Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Cisco Systems, Inc. (NASDAQ:CSCO)

Peters & Co. Limited 2013 Energy Conference

September 10, 2013 12:30 pm ET

Executives

Gary Moore - President and COO

Analyst

Brian Modoff – Deutsche Bank

Brian Modoff – Deutsche Bank

Good morning. Welcome to day one of the Deutsche Bank Technology Conference. I am Brian Modoff the Senior Communications Analyst here at Deutsche Bank.

With us today is Gary Moore. Gary Moore is the President and COO of Cisco Systems. Gary, welcome, and thank you for being here with us.

Gary Moore

Brian, thank you and it’s a real pleasure to be here and having the opportunity to talk to so many people.

Brian Modoff – Deutsche Bank

So, first question I think we will start off with this is I ask some questions I had about this morning on your Whiptail acquisition last night. I know you have been probably busy and a few questions. Can you kind of talk about why maybe the acquisition, what it means for Cisco and what is the mean, what it means for your relationship with NetApp and EMC.

Gary Moore

Sure. So, timing is everything, right when I heard that we are going to only sign and announce today I like great. I’m going to be with few of my favorite people so it should be fun. So, certainly I think the acquisition is pretty simple within the sweet spot for Cisco, 80 engineers, mid double-digit revenue. There are company that we believe after looking at what’s available either from a partner point of view, where other acquisitions made the most sense to put solid state memory in to our server.

So, this is an extension of our UCS platform and the reason we want to do that had everything that do with application performance and what we are getting from our customers relative to, where they want to see that performance improvement (inaudible) server. So, that’s the play.

We have also been very clear of that we have no intention, no plans to go in to the broad based storage market and we have said that directly to the market, we said that directly to both Joe and Tom at EMC and NetApp.

So, I think obviously there is a story there that the class, the type if you will probably more fun to write about than the pack that we are expend in UCS of that line. But I think once we close the acquisition, come to the analyst with what that roadmap is, people really don’t see what it is and what’s the way to extend the value of the UCS and delivery.

I think from an EMC point of view I talk to EMC directly myself yesterday and we believe that there is a lot of advantage there. This will play really well to the (inaudible) and the BCO offering we have both culture proving and how yesterday about that as well as I think from an NetApp point of view this will play well offering with them.

So, right now feel very good about the acquisition and the fact that we are getting close and really start to execute on the strategy.

Brian Modoff – Deutsche Bank

I was wondering we would know one thing we found very feeling the UCS it’s an architecture. They are integration elements all the way from the server through routers if you want Active/Active suppose to be like Active/Active with the router actually part of the architecture.

Now one of the things we feel very key in terms of UCS and why we like it and riding about extensively since the company launched it. We would note Cisco gone from nothing to number two in market share because of this architectural approach versus the selling boxes.

So, I guess another question would be discuss with us the rationale for 4000 limited restructuring plan Cisco announced during the latest earnings call and then after that let’s talk a little bit about that card. One of the things I have had questions from the investors on as well what you do with SOC now. So, they had this a little more cautious view is SOC – would the SOC drive in the next quarter albeit as well.

You do have to kind of look at see what the numbers, how the numbers play out. But can you about the restructuring and talk about your guidance and your view them a macro world. We see certainly some strength in Telco. There is NXP we had earlier talking about more positively about base station spends. We have seen some pickup in China. We have even seen some (inaudible ) Europe we are getting little better.

Certainly Vodafone now with that big chunk of money thank you for Verizon, or we will be paying on LTE and that good news for you as well. So, can you talk about that all that?

Gary Moore

Yeah, go back to the regional question around the restructuring Brian to start with and we can guide keeper in to those elements. The restructuring that we announced during the earnings call roughly 4000 people, 5% of the workforce. I think based on two things. What we saw relative to the revised guidance was a continued growth, but on a much slower pace of the recovery.

I think if we look at the different market the three regions we have, we were getting some positive signs as well as some clients that caused as one of the more conservative with the guidance. So, we took our guidance, which we are still very committed to the 5% to 7%. So, and we went to the lower end of that as we did the earnings call 3% to 5%.

The second part of that has to do with reinvesting in our growth areas. I wouldn’t expect any of you to think that we are going to drop that money to the bottom line in terms of increased earnings. This is about taking and turning the dials if you will to shift our investments so where we think the growth is going to be. And the growth continues to be in datacenter with UCS in the Rockies and the MES and the areas that we talked about during the call, not the least which is the internet and everything.

And it’s about reprioritization of resources against those growth areas and continued to invest in that – invest in that opportunity that we see there. 17 of the 19 last acquisitions we have done have been in software and those clouds. So, we have to see that engine and this is the way for us to do it.

Question-and-Answer Session

Brian Modoff – Deutsche Bank

Okay. You made a comment on architectures and also just for the audience we do have two microphones out there for Q&A. We have also got this iPad after which you can send questions as well. But you mentioned your last acquisition and I would also note that those some of the last but then in wire and so one of the things we talk about regard UCS is how it’s an architectural approach that enable you to become a significant player on a market because you are selling an architecture.

Gary Moore

Right.

Brian Modoff – Deutsche Bank

This is also good for your margins and your pricing, but you have done well in datacenter as a result of that.

Gary Moore

Right.

Brian Modoff – Deutsche Bank

I look at wireless. We knew all of your acquisitions. We knew Ubiquisys. We knew Intucell. We covered Starent before we acquired. In Starent case that’s a lot to do. I think you have 23 or 25 public carriers (inaudible) packet core because of Starent, but with Intucell has the SANs. And Ubiquisys has the center cell. You have all the pieces of an LTE, all IT architecture also 3G and 2G as well, but you have got this is all IT architecture, (inaudible). How do you see yourselves evolving now in wireless? You can conceptually and particularly the enterprise compete with Ericsson, compete with (inaudible) compete with these other players all the way through for an entire wireless systems. Do you see yourself evolving and becoming a player like you have done with UCS against HP and IBM, do you see start doing this in that area?

Gary Moore

So, I think we have been pretty direct relative to when we acquired Starent we had a roadmap about acquisition. We believe there is an opportunity to create software and that continue to expand primarily outside the U.S. we have a huge opportunity to expand in those market as well as continue to do the kind of investing not only internal development and the integration of those acquisitions, but also to continued to look at things that will accelerate us in the market.

So, it definitely is one of our top priority growth area and we think we have a very broad portfolio for service provider for mobility. We are number one in all three of those and I think we have the opportunity to continue to expand on that and leverage that given the architectural point of view.

Brian Modoff – Deutsche Bank

We see wireless that portion of wireless being significant (inaudible) you put a broad based or broad number of (inaudible) what’s kind of your target that is becoming significant. What I mean by significant is this 5% or more revenue?

Gary Moore

It’s a great question. I honestly don’t know the answer, but last quarter we stood high double-digit quarter. Quarter before that we have been 100% growth on a (inaudible) base, that base is growing very rapidly. I mean this has got the acceleration of UCS.

Brian Modoff – Deutsche Bank

Okay.

Gary Moore

And so we have a lot of confidence and our ability to continue to invest in this space as well as continue to view things together to continue that acceleration.

Brian Modoff – Deutsche Bank

Who are we targeting? I mean we talk with AT&T. We know AT&T small cell (inaudible) 40,000 of these. AT&T is very important and they got it (inaudible) if you look at what’s happening in wireless, air interfaces gotten very efficient. We don’t getting more (inaudible) out of air interface. The way we are increasing system capacity in wireless is with the network, the network architecture identification is key element of that, but in order to indentify for you to mitigate interference using songs, which you did (inaudible) self. So, they are moving in this direction. So, this is an opportunity given us the network play for you to gain share. Who you are targeting is or are you having special with AT&T do they understand your architecture, the Vodafone and other one we see very favorable very do they understand your architecture.

Gary Moore

Yeah, so we have both Kelly Ahuja who spoke last week covered this pretty well, but I think the I hate to say we are targeting everyone. But I actually think we are targeting everyone and AT&T early (inaudible) was our lead customer and they really convinced us to move in to the space and do what we are doing. So, we hope the penetrate is there even deeper. I know it’s important to them and not only the rest of the U.S. carriers, but other carriers. So, I think we are well positioned in the very large SPs and actually some of the others have a huge interest here. We’ll see it go ahead.

Brian Modoff – Deutsche Bank

Yeah. I know Intucell is AT&T is a big stand of Intucell finance price the quarterly early, the relationship there? So, over the last couple of years one of the things that investors have been concerned about is okay with before SDN we had Avaya and we had these other guys are going to be you’re up on pricing and your margins are coming to pressure and your gross margins have actually stayed pretty stable 61%, 62%. SDN was going to cannibalize you in fact obviously it hasn’t haven’t got ACMA coming out as soon as the interesting architecture from you. Your operating margins have stayed in the high 20s. What is your view for Cisco to continue to lever these results and is there any upside to exceed them especially as you continue to add more software revenues to your portfolio?

Gary Moore – President and COO

That’s a great question. So, I think as we said in your Analyst Meeting back in December, we’re very comfortable with the 61%, 62% gross margins plus or minus 1 or 2 I believe is what we said. We’ve reiterated that, I think on every call and by the way we’ve delivered on at the high end of all that guidance over the last 10 quarters. So, I think what we’ve been able to do in managing the business continuing to drive operating leverage, we’re very comfortable with that, that long range projection. I think as you think about our ability to expand margins, certainly that’s what we’d like to do. As we build out these capabilities in these new offerings especially in the migration of software as we take it from $6 billion to $12 billion across the three playing, that’s a slower migration, it’s not like we’re going to go out and buy a big company like it’s a fair tomorrow, it doesn’t mean we wouldn’t but it’s – that’s delinquent planning that this is the gradual migration that we’ve talked about as long as making the investments there. So, I think we’re comfortable with the guidance we gave and obviously we’d like to expand those but that’s not something that we’re going to commit to today or change the guidance from where we’ve been.

Brian Modoff – Deutsche Bank

Okay.

Gary Moore – President and COO

Is that fair?

Brian Modoff – Deutsche Bank

That’s fair, okay.

Gary Moore – President and COO

I think we have questions from the audience. Vijay. Would you wait for the microphone, please.

Unidentified Analyst

Yeah, thanks Brian. Thanks Gary. This is more of a conceptual question reflecting from your services background. I mean I recollect the UCS launch where you had a parade of your systems integration partners, if I recollect CSC, IBM and the likes and there was dancing on the floor. So, my view is as we ahead into NCME, would you continue the dance with the systems integration guys or would you say if you’re leaving money on the table, Cisco can run and how to execute some of your historic partners in services systems integration opportunities as the word moves more towards cloud infrastructures, your thoughts there?

Gary Moore – President and COO

Thanks Vijay. And you remember the dancing. So, that was a great lunch. I think first half and certainly it’s going to be very important to us. And there is a discussion later today I think it’s at 3:20 with this front-end to me and around I think it’s an SDN panel. Okay, good. I think that’s going to be worthwhile for everyone to get a much deeper understanding of our view here. But we’re a partner driven company. And we have 72,000 partnered companies around the world now, they extended, some of them are more strategic than others, some that were very strategic have become less strategic. And it’s kind of that dance if you will that you talk about but where we can partner and go to market to give our customers a better choice to extend our reach et cetera, we’re going to continue to do that. And we have a lot of partners and I think quite honestly a lot of customers very excited and interested in what they’ve seen from an SME and how we’re going to bring that out. So, I can’t go into that, obviously we talked about it at Cisco lot of couple of months ago but we haven’t really launched to get. So, I don’t see us changing our partner strategy in a broad sense but there will be partnerships become more or less important as time march going. Yeah.

Brian Modoff – Deutsche Bank

You got a question back there. Chris?

Unidentified Analyst

Thanks very much. I wanted to press you a little bit on the Whiptail answer and trying to understand how that fits into UCS and accelerate the applications. My understanding of the Whiptail technology is that’s primarily array-based flash and that array would frankly be positioned most often and not against EMCs VMX whether it’s upcoming flash products and not going to sell. So, can you maybe expand a little bit on how you plan to use that technology to accelerate UCS? And then secondly, is this symptomatic in what we’re seeing across the active landscape symptomatic of just less cycle to growth within IT and you’re needing that move into each other’s businesses in order to fine growth avenues. Thanks a lot.

Gary Moore – President and COO

Yeah. So, Chris I mean first off we don’t view this as moving into EMC or a NetApp's business or IBM’s or anyone else is. Understanding that, all three of those players have investments in this area, we believe that Whiptail was the best degree that was available out there and actually will be deeply integrated into the UCS platforms and other things that we’re doing I mean our innovation right now you’ll see between now and the end of the year our number of announcements that we’re making where this will maybe make a little bit more sense to you. But this is an integrated into this – into the UCS platforms to accelerate application performance especially applications like SAP HANA which is lot of drive to and a lot of customers are just banging on us about you need to have this capability in there.

So, I think David Yen and Paul Porras who run this business unit felt very strongly that this is an acquisition that they needed to make to put in there even given that it would cause some amount of potential conflict of friction in the market. EMC still a great partner, still very committed EMC NetApp of same thing. And we’re going to continue to go-to-market with that and try and do the things that makes sense for Cisco and our customers and our shareholders. And we think this is an area that I think the estimates are $46 billion for this space over the next three to five years so it’s not like it’s going to be a major component, our competitors see they wanted them we’ll not say it doesn’t have the management or a whole lot of the other things you need to be in this storage business.

So, we’re very comfortable that the way we’ve defined this the value that we’re going to drive from the acquisition with the AD Engineers et cetera we’ll be able to demonstrate a roadmap where I think this makes perfect sense and over time hopefully no one be thinking that is competitive to NetApps and EMC. So, I wish I could be a little bit clear on that and we will be as we close the transaction. But I would tell you that I worked on this for the last couple of days or more and feel very comfortable with our strategy there and our ability to continue to drive those partnerships in a successful way, okay.

Brian Modoff – Deutsche Bank

Yes, the question down here. While the mics coming over, I’ll ask another question. So, you talked about things that you’re getting into, let’s talk a little bit about things you’re going out off. You’ve exited Flip and Linksys. Are there other assets that you might consider exiting like set-top box or as a good example?

Gary Moore – President and COO

So, first of all let me be really clear we’re not going to exit the set-top box first, we’re very committed that business is very committed to our service provider customers there. We’ve recently separated the business unit there to give a greater focus on that set-top box business as what it is but we believe we’re in a great position to leave this transition from table set-top, IP set-top and eventually with moving that directly into the cloud with our video-scape architecture. So, we think this is a great market for us, it accelerate the commoditization accelerated, we believe the things we’re going to add value back into that if the longer term play that will make this worthwhile. So, we have no intention to getting out. We have exited we hopefully exited the Linksys. There are other things that we’ve either moved down or done a smaller and did make the front page but also calling back some of the investment areas in R&D. But our R&D investments have gone up every year, we’ll continue to do so to maintain that market leadership to continue to expand and we’d be shipping more and more architectures as well though?

Gary Moore

Great point. We are - and one of the things that our ASICS allows us to do - again along with merchant, but ASICS allows us to have a lot more control over our destiny relative to where we’re going and how fast we go and not to be dependent upon someone else and that’s allowed from an engineering point of view for us to create these architectural platforms. And certainly, the VideoScape, the whole offering that we’ll have there is more of an architectural.

Unknown Analyst

And so when are we – when’s the virtual we’ve been hearing about virtual set-top boxes for awhile when is that going to be meaningful and when are you going to see the carriers really moving to that where it’s your broadband connection to your home and software and there is no box getting shipped to you anymore?

Gary Moore

I think you’re seeing a little bit of that now going from having nine boxes in your house or three boxes to one that kind of thing. But I think that shift is going to take a little bit more time, which I think we can help accelerate with how quickly we advance. But given the economy and just where things at that’s not going to be something that people driving it quickly through in my mind. Clearly as usual or Jesper Andersen may have a different opinion of that but I think that’s where we are at.

Brian Modoff - Deutsche Bank

Question? Yeah, thanks Gary. I want to return to the restructuring and understand a little bit better exactly what Cisco is signaling to the market by it because if you're the pessimistic school would say okay, we've seen this before. Cisco is cutting people that means it’s going to be followed by slowing growth in the next quarters. The optimistic school would say John has been pounded by investors over the last few years as to what they want to see in terms of capital return and margins and he gets it and he’s saying by cutting these people- we’re going to hold the operating margin in the mid to high 20s come hell or high water. And I'm just wondering which of those two are you actually signaling to the market and were you surprised by the stock reaction afterwards when you announced it?

Gary Moore

So, 20, 20 hindsight I would say, we might have done that differently. We felt first off is the 4000 people but the number has crossed the 4000. I think we did exact precision lightly and we didn’t do it because of short-term thing that we saw in the market just to be very clear about that. I think we have a lot better visibility today than we had three years ago. This was a decision that we made because we do need to reinvent in areas and takeaway from areas that weren’t growing in the way that we had planned for them to grow. So, I would try and characterize that as a shifting and a rebalancing of that investment towards the high growth areas, that we have that I’ve talked about, whether it is Mariachi or MDS Data Center, internet of everything mobility etc. Those areas are getting additional funding because we are making no shift with those resources. And I don’t think it’s any more complicated than that.

I think the fact that we made a decision to announce it during the earnings call along with the reduced guidance, three people out. I think we knew that would happen, but it was we look at it more from a long-term point of view and not how the stock would react that day, which it dropped 4% before John and Frank and I and Rob ever got on the call, which was interesting. And then, I think it did, it exactly come back a good part of that and it stabilized. And I think as we look out, we still think our innovation engine is being said, it’s alive and well, as I mention we have a number of things that you will see to include Insieme is executing on track, it will come in before the end of the year and you will see a continued strong start from Cisco.

And these are investments that we have to make. You don’t just bring a company like Insieme in and say okay we got it (inaudible) just like we have done with QCS just like the acquisition of Whiptail. Those investments, those engineers who have to integrate that, have to be funded and you know it’s what we are trying to do.

Brian Modoff - Deutsche Bank

We’ve got a petty run down on Insieme. We published a note about two weeks ago on it. It’s definitely worth a reading for those you that are looking at trying to understand that architecture. Continuing on kind of that, I want to revisit the kind of the economic side of things, what’s your view on the current economic environment in the U.S, Europe and APJC. And also in particular the China and Japan, when do you expect these markets would tuning to growth? And I have a question on China.

Gary Moore – President and COO

Okay. We got number of questions than before we hit China, that’s good. Appreciate, yeah. So, the – I think what we’ve been seeing is the U.S. leading this recovery. And our commercial business continue to be extremely strong in the U.S., we grew 12% last quarter, that’s just from I think in the quarter before that. Our enterprise and service business grew 9% little bit slower than the prior quarter but still great momentum. Our (inaudible) business 12% growth in the U.S. If you just looked at that, you go wow. This is a recovery.

Europe, if you look at Europe, we had 6% growth across Europe which is the first time in a long time that we’ve been able to feel very good about that. We saw great growth in the UK, Ireland. We saw Northern Europe continue to be strong although a little slower than what it had been and we still believe that Southern Europe is a loud card that could impact the rest of Europe to grow just given the effect of that. So, that is one other reason further more cautions there.

In going to different countries and go, why did that enterprise spending go down or why did this happen. And I was just looking it on that detail as well as number of the customers that we talk to and John talks to more customers at senior level than anyone I’d ever met in my life. And he gets good feedback. If you go to Asia Pacific, Japan and China that quite honestly is a region that we’ve put – had count on a great deal, it stays important reason to it, it’s complex. And it has negative 3% growth which is clearly not where we wanted to be and I think there is a number of factors on the positive side. India is back, it had 19% growth in the quarter. Feel very good about where we’re at there.

So, rest of Asia pretty consistent, strong good growth in different areas of Asia and but then the two big markets Japan and China. So, China I think most U.S. companies not just Cisco are having more difficulty in China right now when what we normally would have. That said, we believe we’ll work through this over time, it’s certainly where that’s going to take two more quarters or three more quarters or even longer, I think it has a lot to do. That is under our control between the U.S. and Chinese government. But in the meantime, we’re very committed to China, we’ve been there a long time, we’ve been very successful there. We have great customers there and we actually closed some deals in China but they were not the big mega deals that we’ve been signing.

And then, if you look at Japan, this is – now I think about being in sales of the comparables quarter-over-quarter and year-over-year sometimes can get to. Japan is little bit two years prior to this what was the country of the year for Cisco is through the Chairman’s Award growing both those years almost 30%. We have build out every major carrier infrastructure there. We are well positioned there and well there maybe some players that are going better in optical in different places that kind of thing for the most part we feel very comfortable with not only our position in there that our ability to once that capacity is used up and the build outs start again to be in very well positioned to see that growth pick up. In the meantime, there are lot of other things that we can sell. If you think about the data centers you think about mobility, if you think about the other things that we have in our centers that’s the shift that’s focused to really get to bring that Japan growth back. I'm particularly bullish on Japan for the long term and we continue to make the executive investments there that as it go allow us to continue to be strong there.

Brian Modoff – Deutsche Bank

Little more in China, then another question from the audience. In China, industry data shows the recent calendar quarters Cisco loss, if you point to you’re out of market share or well again, was this mostly in China and what is Cisco’s strategy to be gaining share enrolling in APJC EMEA and also increase share well in the U.S. total than the LTE rollout.

Gary Moore – President and COO

Yeah, clearly well we gain share in the quarter most of that the expense growth, a couple of player certainly Cisco is one of them. And as we look at China and SP globally, we still see continued CapEx being constraint.

And so there are other things that we are looking at relative to that, continuing the relationships, continuing to expand into areas that we are not relative to mobility, moving outside, more outside of the U.S. and opportunity there as well the things that we are going in the datacenter and in other areas.

So, I think the global SP CapEx spend is going to be in pocket. We are going to activate those pocket, but we have (inaudible) frequency.

Brian Modoff – Deutsche Bank

Another question from the audience? Okay. So, what you think the way of the technology trends like Big Data, networks like SP and NSP. And what is your specific opportunities and lead in those transitions. And can you maybe just a little of a (inaudible) is going to be in all those.

Gary Moore – President and COO

And servers going to play a huge role in that. I think we believe that pretty more intelligent and in to the network is something that we have been working also five years. I think the investment that we made (inaudible) what they are doing it’s exactly in to this and they are going to be a major piece of it.

Certainly what we are doing with open day light that once they Cisco one that renounced couple of years ago open network environment. Great traction in the neighborhood of 160 to 200 customers that are using (inaudible) to program to the network greatly activity there. So, I think you are going to us continue to evolve that strategy and once semi is announced formally and comes in you will hear a lot more about it and again.

I think (inaudible) will be able to talk about how that’s play SPN and function virtualization and the network as well.

Brian Modoff – Deutsche Bank

Okay. Another question from the audience, yes, down here.

Unidentified Analyst

I have a question about I don’t like use the word smart grid, but sort of the

Gary Moore – President and COO

Excuse me. I think I know you don’t like it. You know that it does mean a whole lot of thing to different people.

Unidentified Analyst

Exactly, anyways so you have made some announcements you are active in that space and some people say this is maybe last frontier of really big networking that can be developed, which is not. I mean compared to the Telco network we haven’t developed at all. Maybe you can share some of your thoughts how we should think about this from a Cisco perspective kick in this become really big business or is this more of a niche. How do you think about this?

Gary Moore – President and COO

We think it can become a huge business. It’s a $14.4 trillion market opportunity based on the estimate. If you think about how we are position from a knowledge point of view around the wisest being connected, how to manage them, how to secure them, how to monetize them for customers. I think it uniquely position. The internet of everything taken the electrical grid and secure and doing things that interesting and we have made some big investment there and we are getting good returns. We have a number of large customers, but relative to dollar size not been something it’s going to even make you read a paragraph on it.

On the other hand we think we are laying that foundation and the knowledge. There is a lot of things that we have done. In the early days the smart grid that now allowed us to do things with other industries around connecting things.

Last spring then within April we brought in 60 customers and partners from around the world to be more of a user group and help us shape, how do we secure, monetize and growth the standardization, standard system of be one of the most important things and we have another event come up in November Barcelona with a much broader set of customers and partners to drive this. So, there is a lot of interest and lot of opportunity. We're going to continue to focus investment there, because we think it is such a great long-term growth plan.

Brian Modoff – Deutsche Bank

I think that's also why wireless is such an important part of the new strategy. Think about it Internet of Everything you're talking about machine-to-machine communication. Most of that will be wireless. So, having that as part of the architecture is going to be key. And I think is part of why you're trying to have that in -- made these acquisitions that you've made.

Gary Moore

Absolutely.

Brian Modoff – Deutsche Bank

So, another question now moving on o the topic of software and services over the past two quarters, Cisco Services has underperformed your long-term guidance range of 9% to 11%. What are the reasons for this and what do you need to do to improve your performance in that area?

Gary Moore

Yes, so it's obviously a business near and dear to my heart and after 11 years of compounded annual growth of 12%, 12.2% to be specific, I think it surprised a lot of people. I think the one thing you have to know about the last 11 years is not every one of those quarter, every one of those years its' been double digits like that. So, I think typically in services, when core product growth slows down, which it has for several quarters as I pointed out during the earnings call. That eventually catches up to services. So, we have about a two-quarter lag there. As you see the core product growth pick back up, you'll see service pick back up. We're very comfortable with the 9% to 11% for the long term and, quite honestly, if you look at all of FY '13, our last fiscal year, we were in that range or in the low end of it, but we were in that 9% to 11% range even with the last two quarters being weaker. So, there is a number of things that we're doing in services in addition to traditional things. You'll see us, we've brought together our Internet business solutions consulting group along with our technical advisory services and brought those teams together with a more comprehensive offering to the market. There's a number of things that we're doing around enabling partners around managed services that's a new revenue opportunity. So, we have a big opportunity to continue to grow our share and our partners' share in the services space. But we've got this lag right now. But long term very comfortable with the 9% to 11%.

Brian Modoff – Deutsche Bank

So, just a few things similar to the correlation between what has happened on the products side that's creating bit of the lag effect initially?

Gary Moore

Absolutely. When you don’t end up the core services to put technical services on, you got two ways to grow that. Attach or renew. And right now the product growth is slow, you can't attach the -- the only thing to attach to.

Brian Modoff – Deutsche Bank

Yes.

Gary Moore

So, you work on the renewals and double down there, which we're doing. But that’s, you know, you can't renew something that's not ready to be renewed. But we've made good progress there. And then I would say the other area of growth, advanced services, which continues to grow significantly high double digits. The opportunity there for new build-outs, the complex build-outs, some of the things that really advanced services does so well in detailed design. When you're not building out big infrastructures, that's not there. But, think about as UCS continues to grow, think about what we're doing in the datacenter. UCS, $2 billion run rate revenue after four years. A lot of datacenter services that we created, we're going to do the same thing with Cisco 1PK and the service around that. So, we have a lot of growth opportunities for the services business.

Brian Modoff – Deutsche Bank

We have a couple more questions, and then we'll be wrapping up. You know, talk about software a little bit. If you look at SDN, that's actually an opportunity for you to start to sell as we wrote about recently, and now start to sell into the software piece of enterprise where you're talking $350 billion TAM versus say $18 billion networking TAM. How do you -- if you look at SDN and things like orchestration, it's hard -- you mentioned earlier about application, accelerating the delivery of port applications. How do you see Cisco moving into that space? What are you targeting initially in software? How do you see yourselves capturing part of that TAM?

Gary Moore

Yes, so there is -- I mean, from our point of view, the $6 billion in software is spread across really infrastructure software, embedded software and then the higher level applications, so you've got IOS and XOS on the infrastructure side you got security and new offerings that we have that are embedded and then at the top level more and more of what we’re doing around hosted communications bringing VideoScape there opportunity for growth in those areas and plan between those plains I think is the big opportunity for us. So, I think for us it’s more about continuing to grow those things, where we’ve the ability to consolidate like we’ve done with the IOS team. We’ve got all of the IOS teams together under one leader. Clearly in that middle layer, you have got different things going on and then on the top level, you’ll see going a lot more now with web access some of those things that integrate those applications. So, a lot deeper focus there around especially around the hosted communication side.

Brian Modoff - Deutsche Bank

My [question] is really around competition. If you think about there is a huge - a lot a huge amount of change competitively recently you have got Juniper looking for a CEO, you have got Nokia no longer handsets and having some money to buy assets but clearly changing their focus. You’ve got ALU going through a big restructuring saying they are going to sell assets. You have got other players that are just becoming less and less significant as players in the market like say Brocade with fibre channel. What do you see happening competitively? It seems like there is - there is a huge amount of change a lot of weakness out there frankly what’s your view on the competition is this an opportunity to pickup share kind of what are your thoughts.

Gary Moore

So, we think there is huge opportunity to pickup share. There is a lot of self conflicted wounds out there from a number of these companies as well as historically and traditionally with Cisco, when the economy softens and growth slows the value play that we have has allowed us to maintain share and growth during these times as we’ve done. And then as the economy returns really accelerate to capture all that so we’ll continue to make the investment that will uniquely position us there.

We never give up on competition. There is a lot of players if you go back over the history of Cisco, whether it’s Wellfleet or some of the others there aren’t there anymore. But some of these guys will get a second life because they are restructuring so it will be a different concept not as broad based maybe more of a niche player that will have its own issues for us but we believe that we can compete end to end from an architecture point of view continue to drive share.

Brian Modoff - Deutsche Bank

Okay. Thank you very much and thank you everyone for attending.

Gary Moore

Okay. Thank you. Thanks, Brian.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Cisco Systems' Management Presents at Deutsche Bank 2013 Technology Conference (Transcript)
This Transcript
All Transcripts