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

I think in our filings, we outlined some of the things that we're doing from a supply chain perspective. So I'll probably won't comment on any specific suppliers or any specific ordering levels. One thing I'll say is we believe we have the best supply chain team in the industry. We're not alone on that. I think Gartner just gave them the #1 place in the supply chains for the second year in a row. And our supply chain team is moving heaven and earth to get product to our customers. And -- I think we talked a little bit about that on the earnings call with an erosion, what we believe, a transient erosion in margins as a result of expedites and other measures that we're taking to get product to our customers. So I don't want to go into any more detail in our filings, but we're taking prudent but aggressive measures to get product to customers as quickly as we can.

Got it. Let me ask you about some of the bigger ticket items within enterprise and cloud for Cisco, and I want to start off with the Catalyst 9000, which has been a very -- I think, objectively, it's been a very successful product. And it's not necessarily a one size fits all and that, obviously, there are different iterations where you're replacing the 2000, 3000, 4000, 5000, 6000 families with the equivalent 9000 series. And not all those rollouts happened at the same time. The 6000 was rolled out much later than had been the case with the 2000. But the question for you is if I think about historical rollouts of other products in Cisco's history, if my memory serves me, I've been covering your company over a long time. This product already would have been long in the tooth, and we would have been seeing a rollover already, I think, well before today in terms of the growth, yet the past couple of quarters, you off-cited strong growth for the 9000. And so my question to you is, how much runway? How much duration is left on this very important key product line? Not just for revenue, but also for bottom line, and has a very healthy margin structure. Do you have visibility as to that duration? And if there is a long runway ahead, is my sense, what's changed? Why is it different? If I'm correct, that this, in fact, is different than previous adoption cycles? What's different about this one?

Yes. I have to go back and look at some of those previous adoption cycles. I mean this has been a bigger cycle for us. I think just the timing of the Catalyst 9000 launch. I mean as we said before, the Catalyst 9000 was the fastest launching product in terms of revenue ramp in Cisco's history at the time. And I'd have to think -- I don't think we've exceeded that since the launch of the Catalyst 9000. So it's clearly like a star product for us. We're -- obviously, as you know, continue to see significant growth. We saw double-digit revenue growth in the Catalyst 9000 family last quarter. And I think we've seen that orders accelerating sequentially now 4 quarters in a row. So it certainly does not look to us like the wave is cresting or about to come down. And we've said, I think, all along that this would be a long multiyear replacement and upgrade cycle. And that's what we continue to see is a multiyear investment cycle there. I think that we -- one of the things that -- I don't know if it's different, but that stands out for me, for what it's worth about this cycle is that the star of the show is the Catalyst 9000 equipment, clearly, from a revenue perspective. But we've layered in a lot of additional innovation here, right, with the recurring software license and the value that our customers get from automation platforms like DNA Center. Now with the integration of things like ThousandEyes that gives them a visibility to the performance of the network and the ability to improve it, that's now included in the DNA premier license, for instance, which a lot of customers are finding very attractive as they look at the different tiers of licenses we offer. So one thing that is different about the Catalyst 9000 is it's certainly an excellent family of networking products. We're super proud of everything we do there, and our customers rely on us for that technology, but it brings a lot of other value and has provided us with a platform to deliver additional innovation to our customers through the recurring software and the extensibility of that platform. And I think that is something that, from my perspective, does feel a little bit different than the past cycles.

Well, that does resonate. When you all launched the 9000, it struck me that you really were at least trying to shift the battlefield going from the traditional selling a hot box with greater throughput and other greater capabilities to really selling an architecture where you've integrated security, app visibility, net visibility, automation, orchestration, et cetera. And that's really a very different approach. It's more of a solution sale as opposed to a box sale. Of course, begs the question is not one size fits all for enterprise customers. Some will always buy best-of-breed and others are going to want that architecture. And you listen to Juniper, Arista, Cisco, everybody's got a great story to tell. They're from different perspectives, but certainly from your perspective. I trust -- well, let me ask you the question, is that architecture resonating and it begs the question, but what percentage of enterprises you're actually raising in architecture as opposed to stick into a traditional best-of-breed?

Yes. I mean we think it's resonating, and we think that's one of the reasons you're seeing that Catalyst 9000 cycle perhaps is different from some of the past cycles. The -- I will say the ThousandEyes' capability, in particular, has been something that's been extremely popular. We announced at Cisco Live that we were integrating ThousandEyes with our catalyst products and with AppD and now I think yesterday at our -- we held an event -- future pod event where we announced a bunch of new cloud products and services. And yesterday, we announced integration of ThousandEyes into our Nexus as well as our SD-WAN capabilities. So what you're seeing us do now is bring kind of a world-class visibility capability that will span the customer's own network as well as the Internet because that's what their users are spanning. They're going to Office 365 and other SaaS services like WebEx on a regular basis, but clearly, the on-prem network is still important. But our ability to extract deep data and telemetry from that set of products and deliver a more complete picture to users and IT departments of the performance they're experiencing as well as what they can do to remediate any performance issues is just one example of what we -- of the additional value we can deliver with that architectural approach. And I would say that, that has been a particularly appealing capability to a lot of our customers.

All right. That's -- I think it's a good segue to cloud access. What is your strategy with respect to enabling customers access to the cloud? And if I could broaden the question, I think cloud networking, there's a number of young turks, Alkira and Aviatrix come to mind, NU and VMware and HP and a whole lot of others. We're obviously focused on this hybrid and multi-cloud environment where enterprises have adopted and are adopting multiple clouds, including private cloud, that's probably going to be the dominant IT environment. And also for medium enterprise as well, at least a certain portion of them. What is your approach? And how does that stack up competitively versus what others are doing? And what's the opportunity for Cisco? How much of this is opportunity? How much of it is just damage control, guarding against the risk?

Well, I mean, I think there's a tremendous opportunity. I mean I'd note outside of a few product lines like, for example, UCS, the vast majority of our products are not substituted by cloud. You can't move your enterprise switch or wireless access point, for instance, out of your building and into the cloud for obvious physical reasons. And so we really see the balance across our entire portfolio on this as being more of an opportunity than a threat. And what we're seeing in the broadest levels is that our customers are looking for ways to deploy common policies and common capabilities, as you said, Paul, across multiple clouds as well as private clouds and their on-prem environments. And we -- I believe Cisco is incredibly well positioned to take advantage of that. We're one of the largest IT companies who is, in fact, cloud-agnostic or cloud-neutral. We are not seeking to move our customers' workloads to our cloud per se. And we're broad enough to be able to partner and we've announced partners -- partnerships with Google, with Amazon, with Azure and, frankly, with other cloud players as well. So we think we're in a place to bring this together for our customers. And you're going to see just yesterday at our future cloud event we announced some new things, including our service mesh capability for application-oriented networking. We've obviously, at Cisco Live earlier this year, announced integrations with Google Cloud as well as Megaport to provide kind of preferred premium cloud connectivity integrated with our SD-WAN fabric. We see a lot of customers interested in using the SD-WAN fabric as a way not just to connect all of their branches and their headquarters together into the Internet, but now to connect to their workloads in the cloud and to provide a higher performance access to SaaS services like WebEx and Office 365. So we see a pretty broad opportunity there. And I think you'll continue to see us drive kind of this multi-cloud view across our product lines and drive solutions to our customers that simplify their operations and make them more consistent across multiple clouds in their on-prem environments.

Kip, I know it's a bad form to ask you to mention smaller competitors. It's like asking for it's -- once upon a time, bad example about [ ages ] But I trust this is an answer to the cloud flares and zscalers in the world that come from different departure points. But certainly, it comes -- I think it can be transduced to network as a service and the risk opposes you -- this is your answer. You're going to be partnering with the big guys in the cloud, coming out with your own network as a service approach. This is still fairly young, I take it.

Yes, that's right. I mean we launched Cisco Plus actually at Cisco Live just earlier this year and also launched our network as a service kind of strategy and our Cisco Plus SASE, of course, that's the secure agile service edge capability just at Cisco Live. And what we're seeing is, we believe, in the networking -- there's been, as a service offers in certain parts of IT for some time, including, for example, in the compute and storage side, which I very direct analogs in the cloud world. And in fact, we also announced our Cisco Plus hybrid cloud offer, which gives customers who prefer UCS technologies, access to that type of consumption-based offer. But we think there's a big opportunity for us to innovate in the network as a service area, including in SASE. That's not an area that has been given this sort of capability and it's an area where I think we can bring a lot of innovation. And one thing we've seen, for instance, in SASE, is it's very clear to everyone that SASE includes both networking and security. We think those are 2 areas Cisco's incredibly strong in. So we're very happy to combine those capabilities and bring them to market for our customers. But there's a -- I believe, there's actually a third leg to the stool that isn't talked about as much. And that's actually the visibility capability. And once again, I'll bring up ThousandEyes. One of the things that we were looking forward on, as we acquired ThousandEyes, was actually the SASE service transition, because as you move to an as-a-service model where customers are relying on Cisco and our partners, for instance, to help run essentially through SASE and other things, parts of their infrastructure, it becomes incredibly important that those customers have clear visibility to the performance and the results that they're getting from that infrastructure. That is in many ways, the product that they are consuming. And so ThousandEyes, we believe, gives us a really highly differentiated capability across the as-a-service networking portfolio, where we plan to really drive innovation. It gives our customers something really different. I'll also note that it's not just visibility. We're actually able to use the intelligence coming out of ThousandEyes, global network of probes, to not just show customers the performance they're getting, but to optimize the performance of things like SASE and to route traffic in ways that actually improve the performance for our customers. And we think that, that's a differentiator for us as well in that market.

Before we wrap up, I'll just note that ThousandEyes have a lot of traction out of the gate and certainly up until the time you acquired it. Hopefully, you all maintain that traction and enhance both their portfolio and your portfolio in terms of the integration and cross sell.

Yes. We've been really excited about the reception that technology and that solution has received with our customers. I mean -- I'll just say that that's been a wonderful experience for our customers, and we're really happy about the way things are going there.

I want to keep you on clients. I want to make sure I keep going on time, but let me let you -- however much time you want to do it, what closing thoughts do you want to leave the investment community with?

Well, first of all, thank you for the time today. It's usual, great conversation. I think we covered a lot of the key things. I don't know how much I would add. I think we're excited about return to work. We don't have a crystal ball. There's lots of different things that could happen, but we certainly see a strong case for a very network and video collaboration intensive workplace. And we think that, that is an environment where we can add a ton of value for our clients. We're really excited about the opportunity to bring our portfolio as a service. As I was just describing, we think there's room for a ton of innovation on the networking side of as a service in the IT industry. And obviously, that's where we plan to drive things and innovate. And then lastly, overall, we think sort of observability and visibility is a key thing for our clients. And it's something that given the breadth of our portfolio and some of the assets that we have like ThousandEyes and AppD, it's an area that we're seeing a lot of traction, a lot of interest and an opportunity to further differentiate our portfolio. So those are some things that come to mind. And again, Paul, really appreciate the time today.

Kip, I'm going to apologize, and hopefully, Marty won't kill me, but let me just squeeze in 1 quick question. It is important, I should have asked you upfront, which is, I think we in the investment community view networking as a zero-sum game. You win, someone else loses, someone wins, you lose. I always worry it's a self-serving thought. But I thought for a while that networking, actually, the prominence of networking is greater today, and it's not a zero-sum game. And you can win and others can win as well. In terms of competition versus market growth, any thoughts you want to leave us with?

That's a great question. I don't think it's a zero-sum game. In fact, I'll say internally, when I bump into people who are thinking about that way, I usually spend time trying to persuade them to think differently. And the way I think to think about it is our products create a lot of value for our customers. Networking is an incredible value creator if you think about -- I mean setting aside Cisco for a minute, I mean think about what the pandemic would have been like have we not had networking and think about the value that's unlocked by better connectivity, higher performance, better security, higher visibility. All of that just creates a ton of value. And I think the way I personally think about it is we innovate and create these new technologies that create a ton of new value that wasn't there before. We share that value with our customers. That's what pricing is, is a negotiation at some level around the value the customer gets and the value that we get. And I think our sustained kind of premium pricing position demonstrates that we bring an awful lot of value to our customers. So I think we rarely think of it as a zero-sum game. We certainly don't take competitors lightly. We do not like to lose. And we certainly won't sit around after losing a deal, say, oh, but it's not zero-sum. But in terms of how we think about our strategy and how we think about the markets and our R&D investments, we certainly don't view it as a zero-sum game.

Right. Well, thank you, Kip, for joining us. Marty, thank you. Thanks, Cisco organization, and I want to thank all the clients out there. Take care, guys.

Thanks.