Cisco Systems, Inc. (CSCO) Presents at Cowen and Company 48th Annual Technology, Media & Telecom Conference (Transcript)

Cisco Systems, Inc. (NASDAQ:CSCO) Cowen and Company 48th Annual Technology, Media & Telecom Conference May 27, 2020 8:30 AM ET

Company Participants

Jonathan Davidson - Senior VP and General Manager

Conference Call Participants

Paul Silverstein - Cowen & Company

Paul Silverstein

Good morning everybody. It is Paul Silverstein, Senior Analysts, Networking and Communications Equipment at Cowen. It is my pleasure to have with us this morning, Cisco Systems. We have Jonathan Davidson, Senior VP and General Manager of Cisco’s Mass Scale infrastructure.

Jonathan has done two tours of duty at Cisco, totaling 15-years at Juniper Sandwich in between. His current responsibilities, he leads an organization that builds silicon optics, hardware, software and systems innovations for cloud service provider and large enterprise. It is the new mass-scale infrastructure and he has seen an awful lot in those 15-years.

Before we start, I believe there is a standard disclosure statement Jonathan that you want to make, is that correct?

Jonathan Davidson

Sure and thanks Paul. With most of these things I will be making are Forward-Looking Statements. For a full disclosure, you can go to cisco.com and red the forward-looking statement.

Paul Silverstein

Thanks Jonathan. So, to start off with, for those unfamiliar, can you provide an overview of your roles and responsibilities at Cisco, and correct me if I’m wrong, but you have got routing, automation, orchestration, optics and you sell really throughout the spectrum in terms of very large enterprises, public sector companies, building out mass-scale infrastructure, hyper scale cloud and service providers. So, why don’t I let you provide the overview.

Jonathan Davidson

Alright. Well, you pretty much have gotten all of that. The way I would like to think about it is, we have got a set of businesses around things like mobility, which predominantly is around the transition to 5G, the mobile core, which is the subscriber experience that you get, that is how you - the company that you can get mobile subscription from are able to know, if they are going to give you a free package like Netflix is free this month or something, we have to be able to track all of those Netflix bits and so other things that they are not charging of that as an example.

Also you mentioned the optical systems as well as optics, the cable access markets. So predominantly the devices where the service is substantiated were also called the subscriber management software. You mentioned automation, orchestration, and then of course our routing business, and then it goes along with that.

So, from a responsibility perspective Cisco is a functionally organized company, so I’m responsible for the product strategy, product management and engineering for each of those separate businesses. And then of course, I partner with my peers for sales, marketing services and the other functional organizations.

Paul Silverstein

Alright. So, why don’t we start out with big picture Jonathan within mass-scale infrastructure and it covers a lot of ground as we just went through. What are you most excited about with respect to product portfolio, technology, customer opportunities. Let me just point out correct me if I’m wrong on the webscale side of the business to my memory I maybe off here, but I think this past quarter was the first time I recall Chuck proactively calling out cloud companies in terms of becoming meaningful to the equation.

I think you all have been very transparent in saying historically that you were where you wanted to be in that customer segment and again this past quarter, some to my knowledge Chuck called it out, which suggests that you are - either become meaningful, that also become meaningful and on the service provider side where you had a very good quarter relatively speaking in terms of the order book, I think were being down single-digits it has been down double-digits for the past two or three quarters before that. We are going with this is your new 8000 series of routers, which I don’t think you commercially ship yet. But that is based on your new Silicon One architecture.

I would think that based on the specs that you all have announced, which appear to be significantly better than all of the competing platforms out there, if it works as advertised, when that product hits the market which best I could tell you around the turn of the year, I would think that could have a meaningful impact in turning your service writer routing business from what appears at the risk of being unfair.

What appears to have been a share giver to become a share taker and thereby meaningfully improving the outlook for that service provider business, which is heavily weighted to the routing, but again let me let you respond. I apologize for that.

Jonathan Davidson

So, you start off with what are we most excited about. So, certainly we have got a phenomenal portfolio from the smallest of routers like a cell site routers all the way up to the largest platforms which would be the Cisco 8000 router that we announced back in December.

We started to ship these out to customers late last calendar year and to your point official GA or General Availability actually has happened now for our best platforms as well as for the modular platform. So we have the highest density platform in the market shipping and generally all bout 14.4 terabytes per slot and 10.8 terabytes in a single route unit.

So, that is generally one area that I’m certainly proud of and that the team done has a phenomenal job in building that over the past four plus years. It takes a lot of innovation and lot of focus, a lot of tenacity to just stick with a project for 4.5 years to get to the market. But we knew that we had to start with the fundamentals and really build from the ground up.

So the new silicon, new systems, new mine cars, as well as a new approach with our market leading software. As you are aware, we have number one market share in kind of the service provider routing space and we believe that this is the right product at that time in the market.

You mentioned the hyper scale is there always on the cutting edge, whether it is deep 100 gig density or the transition into 400 gig and we certainly believe that this platform is well positioned both from a hardware as well as from a software perspective.

But also from a flexibility on how our customers can consume it, yes you call it out a well known fact it is not [Technical Difficulty] that we did not do as well as we wanted to. And the first phase of the web build out, and I think you could tie that back to really just not listening well to what was happening in our web accounts and hyper scale customers, and not only building what they need, but also changing how they wanted to consume the product.

So we have learned our lesson, we spent a lot of times listening, co-creating with them, this is not a short-term endeavor. This is a long-term transition, not only for us, but for our customers, they go through build new data centers or as they refresh their data centers, so it is not something that you will see a spike in any given quarter. This is something that is going to grow overtime and as anything we have to stay on the cutting edge of innovation and we have to stay in a mode of constant listening as well.

Paul Silverstein

Jonathan I want to make sure, to the previous response so you are making progress with the webscale customers, you are listing better, you are responding to their needs. And I will say for what it is worth, that is consistent with checks we have done and we bring about this in terms of better go to market, better responsiveness as well as better technology.

But the piece I want to make sure I understand is the 8,000 just went GA, I thought you said that the 8000 were positioned for that webscale market. If it is, I assume that is for a data center interconnect or routing use cases as opposed to ensure data center topper rack to least as fine.

But perhaps I’m wrong, if that is the case, if you are already making progress, I would assume if the 8000 is successful, that success will come on top of the progress that you are already making. We should say the current progress is not the 8000, the 8000 being incremental. What is the case?

Jonathan Davidson2

Yes. so we have had I would say a reasonable amount of success with our existing NCS 5500 plant platform family of both chassis and fixed platforms. As you are likely aware, different service providers and different types of scalers have different religions around whether they want to use modular platforms or whether they want to use fixed platforms. And so the good news is we build it all.

So you don’t have to pick a religion when you plugged on different platform hardware types. And the fixed platforms has seen I would say a decent amount of success over the past several years across a number of use cases. And honestly inside of most hyperscalers this concept of kind of the switch of the router was blurred a long, long time ago. You know what they consider what the industry things that are switching, they are often routers.

In this case the platform that we have built is does not go down to the top of that level at this point in time. This is much higher up in the hierarchy of platforms. We are positioning it initially as a core routing platform, but from a density perspective it doesn’t - from a hyperscale perspective it does fit into a number of roles inside of number of products of the hyperscalers outside of that route - but moving into a number of other roles I think. Generally there is five to seven different roles inside of most of the hyperscalers and some have more, some have little less, but we think it fits into a good chunk of those roles.

Paul Silverstein

Jonathan, the 8000 also crosses the service provider market, which is obviously pre- webscale with additional billing works for routing.

Jonathan Davidson

The last couple of months has, I think highlighted the importance of connectivity to our homes. Obviously, we continued connectivity between businesses and cross connectivity and of course the service providers are scare in providing that level of connectivity. And so, they are continuing to grow because this is new.

For the last decade plus we have seen on average 30% bandwidth growth on the core, 50% bandwidth growth CAGR on mobile infrastructure and this is really - so there is no sign of abating. We have also seen anecdotes from different customers where they have consumed 18-months of their access capacity in a period of weeks.

We have seen others where they have seen similar averages - more telling averages - in 15% to 40% growth in the hearing traffic, in the first several weeks of the pandemic as the different quarantines and sheltering-in-place orders were enacted around the world. And what I believe service providers are trying to sort through is, is this for new baseline for bandwidth and it is going to grow from there, or is it going to go down?

I mean, we have seen both around the world. We have seen that baseline and things continued to grow. But I think what is becoming apparent to many is that, there is going to a shelter-in-place in different parts of the world is going to be treated differently? But the work-from-home is going to be in certain other parts of the world, it is going to last for quite some time. And where we saw initially different over the top video providers de-rating their traffic, that is always going to get acceptable for so on and they are going to have to get back to normal.

These customers are paying the same price they were paying pre-COVID or being able to watch the HD and 4K videos and they are going to want to get back to that level of quality of videos as well, which is going to add additional one data point from one of my service provider customers is based on 20% traffic growth on infrastructure, but if the over the top video in that continued they are will see a 43% growth in their traffic on their infrastructure.

And so, the capacity is there and I think the majority of service providers around the world, there are plans of building 50% to 75% high level capacity in their infrastructure, additional capacity has done very well during the pandemic, but there is also going to be a need for additional growth on top of that.

Paul Silverstein

Right. John, let me just, I just want to wrap up on the 8000. You have this in customer’s hands since the end of 2019. So, they have had now almost six months to get a feel for it. I recognize it is just GA so revenues will come. So, can you give us any insight based on the feedback you are getting from customers, your expectations or how meaningful an impact this platform could have. It is a not insignificant portion of business in terms of service provider works for routing. Any thoughts you could share with us?

Jonathan Davidson

Sure. I can add - a major platform reduction. I will start with a specific use case and then over a period of time, I would like to call out 24-months, you start to add additional use cases, even in the use cases, what you have already deployed, they are often individual features. Handfuls of features that satisfy the need for they are having just happened to run their operations environment.

And so, we have to make sure that if they want to deploy and service provider a, that we are able to go and things that they have a handful of operations feature so they executed into the infrastructure. This is not with us with all these things. And for the most part, we know what those features are for every service provider.

But they are always evolving. And so, we have a very tight inter hoc process with I’d say the top 50, who are deploying routing infrastructure. So we want to make sure that when they go to deploy the simplified experience.

I will add one additional thing not specific to the 8000. But we launched along with 8000, which what I just described to you getting new software getting new platform introduced traditionally it is been a very long process. And we want to be able to decrease what I call the time of value.

It is not my time to value. It is their time to value like how long does it take for them to get the platform into their infrastructure, and actually get it integrated and then deploying so they can get the benefits of all this new technology.

So we have developed a cloud-based service that enables them to actually upload a configuration from one of their devices. And we will dynamically on the fly, go and test plan for them using machine learning, which they can then use to check inside of their own labs or they can test in the cloud with some level of limitations. So they even use that to test in our own system labs as well in the basis of desire.

And this has helped certain customers have adopt that automate that testing experience. Now, this is the first time - so it is not like beginning all of that. But we expect over the course of the next 12-months to 18-months as customers start to adopt this. The newer release of the software with newer features and newer use cases, we will be able to be more rapidly adopted because of this only.

Paul Silverstein

That is a perfect segue to your optics strategy in Silicon One in terms of flexibility and time to market. And I apologize, I just want to make sure. Silicon One within your purview?

Jonathan Davidson

So Silicon One is definitely one of the things that I call it my babies.

Paul Silverstein

Perfect. So my understanding with Silicon One strategy which was announced late last year. Not surprisingly, and Microsoft and Facebook among others, they are showing interest. You are not surprising. But my understanding is that is an architecture that enables use Cisco to relatively rapidly bring to market different silicon for different use cases in products such as the 8000 series your first products based on that Silicon One architecture for Silicon launch.

But that is very much a time to market. And very important core competency in terms of a building block. You have always had A6, but this is entirely new architecture. Can you share some insight about that before I ask you about your optics strategy.

Jonathan Davidson

Sure. So high level, this was part of the lab acquisition four and a half years ago. So Eyal Dagan who leads that engineering team as well as the hardware engineering for Todd Nightingale and myself.

So Todd leads our, basically, our enterprise and compute divisions. We called basically the tech-based networking, data center, all that kind of in his review. And certainly other specialized hardware and silicon tools both Todd and I can leverage the synergies for that.

Specific to Silicon One it is a completely clean sheet architecture. As you are likely aware, there is different blocks inside of silicon and no blocks were reused in the making of the silicon literally everything was built from the ground up from scratch and what that enables you to do is be extremely efficient and be very thoughtful about every single block that you are building.

And what you are seeing is the design point perspective is the goal was to get the bandwidth scale as well as the overall power savings efficiency that you typically would get with what is called switching silicon, but we also knew that this was going to be run in silicon.

So, we wanted to make sure they do have high feature content, as well as the ability to do deep buffering. So, that actually able to have a utilize as a route and so in my opinion, we have definitely hit the mark, where we have the most efficient routing storage in the entire market.

We have got the highest performance, I mean bandwidth perspective in the market and I believe we have really knocked it out the park from that perspective and were seeing interest from our artificial service provider customers hyperscale and web customers and then of course, you mentioned earlier even from public agencies and anyone who uses building critical infrastructure or has a need for significant bandwidth capacity.

Paul Silverstein

Great. So, correct me if I’m wrong, but I think since this sort of thing in dividend in 2012 there would be dozens and dozens of acquisitions that Cisco has consummated. I believe only two were hardware based and those happen to have been done in the last or one of which is still pending and both of those of course were optics deals.

First looks Tara where silicon photonics focused on intro data center switching applications and now Acacia, we are coherent DSP more telecom or distance oriented. Again, that hasn’t yet closed. Can you talked to us about your optic strategy and before you respond. I know there was a slide that you all put up recently and I apologize I think this was at an industry analyst have been.

But were you so not surprisingly that optics is an increasing portion increasing percentage of customer spin on routing and switching platforms, which I assume is part of the reason behind the strategy. What is - once upon a time you all bought Cerent and you all bought Pirelli to get into the optics business. It seemed like for many years, you have downplayed optics before coming back to it in the last two or three years. What is the thought process behind the renewed focus?

Jonathan Davidson

Yes. So, a couple things. One, we also have acquired Leaba 4.5 years ago, you could consider that a hardware company although they were pre-products at the time. And to your point from just really a service provider perspective, we made two additional acquisitions mostly in the software space to help with all the hybrid connectivity as well as more around the automation and orchestration area.

Specific to optics, you bring up a really good point and this is one of my favorite slides. I was faced with shareholders, the amount of cost to move a bit from point A to point B, and how you go back 10 plus years ago, 10% of that cost is in the optics, and today it is about 50/50. And if you move forward, we believe there will be like over 70%, especially when you talking about digital coherent optics of which Acacia specializes in.

Now this is, a rule of thumb. These are not jumped out and build a business model based on that. There are the high level statistics. So that is just - optics that have along with optics along the reach of more expensive optics itself.

Yes. When you think of it, there is really two things. One, we actually acquired an optic company back I don’t know exactly, it is probably pre-2012 with core optics. So, we have been building in light of [Multiple Speakers].

Yes. So, we have been building optics internally for quite some time, and then what we have seen is that, there is obviously a lot of different types of optics and there is historically it is kind of medium and long reach. There is also in QSFT, there are different form factors. So, you have to build a pretty broad range of technology, and it is pretty similar technology and we really have to -- just like you do with silicon.

And our belief is that, we need to make sure that we own the core intellectual property around some of these key areas around optics, not only because that we mentioned around, simply the amount of the time that is moving through optics but also we see technology transitions, where the optic technology and silicon technology is going to become closer and closer, over the coming generations of time.

And I don’t have a magic eight ball. I can’t tell you exactly when that is going to be, but we know that it is going to happen. That is a matter of time and we need to make sure that, we have got all the different pieces of the puzzle.

One example of optics getting closer and there was a press release in just last couple of weeks talking about how our Luxtera team actually was partnering with one of the ODM players that do onboard optics to make it easier to cool the device to make it.

You know you are going to use all of the reports from day one, there is no reason to use a lot of this. You might want to just go into the optics on board and see if you can join cost efficiencies out of that, operational efficiencies out of that. And I think we are still early with onboard optics, but it was a good learning experience for us and for the other vendors who were involved in that program.

Paul Silverstein

Well, so, to your point I saw during announcement, our first take was this was more about silicon and it is about optics i.e. silicon and optics eventually coming together on the same dine and the same board, addressing the distance issue. But, to the slide that you referenced, increasing optics is a bigger portion of the equation.

And I know time is short in return to the big picture question, you have discussed the 8000, we discussed the optics, we discussed the Silicon One strategy, what else are you most excited about that can have an impact on Cisco’s business for the better, if not now than in the coming years?

Jonathan Davidson

Yes. I would call a two specific things. One is around the transition to 5G. We certainly see that this transition is happening around the world. We even have alignment of a few key elements first of all, obviously you need to have spectrum, need to be available. It needs to be reasonably priced. And I think that has been challenged in a number of countries around the world.

The second thing is you need to have handsets ready to go. And while I think Samsung has done a good job of that, that is definitely the giant of 5G-enabled handsets out in the world. And then actually we make some pretty big technology decisions around your mobile phone provider, your LAN provider to see that there definitely are more service providers looking at virtual ORAN-enabled technologies than even 12-months ago.

So we think the disaggregation and opening up of interfaces and more standardized interfaces is good for the technology environments, good for some of our customers. And will create more choices using accelerated markets. And then of course, our resource partners need to go and build out new transport infrastructure as well as IP as well as an optical perspective. And so we have been working closely with a number of them. You might have seen a press release.

A couple months ago now like NTT, that they have selected Cisco as their primary backhaul supplier for their new 5G network. And as you know they have been on the cutting edge of 5G in Japan for quite some time in preparation for the - till through 2020. Now until get 2021 efforts. And certainly, we are tracking what is happening with 5G around the world.

And then the last thing I would say, that we are excited about with how much into the 8000 is that just the transition of architectures that what ZR is going to bring into the fold. And how that is going to enable a simplification of the IP and optical networks by putting the transponders without really paying taxes directly into most of our routers.

And that will remove network elements that saves power and is a more automatable network. And so we have seen early interest in that technology as well. Obviously there is some Z Optic start shipping at scale. And so that is likely to happen towards the end of this calendar year.

Paul Silverstein

Jonathan, in the last minute or two, I think many investors may not know or may have forgotten. But way back when - I have lost track of probably was a decade ago maybe longer. You had what for many years was an extremely successful acquisition. And if I remember restoring, which brought you into core mobility and in LTE, they did extremely well for a while.

We don’t the name is now part of a larger organization. And I don’t think we have heard a lot about this. And it doesn’t seem that it had - I don’t know if it is flagged over the past several years. But you just referenced 5G both the transport piece, IP routing and optical, as well as the core mobility piece.

Any update you can provide with respect to your competitive positioning? Are we going to see is there the prospect that, again at the risk of being unfair that you’ll do meaningfully better in 5Gcore that have here is the been the case perhaps, again it was bit unfair over the last year or two?

Jonathan Davidson

Yes. Great question. So Starent is now our what we call the Cisco Ultra Cloud Core. And when we acquired, the industry was all about appliances. And since that time, it is moved pretty dramatically to be a software business. So initially it was virtual software and now we are well on our path to automated software system.

This is what I described in the beginning of the call around that transition to 4G and 5G and we need to discover that as the software that describe and as a software is the mobile core. Whether it is a 3G, 4G, 5G. There also was a blog and I’m not sure if it was a press or just a blog from T-Mobile and they are talking about our partnership around helping them build as a 5G network, which they actually started offering public towards the end of last calendar year.

Also, they announced that they were planning to be the first to deploy 5G as the infrastructure that is built on Cisco’s mobile platform. And if you go and look at who has differed what around the world, as this as far as I know and I wanted to dispute as and I track pretty closely it is first 5G at a core deployment from the world and so we are excited to partner with T-Mobile on doing that and currently with current acquisition closing and there is going to be more subscribers on that network overtime.

Paul Silverstein

One last question and I apologize and we are running overtime so I will try to keep it short. The U.S. government method has been very vocal in connection with your political views at the Huawei and China in terms of championing how important 5G is. The obvious thought is, is there going a lot of players in the U.S. when it comes to 5G at least at the system’s level you are one of the very few. Any thoughts you can share with respect to the U.S. ion initiative or anything in that vein in terms of 5G in the U.S. push anything you’ve showed us?

Jonathan Davidson

You were breaking up a tiny bit there. So, I’m not sure I got all of that thing, I have to choose with it. So the basic around 5G and where we’re at. There are smaller radio vendors inside of the US that it will be building or building over and DRAM software or actually that building to over software plus the radio themselves.

They are obviously we have got occasional technology with large companies like Qualcomm that to do as they build the key components for 4G and 5G infrastructure. We have never believed that key elements around transport and of course on a very destructive what was rolling around the mobile core and I mentioned what was happened with T-Mobile.

We certainly think that and the government has called us out if there is a need to help them more rural Telco’s migrate from their existing deployments to I will just say they have got more in the Western Hemisphere that’s the initiative of the government started and we are certainly here to help them as much as possible with that effort.

And so we are going to stay laser focused on that as an industry continues to evolve and I have said this before, and I will say it again, as we stay focused on listening to our customers as to get focused on innovating with the kind of long term differentiation and mind and that’s our key focus areas for the space and what happens kind of on the geopolitical side is outside of our control, and so we have great personal results in a lot of different attacks our innovation agenda on that front.

Paul Silverstein

Understood. Not surprising, I would love to have another hour or two, but I’m afraid we are going to have to leave it at that. I appreciate the time and insight this morning. I hope you and everyone on the line today hope you and your loved ones and friends, family, et cetera, I hope everyone is safe and sound. Thanks Jonathan.

Jonathan Davidson

Thank you, Paul.

Question-and-Answer Session

End of Q&A