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

Hey, this is Meta Marshall from Morgan Stanley. I lead up the networking coverage here. We are pleased today to have Cisco. We have Todd Nightingale, SVP and General Manager of the Enterprise Networking and Cloud Group. We also have Marilyn Mora who heads up the Investor Relations effort. I'm going to start with a brief disclosure and hand it off to Marilyn for a little brief disclosure, and then we can jump right in. So for any appropriate disclosures, please check out morganstanley.com/researchdisclosures. If you have any questions, please reach out to your sales representative. Marilyn or Todd, any safe harbor you want to give quickly.

Yes, I can go ahead and do it. So we may make forward-looking statements, and I'd refer you to our Forms 10-K and 10-Q, which is on our SEC filings and our Investor Relations website.

Great. Thanks so much. So Todd, we're pleased to have a chance to talk to you. I don't think investors have had as much of an opportunity to speak with you. And so you took over the enterprise networking and cloud business last year after managing Meraki business since 2014. Meraki has been allowed to kind of operate pretty independently from Cisco for some time, turning it into a pretty phenomenal business. How can you bring some of that Meraki culture with you to Cisco and bring some of the innovative thinking to kind of Cisco's biggest business segment?

Sure. That's a great question. I appreciate the time today, for sure. It's my first time at a Morgan Stanley conference. So I'm very excited to be here. Next time, we'll have an actual fire for a chat. The -- look, I think it was an incredibly powerful, important experience for me to get to operate that Meraki business because, number one, in some ways, Meraki ran and runs independently, but in other ways, it leverages the power of Cisco, the brand, the channel, the go-to-market. There's enormous power in Cisco's ability to reach, especially a networking buyer but, more and more now, beyond every buyer, cloud, DevOps buyers, IoT and line of business buyers who are leveraging technology from us, so that's been great. I got that experience. But there was an important part of that Meraki component, which is this tight-loop operation of a true platform strategy. The Meraki technology has a full campus networking stack, and now we've been able to expand it to cameras and IoT sensors. And the success, the enormous growth of that platform, more than 20x since acquisition, has come by leveraging the power of Cisco but also by running that platform strategy so we can dramatically simplify how our customers experience and use this technology, but we can also drive the entire business by innovative sales motions and lower touch, lower friction sales motions by leveraging the technology and the platform, a sophisticated customer success motion that's incredibly data-driven and we can drive future development in a data-driven way by seeing how our users, our customers really use our technology every single day. Now looking at the larger Cisco portfolio, practically, every part of that is applicable. The telemetry, the foundational telemetry has been put in place so that we can start to make these data-driven decisions. Chuck has recruited Maria Martinez, who practically invented the idea of customer success, to run the customer success motion here. And we're starting to drive this real land and expand and adopt motion through the platforms. And so I think the Meraki experience informed our group's decision to drive a platform strategy across all of our -- all of Cisco infrastructure.

Got it. That's helpful. We usually have very good snacks at the conference. So next year, next year, you're going to have the snacks. Reading some interviews with you in the past, you noted that what drew you to Meraki initially was just kind of the simplicity of the solution. We've had a lot of the networking vendors here over the past couple of days. They've all kind of talked about how customers are looking for simplicity solutions. This reputation is persistent with Meraki, but maybe Cisco hasn't always been known for the simplicity of the solutions. How do you -- you kind of briefly touched on it, a platform approach, but how do you kind of bring that single pane of glass or platform to the Cisco portfolio in general?

Yes. I think the -- look, I think this idea of driving simple IT, it used to be almost a dirty word, like people would think of that as being basic or rudimentary. And Meraki did, in a lot of ways, I think, blazed that trail. Simple is not a dirty word. It should be simple. By simplifying powerful technology, we can democratize the highest value, most differentiated technology Cisco has and put that into the market everywhere. So every customer can access it. So that we can be more competitive for customers with smaller and smaller IT shops as well. That helps us drive market share down. But this really did inform the strategy that, like, we needed a year ago. We needed to get the rest of Cisco's technology onto a platform strategy. We -- and so we took the opportunity. In data center networking, we converged all of the insights, analytics and automation products onto one Nexus dashboard. So our entire Nexus data center switching portfolio, all of the automation, all of the insights are delivered on Nexus dashboard. We did the same thing with cloud and compute. So all of our hybrid cloud and cloud automation technology is now all managed through Intersight. And Intersight is our platform in the cloud automation. And of course, we have Meraki and DNA Center on the campus side. And so we've moved to that platform motion. And now we find ourselves with telemetry being fed into the system from all of those different platforms and really allowing us to make data-driven decisions across the business. That was incredibly, incredibly important. And we have the opportunity to drive, and we are starting to drive, just a radically simpler experience which, to be honest, it drives the land-and-expand motion, which we -- which Cisco being -- having best-in-class components everywhere hasn't always like leaned on. But you can get onboard on the Meraki platform for wireless, then when you add switching or SD-WAN or cameras, it's so much easier. And we see the same thing with Intersight for cloud automation or Nexus for data center. And that is an important motion platform, it can drive a land and expand motion.

Got it. You talked about telemetry. You talked about kind of analytics. Where does that kind of inform, I guess, automation or kind of ways for people to kind of operate their networks as efficiently as you may see a public cloud vendor do?

Yes. I think the reality is we've -- this industry has spent too long, like, getting great logs: sys logs, feeding in RADIUS logs, SNMP traps. There's all of this technology feeding information into what has to be complicated systems so then human beings can try to -- to be honest with you, try to figure out what is really happening, how do I diagnose a problem that's happening right now. That is insufficient in the market right now. If we've learned anything through COVID, it is that these networks should be able to diagnose themselves, and they should be able to pinpoint a problem before it affects users. And so by bringing this telemetry in, we have the opportunity and we are building best-in-class machine learning algorithms that -- by doing exactly that. Like, analytics isn't good enough. Analytics plus algorithm equals insight. And then you have to be able to take action. And so when we think about automation, we think about, well, how do I transform my entire infrastructure in 20 minutes, what type of automation framework, how powerful can the platform be to do that. And there is this reality, really great insights that tell you where the problem is, really great automation that can change and heal the infrastructure. Eventually, you can't close the loop. And you can find fully self-healing algorithms that can diagnose a problem and resolve it. And we're finding that there's applications for that. We even have predictive analytics that is now searching for problems on the Internet and routing people around them. And we're going to start talking about that reaching the market later this year.

Got it. And I just want to remind investors that if they want to put questions through the portal, they'll show up on this laptop, and I can ask them real time. But another maybe area that investors have questions about is just that line of who is a Meraki customer versus a Cisco customer and how that's changed. And then maybe as you make some of these platform changes to the Cisco portfolio, does that line kind of blur even more of who -- what makes sense as a Meraki customer versus a true Cisco customer?

Yes. I get the question. But Meraki's been part of Cisco for 8 years. We think of it -- it's one Cisco, it's part of the family. And the -- but the Catalyst -- what we have now is we have a Catalyst portfolio. And we've expanded our Catalyst line to really build one cohesive operating system, one cohesive platform for not just our switching infrastructure but now wireless is on the Catalyst platform as is routing. So we have Catalyst in our -- we have the traditional Catalyst business, and we have the Meraki business. And to be honest there, you nailed it. These lines are blurring. Last year, we launched our first Meraki switch that was built 100% on Catalyst hardware that allows some of the most differentiated features on the Catalyst side, like software-defined access, group tagging, to be enabled on the Meraki infrastructure for the first time. It also allows us to build one extended fabric between the sites. And you're going to see more and more of this from us, the ability to choose in a more flexible way, whether you want to use DNA Center or on-prem management or you want to use Meraki for cloud management. We hope to deliver more and more flexibility to customers over the next year.

Got it. Another one of the transitions underway at Cisco is just kind of thinking about what becomes a subscription sale, what becomes a product sale. You guys have been very innovative and very successful at Meraki with this initiative. Can you just give a little background on how the subscription worked with Meraki and how that approach was devised?

Sure. It was devised before my time, actually. Some of the Meraki founders, I think, really nailed a simple model here. So on the Meraki side of the house, you would buy a device, like a wireless access point or a router, and you would buy the appropriate license that came with that to operate the cloud management technology. And that was it. Basically, those 2 SKUs are the only thing on the purchase order, and you have -- you get access to everything. And that includes hardware support, all the software and cloud licensing you need and the hardware, which you own. And that -- and so when we shifted the Catalyst technology over to a licensing structure, we -- I think we got about halfway there. We sell that now as a -- all of the software license you need is available, and you can have different tiers with different bundled technologies. And we're able to put a ton of differentiation into that. But we have -- I think we have room to grow there. So we're looking at now moving even closer to that Meraki model where we include all of the licensing and all of the support you need. We just got asked about this on our Global Customer Advisory Board yesterday. So it's very, very timely. And yes, we're already in the process of shifting that over. And I think there's even one more step beyond that, to be honest, which is to start selling complete solutions as a service -- and what that would look like would be, for example, a secure WAN solution might include the router and SD-WAN technology, a security gateway, a cloud security gateway and end-to-end visibility. And instead of buying technology in each of these areas and some hardware and some cloud licenses, we could sell, and we are looking to make this transition over the next 12 months, a single as-a-service offer across the board that would be 100% as-a-service, billed monthly and really deliver that total solution to the customer. We're trying to stay away from like a pure Hardware as a Service motion or Software as a Service motion, deliver a whole solution as a service to the customer, focus on the outcome and the experience not the product and the technology.

Got it. I mean in just -- you mentioned kind of your customer advisory panel yesterday bringing this up. When I think of Cisco customers sometimes, there's some very mature equipment within their networks. They've kept it well past the useful life. And so on a subscription, is there a hurdle of, "Well, we've kept this well past its useful life," and how do you kind of get them there on the, "This is all the stuff that you're missing out on that you could be getting with a subscription?"

I think, to be honest, I think there is 2 parts to that. One is the subscription will help our customers keep their software up to date, which is incredibly important. We see the security ramifications of not doing that. Like, people have to keep their technology patched and updated. It keeps their features fresh and it keeps their security posture high, which is incredibly important. And so I think these subscriptions have already helped thousands and thousands of customers do that. And we are looking even more deeply at driving that. And I will say, like, people are taking a more serious look at security, and that's helping us along here. As far as the hardware being used past its useful life, I think it just proves how robust and resilient that Cisco hardware is. It has a useful life for years to come. But look, I think realistically, people are running more -- these networks are more and more mission critical, more and more business critical. And the technology is moving faster and faster. We don't see the lifespans of this technology expanding, quite the opposite. And we see people wanting to drive to WiFi 6 even in an accelerated way because that transition, that performance provides for a real use of a wireless-only or wireless-first office. That's driving transitions into the switching infrastructure, towards mGIG. We see enormous savings by driving to an SD-WAN infrastructure instead of a traditional WAN or MPLS infrastructure. And so we've had this idea of, like, holding on the hardware until it has fine layers of dust on it. I think we're going to see the industry shifting the other way, for sure.

Yes. I mean it would seem it only takes a couple of solar wind tax, all of a sudden, like, everybody realize how old is some of this equipment in my network and how do I get that out.

I update my iPhone every 24 months, am I really going to trust my switch 8 years later, I don't think so.

Yes. That makes sense. Okay. The Catalyst 9K upgrade cycle has been a story kind of echoing in the ears of investors for many years now. We kind of constantly get the question of where are we in that upgrade cycle and, if they haven't made the upgrade yet, what's kind of getting them across the line to make that upgrade now.

Well, I'll tell you that we definitely see WiFi driving switching upgrades. So WiFi 6 provides a really compelling moment in time to upgrade your WiFi, to be compatible with all the advanced features and battery savings, et cetera, that you're getting from your devices. And in order to get all the power out of WiFi 6, you do need mGIG switching, and so that carries it through. And we've seen an enormous, enormous transition to WiFi 6 and enormous wireless growth over the last 2 quarters. And we're expecting, as people start coming back to the office and the users want to get the most performance out of that wireless, that it's going to start pulling through the switch -- accelerate that switching refresh as well. But I'll tell you, I think there is a bigger picture on switching, which is people really are looking for a more agile network. And when we did -- when we looked at the sites that were most critical, all the critical infrastructure during COVID, almost everyone was trying to figure out how do I make a more autonomous site, how do I deploy cameras and sensors faster, how do I get -- how can I be able to pop up testing sites or inoculation or vaccination sites, how can I pop up different types of retail environments to be as safe as possible, I need to be able to change this infrastructure faster. Software-defined access and a platform-based DNA transition gives you that kind of agility that people need. I think that is -- in the long run, I think that's the value a lot of people are going to be looking for. That's what will drive them to a Cat 9K transition.

Got it. There's nothing like panic to drive people to an upgrade.

It's an opportunity to become more agile.

Yes. No, I just -- it's kind of one of those things where, like, you imagine your inbox, Chuck's inbox over the last year of, like, help me now, how can you help me now. So security is most often the trigger that we kind of hear about on upgrading some older equipment. How do you guys approach that conversation that is still kind of this best-of-breed versus platform versus you guys have the most kind of access to a lot of the telemetry data just given your presence within the network? And so what is that conversation like with customers today? And how has that evolved over time?

Yes. I think -- look, at Cisco, we pride ourselves on having the highest performing and most flexible campus infrastructure on the market -- data center infrastructure on the market, no doubt about it. And we have no intention of stopping that. We have deep investment on the silicon side. We've just closed a case -- deal recently. We have partners across that organization, across that supply chain. And so like that's always going to be important to us. That's who we are or who we have been. But this phenomenon of customers really driving towards agility, a need for insights and automation, that is what we're hearing. Our Global Customer Advisory Board, if I -- when we have a session on automation, it's oversubscribed by 2x because there -- all of them need the ability to transform their infrastructure overnight. They want -- the technology has to support experimentation in their business models: what happens if I restructure the way my entire hospital works, does it -- is it more efficient or less. Well, in order to run that experiment, I have to be able to change the infrastructure. I need to then be able to see what's really happening. Today, we have tons of customers who are focused on the COVID use cases and return-to-office use cases, especially. So all of the, like, pop-up testing sites and all that stuff, that was Phase 1. Now we're seeing customers who are saying, "Well, how can the technology help me enforce social distancing, warn me when social distancing practices aren't being kept? How can they empower a hybrid workplace so that with fewer desks that are more highly spaced, I can still have a more efficient use of those by making sure every desk is used?" And so like, we've been building out technology. Our WebEx rooms now can notify you if you have too many people in the room. I've seen it happen. Trust me that no one likes walking in and telling Chuck, he's not allowed to have 3 people in this room. But the technology doesn't care. The technology will tell him, right? The -- our DNA Spaces technology can find parts of the office where there are too many people that can help do contract tracing, should you need to. Meraki's camera technology we're about to announce is able to run machine learning algorithms to detect desk occupancy based on camera views so that maps can be made available for folks to find desks that are empty but that are still spaced out, so we can get better utilization of our space and a better hybrid work. And this type of transition, it's all supported by the infrastructure they have because it's agile enough to make these changes, to make these kinds of transitions. And if there's one thing our customers are telling us, it's like, they just need to be ready to change, their technology to be flexible and agile.

Okay. Maybe turning to SD-WAN, there's obviously budget available because there's a huge kind of ROI of any of that investment. However, it's probably one of the areas where any number of vendors are going to talk about their kind of solution in the space here. And how do you kind of leverage your legacy with the ISR portfolio? And just kind of best utilize your positioning as installed base but also kind of an innovator within the space?

Yes. I think the deployed base, it makes it easy for people who already own XRs, especially the last 2 generations, to transition into an SD-WAN market. So that's first. But our position in the market also makes it possible for us to partner deeply with cloud providers. And this is incredibly important. When people were deploying MPLS networks, the core use case was site-to-site connectivity. I want secure, reliable connectivity between my sites. Actually, generally speaking, that is not that important anymore. It is far more important that every user has the most efficient and most secure connection to my cloud, to my cloud providers and my private cloud. And so we have deep partnerships with Google and Amazon, Microsoft that allow native connectivity from our SD-WAN fabric to our -- to each of these cloud offerings. And not only is it the easiest to onboard, but it's the most powerful, most optimized, most application-specific technology. And you're going to see at Cisco Live, which is at the end of this month, we're going to be launching SASE architecture, which really takes us to the next level. It provides a security cloud, direct and supports this direct access to cloud providers. But really, it's focused on one policy, one fabric and one experience for all your users, whether they're at a major SD-WAN site, a major campus site on Meraki or Viptela or clients from home running our AnyConnect technology that everyone can connect to the same fabric, have one policy and one experience. And I really think that's the next step and an area that really only Cisco can deliver a solution like that.

Got it. Another question that I've been -- I think we kind of touched upon the campus trends and kind of the return to work and what that can do to campus switching, particularly as you get a lot of WiFi investments. But maybe on the data center environment, I think there's this idea that COVID brought this acceleration of the move to the cloud. But what we're seeing in our own surveys is, now there's kind of the stalling out where the last of the applications that are left are the really hard ones to move. And so you maybe see a slowdown in the migration of the move to cloud. But that leaves a lot of on-premise data centers that need to be managed and need to be made more efficient. And so just what are you seeing? Is the customer demands or kind of the customer requests that are coming from your data center customers any different than kind of what we've talked about on the campus environment?

Well, for sure, it's a very different environment. And we sell, obviously, data center networking technology to those cloud providers. So that's like -- that's sort of a market onto itself. But when we talk about the users, we're talking about folks that have real data center infra. I think the real transition that they're looking -- that they need to make, and that we're working hard to give them the technology to make, is a transition to hybrid cloud. We want to close down data centers and support that through our private cloud solution. That gives the same type of flexibility, of seamless scalability as a public cloud offering, but you can do it in a private data center and you can do it delivering the types of infrastructure and the type of applications you're talking about. And that realization is also really driving an understanding that just about every major enterprise that we work with is focused on a multi-cloud strategy. All of their cloud is not going to land in AWS or Azure, GCP or a private cloud, it is going to be a combination. They're going to use the strengths of all of those things. And it's why our compute and cloud business, we're focused on hybrid cloud, and we're focusing on tooling that's cloud neutral. I need to do workload optimization across all of these. I need to do application performance management across all of these. I need to be able to do seamless Kubernetes deployments, seamless infra as code automation across all of that. And so cloud neutrality is really the name of the game for us when we think about our cloud automation strategy. And we can help customers take those data centers and transition to a private cloud motion, and then really run that hybrid cloud infrastructure from public to private clouds.

Got it. And maybe just from a sales force perspective, Cisco obviously has huge reach. It has probably one of the best channels there is kind of within all of tech. Just how do you get them -- but are used to selling appliances or used to selling kind of in the same motion that they've had. And so clearly, over the years, they've started selling more of these platforms that are kind of more software. But just what is happening in terms of kind of getting the sales force ramped for more of this platform, more simplicity, more automation message?

I'll just thank my Cisco sales friends. People tell -- people have told me for a long time this product sells itself. Our products don't sell themselves. They're sold by the most sophisticated, most talented sales team in the world. But we could make it easier for them. By radically simplifying the way our technology is used, we do 2 things. First is we also simplify the way it's sold. We can turn the breadth of Cisco's portfolio into our biggest strength by making it so much easier for our sellers to present, to demonstrate, to run a free -- a see, try, buy motion with demos and free trials. And this radical simplification of the technology drives a simpler, lower friction sales motion. So we can make it easier for them. And we can make it, importantly, lower friction. So they have more time to build those relationships that matter and find new customers and new opportunities in the market. And there's other things that we do, but the power of the platform is incredibly important. I'll tell you that across the board that we are looking at our go-to market and ways to make it more efficient, how to compensate sellers, so they're focused on recurring revenue and driving platform attach and to realize that our customer motion is not just on the sales team, our customer success teams out of Maria's customer experience group has an enormous touch and the ability to drive adoption. So we've launched enormous adoption teams there that are engaging with customers on onboarding technology and driving this adoption, preparing for renewals but also making sure our customers get the most out of those platforms. So look, I think it's a great question because it's not just about the technology here. It's about building that tight loop, that holistic motion that focuses on the customer experience the whole way through. And that's something I'm getting like super impressed with Chuck and the leadership team, that they're so focused on transitioning Cisco because it's a big lift for us. It is a big change.

And maybe just the last question. We've talked -- clearly, it's a big role you're stepping into. We've talked about a lot of the initiatives. Just how do you prioritize? Like, when you wake up over the next 6 months, what is the 1, 2, 3 on your list of things to do that are specific sales initiatives? What are you publicly willing to say?

Delivering Chuck a strong year-over-year bookings growth is a big part of it. I'll tell you -- I mean I happen to have this one at the tip of my tongue because I've been spending a lot of time talking about the strategy with my team. But for my team, we're focused on 3 things. We're focused on the platform suite strategy we've been talking about. We're focused on the as-a-service transition, that third moat and being able to sell complete solutions as a service. And we're focused on building the team that we all want to lead with a strong focus on diversity and inclusion and a strong focus on the cloud talent and the cloud automation talent that we're going to need for the next 10 years. And those are the 3 things that I wake up and go to bed thinking about every day and as my whole leadership team does, too. So yes, I really appreciate your time today, too. Thank you so much.

Yes. Perfect. Thanks so much, Todd, Marilyn. It's always a pleasure, and I look forward to doing this in person next year.

Absolutely. Thank you.

All right. Thanks.

Thank you.