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

Got it. Got it. And then we're going to segue a little bit more to the telecommunication landscape of things. And I was hoping you could outline some of the wins you are seeing in the 5G backhaul and packet core side of mass-scale infrastructure. And I think one thing would be interesting is how have conversations with service providers progressed through the pandemic as it pertains specifically to the telecom side.

Yes. So I mentioned the Japan market share. A lot of that market share is because they've been building out their backhaul infrastructure. And we're seeing wins in other parts of Asia as well as our traditional markets where we've had greater strength. So those are certainly more of the transport side. From a mobile core perspective for -- our people call that the packet core kind of in the 4G world, and now you think of that as the 5G SA core, so I'm just going to refer to them all generically as the mobile core. So we've had tremendous wins here in the U.S. We've been public with T-Mobile, which is the first provider in the U.S. to have a 5G SA core. So some people refer to that as kind of the real 5G deployments here in the U.S. across a broad swath of the entire country. And we have wins in Western Europe and Asia as well. And we're also starting to see kind of early feedback on private 5G wins as well. We have wins here in the U.S. as well as in Asia with that, but it's still very, very early and it's still a nascent market for 5G private deployments. But we have many, many, many wins over the past several years of private 4G deployments, mostly in the mining space and things of that nature. But we believe that we've got technology leadership position not just in the transport world but in this mobile core world as well with our early movement to virtualization many, many years ago and then our adoption of micro services or cloud-native-based technology for our mobile core and how that helps our operators deploying this technology significantly more efficiently than they have in the past. So we're excited about where we are and the market potential. Now you asked about COVID. We've actually seen for those customers who had not already made their 5G technology decisions, we've seen COVID actually slow that down a bit and push things out by 9 to 12 months where -- for lots of reasons. Sometimes it's the spectrum auctions were delayed by certain countries. We also saw the ability for certain countries to get permits to deploy radio technology through certain municipalities was delayed and then also just not having their own staff in the office to do evaluations of technology. So we saw definite pushouts, again, if you have not already made your technology decision. If you already made your technology decision and if you were on the path of deployment, there were very minor hiccups in the beginning, but that's been mostly proceeding at pace. But the majority of the world have not yet made their technology decisions for a mobile core or for backhaul, and so there's a little bit of a pushout from that perspective. And we've obviously been coming up with ways to help them do a lot of the testing they normally would have done on their own premise as they can now do that virtually using our services or using our facilities, and that has been helping keep things back on track.

Got it. Got it. There's one question came up on my side is in 2019 at Mobile World Congress, you announced a very elaborate case study that you guys did with Rakuten, and we heard a lot about that kind of design, that kind of core, and there's all the different components to that. How many of these large kind of packet core deployments or architecture do you expect that we could see in potentially 2021, right, get deployed or get announced? I know that the time line has moved around, but when do you really expect to see the large kind of movements for these big type of deployments start to really show up?

Yes. So I think there's really, I think, 2 parts to that question if I could read between the tea leaves there. So the partnership with Rakuten for their initial portion of their deployment has been great. I think we've got by far the largest Far Edge deployment in the world with Rakuten, and that's extremely exciting. And that's for a high-quality, high-availability piece of infrastructure. The second part of that is we really helped them deploy their virtualized RAN technology with the orchestration cloud software that was needed as well as the mobile core, the transport architecture for their IP as well as the overall orchestration software for their automation, for networking as well as their cloud technology. So that was the different elements that we were partnering with them on. Now that is migrating from a virtualized RAN, and I'm not talking about [indiscernible], over to an O-RAN environment. And so there's a lot of players in that space. And so we have been investing heavily to build an end-to-end ecosystem to further drive this O-RAN environment forward. And I think this is one of the areas that has been slightly delayed a bit by COVID because of the need to not only testing your labs but get these out into a live network so you can look at the performance. Like when I say you, service providers can look at the performance of the infrastructure, make sure that it meets their performance requirements to go into broad-based scale of deployments. What we've seen over the last 9 months is a continued and growing amount of interest in the market for O-RAN-based deployments. This is why we continue to invest in bringing together this entire ecosystem. And we've seen that newer greenfield providers continue to embrace this technology very aggressively, but we're also seeing that what you consider kind of existing or brownfield operators have also been more interested. So we've seen Vodafone in the U.K. talk about how they're going to be deploying O-RAN, vRAN technology. We've also seen Telefónica, their CTO make a public statement that they are interested in deploying this technology. So we're seeing it move from kind of greenfield only to those providers who already have a large amount of infrastructure out there. So our play continues to be at the orchestration layer, continue to drive the ecosystem, the transport as well as that automation layer to help bring this forward. And we're engaging in multiple accounts with that. And as we move forward in those, we'll be sure to share the details with all of you.

Got it. Got it. And I want to segue back to the web scaler side of things. And one thing, I guess, you already kind of touched on was the demand profile of web scalers. But if we were to dive a little bit deeper into that and break it down between 100 gig and 400 gig, how would you characterize the demand profiles of each of the switching speeds?

Yes. So what we've seen so far is -- and there's still a large amount of 100 gig that's being deployed. In fact, some of our customers are actually buying 400-gig ports but deploying them as 100-gig ports until they get the optics to the price points that they expect to be able to get to a large amount of scale. So from a platform perspective, we have the greatest density. We have by far the lowest power per 100 gig, per 400 gig and the greatest amount of actual capability versus anybody else in the market. And so that's driving and continuing to drive just a tremendous amount of interest in our Silicon One-based platforms. And that's helping to drive what I would consider significant wins in the web and hyperscaler piece. And this is something that we're going to continue to invest very heavily in to make sure that we keep our competitive edge in this area. As I mentioned, we already announced a nice set of silicon. We expect to announce the platform as part of that in the not-too-distant future as well.

Got it. Got it. And then maybe just shifting gears a little bit to the overall M&A strategy of the company. And I was hoping you could kind of provide or give the acquisition that comprises the Silicon One platform and then provide a brief overview for the audience on the optics strategy of the company just because there have been a couple of acquisitions made over the couple of years that have fitted in different places in the portfolio.

Yes. So we've been building optics for over a decade now. It started out with an acquisition 10 years ago. We have since acquired 3 optics companies in total. And we also have -- obviously, you're all aware, we've announced the intent to acquire Acacia for $2.6 billion, and we're awaiting one final approval to get that done. And we think that it's been critically important to have that key intellectual property of technologies like silicon photonics to be able to support not only data center-level optics but also digital-coherent optics so that we can participate in what is an ever-increasing portion of the TAM for connectivity. And what people may not realize is when -- even when we talk about things like optics, there's silicon inside the optics themselves. And in some of our customers, we actually sell just the silicon, and then our customers actually build optic modules themselves. So we're very familiar with this business model of being able to sell components on their own like optics or some components of the optics or silicon standalone or systems. And it's not just something we just woke up one day and locked. We've been moving towards this business model for many, many years. So our optics strategy is to own the key intellectual property to innovate at the same pace or faster than what we have been doing on our own silicon for networking and our systems and software so that we can help to continue to drive the overall cost down for infrastructure because, as we know, that's critically important for all of our major customers around the world. And that's just kind of probably a 2-minute refresher on our broad-based strategy here.

Got it. Got it. And then I think we're kind of getting tight on time, but I do have one important question towards the end of my question list that I want to touch up with you. It's related to disaggregation of hardware and software. And I think one of the big reasons why I bring this up is AT&T recently announced that they will use Cisco's IOS XR software for converged IP edge routing, and it's not for its core routing software. And what we wanted to know is how prevalent do you expect disaggregated work and deals such as these to be in the coming years. Should we be expecting a lot more of these kinds of announcements and architectures in the coming future? And then I have one other follow-up after that.

Sure. I'm really proud of the partnership with AT&T around using our IOS XR7 software and be able to put that on to white boxes. The white boxes that they have are not too different from what we have on our own from a -- when we use our Broadcom silicon, we build very similar-looking devices. So it wasn't much of a stretch to go and get that software to work on AT&T's specific platform. I'll call out that AT&T spends $20 billion-plus a year on CapEx. So they've got the people and the investment and the scale needed to make disaggregation work. And we're seeing the same thing with kind of some of the top hyperscale customers as well. They've got the scale. They've got the CapEx spend to go and make that work. The majority of our customers need an integrated system. They need to have one kind of throat to choke, so to speak. They need to be able to have one phone number to call in case something breaks. They need global distribution of our warehouses so that they can get RMAs in a timely fashion in 2 hours or 4 hours. They don't want to sell spare. And so it's not just the disaggregation, it puts you in entirely different ecosystem. And so the things that you normally would get from Cisco, you know how to do a lot of those things on your own because you decided to go down this disaggregation path. And if you have the scale and the technical competency and know-how, then it can make sense for you to do that. But we're seeing a broad portion of our customers after we have a very open conversation with them because we're very willing to do it. But after we have the open conversation with them, the majority of them by far stick with the fully integrated model. And I definitely see that, obviously, we're going to keep with the disaggregation as a portion of our strategy. And we're going to continue to work with folks like AT&T and the hyperscale customers on this disaggregation, but I don't see any major movements towards this of my current customer base. But obviously, we're willing to stay very open, and we're going to meet our customers wherever they want to meet us.

Got it. Got it. So I know we were in a little bit late starting this one, but I do want to respect everyone's time heading into the next slot. Jonathan, thank you very much for the time, and I hope everyone enjoyed this fireside chat.

Thank you. Appreciate it.

Thank you, Jonathan. Absolutely. Thank you for the time.