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

Yes. So we're still in the early phases of this. I think Chuck talked about some of this on the earnings call, but the first real waves of it kind of hits in 2021 and particularly in the second half 2021. And so you really won't hit scale until you get to what's our fiscal year '22. The teams and my teams, the sales teams, our CX teams are all working on this now. We're trying to get ahead of it and are really focused on how do we maximize the opportunity there. And I think as we look at the traction there and look at what's been going on, we're seeing that it's really about adoption of the software and how well the software is doing. Like we talked about, SD-WAN is doing exceptionally well. We're also seeing in the enterprise that as you see the ramp of things like WiFi 6, as you see the ramp of Catalyst 9K and people start to do more sophisticated things with the network, they are adopting the new capabilities much faster as part of this migration to the new infrastructure. And so we're still -- like I said, we're still in the early days, but we feel good about where we're going and where we're focused as far as the campus refresh and the SD-WAN refresh, and it's linked back into those renewals.

Great. And can you just help frame the value proposition? Why would someone necessarily renew? What's the harm in not renewing if you're running on some of the older legacy on updated software? What's the real value proposition that will kind of determine? And again, what's the downside if people do not extend?

Yes. So if you look at it, the reason people want the new software capability is a lot of what we talked about that we saw with the pandemic got exposed. The people that had automation, the people that had highly automated infrastructure and had high degrees of insights, the analytics and the infrastructure, actually made the transition to work-from-home fairly easily. There's still a ton of work, don't get me wrong, but relative to some of their peers at least. And what this exposed to a lot of enterprises is that in order for them to be agile, which they need whether it's because of a pandemic or whether it's because of the needs of the business, they have to have higher degrees of automation and agility. And fundamentally, the software that's incrementally provided that drives subscription model is all about that. It's all about having a controller-based architecture that has both automation integrated into it as well as analytics. And so what we're seeing is actually, people really understand that, especially with the most -- latest pressure test that was caused by COVID. And if the software is not renewed, then they -- they'll get less access to these new innovations, less capability to actually take advantage of newer releases. And so there's the implication to the business itself and its ability to have agility to be able to respond to the needs of the business and to be able to actually have those capabilities. I'd say the only other piece is around security. We -- it's been less in the news and forefront now, but security is still top of mind for enterprises. And a lot of the capabilities that you get via this controller architecture enable you to have higher degree of security, particularly against things like availability based attacks where you have people coming in and they're not trying to steal data from you. They're just trying to disrupt your operations. Ransomware is the most obvious example of this. It doesn't actually steal anything from you. It just keeps you from getting to your data as a user, and we've seen it completely disrupt operations for all kinds of enterprises. Well, part of this automation framework is also to enable enterprises to do very sophisticated things around how do I segment the network and how do I enable it so that if you, Robert, get infected, you don't infect anybody else and we keep you isolated even when you're on the network. That's a big deal as well, and security always resonates and always sells. And I think as you're seeing more and more devices come on the network, you're going to see people understand this -- that this is critical more and more and that it'll be another thing that they'll need to renew to continue to get access to from a capability point of view.

Great. So I'd like to shift over to the data center, I guess, in particular, the 400 [ gig ] that's coming up. Can you help frame really what factors do you think are going to be the primary drivers of adoption? Why would a hyperscaler deploy 400-gig as opposed to just utilizing additional 100-gig products in a different setup? Really, what is going to be the primary push? And then with that background, why do you believe Cisco is well suited to handle these needs?

Yes. So there's kind of 2 sides to this, the hyperscaler deploying a 400-gig and there's the enterprise. But both of them share a common element, which is when people are installing infrastructure, they're installing infrastructure not just for today but for the next 5, 6, 7 years. And when you want to do that, you want to make sure what you install today can meet the needs as the business grows. And for web scalers, obviously, they've had explosive growth. That means they need to be able to scale to accomplish -- they're supposed to grow. For them, it may be not in the next 5 to 7 years, maybe for the next 2 to 3 years. That growth just simply comes from more traffic that can be generated because there are more workloads. There's more things going on around AI/ML. There's just more traffic in general because you have more devices connected. You have more users that are aggregating into those platforms. When you look at an enterprise, it's a similar concept, and Cisco is very well positioned to take advantage of this. We already have DC switches that are 400-gig capable. We've seen some of that get early traction in the market. We -- that said, we don't believe that the market's really going to scale towards -- until you get towards the end of calendar year '21. And a lot of that is gated by some of the optics capabilities, but those are [ coming ]. And for now, we're seeing people demand that they have the capability from an architectural point of view to take advantage of 400-gig, and we're able to meet that need. And so we'll see it continue to grow. Adoption has been metered a little bit by COVID-19, but we have -- that's really around how do you qualify some of this kit, how do you get some of the stuff deployed. But we do have customers moving beyond tests and are starting in deployment, and we feel good about where -- our position for that opportunity. And I think in web scale, in particular, it creates another opportunity for us to insert new capabilities either through the acquisition that we've acquired on the optics side or through a new silicon we've been building like the Silicon One launch we had, I think it was now almost a year ago.

And so these hyperscaler customers, they've begun releasing their 2021 CapEx outlooks. And so we'd be curious to hear, how has this compared to what your previous expectations were going into the new year? And do you have any sort of sense of what percentage might flow to networking and really into your key areas? If you have any sort of breakdown, above average, below average. Anything to help us frame sort of that next-year-out hyperscaler spend?

Yes. And to come back to Marty's point, I don't think I can provide you a forward-looking forecast. But we've been working on a technology road map for this for 5 years, and we see the MSDCs really embracing it. It's across our switching technology, our roam technology, our optical technology and even our security capabilities. Last December, we announced a complete change in our strategy, where we talked about disaggregating our software, our hardware and allowing the hyperscalers to consume however they want, whether it's just our silicon itself, whether it's our optics or whether it's our software or it's a fully integrated system. And I can tell you that we have won several designs and web scale spaces across every one of those facets. And we're going to continue to push on that, and we're going to continue to drive to that. And that's largely incremental business to Cisco. And so we're pretty excited about the innovation we've brought to market and where it can go from here.

Great. So I'd like to touch on sort of the latest that you've been seeing with WiFi 6 deployment. How has COVID really impacted what your expectations were for the deployment? Are you seeing any return to closer to what you were originally expecting? Just the latest update in terms of what kind of adoption or uptake we might see, whether it's a percentage of access point deployment over the coming near term, really just the latest update on WiFi 6.

Yes. It's a wireless first world, and the first interaction with that from an end user is the WiFi network. And what we're seeing with WiFi 6 is rapid adoption. The device ecosystem is in place, and so meaning that your phones are now WiFi 6-capable. Your laptops are WiFi 6-capable. And so that's been there, and it was there much earlier than some of the prior transitions. And so that's helped. I think the other piece is as people are out of the office, a lot of the companies are taking advantage of that and using this time to deploy new incremental WiFi. And the nice thing there is deploying WiFi can be intrusive when people are working because you have to actually go deploy the wireless near the workers. This gives the -- an opportunity for companies to go retrofit buildings while people are out of the office. And that's really important, kind of back to what I said earlier, is one of the big things from a wireless point of view is constraints that can be there for things like video conferencing apps. You can -- just by replacing the WiFi 4 AP with a WiFi 6 AP, you can get like a 300% increase in the capability to support high-def video streams at the desktop. So if I'm going to have a lot of workers now not going into conference rooms but sitting at their desk and doing video conferencing but being in the office, I'm going to need WiFi 6 to help support that. And we're having that conversation with lots of enterprises as they're all thinking about, okay, people are coming back. How are they going to work even when their office is going to be different than how they used to work? What do I need to change to support that? And WiFi 6 is one of those things that can help. And what we've seen from an overall industry adoption is the majority of our wireless deployments now are WiFi 6-enabled, and we're seeing very good adoption sort of overall for the new standard. So we're pretty excited about where this can go from here. And the nice part is, is when you deploy WiFi 6, you inherently also set up an access switching upgrade because WiFi 6 is higher bandwidth. So it actually needs what's called an mGig connection, a multigigabit connection, back to the switch to maximize the throughput of that wireless access point. And so to get that, it's not only a WiFi 6 upgrade, you also have to upgrade the access switch to support that. There -- right now, most companies are prioritizing their WiFi upgrade, but it's going to create a demand on the access switch. When you upgrade that access switch, that'll create a demand in the aggregation switch, which will create a demand on the core switch. So this is a big transition for Cisco and one where we're spending a lot of focus and time on because it does have that ripple effect of not only driving spend in wireless but also driving spend throughout the network because of the higher speeds and the higher bandwidths required.

And with this, as I think about 5G, do you have any concerns? Are there any precautions being taken that a 5G connection can replace some of your typical access point business, or really how that might impact use of the network if some of the more typical wired infrastructure is replaced by 5G connectivity?

Yes. The -- 5G is an incredible technology, and the Hype Cycle is through the roof on it. And so I think it's important to anchor into use cases, right, to kind of compartmentalize this. What we believe is there will be huge applications for 5G in the enterprise. Wireless WAN, and so the ability to connect the branch router wirelessly, has been something that's already -- a pretty good percentage of our routers are connected via wireless WAN. 5G makes that much, much better. And that'll take off -- that'll be the first thing that takes off, and that will go really well. 5G on the LAN, on the local area infrastructure, as a capability to replace WiFi, we actually believe it'll be used to augment WiFi. And where we think it'll get used based on our conversations with lots of customers and working through a lot of these use cases are in spots where you have requirements for a particular device. So think about industrial facilities where maybe you have a robot that's operating at a huge RPM. So it's running really fast. And maybe it's a bottling plant and it's doing bottling and it needs superfast connectivity back into the network to do its job, to monitor and it needs it to be -- have very clean spectrum. 5G can help do that. It's a perfect application for it. But for those workers that are in a plant or for other machines like robots that go around and pick stuff off shelves, they don't need the same requirements. And WiFi is going to be good enough for those users. It's going to be highly predictable, and it's going to be more cost effective for the enterprise in most cases. And so what we see is the need to actually have these 2 infrastructures blended, and that's where Cisco is focused is how do we help people run both, manage both and experience both. And we're doing several different investments to do that on a go-forward basis both through partnerships with SPs, through partnerships with third parties who make different pieces of an infrastructure stack and then also investments in things like -- that Cisco is bringing to market like OpenRoaming where you make it simple to move between 5G and WiFi. The only other thing I'll add is in the U.S. as well as in South Korea as well as some other countries, in WiFi, there's also been the [ open-end ] of the, what's called, the WiFi 6E or the additional spectrum for WiFi. And this actually gives us the opportunity to also produce a lot of the same use cases that you get from cellular using WiFi because it gives you a huge swath of spectrum that you can now use that's clean and doesn't have any interferers for wireless in the enterprise. And I think that's the other big thing that's coming next year that will also be highly disruptive to the wireless space and is something that allow WiFi to satisfy even more use cases than it does today.

Okay. Well, I think we're out of time right now. So Scott, Marty, really appreciate your time. It's quite insightful. Thanks again for joining us.

Thank you, Robert.

Thank you so much, Robert. Appreciate the opportunity to talk to everybody. Thank you.

Bye-bye.