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

Good afternoon, everyone. Before we get started, if you are a member of the press or media, please disconnect at this time. This is a restricted line. Any unauthorized party in this meeting or any unauthorized use of the information communicated in this meeting is subject to prosecution to the fullest extent of the law. Any unauthorized person, including the media that is on the line at this time, please disconnect. Please note, today's call is being recorded.

Perfect. Thank you. Hello, everybody. I'm Aaron Rakers. I'm the IT infrastructure and semi analyst here for Wells Fargo. I'm pleased to have with us here this afternoon or this morning, depending on where you're at, Cisco Senior Vice President of Strategy and Operations, Enterprise Networking and Cloud Group, Kip Compton; as well as Marty Palka, Chief Intelligence Analyst and member of Investor Relations. So before we start and Kip, again, thank you for joining us. We'll keep this kind of open format discussion. But before we go there, Marty, I believe you had a few words on safe harbor.

Sure. Thank you. And we will be making forward-looking statements today. Actual results may differ materially from those forward-looking statements and are subject to the risks and uncertainties found in our 10-Q and 10-K. And I will now turn it back to you, Aaron.

All right. Marty, you nailed it. That was a great job. So Kip, again, thanks again. For those in the audience that aren't familiar with yourself, maybe we'll just start if you could go over your responsibilities at Cisco. Some of your maybe background and maybe some of the significant product categories and areas that you're responsible for.

Sure. Thanks, and thanks, everyone, for joining. Looking forward to talking this morning a little bit about our business. I've been at Cisco for a long time. To your point about my background, I've run a number of different businesses at Cisco, including our SP Video business, our cloud business, our IoT business. I was CTO for our video and collaboration business and for our services business. These days, as you mentioned, I'm Senior Vice President for Strategy and Operations for our enterprise networking and cloud business, which somewhat well correlates to the secure agile networks reporting structure that we just unveiled, not perfectly. That reporting structure does not match our internal org structure for some good reasons in terms of how we operate, but that's probably the closest approximation. So the enterprise networking cloud group includes our data center products, be it switching or servers. It includes our campus products across wireless, routing and switching, of course, includes our Meraki portfolio as well, includes IoT and also our new network services businesses like Cisco Plus and our ThousandEyes capability. So it's a fairly broad business, and there's always lots of things going on.

Yes. You've got a lot on your plate basically is what you just said. So you touched a lot of things. Maybe I'll start the discussion by the enterprise customer drivers that you're seeing today. As you're engaging with these customers and there's a perpetual question of workloads residing on-premise versus hybrid versus public cloud. Just what are you seeing or how is the engagements with those customers changed and evolved as we've thought about these architectural dynamics playing out in the market?

That's really a great question. It's something that's definitely top of mind for our customers. And a lot of people describe the current environment as a multi-cloud world, and I think that's pretty accurate. Almost all of our customers are having parts of their IT infrastructure in multiple different public clouds as well as, of course, on-prem. And we think that's a situation that's going to continue for the foreseeable future. People are in the cloud for lots of reasons, chief among them agility and speed and flexibility. And they're in multiple clouds for lots of reasons as well, often looking for the best place to run a given application or needing to be in multiple environments because they have partners, suppliers or customers that they need to meet in those environments. And we're doing a number of things to help our customers with this environment. Broadly speaking, we're delivering solutions that make it easier for them to take advantage of a multi-cloud world. Probably the best example there or some of the integrations we've done with our SD-WAN products and multiple hyperscalers to make it easy for our customers to securely connect multiple public clouds as well as their branch offices and data centers to realize that hybrid multi-cloud environment. We've also launched a number of enhancements in our Intersight platform that enable customers to manage workloads across multiple environments, things like our Intersight Workload Optimizer and our Terraform service for Intersight that we partnered with HashiCorp on. Of course, we've also got assets like ThousandEyes. The network performance is critical when you're talking about clouds because that's how you access the applications, and ThousandEyes gives our customers the ability to measure that performance and remediate issues. And then there's things like AppD that enable our customers to consistently measure the performance of their applications across multiple different cloud environments as well as on-prem environments, and it's a key part of our full-stack observability strategy. So that's a clear set of technologies and tools that we give our customers to let them take advantage of that multi-cloud environment. I'll note there's another sort of related thing that we do, which is really using those technologies to make our solutions better for our customers. And probably the best example there is cloud management. Obviously, a tremendous amount of our business stays on-prem. The wireless access points are not all going to move to the cloud. The radios are not reached. The switches need to be there. The campus infrastructure will be there in the campus. But that can be managed from the cloud. And I think you're seeing the popularity and the strength in our Meraki portfolio, showing perhaps most clearly the strength of a cloud-managed strategy and solution, but you're seeing that expand with things like Intersight into our compute environment with vManage into our SD-WAN environment. And I think you'll see us continue to leverage the cloud ourselves to deliver our capabilities for our customers in that way.

Yes. And you touched on it a little bit there with some of the SD-WAN integration with the cloud hyperscale customers. Can you talk a little bit more about what you've done so far? And how we should think about that evolving even more as we move forward, kind of segueing off that last question?

Sure. I mean I think what we've done so far is make it easy. In the cloud, when you instantiate a workload, you typically have a network segment like a VPC is determined in the Amazon environment, for instance. And the ability to connect those to your on-prem data centers and across different clouds using a software-defined WAN technology is one of the key things we've done. But we've really brought a lot -- that's just one example. We brought a lot of our capabilities into those environments, whether it's, as I mentioned before, the AppD capability, some of our cloud security capabilities. And we're really, when it comes to workloads, looking to bring across, particularly networking and security, but then our compute and workload management aspects bring a consistent environment across these multiple clouds and on-prem for our customers.

And what I get from you is that you've got the networking layer, but what you really kind of -- or what the company is really trying to drive or has driven if it's AppD and some of the other things is that visibility up into the application layers more and more. Are there areas that you'd say are still areas for which there's further visibility that you can embed in the business that drives even a deeper insight or integration up to the application layer from Cisco's perspective?

No, absolutely. We're -- yes, I mean, absolutely. I mean first of all, it's a rapidly evolving space. So there will always be, we think, new opportunities to drive greater visibility into these environments. And it's the application layer, but it's also how the infrastructure affects applications. So I think a great example of that is actually the ThousandEyes capability, which has just been a phenomenal acquisition for us, and it's something where we've been able to integrate their technology into a lot of our networking products, really increasing essentially the number of data collection and sensor capabilities that ThousandEyes has to provide even finer-grained information. And that's a really interesting capability for a lot of our customers because it enables them not only to see how their own applications are performing, but to see how their infrastructure is affecting the performance that their employees see even with things like SaaS services, Office 365 for knowledge workers, Webex or Zoom and so forth. And so that's proven to be an extremely valuable example of the visibility that we can provide.

That's perfect. So I want to take it up maybe a level here and maybe just ask you kind of like at the networking layer, right, the data center piece of it. There's a lot of discussions around 400 gig. What are you seeing maybe with 400 gig in mind, but what are some of the architectural things that you see, maybe have accelerated in a post-COVID environment for your enterprise customers? What's the big architectural themes?

Sure. I mean I think a few. Maybe I'll touch on 400 gig first. And we're seeing growth there. I mean I think we said at the end of this most recent quarter, we had 541 400-gig customers since FCS of our 400-gig solutions. That compares with 415 a quarter before. So if I'm doing my mental math right, that's about 20% more customers in 1 quarter. So we are seeing the uptake there and we're excited about that. And a key part of our strategy there is really recognizing how critical optics are to the 400-gig story. And generally, as the speeds increase, the percentage of the cost that's due to optics increases. And just as an example with 400 gig, you've got about 70% of the cost per port in the 400-gig solution being the optics. And as an example, with 10 gig, that was only about 10% of the cost. And so that's one of the reasons you've seen us over the last several years investing heavily in optics, including acquisitions so we can position ourselves for that 400-gig transition, which is still fairly early. In terms of broader trends in the enterprise, I think there's a few things I would probably touch on. One is that it's perhaps another aspect of the cloud where customers have gotten a taste of a different consumption model with the cloud. Where they -- it's interesting, cloud prices are not necessarily cheaper, but you only pay for what you use and you don't have any capital tied up, and so it's much more flexible to change directions. By the way, something that IT departments have really come to realize as a result of the last couple of years in the pandemic is that there's a real value to that flexibility and agility as it's been a very uncertain time. And so one trend that we're seeing is customers are interested in those more flexible consumption models. We call it Network as a Service for their networks. It's kind of an interesting moment when customers are seeing that their infrastructure has never been more important to the experience they're delivering to their employees and customers. But at the same time, they would like the flexibility and they would like more integrated, simpler solutions they can consume as a service. So it's an interesting moment. So that's a key trend. Another key trend, frankly, is return to office. You've seen the growth that we've talked about in the wireless markets that's driven by, I believe, a confluence of WiFi 6 and the return-to-office upgrades that a lot of enterprises are going through. I had -- it's anecdotal, but I had a conversation with the CIO that was somewhat of using a quarter or 2 ago, and he was like, "Look, we need to upgrade the networks because everyone's coming back. Every meeting is going to be a video meeting." The people are going to be in the office on Zoom and Webex, not at home on Zoom and Webex now. And our network in the office wasn't built to do that. Then he said, "Yes. And I'm also a little bit worried that their connections at home might be faster than what we have in the office." And so I think people are realizing that actually people that -- a lot of people have gotten used to a pretty good experience in their work-from-home environment, and a lot of enterprises are driving some pretty massive network upgrades on the campus side to prepare for the return to office. So I mean those are a couple of trends that we're seeing.

Yes. Yes. No, that's interesting. And I know in the context of 400 gig, I mean, we've heard and seen and maybe this isn't necessarily something that you touch a lot in your responsibilities. But help us maybe appreciate what Cisco has done with Silicon One, if at all, if you have any thoughts around that? And how that evolves? And I don't know how much you engage with the cloud titans directly, but any thoughts on what that strategy has evolved to and started to look like?

No, absolutely. I mean the web scalers has been a long-term project for us at Cisco. I think we've been pretty open about how that started and now, frankly, how it's going. And we spent a lot of time working with them and understanding how we can package our technology for them so that they can consume it. We think networking is an incredibly relevant technology for cloud scalers. A lot of the most challenging cloud problems are, in fact, networking problems. And I think our success with the web scalers over the last few quarters has demonstrated that. We talked about at our Investor Day a little bit trying to quantify how this is going, and we're offering hardware, we're offering software, we're even offering components to some of the web scalers and trying to meet them in the way that they want to consume our technology. And again, at Investor Day, we kind of tried to share without -- while respecting the confidentiality of the web scalers, which is very important to them, sort of how we're making traction. And suffice to say, we're seeing a lot of traction and the efforts that we put into approaching this market in a more open way has really started to pay off. On Silicon One in particular, that's a big part of that story. We have web scalers consuming that silicon. We have web scalers consuming systems based on that silicon. And I mean there's a lot of benefits to the Cisco and architecture. I mean we've talked about that a number of times. But what I would just point out is we believe that it is the highest performance per watt of power or power efficiency solution available. And that's very, very important from a sustainability perspective, right? I mean these cloud infrastructures consume massive amounts of power and that isn't always good for the environment, obviously. So we're really proud of that, and that's really important. It's also a critical economic factor, of course, for the web scalers. I mean it's not uncommon for them to spend more money on the power to power a piece of infrastructure during its lifetime than they spend upfront buying the infrastructure. And so that is a real tangible benefit of our architecture and something that a lot of the web scalers are starting to take advantage of.

Yes. And the proliferation of that product portfolio has been pretty impressive, right, since it was first introduced, and that's definitely shown up. One of the architectural themes that I'd love to ask you about, just given my responsibilities of looking at the system player, but also some of the silicon layers is this idea of as we move to micro services, as we move to containerization of application layers, I'm also starting to see like the underlyings of the infrastructure starting to disaggregate. This idea of composability and disaggregation of the network and compute layers. How do you see that? And how is Cisco addressing that as you see it today?

Well, we're seeing that, frankly, more in the web-scale environments that I was just talking about. And we've met those requests in the way I just described, delivering the different components, and we've seen a lot of success there. On the enterprise side, we've seen more interest in a more simple and integrated solutions. Whereas people are trying to wrap their head around how they deal with the complexity, most enterprises do not have the depth of engineering staffs that a web scaler has for instance. And so they're actually looking to us and saying, I've seen more conversations about, hey, could you offer us data center networking as a service and wrap this all into an integrated solution, frankly, than I've had people talking about the disaggregation of that stack. And we're making a lot of investments in a product called Nexus Dashboard to meet that requirement. This is something that started a couple of years ago. And we've really brought together a lot of the different tools that customers use to manage their data center networks into one that integrated dashboard that makes it easier for them to manage that environment more intelligently. So we're seeing that disaggregation trend on the web scaler side; but on the enterprise side, I don't know if I'd say it's sort of the opposite direction, but it's kind of a different direction in terms of them wanting something simpler and more integrated to operationalize.

Yes. Yes. And you brought it up and kind of the final topic of discussion I wanted to bring up is the Cisco Plus and the Network as a Service strategy that the company had. Maybe you can help us appreciate what's all involved in that and maybe where we're going, like, I think the integration of the SASE stack and the assets of Viptela, Meraki, et cetera. What have you seen so far? And how should we think about that evolution as we move forward?

No, absolutely. And as I said, I mean, we've observed -- I think customers kind of learned from the cloud, if you will. Cloud is a technology thing, but it's also a consumption model, and we've observed a lot of demand for that. So we launched Cisco Plus at Cisco Live earlier this year. That's essentially our consumption model brand. We've actually launched our first Cisco Plus offer. It's available in the marketplace. That's Cisco+ Hybrid Cloud. And that's a complete plus networking as a service offer. And we have customers consuming that today and have multiple enhancements planned for the next year for that offer. We view sort of SASE as an example of Network as a Service. We think it's actually broader than the access piece although that's super important. And we actually think Network as a Service is kind of an interesting greenfield in many ways. The cloud has really defined a lot of the models around compute as a service and storage as a service and so forth. But Network as a Service is relatively new area, especially as it results to on-prem networking. And so that's something we're pretty excited about. We have SASE offers in the market today, and we'll be bringing our first Cisco Plus SASE offer to market in the coming months. It's currently in field trials. And that will be a more tightly integrated, more SaaS-like offer. So we're pretty excited about that. We think there's a great opportunity to bring together our networking and security technologies, to state the obvious there. And we've gotten some good feedback on the field trial.

So I'm trying to think about -- I mean, Cisco has done a very effective job over the last several years of driving more subscription, right, recurability...

Absolutely.

And subscription motion to the model. This seems to be, as it proliferates, this is another layer on top of that, if it's a SaaS delivery model. How is this priced? How does it -- how does the end market or the end customer consume that?

No, it's a great point. I mean as you noted, we've been very successful at attaching recurring software licenses to networking hardware. Of course, the Cat9k and the DNA license being the rightly -- so I guess, the poster child or head example there. With Cisco Plus, we are able, as you said, to take that to the next level where we can actually wrap the hardware into that subscription as well as a more valuable integration. So with Cisco Plus, customers get a much more simple dashboard to manage the solution and to aggregate everything in one place. It shows them all of their consumption. And that simplification and ease of use and the flexibility that comes with the hardware as a service component of that is something that customers value and that we can monetize through a subscription. So Cisco Plus certainly represents an opportunity for us to further accelerate our transition to recurring revenue.

And that's kind of under -- is it 1-year or 2-year, 3-year term, 5-year term? Is that how [ you divide that ]?

Oh, yes. I mean yes -- I mean, I think by way of example, if you're looking to buy a SASE-type solution, it might be as simple as, well, how many sites do you have that you want to connect? And what's the provision bandwidth from your service provider? And then Cisco with our partners would determine the correct harbor configurations to meet that performance need, ship those out to your sites. When you plug those in, they kind of call home and register with the cloud, which should already be configured based on the services that you had ordered. And that solution would be up and running in a simplified dashboard very, very quickly. And you would be paying sort of per month based on provision bandwidth and the different features and capabilities that you wanted. Did you want remote access with that so your employees could access your company network when they're not on site, for instance, using a VPN or Zero Trust technologies that could be licensed per user, the core connectivity per site based on the bandwidth to those sites, rolled up into a monthly charge with some reasonable 1-, 3-, 5-year-type term commitments to enable us to offer that service. So it's something where we believe that there is a premium for simplicity right now in the market for a lot of enterprises. They're looking for greater agility, greater flexibility and they see the technology and the network as being a differentiator in terms of productivity for their employees and experience for their customers. But it's not something where they want to spend a ton of their time and they prefer to have a simple solution that they can consume as a service.

Kip, I went through most of my questions. I'm going to kind of end on this question and let you get on with your day. But the -- there's a lot of kind of things going on in the demand environment right now. I'm just curious of how you would characterize the demand environment? And I guess in that same context, how much are you engaging or having to engage with customers around, just managing lead times and expectations vis-à-vis supply chain challenges?

No, absolutely. It's a great question. I mean I'm personally not as close to that. We have supply chain teams. Obviously, our customer-facing sales teams that engage with customers on that. Obviously, we're seeing an exceptional demand environment right now. And I think that there are multiple things contributing to that. I probably don't have too much to add beyond what we've already said about that, which is we're seeing strong demand. We're not seeing an increase in cancellations of orders, for instance. We don't really see signs that there's double ordering or anything like that. But customers are obviously aware of the supply chain issues and are ordering, taking that into account so that they can receive the equipment when they need it. And so you do see customers ordering further ahead of time, which I think is an appropriate response to the current supply chain environment. It's something we're monitoring very, very carefully.

Was there anything that I should have asked you that I didn't ask in the final 2 minutes we've got left? I mean because you run as you let off, right? You've got a lot of things on your plate. I'm sure that we could have a discussion for another hour. But are there any other big topics you'd like to leave myself or the audience with as far as trying to think about what's happening?

No. I mean I think it was a great set of questions, frankly. I mean I think in terms of the broad trends that come up most frequently in our customer conversations right now, certainly the cloud and the really multifaceted impact of that, right? It's like how do we help them take advantage of the cloud for their workloads? How do we take advantage of cloud to deliver better, easier, new capabilities to our customers? And then the return to office. Those are really the 2 big things that seem to be top of mind. I mean obviously, every customer is different. But to generalize, I think those are the 2 key trends. And I feel like we had a great opportunity to discuss those this morning. I mean it's an interesting and exciting time. I mean at a high level, the events the last few years have only made networking more valuable and more important and only stimulated demand, given the amount of video that we're all engaged in. So I think it's a very dynamic but sort of exciting and interesting time for our business.

You bring up a great point in the return-to-office stuff because I'm sitting here in the office coming back here sporadically. And I could see where a lot of enterprise is trying to figure all that out. So I appreciate you taking the time. Marty, as always, good seeing you again, and we'll end it there. Thanks so much. Kip, great discussion.

Thank you. Have a great day.

Thank you.