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

Good morning, everybody. My name is Mark Carlucci. I cover ESG here at Morgan Stanley. I'm joined by my colleague, Meta Marshall, who covers Cisco. We're very pleased to be joined by the Cisco team, including Tae Yoo, who cover -- who's the Senior Vice President for Corporate Affairs; and Marilyn Mora, who is the Head of Investor Relations. Before we get started here, we have some disclosures on our side and Cisco has some to go through as well. So from our standpoint, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. I'm going to turn it over to Marilyn to read through disclosures on her side.

Thank you, Mark, and thanks, Meta, for hosting us today. So before we begin and we turn it over to Tae, I just want to let you know that we may be making forward-looking statements. I refer you to our SEC filings, specifically our Form 10-K and 10-Q, which can be found on the Cisco Investor Relations website. I'll now turn it back over to you, Mark.

Thank you. Wonderful. So we'll get started here. [Operator Instructions] So just to kick off the conversation, Tae, I was hoping you can maybe just provide a -- for investors who are less aware, just a high-level overview of Cisco and your product offerings.

Yes. What we basically do is that we provide technology and solutions that power the Internet. And what that enables us to do is partner with our customers to help them reimagine their applications, secure their data, transform their infrastructure, and most importantly, enable them to empower their employees to both solve problems for their customers, but more importantly, to innovate. The other thing I'd like to point out is that we've always -- people talk about purpose-based today, we've always been a purpose-driven organization. And 1 of the things that we've always done is felt that we are a stakeholder in the global community. And so in many places around the world, we were actually there with a social presence around skills development and training before we had a commercial presence.

Wonderful. And from an ESG perspective, wondering if you could just similarly, just high level, describe your approach to that as well.

So ESG, like many things, start at the top. So as you can imagine, the Board of Directors, the Audit committee oversees financial and risk management as well as security and privacy. And then we have the Noms and Governance Committee who oversee the CSR, ESG components. But the most important piece is that, in addition to their advocacy and active oversight, is the fact that we actually have a process that we've developed over a decade ago. And what it is, is that we actually do materiality assessments and stakeholder engagement, identify the key areas that we, as a company, need to focus on. And then it shifts to the business, the functional leaders, where they will identify key areas, the top 2 or 3 things they want to work on each year over a period of time. And then they implement it, they measure it, and then we report it. And it's -- I think back to 2005 when there was just a handful of us who did the first CSR report, and we were so proud of it. Now it's over 100 pages. It's all year long. We have the environmental hub so that everyone who is in the company realizes that we have to be very proactive and be able to show our measurement and metrics as we go along throughout the year.

Wonderful. Yes. I'm wondering if you could maybe elaborate on that second point in terms of how you sort of incentivize your progress on your various ESG values throughout the organization from the top down.

So it's basically just a normal -- one of the most important things is that this has to be something that we do in the normal course of our day in our business. If it is bolted on and something special, what we were afraid is that when we completed those actions, that then everyone would disperse and move on to other things. The way we approach it is, is that every year, we have multiyear commitments and we have targets that we hit, just like we do for all of our customers. And we go through and measure those, whether it's reduction of GHD and of our use. And it's not just saying we're going to reduce it, it's actual key projects that we run throughout a period of time and be able to then connect that to the reduction or hitting our targets.

Wonderful. Well, so the focus of this discussion is mostly on inclusive growth. So I want to shift to that a little bit. For -- Cisco states a purpose of powering an inclusive future for all. So just hoping you can elaborate on what that means from the company's perspective.

So there's both internal and external approaches. The internal is how we comport ourselves and how we create an environment where we have maximum efficiency and people feel committed and to bring their best, and that's where the inclusion comes in. But we also look externally as well and have done since the beginning of our -- the founding of the company. And that's really if -- Cisco is a microcosm of the globe, right, in terms of all the issues that are out there in the world, you see some of the concerns people have. But we're tied together by a common culture which is that we all work for this company. And so our conscious culture is all about engagement with each other in terms of respect and equity, and we've had challenging conversations, but it's done in a specific way. There's a form of behavior that we'd like to ensure that we have. But it's also, what are we doing in the communities around the world? And we've stated that there will be some very specific things that we worked on for decades now, which is around economic development, skills attainment. If you think about what the digital world and the digital economy is, as we want to ensure that people can participate in those economies, and that's directly tied to access to skills building and technology. So it's bridging that digital divide, but it's also creating and supporting economic development.

And you spoke a bit earlier about the measuring and metrics and things like that. Just curious, I know this might be a hard concept, but curious how you think about making that inclusive future for all more tangible in terms of any specific metrics that you're measuring to measure a rate of change for the company?

Yes. One of the key commitments that we made was that we would -- as the world becomes very digital, back in 2016, we made a commitment to positively impact 1 billion people with digital solutions by 2025. And we do this through partnerships with various NGOs, nonprofits, social enterprises and entrepreneurs. And today, we have over 527 million that have been positively impacted. It's not just people who are in a program, but it's a measurement process, and we're -- we'll be in the process getting an assurance for that because as you report, we want to have a very professional approach the same way that we have the rigor around our financial performance. We want to have it with these as well.

Great. I think that's a good point to transition over to Meta to speak to some of -- about how some of the products enable inclusivity. So Meta, I'll turn it back to you.

Yes. Great. Thanks, Mark. You've mentioned kind of the digital divide as we've gone along. And we've also mentioned that Cisco is really kind of an enabler of that connection to the Internet. And so whether it be the initiative to positively impact 1 billion people, what does that actually mean is that to kind of what products can you do, what programs can you put in place to kind of promote that inclusivity or shrinking that digital divide?

Well, I think the one that we've been working on the longest, but that we saw very firsthand is if you think about something as basic but as important as education. And we've been working with the Networking Academy Program, which is in over 180 countries. And it's teaching people to design, install and maintain networks, and more than 12 million students have come through that course. And it's measuring that and what happens to students who complete all of the certifications. And what we see is that over 90% of the students said they go on to get better jobs, higher-paying jobs, or more education. It's working with entrepreneurs who can create apps for water, which is one of our most basic needs, in the sense that women and children have been spending a lot of time looking for and carrying water, whereas we can use an app and use GPS to mark water points. And you know that it's a very efficient way to do that. Something that took 6 months, you can do in 3 weeks. And if there's a problem at those water points, you can actually be able to figure out what the supply chain is to get those water points back up and running. With IOT, you could actually look at pathogens. In terms of -- this is a personal passion of mine, but I do think that high-quality Internet access that's affordable is a human right. When you think about the way the world is going, whether it's health care, education, all of these skills development, economic development, it depends on our ability to access that information remotely from wherever we are. And through the pandemic, what we saw is the ability to partner with cities like Dallas and Toronto, space like Arizona and Michigan with the public sector, to create opportunities for people who don't have access to that. And what we saw in the pandemic is that going to school was not just about learning. That's where students went to get meals. If you were in an underserved environment and couldn't afford to eat, you went to school to get meals. You also went to school to do -- to have Internet access. And so when you're not physically going, we wanted to ensure that the continuity of their lives can continue.

Yes. I mean, and may be building upon that, certainly, we just got a large exposure to finding out what happens if you don't kind of have that Internet access or you don't have that connectivity. What are trends that you're kind of watching as you move towards more of an environment where we just saw what happens if 20 million students don't have connectivity. But just in terms of what happens if populations don't kind of have that connectivity and making sure that you're there to kind of close that gap?

So I think a lot of it is partnerships because no one organization company can actually drive this. It's a partnership with the public sector. It's a public-private, nonprofit academic partnership when you think about it. And it's really working with institutional ways of providing that. All of us can do short-term things. You could actually put together mobile Internet canopies that you drive around town and do that. But ultimately -- and we've done that. But ultimately, it's really building systemic institutions that provide consistent, reliable opportunities. And I think that the other thing that we're keeping an eye on is the -- going back to work, what does work look like, the future of work. I think all of you -- I hope many of you or all of you have seen our launch yesterday of Webex Suite. And it's really this notion that if you provide technologies where everyone is equal, that the best ideas flow and the highest efficiencies result in terms of solving problems and innovating.

Got it. Yes. No. I mean, some of those technologies that were rolled out yesterday definitely kind of speak to promoting everybody having a voice no matter where they are and kind of designing that technology to enable that equal footing no matter where you are. Certainly, during the pandemic, everybody, I think, understands kind of the investment that was made in making sure that children kind of had connectivity. But what are kind of other initiatives that you think maybe got lost during the pandemic of areas that you guys kind of invested in or are efforts that you made to kind of promote ensuring the individuals didn't get left behind?

So I think, first of all, teachers and academic institutions, right, places of learning. And working with our instructors in the Network Academy Program and also working with systems through our business is setting up the right -- it's not just even the technologies. One of the things that's really interesting is 80% of Cisco employees actually work from home one day a week long before the pandemic. And it was having not just an infrastructure in place, but also a protocol of how we interact, how we learn, how we solve problems. And I think that, that was why we were able to seamlessly morph into the digital environment. And it also enabled us to work with our partners and with our communities to try and help facilitate both the technology as well as the process of effective interaction and work. I think that the other component is the importance of the technology around health care. There was a time when you could not actually have an interaction with your health care provider unless there was another health care provider sitting with you. All of that has changed, but we -- the infrastructure around that is the pop-up clinics. It was the -- getting and making the ICUs up and running. It was ensuring that that patient data was secure, that it's not just about adhering. In addition to adhering to HIPAA regulations, it's also about ensuring that everybody in the interaction and the process of their privacy is respected and secure and give them confidence that you can actually have access to that as well as first responders. I mean, there's a lot of learnings that we and our customers both had throughout this process that have been warped and integrated into our products and solutions that -- one of which you saw through our launch yesterday.

Got it. I mean, I think also another area that would kind of pop into my mind, just given your guys' exposure is the public sector of just kind of continuity with constituents, just as constituents are looking to kind of their public leaders either for additional guidance on COVID regulations or other things that have kind of happened over the last year. And so anything that changes -- certainly, you guys had a vision, it kicked into gear or kind of perfectly enabled you as you came out of -- or went into COVID. Is there anything that kind of changed your direction based on what you saw in COVID as far as kind of how you viewed your kind of mission statement with sustainability?

One of the things that we were really, really adamant about was that we not lose this momentum around sustainability, specifically, environmental sustainability and regenerative sustainability because as people were hunkering down -- as you know, just what we found was that everything that had happened over the years, all the interventions that were out there and programs to bend the curve on environmental and climate was not nearly as successful as what you saw with COVID because people were not using -- were not out there. And how do we take that forward in a way to ensure that as people come back to work and we are back to what normal will be in the future, that it is with sustainability in mind. And so we were very conscious that we stay the course we've had. We've been on a journey for -- since 2006, 2007. And what we did was that we had -- in 2007, we introduced telepresence, which is a precursor to all of this. And what we wanted to do is we thought we found a [indiscernible] is land transaction. And we saw that we could reduce travel, which would be a financial savings as well as quality of life. The second was that it would reduce our impact in terms of environmental issues. And the third is that we wanted to use our own technology, so we can figure out what the experience needs to be. And as a result, we set a goal that we would reduce our travel by 20% over a 10-year period with a 2007 basis. After that 10 years, what you saw was our revenues actually increased by 41%, but our reduction in travel was 45%. And so we had all these great outcomes because it did improve our quality of life because we weren't traveling all the time. It did reduce, financially, the cost of travel. But more importantly, it enabled us to look at how do our customers use our technology and how do we, as a microcosm of the globe, interact and use this technology. So that would be another example.

Got it. I mean, you kind of alluded to it there, but just in terms of -- there's been initiatives in the past around smart cities. Certainly, you guys have a big IoT business. Just from a carbon footprint and kind of what Cisco technology can do, whether determining there's nobody in the room and turning off the lights, just other initiatives that may come on kind of that smart city or IoT front and how you see that kind of going forward?

So I think that as we look at sustainability overall, it's really things that we do ourselves in terms of reducing GHG emissions. And it's the products that we develop and impact our customers. It's using circular economy so that we're very smart about how we reuse components. And it's also about taking our products. If you look at Silicon One, if you look at the 8201 router, compared to its predecessor, there -- which was a huge rack-mounted, huge behemoth that had 2,300 different chips. And what we were able to do is bring that down to a specific ASIC, which is Silicon One. So it went from this huge behemoth to a single pizza box basically. And it's not only did it reduce the amount of energy significantly, it also impacted the shipping costs, right, 202x smaller in terms of footprint and maybe over 60x, 65x lighter in terms of shipping. So -- in terms of packaging. So what it does is that it's how do we continue to focus on developing and using circular design principles as we move forward with our products.

Okay. Got it. Mark, I'm going to hand it back to you to kind of -- to talk on some of the employee front. Mark, I think you're still on mute.

Oh, sorry, can you hear me? I was saying I kind of laughed it myself as you were talking about the lights turning off because they turned off on me exactly as you said that. But I want to jump back a little bit to the COVID topic, and it was not only disruptive for customers, but also employees. And Tae, I know you mentioned even before COVID, you had 80% of your workforce working from home, at least one time per week. Just curious if there are, I guess, one, what sort of learnings came out of COVID from the standpoint of managing your workforce. But two, whether or not there were any sort of permanent changes that resulted from that?

So I think the one permanent change is that working remotely is a norm. Somebody, at least one person in over 90% of meetings in the future will be remote. And this has huge implications to employees' lives because you see it's not just child care which most of us understand. But it's also elder care. So many people care for their parents or other family members. And so they can work remotely, but not feel like they are sacrificing their jobs. The other thing that we embraced was the fact that we need to meet our employees where they are. These are employees who contribute, who have intellectual capital, who can solve problems or key innovators, how do we make it work for them? And if you -- we're going through the launch in terms of Webex Suite, it's really getting smart about how effective meetings are, how many meetings in our -- overlap with other meetings. It's really finding ways that enable us not just to work a lot, but be able to have a lot of impact and a lot of results. And so I think that a lot of that came from COVID because everything went digital and remote. And you see it manifest itself in some of the things that we announced yesterday.

Yes. And I guess along those lines, do you -- from a productivity standpoint during COVID, when you had more employees remote, did you notice any changes there for -- positive or negative?

I felt more empathy in the sense that there was -- what you had were people who were able to have intense child care and supported home so they can dedicate their time in the office, right, or to travel. And people who were not maybe early on in their careers and didn't have these luxuries, you didn't quite empathize with that. But what happened with COVID is, is that all the support you had at home stopped, right, because everyone was isolated. So you didn't have the same level of child care and home support. And so everybody started doing our -- everyone had to do for themselves. And I think that what that brought to these -- this is just my observation, is that it was a sense of empathy. We talk about proximity, and proximity is not just being close to each other, but it's actually absorbing in a very personal and close way some of these experience. And because of that, I think there was a lot of that going on. I think there were other questions, for instance, we had a lot of evening meetings. So at first, it was like, why are they making us work at night? But then we realized that this is a global economy and all the technology in the world is not going to solve the international dateline. And normally, we used to travel to their locations and meet during their business hours. So you can't expect people to adjust that just because you don't want to work at a certain time. And so what we've learned is, how do you integrate your work and your life and still have the results that you need to have, still have a respect of other people's time as well. And I think that's what we've done globally. And it's an adjustment, and we're still adjusting to that.

Yes. Yes, that makes sense. And where I was going with that is it seems -- I think a lot of people were surprised with you could have both employee flexibility, but also they're able to over-deliver on their responsibilities at the same time. Just staying on the topic of employees, one more question, then I'm going to turn it back to Meta. But from a -- one thing we didn't really touch on much was from a diversity and inclusion perspective. One, have there been any sort of changes you've made over the past year? And two, just more broadly, what sort of initiatives do you have underway at the company?

So we actually lined our social justice commitments and beliefs. And as part of that, it's easy to put a belief up there, but it's really important that there's actions underneath of it. And so there's 12 actions that were launched, one of which would be the $50 million commitment in terms of incubation of so that you have very specific -- a targeted focus working with HBCUs and other organizations to provide investment and start-ups and innovative technologies.

Wonderful. Well Meta, I'm going to turn it back to you. I know you had a couple of more questions, and we have a few more minutes here.

Yes. So you kind of mentioned, over time, products have gotten smaller. You're trying to figure out ways to either from a lower power impact or a smaller form factor standpoint, kind of be more conservative there. But just -- or have less of an environmental impact there. How do you manage your work with suppliers to make sure that they kind of have some of these same core values? And how do you hold them accountable since certainly you guys are not manufacturing every single one of your products?

Yes. So as I said, we started this journey in 2007, but we've also had 5-year goals that we invested in. The first 5-year goal, we put $65 million into it. The second one, we put over $45 million into it. And we'll be finishing up our second 5-year goals in fiscal '22. And as part of that, we set goals for ourselves in terms of reduction of GHG and the purchase of renewables. So our goal from 2007 to 2022 is to get to 85% renewable. And we are at 100% renewables in the U.S. and parts of Western Europe and 60% in India. So we've been measuring that. We also work with our supply chain, and our supply chain organization had set a goal as well to get our suppliers to also make commitments around GHG reduction. And it's a very practical way of how do we get from where we are in very measurable steps over a period of time. And I'm happy to say that over 30% of that is -- 30% have reported and 80% will actually have GHG goals -- reduction goals by 2025. So those are things, and it's all online, it's all very transparent of where we are and where we're going.

Got it. And maybe just as, certainly, you've laid out kind of a lot of what you've been doing over time and how that evolves. As you look forward to the next 5 years, is it -- I guess, there's kind of the 3 vectors that you've been going along, which is inclusivity, kind of more of the equality framework and then just kind of the environmental footprint framework, which is it that each one of those is important and you're going to grow along each of those? Or is there one where you think that you can kind of continue to maybe grow above the others? I know it's your connectivity, but a little bit of a pause here. All right. Well, I think we're having a little bit of a problem with Tae's connectivity, but we've also kind of come to an end. Marilyn, I don't know if you wanted to kind of give any answer there or else, we can kind of start to wrap up.

We can start to wrap up.

Okay. Yes. No, great. Mark -- I'll hand it back to Mark, but I want to offer my thanks to Cisco for being here today and then hand it off to Mark for any last words.

Yes, likewise. Yes. Thanks so much, Tae and Marilyn, for doing this, and thanks very much to our investors. If there's any questions, please don't hesitate to reach out to myself or Meta. Thank you.

Great. Thanks.

Thank you.