Cisco Systems, Inc. (CSCO) Bank of America Securities Internet for the Future Tech Talk Conference (Transcript)

Cisco Systems, Inc. (NASDAQ:CSCO) Bank of America Securities Internet for the Future Tech Talk Call February 28, 2023 10:00 AM ET

Company Participants

Jonathan Davidson - Executive Vice President and General Manager, Cisco Networking

Marilyn Mora - Investor Relations

Conference Call Participants

Tal Liani - Bank of America

Tal Liani

Hi. Good morning, good afternoon or good evening to everyone, depending where you are. We are here from Mobile World Congress and I’m hosting today Jonathan Davidson for a Tech Talk on Cisco’s Networking. Jonathan is the Executive VP and General Manager of Cisco’s Networking. Prior to that, Jonathan was Executive VP and General Manager of Cisco’s Mass-Scale Infrastructure Group in June 2021 after being named Senior VP and General Manager of Cisco’s Service Provider business in August 2018. So basically, we can ask Jonathan almost about everything we want to ask about. So that’s a good Cisco 101. But before we start, I think the IR team needs to state a – make a few statements and then we can start with our questions.

Marilyn Mora

Thanks, Tal. Today’s call relates to Cisco’s Networking business. I’d like to remind everyone that no new financial information regarding Cisco’s overall performance is intended or implied. We may make forward-looking statements, which are subject to risks and uncertainties outlined in detail in our documents filed with the SEC, including our most recent filings on Forms 10-K and 10-Q, and actual results may differ from statements made today. I hand it back to you, Tal.

Tal Liani

Perfect. Thank you. I’ll just get the microphone closer. Hopefully, you can hear us well.

Question-and-Answer Session

Q - Tal Liani

First of all, Jonathan, congrats on the new role about 6 months as GM of Cisco’s Networking, can you just take us – just to start off easy, can you take us through what’s included in your new responsibility?

Jonathan Davidson

Sure. Happy to do that. So there’s two answers. For those of you who are familiar with my old role of having the Mass-Scale Infrastructure group, we built products that both service providers as well as the hyperscalers would use that included things like core routing, mobile core, our IoT, mobile IoT business, in addition to optical, cable, anything that they would require, then added on the enterprise networking and cloud business, which includes WiFi, campus networking, SD-WAN and access routing. In addition to that, there’s whole the Meraki portfolio, our data center portfolio and ThousandEyes. I think I got everything in. Basically, anything that’s connectivity plus the compute business.

Tal Liani

Got it. Okay. I – to be honest, everything you do is so important for the company. It’s the majority of revenues. And I don’t know where to start, so I’m going to start from where we have been discussing here today, where [indiscernible] basically and talk about networks and wireless networks. And I want to start from Internet for the Future. What’s included in this segment is – I’m just saying it for those who are not familiar. It’s routed optical networking, public 5G, silicon and optics, etcetera. And what I want to ask is, first, about the trends that you are seeing in Internet for the Future. It has been we’ve seen high growth for a period of time. We’ve seen 42% and 46% growth, and then we’ve seen declines. In the most recent quarter and the quarter before, revenues were down 5% and 1.2%. Take us through the cycle. Why are we seeing such high growth and then declines? And more importantly, how – what is the outlook for this division? What is driving growth? What are the products? And what are the customer trends – spending trends that are driving revenue?

Jonathan Davidson

Yes. So there is a few answers. As just anything, it’s complicated. I wish – I always wish we’ve had simple answers. But when you think about the year-over-year that we had, growing 46% in Q1 of ‘22 and then the compare to that of minus 5% in Q1 of ‘23, I would have loved to have grown another 46%, but this is a space where that could be difficult. One, we are definitely winning new franchises. We have a phenomenal portfolio, both for the carrier space, whether it’s for routing or optical or what we’re doing with Acacia and Silicon One around router-to-router network. We’re seeing that trend accelerate into the market. We’re seeing a lot of our customers doing their own analysis of the total cost of ownership, and they’re seeing significant benefits in that space. There was – and it’s hard to quantify, and I know this question has come up on, I think, almost every single – already the call the last probably six quarters is how much of this is full in spend. What I can tell you is that customers order to lead time, and lead times have been extended over the last period of time. Although as Chuck and Scott had mentioned in the last two earnings calls, we have seen some of the lead time fees over that period of time over the last two or three quarters and we expect that to ease as well. So there is a combination of buying cycles. There’s a combination – and when I say buying cycles, carriers still buy big amounts of gear. They then take time to deploy that gear. In conjunction with where our portfolio is at, in conjunction with winning new franchises, especially in the hyperscale space, that’s driving where we’re at. And I think you might have used the word volatility. I’m not a huge fan of that word, but I do think that this business has always been, I’ll just say, lumpy in nature. And we certainly expect, with our portfolio, to be able to continue to win new franchises. I think Chuck shared in the last call, specifically to the web scale, how we have 18 out of 35 use cases. We’ve seen the number of use cases go up quarter-on-quarter in the web scale world as well. So we expect to have access to more addressable use cases with our expanding portfolio, and we expect to have more wins as well if we continue to execute.

Tal Liani

Okay, got it. I want to stay at the high level first, and I want to say maybe at the spending level. Some cloud titans are talking about spending cuts. We’ve seen Meta and others. Service providers AT&T and Verizon are talking about spending cuts. Are these impacting the networking piece? So what I’m trying to understand is the implied decline in orders that we see throughout the industry, it doesn’t matter if it’s Juniper, Cisco or – that’s because of the ebbs and flows of the cycles of ordering. So the declines that we see in the orders, is it just because last year orders were so strong or is the environment itself is weakening? Are you having concerns that some of the projects are not going to happen, are going to be pushed out, delayed or do you think that from a deployment perspective, it continues as planned for the networking piece?

Jonathan Davidson

Well, let’s talk about some of the – I think some of the tailwinds specifically. One, with the infrastructure fund becoming available not only in the U.S., but in large parts of Europe as well, we expect that to be a tailwind, which really isn’t going to kick in until the end of this calendar year when more dollar spend becomes available. So the government’s focus on the need to close the digital side, get access out into not only rural communities, but there’s areas inside of cities that don’t have the right type of connectivity. And certainly, we’re supportive – very supportive of something close to the digital side. You mentioned Meta, and I think it’s important to note that they dropped their forecast by a few billion dollars. But the range, I believe, and I could be a little bit off here, so don’t quote me, is still somewhere in the $32 billion to $34 billion range. To put that in perspective, AT&T’s CapEx is usually in the $20 billion, $22 billion range. So it’s still a phenomenal amount of CapEx being spent and is still significantly up when you look over the last several years with Meta. When you – in addition, to take into account that there’s real competition in North America around 5G. And that requires not only deployment of radios. It requires trenching and fiber. It requires a deployment of a new metro infrastructure for both optical and IP. And that’s going to, I think, enable the market to continue to move in a positive direction. I don’t have a crystal ball, by any means, but I do think that there’s tremendous amounts of tailwinds that are going to – as long as you have the right portfolio, like [indiscernible] does, you’ll continue to be able to move in a positive direction.

Tal Liani

So I got a question from the audience. And I didn’t know we’re going to get it so early, but I knew it’s going to come. And the question is, AI, how much of a driver is it, generative AI and AI in general? How much of a driver is it for your business?

Jonathan Davidson

Yes. I’ll talk about just AI in general. I think what you’re seeing in the market is what we have been working with, especially the hyperscalers the last several years, where we know that building out AI network is very different from building out a traditional hyperscale network. And it even sounds weird to hear me say traditional hyperscale network because, obviously, that’s a lot different than the traditional enterprise data center. And so we believe we’re still in the early phases of these AI networks. We see that they’re going to be different at the silicon level with unique features, they will be different at the software layer and how routing happens and the capacity needs for that infrastructure. And we believe that we’re working with the right people on the cutting edge of what those architectures need to be, and we are certainly investing. But we think we’re in the early innings of that, even though we’ve been working on it the last couple of years. We also see an opportunity to take these types of AI networks and bring them to the enterprise. There have been a number of reports out there – it’s a public domain, you can go and read them, that talk about the cost benefits of building out your own AI infrastructure as a private data center. And we believe that we have all the right components from compute, to networking, to the software to enable a very cost-effective way of deploying these custom AI clouds.

Tal Liani

Yes, got it. Is it – do you think that these efforts – I mean, Chuck spoke about – on the call, he spoke about, I think, 3x to 4x more networking needs of AI. And I heard different numbers, higher numbers in some cases. Are these a driver for sheer bandwidth, meaning just more of the same or does it require from you special products that address AI needs?

Jonathan Davidson

So right now, what we are seeing is that it requires, at a minimum, special software to enable the right type of data flow through the infrastructure. And so we are – we know routing really well, I’ll just put it that way. We’ve been in this business a long time. And the people who are building these biggest networks are spending a lot of time with us to make sure that we understand the problem statement and that we can jointly work on a way to resolve the issues that are getting faced. Certainly, and I gently mention this, I do think that over time, there’s going to be more opportunity for features or capabilities to be built in silicon to address these different types of workflow. I would say, as an aside, off of the network piece for a second, but I do think that generative AI and future instantiations is going to enable our customers with the data sets that we have to be able to provide for a better experience for the end customer. And we are still in the very, very early – I wouldn’t say early innings because I’m not sure that the game has really started yet. People are warming up on the field, but there’s tremendous possibility when you have the right data sets. And we’ve got 37 years of data sets around problems inside of infrastructure and solutions to those problems. So being able to feed that in and leverage that for our customer [indiscernible].

Tal Liani

Got it. Just for the audience, I’m saying that I’m going to take the next set of questions. I’m going to ask about routing, optical and then switching, data center switching, etcetera. And I want to start with a high-level question of routing. Something that me, covering the space for over 20 years, I always ask myself the same question. So the routing market didn’t grow between 2012 and 2020. Then we got used to really high growth rates. Traffic went up, started working from home and demand for router has improved. Some of it we’re seeing today. We’re seeing it in your numbers, right, and – because there’s a delayed impact because of the supply chain. The question is – and I’m not asking you to forecast the future. I’m just trying to understand conceptually, now that we passed the 2 years of abnormality in the market, people working from home, et cetera, demand for routers, can you drive up the market for the next 2 years? Are there drivers now that can sustain growth in the market or are we going back to the 8 years of no growth that we had between 2012 and 2020?

Jonathan Davidson

Yes. Let’s talk about specifically for routers. I think that there is one big tailwind that speaks specifically to the shifting architecture of, I would say, the global Internet, which is what – just to define is router-to-router network. Some of our competitors have decided to pick a different proper noun to describe the same architecture, which we’re all for because we believe that, that architecture is inevitable. And the reason why it’s inevitable is not because we say so, but because it provides a significantly lower total cost of ownership. Now where that goes from a market perspective really depends upon where people decide to put the pluggable coherent optics. Do they put it in a router TAM? Do they decide to put it in a switching TAM? Do they decide to put it in their own optical TAM? I can’t predict what the market is going to do. But I can tell you, in my humble opinion routed optical network is the future of infrastructure. We have been waiting for this moment to happen for a decade. It started to happen 2 years ago with the shifting of what some called the bright VR optic with not only the – not only being coherent, but with the amplifier built in, we really see that this is – there is zero excuses now to move to that architecture.

Tal Liani

So the fact you have these assets in-house – and I take you back to the acquisition of Acacia. But the fact you have these assets in-house, does it give you an advantage versus someone like Juniper, who needs to partner with other companies or whether it’s almost anyone else in the market?

Jonathan Davidson

So we have been very careful in the acquisition of Acacia. Obviously, a big part of their business model was selling not only to Cisco, but selling to the traditional Cisco competitors, which Acacia classifies as network equipment manufacturers, which obviously Cisco falls into that bucket as well. What we’ve done with that acquisition is we have kept them – siloed is the wrong word, but protected so that they are continue – able to continue to execute on the innovation to stay ahead of competition. But also, they still have their sales team intact. So their sales team works with a number of the NEMs, traditional competitors out there. But that’s obfuscated from me and my leadership team, so we don’t know specifically who those are. We don’t know how much they are selling. We don’t know what the prices are that are being sold to them. And then we believe that’s kept an even playing field, and it kept the Acacia business intact and in a really good spot. So we’re going to continue with that business model. In fact, I’ll just share this with you. When I get the bookings report, if it’s to one of my traditional customers, I will see customer name and the booking. If it’s to an NEM, it will just say Acacia customer A or Acacia customer B. And that way, we’re able to keep that wall. And there is no legal reason to do that. It’s just we want to make sure that the business model that existed prior to the acquisition stays.

Tal Liani

Yes. The fact, though, you have it in-house, does it give you any advantage in software, in integration, in pricing? Or is it – so when you talk about the routing market and you say integrated optics is a real big trend, is it a big trend for everyone? Or do you think that it’s a driver for you specifically?

Jonathan Davidson

No, we believe it to be a big trend for everyone. We want to be the leader in this, whether we get the switch port and the Acacia port or the router port and the Acacia port, or whether that Acacia port is sold through another NEM. We just want the market to move in this direction. We think it’s the right way, not only for cost reasons, but it drives significant agility. And quite frankly, there is a tremendous savings from a power perspective because the sustainability question is well around all of our competitors – almost all of our competitors, our customers [indiscernible] requirements and commitments that they have made. And this is a big way for them to be able to address those.

Tal Liani

Basic question, is it more of a driver for the core part of the network or also for the edge and metro part of the network?

Jonathan Davidson

It’s a core driver for every part except for subsea. That’s the one application that these coherent optics currently are not good for. But everything else, the metro, the data center interconnect as well as long haul, it’s phenomenal for us.

Tal Liani

Got it. I was asked to push the microphone a little bit closer to us. So here, I’m doing it. Okay. I want to ask you still within routing. I want to ask you just about your 5G opportunity. On one hand, last year was a year of build-out of 5G, and we are hearing from wireless carriers that are slowing down spending just because it’s getting to a little bit more maturity. On the other hand, it is a driver for the routing companies, especially for excess routers. How – what does 5G mean for you? What is – where are the areas where you benefit from it? And do you think 2022 was really the peak year and from there it’s going to slow or that we still have legs to go grow?

Jonathan Davidson

Well, let me give you a little bit of an anecdote. So if you go back to just the 2, 2.5 years ago, I still had customers that were building out their 4G network in – predominantly in South America. Now what does that tell you? Well, what it means is that there is a very long ramp that – and I’ve explained it this way before, I believe, where if you took every country on the planet and you stack rank them by GDP, and then you then sort it based on ARPU, you would be able to roughly see which countries go first in the movements of the next G. And so places like Japan, South Korea, the U.S. have been relatively aggressive in the movement. And now you are seeing – in my opinion, you’re seeing that second wave coming through. You saw bold announcement, the team from Modi out of India, towards the end of last year that specifically talked about how they were going to very rapidly start deploying 5G infrastructure. And there is a lot more countries after that, that are going to need to do the hard work of digging trenches, putting out fiber, hanging radios, deploying IP and optical equipment, and I think we’re going to see that for some period of time.

Tal Liani

Got it. There is also the enterprise opportunity, but the enterprise opportunity requires business models to develop around enterprise. Cellular network this time is not just about consumer, right? So the question is how is Cisco involved in the evolution of this market also into the enterprise segment?

Jonathan Davidson

Are we talking about...

Tal Liani

Overall.

Jonathan Davidson

Mobility still for 5G?

Tal Liani

Right. 5G, but I don’t think I can talk about 5G in isolation here because I have to think about all the other parts of your portfolio that you have.

Jonathan Davidson

Right. Right. I’ll start with 5G and I’ll expand a little bit. So we just announced this week the addition of a 5G gateway into our Meraki portfolio, talking to the joint press release with T-Mobile. And certainly not the only customer, but there will be – that’s the one that we announced this week. And what is it? So I think many of you know, Meraki is not just a product. It is a platform, and it’s one of those areas where you actually get the – with that platform approach, you have product-led selling. So customers can start from lots of different places. They could start from Meraki using WiFi or Meraki using switching, and then they start to add other things. They might add SD-WAN. They might add SASE. We actually have a very healthy camera business that’s relatively new but has been doing very well since we launched that. And this new 5G gateway is no different. So you can use it for fixed wireless access. You can also use it as a backup link. And with the capacity and bandwidth that you have with 5G, it can make a great single point of connectivity or it is a phenomenal backup plan where you don’t have to decrease service. Now, when you start to combine all these things into a common single pane of glass dashboard, that’s the power, when you know that you’ve got all of the APIs inside of this platform to integrate into our partners’ managed service provider platform so they can very easily go and roll out a 10,000-node network and do 100 sites a night without anyone manually provisioning anything, that’s power. That’s very powerful for our customers and partners to be able to rapidly deploy the technology.

Tal Liani

Got it. The – I listened – the first day of Mobile World Congress, I listened to the opening presentation of Deutsche Telecom, and I was surprised that he spoke about white box. He called it black box, but he meant white box routing, white box switching just in general. He spoke about the fact that the networks are going to – the wireless networks are going to open RAN, and it’s opening up and there is disaggregation of hardware and software. And then he said, we want to save money. We want to take our entire network to disaggregation conceptually. How are you positioned – when it comes to disaggregation of hardware and software, how are you positioned? What’s – first of all, give us – because you know the market more than us, give us an overview a little bit of what’s happening, and then how are you positioned to address this trend?

Jonathan Davidson

Sure. I think we’re actually the only vendor in this market who actually is prepared. So it’s been over 3 years now since we announced the fact that we would sell our silicon to people who want to buy it. They can build their own platforms. We would sell our hardware with no software, and people could put their own software on it or you could buy a fully integrated system from us. And we are still in that business. Not only are we in that business, but we have a significant number of design wins in each of those areas. Now if you want to bring your own OS to our silicon, to our hardware, it’s actually a fair amount of work that needs to be done to integrate that. That’s if you have your own OS. There is very few customers out there that actually have their own OS. But if you wanted to use something like SONiC, we actually have our own distribution. We have our own support services team. So if you have a question about SONiC, you can purchase it from us, we can support you in that. So I feel like we’re very prepared for that world. And the key is to be able to amortize your OpEx as a customer over a certain number of devices to make it cost-effective. And if you’re able to do that, that’s great. But for the majority, a number of our customers, they simply don’t have the volume to make it cost-effective to do and pull that OpEx into their own and then be able to amortize that cost. But if they want to do it, even if it’s not cost-effective for them, if they still want to do it, I’m happy to work with them and happy to help them down that journey.

Tal Liani

Got it. So that maybe is the point to ask you about Cisco Silicon One. Can you give us an update of the opportunity – what you’ve seen so far as a stand-alone product and not part of a router basically?

Jonathan Davidson

Right. I mean the pace of innovation is so rapid. We launched 3 years and 3 months ago one piece of silicon. And from that piece of silicon, in 3 short years, we’ve launched over another dozen pieces of silicon off of that same architecture, and there is a lot more to come. I can’t talk about the pipeline, but the pace of innovation has been noticed by the market. It’s been noticed by, certainly, the hyperscalers who go down the path of building their own systems or just those who need to know how silicon is built, and that is a big driver of the decision-making. So these are mostly the largest, most sophisticated customers. And one of the big pieces of the value is I can use the same silicon as a top-of-rack switch, as an aggregation switch in the data center, as a data center interconnect router, I can use it as a WAN router, I can use it as a peering router. And so what that means is I can have a consistent operational framework. There is no other vendor in the planet who has one architecture and one piece of silicon with one SDK that can go and do all of those goals. So that puts us in a very unique position across that, and that has really resonated well with the customers who are in that space.

Tal Liani

I got a question from – again, from our audience. But – not related to anything we said, but I’m going to inject it.

Jonathan Davidson

Let’s pivot.

Tal Liani

Yes. The question was about your backlog and cancellation. Fortinet noted that their backlog will – about 30% plus could get canceled. And the question is, is Cisco comfortable with the current cancellation rate of your own backlog?

Jonathan Davidson

So I’ll just repeat what – I think it was Chuck who talked about this on the last earnings call. And I’ll have a look and make sure I get it right. If I don’t, just correct me. So we gave some guidance in – at the end of Q1 on that earnings call that we were 3 to 4x our average range. And then going to the end of Q2, we talked about being, I think, it was 2x our – at least 2x our current range.

Tal Liani

I did the analysis. I can help you with the numbers.

Jonathan Davidson

Yes. Yes. Perfect. Alright. I have so many numbers I have to remember. It’s hard to remember all of them. That’s why I use a cheat sheet for these things. So I think that gives you an idea of where things are. Cancellation rates are still within or below norm. So I don’t have any comment on competitors and what they are thinking about things, but obviously, it’s something we track very closely.

Tal Liani

Got it. Okay. Okay. I want to switch to data center switching. Before we go to data center switching, I want to ask a question that is on the border between switching and routing. Three years ago, you had no business with cloud titans. Now it’s a respectable business and it’s growing. What did you do? How did you convert the business from no presence to a notable and successful position?

Jonathan Davidson

Well, quite frankly, I think it started with Chuck, where he decided that this is an area that was protocol for Cisco to participate in. And then he then approved the acquisition of Leaba, which gave us the right foundational DNA to be able to grab the space, and having a clean sheet architecture for silicon does not happen very often. And then being able to turn that into reality is a huge kudos to the people who made the decision to buy the company before I got back to the decision – quite frankly, the team who actually built it, who are the best silicon team I’ve ever had the opportunity to work with. And lots of great engineering work going on from that perspective. But on top of that, it’s really about how we engage with the hyperscalers themselves and going in, listening to them, earning their trust so that they spend time with you to share their problems. It’s not like when you go in there, you have one meeting and you’re selling a box of cereals, right? This is very complex. And you’re not going to sell them what you currently have because you probably don’t have the right thing. But the willingness for us to go in and listen and the willingness for them to spend time with us – a lot of time with us and their trust in our ability to execute has put us in a position to actually win – to actually go and win a lot of use cases. That said, there is still a lot of opportunity out there, and we’re continuing to stay focused on that. So if I have to leave you with one thing, be humble, listen and build great technology.

Tal Liani

Got it. So, data center switching, first, the outlook for the market. This market in general, is growing. It has been growing for many, many years. Actually, it has been growing historically even better than campus, better than routing. How – what are the big drivers that you can see now outside of traffic growth? Traffic growth is the obvious. What are the big drivers that you can see now for data center switching? And can you talk about your position within data center switching? And I know that you said on the last call there is a problem of definition because whatever you sell to cloud is recorded in routing, not in switching. So, let’s try to avoid this discussion. We understand it. Let’s talk about conceptual, right, regardless of the question of where it’s recorded.

Jonathan Davidson

Well, I already mentioned one tailwind that I believe, which is around the private AI networks that I think are – they exist. We are in them today, but I think they are going to become more important and bigger as time goes on. So, that’s certainly one. The other, I think key driver is just how software is written. And we continue to see enterprises rewriting their software, where the database might be on-premise, your front end might be in one of the public clouds. You need to make sure that you have got the right level of secure connectivity between those two things. So, we have been working with the cloud providers to do dynamic cloud on-ramps. We think that’s really important and also being able to do that in a way that takes into consideration your security posture, your policy for all of those areas. So, I think the fact that we can play in those various environments, whether it would be the campus connecting to the data center and the data center connecting up to a public cloud is important. The other – you said I couldn’t talk about bandwidth so – but that is the fact. As more data centers migrate from 10 to 40 to 100 to 400, that is inevitable. And if you have 100-gig port, you have 400-gig port, the 400-gig port costs more. So, as you see people moving up the bandwidth range, that obviously is a bit of a tailwind as well.

Tal Liani

Enterprises. So, let’s – we spoke about service providers before. We spoke about cloud before. So, I am trying to isolate the enterprise, all the way from commercial, all the way up. How are you concerned – how much are you concerned of the next 2 years, let’s say, with enterprises when it comes to switching – the switching market? Are there enough drivers to – for growth, or can we see a period of absorption?

Jonathan Davidson

From Cisco’s perspective, we know that we had – a couple of years ago, we had a couple of product gaps. We have since filled those gaps, and we feel really good with the different architectures that we have for the data center space. We have a phenomenal product in API, where if somebody wants a true SDN controller that’s policy-based, that’s the right approach. And people who have deployed ACI absolutely love it. It’s – you can go on Reddit and look for ACI, you will see just a ton of love for the platform and the product. If customers would prefer to go down the path of an EVPN fabric that may or may not be multi-vendor, we have a phenomenal solution in that space as well and the ability to choose with the same hardware. You can pick which one you want to deploy. And I think that, that level of optionality, and the fact that we can go from very small data centers to the largest of data centers with our hyperscale portfolio means that all-in, not talking about where we put things from a market share perspective, we certainly expect to see general trends of data center up into the right for quite some time.

Tal Liani

Got it. 400 gig, how much of a driver is it? The reason why I am asking it is because in 2021, half of the market was basically two cloud companies that buy white boxes. How much is this a driver for the enterprise for service providers for your cloud, not the white box cloud, etcetera?

Jonathan Davidson

Yes. I want to see if I can get the dates back on the top of my memory here. The upwards – even 18 months ago, we were seeing telco clouds move to 400 gig already. And so with hyperscale, total cloud, enterprise, and it’s still very early days for the enterprise and the migration to 400 gig, but we feel like we have got the right portfolio to tackle that market, and we are ready whenever they are ready to make that move. But I do think that a large part of the market is happy with the level of connectivity that they have. And so there has to be some other reason if they need to shift or upgrade.

Tal Liani

I want to ask a little bit about just – I want to understand the drivers in the campus versus data center. So, I am going back. And again, maybe me – just my gray hair kind of and the history, campus was driven in the past by two things, new employees, more employees or new technology, Power over Ethernet or something. Right now, it looks like it’s attractive for everyone. Juniper with your – you have new products. What’s driving growth in the campus? And why is campus even interesting going forward? And is the question – sorry, is the answer, does it lie in the answer for switching, or is it more in the security and WiFi and all other things?

Jonathan Davidson

Yes. Let’s just unpack it. I think you are right on kind of the historical trend of why campus grew. I think also, I would add that whenever there is a new WiFi speed that might require things like mGig, where you have multiple connections to that, because quite frankly, the access points could just have more bandwidth and so you need to have more bandwidth coming out the PoE side of things. So, that certainly has been a driver in the past. And I think there is – one of the obvious points is, are people going to go back to the office. And if they go back to the office, what kind of connectivity do they need. Well, we know that we are in the world of hybrid work, it’s going to stay. We are going to stay here. Although whether you are a company that mandates five days a week or whether you say come in two days a week or whether it’s not mandated at all, when they come into the office, they need the connectivity. And we have been able to help our customers start to really re-imagine what the workspace should look like and how you can use the workspace for collaboration. And in some ways, it actually needs more connectivity. So, you look at things like PoE-based lighting and how that can help you stay above the 50% of power consumption if you go down that path. How you can look at having a new type of experience, where every single meeting room can have a connectivity device in it for being able to do Webex. And the vast majority of meeting rooms today do not have any sort of video screen to enable real-time communication, and we think that, that is going to be an additional driver for these cycles as the office space is re-imagined from just being a place where you are mandated to go to work to a place where you go to work to accomplish specific tasks around collaboration. So, we are – we continued to be optimistic about how the campus network is going to be. And you called out the need. Obviously, security is a big part of that as well. This is where we have our software-defined access, where you can, at a very simple software-defined controller policy-driven model, just like we have had with ACI for a long time, go and create a similar type of model that exists inside of your campus that can be extended to the data center and actually can be extended through your WAN – or SD-WAN network as well.

Tal Liani

Got it. So, I want to finish with the last question because we ran out of questions and time, time more than question. The – one of the achievements of Cisco is that you have got to 44% recurring revenue. Not all the end markets are willing to accept recurring revenue. So, the question is, when you look at your portfolio and you think about service providers, cloud enterprises, even within enterprise, data centers and campus, in your area, what are the ways for you to increase the rate of recurring revenue?

Jonathan Davidson

That’s a very open-ended question. I think there is a lot of ways. First of all, we have SaaS-specific products. So, things like ThousandEyes, which is part of our full stack observability portfolio that gives you really the only global view of the status of the Internet in real time. It also can – you could put agents and probes into your private network. You can put it into your public cloud, and it will give you visibility to understand what’s happening. As software is being written in unique ways and you can have pieces of it everywhere, how do you know if it’s a database problem, if it’s a region problem, if it’s a local problem in your private data center, and ThousandEyes can give that to you. So, it’s a very unique value proposition. That is all subscription, all software. We also have our IoT control center business. We are the largest mobile IoT business. We have over 200 million IoT things running across this infrastructure with over 60 service provider partners around the world. We also have something that you might not be aware of, something called Cisco Spaces. So, Cisco Spaces is a key part of our hybrid work portfolio, where you can – this is a cloud SaaS-based application. We will take a layout of your building, a CAD drawing. We will turn it into a three-dimensional model. You then put sensors in every single one of your room, whether it could be humidity, temperature, CO2. In conjunction with Webex, we can detect the number of people in every room. We can tell which rooms are available, not available. You can actually go and put our cameras up. We can tell you how your office spaces are used, how people are walking through the office. And with all of that data, you can start to see which areas are more utilized or less utilized. We are seeing tremendous adoption of Cisco Spaces because it really helps our customers convert their spaces and really make sure they are being utilized in the same way. If you ask those facilities manager to – we are seeing more facilities management moving into the HR function. If you ask them, how often is this conference used – how many people are in the conference room when it’s used on average, they didn’t have any of that data before. And now we can easily give them all of the access to this type of information. If you put that into our traditional businesses, we sell software with every piece of hardware or almost every piece of hardware, except for the disaggregated ones. And a portion of that software is recurring. And the enterprise oftentimes helps with DNA. In the – more of the traditional carrier-led products, we sell not only perpetual licenses. But as part of that, we have something called SIA, which is software innovation. And that, if they want to get access to, they usually will buy a 3-year license to start. And then after that 3 years, they either buy access to that innovation for the next period of time. So, there is lots of ways that we can make sure that all the innovation that we are building inside of software part of the business, which even in my networking space is the majority of the engineering talent, is able to be monetized in a recurring way.

Tal Liani

So, you answered – I didn’t stop you because I learned a lot from what you had said. I didn’t ask it the right way and I am going to ask it again.

Jonathan Davidson

Okay. So, I gave you the wrong answer.

Tal Liani

No. You gave me things that we didn’t know, so that’s great. And I do have another question from the audience, but I want to first ask it the right way. When you take your campus switch, you changed it. Your historical campus switch did not have a recurring revenue aspect. Your new campus switch does have a recurring revenue. Actually, the whole model of it is different. The question is, can you do it also with data center switching? Can you do it also with routing, or are these customers, especially on the cloud side and service provider side, will not change the way they buy “legacy,” it’s not legacy, but legacy equipment, and you have to find new products to sell them in order to grow the recurring revenue part?

Jonathan Davidson

Short answer is yes. We think this is going to be done in other areas as well. We have not only done it in the campus switching space, we have done it in Carrier Routing, right, which is probably the most challenging space to do it in. And there has to be a benefit to the customer. You don’t go, hey, I just want to charge you more over the – you are 7-year depreciation cycle. So, we believe that there is significant innovation and significant value. We started doing this on the carrier side 5 years ago, and the majority of the customers have migrated to this model.

Tal Liani

Got it. Okay. Just a quick one, someone is asking, he said, do you think enterprise switching is the growth end market when you combine data center and campus, etcetera, or are we going to go to reversion to the mean for growth after customers digest the orders from the last 2 years to 3 years?

Jonathan Davidson

I tend to believe that it is a growth business because there is a lot of connectivity that’s needed. And I think moving to these new models, not just only business models, but in these new types of workspaces, generally more connectivity is going to be needed versus less connectivity. So, if you – I will give you an example. In one of our buildings, we migrated from a traditional office environment to now it is really a meeting center, where if you have an offsite, you do it in that building. And that building is packed with connectivity because you have a lot more people than you would if it was a normal office space, where people would go in and do their normal software development or whatever function they might have. And so I think you are going to see more varied use of how buildings are used, and I think that actually drives the connectivity meter up, not down.

Tal Liani

Got it. Great. So, we will stop with that. Thank you so much for everything. This was a very deep discussion, and I think people that listened to us know everything now about switching, routing and optical.

Jonathan Davidson

Thank you very much for the time. I appreciate everyone being on the call.

Tal Liani

Thank you. Have a great day.