Cisco Systems, Inc. ($CSCO)

Good afternoon, everyone, and welcome to keynote section at JPMorgan Technology Conference, and I have the pleasure of hosting Cisco Systems with on a keynote on securing and scaling it. With me is Chuck Robbins, CEO and Chairman of Cisco Systems. Chuck, welcome and thank you for coming to the conference. .

Thanks for having me. It's great to be here.

Yes. No. Our pleasure. Maybe I'll start you off with something you said on TV after your recent earnings spend, which, by the way, I think anyone I talked to you an outside technology took note of. It's great when energy analysts come and tell you Cisco had a great brand. You know that it's got well. So maybe you did mention on live TV going through networking super cycle. Maybe just flesh that out a bit or unpack the various factors you're seeing the confidence that it is a super cycle as you see it.

Yes. So I think the notion is that with this AI revolution, everything is dependent upon the network and everything is dependent upon modern networks, secure networks, and this whole notion of the node has a certain amount of power, but when you network the nodes, then you get exponentially more power. And so we see this happening in and you think about what's happening in the hyperscaler business, which we took our AI infrastructure target up to $9 billion for the year from 5. And then you look at what's happening enterprise space. And you've got every enterprise was previously focused on modernizing their infrastructure in preparation of AI. Now we got the Mythos issue that we can talk. You've got sovereign clouds that are popping up. You got neo clouds. So they're all networking dependent. And then you have public sector organizations all around the world. that are looking at all those trends that we just described. They're also gearing up their infrastructure for defense reasons and other reasons. So it's just -- everything seems to be moving at the same time right now. So I just called a networking super cycle. I didn't know it's going to get picked up like that, but it's -- I guess I shouldn't say this, but I've been in this business since these networks started to exist. And obviously, the dot-com era was one thing, but this is something that I think even subsumes that.

So maybe let's talk about AI. You mention it as one of the drivers. When you think about the magnitude of changes, and everyone wants to know what are the magnitude of changes you foresee coming through. How would you compare that to the magnitude of changes industries through since the early 2000s. Clearly, a lot of investors want to compare able the early 2000s. But how do you -- when you think about the next 5 years, how would you describe the magnitude of the change we're going to go through because of AI?

Well, I think it's -- it's a combination of 2 things. It's bigger than anything we've seen, and it's happening faster. So when you have that occur, it just blows away anything that we've seen historically. And I lived through the dot-com days. And in those days, you had customers that didn't have the financial fortitude, they had an idea. They had a plan and they needed networks, they needed to connect. Today, if you look at most organizations that are investing heavily right now, they see this transition as being existential to their success and they have some of the best balance sheets in the world. They have the highest cash flows in the world. So it's -- from that perspective, it's very, very, very different. You have some start-ups in this space, obviously, but I think that in general, it's different in that the companies that are spending most of the money or a large percentage of the money are very well funded, very successful companies that have been -- that have shown their ability to navigate different trends like cloud and others. And I think that's just a meaningful difference than what we saw the first time. And it doesn't mean that -- you get a lot of questions about it, is this a bubble or not? I don't even know what that means. But I mean, there will be misplaced capital. There'll be companies that won't exist that will try something that doesn't work out. And I think you'll see the winners emerge just like we're beginning to see now, and then you'll see them succeed as we go forward.

Let's layer on agentic AI on top of this. What kind of changes does that bring? How does the corporate America then sort of function with agentic AI? What does it mean overall for enterprises like even JPMorgan how things work eventually.

Well, I think what it really does in our world is it drives home the absolute requirement to have security merged into the network, fused into the network. We've said that for a very long time and agentic actually makes that a requirement because these agents are going to be moving and processing and working in your infrastructure independently, and there's absolutely no way with the latency requirements particularly as you get into manufacturing and you get into robotics. There's no way that you can conveniently route this traffic through appliances to apply security policy against it. It's going to have to be done in the network. And so a lot of the work we've been doing with smart switches and emerging security services into our networking platforms, starting first in the data center and they're moving out in the campus. And people originally didn't understand why we would do it in the campus and now with the agentic applications, particularly at the edge or robotics manufacturer and those kinds of things, you're going to see the need for that in ways that we haven't yet. And I think that, as I've said before, none of my networking competitors have a security business and none of my security competitors have a networking business. So we -- assuming we execute well, I think we're going to have great solutions in the space for our customers. And if you look at the smart switch technology, which effectively is either CPUs or DPUs built into these networking products so you can run security services in line at line speed with no degradation. As a percentage of what we've sold, our customers have probably about 5% of what they've been buying is the smart switches, and that we think that's going to escalate pretty quickly.

So when we think about scaling AI, clearly, supply chain is emerging to be one of the bigger topics as well, along with revenue acceleration, we are seeing maybe potentially worsening supply constraints for the industry. You highlighted on the earnings call last week, the magnitude of advanced purchase commitments and inventories that you're sort of accumulating be able to address that, the new run company and the supply chain the size of Cisco, how has that changed over the last 5 years? What are you having to take note of now that you probably didn't need to 5 years ago?

Well, if you go back 11 years ago, when I became CEO, I can tell you I knew very little about supply chain. And now I'm told a lot more than I ever anticipated that I would know. Mark, our CFO, will be up tomorrow, and we'll talk a lot about some of the purchase commitments and inventory that we drove. But I think in a simplest form, we have a world-class supply chain team that's been ranked #1 in the world by Gartner on multi occasions, and that's across any industry. So the team is very good to start with and I honestly think what's happened is our supply chain has now turned into a competitive differentiator for us. And we're leveraging our balance sheet. We're leveraging our size, we're leveraging our ability to get ahead of this. And so if you look at some of the creative things we've done, we've actually -- I never dreamed we would be making equity investments into companies in our supply chain in order to help them diversify geographically in some cases or in the case of a recent investment we made with Nanya, it was connected to securing memory supply which is a big issue right now. And I know we'll talk about it, but the other big thing that has completely changed our supply chain dynamics is Silicon One is having our own silicon. We have a much degree of control over our intent and I think that's something that's helping us right now as well. But I think the big difference is that it used to be that you only heard about supply screwed up. Now I think it has gone from that to being a competitive differentiator for us as we move forward.

So let me follow up on that and bring Silicon One as well. One, it sounds like you think supply constraints are now structured, given the demand we are seeing. Silicon One stands out to be what helps you as part of that differentiation. And then maybe flesh out the silicon one, your thinking on the road map and how does it position you in this sort of demand infrastructure demand landscape rate to your competitors?

First of all, if we didn't have our own silicon, the $9 billion that we announced would probably be close to 0 because we would simply be a sheet metal distributor of merchant silicon. Because when you look at what hyperscalers are looking for, the value in the products are either in software or are in silicon. The rest of it is important, but the real value are on those 2 things. And many of them have moved to their own proprietary operating systems that we all write expose APIs so that they can build their automation platforms and their management platforms. So if you don't have software and you don't control your own silicon, then your future role in these networks, I think, is just going to continue to diminish. So we're very fortunate that we made the decision in 2016 to acquire Liva. And now what that's done for us is allowed us to build a single silicon architecture across our portfolio. And by fiscal year '29 -- we're ramping up fiscal year '26 now by fiscal year '29, all of the high-end systems across our entire portfolio will be powered by Silicon One. And so in fact, I did bring one, you got to have props, right? So there's a chip...

I don't know if we can zoom in.

You can't see it much, but it's not cerebrous, right, but it's really turned out to be an incredible differentiator for us. And what it allows us to do now is in our traditional business, you have the systems, the silicon, the software and the entire stack for our enterprise customers. And then when you get into the hyperscaler, we made a decision in 2019, and we launched and told them that we would sell them our technology in whatever way they wanted to consume the technology. We'd sell you a fully integrated system with silicon hardware and software, we would sell you our software, if that's what you want to buy. So you just our silicon, if that's what you wanted to buy. And I think that gave them a higher degree of confidence that we about really meeting them where they were. And we really -- anybody who heard me talking about this 7 or 8 years ago, I was very open about the fact that we had missed the cloud revolution, and we missed and the relationships weren't where they needed to be 8 years ago and now fast forward all the hard work and all the time we've spent there and listening to them, making sure our ears were working and making sure that our actions were aligning with what they were telling us they needed. These customers are big enough, you can look at each one as a market of one. So if you look at it as an example, we did announce a restructuring of something less than 4,000 jobs in Q4. And part of that is we need to fund more silicon tracks you have to almost run these things concurrently now with the speed at which these things are changing. So we did that in order to fund silicon optics. We haven't even talked about optics yet. I think we had $1 billion-plus Acacia quarter on long-haul optics and then AI and internal AI tooling and things of that nature for our employees. So -- but I think the silicon side is probably the most meaningful difference we have right now.

You mentioned the hyperscalers. We all look at their CapEx outlooks and confer that they have aspirations of scaling very quickly. Supply chain aside, how do you think about what are the other hurdles they need to overcome to be able to scale relative to their own aspirations where they want to go with their scaling.

Well, I mean, clearly, energy is emerging as one of the biggest. So I think supply chain, energy, I think the -- but the technology and the scale is just moving at a pace we've never seen before. And when you look at in the hyperscaler space in the last quarter alone, the way they award business is they give you a design win and that's sort of like think of it as a franchise inside of their infrastructure. There's defined sort of places in their infrastructure. And we were awarded 5 of those last quarter. Two in the optics space and 3 in the system space. And one of them was with this little chip, which is a G300 and then the other 2 were with a chip called P200 and this gets back to your question. The P200 is for what's called scale across technologies, which effectively is connecting multiple AI data centers together. So basically, these models in this these clusters are no longer, in many cases, fitting inside a single data center so they're expanding them into multiple data centers and they need scale across technology and that P200 is our first silicon that was custom built for scale across use cases. And so that's helping them alleviate those kinds of issues. And we won -- 2 different hyperscalers with scale across use cases in Q3. And we also announced on the earnings last week that we also have been awarded a third hyperscaler scale across architecture in the first couple of weeks of this quarter. So I think if you look at energy, you look at supply chain, you look at just pure location, geography, the population and the general belief of local citizens about whether you should be building data centers. I mean, all those things are becoming impediments, which is why there's a lot of discussion about potential data center pod in space or whatever those may look like. So.

Yes, yes. So maybe let's go back to optics a bit. When you're helping your customers scale both are playing a big role now. I remember a time when Cisco had stopped talking about optics. Clearly, now the vision of putting these 2 together has worked well for where we are headed. Where do you see synergies optics and systems? How is that playing out across the portfolio with your customers, particularly as you look to help your customers scale?

Yes. I think we made a couple of very strategic acquisitions over the years. One was Luxtera and one was Acacia and odds and ends around it. And they've turned out to be -- again, we had great rationale for making the acquisitions then. We had great rationale for making the silicon in 2016. But in today's world, they look even more brilliant than they were at the time. So I give my team credit. I'm sure they saw that coming. But if you look at the beauty of the optics are that they work these pluggable optics work with any vendor's equipment. So when we win, we think there's a high likelihood that those customers will plug the optics in and the optics is at least equal to the size of the networking spend of the switching spend. So you really double your addressable market by having both and it's -- so we sell them when our competitors are being chosen for use cases, and then we sell them for our own connectivity. And it's critical to have both when co-packaged optics actually comes to fruition or some of these other emerging optical technologies. The fact that we own both really massive differentiation as we look to serve these customers more effectively.

Let me pivot a bit. And I know you've talked about this before, you mentioned this before, Anthropics -- and how concerned should we be, first of all.

Yes, Shouldn't have probably -- it's just the -- we had never heard of it 90 days ago, and it's the #1 topic, ain't that amazing. And that's how fast this thing is -- it's the example of -- if you really want to know how fast the markets move and think about Mythos, 90 days ago versus today. And that just tells you where it is. So you can look at Mythos and open AI's latest models. And if you're a pessimist, you can create a very, very scary future, and if you're an optimist, you can create a lot of positive ideas about what it's going to enable us to do from a security perspective, et cetera. And there's going to be a little of both that are going to apply. There is the ability -- they're very good. Just to be clear, we've had -- we had it for 7 weeks before it was talked about publicly. And we have the version that has no guardrails. So it is a powerful platform that, first and foremost, it has helped us running our code through it, understanding where we have vulnerabilities that humans didn't -- couldn't pick up -- it's also very good at creating exploits to take advantage of those vulnerabilities. And so we think using it to help our customers defend against attacks is going to be very important because one thing that a lot of people say, is that these models are as bad as they're going to be right now, and they're pretty good. And so I think that -- look, what it's really done is it's become a CEO level discussion. The number of CEOs that called me when this hit, who don't -- who still today maybe don't have the model, but they just -- they want to know what they should be thinking about, what should they be looking at? And I'd say there's a few things here. We actually -- we created what's called a harness. And by the way, we restricted usage of this model to our security team only. So no one else inside Cisco has access model right now. And they've been running our code through it. And they also created a very sophisticated harness, which is a framework for taking advantage of the model to run your software through it. It's really just -- and we open source -- I think it's Sami, what's it called? Do you remember? While we open sourced the framework last week for our customers to be able to use and it will give them the ability to take any model and actually create this harness, which is what you need to actually really fully take advantage of the capabilities. The second thing is that we did release a white paper called Shield Up, which is a set of recommendations for all customers as we prepare for this new world of these models. And you just have to assume they're going to be in the hands of our adversaries, they're going to. And one of the big things that is highlighted, though, is the amount of unpatched and perhaps last day of support equipment technology, not just from Cisco, but any vendor inside of our customers' environments. If you remember Volt Typhoon and Salt Typhoon, both of those had a lot of instances of exploitations of old equipment that couldn't be patched. So we see a lot of customers now who are beginning to really inventory that so we announced Cisco IQ something our customers can put on their -- put into their infrastructure and actually begin to -- on the Cisco front, inventory, what they have, give them a view of what's past last day of support was past the last day of patching, all those kinds of things. And I think this is going to we talked about last week on our call that we really don't have anything baked in for what customers may do from that perspective, but we think it has the potential to expedite the whole refresh cycle that we're going through right now, and we'll see how that goes. But I think Mythos is a -- it's just it's very powerful, and it's going to fundamentally -- and the corollary from OpenAI, to be clear, are both very good. And I think they're going to continue to get better, and it's just going to require us to operate at a different level from an operation perspective.

So maybe talk about the opportunity here a bit more one, like any early thoughts in terms of the size of the refresh opportunity about products that have passed old for support. Secondly, what does it mean for your security business? Like one is a bigger infrastructure second, what do you need to do? And what monetization opportunity does it offer you business in the future.

Yes, we're -- we've put together some estimates on how much end-of-life equipment our customers have, and it's a pretty meaningful number. It's at minimum tens of billions and perhaps $100 billion to $200 billion. I mean it's a big number out there. And what we see customers doing now is they're segmenting their infrastructure so that they can prioritize where they go tackle that first. So I'm going to segment my infrastructure and put deep security connections between those 2 segments in my infrastructure so where I'm exposed to the Internet. I'm going to go hard and I'm going to really screen that all from other areas and have a very high security posture when that traffic crosses those zones. And so we're helping customers do that. I'd say on the refresh cycle in general, we're in the top of the first in baseball jargon. I mean it's early. We've only released some of the early products in our campus switching as an example. So I think you're mid-single digits of what's out there that we need to replace. So I would normally say it will be a very long cycle and it will just be a steady long cycle. With Mythos and whatever else we don't know about 3 months from now, 6 months from what things lead customers to perhaps move faster, we'll have to see, but it's very early. Now on the security side, we have we've now refreshed the entire portfolio. It has been a part of the portfolio that we've had been hoping would improve, and it's beginning to show that everything we believe is going to happen, it's just happening at a slower pace than what we had hoped to be honest. We saw significant firewall growth last quarter. We've seen 5 consecutive quarters of really high win rates against our in the firewall space now that they're all refreshed. And I think that, again, when you look at Mythos and you combine the smart switches and the new technology that we had for the campus with our securities we can run in line, I think it will be good for both our infrastructure as well as our security business.

Let's just step back. I wanted to get your thoughts on something broader. Clearly, investors are concerned about what AI means for software businesses in aggregate. Do you have your software business extends beyond security. How do you think about AI disruption risk to software businesses or your own business, however you want to cut it, like give us your broader views of how you're thinking about it?

It's -- so our software assets are largely around security, observability, network infrastructure, monitoring and things of that nature. So they're not the single use case SaaS products, which I think are the early low-hanging fruit for AI to disrupt. I know what we're doing with it internally. I actually reviewed a presentation on the plane coming here today that's going to be given to our Board next week. And I've talked to our team. And I think that the piece of the software business today, that is, I think, most likely and being replaced by AI are the single use case SaaS companies. They're just -- and then the other thing we see is that on some of the major bigger platform players, some new modules that you might to buy, you can actually obviate using AI in some cases. . So I haven't really -- we haven't had a lot of concern, maybe we should, but we haven't had a lot of concern yet about AI disrupting the software parts of our business. We think AI is going to meaningfully improve our software businesses. And we think that when you look at security as a software -- a software -- the parts of our security solutions that are software, getting those implemented into the network, that's not going to be -- and then working in conjunction with the models like Mythos, I think is ultimately going to be what's going to solve these problems. It's not going to be our stuff being displaced because we know how to communicate with the network in a way that is very unique.

Maybe just following up, as much as you don't see that concern. How much does it help you on the operational side? Do you operate the business at a much lower OpEx intensity given the help from AI?

I would say that in certain areas, we're seeing some benefit. But the good news for us is we're able to reallocate those funding in the silicon and things of that nature so that was the restructuring we talked about was I made a point to say this is not AI replacing people's jobs, right? We're not -- I mean at broad scale at that level yet. But what we do see is it's a reallocation to these areas that we need to grow. But internally, we're using AI a lot -- we're using a whole lot in our customer service organization, much like every customer in the world is doing. We're using it in our legal space. We have 27,000 daily users of our own proprietary AI model front end to the model circuit, and it automatically determines which model is most effective for the types of queries that we're getting asked. We're using it big in sales now. It's being used meaningfully. So I think what we're -- I would say we're at the phase where we're in our programming, obviously, our coders, I think that our software at the end -- I think G2 has said at the end of '27 you might see 75% of our code being written by AI and I think the next big topic we were talking about it on our earnings call is going to be tokenomics because the cost of all this -- and driving the productivity of your people up by using these tools the token usage is just getting pretty crazy right now.

Yes. Okay. Let me try to get into more questions before we need to wrap up. Quantum. How do you see quantum interplaying with AI. You've made -- Cisco's made progress on quantum, including quantum networking, but where do you see quantum intersecting AI?

Well, it definitely is going to. And I think it's just going to make AI that much more effective in some cases, that much more scary, right? So we began investing in 2020 in this space, which, again, is great that we started. So we built a prototype networking chip for quantum because when you have these quantum devices, there are going to be nodes. When you put them together, you're going to exponentially increase the power of these nodes -- and so the network is going to be even that much more important and the security is going to be deeply important. So I think that when you combine AI with Quantum, the power of what you're going to do is obviously going to be massive. So moving the data around at Quantum speeds as well as providing the series is going to be something that we're going to spend more time line. An early -- you would I'll take the different dates that you hear from everybody an average amount 20, 30 something, I don't know.

Last one for you. Asking you to make predictions here, if you had to make 3 predictions about how AI changes the broad economy and AI infrastructure in the next 5 years, what would those be?

I really do think that we had this term called cloud native. So you went from embracing the cloud to being cloud native. And I think being AI native is going to be to be successful 5 years from now I think that's a given. I do believe that the fusion of security and networking will happen, and it's going to happen over the 24 months probably because it has to. And then I think the other thing -- this is not necessarily IT related, but I think it is going to drive an incredible productivity boom. I really believe that in the world, but particularly in the United States. I think you're going to see productivity boom like we haven't seen and probably in our lifetimes too.

Okay. Great. Any closing remarks before we...

Just thanks for having me. It's great to be here. I appreciate giving us the opportunity.

Pleasure. Thank you. Thank you.