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Cisco Systems, Inc. (NASDAQ:CSCO)

Conference on Service Provider Routing Business

April 13, 2012 11:00 am ET

Executives

Marilyn Mora -

Surya Panditi -

Suraj Shetty -

Marilyn Mora

Hello, everyone, and welcome to Cisco's conference call focused on our service provider routing business. This is Marilyn Mora of Cisco's Investor Relations team. I'd like to thank all of you for joining today's call.

Today's discussion will focus specifically on Cisco's service provider routing and optical strategy to sustain market leadership through innovation and architectural approach. Now on to the format of our call today. It will include a 20- to 25-minute presentation followed by an opportunity for Q&A.

At this time, I'd like to introduce you to our speakers, who many of you know and have met. First, Surya Panditi, Senior Vice President and General Manager of Cisco's service provider business and a 7-year veteran of Cisco. He is responsible for the strategy, engineering and marketing direction of Cisco's comprehensive family of service provider networking platforms, including core and edge routing. Welcome, Surya.

Surya Panditi

Thanks, Marilyn.

Marilyn Mora

Our next speaker is Suraj Shetty, Vice President of Worldwide Service Provider Marketing and a 15-year veteran of the company. Suraj's responsibilities include leading the company's products and solution marketing function in video, emerging technologies and solutions, cloud, mobility and routing for the service provider and enterprise sectors globally. In addition, he is a member of Cisco's service provider business counsel. Welcome, Suraj.

Suraj Shetty

Thanks, Marilyn.

Marilyn Mora

Now I like to remind the audience that today's call will pertain strictly to Cisco's service provider routing and optical strategy. No new financial information regarding Cisco's overall performance is intended or implied, and is cautioned not be viewed as an update to the quarter.

We may make forward-looking statements regarding our service provider business, which are subject to risks and uncertainties outlined in detail in our documents filed with the SEC, specifically, the most recent report on Form 10-K and 10-Q. Actual results may differ from statements made today. So Suraj, let's go ahead and get started. I'll turn it over to you.

Suraj Shetty

Thanks, Marilyn. And let me kick it off out here with our latest love affair, which is our new iPad. I don't know if many of you have realized it or not, but with just upgrading your tablet from the iPad 2 to the new iPad with retina display, it's any video stream that it can get on this new iPad can be about 2 megabits per second. Just as a comparison, that's 3x higher than the previous iPad 2, which lasted for just a year. What you can see right now is just one tablet having such an amazing impact on the network itself. And when you go and look at what's happening every year, iPad -- next year there'll be another new iPad, new iPhone, new set of devices coming up, which will need more and more bandwidth. Just think about the same video Netflix stream that you saw. It will need more bandwidth and of course, you get a much better quality. And there will be more applications coming like that, which will drive more need for more devices and more bandwidth.

This cycle continues to speed up, and thanks to the tablets and the smartphones, we continue to see a major impact on the netbook. How big is it? Let's look at that. One of the things that my team has done is we do this visual networking index, many of you probably are familiar with. And the reason we do this is just to track this massive change that's happening in the marketplace driven by the tablets and the smartphones.

When you look at it over next 5 years, we'll have a zettabyte of data. It's a 299% growth. What's even more important is how this is going across the board, whether it's a video, mobility and cloud. These are the 3 major trends that's driving it. 90% of the traffic is going to be video all the time. iPad doesn't even have a landline connection or a wired connection. And when you look at it, all that services are coming from the cloud. So this is having a massive impact, and this has to go over an IT infrastructure.

And when you look at the network infrastructure, 10 years ago, it's very simple. You download it, you had a web browser, you got -- went to the Internet and there was an IP core, there was an IP edge and access the apps, it could be wired or wireless. And you got it all with these devices.

Now as the data centers have proliferated, as web tool continue to drive increase, as optical became more and more -- became the connection point between these data centers along with the routing, there is a major trends that's going on. Two things. The traffic is not just -- not south as you saw before. It was more about -- it was more -- now it's more east-west also. What does that mean? There is a lot of content getting replicated between data centers from the data center to the user and especially driven by video as one of the major applications.

So what you see here is number one, you probably have heard a lot of things saying, "Oh, why do you need routing when it's all going from point A to point B?" That's actually not true. And as this picture can tell you, as the applications in the cloud proliferates over time, the traffic path is more undeterministic [ph]. The other trend is the IP plus optic. There is the other question that you've asked us many times. Is optical going to grow? Is IP going to grow as this traffic grows? And what Surya will talk about is how does this IP plus optical come together. And since we have a strong base, both in routing and optical, Surya will talk about how we plan to work on this major transition.

Now when you really break it down, there are 3 pieces, which is cloud, the network and the client. That's how -- if you want to simplify that previous picture, you've got to look at it as 3 buckets. And once you look at it, Cisco, we believe, is very well positioned as we talk about cloud service, as we talk about network, about the client.

And at this point, Surya, why don't you walk us through and see how we'd kind of -- give us more details on it?

Surya Panditi

Thanks, Suraj. So let me back up starting with what our customers are looking for and then I'll talk about how our architectures, our product and technology and our solutions are addressing it.

I think the conversation even in the last few years has changed to one of a partnership with our SP customers to partner with us and are looking to lower their CapEx and OpEx, so addressing the expense part of it. I'd call that optimization. That's one important business objective they have.

The second is tied to new business models. As Suraj mentioned, there are new devices and in fact, many of these devices are now coming in not just into the home, but also into the workplace. We call that or many people call that Bring Your Own Device. But that has given the need for new business models, and that's the second area. And third and most importantly is the monetization of the investments that our customers are making in the network. And so what we're engaging with is the opportunity to create new services that could be implemented very fast, rapid, as well as well managed, so that our customers can offer new services. And the ones that are sticky can scale, and the ones that don't work out can be shut down. So it's really a way to get into the new model of very rapid service deployment. And those are the 3 areas we're partnering with our customers.

So that places certain expectations on the network. The first one is scale. As I said earlier, the services are expected to scale, which means that you have to have subscriber scale, you have to have bandwidth scale, you have to have the number of end devices to be able to scale. That's one important task of the network.

The second one is simplification. I mentioned earlier that it's not just the fundamental capability, but it's also the management so you can actually provision and deploy new services rapidly. And last but not least is the innovation. What I mean by innovation is that we are all in the same position of ensuring that we're leveraging the intelligence of the network, and that the network is not just a dumb pipe that's carrying bits from one point to another. And the reason is that the network has incredible information that can enhance the end-user experience. And so what our SP customers are looking for is that network intelligence be available and reflected, and be available to applications that can take advantage of the capabilities of the network. So that's what we offer because we've embedded intelligence in our network elements.

So let me talk a little bit about coming to what Suraj was talking about, not just the north-south but also the east-west view of network traffic. The common denominator, really, has become 100 gig. And when I say 100 gig, I mean both in terms of the very basic transport, so on the WDM, as well as 100 GigE for interfaces that connect data ports together. And what we've been able to benefit from is our leading-edge technologies in these areas that cut across our routing and optical portfolios, but also our data center portfolios. So I'll talk a little bit more about each of these areas.

So the first one is on the core of the network. We've been able to maintain market share because of the fact that we've invested heavily in innovation and been able to reap the rewards of that. We have the highest capacity core router that we're shipping today. We were the first to market with 100 GigE, standard space 100 GigE interface. And we've also now taking orders for 100 gig WDM. And this, by the way, was technology that came from our acquisition of CoreOptics, which has turned out to be an excellent acquisition for us because we've got a great team that came along with the technology.

And just as a side comment. In optical, it's really important not only to have the technology but also have the team that understands how to build the next thing. And I think what is important to us is that we're maintaining that leading-edge position as the technologies evolve and as we get to higher and higher speeds. We have over 450 customers. And on the optical side, the ONS platform, the 15454, we have over 2,000 shipped worldwide.

Now on the edge, the ASR 9000 has been in, well, I think, when we talked at the last quarter call that John had. But it's really the #1 market share on the edge, almost 50%, and we're shipping the highest capacity edge platform. So what our value proposition is, it's both a lower total cost of ownership, but also the fact that it's a platform that has legs. So when our customers choose the ASR 9000, it's a platform that can scale in the future versus some of the other competing platforms, which have been -- which are fairly long in the tooth. And so we have a compelling value proposition there. And we've also now -- we're shipping the industry's first 2 400 GigE on an edge platform, and that we have over 1,000 customers worldwide for this platform.

I mentioned data center a few minutes ago. Data center. This is specifically on the SP network infrastructure. Again, #1 market share at about 47.5%. Again, we're shipping the highest capacity switching device in the data center. Also, the industry's first 100 GigE for the application and as well over 7,500 customers. That includes both SP and enterprise for clarification.

And then on the mobility platform, we have really 2 spaces that we're playing in. One is the mobile backhaul which, as you know, with the proliferation of mobile devices, is an area that is of great interest to us and to our customers, over 42% market share there. And on the packet core, which is the product that we got as a result of the Starent acquisition, now we're #2 in market share at 28%. And really what we have in the packet core is a breadth of technologies we support, 2G, 3G, 4G, but also some of the other capabilities we've been able to bring to market.

As you probably know, Cisco has had a very strong enterprise Wi-Fi solution, and we've been able to leverage that technology now into the service provider space. But frankly, not looking at it as a siloed application, but looking at it as a solution so that our customers can look at multiple access technologies and have a common architecture for all of these different technologies so they can give a better end-user experience when they roll out untethered devices that may be on -- whether it's on their cell networks or on unlicensed networks like Wi-Fi.

And one of the benefits of partnering with Cisco is that we don't have a macro radio franchise to protect. We're really agnostic to the macro radio. So we're independent, and what we've done is being able to provide a solution that does not rely on a particular technology for the macro radio or particular -- we don't have a particular incumbency to protect in that space. And we've been able to, really, on the new deployments around LTE, we have -- as we announced at the Mobile World Congress, have announced over 30 wins in LTE.

So again, I mentioned earlier that there's a 100 gig kind of common building block, and we've got a clear competitive advantage across all the various segments in the network with 100 gig. So I want to spend a few minutes talking, as Suraj indicated, on the optical technology. I mentioned the Core Optics acquisition, and really that was given -- that was born out of the need to address capacity exhaustion problem. As you went from 10 gig to 40 gig, we recognized that the market needed to scale.

The second thing is that unlike at 40 gig, at 100 gig, we saw the technology coming together and the industry adopting one modulation scheme. And that helped us to make sure that we would not have the wrong technology because if you have multiple modulation schemes, you can end up having the wrong thing in your hands. But with 100 gig, we saw the industry coalescing around one and we found, as I said earlier, a great team. In my opinion, the industry's best team, and now they're part of Cisco. And what we've been able to leverage with the CoreOptics acquisition is advanced DSP technologies and also being able to offer the lowest total cost of ownership. And as I said earlier, not only are we shipping 40 gig there, but also already taking orders for 100 gig.

Now on the other acquisition we announced recently, the cost of interconnect, as you go to higher speeds, is also an area that we needed to address. And it's not just cost, it's also power and density that are important when you get into higher and higher density for the interconnect space. And what we found is that the industry was, frankly, looking at different implementations but wasn't quite there, and we needed to have something in our portfolio that allowed us to have very low footprint in terms of space, in terms of power and of course, also with a lower cost. And we invested in this company Lightwire, and we watched. And at the right time, once we knew the technology was feasible, we went ahead and acquired the company. And again, it's a great team.

And one of the benefits of Lightwire technology is it's taking advantage of CMOS. Unlike some of the other approaches in the past that have taken -- gone to exotic technologies like Indian phosphide or ganium [ph] moissanite this is CMOS, which is very common, and the industry is really able to scale in this particular area.

So I wanted to talk about coming back to the earlier topic about who wins if IP and optical come closer together, and why is that important. So first thing is that if you think about kind of the current state or even in some cases the previous state, and because people are already moving down this path, is that you have 2 different worlds. The optical was deployed first and has legacy, and then as the data and IP started coming on top of it, it was really a different capacity planning exercise, provisioning was different, autonomous systems and there was no real visibility between the 2 layers. So it reduced service velocity and it caused more expense.

As these worlds come together, what happens is you get optimized provisioning, which means that you're able to have visibility or the resources across layers, which means that our customers can offer better service level agreements, that the path can be optimized, and I'll talk about that in a few minutes, so you can get both simpler provisioning, as well as higher resiliency. And you have a simpler network, which means lower cost of ownership, both because of the CapEx of combining these 2 layers but also the operating expense becomes lower because you don't have a provision on a node by node basis.

Now what I mean by that is, if you look at, without the integration, if one were to provision at every node, you'd actually have to go compute the path that you want to follow and in the end, you end up with a path that particular session or packet would have to traverse in order to go from point A to point B. Now if you have integration and visibility, you can provision what we call A to Z provisioning with a point and click, and then the network has the intelligence to determine at every node what the best path is. And so you have much more rapid deployment of services. And so instead of taking months, you can take minutes to deploy a new service. And you can provision on demand, which means that now, coming back to my first point about rapid service deployment, this is one of the elements of that.

Now Cisco has really no vested interest, but we also bring great technology on both sides. So unlike some players who may have more of an optical-only and some players who may have more of a routing-only approach, what we are able to do is say take the best of both. We have businesses in both sides, and we're combining those in a smart manner that address that 3 needs that I mentioned about our customers: lower OpEx, lower CapEx and service velocity so they can have monetization of their investment.

So I also wanted to talk about scale and what we're doing in terms of scaling the network and simplifying the operations with our network virtualization technology we announced when we came to market with our ASR 9000 system. And what the 9000 system does is by leveraging network virtualization or nV technology has 2 use cases or 2 applications I want to talk about.

The first one is the simplification of operations, which is the ability for remote sites to feel like they're actually line cards inside the ASR 9000 chassis. What that means is that our customers don't have to do truck rolls to be able to upgrade a remote site or to provision a new service or to change swap out -- some capability that the software needs to be upgraded for. What they could do is from a centralized location at all of these remote sites, in one instant, come up with a new service and a new software upgrade. So it's an incredibly powerful technology for scaling and for lowering OpEx because of network virtualization as for the remote sites.

The second one is in terms of the resiliency, the network virtualization technology can also allow the 2 side-by-side routing chassis to behave like one device. So one of the questions we're asked is, "If I put so much of my services on the edge router, what happens if one of them goes out of service for some reason?" With nV, what we could do is make sure that, that still is available because even if one goes down, the other one is there to carry the traffic. And so it has incredible resiliency.

So what I wanted to point out is the innovation that Cisco has come up with in terms of using technology such as nV to solve customers' business problems and to allow them to come back to this, my earlier point about lowering CapEx, to be able to lower OpEx with this nV for scale and then of course, to rapidly deploy new services.

Suraj Shetty

Surya, how would this work in a competitive environment? What does competition have?

Surya Panditi

So competition, frankly, has building blocks, and they don't think of it as overall system. So you can buy point products. And then it's up to the service provider to either over provision, which means more CapEx. And then they can buy these boxes and architect themselves. And most importantly, I think, the biggest issue is the remote management of these devices that appear like line cards is a big deal because OpEx, for our customers, is a huge expense. And anything we could do to optimize OpEx, I think, is a big benefit to them. So this really is the foundation for the next-gen edge. And as I said a few minutes ago, a lot of the competing products are long in the tooth. And with the ASR 9k now we have a new platform.

So just to summarize what we have done, coming back to the 3 major drivers that Suraj talked about, mobility, video and cloud, are very important initiatives for our service provider customers. And they all rely on the foundational technologies of the IP network and what Cisco's able to bring with an end-to-end portfolio, except for the areas that are really not relevant like the macro radio, is the intelligence that allows them to deploy these services. And then make sure that their end customer, whether they be consumers, whether they be enterprise customers or small-medium businesses have the best experience because they're able to leverage the intelligence of the network.

So that has given us really a lot of successes across the globe, we have customers, service provider customers, literally, in every part of the globe, as well as in all of the various different market segments for the service provider area.

So I'd like to thank you. And now Marilyn, I'll turn it back to you.

Marilyn Mora

Thank you, Surya. Thank you, Suraj. Now, we'd be very happy to open up the floor and take any of your questions. We will be taking questions electronically. And the easiest way to ask a question is to bring up the chat box, and type in your question. We can then go ahead and read them from there. So let's go ahead and get started. I'll give folks a couple of seconds here to enter the questions.

Question-and-Answer Session

Marilyn Mora

It looks like our first question comes from an investor who's asking, last quarter, Cisco, you saw some improvement in your routing business and your market share. What do you attribute it to? Product cycle, a more aggressive stance or maybe you can share your insight?

Suraj Shetty

Marilyn, I've been here for 15 years. One thing I've learned is not to celebrate every quarterly market share gains or sulk when we lose market share on a quarterly boundary. What we really look for is a long-term trend itself. And when we really look at it over the last 6 quarters, we've had in the core market, we have had 6 quarters of market share growth, 4 out of the last 6 quarters on the edge market share growth. And I think that is primarily driven by what Surya kind of talked about. It's an architectural approach. It's not about point products anymore, as we talked about with the nV technology innovation. And the important part is integration of OpEx. How we do IP plus optical, and 100 gig being one of the great examples of that, a critical acquisition like CoreOptics. That's what we feel very strong about that we are in a very good path for long-term market share gains.

Marilyn Mora

Great. Thank you, Suraj. Our next question is, given Alcatel's weak balance sheet, competition with Huawei and Juniper's issues, how do you expect these outcomes to impact Cisco?

Surya Panditi

This is Surya, I'll take that question, Marilyn. So firstly, the 3 reasons why -- how we approach our partnerships with customers, first one is architectural. They're trying to solve a particular business problem, which leads to them needing a particular technology architecture. And as Suraj said a few minutes ago, it isn't just about point products. Of course, I'm very proud of the fact that we have market-leading point products, but at the same time, what we've been able to do is get that architectural view. And then lastly, to be able to have rapid deployment of services. And so the convergence of IP and optical that has allowed us to able to address the technology perspective on how they're going to get the lower CapEx, OpEx optimization piece. And there are -- some of our competitors, frankly, don't have those elements. So they're either trying to do partnerships that are too loose or too many, and so it spreads them very thin. Or they're distracted because they're trying to figure out how to react to some of the moves that we've made. And I think the CoreOptics acquisition is one example of that. Now the other thing is that we've also focused on innovation ourselves. And coming back to the network virtualization technology, what that has done is allowed us to come back and attack the problem of rapid scale, which is again an architectural issue and using technology and innovation to solve an architectural problem. So I think that is another area that having the capability to invest in innovation is important. So when our customers choose on a longer-term basis to work with somebody, I think it's an important thing for them to say, "I'm not just choosing a product that's here today." Of course, that's important, but the even greater important thing is, is this company going to be able to invest, do they have the financial capability to invest in innovation to be able to scale with me and with my network needs. I think that's the difference against some of these competitors.

Marilyn Mora

Okay. The next question from the audience is, you mentioned being in a position of enabling new business models for your service provider customers. What are your thoughts around the increasingly strategic value of content delivery networks?

Surya Panditi

So that's a good question. What we've seen is that there is an end-user benefit of providing CDNs or content delivery networks that are integral to the routing infrastructure, to the network infrastructure. So for example, on our ASR 9000 product, we have the ability to do caching. And you may know, we also have the CDS technology that we have on our video portfolio. And so you can actually have the benefit of doing caching at the edge of the network, and then time that seamlessly to the core of the network or to wherever the content may reside. What I expect to see is, over time, it would be use cases that are very scalable. And there will be use cases that are very on a point technology or point offering that's important. But again, we've seen the combination of content plus network, plus client, like we've done with our Videoscape offer, for example, is an important capability for our customers.

Suraj Shetty

I think -- going back to what Surya said earlier on, I think it's not just the IP plus optical pieces that we have. We also have the greatest EPC platform here, as well as Videoscape, as you pointed out, and as well as cloud. I think we are kind of in a unique position that how we [indiscernible] a router 10 years ago, it was just a pure Layer 3 device, it's becoming all Layer 2 all the way up to Layer 7, which is CD are not included.

Suraj Shetty

I agree.

Marilyn Mora

Okay. And it looks like now we have a follow-up question to that one. It says, and in the same vein, as smartphone and connected devices continue to proliferate and IP-based video streaming spans multiple platforms, how are you positioning and differentiating your mobile routing hardware technology in this context that perhaps with content delivery performance?

Surya Panditi

So again, a good question. So firstly, it's not just hardware. A lot of what this is when you look at mobility, the smarts are in our software capabilities. And I want to start with where the subscriber awareness resides. When you're looking at mobility, the difference between Cisco's approach and somebody else's is our 5k platform, which is the EPC, has the subscriber awareness. And what we're able to do now is leverage that across multiple technologies of access. So you can imagine that you're sitting at home on your smart device, on a Wi-Fi network. Now in the traditional old model, your subscriber awareness would be your home phone number or your home address because you're really going Wi-Fi through your local in-home router and then you're back on a some kind of a DSL or cable uplink. But when you move to your car, hopefully, you're not driving it while you're looking at your video, but once you move to your car that your chauffeur is driving, you can then -- you're now on a cellular network and then you might go to an office or a hotspot or a hotel room. The real challenge has been to have a seamless user experience across these different technologies so you don't have to keep re-authenticating and losing your spot on that particular experience, video or otherwise. So with the EPC, what we're able to do now is to be able to say let's start attacking that problem, let's make sure we're bringing in SP Wi-Fi as not just on unlicensed radio, but as an experience that has the same subscriber management on the EPC whether it's on the Wi-Fi or on the cell network, seamlessness and a much better user experience and at the same time, allows our service provider customers to add more value in their offer to their customers so there's also the opportunity for them to monetize that investment.

Suraj Shetty

Just to add to what Surya said, there is one more technology that we have in our Carrier Routing System, as well as in our ASR 9000, and we call it the network positioning system. Now the way it can be used is wherever the content is, it can actually go and search for that content. The router itself is knowledgeable enough to find the nearest content and then position it for distribution to the device itself. So here's another example of innovation that we've done. So it's not just IP plus optical, it's just not about core and edge and access coming together with network virtualization. But it's also how we locate the content with CRS and ASR 9000, the technologies like MPS, helps us bring all these pieces to deliver that unique experience for our customers that Surya explained.

Marilyn Mora

Now we've got a couple of questions coming in, more competitive based. And the first one relates to CNN and Alcatel both introduced 100 gigabit per slot. How do you compare? And do you have first market mover advantage?

Surya Panditi

So 2 things. One is that, I'd like to come back to this combination of IP and optical. I think the important thing is that you can take advantage of the overall capability and capacity. And second, frankly, is there are people announcing technologies, and we're delivering technologies. So what we've done is we've got -- the acquisition of CoreOptics has given us 100 gig WDM -- I mean, on WDM has given us really leading 100 gig technology. And of course, we're working on and we've done some tests that have been in the light reading, for example, on our other capabilities. But I really want to separate out announcements from shipments, and we're actually shipping versus just talking about something that's going to be available in a couple years.

Suraj Shetty

And it's important in this space when you see competitors announcing 1 year, 1.5 years in advance. We have seen our competition struggle with it because engineering sometimes is not a straight line from point A to point B. There can be challenges along the way. And what we are emphasizing is actually the customer deployment. We are so comfortable with our solution that we actually put it for a public mega test with light reading itself, and we have done 4 of them over the last 5 years. That kind of tells us kind of showing real need behind this, and actual customers who are buying these platforms.

Marilyn Mora

The other competitive question we've got here is, how does Cisco stand up against Juniper's PTX offering?

Surya Panditi

So let me start by saying that we've taken a fundamentally different approach. And the reason is that our customers have an investment in the CRS, and what we've done is allowed them to make that investment not just for a multiservice core but also for LSR, or let's call it lean core. Broadly speaking, that's a little simpler -- simplification of the application, but I'll call it that for a minute for those kind of applications in the same box. So they don't have to go out and either re-architect their network or buy another box, which is the approach that Juniper has taken is an entirely different box. So you've got the T1600 and the 4000, which kind of their core. And then of course, if you want something else like LSR or lean core, you have to go buy a PTX. Different architectures, different products, complexity, management headaches. So the CRS is a much simpler approach to them where they can say we've got the CRS multiservice core, but also we can announce the lean core, as well as -- by the way, optical integration in the same system. So again, lower cost, lower OpEx.

Marilyn Mora

And our next question relates to your ability to deliver 100 gig. You talked about it earlier in your presentation. Where are you in the adoption cycle? And are you seeing pricing becoming aggressive?

Surya Panditi

So 100 gig is -- there is a lot of interest in 100 gig. And I mentioned earlier, we've already started taking orders for our 100 gig WDM offer. And there are 2 parts to it. One is 100 gig as an interface on to the routers. That we've been shipping for some time with the CRS-3. So that, I think, we started shipping about 12 months ago.

Suraj Shetty

About 12 months ago.

Surya Panditi

About 12 months ago. So that's been in the market for some time. And then, of course, on the transport side, 100 gig WDM is still new and we're starting to see a lot of interest in it. We, again, as I said, we have orders for it. We expect that to be on a pretty significant growth curve because of the commonality of 100 gig across both the routing, as well as the transport layers.

Marilyn Mora

Great. [Operator Instructions] It looks like the next question relates to your entry into the optical market. It talks about, is Cisco seemingly more invigorous by its entering into the optical market given the CoreOptics acquisition and Lightwire. What is writing your renewed interest? You mentioned it earlier in your presentation, but can you review?

Surya Panditi

Sure. So I wouldn't look at this as purely in the optical market. What I'd really look at is that with convergence between the layers, there is the ability for customers to build simpler networks and to have networks that are more dynamic. We know that traffic is all driven by IP, so our focus really has been on leveraging optical technologies that allow you to scale the network, again, driven by IP as a common layer for all kinds of traffic. So one instantiation of that is what we've called IP over WDM, and that means the integration of the transponders into the router. So that's kind of think about it as a router that actually comes directly WDM rather than coming out gray optics. So the 2 benefits of that, one is by integration, you get to save some money, which is good because our customers save money. But even more important, they can dynamically use the available capacity because now it's that intelligence of IP that is able to influence how you utilize the network. So our interest in optical -- we've been in optical for some time. In fact, we entered the optical space many years ago. But what we really have focused on is this IP plus optical being our sweet spot, and that is a different approach than saying we're going to go off and participate in the purely optical market. What we've done is we've got the best of both worlds together, and we're in the position to say by allowing visibility of transport into routing, we can have more efficiency and we can have faster provisioning and again, take advantage of the fact that the capacity needs to change dynamically.

Marilyn Mora

Great. And our next question comes from a sell-side analyst who's asking, the mobile packet core is more than just a router with software. Can you talk about your mobile core offering in terms of how it complements the ASR 5000, i.e., Policy Management, IMS enablement, et cetera?

Surya Panditi

So our mobile packet core product is the ASR 5000, and what we've done is we have the ability to support multiple technologies. So again 2G, 3G, 4G and the various forms of that. And we have in-line services. So when you talk about things like DPI or policy, et cetera, we do that in line, and we can actually do service chaining on the EPC, or let's call it a mobile packet core. We can do in-line service. And what we're also able to do is have the capability of enforcement of these kind of policies across the network in order to be able to allow monetization for our customers of the mobile subscribers. So now they can have not just the bandwidth optimization, but also to be able to do something like new services that are enabled on the smart device. So again, that's our approach on the ASR 5000, which is our mobile packet core offering. And what I talked about a few minutes ago was extending that to Wi-Fi as well. So you could think about both licensed like the 2G, 3G, 4G or unlicensed like Wi-Fi as being different in some fundamental ways, but also we want to make it a common experience. And of course, all of these technologies are built on an IMS construct in the mobility space. So that is our -- we participate in that general offering. Now we don't offer all of the elements. Our approach is to have the capabilities that are important for subscriber management, but also leverage the IMS investments that our customers may already have made.

Marilyn Mora

Great. Suraj, I'm going to give this next one to you. The question from the audience is, to clarify, does ASR 9000 have 24 ports of 10 GigE versus others having less ports and offering less throughput?

Suraj Shetty

Yes. We've announced this as part of a fall announcement on the ASR 9000 when we announced it in [indiscernible] technology. Let me go back and reemphasize what Surya said. Our competition is still talking about a 10-year-old problem, high density, high ports and throughput. We are not just addressing that part of it alone. We are leapfrogging that with network virtualization technology, which ties back edge and the access technologies together. And by the way, that's true for, and if you remember the picture, the ASR 9000v, which is good for a wired environment, as well as 900, which is used good for a wireless environment. So we are actually converging both the wired and the wireless environment with the nV technology itself. So we are not just meeting and exceeding the capacity of what our competition is talking about, we are actually leapfrogging them from how an architecture is deployed.

Marilyn Mora

The next question comes from a sell-side analyst at UBS who's asking, MPLS switching is emerging as a new type of core switch and service provider networks. These switches are less functional than traditional core routing and at a lower price per port. Do you see this as incremental market to traditional core routing or cannibalistic to your core routing market?

Surya Panditi

So it's a good question. I'll first start with what is the concept and then what is the reality. So the concept was, well, we may have flows that don't require as much routing intelligence, and so maybe we could save some money by having a kind of a separate network or separate architecture to address it. The fact is that the minute you start doing this overlay kind of things, it becomes complex and expensive. And so one of our competitors chose to have this new technology so that they can address, let's call it lean core. I'll use that term again in a general way. But if you add more complexity, more cost, more management systems and have still to carry both kinds of traffic, it makes a lot more sense to have one single architecture. And it's interesting, I've been with meetings with several customers who first started out saying, "Isn't this the right approach?" And then realizing over time, and they actually look into it, that it's much simpler to have a single platform like the CRS that has a multiservice core capability, as well as the LSR capability all in one system. So they can then choose which traffic flows through which, rather than have something that's an overlay or a different approach. So I look at this capability really as a way to have efficiency where you need it, but again to have the simplification, the simpler approach of having a single architecture and then having both multiservice, as well as lean core in the same device.

Suraj Shetty

But this is also an example, Surya, of how our engineering philosophy is so different from our competition, where we look at the same platform to do lots of multiple function with the CDM whether it's light core -- lean core, as you said, on a full-fledged MPLS versus some of our competition who is rip and replace, let's go and build a new platform, let's build a new widget. And that, I think, is very painful for our customers. This is why I think we believe that we have a strategy, which is much better from a cost-optimization perspective.

Surya Panditi

Yes. I know you're right. It's really the total cost of ownership, and I think we have to look at how the architecture leads to the product and the technology and not the other way around.

Marilyn Mora

Okay. The next question from the audience is, can you talk about your DPI or your deep packet inspection functionalities in your routers? How do they compare to stand-alone leaders like Allot and Procera?

Surya Panditi

So DPI functionality is an important part of what our customers look for, and we have the what we call the SCE product, which is an offering that we have on our -- as an appliance. And we also have DPI or deep pocket inspection functionality on several of our platforms like the ASR 1k or the ASR 5k. So really you should think about it not as just one point. It's a functionality that can be implemented at different parts of the network, solving somewhat different problems. So in some cases, it's important for the customer to have DPI kind of a line. In some cases, they don't need to do as much deep packet inspection. Maybe it's just for some traffic. So it really is a use case driven capability, not -- you shouldn't think about it is just one appliance or device. It's for the use case that has different implementations, and we do offer multiple variations of that.

Marilyn Mora

Great. The next question comes from a sell-side analyst who's asking, how will Cisco's SP architecture vision encourage service provider customers to move to a single vendor solution? Should we assume it's about end-to-end control of application delivery? Suraj or Surya?

Surya Panditi

So the question of...

Marilyn Mora

I can repeat the question.

Surya Panditi

Yes, please.

Marilyn Mora

The question is, how will Cisco's service provider architecture vision encourage service provider customers to move to a single-vendor solution? Should we assume it's about end-to-end control of application delivery?

Surya Panditi

Okay. So firstly, our responsibility and our partnership with our SP customers is to provide them the opportunity and give them the capability of using network intelligence to roll out applications. The applications themselves could be from third parties, it could be made by our customers and in some cases, especially if it's around how you utilize the network, how you optimize the network, it could be from us. So the advantage of having an end-to-end approach is that we can now abstract the right elements of the network and provide those as capabilities that the applications can then take advantage of. An example of that is this MPS that Suraj talked about, which is that is a network capability, so you can actually have optimized caching of content. But in order to, let's say, monetize that investment, our customers might say we want to use it in a certain manner, maybe we want have a service offering with a service level agreement that combines MPS with our Quality of Service or POS capabilities inside the routers and then to package it to say, I'm going to go to a content provider and say, "I will charge you for having that experience that your customer can have that is better than the experience they can get from other competing provider." So that's a really important example of innovation that leads to monetization.

Suraj Shetty

And then just to talk about what Surya just -- or reemphasize some of the points we made earlier on. It's about the cloud network and client coming together. The first slide that I presented, when you have a new device which comes out and steps up 3x more bandwidth than the previous device from the same company, it's very hard to predict what's going to be the next wave of devices that's going to take more and more. We'll see incremental things machine to machine, that's a new trend that's happening. And that's why when we look at it and we offer a complete package, it's not just a greatest architecture solution, but also with how we look at the trends, how does that shape some of our architecture philosophy. And I think we can truly become a partner with our customers, and that will show up in market share and eventually with a single vendor or not, that is something that we have to earn over time.

Marilyn Mora

Okay. Great. the next question seems to be a follow-up to the MPLS switching question we got earlier, and you talked about your offering compared to the competitors. Do you see it as being additive to the overall market?

Surya Panditi

I think it's part of the overall routing market. I don't think it's additive in the sense -- you really should think about this as bandwidth is growing, and as Suraj talked about, what's driving bandwidth growth. And clearly, our customers are looking for both optimization, as well as new services. On the optimization part is they will not pay the same per bit tomorrow as they did yesterday. So there is, obviously, a rapid increase in bandwidth, but the CapEx is growing slower, and we are enabling that by having these built into the same routing infrastructure so they can actually have a full multiservice core, but also lean core under the same device, and it's still part of the overall core routing market.

Marilyn Mora

[Operator Instructions] The next question from an investor is, can you describe your current gigabit per port in ASR 9000 versus competitor products?

Surya Panditi

I'm not sure I understand the question. We have a 2 by 100 gig line card inside the ASR 9000. And so again, we have been able to get to market with a market-leading product with this capability. As Suraj pointed out, you shouldn't just think of it as "Okay, great, we've got 2 by 100, which is market leading." What's important is with the nV technology where taking scale both from a product, let's call it, line card density perspective, but more importantly from a system perspective where we may have leapfrogged our competition.

Suraj Shetty

And I will come back with the whole system GigE capacity because that's really important, right? If you -- 5 years ago, it was good enough to have a 2 by 100 GigE, 24 by 10 GigE just at a chassis level. And what Surya talked about, you can actually put 2 chassis next to each other and make it look like one system. Right then and there, we've doubled it. Then you kind of scale it even further by putting 9000v and a 900, which has more GigE ports. So you're fanning out and making it look like a single system. So now you can have thousands of GigE and make it part of a single system, which can go up to 96 terabits. And that's just a scale, right? So this is something that you can start with single chassis, a small form factor with 2 by 100 GigE or 24 by 10 GigE and then scale it all the way up to 96 terabits by putting more of those ASR 9000v, more of the 900s, and that is something that's very unique to Cisco. None of our competition has even come to replicating with back-to-back 9000s or connecting 9000v by 900 to create this one single system.

Marilyn Mora

And the next question from the audience relates to, from a geographic perspective, do you see differences in trends or demands by your customers and also in trends of spend?

Surya Panditi

So I think we have the same impact of macroeconomic trends that you would expect a company of our size and our breadth to have. So I don't want to, again, as we said earlier, we're not going to comment on the quarter. But more generally speaking, I would say that you can follow where the CapEx is going in various market segments, and we're seeing the same kind of trends.

Marilyn Mora

Okay. I think we have time for one last question, and the question relates to the overall routing market growth. Can you elaborate on your view on what are the drivers of growth in the market? And how does that translate for Cisco?

Suraj Shetty

I think I'll go to the first part of my slide deck. I think every time you buy that iPad, I think you are answering the question yourself. You are just -- we are all contributing to that massive IP traffic growth. One of the biggest challenges, I mean -- and 3 years ago, we didn't even had an iPad. Now we are seeing by 2015, 8% of the IP traffic will come just from tablets alone. So here is an implication of just one family of devices which didn't even exist until 2010. This is one of the reasons why IP will continue to grow, both fixed and wireless. We just announced at mobile VNI why it's going to go past 16% or 18% by 2016 or 18x -- sorry, not 18%. So IP will continue to grow as more of us keep buying those tablets and smartphones and the capacity, 4G connections in the mobile world, the 25 meg cable and fix connections or the 1 gig connections in some parts of the world. We are all contributing to that. So as long as the IP traffic continues to grow, that is all going to go over to SP routing infrastructure. It's very clear. So I think we have to keep track of both of these trends to say how it's going to shape over time.

Marilyn Mora

Okay. Thanks, Suraj. That wraps up our Q&A question. I want to thank both Surya and Suraj for sharing their insight today and our focus on driving continued execution in our service provider business.

Folks, if you have any follow-up questions, feel free to contact the Investor Relations team for any follow-up questions. And again, we thank you for your participation and continued support. This concludes this call for today.

Suraj Shetty

Thanks.

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Source: Cisco Systems' Management Host Conference on Service Provider Routing Business (Transcript)
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