Cisco Systems, Inc. (CSCO) Management Presents at Goldman Sachs Service Provider Tech Talk Conference (Transcript)




Cisco Systems, Inc. (NASDAQ:CSCO) Goldman Sachs Service Provider Tech Talk Conference Call February 26, 2019 9:00 AM ET

Company Participants

Jonathan Davidson – Senior Vice President and General Manager, Service Provider Business

Emily Hunt – Investor Relations

Conference Call Participants

Rod Hall – Goldman Sachs

Operator

Good day, ladies and gentlemen and welcome to the Tech Talk on Cisco’s Service Provider Business. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Rod Hall. Sir, the floor is yours.

Rod Hall

Yes, hi, everyone. Thanks for joining. I am Rod Hall with Goldman Sachs. I am the networking analyst as well as the IT hardware analyst. So welcome. Thanks for joining us. You might hear a little background noise because we are here at the World Congress, so a lot of people filtering around the room that we are talking from here. But I am joined by Jonathan Davidson, the SVP and General Manager of Cisco’s Service Provider Business. So welcome, Jonathan.

Jonathan Davidson

It’s great to be here.

Rod Hall

And I also have Emily Hunt here from Cisco’s IR department who is going to read us an exciting disclaimer, after which I will read a Goldman Sachs disclaimer, after which we will get started. So Emily, if you want to…

Emily Hunt

Okay. Yes, thank you, Rod. I’d like to remind everybody that today’s call relates to Cisco’s service provider business only. No new financial information regarding Cisco’s overall performance is intended or implied. We may make forward-looking statements which is subject to risks and uncertainties outlined in detail in our documents filed with the SEC, including our most recent filings on Form 10-K and 10-Q and actual results may differ from statements made today.

With that, I will turn it back over to you.

Question-and-Answer Session

Q – Rod Hall

Thanks, Emily. And then I’ll read the Goldman Sachs disclaimer. So we are required to make certain disclosures in public appearances about Goldman Sachs relationships with companies that we discuss. The disclosures relate to investment banking relationships, compensation received or 1% or more ownership. We are prepared to read aloud disclosures for any issue or upon request. However, these disclosures are available in our most recent reports available to you as clients on our firm portals.

So with all that excitement out of the way, I thought I would open up and just ask you, Jonathan, if you could talk a little bit about your background. For people that don’t know you well, this is your second stint at Cisco. Could you talk a little bit about just give us a little bit of background and what you are responsible for at Cisco? And we’ll jump into some other questions.

Jonathan Davidson

Sure. Thanks, Rod. Appreciate it. Great to be here. I feel a little left out not being able to read a disclaimer, but it’s okay. So a few things, first of all, so I’ve been back at Cisco now for 2 years. Actually started at Cisco through a fifth acquisition, I believe it was the fifth, in 1995, and was here for 15 years before I left for 7. Now here back, I am responsible for the service provider business, which encompasses 5 unique business areas around mobility, optical, cable, automation and routing, so all of those we call sub-businesses together form the service provider business and that’s my responsibility here.

Rod Hall

Great. And then since you returned to Cisco after a prior long history with Cisco, could you say what some of the surprises you found as you have gotten back to the company? What’s changed since you were away?

Jonathan Davidson

It wasn’t a complete surprise. The industry is relatively small and you know lots of people, especially since I was here for so long. But what was great to find out in coming back that what I had been getting told was that this is really the new Cisco. And what I mean by that is this is a place where people collaborate across technology areas in a great way to focus on our joint customers’ outcomes because really, we think about technology, the real innovation of technology happens at the edges nowadays and where those technologies touch each other. So how enterprises can connect better to service providers, how security can be better integrated with infrastructure and things of that nature. And so I was happily, pleasantly surprised that what I had been hearing and been told before I came back was actually very true itself. And I think that’s part of the cultural shift that Chuck has brought to the table.

Rod Hall

Okay. How about some of your priorities in service provider looking forward?

Jonathan Davidson

Yes. Well, if we think about the top line business priorities, we focus on our customers’ outcomes, and we focus on making sure that we are innovating at the pace that our customers demand to make sure that in every single product and every single solution or domain area, that we have market leadership. This is very important for us. Our customers are technologically extremely savvy. They understand their own market obviously. They understand our products and technologies intimately. We have a lot of very detailed technology discussions with our customers. And they tell us if we are not meeting the market and so that’s great to have. This is one of the reasons why I say I will never be in a consumer company, because consumers don’t know what they want and they can’t really tell you, but in our space, they know exactly what they need, they know what their problems are, and they’re very vocal in helping us understand how we can help them best. And so that’s really what we’re focused on, is making sure we give them the outcomes that they need for the whole company. And I’m talking predominantly from a technology perspective, but obviously, it encompasses much more broadly than that when you think about our customer experience organization, how we can help them accelerate the deployment of these technologies and the integration of these technologies into their existing systems.

Rod Hall

Okay. Well, we’re at Mobile World Congress. So I know Cisco’s made some announcements. I thought maybe it’d be good to get you to summarize those and talk about the ones that are resonating the most with the operators, what are they most interested in?

Jonathan Davidson

Sure, absolutely. Well, everything that we’re talking about at the show or that we’ve launched at the show has deep, tight customer, what I’d call guidance. It’s not feedback. It’s not that they are giving us so we can discard or not discard. They are guiding us to go and help solve the problem. And so we like to bucket things into three unique areas for Mobile World Congress. And we talk to our customers who haven’t been engaged in the development process about those three areas. The first one is in the area of helping them grow their revenue and that’s critically important. The second area is how we help them actually go through and reduce their costs, both on the CapEx as well as on the OpEx side. And then third and I think equally as important as the first two is in helping our customers mitigate the risk that they have inside of their infrastructure. And that really breaks out into a few areas and I will get into that as well. But if we start off with this first area of grow revenue and if you were in our booth and you were seeing the – out through the door here, you would see that we have 29 unique demos that actually are categorized in those three areas. But I won’t go through all of 29 because that would take all the time we have, but I will just highlight a few things for you. And really, since we’re at Mobile World Congress, we’re going to have a bit of a mobile bent to things. So we want to help them around being able to develop new 5G services, and we want to help them go and create revenue streams.

And I will give you some factoids around that. GSMA did a survey, and 69% of the respondents, who, by the way, were all CEOs of service providers, responded that they believe that enterprises are aware they are going to be able to help monetize their 5G investments. So 69% of CEOs says enterprises are aware they’re going to monetize their investments. That’s critically important, because I don’t know of any other vendor at this show who understands enterprise better than Cisco. And majority, almost 70% of CEOs are telling us that, that’s important to them. So we have a couple of things to help them with that. The first one is what we call the Cisco Unified Domain Center. And this actually helps solve a fundamental challenge that I think a lot of the Fortune 1000 enterprises have, which is around how do I, being a CIO of an enterprise, help extend my policy domain into the mobile infrastructure provided by the service providers? So I could put an MDM client onto my employees’ phones, but I don’t really always have geolocation. I don’t know what applications they can have access to, based upon where they are. But if they are inside my building, I don’t mind if they pull down what our sales forecasts might look like or I don’t mind them pulling down what’s happening from a back-end accounting perspective. But if they are at Starbucks, I probably don’t want them to be able to pull down that information. And so this is an example where you can give – think about it this way we are giving the service providers the tools to build a virtual sandbox and then give that sandbox to the enterprise IT leader. And then the IT leader in the enterprise can then decide what they want to do with that sandbox.

So first, the SP controls their network, they will decide the size and shape of the sandbox, and then the enterprise can then go to find out. So if they say, hey, look, I don’t want you to use Facebook inside of my enterprise, you can do it with this tool on your mobile infrastructure. Now when you leave, you can use Facebook, but you are no longer going to have access to any of the applications that will give you sensitive data unless you are in another secure facility that’s owned by that enterprise IT department. So that’s just a simple example of what you can do with these tool change and what something like the Unified Domain is able to give. So people are very excited about that because it actually enables them to have access to potential profit pools in the enterprise that the service provider potentially can have access to. That’s number one. The second one is what we call the Ultra Cloud Core, which is our cloud-native approach towards the EPC or the Mobile Packet Core. And what that does is it basically enables us to use a microservices-based architecture, which will give our service provider customers up to 20x improvement in bandwidth capacity of a given x86 system. And why is that important? Because if I am able to put more throughput through a given x86 system, that means that the cost structure for them deploying that infrastructure is dramatically reduced. And so a lot of our providers are always looking at how they can reduce their capital costs and this is one where they can do that. The second one, I should say, before I move on to that, the other key thing about going cloud-native in microservices is their time to market is dramatically reduced. So the ability for them to deploy net new services is dramatically reduced as well. Also an area of growing revenue is a product that we call Umbrella, which is on the security side of the business. We have an operator in Western Europe who has partnered with us, that has been able to go and have an opt-out service for security and preventing malware from really impacting their end devices and being able to help them scale us. So this is a cloud-based service offered from Cisco. You can turn it up very rapidly. The operator can get the revenue before they really have to put any kind of tremendous amount of costs to their infrastructure. So it’s not like I have to put in a lot of cost and then wait to amortize that cost. My revenue is going to grow along with my expenditures at the same time, which is always top of mind for them and gives them a good way of getting their return on invested capital.

The second big area is around reducing costs. So we clearly are on the cutting edge of silicon, and we’ve launched a whole set of new platforms around access and aggregation, which is specific to mobile backhaul and how we can actually have a very secure approach to actually being able to offer new services. People here have probably heard a lot about slicing. So you can offer a secure slice through the infrastructure. We offer new line cards for our core base routers that up to 9.6 terabits per slot. And then finally, our Edge platform, we actually launched updates to that 6 months ago and so we are just reiterating that point. The third big area is around mitigating risk, and this is critically important. One, we want to – we launched an architecture around the service providers, how they can make sure that they have got pervasive security in each one of the relative areas of their infrastructure and how they can then go and offer new security services. One example of that would be the Umbrella product I just talked to you about. But the other real one is that our customers are deploying critical infrastructure. If you have kids, obviously, you know that what’s out their connectivity to their mobile phones, teenagers get very angry and angst-y because it’s now the bottom of Maslow’s hierarchy of needs is to have connectivity. It’s a bit of a joke if you can’t see my smiley face on the phone. But the truth is that this is quite critical infrastructure for every business as well. The speed of business requires that infrastructure always beyond, always beyond beautiful. But what we’re also hearing from our customers is that they need to understand that they have trusted hardware and trusted software. And so we’ve launched a product that we’re calling Cisco Crosswork Trusted Insights. So for the first time in the entire industry, we’re letting people understand that the hardware and the software that they have running on their critical infrastructure is actually trusted. We also want them to know there’s third-party software running on the device, and there’s really good reasons for why third-party software might be running on a device. A lot of people are going for probes on those devices, but you need to make sure you know that those probes actually are the probes you want running on those devices, that it has the right version, control and that those things can then be white listed. So there’s a lot more that we’ve actually launched, but those are the highlights and the only ones we’re just getting just phenomenal feedback from, from the service providers here at the show so far.

Rod Hall

And just to expand on the Trusted Insights product, is that – so that’s scanning across the entire network and letting someone know if anything on – in there is…

Jonathan Davidson

It’s not scanning. Scanning can’t give you what you need. What this does is actually security, first of all, on critical infrastructure has to start with hardware. You have to start with a root of trust in hardware, and then you can start handing off that trust to every layer of software within that piece of device. We then have ways where you can actually then go and attest to that is to a cloud-based service. And so what we’re doing is these devices – well basically, think of it as registering to the cloud service. And then from the cloud, we will go and then report that back to whoever owns those devices or those entities.

Rod Hall

I got it, okay. So there is a lot of the talk at Mobile World Congress is about 5G, kind of as it was last year, but it seems more real this year and pervasive. I wonder if you could talk a little bit about how Cisco participates in 5G. You’re not a RAN vendor obviously, but you have a lot of other ways to participate, so…

Jonathan Davidson

Absolutely. So as you might guess, we got that question a lot in the past. We actually don’t get that question a whole lot now. Everyone knows obviously that we’re not in the RAN space. But I will tell you this we are the number one vendor in EPC globally, so that’s the Mobile Packet Core. And you could think about it as where the subscriber experience is actually instantiated. And so if everyone is right next to you on your desk right now is a mobile phone. So that mobile phone obviously goes over the radio. But you could think about where the radio, now it’s IP from your phone, right, but where the actual subscriber experience is instantiated. So where I decide how much bandwidth you get, where I decide if Netflix is free or if you’re going to be charged to your billing or not, where I actually go and pull down the capabilities that you paid for is in that Mobile Packet Core. And this is why we call it the subscriber experience. And there is the same thing, not just only on mobile, but you have the same thing in fixed networks, whether its cable or BMG or PON or DSL networks, the same exact type of capability. We are number one globally when you put those three different technologies together as well. So we play in that space obviously, but we also are critical in actually the IP infrastructure. So once it comes off the radio and goes into an IP infrastructure, we play a big part in that mobile backhaul. We are moving towards mid-haul architectures, moving towards front-haul architectures. But today, the majority of the world is in a backhaul type of architecture front. And we are the number one provider of SP routing in the world and that’s a big part of that play, whether it’s access routers, aggregation routers, head routers or core routers.

Rod Hall

Okay. And then on 5G, you talk about the Mobile Packet Core, and then I know you’ve talked about this customer experience group that you’ve got. Just curious how those two things come together, do they come together or do they kind of operate separately?

Jonathan Davidson

The Mobile Packet Core and customer experience?

Rod Hall

Yes. Since the Mobile Packet Core drives all this customer experience today, is that the primary way that they help carriers design it? So there’s a revenue opportunity, I guess.

Jonathan Davidson

Yes. They definitely come together and not just because they both end in experience. So I am responsible for the product’s development, product strategy, product management. So one of the folks that reports to Chuck is Maria Martinez, who came to us, I think, almost a year ago now from Salesforce who ran the customer experience team there. So she is transforming the organization. And what her organization does is help our customers accelerate the deployment of these technologies, both through help customers understand where their gaps might be by actually helping do software development to integrate these technologies into our service provider customers’ OSS and BSS stacks. And so the product and the customer experience teams go together into our customers and really help them with this transformation. Now there’s the traditional way that we have sold things like the Mobile Packet Core, where we sold it more as an appliance, where we gave you an appliance and have the software running on it. We’re migrating or we have migrated towards a virtual environment where we may or may not sell the compute, and oftentimes we will sell the full, what we call, the NFVI stack. So it’s the software stack that actually helps you go and bring up the virtual machine, which runs this Mobile Packet Core software. And so we can help our service provider customers to actually go and bring up this stack for our applications and other third-party applications. And so that’s a big area where CX comes because a lot of times, the service providers may not have the right new skills. And so we can operate in a mechanism where we’re giving them training, we can actually do the bring up we can operate it for them for a while; we can do a build, operate, transfer, there is a whole bunch of models. And one size definitely does not fit all with regards to CX, and we can be very flexible to the point where we can even build custom software for them if that’s what it takes to help them operate their infrastructure.

Rod Hall

That’s great, because they may not know how to bring the most value out of that EPC technology that you’re providing them.

Jonathan Davidson

Exactly. Whenever you are thinking about anything cutting-edge and as we move towards cloud-native technology, it’s yet another learning curve, not only for us as we’ve developed that product over the past 2 years but also for our customers that they learn how to operate it. And think about it, instead of managing an appliance, I now have to manage individual processes distributed across lots of different x86 systems. So that’s a skill set that our operators are learning as they go as well. And some of them are well ahead, and we don’t need any help. I don’t want to make it seem like every operator needs help from Cisco. But there are those who certainly need our help and we are there to have the staff to help them on the ground, make this happen.

Rod Hall

Great, okay. So 5G, there’s a lot of debate about when it actually happens. And I know that you have a lot of discussions with these service provider customers. So could you talk a little bit about what you’re hearing on the ground in terms of 5G rollout what Cisco’s thinking in terms of timeframes?

Jonathan Davidson

Sure, absolutely. So well, I’ll go all the way back to Mobile World Congress Americas last September where it’s mostly a North American show and we saw Verizon was very public and went out with their fixed wireless access service in 4 cities. And they have extended that to several new cities and they have been announcing that so far. A lot of what I like to call the G20 nations, there is at least one provider in every country that’s announced that they have or that they will very shortly have 5G support. And so that means a few different things. A lot of them have started with fixed wireless access. There are now some high-speed user elements which is fancy 5G speak for phones to that or is able to go and get a much higher bandwidth service. There are countries that the operators are willing to go, but the country themselves have not actually sold the 5G spectrum yet. And so it’s a little bit of like we are ready and we are waiting for that spectrum to become available. But we see that throughout the calendar year 2019 that we are going to definitely see more adopters. But again, it will be city by city. And just like every other major mobile technology rolled out, there is a major city by major city and then they will fill in the space over time. Cisco’s owned VNI Index actually extrapolated out how many millions of subscribers would be on the network. And by 2022, it was still in the millions range and not in the hundreds of millions range in even 3-plus years from now. So that’s just a forecast. We certainly – we are not perfect. We can be mistaken. It might happen much faster than that. But our belief is that you have to get the coverage, you have to get all of the phones out there and available, and then you have to hit a certain price point before you can really go mass-market on those phones.

Rod Hall

Okay. So how about service provider architectures? We have been hearing a lot about architectural shifts that go along with 5G. They are not necessarily the same as 5G, but we know service providers are trying to get toward more automated networks, for example. And I wonder if you could just talk about how you see architectures shifting the next 2 or 3 years.

Jonathan Davidson

Sure. So there is a lot to unpack in there. So 5G in and of itself is a new 3GPP standard that’s driving the new architecture that is actually enabling what is called CUPS, which is Control and User Plane Separation. And basically, think about it this way, the data plane, so the actual moving of the bits that let’s say your video bits that can now get moved closer to where you are physically standing right now. And the control plane bits, so think of those as the – I want to be able to understand the billing records for when I start and stop calls and things of that nature. That’s the control plane aspect. So the user plane will get closer to where you physically are standing and I am talking to all of you on the phone right now and then the actual control plane will stay somewhere a bit more centralized. That’s a really big architectural shift. So, both of those used to come back to the same physical appliance. But you might have heard of things like MEC, Mobile Edge Compute, so the ability to put just compute and storage closer to the users. This new CUPS architecture will take advantage of that MEC or putting storage or compute closer to the user. So that’s a net new opportunity because it’s a net new architectural shift. Now why is that important? Because most of the data that you’re seeing on your phone actually has videos that in fact, it’s over 70% video bits today, and if you fast-forward 3 or 4 years from now, over 80% of them will be video bits. And believe it or not, most of what you are watching on your video bits on your phone, on your iPad or whatever your favorite device is, is actually coming from the video cache. And so those video caches are more centralized in the network today. But there is significant value in pushing those video caches out as close to you as possible because even though we like to think of ourselves as snowflakes and we’re all unique individuals, most of what we watch is actually pretty similar. Everyone can talk about Game of Thrones because everyone’s watching Game of Thrones. And so that’s why those video caches become so important because it helps lower the cost of the infrastructure, because every bit that I’m able to serve from a video cache is a bit I didn’t have to retrieve from the middle of my network. So that’s a big architectural shift. I would say, the next big – what I’d say probably one of the larger ones for the industry is the fact that we can – we finally are at a point where we no longer have to build bespoke networks for every type of service.

Now what does that mean? What it means is for really the past two decades, if you wanted to offer business services, you built a business services network. If you wanted to offer cable services, you built a cable-specific network. If you wanted to offer mobile services, you built a mobile-specific network. And now with the continued growth of traffic and everyone’s network infrastructure, bandwidth needs are growing anywhere from 30% to 50%, although we have many customers that are growing at well over 100%. What that means is that you’re actually able to class all of these service types onto a common IP-over-Ethernet infrastructure. And so you’re able to dramatically reduce the costs of building infrastructure because you’re no longer building 3, 4 or 5 different infrastructures. You are able to overlay all those services. Now you still have the same number of bits that you need to carry, so that’s just a really big IP-over-Ethernet infrastructure. But the economics are there, and the capabilities in IP are there to enable that to now happen. And so we actually did a press release just 2 days ago with Bharti, explaining how they were going and helping to simplify their infrastructure by utilizing the Cisco portfolio exactly for this purpose.

Rod Hall

And would Cisco participate that – in that mainly by providing the IP layer and just more of it or can you talk a little bit about how Cisco’s revenue plays into that change?

Jonathan Davidson

Yes, absolutely. So absolutely, we play in that. So we are the number one routing vendor in the world. And so clearly, if more bits are moving onto an IP-routed infrastructure, that’s a rising tide that can lift many boats, some are sailboats, but it can lift many boats. And certainly, we expect to participate in that infrastructural change. What we also are seeing is probably the last architectural shift that applies to this construct is our customers’ movement towards automation. And if you asked me a year ago, I would have said that most providers are still trying to figure out what their journey towards automation looks like. Now almost all of them are – have their automation journey underway. There still are a few stragglers who are trying to figure out where to start, but most of them have at least started. Now this isn’t a 6 or 12-month journey, this is a multiyear journey because you are changing behavior, you are changing operational tools. You are changing actually the flow of the business from how an order comes in from their customer to how that order is getting provisioned and built. This is a pretty fundamental change in the business. And so we launched last year our Crosswork portfolio and we have seen a great uptake in that portfolio as part of our customers’ journey toward automation. And we announced a set of new tools as part of that rolling of that framework this week as well.

Rod Hall

Okay. One of the things that’s come along with automation is this idea that at least some operators have talked about building cloud-like infrastructure based on more commoditized products, things like that. Could you just maybe say a word about what you’ve seen on the ground, I guess, with respect to people trying that versus people going with more branded solutions?

Jonathan Davidson

Right. So I guess the first thing is it’s important to everyone to know that we have embraced what the industry has been calling a disaggregation model. And there is a few ways to look at that. So one is you have the traditional model where we sold the software and the hardware integrated together in a package, and they would buy that from us, usually with service and support. The disaggregated model would be where they would buy the hardware or the software separate from us. And so we are very – we have changed our entire model. You can go online. You can see what our pricing model is for hardware or software separately. We are happy to sell each to you separately. But what this has enabled us to do is have a real conversation around what’s the business purpose behind the disaggregation model. And so one of the things that’s enabled us to do is say, what is the problem that you are trying to solve from a service provider perspective? And what we have found is that we didn’t – we haven’t really, for the last two decades, been able to or we haven’t had the need to explain that there are actually three parts that should have been on the price list when we sold products to our customers. We had the hardware and we had the software, but hidden in our price list was what you would define as systems integration. And that’s actually making the software work on the hardware. And so what we do is it enables the conversation to say, well, absolutely, we will sell you our software. Here you go and then say okay, I want to go and pick hardware vendor B. We go, that’s great. Who is going to do the integration for you? And they say, well, we want you to do it. We go, okay, great. Here is the bill for that. And they go, well, what do you mean? And so we explain what system integration is and they suddenly then go, well, I don’t want to do that. I want to pay someone else. And we say you could go ahead pay someone else, that’s great. But someone has to do that work.

The second part to that integration is it helps them understand the value of the scale at which we operate, right. So if I am selling you a complete system, you get the value of Cisco economics behind you. Since I’m selling to so many customers and I’m selling to so many customers the similar hardware and similar software, I had economies of scale. And if you are going to go and buy bespoke hardware from another place, a white box or what have you, they typically are going to sell it to you based upon the volume that they have. And most of them don’t have the volume that Cisco has. And so that also has come as a bit of a shock to certain service provider customers when they go, oh, my hardware is a lot more expensive if I buy it somewhere else. And we go well, that’s because capitalism. That’s the way it works. This is volume driven. And once you have the conversation with customers, they fundamentally understand it. And some customers have still migrated down that path because they have the volume to be able to go and make that an effective business case. And other people have decided to do it because they want to try and go down that model. And the majority of them are still going down the integrated path, but we are very open to all of those models. And I would say the last piece of it when we talk about disaggregation has been the way that we have been able to change our pricing model for our software over the past 12 months, both on the automation side as well as our traditional IOS XR software, which is our network operating system stack where we have enabled people just to buy the portion of the software that they need. So they don’t have to buy the full XR software from us if they don’t need all of these features and all these capabilities. So we’ve been able to package it in different ways and make it much more flexible for them. So think of it as more of a pay-as-you-grow type of a model not just from a hardware but from a software perspective and people really appreciate the fact that we are helping them think differently about how they can basically get the better ROIC for their investments.

Rod Hall

Is there also with the system integration point you are making, is there a speed issue? It seems like operators have really struggled to implement automation over time, and they’re losing money as a result. There’s no OpEx savings aren’t coming through. Do you hear them coming to you more saying, look, can you help us accelerate deployment here?

Jonathan Davidson

Yes. We definitely are hearing where they would like I want to categorize this. There is thousands of service providers like I don’t want to speak for everyone. But the truth is you could put people in categories. And this is why we you kind of put them on a curve. We have a little actually kind of a 6-box where we place people. And there are people who literally need zero assistance from us where they just say, ‘Hey, make sure your platforms have these interfaces, and we’re good.’ And you could probably guess who those customers are. That’s generally a very small number of customers. There are those who say, give us your products. We know how to integrate it. Thank you very much, you helped us accelerate, but the majority of the number of customers fall into kind of the third area where they are ready to consume some of our automation portfolio and then we help them figure out which parts can give them the biggest operational benefits the fastest. And then we can then help them with our customer experience team that integrate and deploy those, and then they very rapidly want to take over the operations of those products and the majority fit into that third bucket by number of customers.

Rod Hall

And you think that there is probably a big learning curve here at Cisco. So, if you are doing all these this majority of people and you are implementing automation for them, you have got a lot of learning that you are doing as a part of that, which helps you accelerate for other the next operator, the next operator they just?

Jonathan Davidson

Yes. So, we think about, so every time we talk to them, we obviously, we can create templates or playbooks or things of that nature to help us go and move on. In some cases, we don’t most of our customers don’t want us to build bespoke software. Most of us most of our customers realize that the more they’re on common software, the better that is for them because that means that they’re going to get software upgrades with more features, more capabilities, and that’s a good thing. And so oftentimes our software will be integration software into their systems. However, there are certain times that some of our customers are have a problem that we haven’t solved yet from a product perspective. And our CX team has got phenomenal software development capability, and so they’re actually able to build bespoke software that was needed to help them accelerate their journey and that’s one of the real, quite frankly, benefits of partnering with Cisco, is that we can run the full spectrum. We’re not a custom software shop. If that’s required to get the job done, then we have that capability and that skill set.

Rod Hall

Okay. So, shifting gears a little bit, there’s been if we look at competitors of yours like Juniper, they’ve seen a lot of deflation of routing for pricing in the hyperscale world, in the cloud world. And there is continuous talk that carriers want to move more to hyperscale type of architectures. And I’m curious what you think about routing in the carrier world. Is this part of the routing in the carrier world experience, this kind of price deflation? Or are things just totally different as we get into the carrier world from your point of view?

Jonathan Davidson

Well, I think it’s important to I wish things were quite as binary as that. It’d make my life a lot easier. But what we do is we basically track 15 kind of unique use cases across the spectrum of routing. It’s not even as simple as saying access, AGG, edge, core. It’s this that’s 4. You actually have to double-click on each one of those to actually understand the full spectrum of use cases. And so, what you’ll see is providers are getting very good understanding what’s the minimum viable product, what’s the minimum viable feature set for each one of those respective use cases. And I want to make sure that I am buying a product that meets the requirements for that use case. And so, our goal is to build best-of-breed, cutting-edge, innovative products in each one of those various roles. And so, it would be great to say, oh, everything is moving from A to B, but the truth is that it’s more complicated because of the number of roles that are in a customer’s network. So that’s number one. And number two, each one of these roles generally is a unique decision point in our service provider customers. And what that means is that they’re going to go and put an RFP out. They’re going to get the responses. There’s going to be a short list. There’s going to be a bake off. And then they got to pick somebody, and then we got to go and do a trial, a testing for 6 to 12 months. And then they’re going to roll it out 12 to 15 times, right, over a 5 to 7-year period. So, we’re you look at the hyperscale or the web-scale or whatever you want to whatever the favorite name this week is for them, they generally will move much faster. We will deliver them a box on Friday, and they will have it in production on Monday. And they just operate at a different speed, and the reason for that is not because they’re smarter than service providers. Really, it comes down to the fact that they own their applications for the most part. And owning your application that means that you have to actually set the build the resiliency into the application, and it doesn’t have to be built into the infrastructure. I mean, the infrastructure needs to be reliable, but if I’m on, let’s just say, an application that’s running on my phone from one of those web-scale companies and it’s not working, I hit reload, and I’m going to a totally different service provider than I was 5 seconds ago, right? So, they get the benefit for the most part of having load balancers in front of their product, whereas service provider customers, the network is their product, and so that’s a very different approach. I notice when my call drops, and if it happens too many times, I’m going to switch. But if I have to hit reload three times to get the app on my phone to work, yes, I’m annoyed, right? But at the end of the day, that service is probably free to me, so there’s really nowhere else I’m going to go anyway.

Rod Hall

Right, okay. Good. I guess while we’re on the subject of the service providers, that vertical continues to be weak for everybody, not just Cisco. I know your orders were down just a little bit this last quarter, a little bit, 1%. But wondering if you could just talk about how you see service provider spending going as you look out over the next couple of years. Will this weakness persist or are you going to get to a point where it finally bottoms out and starts to recover?

Jonathan Davidson

I mean, from the – I mean, the analysts put this data out there, and they’re very good at understanding what it is exactly. And we still expect CapEx to be flat. That’s just reading what the analysts are telling us. I don’t have any Magic 8 Ball that’s going to say anything different from what the public analysts have said. But what I could tell you is our belief is that if we focus on our customers’ outcomes and if we focus on having the best products and solutions that drive down CapEx and OpEx for our customers that we are going to have our fair share of the market. And that’s going to really help us, and it’s going to help our customers at the same time. So, that’s what we stay major focused on. When we’re hearing this is people always say, oh, isn’t Mobile World Congress tiring? And I am like I love Mobile World Congress, right. It’s a great way to talk to all of my customers in one place in just a short period of time where we get a pulse of what’s happening in the space. And yes, you are tired when you leave, but it’s a great event. And I think we are in a phenomenal time in our industry. Obviously, with CapEx flat and the amount of balanced growth growing at 3x or 4x over the next 3 or 4 years, depending upon how you count it, that’s a constant. And so, we have to stay on the cutting edge of things like silicon to make sure that we can help our customers lower their ASP costs because they are having to add 30% to 50% capacity every single year. If you look at a country like India, they went from 140 or more of bandwidth per capita to number one in under 18 months, right. That’s not 100% growth by the way, that’s like thousands and thousands and thousands percent of growth and we still see that the majority of people in India still don’t have smartphones.

Rod Hall

Right, right.

Jonathan Davidson

Right. So, there is still a lot more that can be done there. And even if you go into other parts of the world, you would be surprised if you do a lot of traveling how often I live on 3G networks. And I am talking now in the G20 I am not talking about being in the smaller places. So even 4G coverage isn’t as ubiquitous as you might think in whatever country you might be in.

Rod Hall

Right, right. I guess it depends on how successful you are at helping them drive revenue streams, too. The better the revenue streams, the better the spending will end up being. So, I wanted to ask about the conversion of the business to this recurring software model. We’ve seen a lot in enterprise, and we kind of know where that’s going. Could you just give us a little bit of an update on where the service provider business is in that transition and then how we should be thinking about that transition for service provider over the next 2 or 3 years?

Jonathan Davidson

Sure. So, we started making this change a year ago in our service provider portfolio, specific to our XR portfolio, where we really started to actually monetize and value the software to an appropriate level. And so, what we did is if you think about these are not direct numbers. But if you think about a device costing $10, right, where it used to be $1 was software and $9 was hardware, we’ve changed that ratio. So, a much more dramatic portion of that $10 is now software, and then we broke that software down into two components. One is the right to use the software. We call this right-to-use licenses. And then there is a big portion of that as well that’s a subscription and software upgrade portion of the software. And so we have been now in that model for any new product that we started to ship. About a year ago, we’ve been going to that model. Now we aren’t going to retroactively change that because we have a lot of contracts in place, so we’re not going to go back to products that we had on the books for 5 years because it just it gets too complicated for our customers. But for any new product that we’re going to take to market, we’re going to be migrating to this model. And by the way, it has been very well accepted by our customers because they see the value in the software that we bring. And they appreciate the fact that this is the new era of just how you need to monetize your business. And we expected to get more pushback than we did. That’s going very well. But that said, it is going to be through new product introductions. So, it would be.

Rod Hall

Gradual process.

Jonathan Davidson

Gradual over time. So, I’m sure, if you fast-forward 5 years from now, we’ll still be selling products in the legacy manner because for people buying our products for a long time today.

Rod Hall

Are you finding that people like the idea of matching costs to revenues? In other words, instead of just paying off for CapEx, you’re paying on a ratable basis over time for that networking?

Jonathan Davidson

Every service provider is a little bit different. Some of them have got more flexible models around OpEx and CapEx. I would say the majority of them are the big budgets are on CapEx, and their OpEx budgets are relatively small if you don’t count the people portion of the OpEx. And so, we made sure that we were we’re able to help them take these models, and it works with their business models, and it works for our business model as well. But it is a transition that we’re both going through. In the past, if you think about infrastructure as, hey, go and buy $1,000 worth of infrastructure, and then you get to get revenue for that over the next 7 years that they don’t like very much. So, if we could better align the upfront costs to when they’re going to get the revenue, they appreciate that. So, part of this I kind of hinted up the page a new model not only for hardware but for software. But people appreciated that movement towards that model as well, and it helps us as well.

Rod Hall

Okay. I mean, we’ve got about 10 minutes left. So, Kate, do you want to poll the audience for questions? And then while we’re waiting for people to log in for questions, we’ll ask Jonathan one more.

Operator

Certainly. [Operator Instructions]

Rod Hall

Alright. So, while we are waiting, maybe give us a little bit of an update on routing and routing product innovation. And we know you’ve made acquisitions there, and just wondering if you wanted to just give us a little bit of an update on how you’re thinking about the change in the portfolio over time.

Jonathan Davidson

Sure, sure. A few things. So, one, I think everyone knows, about 3.5 years ago, we announced the acquisition of Leaba. So, we don’t have any products to announce on that today, but at some point, we’ll want to talk about that. We have done actually 3 acquisitions in the last year on the software side of the business, which helps to actually accelerate our automation portfolio. We bought a company by the name of Ensoft, we bought a company by the name of Skyport Systems, and then we just bought a company by the name of Singularity. So, these are all in the manner of helping to accelerate our movement towards an automation portfolio with actually helping to accelerate our cloud SaaS-based service of think about cloud operations. So, we now have one shipping cloud operations product called Crosswork Network Insights. We announced that a year ago. This is a product that I’m going to get a little geeky on you for a minute, I apologize. This actually helps our customers understand, if someone’s trying to hijack their BGP routes, this is the BGP is the protocol that helps all the routers talk to each other and know what the connectivity options are. But it’s very hard to know if somebody elsewhere in the world, I’ll just say, is hijacking your routes, and so instead of the traffic coming to you, it’s going to them. It’s very difficult to know that. Usually, you wait for someone to complain that they can’t get to you for whatever reason, and this happens pretty regularly on the Internet. There are some bad actors that are based in a few countries. And this gives them the ability to understand if that’s happening in near real time, and then they can go and mitigate the problem.

Rod Hall

Okay. Well, so speaking of that, and this almost seems like it’s scripted, but of course, it isn’t. No, but I wanted to ask you about all the geopolitical concerns. There’s a lot of talk about Huawei and their participation in 5G and 5G roadmaps. And so just could you just talk a little bit about the situation as you see it on the ground, how is it affecting discussions with customers or is it effecting discussions with customers?

Jonathan Davidson

Yes. I mean, we what I can tell you is that we stay focused on innovation. We stay focused on making sure we’re helping our customers with their outcomes. And if this means that we have more customers asking us to help with their outcomes that’s great, but I can, we don’t base our business model or our business plan around what may or may not happen in the geopolitical situation because that’s uncontrollable by us. And so, we’re going to react to market conditions as they stand, and we’re excited to help our customers with their outcomes. I’ll leave it at that.

Rod Hall

Okay, sounds good. Kate, do you have any questions on the line?

Operator

We have no questions in the queue.

Rod Hall

Okay. So, I guess I’ll maybe broaden out that discussion a little bit and talk about, I guess, the flip side of it, which is you really don’t have any exposure to the Chinese service provider market. But do you think that there’s a chance that beyond that, we see more spread of this geopolitical risk? Or and are your customers concerned about that at all? I mean, you hear people talking about the worry that maybe regulations are changing out from under them a little bit more unexpectedly than they, have, in the past.

Jonathan Davidson

I think the well, there’s a few ways to answer that. I wouldn’t say that we have zero business in China, right? I don’t think that’s a fair statement.

Rod Hall

About 3%.

Jonathan Davidson

Right. But what I could say is that the market and the geopolitical things that there are, I mean, I read the news, right? So, I know probably about as much as you do about what’s happening behind closed doors. But the net of it is when customers ask us for, ‘Hey, can you help us in this area?’ we’re going to respond. And so, it’s up to them to decide if they want to change their behaviors or if they want to look for different options. And if they decide to look for different options, we think that we definitely should be on any service provider short list when it comes to any of the products or technologies that we offer, whether it be in the data center or in the routing space or in the NFVI stack or obviously in the mobile infrastructure, which obviously have gotten a lot of press here recently.

Rod Hall

Okay. So, this is meant to be more of a tech talk than a political discussion. So, I am going to ask you another technology question. How about industrial IoT and that opportunity? What are you hearing from service providers and then from industrial customers that you have to [indiscernible] both sides of that equation?

Jonathan Davidson

Right. So funny enough, so we are actually in the same building that we were in 3 weeks ago when we had Cisco Live Barcelona for Europe, where we actually launched a whole new portfolio of hardened IoT switches to help with the industrial IoT era, that were phenomenally accepted by the market around what we’re able to offer and how we’re able to accelerate, whether this is on major orders with robots and warehouses and things of that nature. And so, we’ve got a full portfolio, not just for the industrial IoT era, but obviously, we’ve got a phenomenal product from our Jasper acquisition that helps the onboarding of mobile devices for tracking the workloads on physical trucks through countries and things of that nature. So, we’re excited about what the IoT market has to offer. And we’re excited with the portfolio that we have, and we’ve seen the reception from our customer base.

Rod Hall

Could you maybe juxtapose two things for me? One is the carrier revenue opportunity in IoT, talk to us maybe a little bit about what you are hearing there outside. And are they or do they think there is much of a revenue opportunity for them? And then the flip side Cisco’s revenue opportunity, obviously, you are selling the technology, but again is there systems integration where does it how much further beyond the technology does it go for Cisco from a revenue point of view?

Jonathan Davidson

So, I think we have to bucketize those into different areas. There certainly are a number of SPs who believe that 5G will give them more access to IoT, especially inside of the enterprise because it’s licensed spectrum. It has some security things that are fundamental to licensed spectrum that are not there for shared spectrum. And so many I would say nothing. If there are several service providers who believe that that’s a major opportunity for them, private LTE exists today. It’s not a huge market for the service providers, but you see it in places like mining where it’s out far where there may not be a macro cell. And so, the service provider would partner with a local, maybe smaller service provider to actually go and offer that there. But 5G potentially gives them the opportunity, especially in certain countries like the U.S. where you have seen areas to be able to make that a larger opportunity, which wouldn’t necessarily require the service provider to go into. We also see the opportunities that have been around for a while, like with Jasper and how they can go and have a mobile workloads trucking is a great example again for things like that and how that can continue to be a revenue stream for them. But then there’s ones that may not be quite as well understood of how the SP can garner new revenue. But for example, I have a smart meter on my water supply at home, and it can send me a message if it thinks I have a leak in my house from my water main. It can tell me if I’m over usage for that particular month of the year. And so, there’s lots of things where that can come into play. Now it’s unclear if the service providers believe that, that’s a massive opportunity for them. But certainly, this technology, it gives the opportunities for all of those new use cases to kick into gear, not just for tracking whether there’s flow, but is the quality of the water what you expect it to be and be able to do it at a massive scale. There certainly water has been top, of mind in the U.S. over the last few years. But I think it’s also going to be top of mind Mobily as well, not just the flow of water but the quality of water and how we make sure we manage this kind of precious resource. And I think there is opportunities for the service provider to provide as much value as they want to in that equation.

Rod Hall

Right. Yes, a lot of opportunity for innovation, and unexpected how it all comes out usually. So, we’re done with the hour. So, thank you very much, Jonathan. It’s been really interesting. Really appreciate the time. And thanks, everybody, for joining.

Jonathan Davidson

Okay. Thank you all.

Operator

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.






Dell Server

Leave a Reply

Your email address will not be published.