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

Cisco Systems, Inc. (NASDAQ:CSCO)

2013 Raymond James S4 Systems, Semiconductors, Software & Supply Chain Conference Call

December 10, 2013 9:05 am ET

Executives

Paul Perez - Vice President and Chief Technology Officer, Data Center Group

Analysts

Simon Leopold - Raymond James & Associates

Simon Leopold - Raymond James & Associates

Okay folks, why don't we get settled and try to get started with our next session. I'm very, very pleased to have with us our next group. We've got Cisco presenting. My name is Simon Leopold, Communications Equipment Analyst with Raymond James. We're joined today by Paul Perez who is VP, General Manager of Computing System, known to many of us as the UCS, that's the Server Group. It is certainly a very hot space for Cisco.

So we've got essentially a fire-side chat format, lacking the fireplace, but nonetheless I'm going to run through some prepared questions, but giving you a fair warning that if you've got some questions, I'll come back and poll the audience to see if folks have something, but why don't we start by setting a little bit of context. Tell us about your role in Cisco, the data center business unit, maybe a little bit about your background to help people understand where you're coming from.

Paul Perez

Sure. First thing is, good morning and thanks for being here. Simon said, my name is Paul Perez and I have been at Cisco a couple of years but I have been in the industry for 30 years. I was born here in New York, so I'm a native, and most of my background has been in R&D, microprocessor designer, during the heyday of RISC, a system designer with big mission-critical UNIX systems, participated in the early days of blade server development, founded a couple of hyperscale businesses, I spent many years at Hewlett-Packard in what they called the Hyperscale Business where it was my doing. I was also the Chief Technology Officer for Enterprise Storage and Enterprise Computing at HP before coming to Cisco where I had a combination of both strategy role and general manager role, in charge of one of our lines of business.

So that's me as far as Cisco UCS and Cisco Computing. You can think of it as being the disrupter in the market. This is a business that started four years ago and conventional wisdom back then was that the market was pretty stable. We had HP, Dell, IBM, with relatively stable market share positions in the compute space, and in four years we have become number two worldwide in blade server market share by revenue, and we were acquiring customers at a clip over 5,000 new customers a month on a base of about 28,000 unique customers, we have a run rate of above $2 billion a year now, and in the last fiscal quarter we grew 44%.

Simon Leopold - Raymond James & Associates

So a pretty impressive numbers, and just a few years back, I guess three years when you launched UCS, or a little longer four, so four years ago I remember many challenged the whole concept of Cisco's entry into this market space. So with the benefit of hindsight, what do you think are the key reasons for the current success?

Paul Perez

Simon, sometimes it's second mouse gets the cheese, right. The team had the benefit of studying the market and looking at trends as an outsider, looking into a new market opportunity. Based on that insight, what the regional founding team did well is they identified two trends that will be tossed with CIOs and IT groups. The first one was virtualization and specifically optimizing compute infrastructure for virtualization, and the second one was the adoption of private cloud. And therefore, we set about to innovate and create new technologies that optimized in those two areas.

So for example, the ability to provide bare-metal network performance to virtual machines and virtual workloads was a key differentiator. We did that with our own custom silicon. And then on private cloud, we actually embedded automation technologies into the network fabric. We called that fabric computing, which is a [indiscernible] in the industry, that we made it very easy for everyone to be able to automatically provision and re-provision and administer large compute environments.

Simon Leopold - Raymond James & Associates

So if you look at where you are today, what is the next wave of trends, what happens after this in terms of evolving the product portfolio in the market?

Paul Perez

So the team was very disciplined in the market segments we went into, and the first four years of life for UCS is what I call and my team calls UCS 1.0. And even within UCS 1.0, there's still quite a bit of runway. International expansion is one. Another one is the continuing rollout of private cloud in enterprise. On the last few years, there has been a lot of trials and some early adopters, now it's in mainstream, how do we do it, not necessarily whether we do it or not. We are in the midst of executing what we call our UCS 2.0 strategy, and that's focused really on where are intensive applications, mainline apps, big data analytics, and also extending the value proposition of UCS across multiple geographic sites and creating heterogeneous environments in service provider clouds as well.

Simon Leopold - Raymond James & Associates

Fairly recently you made an acquisition in the UCS business unit, a company called WhipTail, solid-state storage. I can tell you that among my colleagues, we argued and debated what that meant and what the intent was. So why don't we get your perspective on I mean what this acquisition does and where it fits into the portfolio?

Paul Perez

Sure. So the acquisition, if you do think it's quite a [inaudible] and for us, it was a means of probably we don't think of ourselves as being in the server market, right, and we were not thinking about whether [it's the greatest of] (ph) the storage market or not because [inaudible]. When you think of being in the computing market, right, in the computing market it's the business of optimizing application environments for performance and also for total cost of ownership, and one of the trends that's happening in computing is a trend towards converged infrastructure, right. So how do you deploy compute, storage, and fabric, altogether as a building block and also pieces and parts?

So, a lot of it is through a lot of customization where there's a need to partly integrate application acceleration to data acceleration with solid-state into compute environments. So we think of it as, there's a structural change happening in the market where there are cases that historically have been more identified with the storage domain and those were moving more towards the compute environment, and we have to make our strategic choices whether we wanted to own it or not, right. So we see ourselves moving aggressively against our compute competitors and probably be first in creating that [certainly] (ph) the first infrastructure more so [inaudible].

Simon Leopold - Raymond James & Associates

So part of this is, today we had is with regards to WhipTail is the captive partnership with EMC and VMware, and [inaudible] was up 50% year-over-year.

Paul Perez

Yes, a little more.

Simon Leopold - Raymond James & Associates

So not showing any material signs of slowing, so can you put some context around WhipTail and the relationship with VCE?

Paul Perez

Sure. Coincidentally, I spent two hours with Praveen, the VCE CEO, last Thursday. I also spent a fair amount of time with the planners at EMC on Thursday as well. We're being very open to model with them, and it is one of those where I think they feel comfortable that we are not getting into storage and that we will continue to be with partners. They understand our positioning around there is a structural change happening in the market and clearly everyone, I mean people like companies and WhipTail and WhipTail's peer set, I think there's a couple of them here at the event talking, and others are creating similar technologies. We think that we have our unique architecture and we have invited VCE to consider UCS plus WhipTail just like they are considering XtremIO from EMC, and with our partners like NetApp and EMC, we are being again very open in saying, what we like to do is to create a playbook, what is next set of FlexPods or VSPECs which are the brandings for those happy meals that could be used either there or ours or both solid-state technologies.

Simon Leopold - Raymond James & Associates

So maybe shifting gears a little bit, looking at the UCS business overall, I think we have got a good understanding of Cisco's customer base, but maybe could you tell us a little bit about what makes the UCS business line either unique or different in terms of what verticals you are strongest in, service providers, enterprises, Web 2.0 players?

Paul Perez

Okay. Well, we have a, I would say over half of the business is commercial and enterprise, and then the rest is evenly split between service provider and public sector. And our commercial customer, I have a unique definition for the commercial space, which is a customer that is big enough to require an attended IP environment but maybe they don't have the resources or the expertise to attend it properly, and therefore solutions to that problem that are technology solutions, that are easier to use by everyone, tend to be very valued. Those customers tend to be in their initial VDI deployment or they have new projects, and that's usually the searching factor for UCS.

Enterprise, you get into a very large scale VDI. So an example might be an insurance company that we started out as a VDI implementation, will be playing the virtualization standard with blade, and as they learned that we could manage blades and virtualization with physical bare metal rack-mount for performance exactly the same way, they consolidated their database environment into UCS as well and they shrank from two overcapacity data centers to about one data center and that allowed them to deploy big data environment on UCS as well. So, a huge consolidation value in enterprise.

Global enterprise, we have the financial institutions that are using UCS, a lot of it in grid, a lot of it in line of business processing, a lot of it in VDI. Service provider, we have companies like Savvis, Terremark, that are using UCS in different tiers of their dedicated hosting and public clouds.

Simon Leopold - Raymond James & Associates

Now there is another group classically called the Web 2.0 players, whether it's Facebook, Microsoft, Amazon, now you did mention Terremark as a customer, but when we think about this group of Web 2.0 companies, that group has been raising their CapEx forecast, what they are spending on data centers, but they are not necessarily customers of yours. What does that tell you in terms of the overall market? Does their spending indicate a shift of dollars or does it indicate the overall growth of compute spend?

Paul Perez

I think that a lot of it is related to the adoption of mobility [inaudible], not a lot of it. That class of customers have a few distinguishing characteristics. Number one is their business model. I'm normally not known for having a soft voice but…

Simon Leopold - Raymond James & Associates

Now you are in stereo.

Paul Perez

It's the end of the year. Where was I? So, the business model, right, those customers have a business model that's based on advertising revenue. They have a smaller set of very large apps. So their environments are fairly homogeneous. And the other distinguishing feature is that they have spent a significant amount of R&D dollars to create custom, as we spoke, automation frameworks that suit their needs in a very tailored way. And because of that, it frees them up to leverage basically what Taiwan and FedEx can provide, okay, so bare-bones to compete. And we are not actually in that market although we have some customers like LinkedIn in that space. We tend to go after markets where we can provide value.

Simon Leopold - Raymond James & Associates

So it's often referred to as the white box market, sort of no branded servers, and I think in some recent interviews back in September, John Chambers, your CEO, talked about white box as competitive threat. So for your business unit, how do you think about the white box trend as a competitor?

Paul Perez

Yes, I think in the context of Cisco, we have a fairly large percentage of our business which is service provider, to additional service providers. We are talking the AT&Ts, Verizon, et cetera of the world, and to those customers, potentially companies like Google that self-assemble could be a threat. So I think of white box as being an indirect threat to our business because it threatens our customers. We do run into instances where a customer who is willing to experiment with white box may not consider UCS, but clearly at a sustained clip of 44% year-on-year every quarter, it hasn't been much of a threat until now and we don't foresee it being a big threat in the near-term.

Simon Leopold - Raymond James & Associates

Okay. Why don't I just check with the audience to see if we've got anybody with some questions out there? Sure, in the back.

Question-and-Answer Session

Unidentified Participant

[inaudible]

Simon Leopold - Raymond James & Associates

So just repeat the question.

Paul Perez

Yes, so what's my opinion of the instructions at architectures, x86 versus MIPS versus ARM, did I get the question right? Yes, I think in mainline computing, x86 will be there for a long time and UCS today is exclusively into x86, and we don't see a big urgency to try to diversify from that. ARM clearly has derived a huge benefit from catching the mobility trend with tablets and smartphones and there are segments of the market that are looking at different instruction set of architectures. Those customers tend to write their own applications. So the ecosystem of shrink wrap apps around ARM will take a fair amount of time to develop.

And then the other thing is, ARM is an architecturally licensed model and people will take an architectural license and deviate it slightly. So Intel probability becomes an issue which is why you have the Linaro Working Group. MIPS is being used in a lot of embedded devices, although I see a trend more and more towards considering ARM in those embedded applications where MIPS is played and I think probably Intel is also now pushing a foundry model to embed things like Atom.

Unidentified Participant

[inaudible]

Paul Perez

So the question was, can I comment on NfV, Network function Virtualization in the context of our alliance with Citrix on NetScaler which is an application delivery control solution? Well, the first thing I will say is, NfV means different things to many people, and there's about three different contexts for NfV. The first one is around virtualizing mobile network course. When you think about our telco's mobile network, how do you move that from custom hardware appliances to virtual applications running on x86, that's a huge opportunity for UCS and as a matter of fact it's an area that is an architectural play in the Company. And maybe I'll close on that until we see another session.

The second one is one around providing virtualized Layer 4 through 7 services, firewalls, load balancers, and we do have the ability to either express NetScaler, what Citrix calls VPX, which is a virtual ADC appliance on what we call the Nexus 1110, which is our UCS server, hosting different network services on top of our Nexus 1000 virtual solution. And the value that we have there is that the Nexus 1000 is hypervisor agnostic, so we can create the same operational environment and policy environment on VMware and Hyper-V [indiscernible]. So I don't know if that answers the question but…

Unidentified Participant

Are people asking for that solution right now?

Paul Perez

Are people asking? Yes, absolutely. I think it's going to be ramping through the course of the next few quarters.

Simon Leopold - Raymond James & Associates

So this Thursday, Cisco is hosting its Analyst Meeting. So not looking to steal the thunder from that, but on your business unit then, rewinding to the most recent earnings report, Cisco had forecasted January quarter sales down 8% to 10%. So what does that mean to you? How do you see your business unit operating in that context?

Paul Perez

So right before the earnings announcement, we also had announced a little bit of restructuring, and the reason we did that was to realign investments into areas of growth and that 44% year-on-year growth, I'm considered a growth factor in the Company. So from that angle, I get everything I need from Cisco to do my job. As far as the quarter, if you want to hear more color around that, just show up at our Financial Analyst Conference and you will get a lot of detail on that, but I'm not going to talk about that here.

Simon Leopold - Raymond James & Associates

I'm looking forward to it.

Paul Perez

I like to keep my life simple.

Simon Leopold - Raymond James & Associates

So another topic that had come up on the last earnings call, it seems to be in the press, are essentially what we refer to having a political backlash, our concerns about the foreign governments maybe not wanting to purchase equipment due to espionage concerns. How relevant is that to your business?

Paul Perez

It hasn't been material. We have been predominantly an America-centric business and we are going through a lot of international expansion, but it hasn't been material.

Simon Leopold - Raymond James & Associates

Let me see if there are more questions here, and I have got one more. So maybe the place to close out is to think about where you are going in UCS, and we had an earlier question kind of touch on this but if you look at really let's say a two, three, five year view, what do you see the evolution, where does the portfolio go when we think about whether it's video, mobility, software to find networking, network function virtualization, the whole alphabet soup of buzzwords, how do you kind of think of this from a long-term vision?

Paul Perez

On a personal level, in five years I'm hoping that you guys will rate Cisco stock high enough that I can pay off my Bay Area mortgage. But on a serious note, within the Company, John always likes to talk about what are our architectural places, and UCS up until now had been a new business, right. We had to feed it, invest in it, see it grow. Now that we are in the billions of run rate year, we are considered part of core. Now we are an asset that the Company is looking to leverage.

So we see [computing] (ph) like a substrate that all the other business groups are looking to adopt. So, partnering with our Mobility Technology Group on NfV and creating a good market to our Service Provider Group that's UCS-based is a huge growth factor for us. Doing the same thing on SD video where pivoting a lot of our video distribution, quality of service, encoding, transcoding applications, in that space, WebEx and Hosted Collaboration Services as well. Security, you think also of our newly acquired security software running on UCS creating a planned model, that's getting about pretty strong now within my business.

What I'll see is we'll have diversified into extending our ISV ecosystem of solutions that we offer to the market. We will have expanded into new markets, some of them are high-performance computing, some of them are electronic to sound automation. We will definitely expand into areas like remote office, branch office, and we are working across the Company with our switching teams to look at how we can take advantage of Cisco IP. I mean we are shopping in our own closet and it's not about selling UCS alone, it's selling UCS together with Nexus, together with our virtualization capabilities, together with a lot of our automation software, and it's looking pretty bright from that angle.

Simon Leopold - Raymond James & Associates

Great. This has been very enlightening, Paul. Thank you for joining us. We just had a discussion with Paul Perez of Cisco Systems. Thanks for joining us today. Thanks Paul.

Paul Perez

Thanks for the invite.

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 2013 Raymond James S4 Systems, Semiconductors, Software & Supply Chain Conference (Transcript)

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts