Look, I think in that stack that we're trying to deliver, we call our architectural solution intent-based networking. In that stack, and I can talk more about the real effect, the hardware, the ASICs, the systems, the optics are still very, very critical. So getting the right price-performance, features, power, space from the systems is important. But then beyond that, it's the programmability, the flexibility of the silicon architecture, what data telemetry, streaming telemetry can you get out of this is really, really important. So the systems are still really important. Number one, the operating system on top of that, that was in-house, but we had to redo it completely and build a modern, programmable, modular operating system. Beyond that, we continue to look for opportunities where we can augment the solutions. One example is we bought Viptela for a software-defined WAN solution and are able to take our hardware systems, use Viptela software to provide the best industry-leading SD-WAN solution. Another example is taking location data out of our wireless infrastructure, and we bought a company called July Systems, that is able to take that, create a middle lower layer and, in the cloud, offer that data up, which is business-relevant. So it's not just an X, Y coordinate, it tells you that you're actually in the pharmacy, in the retail store, and here's how many people are coming in, how long they're staying; and make it more relevant. So those are 2 quick examples. And there's more where once you have an intent-based networking software platform, there's more and more value we can deliver through software applications on top, if you will. One last example I'll give you is a company we launched a few years ago called Lancope that gave us the Stealthwatch product. And that allows us to take the data that's coming out of these intent-based networking systems, the infrastructure, and allow you to detect malware and threats based on network traffic analytics.

And so where -- you just mentioned kind of some of the acquisitions that you've brought in, where do you still partner or where kind of on the analytics layer is it critical to kind of integrate with other partner?

The partnerships -- that's a great point. The partnerships are on the user access device side and to offer solutions in that area as well as on the cloud side. And let me touch on both of those for a minute. So on the access side, for example, we've been partnering with Apple for a very long time. It's very important for the IT administrator to understand the experience of the end device. So what is your iPhone, your iPad, experiencing on this WiFi network? And then how do I help you troubleshoot and do a better experience? How do you prioritize the traffic from the device itself? If you don't have any kind of relationship with the end device provider, you can't offer an outcome like that. Another one is we partner with STANLEY Healthcare. So STANLEY Healthcare provides a baby monitoring service in hospitals, where they need to make sure that the network that it's running on is certified and always delivers the service in the SLA that they want to provide to their customer. But by partnering with STANLEY, they can be assured that the integration with the Cisco wireless network, Cisco access intent-based network always works. And so it allows them to move much more quickly, and the customers to get the value much more quickly through STANLEY. So that's on the user and the access side. On the cloud side, you've got to go partner with the biggest public cloud players as well as the SaaS providers. And so we have more -- very recently announced partnerships with AWS as well as Azure. And then on the Microsoft side, also with Office 365 as a SaaS application. In terms of how do you take your software-defined WAN fabric to get connectivity, to get security, to get application policy for the best experience from anywhere the users are in the branches, in the campuses, all the way into where the applications reside. And for that, you need to have some sort of virtual presence or integration with that cloud provider or SaaS provider. So the partnerships and the ecosystem are really important on, I think, both ends of the equation.

Got it. We'll come back to kind of intent-based networking in a minute, but I just wanted to maybe start with 5 years ago, there was kind of this thought that software-defined networking was going to eat away at kind of the Cisco model of integrated software and hardware. And really, what we saw was that kind of the opposite happened. White box stayed very limited and SD-WAN maybe didn't see kind of the -- or SDN didn't see the adoption maybe we were expecting. How have you seen SDN evolve? And how do you think, like, this time with intent-based networking, we could see more adoption of that model?

Right, absolutely. So I think I'll give you my view on this. So we are using some of the SDN concepts in intent-based networking. Let me see if I can contrast the difference a little bit. In software-defined networking, a huge focus was in a switch or a router, how do I program an individual device for how the traffic needs to flow? So think of it as very much inside a box, what do you need to do to program it to move packets, move traffic around? And sort of using a software layer to do that programming. What we're talking about from intent-based networking is a much larger abstraction. And so for a customer, like, they don't really care about how a switch is programming the packet flow. That's not what their business is about. Their business is about, I want doctors having access to medical records. I want patients having access to the patient application. I want my heart rate monitor to go through an administration server. I want guests to have access to the Internet. I want these applications to have a great experience. And that's it. And I want the network to automatically deliver based on my intent. So intent-based networking will -- takes that software-defined concept, abstracts it to a level where we can absorb intent from a user and then automate the provisioning of an entire set of network devices. So not one, hundreds or thousands on different types of network devices and then get data out of that infrastructure to ensure that what you were trying to get out of it, the intent, was actually delivered. So think of it as a box level technology versus a system-wide abstraction with intent-based networking.

Got it. And how is the -- I think we traditionally think of CCIE certified engineers within a data center who have been working with their Cisco infrastructure for forever. When you move to intent-based networking, like is the skill set changed? How are you training kind of those engineers who are in networks to kind of adapt to that new framework?

Yes, that's a great question. We get that question from our customers a lot. And it's -- the answer is that it's an augmentation of the skills they have. So networking isn't going away with intent-based networking. You still need to know how that connectivity happens and how to build large-scale networks that are highly available and secure. But you now have better tool sets, you now need to think about policy in a different way. So previously, you were thinking about IP addresses and how do you make things work at a sort of ground level. And now you have an ability to say, okay, how will I integrate with active directory, how will I securely identify this heart rate monitor, how do I construct policy, what access right should a heart rate monitor have? So the way we are sort of adding skills is how do you get better at thinking about security policy, how do you think about the API access that we provide to our software systems now so that if you need to bring different components together and add your own software on top, that becomes very, very easy. So it's a little bit of a networking person with a little bit of software skills and being able to be much more agile in this new environment. And so we're now working to add some API programming skills through DevNet. By the way, our DevNet program is incredibly powerful here where we are hundreds of thousands of people in the community -- in the networking community are being reskilled for just these new types of skills.

Got it. And so do you find that the conversation that's taking place with the customer is much more around kind of the business purpose or the speed to business purpose as opposed to kind of OpEx savings that can kind of come with some of the advantages...

Yes, absolutely. And of course, they're looking for OpEx savings as well, right? It's not a -- it's just -- one side of the equation doesn't work there. But the conversation starts with the security and segmentation I'm trying to create. For example, like I have a threat that comes in, can proliferate everywhere and infect every one of my users very quickly if I don't have a segmented network. I've been wanting to do segmentation. It's been very complicated. But now with intent-based networking, it is automated. I can do it very, very quickly. So I get a better outcome. And because I'm not doing it manually with operations-heavy manual tasks, I can save on costs while I'm doing it. And because you're giving me all of the data that helps me figure out what happened to this laptop user, why can't they connect, I can get them back to productivity very quickly and the IT person can root cause the issue very easily based on that data and telemetry. So again, we're trying to help on both the business side of the equation as well as the operations and the cost.

And another change that we've seen with networks, where clearly Cisco can offer solutions, is when they're moving to hybrid cloud. So does this intent-based networking conversation get coupled as they're thinking about their hybrid cloud strategy or where kind of pacing of that strategy do you see the intent-based networking start -- conversations starting?

So the intent-based networking architecture applies to every domain that you think about in networking. And so if you think about it from a campus branch access network, wired and wireless, or from a wide area network that's connecting over the Internet, over MPLS, over satellite, over 4G or 5G, doesn't matter, into a hybrid cloud environment. And then what happens within the hybrid cloud environment is also really important. In all of these domains, the intent-based networking concept prevails. And so what our customers are looking for is when I describe that extraction for you, the policy construct that they think about is from a user to an application. And for that policy to be delivered by the underlying network and the software and systems, we need to be able to deliver those principles in every domain. And so in the access network, I know that you're a doctor, but the application you're trying to access could be in a private data center, in a public cloud, could be a SaaS application. And I can link all of those through that software-defined WAN in the middle. And so it is completely applicable to hybrid cloud. And in hybrid cloud, again, those partnerships with the likes of, as I said, Azure or with AWS that we recently talked about, become extremely important because the networking concepts in public cloud are quite different because they all have their own tools and software capabilities, that IT comes to us and says, help me with consistency so that the tooling that I use, the intent-based networking software capabilities that I use from Cisco on-prem, in a hybrid cloud world, I need to be able to use the same in the cloud. And what we've done recently, we've taken our SD-WAN architecture, extended that to hybrid cloud. We've taken our ACI application-centric infrastructure that allows you to provision policy for applications. We've extended that to public cloud environments as well. And we've taken Stealthwatch, which was a threat detection software that was on-premise primarily and also made that available in the cloud. So IT can take the same tooling and get consistency regardless of which environment they're trying to manage.

Okay. And does that kind of same philosophy apply to -- as we move to more kind of container-based architectures versus VM-based architectures?

Yes, absolutely. So the -- as you go from VM based to container based to land or function based, you're going to see the application environment, obviously, continue to move to the best, most cost efficient, most agile development environment, and we need to continue to support those. All of those change a little bit the security paradigm and how the connectivity needs to be set up. And so we also take -- put a lot of effort into making sure the software we're building with intent-based networking, it has the flexibility to address that. Because once you move from VMs to containers, you may see a scaling that change significantly. And you need to be able to address that. So have you built the virtual router that you're putting out there to be able to handle that scale? So those are some of the elements that change, but fundamentally, what IT is trying to do doesn't change. The unit that they're connecting to on the application side does change.

And so what ends up being the most -- clearly, there's competitors that have tried to come in at various pieces of either SDN or market segmentation or SD-WAN, where do you find that the Cisco value proposition ends up being strongest or kind of keeping competitor --- keeping your competitive position as strong?

Yes, I think, to solve the customer problems here that I described from a user mobility security or cloud point of view, having an architectural solution in every domain and then linking it across domains is really the only way to deliver it. And I think what we find is we're pretty unique in that not only are we talking about having best-of-breed individual systems. So yes, if we need to have the best switch, best router, best access point, we've got that. But then having the operating system, these software controllers, these software layers and applications on top of that in one domain but then being able to link that across multiple domains, is completely unique. And our customers are very actively having those conversations, deploying that. Like how do I take a network segment that I created in my campus, carry it over the WAN into the cloud? How do I set up an application policy in the software that I use for cloud and data center, which is ACI from Cisco, and how do I provide that SLA automatically through the WAN? So this is an architecture approach that it's per domain but also links these domains together to deliver the outcomes from user and device all the way to application and data, which is what the customers are asking for.

Got it. And what other kind of products or services kind of get brought into this conversation as they rethink their network architecture? Is it security? Just kind of -- is it always kicking off an SD-WAN conversation, just kind of what other areas of the network are getting touched as you think about intent-based networking?

So there's some that are brought in very, very frequently. And I think #1 is security. I think one of the biggest reasons to move to an intent-based network is to deliver the best security and segmentation, threat detection capabilities. And other reason is to provide the best application experience. And so security product integration, whether it's with our cloud security solutions with Umbrella or Threat Grid or whether it's with things like Stealthwatch, I think it's absolutely critical. But then integration from the application side with like AppD. So if I want to know if the experience the user is having for a particular application is based on an issue on the circuit that they're using or the run time environment for the application itself, that integration with AppD allows us to provide an end-to-end solution, where AppD is monitoring how the application is executing in the app environment, and we can monitor the network end-to-end at the same time. And so I think there's sort of an ability to talk about the solution broadly with a lot more Cisco products. In fact, even the collaboration products, a lot of the questions are, look, you have WebEx, and we want to make sure WebEx, as a SaaS application, perform its best. But for that, you need to design your network correctly; and how do we help you do that.

Got it. And so as your guys' team has laid out over the past couple of years, the Cisco networking focus has been around analytics, automation, response. And clearly, you've kind of highlighted a lot of the products and improvements you've made. But like where are you still working on enhancing that portfolio?

We continue to -- so automation; analytics; I think, response, we look at it broadly as security, we continue to enhance that in every single domain, more and more capability and linking across the domains. So how do you automate the linkage between access and WAN, for example? We're going to continue working on that. There's -- we're going to continue looking for opportunities based on customer feedback on -- when you think about segmentation, for example. In segmentation, how do you identify a device, how do you identify what it's doing and how do we help you construct policy? So that's all software work based on the analytics that we have. We recently took the data that we have and added AI/ML capability to personalize it for your environment, help you root cause issues much, much more quickly. So we're going to continue to drive that. I think a huge focus for us, though, beyond the continued software innovation is to work with our partners and work with our customer experience organization to really help customers get complete value out of the intent-based networking solutions. So huge focus on -- you talked about the reskilling of customers themselves but, at the same time, how can we help them move from a very traditional way of networking to a very different way of networking. And that's not a box sale. That's not a -- here's a box, go for it. That is a lot of design, consulting, training work that we're doing with them to make sure that they're able to get the full value, again, in every domain and then can start linking them together.

And so are those kind of overlay sales teams? Or are those retraining the kind of the core networking sales people to kind of abstract the conversation that they've been having?

Yes, I think it's always going to be a combination. But in general, the ability to sell solutions, we've had that for several decades, and our partners are very good at solutions selling where if this is the outcome you're looking for, here's the solution you need. But then following through after that with partner services, Cisco Customer Experience Group, our own services, to help you unbox, deploy, turn it on, set up the policies, understand how you use the data and the software, adopt basically the entire value. That's a tremendous focus for us. So it's less on the presales aspect of it and more investments on post sales, helping customers get the entire value.

Got it. Maybe moving on to SD-WAN for a little bit. This has probably been one of the biggest growth areas of networking for quite a while. Cisco has a natural position in that given kind of your branch router business. But how have you seen customers look at the SD-WAN solution -- or customer decision and what is kind of factored into -- or have been the cue to kind of make that decision?

The biggest driver for SD-WAN isn't, "I'm trying to do a router upgrade." The biggest driver is hybrid cloud. The biggest driver is SaaS applications that I'm trying to consume. And when you try to consume, for example, Office 365, Office 365 will say to you that it's best -- to get the best experience, come over the Internet or come over a circuit that immediately drops you into my network. And I can give you the best experience for Office 365. If you go to another SaaS provider, they're going to give you the same answer. And same thing with the GCPs, with Azure, with AWS. They want to make sure that you are connecting to them more directly, more quickly. If you start leveraging Internet, it opens up a security hole potentially because now you might be exposed. Previously, you had your security stack in one place and you brought all the traffic from your branches to that one place. And now if you need to open up your branch to directly connect to these cloud players, you might be exposing yourself from a security point of view. And so you're looking at, how do I set up the connectivity, where do I run security? In the cloud, virtually, using a SaaS service, on-premise? How do I deliver application optimization to get the best experience? So I'm having to rethink my WAN and my cloud connectivity and security overall. That's where SD-WAN comes in. That's why it is so hot. So as you think about cloud adoption, which everybody has seen the data on that, incredibly fast. Customers are having to rethink, how do I get the right connectivity experience and security for my cloud journey. And the SD-WAN story is really, really important. Now we have a huge advantage in that the WAN networking that they're familiar with and the router that they're using is ours in many, many, many cases. And so we have an ability to take that router and now also through a software layer in the cloud, make it an SD-WAN router and preserve some of the capabilities that they're used to, but now give them the benefits that they need to -- and the capabilities they need to run a hybrid cloud environment with SD-WAN. And so we're having those conversations. We're actively -- you're right, it's a very strong business.

And so how are they making the decision between kind of the solutions that you had, maybe a Viptela, maybe a service provider, managed service provider, kind of providing that service? Like what is weighing on that decision of what they go forward with for SD-WAN?

So a good portion of our routing business, even when it was more traditional WAN management, has been as a managed service through service providers or partners. And so we don't really see a change there. I mean you still have SD-WAN being delivered as a managed service through pretty much all the top service providers for -- with the Cisco SD-WAN solution. So what we find is we have our Viptela SD-WAN solution and for sort of another portion of the market, we have our Meraki SD-WAN solution and both are sold directly to customers as well as sold through managed service providers. And customers are looking at do I have -- what kind of need do I have? And is it better for me to consume this as a package through a managed service provider? Or do I want to run this on my own and making a decision on the partner based on that.

And so have there been any kind of increased partnerships with maybe the SaaS application providers of -- if you're going through your Microsoft Office 365 discussion and then they're saying, okay, we can have a great solution if we tunnel directly in and kind of building a partnership with Microsoft or just getting pulled in through other avenues? Or is it just some of those companies?

Yes. So we call our capability on-ramp to SaaS applications or on-ramp to public cloud. And I just mentioned Office 365 as an example, but there's a few dozen application providers there where for every SaaS application, if you want to be able to select the best way to connect to them, exchanging data from their end is really important because with the SaaS application that you're consuming, like Office 365, the IT does not have a presence on that end. And so what needs to happen is, through the Cisco-Microsoft partnership, we're able to exchange telemetry data in order to make the best selection of a path to get you the best experience. So for example, hey, there's a problem with the path you're taking or the POP that you're connecting to and through the telemetry data, I can automatically redirect that traffic to make sure the users at the site continue to have the best experience. And so that's just one example, but we continue to work on more and more SaaS applications, especially the ones that our customers want and are asking us for a better experience.

Got it. Are there any questions for Sachin? Great. [ François ].

How can Cisco help enterprises having more workers working from home?

How can Cisco help enterprises having more workers working from home? That's a great question and perhaps top of mind in many cases right now. When you think about working from home, you want to make sure that it's another sort of site or space they're connecting from, you want to make sure same thing. Can I bring them to the application security and deliver the best experience? So traditionally, that concept was you VPN from your home into my corporate site. Well, from your home, it may be better for you to go over the Internet and go to Office 365 and Exchange. For that, how do I make sure you are a secure user that I authorized for these services and give you a VPN-less experience that works better. So this is part of a framework called Zero Trust that Cisco has multiple solutions that come together to deliver. So one part of that is, for example, our Duo acquisition. So Duo will allow you to do multifactor authentication and say, [ François ], you are authorized from your home without VPN-ing in to connect to Office 365 or another application or Box or something like that, or SND or Salesforce. And so now you get the application access seamlessly and securely from your home. And at the same time, if we need to deliver better experience for you, how do we work -- and that's more working with service providers on how do we build better networks and to provide that connectivity from where you're at, all the way to the application to deliver the better experience. And so those are -- again, security and experience are the outcomes people look for. And in this case, even though the underlying network may not be the enterprise's network, we still can offer a security software layer on top to make that much better.

Got it. Well, we're basically out of time. So Sachin, I appreciate you being here today, and thanks, everybody, for being here.

Thank you so much.