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Goldman Sachs Cloud Computing Strategy Conference Call

May 31, 2013 11:00 am ET

Executives

Marilyn Mora – Senior Manager, Investor Relations

Lew Tucker – Vice President and Chief Technology Officer, Cloud Computing

Analysts

Simona K. Jankowski – Goldman Sachs & Co.

Kent Schofield – Goldman Sachs & Co.

Operator

Good morning, ladies and gentlemen, and welcome to Goldman Sachs Conference Call, a conversion with Cisco on Cloud Computing. At this time, all lines have been placed on a listen-only-mode. We will open the floor for your questions and comments, following the presentation. It is now my pleasure to turn the floor over to your host, Simona Jankowski, ma’am the floor is yours.

Simona K. Jankowski – Goldman Sachs & Co.

Thank you, Kate and good morning everyone. Thank you for joining us for the call with Cisco, on the topic of Cloud Computing. My name is Simona Jankowski, and I’m the Comm Tech analyst to Goldman. And, before introduce our speaker I need to read some brief disclosures.

We’re required to make certain disclosures in public appearances about Goldman’s relationship with companies that we discussed. The disclosures relate to investment banking relationships, compensation received over 1% or more ownership. I’m prepared to read disclosures for any issuer now or at the end of this call, if anyone would like me to. However, these disclosures are available in our most recent reports available to you, as clients on our firm portals. In addition, updates to those disclosures are available by ticker on the firm’s public website at gs.com/research/hedge.html. Also, to the extent that companies such as Amazon, VMware, Google, or EMC come up on this call, please note that are covered by other analysts at Goldman Sachs.

So, with that, out of the way, I’d like to introduce our speaker Lew Tucker. Lew is the VP and CTO of Cloud Computing at Cisco Systems. He has more than 20 years of experience in the tech industry, ranging from distributed systems and artificial intelligence to software development and systems architecture.

Prior to joining Cisco, he was the Vice President and Chief Technology Officer for Cloud Computing at Sun Microsystems, whereas he led the development of its infrastructure as a service offering and the development of Sun Cloud. Some of the other highlights in his career include Salesforce.com, AppExchange, the java.com developer community, and the massively parallel Connection Machine.

In terms of the format for today’s call, Lew will first go over some slides to level set us some Cisco’s Cloud computing strategy. After which I will follow-up with some moderated Q&A. You should have received the copy of the slides from me this morning in your e-mail inbox, but if you didn’t, please send me an e-mail at simona.jankowski@gs.com and I’ll send them over right away. We’re also going to have an opportunity for Q&A at the end from the phone line or if you prefer you can e-mail your question and I can ask it without attribution.

With that, let me first turn it over to Cisco’s IR, Marilyn Mora for some forward-looking statements.

Marilyn Mora

Thank you, Simona, I’d like to remind the audience that today’s call will pertain strictly to Cisco’s Cloud Computing strategy. No new financial information regarding Cisco’s overall performance is intended or implied and this call should not be viewed as an update to the quarter. We may make forward-looking statements which are subject to risks and uncertainties outlined in detail in our documents filed with the SEC, including are recently filed 10-Q and 10-K, actual results may differ from statements made today.

So, with that, let me turn it over to Lew.

Lew Tucker

Great, we welcome everybody, This is Lew Tucker, I’m CTO of Cloud Computing at Cisco Systems. And I though we would begin this sort of set the stage here in talking about how the world is being changing as we all know as everyday users of the Internet itself. That it’s really continuing to enjoy a very explosive growth in terms of systems and derivatives and applications that all are being delivered over the Internet. In fact, when we look at for example, the number of devices that are now connected to the Internet, we remember back when sort of like 1984, there were less than like 1,000 devices connected to the Internet and it quickly moved to over 1 million in 1992, and as we look forward to like the year 2020, something on the order of 50 billion devices will be connected to the Internet. That certainly drives increased need for networking and much more of a kind of intelligent approach to its networking to accommodate this kind of growth.

We also have seen an enormous amount of growth in terms of the amount of data and information and in fact more data has been collected now in each year than there has been, for example, in the last 5,000 years. Now that’s just an incredible kind of growth rate and a lot of this is also moving into mobile traffic where two-thirds of the mobile traffic will be video delivered by 2017. And at the same time to accommodate that we’ve moved into a world of virtualized computing whereby most of the workloads now are running on top of virtual machines. This really changes things rather dramatically when we can now not only increase the efficiency of servers and everything going on in the data center, but now we have the ability to move applications freely where they are deployed from in the Internet itself with over 71% of the server workloads being virtualized and that in the last couple of years there had been more virtual machines deployed than physical servers.

Lastly, that we’re seeing enormous growth in terms growth of the number of enterprise apps that are being deployed into the cloud and moving forward. All of this drives an increased need for a much more application centric view of networking. After all the network is there and the infrastructure there is the purpose of which is to deliver the application to our users. We’re also pretty much aware that we’re seeing a lot of other things happening exactly the same time.

In many ways I’ve talked about this as being kind of a perfect storm, our virtuous cycle of innovation whereby as we have increased number of devices the Internet of things where our power meters and mobile devices and everything are being used to access the Internet, which now people are using to collect enormous amount of information and data, so the Internet of thing drives another big trend which is that a big data and the analytics associated with that. That of course drives the increased use of cloud computing technologies and to accommodate these numbers of different devices and the movement into the cloud, we are seeing another major trend software defined networking. So all of these things together forms kind of virtuous cycle where one trend feeds another going forward.

In terms of the growth of Cloud Computing in and of itself, we are seeing a changing from about 4% of the kinds of services that we are seeing today moving forward to almost 27% in 2020. Therefore the kind of the addressable market that we can see is growing some estimates of $81 million this year going to over $700 billion in 2020. One way to think about this I think that’s important is to understand the Cloud Computing to sort of very different consumers of these cloud services.

First, we talked about Enterprise IT consuming cloud services as we mentioned with the Salesforce.com, where we are seeing a growth in business applications and businesses serving their employees with new cloud based services. At the same time we are seeing increased these obviously of how company is using the Internet to serve their customer base, and when you think about these too big differences here, the number of employees of course is very important to have been put the number of customers that our company is serving is much, much larger. So rather than seeing cloud computing collapsing into one or two or three large service providers I think this calls for a new variety of different kinds of clouds that are going to be created.

And when we look at issues around sort of national solvency data, solvency issues and privacy laws, which means this is a global phenomenon and that cloud services providers are growing up throughout the world to serve the different constituent market.

So Cisco’s cloud strategy in approaching this very wide and broad market is to first and foremost leverage our position in the industry as being a primary provider of infrastructure services. This is not only in terms of our Unified Computing where we are doing our Unified Computing Systems and we most recently actually became number two in Blade servers in the marketplace, but also in our core networking business, and that is evolving with things such as SDN and also our XaaS applications, technologies such as WebEx which really allow us to, we start to delivery these services over the Internet and you see increased use of these kinds of services and Cisco increasingly involved in this kind of XaaS delivery model, not only for a collaboration in communications, but also in things such as security.

And one of the recent acquisitions we made with Meraki shows one of the interesting trends that the cloud now it’s being used as the management systems for the delivery of this with Meraki in particular. This allows the company to use now the web to manage all their wireless access points. So this means that the world is really changing, this has great ramifications back in terms of the data center, and then in the underlying infrastructure.

So that our real foundation I think for building Cloud Computing is in terms of continuing to evolve the architecture and the infrastructure for people building cloud. Primary purpose right today is to help people build cloud whether they would be within the enterprise or in the service provider space and using other technologies and focusing on security to allow people to really connect to the cloud with confidence and bring out a whole new set of innovative applications delivered again through the cloud.

To sort of cover these kinds of market we also have the broad range of partnerships with other technologies and other software providers. But particularly that has been with VMware in terms of building out of enterprise cloud both within the enterprise and then service providers and with Microsoft with System Center and increasingly being involved also in Open Source technologies, which we can get into perhaps later in the call.

Around a new phenomenon called OpenStack, whereby we’re one of the principles involved in OpenStack. We’re finding that several players in the marketplace are choosing to go in an Open Source route and therefore we’ve been a big participant in that community. When we look at how these things tie together, I think that if you approach it from the applications on down. The applications are finding that built on top of the cloud platform. So separating the delivery of the applications from a data center out across the Internet, but actually increasingly we find enterprises and service providers are deploying a Cloud platform within their data center, you can think of this is kind of the data center operating system now. And it’s really proven most recently that building applications on top of the Cloud platform, is surely the fastest and quickest way to develop and deploy applications.

Some of these applications are the delivery of Cloud services that we’re seeing Cloud service providers grow up such as Rackspace and Amazon and others, but also for deploying other applications such as Comcast is deploying XFINITY and other applications out to their customers. To make these things really working you need to think about the underlying infrastructure.

So, in terms of that, we combined a lot of the work we are doing with Cloud Computing, with that around our Cisco Open Network Environment technology. That allows us to open up a lot of the systems so that we’re moving to a world where we’re thinking about it much more in terms of kind of a software-defined infrastructure, whereby there is programmable interfaces. We want software to be involved with setting up configuring devices being able to manage traffic within the infrastructure itself and doing this all through Application Programming Interfaces called API. This allows us to highly or make these systems so they can dynamically change in response to load and other kinds of systems that way.

So, in summary, I think that we’ve seen that Cisco has been heavily involved, as I mentioned, in the OpenStack community where we're seeing that as an ideal platform not only presenting the standard for Cloud Computing going-forward. But, also in terms of advancing the state-of-the-art in Cloud Computing. Where we’re able to bring a lot of Cisco’s expertise out into the market and working with a wide variety of other IT companies in terms of making sure that as we evolve Cloud Computing, it’s meeting the needs of customers. Most recently there’s been news about us working, for example, with Comcast and this is working with them on using their data centers now putting files, platforms into their data center so that they can bring on new application services to their customers around their X1 and XFINITY platforms.

So with that, I feel like opening up for questions and Simona if you’d like to go ahead and give me a few questions and maybe some from the audience later that would be later.

Simona K. Jankowski – Goldman Sachs & Co.

Okay. Sounds perfect. Thank you, Lew for those opening remarks. That was certainly very helpful. Maybe just to start out here, one of the follow-ups, just to make sure we’re clear on Cisco’s Cloud Computing strategies, how do you draw the line between which applications you’d like an enabler for versus, which ones you’d like to be a direct provider for? You’ve touched on a couple where you’re actually the cloud provider yourself, WebEx is an example, Meraki is an example, but obviously I think for the boarder ecosystem you are actually looking at by providing the actual underlying infrastructure. So how do you make that distinction?

Lew Tucker

It’s really a matter of customer choice in terms of working with our providers we very much see ourselves as the provider of that primary infrastructure we made to other people to deliver the cloud services. This is our primary position in the marketplace being able to provide all of the infrastructure needed to our customers and our service providers to deliver their services out into the Internet itself.

In some areas however for example in collaboration we found it was really important for us to have positioned ourselves in the marketplace, and so WebEx for example our hosted communication systems those are areas where we build technology that are able to serve them through directly to our customers or to our channel providers and service providers.

So we both develop these services then also make them available to our customers for them to provide to their customers and that we find we are very effective strategy in this world of many clouds.

Simona K. Jankowski – Goldman Sachs & Co.

Okay, as far as some of the essential concerns that we hear from investors around the most of cloud is basically looking at Cloud Computing is inherently a really commoditizing source. There is at least a couple of aspects of that people are concerned about, one is that you’re concentrating a lot of the buying power in fewer player, the Amazon’s or the Google’s of the world.

And then secondly in related to that you’re seeing a push forward more of a white-box architecture model and so in that context, how do you view Cisco’s ability to maintain high margins, and maintain higher level of differentiation in pricing power.

Lew Tucker

Sure in fact, I think that we sometimes confuse or it’s important to separate it out the notion of standardization versus commoditization. We all find that as very useful to grow the ecosystem and grow the industry through standardized API interfaces, and ways for our systems to interoperate, so standardization is very important. It shouldn’t be confused with commoditization. With standardization we want to be able to provide interfaces, so that customers have choice of vendors and when we compete on the implementation, another word to think about the issue around commoditization if you look at other industries such as the automobile industry or hospitality.

Let’s take autos for example. Everybody wants to have its steering wheel in a place where they are familiar with it or that their brake paddle is where they expect to find it. So they can move from one car to another, but obviously some people like to drive BMWs and others have their won favorite car or Prius or whatever so that’s how you differentiate and provide value through the customer at the same time you utilize them the standards so that the customers have a familiar experience.

I guess we are seeing the same thing, just give us a long history in supporting standards and that has put me various of successful strategies for Cisco as we’ve been differentiating how we implement those standards and become the value we can provide in the underlying infrastructure implementation.

Simona K. Jankowski – Goldman Sachs & Co.

Sure, maybe just a takable step beyond just the question of standardization, I think a lot of the questions really revolve around industry structure, so in the order kinds of implementations vendors like Cisco and others would sell to hundreds and thousands of relatively small or mid size or even larger enterprises, who’d all run their own internal data center and IT organizations. A lot of what we’re seeing that with some of this small and mid size enterprises are actually moving their IT consumption through vendors like Amazon, who obviously have much larger scale, did they want to work with, and there has implications both for the technology, but also for their buying power. So how does Cisco think about that change in the industry structure?

Lew Tucker

Sure, we believe that’s a very prevalent trend and in fact that’s why we serve both markets. We sell directly into the end-user or the enterprise for their infrastructure, but we also serve the service providers providing infrastructure for them to be able to deliver those services, so that we are seeing a lot of IT moving out to service providers. I don’t however think of that mean that we’re going in if its only one or two or three even large service providers capturing all of the market.

When we look at the market we see, actually I think that we’ll see a wide variety of service providers, the cloud service providers, particularly when we look sort of the relevant industries and the regulatory requirements that drive that differentiation. So we think there will be a lot of providers and clearly Amazon, for example, and I have been a big user of Amazon and other companies. It’s certainly setting the bar for other providers, sort of basic cloud services.

Other service providers we’re working with, for example, Savvis and others are catering much more to the enterprise business market and that’s where we work with our customers eventually allowing them to either run, provide infrastructure inside their own data centers are going out to one of the enterprise cloud service providers that we supply the hardware to, so they can seeing the services in that way.

Simona K. Jankowski – Goldman Sachs & Co.

Sure. So to the extent that we’ve seen and heard anecdotes of companies like, say, Google or others going to some of the more white-box oriented type of switching solutions, then obviously they’ve long ago gone down that path for servers. Would it be your view that that trend is likely to reserve and ultimately were likely to see kind of the same proportion of Cisco switches in those kinds of customers as we’ve seen the rest of the general enterprise space or would it be that that trend may very well happened for some of those very few hyperscale data centers, but Cisco has a whole host of other software and services in the cloud arena that are more than likely to offset the impact of that trend?

Lew Tucker

I think it’s a very real trend for sure. In fact, some of the very largest and we look at Google, for example, and in many cases I think I’m beginning to view Google much more essentially as they are such a scale they can reach very deep into the supply chain. So they can build their own systems, they can buy their own components and that requires, though, a lot of investment on the engineering side and development of IP that some of the very largest web providers can make that investment in, other [activities] not to go that route. They would actually rather essentially buy the systems and services from infrastructure providers and leverage the R&D that Cisco invests in the systems, so that they don’t have to do that investment themselves. Many of them will not be the size of Google or Amazon or Yahoo and therefore they would like to be able to get those technologies from the companies that really can leverage that R&D over a larger set of customers.

Simona K. Jankowski – Goldman Sachs & Co.

Sure, sure. That makes a lot of sense. On a related note, Cisco has been incredibly successful with UCS or your Unified Computing System, which includes your server product and I think you’ve cited on a number of occasions that you’re in nine of the top 10 Cloud providers. That seems to actually go against the conventional wisdom. The Cloud providers are looking for some of these white box solutions. So, can you just give us a little bit of insight into what is driving the success of your UCS product and also just how that fits into your broader Cloud Computing strategy?

Lew Tucker

Sure. I think what we’re seeing is over the last of couple of years is the relation of converged infrastructure whereby we really are seeing as much more efficient use of the infrastructure, particular as we’re moving up into much larger memory system and much larger storage system that when you combine these things together into unified architecture, what we’re doing with UCS, for example. It’s a lot more efficient, it’s a lot more reliable and it’s most importantly, much easier to manage. When you separate all of these systems into their individual components and your app servers and switches, the management costs and the operational costs quickly get out of control. And as people are growing up in scale, the approach we’ve taken with our UCS system is really focused on, again, the software APIs that allow you to build automated systems for managing these things.

One example, in terms of our cloud strategy, for example, is to make it just as easy for application providers to develop their applications to be deployed on virtual machines on top of the cloud platform. As it is for you some of the capabilities we have in UCS to deploy them essentially on Bare Metal, so that application particularly will have to do and others, which really want to get their last ounce of performance out of on Bare Metal. We can, with our Unified Computing Systems, deploy those applications just as readily as you would a virtual machine and that is because we have the dynamic capability to rapidly deploy new applications on Bare Metal, on Cisco power blades or on our record amount of servers.

Simona K. Jankowski – Goldman Sachs & Co.

Sure, and you’ve actually taken that even a step further as you’re showing your slide 12. For partnering for the storage component and providing even more integrated solutions such as Vblock in partnership with EMC. What is the thought process behind owning the computer elements, but partnering for the storage element, especially considering that storage have historically actually had higher margins? So it would perhaps made sense to have that piece of the infrastructure stat be in-house as well.

Lew Tucker

Yes, of course. Cisco had always partners rather strategically and also in very important areas that relationships with EMC and VMware has converted for them and providing a kind of solution to the customer. And I had mentioned before, not all customers wants to invest in the engineering resources to do that integration themselves. They’re working with DTE and everything else. We can provide a much more tightly integrated solution that has been lowering our operational cost because we’ve done all of the integration work ourselves and I think you will continue to see us adopt a strategy going forward. And as you mentioned earlier the industry I think is kind of oscillating between horizontally structure and vertically structured industries. Many years ago we saw things of which we’re very horizontal with essentially Intel providing the basic CPUs and the component level and then we had Microsoft on terms of the operating and then perhaps Oracle in the application space and now I think we’re seeing actually that trend move the other way towards people or returning to companies like Cisco. We’re much more integrated stack that cuts across everything, from basis all the way through some of the applications.

Simona K. Jankowski – Goldman Sachs & Co.

You touched on the partnership with VMware and that’s actually one that we’ve also been getting a fair amount of questions and interest on. Obviously there aren’t many areas that you partner and in particular as it pertains to the data center or the hypervisor layer and the orchestration layer. At the same time though there are areas now that where you seem to be a little bit more competitive in particular following their acquisition of Nicira. So how should we think about your relationship with VMware?

Lew Tucker

I think perhaps you look at it, it’s not much changed. In fact we enjoy a very healthy relationship with VMware, but we are expanding that again to meet the different parts of the market, other customers that we are expanding our relationships with Microsoft, for example where there is many of our customers who really prefer to have a Microsoft solution with Hyper-V. So we’re putting multiple systems on top of our infrastructure and also companies like I said with Red Hat and others in the Open Source area. So it’s really, we think there is a, Cisco has only started a very broad market and I think one fruition that can figure off and so we were investing in many of these relationships and even now as we’re looking into things such as Open Source and OpenStack, we view that as a partnership again that we’re having with our Open Source communities.

Simona K. Jankowski – Goldman Sachs & Co.

And one of the topics that is often debated among investors and I think more broadly among industry participants this whole notion of open versus closed and some times Cisco is detected as being more of a closed or a vertical integrated stack, but the way you’ve kind of portrayed the landscape on page nine there of the slide, it’s actually pretty interesting in that. Now Cisco supports a variety of hypervisors as well as cloud orchestration platform including OpenStack as you mentioned, or when you look at someone like VMware, which is in a sense vertically integrated in terms of their own cloud management or hypervisor.

So from your perspective as you’ve talked to customers or as you observe the industry evolutions here, which openness is more important that at the infrastructure layer or that at the cloud management and hypervisor layer?

Lew Tucker

That’s actually pretty interesting question. We’ve had a lot of time to go and to give a depth on that, but we think this openness is something that is really coming from the industry or customers themselves. They are demanding that no customer likes being locked into a single vendor and they want choice. One way to do that is to really driven open standard. And so, as we are looking in FY using a lot of our activity in the open server there than that we are their open APIs and that’s primarily for the vendors driven developing their applications and their services and their own management systems perhaps.

We want to be able to have a platform that is open and then provide it by multiple vendors. OpenStack, for example, there is over 180 companies that are involved. So as we’re moving forward, customers would be able to get an OpenStack cloud platform from HP, from Rackspace, from Red Hat and SUSE and other companies and Cisco as well, so that they can have the freedom of choice.

At the same time they like to essentially get a lot of the technology from their primary technology providers. That way they can count on us being supported by the technology providers.

So, Cisco for example it’s providing OpenStack right now, we’re working with companies such as Comcast and others, to provide that integrated technology to have a seamless choice of using the open APIs or OpenStack, but also then having it being integrated into the rest of the infrastructure by Cisco.

Simona K. Jankowski – Goldman Sachs & Co.

Okay, and I’m glad, we’ll focus most of the discussion on kind of the broader Cloud Computing positioning but, obviously one of the topic that specific for networking investors have been really focused on has been software-defined networking and more specifically recently at the OpenDaylight, Open Source consortium, which Cisco to participant in fact the leader in that effectively, puts forth foot over for an Open Source SDN controller. How are SDN and Cloud Computing related and how does OpenDaylight set into that picture.

Lew Tucker

Sure, I think very well in light of both of these trends coming about at the same time, because we get to solve the problem in a unified way. One way to thing about SDN software-defined networking or software-defined infrastructure, perhaps more broadly applied, is the way for us to have software interfaces that can allow infrastructure sales to become much more dynamic, and also, much more automated.

If you look at actually some of the issues that often arrives it’s because somebody is manually logged into a switch or router and they have set out to configure particularly VPN or service, and if made a mistake, which will not be able to do with automated and software systems does eliminate that fingers that somebody might have making that kind of a mistake and instead have a repeatable process that have expressed in the software.

So, that software systems now that allow the infrastructure be driven by through this APIs, it’s right now a Cloud platform it’s build on top of. So, this easiest way to think about it and perhaps is that you have primary infrastructure hardware systems that form the backbone of your infrastructure. On top of that you have the virtualization layer and the software-defined layer and controllers that’s provided by OpenDaylight, which can manage that infrastructure management software. On top of that’s the end. You build the cloud platform and that cloud platform can be VMware or it can be from OpenStack and other players there and that platform is what applications are built on top of.

So I think the critical word here, the most important term is perhaps platforms. Platforms, in essence, are vesting upon which applications are built. So I carry around an iPhone and I’ve got far too many apps on my phone. I keep eliminating them, but that because the iPhone has become a platform for a very loose set of interesting applications.

So when we look inside the data center now we are seeing cloud platform is being used throughout covering the data center so that applications that can be deployed plus anywhere in that data center be able to scale dynamically with load and that drove upon the underlying capabilities of our SDN layer.

So that’s where Cisco ONE has been providing both the kind of overlay technology, tunneling technologies, virtualized networking to provide an abstractive view or logical view of the infrastructure so that in a multi-tenant cloud, for example, each tenant can have the logical view of their own data center that is now shared across many of the infrastructure component.

Simona K. Jankowski – Goldman Sachs & Co.

Okay, great.

Lew Tucker

OpenDaylight I didn’t really, that’s fun. OpenDaylight I think is yet another example of where we’re finding that in fact the customers are asking industry to start to standardize on a lot of the different components that make up software-defined networking and so we’ve joined with a number of companies. We’re setting up OpenDaylight so that we can collectively contribute this technology into this Open Source project much as we’ve done with OpenStack, so that we can come up with a best solution for customers and then as individual vendors we will compete on the implementation.

Simona K. Jankowski – Goldman Sachs & Co.

Sure, I wanted to maybe just take it down to the level of some of Cisco’s specific products and kind of and then send how those are sitting within the Cloud Computing construct that we just been talking about. Starting with your switching portfolio which continues to be the single largest bucket within Cisco’s product revenues, a lot of the emerging networking topologies from the third world companies like Arista or [Flexi] routers are starting to address some of the hyperscale data centers, with over 100,000 nodes and with relatively flat topologies in terms of there actual switching architecture.

And I think what you guys have in terms of your own regions fine architecture scales they are about 30,000 nodes. Obviously you’ve also got an investment in NCN, maybe that’s the answer, but I just wanted to kind of get your perspective on just that sheer question of scalability and we’ve seen almost more start-up activity recently than I can remember for a long time in networking, and just want to attend, how Cisco is addressing that particular challenge on scalability?

Lew Tucker

Sure, I think that as even in my introductory remarks we are showing the scale that’s increasingly important and we are seeing systems being developed that are a much, much larger scale that ever seen before. And so that have cause the change and Cisco is making as well as driven by a lot of the start-ups much more towards as we can find model, so that we have much broader networks, much flatter networks that allow essentially the placement of applications anywhere in the network and also the delivery of different virtualized network services that might exist anywhere again in that much more flatter kind of topology.

At the same time these thing don’t become just a single very large sytem because then it’s a single very large system because then it’s a single very large failure domain, and so these intensive – tends to be broken up into smaller kinds of domain over which you have control and you can introduce new services without disrupting the entire infrastructure.

So I think that the issue of scale is a very real one Cisco obviously is one of the cheap providers and being able to deliver systems at scale that start-up actions struggled with, when we move into virtualized technologies and overlay technologies for example, where Cisco has been very active with Nexus 1000V and other for switch technology that has been really addressing sort of the limitations we’ve seen and things such as VLANs and others that have had limits in the core routing switching, but we have moved up to putting technologies on top of Layer 3 networking so that we can get to the scale required by customers.

Simona K. Jankowski – Goldman Sachs & Co.

So I mean is Cisco’s current roadmap do you think likely to exceed some of the 100,000 type node scale deployments or is that something that we need to look for in CME or some of other efforts to get to that kind of scale.

Lew Tucker

Yes, you’ll certainly begin to see that coming out as we start to get further in CMA, and our agenda there eventual roadmap, which has to do with moving towards a leaf-and-spine architecture. As we roll that out I think you will certainly feel Cisco can be very effectively at the high end of that market in terms of scale.

Simona K. Jankowski – Goldman Sachs & Co.

And one of the other questions on the switching business in particular is that, and I believe right now data center is about 40% of your switching revenues and it’s growing at 12% last quarter versus declining sales in the Campus portion. And as you extrapolate that out that would imply that within a year or two data center will be the majority of the switching business. Does that imply that at that point switching is likely to return to more consistent mid or maybe even high single-digit growth considering that looking out a year or so, we will be more aligned with data center than with Campus?

Lew Tucker

In fact we think the world is changing in a lot of different dimensions at the same time and we often sort of segment the market by enterprise or data center or service provider, and I think that one of the recent things that we’ve seen in the last couple of years, for example, service providers discover, they have very large data centers so that the info look lot more like enterprise systems or where they also have networking.

So it’s the connection actually of the data center networking technology with much more the RAM technology and that’s where again we’re making significant progress in terms of use of SDN technologies to link those together. So the kind of differences we’re seeing between Campus and service provider and data center, I think is actually diminishing as a lot of the technologies to the point applications need this spread across all of them.

In the last year I think you’re going to see again, we’re seeing mobility in wireless and turning into that so we’re seeing things such as virtualized mobile packet core. Now with that just an enterprise technology or is that a service provider technology, I think we’re seeing those actually merge into a single kind of market.

Simona K. Jankowski – Goldman Sachs & Co.

But, I mean just to where your sense that I always kind of do these transitions during that we’ve been in a multi-year, maybe a five or so year transition within the switching market, specifically term Campus deployments or data center deployments. Is there a sense that or perhaps in the latter innings of that and so this market can begin to look a little growth here again looking out or is that not something that’s as simple as that to conclude?

Lew Tucker

Well, I think we’re seeing here a lot of different, the changes I think that are happening right now are much more in terms of how networks are managed and how and sort of at the control playing level. That’s why we’re seeing SDN technology starting to be applied and one of questions that’s come up and have a bad affect on switching business and things like that. So we’re seeing SDN being used much more distributing kind of intelligence across the different layers of our portfolio and we have technologies, for example, like onePK and others that allow these same technology across the switching and routing.

Simona K. Jankowski – Goldman Sachs & Co.

Okay. Last question for me and then I’ll open it up to some questions from those phone lines as well. Videoscape was one of the interesting products and I think it touched a little bit on that in your remarks as well. In that you’ve not only made that available as a product to sell and enable your customers video call services, but you also, I believe, are offering Videoscape as a cloud service that you yourself manage and can operate as a cloud on behalf of the customer. So, can you just going to, why you’ve made that decision, have you had any customers who have gone down that route of using Cisco as the cloud operator in that case? And then, maybe you can touch on the Comcast example. I think that would be helpful.

Lew Tucker

It’s hard for me to comment on very specific customers in terms of that, but we’re seeing video. First of all, video is just exploding as we all know and so the demand for video across both the enterprise and in service providers and then in large media companies, such as Comcast, is really driving a lot of changes there and increased need for video. We’re [interested] with cloud computing. I think it’s in very interesting space. For example, Comcast is seeing a lot more need. So the delivery of service is directly from their data centers rather than just delivering the video stream back in terms of their set-top boxes. So a lot of the functionality now is moving up into the cloud where our customers want out – essentially have [streamlining] videos in the cloud and they have delivery and on-demand on any device.

So, Comcast is not limiting now in terms of delivering their service to their set-top boxes, but more of the other to deliver to PCs, to laptops, to tablets, to mobile phones. So, the landscape of how we deliver video is changing and that’s one of the prime examples where I believe the networking becomes very important, because the quality matters the whole lot there. And so, being able to deliver a consistent user experience across multiple devices is where Cisco is working very closely with Comcast and making that possible.

Simona K. Jankowski – Goldman Sachs & Co.

Great. Well, with that let me see if there is any questions from the audience and again you can either ask your question from the line or if you like you can e-mail me your question at simona.jankowski@gs.com and then I ask you without attribution. Kate, can we open up the lines please?

Question-and-Answer Session

Operator

Certainly. Ladies and gentlemen, the floor is now open for questions. (Operator Instructions) Our first question today is coming from Kent Schofield. Please announce your affiliation then pose your question.

Kent Schofield – Goldman Sachs & Co.

Great. Thanks, Lew. I’m Kent Schofield. I work with Simona here at Goldman. I was wondering if you could talk a little bit about kind of your traditional layer four through seven technologies and how they fit into the cloud strategy going forward. And part of what’s prompting this question is all of the talk really around kind of the program ability of the network and how important the application is. So, can you just touch on how layer four through seven, kind of that traditional look fits into the strategy going forward?

Lew Tucker

Surely. I think that as we’re becoming much more of an app-centric world as you point out, the services you’ve provided through the applications whether that be kind of load balancing services, WAN acceleration and have become increasingly important to deliver that final quality of service to user experience. That has to work in concert with the underlying technologies to deliver that.

So we’re seeing a lot of actual interactions between the different services and a virtualization in fact of the higher level of services, four through seven, so that they can actually be placed anywhere in the network. So a lot of what you’re seeing as the movement in Cisco’s and the so presentable infrastructure movement or whatever is the ability to have those services be deployed anywhere and also I expect to see actually a whole new growth of those services where it’d be changing CDN models and other kinds of things to be able to deliver those services on demand, we are closer to the customer.

So one of the things that you will look further out into cloud computing is, Simona mentioned, my background is in very large scale distributed systems and I believe that we’ll see a lot of those services moving out closer to the customer, closer to edge of the network where they can get the most performance there and we just take something like WAN acceleration, for example, application performance. That is the way to deliver sort of the cash and services and things we like to do [accommodation] closer to the customer. And therefore that’s going to deal in essence be on the edge and perhaps even deployed over hundreds of local data centers of things that are closer to the customer, yet under the control of the platform. So we also have to work for them (inaudible) which is we think is sort of like a low lying cloud, which is closer to the edge. So instead of thinking those services being delivered just from a centralized data center, in fact they’re being delivered at a set of data centers closer to the customer distributed perhaps globally.

Kent Schofield – Goldman Sachs & Co.

Okay. Thank you.

Operator

Thank you. (Operator Instructions) Our next question today is coming from Kevin (inaudible). Please announce your affiliation then pose your question.

Unidentified Analyst

It’s Kevin (inaudible) Capital. So just regarding the opportunities within OpenStack where do you see the largest total addressable markets in the next two years from a revenue perspective and what are the highest margin opportunities within that from that? That I’m curious on.

Lew Tucker

Surely, I can. OpenStack, as we know, is really just beginning. It’s about 2.5, 3 years old. Now we've gone through six or seven releases. What I think is most interesting is that we’re seeing it play both in terms of the service provider world whereas in moments like the last 10 to 12 months we’ve seen several of the largest service providers, AT&T, for example has joined in the platinum number of OpenStack and they’re looking again. In many ways they discover that for them to compete with a lot of the sort of over the top players, they need to essentially start upping their investment in the application services that they can start to deploy and that drives some need them for a open platform such as OpenStack to be able to be deployed.

So they can rapidly develop and deploy new applications. The application world requires the provider to sort of deliver new services in a matter of month. And so traditional way that they consume those services, I mean, perhaps buy those services or as appliances from other customers, but now they find that they need to develop a lot of these services by themselves. They’re too a larger part of the ecosystem.

So we think that OpenStack itself is on new order like about $30 billion addressable market. Overall for the industry with Cisco maybe on the order $17 billion, so, it’s quite an interesting split between enterprise and service providers pricing today we’re seeing the service providers move first, but we’re seeing also a lot the largest of the enterprise so that’s where I think it’s kind of interesting, one of the very large enterprises particularly that can finance difference companies and things like that, the traditional kind of cluster computing model, as we’re OpenStack (inaudible).

So, again that with notion that the different trends of fueling each other the need for very large scale big data kind of analytic, wants be on top of the prime the Cloud platform, also that is primarily we’re seeing in the enterprise space, then we’re seeing service providers such as Comcast and AT&T and others are finding that they want to have their own private Cloud inside their data center, serving their customers through their core applications and services.

So, it’s a mistake I think of OpenStack as simply a way for people to provide, sort of Amazon-style cloud services, to much more important to take of OpenStack at the platform for delivery of any kind of application and the focus there I think is on the delivery of these applications to a lot of the customers and consumers the different businesses have. In fact, I think it actually has a really interesting view on some of this today. We’ve talked about the difference between systems of record versus systems of engagement, systems of record is what we think about a traditional IT application serving employees.

And, each time we sort of solve that problem with Y2K, revamp of applications and then employees there are only growing at a modest rate, but now companies are turning to how did they more directly engage their customers and their consumers and with their services the systems of engagement and that’s where new applications are coming into that space and those new applications will be built on the latest technology, which is a cloud platform such as OpenStack.

Unidentified Analyst

If you look at you mentioned time to market as being very important and there’s tremendous amount of innovation here. I’m curious could you talk about your strategy of moving quickly to acquire companies in OpenStack and where do you have the internal horsepower from an engineering perspective to do it internally or do you start looking at the net diverse of the world and others did and so aggressively buying to get a lead on the other major IP vendors?

Lew Tucker

And Cisco really consistently has been approaching all of these markets that are built by our partner strategy. So as we are having significant engineering efforts that can place within my own group bottom in terms of developing a OpenStack software to find networking, virtualized network services we also are partnering with other companies in terms of delivering open stack and particularly as the commercial Linux distribution start to arrive there and then we’ll also have selective applications where we find that’s appropriate.

Most importantly and if I put on my Vice Chairman of the OpenStack foundation itself and that foundation was specifically set up both to sort of guide the process by which we bring out this platform, but also to develop the rest of ecosystem. Whenever there is a new platform out there like we saw the growth of Linux many years ago and entire ecosystem of companies gets developed on top of that and it’s very much in the forefront of our stake in the foundation and things that we are doing to faster the growth of that ecosystem and that of course opens up opportunities for Cisco again to partner with those companies to make the selective acquisitions.

Unidentified Analyst

Well, great. Well, thank you.

Operator

(Operator Instructions) We have no further questions from the queue at this time.

Simona K. Jankowski – Goldman Sachs & Co.

Okay, I have a couple of questions that came in over e-mail. So, maybe – let me go through those, the first one just kind of sticking with the whole discussion around at OpenStack, one investor is asking just wondering if you would ever be opened to working with CloudStack. He said, it seems that CloudStack is getting much more traction in reality versus OpenStack at least at this point in time. And then, on a related topic, when you think that OpenStack will gain meaningful traction in terms of enterprise spend?

Lew Tucker

Sure, actually we have a very pleasant relationship with Citrix 95 stack so just like sort of momentum and in terms of those working with VMware and Microsoft and Citrix. So, we’re seeing a significant deployments in CloudStack out there, and so we’re very supportive of that and being to run than on our UCS system.

So and CloudStack is another example now in Open Source technology supported by a foundation, that is moving forward. And, so there is certainly some competition there in the market or at least choice for customers between going with CloudStack or OpenStack. We’re more directly involved in the evolution of the technology of OpenStack where we are contributing a lot of the third and resources into that technology, and particularly around one of the areas, one of the projects for example in OpenStack, I have been around extending the model of Cloud Computing to bring out a network service. Networking as a service, as a part of OpenStack.

OpenStack itself consist of about seven different services, but if you think about there is a compute service, storage service, and then networking services is where we play particular attention, because that allows us to now bring a lot of capability that the Cisco in our networking infrastructure and in our SDN technology up to the application layer and we work with other partners on that, some of the close relations we actually had with Nicira in developing what we can open to have network services be very important. So it’s evolving a very simple layer phase for applications to create virtual networks just like they create virtual machines, so that you can have a multi-tier application, for example. You may have a back-end network for your database, front-end network for you web service, and we work with Nicira, and we work with Citrix, and we work with Intel and AT&T and other companies on defining those APIs and the unit basis and collectively contributing code so we could bring that out in OpenStack.

Simona K. Jankowski – Goldman Sachs & Co

Great. A couple of questions came in both pertaining to services. The first one was, how much of the cloud opportunity for Cisco would fall under services and how much under product revenue? It appears is it would fall into both categories, but the relative magnitude is unclear.

Lew Tucker

I actually don’t have those numbers, but I think there are both opportunities, particularly as new technology comes into the market, the services side of that becomes very important, because things are changing very rapidly and our customers really need our systems and bringing those out into their data centres. So services, we do expect to see a lot of growth in, particularly around cloud computing and being able to offer those to our customers to help them move kind of virtualized environment into, now, our cloud platform environment. So service of that, I think, is the primary component of our cloud computing strategy.

Simona K. Jankowski – Goldman Sachs & Co

Okay, great. Kate, can we just poll for one last time to see if there is any last questions before we wrap up.

Operator

Certainly. (Operator Instructions) We have no further questions in the queue.

Simona K. Jankowski – Goldman Sachs & Co

Okay. The last one that I’ll read out from another investor was, can you discuss the upcoming Cisco why demo dates, specifically, which SDN demo you think would be the most interesting to follow from an application perspective and which vendors do you expect to do the demos? I’m not too specific, but put it out there.

Lew Tucker

I’m afraid I don’t really have that information. I think that there will be a variety of different demonstrations of interest and what I would look out for more than everything else by looking at that show is again, one of the things that we’re going to able with new set of applications, particularly the applications around video and around mobile services and again it’s kind of movement of management into the cloud itself. I think those are the interesting ones and SDN technologies are often difficult to demonstrate, because things that take place behind the scene, which we want to look [for] is how that affect things such as the user experience and we increase the percentage of the use of the network itself through these technologies.

Simona K. Jankowski – Goldman Sachs & Co

Sure, sure. And I’ll be out there and I know a lot of investors on this call are going to out there as well. So we’ll look forward to seeing fiscal live at the end of June. But, Lew, thank you so much for spending some time with us this morning of Cisco’s Cloud Computing Strategy and are certainly very, very interesting and informative. So I appreciate you taking the time.

Lew Tucker

So, thank you very much, Simona.

Simona K. Jankowski – Goldman Sachs & Co

Thanks. Have a great weekend. Bye-bye.

Operator

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

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