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

Welcome to Cisco's 2020 Virtual Annual Meeting of Shareholders. At the request of Cisco, today's conference is being recorded. If you have any objections, you may disconnect. Now I'd like to introduce Marilyn Mora, Head of Investor Relations. Ma'am, you may begin.

Thank you. Good morning, ladies and gentlemen. Welcome to Cisco's 2020 Annual Meeting of Shareholders. This is Marilyn Mora, Head of Investor Relations, and I'm joined by Chuck Robbins, our Chairman and CEO; and Evan Sloves, Secretary of the company. The matters we will be discussing today include forward-looking statements, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on Form 10-K and 10-Q, which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. You will also find full GAAP to non-GAAP reconciliation information in the financial information section of our Investor Relations website. I will now turn the meeting over to Chuck.

Good morning. It's now 8 a.m. and the 2020 annual meeting of the shareholders of Cisco Systems, Inc. will please come to order. I am Chuck Robbins, Chairman and CEO, and I will chair this meeting. On behalf of all of us at Cisco, I want to welcome you, and thank you for your attendance. Due to COVID-19, this is the first year we're holding our annual meeting in a virtual format. We'll strive to make the meeting as inclusive as possible by offering our shareholders the same opportunities to participate as provided at our past in-person meetings. Copies of the agenda and rules of conduct are available on the virtual meeting site. With that, it is my pleasure to turn the meeting over to Evan to lead the business portion of the meeting.

Thank you, Chuck. I will conduct the formal portion of this meeting. The polls are open and will close after the presentation of our formal business matters. If you previously voted via the Internet, phone or mail, you do not need to take any additional action. If you have not already voted or you wish to change your vote, please do so before the closing of the polls by using the voting buttons on the portal. After the polls close, we will announce the preliminary results of the votes. After the formal portion of the meeting, we will have a business review presented by Chuck, followed by a Q&A session. During the Q&A session, we will be answering previously submitted questions as well as questions submitted online during today's meeting. Any shareholder who would like to ask a question can do so by typing the question in the Ask a Question box and clicking Submit. If we receive substantially similar written question, we may group such questions together and provide a single response to avoid repetition. If we aren't able to respond to a shareholder's properly submitted questions due to time constraints, we'll respond directly to that shareholder after the meeting using the contact information provided. I would now like to acknowledge Cisco's officers that are joining us via telephone. Conall Dempsey of PwC, the company's independent registered public accounting firm, has also called in today. Next, I would like to introduce the rest of the directors that are joining us via telephone, Michele Burns, Michael Capellas, Mark Garrett, Kristina Johnson, Rod McGeary, Brent Saunders and Lisa Su. The Board of Directors has fixed the close of business on October 12, 2020, as the record date for the determination of shareholders entitled to vote at this meeting. We have an affidavit from Broadridge certifying that notice of this meeting was duly given to all shareholders of record, commencing on or about October 21, 2020. American Election Services has been appointed as the inspector of elections for this meeting. Mr. Jim Raitt, who is representing American Election Services, has also called into this meeting. Mr. Raitt has informed me that shareholders owning a majority of the outstanding shares of common stock are present in person or represented by proxy. And as a result, there is a quorum of shareholders for this meeting. Therefore, this meeting is now open to proceed with its business. We will now proceed to the items of business set forth in the agenda. The first matter to be considered is the election of directors of the company. The following individuals have been nominated by the Board upon recommendation of the Nomination and Governance Committee to serve as directors until the next annual meeting of shareholders and until their successors are elected and qualified: Michele Burns, Wesley Bush, Michael Capellas, Mark Garrett, Kristina Johnson, Rod McGeary, Chuck Robbins, Brent Saunders and Lisa Su. No other nominations were received by the deadline of August 23, 2020, therefore, the nominations are closed. The Board of Directors recommend that shareholders vote for the election of each of the nominees. Our next item of business is the approval of the incorporation of Cisco from California to Delaware. The nature of and reasons for the reincorporation of Cisco for which shareholder approval is being sought are set forth in the proxy statement. The Board of Directors recommend shareholders vote for this proposal. Our next item of business is the approval of the amendment and restatement of the Cisco Systems, Inc. 2005 Stock Incentive Plan, including an addition of 95.975 million shares authorized for issuance under the plan and other amendments as described in the proxy statement. The nature of and the reasons for the amendment and restatement of the plan for which shareholder approval is being sought are set forth in the proxy statement. The Board of Directors recommend that shareholders vote for this proposal. Our next item of business is the advisory resolution to approve executive compensation. This is a nonbinding resolution that shareholders approve the compensation of Cisco's named executive officers as disclosed pursuant to the SEC's compensation disclosure rules. The Board of Directors recommend shareholders vote for this proposal. Next is the ratification of the appointment of PricewaterhouseCoopers as the company's independent registered public accounting firm for the fiscal year ending July 31, 2021. The Board of Directors recommends that shareholders vote for this proposal. I will now introduce the resolution proposed by a shareholder for consideration. Cisco's response to the proposal can be found in the proxy statement. Kenneth Steiner has given notice of the proposed resolution. Is John Chevedden or another duly authorized representative here to present the proposal?

Hello. This is John Chevedden. Can you hear me okay?

Yes, we can.

Okay. Independent Board Chairman, shareholders request that our Board of Directors adopt the policy to require that the Chairman of the Board be an independent member of the Board whenever possible. In other words, one person would be the Chairman and another person would be the CEO. This proposal topic won 52% support at Boeing and 54% support at Baxter International in 2020. The Baxter vote is of increased significance because Baxter forced its shareholders to pay for a glossy management pitch regarding so-called management performance soon after it filed its annual meeting proxy. And this did not prevent Baxter shareholders from giving a majority vote for an Independent Board Chairman. Boeing quietly adopted this proposal topic in June 2020, as reported in a Bloomberg article last week. It is more important to have an Independent Board Chairman after our Chairman and CEO, Mr. Charles Robbins received the most negative votes of any Cisco Director in 2019. Plus, there seems to be a leadership vacuum at Cisco in the role of Lead Director. Lead Director, Mr. Michael Capellas, received the second highest negative votes in 2019. Apparently, Mr. Capellas' primary activity for the past 8 years is to be the founder of Capellas Strategic Partners. The market cap of Cisco is $190 billion, I wonder what the market cap of Capellas Strategic Partners is. There seems to be a tremendous imbalance of power here. It seems like a sergeant has an oversight role over a general. Another example of a leadership vacuum is the Executive Pay Committee, Mr. Roderick McGeary, receiving the third highest negative votes. Mr. McGeary's negative votes might be explained by his role in Mr. Robbins' receiving $30 million in total realized pay in 2019. Directors with more than 14 years long tenure control 50% of both the Audit and Nomination Committees. Long tenure can detract from the objectivity and independence of these directors. It would be a management best practice to disclose during this meeting whether Mr. Robbins again received the highest negative votes and whether Mr. Capellas is second again in negative votes. The final voting result will not change much from the voting number known now by management. Please vote yes, Independent Board Chairman. Thank you.

Great. Thank you, Mr. Chevedden. The Board of Directors recommend shareholders vote against this proposal for the reasons set forth in the proxy statement. The business matters for shareholder consideration have been completed and the polls are now closed. I'll share with you the preliminary voting tabulation. Final vote tallies will be posted in an 8-K filed with the SEC within 4 business days and available on our Investor Relations website. According to the preliminary report of the Inspector of Election, each of the persons nominated as a director has been elected. Each nominee received the support of at least 85% of the shares voted with approximately 95% average support. Each nominee also received the support of at least 58% of the company's outstanding shares. The proposal to approve the reincorporation of Cisco from California to Delaware has been approved with the support of approximately 99% of the shares voted. Approximately 68% of the outstanding shares voted for this proposal. The proposal to approve the amendment and restatement of the Cisco Systems, Inc. 2005 Stock Incentive Plan has been approved with the support of approximately 95% of the shares voted. Approximately 65% of the outstanding shares voted for this proposal. The advisory resolution regarding executive compensation has been approved with the support of approximately 93% of the shares voted. Approximately 64% of the outstanding shares voted for this proposal. The proposal to ratify the appointment of PricewaterhouseCoopers as the company's independent registered public accounting firm has been approved with the support of approximately 95% of shares voted. Approximately 79% of the outstanding shares voted for this proposal. The shareholder proposal submitted by Kenneth Steiner was not approved with approximately 67% of shares voted -- voting against this proposal. Approximately 22% of the outstanding shares voted for this proposal. I will now turn the meeting back over to Chuck.

Thank you, Evan. The matters for which this annual meeting of the shareholders was called to consider have been completed. Since we have received no notice of any other business to come before the meeting, the 2020 Annual Meeting of Shareholders is hereby adjourned. I will now proceed with a business review presentation with a question-and-answer session that will follow my presentation. If we could move to the first slide, please. As we look back on FY '20, we saw significant progress in our transformation despite complex times brought on by the COVID-19 pandemic. We had revenues of $49.3 billion and EPS of $3.21. I'll highlight that in our -- at our financial analyst conference in 2017, we laid out key metrics for our transformation. We had a goal of 30% of our revenue by the end of FY '20 coming from software. We had 31% in Q4 of FY '20 and 29% for the entire year. We had a goal of 50% of our revenue coming from software and services. We achieved 51% in fiscal year '20, and we had a goal of 66% of our software revenue being sold as a subscription, and we actually achieved 78%. So the transformation to more software and subscription continues to move along well. Next slide. Over the last 4 fiscal years, we returned $70 billion in cash to our shareholders. And including last 4 fiscal plus year-to-date this fiscal year, we continue to support the dividend. We increased the dividend again in last Q2. We have had a 40% reduction in our share count and our capital allocation strategy of returning a minimum of 50% of our free cash flows to our shareholders annually continues to be a priority for us. We returned 59% of free cash flow to our shareholders, and the dividend has had an 11% CAGR over the past 6 years. Next slide. In Q1, we continue to make steady progress on our software and subscription model. While we still dealt with the ramifications of the pandemic, we were encouraged by the signs of improvement from our order flow perspective as we navigate the challenges in the market, and we continue to transform the business. Our revenue was, however, down 9% at $11.9 billion. Our non-GAAP EPS is $0.76, down 10%, and our subscriptions as a percentage of software was at 78%, up 7 points year-over-year. We're driving new innovation to help our customers connect, secure and automate their environments faster than we ever had before. And I believe we have the right portfolio to capture long-term opportunities in areas such as 400-gig, cloud, 5G, security and collaboration. Next slide. As we work through this year with our customers, partners, our employees and our shareholders, we believe we've built a strong foundation that will help us be successful as we look to the future. As I mentioned before, the metrics that we set out relative to the transition we have performed well against our plan is to build on this success and set some new goals. And I believe we are coming from a position of strength. We have 35 years of trust with our customers, which has really played out over the last 9 to 12 months as we've helped so many of our customers secure their mobile workforce, enable collaboration and help them actually operate in a work-from-home environment that occurred in a very, very short period of time for virtually every company around the world. In our platform, security and privacy, we believe our basic human rights are never an afterthought, and we're trusted to securely connect people across every industry. You may have seen WebEx as a platform for legislation in many governments around the world in education, health care, financial services and manufacturing. Our innovation is core to who we are and what we do. We're focusing -- looking forward on application experience, secure networking, helping our communication, provide our customers with our architectural transition, the future of hybrid work, end-to-end security and an emerging Edge strategy. And we also believe that our customers appreciate choice. They believe in on-prem solutions as well as hybrid cloud solutions in their app-centric world that they live in. They want flexible consumption models with buying options. They want open APIs across our portfolio, which we have delivered. They want to be able to buy our products as integrated systems or perhaps components, which we announced with the availability of our silicon software and optics independent of being in a single system. And our partners certainly helped us scale, and our customers have the choice to choose not only the hardware, software and services that are right, but the appropriate partner to help them implement. On the next slide is we look at what our customers are going through. Pre-pandemic, we recognize that they were trying to reimagine their applications and move them to a cloud-native world. They wanted to focus on securing everything, but primarily their data. If they can secure their data, that is -- those are the crown jewels of most every organization. They are looking to transform their infrastructure in this new hybrid cloud world. And clearly, they set out before the pandemic and definitely post-pandemic to empower their teams not only to communicate and be productive with each other, particularly in this work-from-home environment, but also empowering their teams to take care of their customers more effectively, interact with their customers more effectively. And we think that we have done a good job of positioning our portfolio to help our customers do that. And then finally, this year, probably more so than ever, our purpose came through, which is to power an inclusive future for all. And this is not just a discussion of corporate social responsibility. If you start fundamentally with our core strategy of securely connecting and automating everything for our customers when we provide secure connectivity to people who have not had it previously, a world of opportunities opens up to them. So whether we're connecting people in remote villages, in emerging countries or people in remote areas inside the United States, once they're connected, you can then deliver health care, you can deliver education. And one of the positive things we've learned from this pandemic this year is that you can effectively deliver health care, education and other vital services to people all around the world over video and over the collaboration technology that we have, but you first have to connect them. And when you couple that with our corporate social responsibility beliefs, then we do believe that it is a very powerful purpose for our company, which is to truly power an inclusive future for all. It's now my pleasure to turn the meeting back over to Marilyn Mora to lead the Q&A session. Marilyn, back to you.

Thanks, Chuck. We will now address questions which have been submitted by shareholders. As mentioned earlier, any shareholder who would like to ask a question can do so by typing their question in the Ask a Question box and clicking Submit. If we are unable to respond to a shareholder's properly submitted question due to time constraint, we will respond directly to that shareholder after the meeting using the contact information provided. So with that, let's go ahead and get started. Okay, Chuck, it looks like our first question that was submitted is on capital return with a couple of shareholders asking will your capital allocation policy change now that a new CFO is coming on board?

Well, first of all, we're -- I want to thank Kelly Kramer for the great partnership that we've had as we worked together over the last several years. And we're excited to have Scott Herren begin with us in just a few short days. And while he and I have not had this conversation, I do not anticipate any changes to our capital allocation strategy.

Okay. Thanks, Chuck. Looks like our next one relates to inclusion and diversity. We received lots of interest on this topic in the questions submitted, and they are asking what is Cisco doing to drive more diversity at the executive and Board level?

It's a great question. And certainly, it's been a big focus for us over the last several years. And I think, as we look back, we have made a lot of progress on gender diversity, which is exemplified by both my direct reports on the executive leadership team, almost half are female. And we have good representation on the Board, although we can certainly continue to improve. I think the current focus areas for us, which we actually began late in 2019 before the big focus emerged this year around social justice was really around ethnicity. We have spent a great deal of time with leadership within the black and African-American community inside the company. We had met with them towards the end of 2019 to really understand what it's like to work at Cisco, what we can do. And from that, we launched 100-day sprint and put in place a lot of initiatives. And we'll continue to focus on that and candidly take a lot of the learnings that we had over the years of what enabled us to improve our gender diversity and apply that to the full spectrum of diversity, which is the way that we look at it and how we think about the importance of diversity at Cisco.

Great. Our next question is on Cisco's innovation. And we are being asked, how does Cisco ensure that it stays ahead of the curve on innovation given the continued competitive nature of the market that we're in?

Well, it's effectively what we do for a living. And our teams have done a tremendous job, both with the spend that we have on R&D every year. And right now, if you look at the technologies that we're delivering to our service provider and communications provider and web-scale customers around the architectural transitions, we have a very robust portfolio, the security architecture. The work that the teams have done in the collaboration portfolio, a lot of the work going on around some of the incubation projects as well as the Catalyst 9000 and the innovation that we brought there as well as WiFi 6 and the data center switching portfolio, I think the teams have done a really good job. We continue to focus on our R&D efforts internally as well as partnering and using strategic M&A where it makes sense.

Okay. Chuck, our next topic is one that has been top of mind for a couple of our shareholders that have submitted the questions both today and previously, and that's on our collaboration portfolio and the remote work environment. And the specific question we're being asked is, what changes have you made to ensure products like WebEx are more competitive in the future versus products like Zoom?

Yes, it's a great question. And I think that if you look at monthly meeting attendees or I think the last number I saw was 600 million, we just finished over the last 2 days our first annual WebexOne event where we had 40,000 -- just under 40,000 registered participants in the first 48 hours. I think afterwards, we had roughly 1 million views of the keynote. The teams have brought incredible innovation at a pace that we never have over the last 6 to 9 months. Examples are noise cancellation so that -- which is very unique to the platform, language translation that was announced, new platforms, Webex Desk Camera, Webex Desk Hub, Webex Desk, expanded People Insights, Webex Contact Center. So I think that the teams have certainly increased the rate of innovation, and there's a serious focus on how WebEx actually aligns with our purpose and aligns with what every customer is trying to do right now, which is to create an inclusive environment that enables all their talent to participate and all of their talent to actually add value to the organization, in addition to 2 fundamental things, which is security and privacy. And those 2 are incredibly important, and I believe, post pandemic, many customers will double down on ensuring that as they use these platforms more, that they will revisit the importance of that as they look to the future.

Thanks, Chuck. Our next topic is on racial injustice and the steps Cisco has taken with the following question being asked of, can you tell us more about the initiatives you've undertaken to address the impact of both the pandemic and the social justice inequities we have seen this past year?

Yes. We were very active in the first few months, in particular relative to the pandemic. We worked hard in communities all around the world. We made cash donations. We took video units into hospitals to help. We've helped build pop-up hospitals to deal with capacity issues. Our teams around the world were 3D printing PPE and face shields. So there was just an awful lot of work that went on there. And then on the social justice space, we have been very active with a number of organizations. Most recently, actually, I think, today, we announced that we are a founding member of the OneTen organization or partner of the OneTen organization, which is an effort to hire 1 million Black and African-American employees over the next coming years. So we have a lot of activities. We continue to stay very active in the space. And I think that we're viewed as being a leader in our activities in this space.

Okay. Well, it looks like we're up to our last question here, and that is on Cisco's ability to drive long-term growth and shareholder return. As I see several asking how is the company going to drive long-term growth and value for shareholders in the future.

Yes. I think the broad base of innovation and the progress we've made across the entire portfolio and the emergence of these big secular trends that are playing well for us relative to the hybrid cloud world that's going to be built, this hybrid work environment that we see, the emergence of the Edge, our ability to really deliver a continuous authentication security architecture for our customers, delivering more and more of our technology as a service. So I think the innovation pipeline and the work the teams are doing is quite robust. And then from a shareholder return perspective, we remain committed to our capital strategy. We remain committed to our dividend. And I think the combination of those will provide a good experience for our shareholders in the future, Marilyn.

Yes. Sounds good, Chuck. Thank you. So that is all the time we have today for questions. And this wraps up our Annual Shareholders' Meeting, and we very much thank you for attending and participating in today's meeting, and we look forward to speaking with you in the future. Thank you.

And thank you for participating on today's conference call. This concludes today's call. You may now disconnect at this time.