Cisco Systems, Inc. (NASDAQ:CSCO) 2016 Annual Meeting of Shareholders December 12, 2016 1:00 PM ET
Chuck Robbins - CEO
Evan Sloves - Secretary
Amy Chang - Director
Sam Jones - President and Co-Founder, Heartland Initiative, Inc.
Julie Hammerman - Executive Director of JLens
Mark Chandler - General Counsel
Good morning. So, it’s now 10 am in this 2016 Annual Meeting of the Shareholders of Cisco Systems, Inc. will please come to order. I am Chuck Robbins, Chief Executive Officer of the Company and I will chair the meeting. On behalf of all of us at Cisco, I want to welcome you and thank you for your attendance today. Before proceeding to the business portion of the meeting, I would like to introduce the other Directors and executives of the Company who are present here today. As I call your name, please stand for a moment.
The directors present are John Chambers, our Executive Chairman; Carol Bartz, our Lead Independent Director; Michele Burns; Michael Capellas. We have a new Board member, Amy Chang who came down with a flu this weekend but she is joining us over WebEx. Amy, are you there?
Yes, I am, Chuck. Hello.
We hope you feel better, Amy.
Your voice validates that you are sick. So, thank you for that. And we’re glad you’re not here getting anybody else sick. Dr. John Hennessy; Dr. Kristina Johnson; Rod McGeary; Arun Sarin; and Steven West. I’d also like to take this opportunity to thank Brian Halla for his years of distinguished service to the Company as member of the Board of Directors. As reported in the proxy statement, Brian was not eligible to stand for reelection to the Board under Cisco’s age limit policy.
I would now like to acknowledge the following Cisco executives here today. Kelly Kramer, our Chief Financial Officer; Chris Dedicoat run Worldwide Sales; Mark Chandler, our General Counsel; Kevin Bandy, our Chief Digital Officer; David Goeckeler, our GM of Networking and Security; Rebecca Jacoby, Chief of Operations; Fran Katsoudas, our Chief People Officer; Hilton Romanski, our Chief Strategy Officer, Rowan Trollope, General Manager of IoT and Applications; Karen Walker, our Chief Marketing Officer; and Prat Bhatt, our Chief Accounting Officer.
Also present to assist with the meeting are Kris Muller, PricewaterhouseCoopers, the Company’s independent registered public accounting firm; and Gordy Davidson, Fenwick & West, the Company’s outside corporate legal counsel.
With that, it’s my pleasure to turn the meeting over to Evan Sloves, Secretary to lead the business portion of the meeting. Evan?
First, I’ll give a report on the notice of the meeting and the presence of a quorum and make several announcements. The Board of Directors has fixed the close of business on October 14, 2016, as the record date for the determination of shareholders entitled to vote at this meeting. Notice of this meeting was duly given to all shareholders of record on or about October 24, 2016. IVS Associates has been appointed as the Inspector of Election for the meeting. Mr. Creig Dunlop, who is representing IVS Associates, has informed me that shareholders owning majority of the outstanding shares of common stock are present, in person or represented by proxy, and as a result, there is a quorum of shareholders for this meeting. Therefore, this meeting is now open to proceed with its business.
As you can see in the agenda and rules of the meeting that we distributed, after I have completed the introductory matters, I will turn to the business portion of the meeting. After the formal business meeting, we will have a business review presented by Chuck, followed by a question-and-answer session. If you have a question you would like to ask, please write your question on the cards that are provided and pass your cards to the aisle. Representatives will then collect your questions. Similar to what we do in our Company and other meetings, during our Q&A session, we will focus on your most frequently asked questions in the time allotted. To expedite the flow of business during the meeting, I will first propose each item of business for discussion in the order listed in the proxy statement and then you will vote on each of the discussed items. Please refer to the agenda and rules of the meeting handout for more detailed information regarding the order of business and the rules of conduct for this meeting.
We will now proceed to the items of business set forth in the agenda. The first matter to be considered is the election of Directors of the Company. The following individuals have been nominated by the Board upon recommendation by the nom and governance committee to serve as Directors until the next annual meeting of shareholders and until the successors are elected and qualified, Carol Bartz; Michele Burns; Michael Capellas; John Chambers; Amy Chang; Dr. John Hennessy; Dr. Kristina Johnson; Rod McGeary; Chuck Robbins; Arun Sarin; and Steve West. No other nominations were received by August 1, 2016, the deadline specified in last year’s proxy statement for nominations. Therefore, the nominations are closed. Board of Directors recommends that the shareholders vote for the election of each of the nominees. We will vote on the election of the Directors momentarily.
The next matter to be considered is the advisory resolution to approve executive compensation. This is a non-binding resolution that the shareholders approve the compensation of Cisco’s named executive officers as disclosed pursuant to the SEC rules including the CD&A section of the proxy statement, the compensation tables and the narrative discussion. The Board of Directors recommends that the shareholders vote for this proposal. We will also vote on this proposal momentarily.
The next matter to be considered is the ratification of the appointment of PwC as the Company’s independent registered public accounting firm for the fiscal year ending July 29, 2017. The Board of Directors recommends that the shareholders vote for this proposal. Ms. Kris Muller of PricewaterhouseCoopers has informed me that she does not wish to make a statement at this time. She will be available to respond to appropriate questions during the Q&A. We’ll vote on this proposal momentarily as well.
I will now introduce our fourth, fifth and sixth items of business, the three revolutions proposed by our shareholders for consideration in accordance with our bylaws and the rules of the SEC. Cisco’s response to each proposal can be found in the proxy statement. As our next item of business, the Unitarian Universalist Association joined by another filer has given notice of the proposed revolution in accordance with our bylaws and the rules of the SEC.
Is Charles Dumont [ph] here? Great, please come forward. Please present the proposed one. Under the rules, you have five minutes.
Unidentified Company Representative
Fellow shareholders and members of the Board. My name is Charles Dumont. [Ph] On behalf of the Unitarian Universalist Association, I hereby move proposal for asking our Company to provide a report on its federal and state lobbying expenditures, including indirect funding through trade associations. As the manager of endowments entrusted to us by our congregations, the UUA takes this fiduciary duty seriously. But we also express our faith through the way we invest our money. As expressed in our fifth principal, the Unitarian Universalists are committed to the right of conscience and the use of democratic process.
Today, we are deeply concerned that excessive money in the legislative process can corrupt our democracy especially when it comes without full transparency. Our Company spent over $5 million in 2014 and 2015 on federal lobbying. And there is incomplete disclosure about spending at the state level where our Company has lobbied in 34 different states from 2010 to 2014. Cisco is required to report all of its federal state and lobbying and has this information. So, putting this into a report can be done at little or no expense.
Corporations contribute millions to trade associations that lobby indirectly on behalf without specific disclosure or accountability. Cisco fails to comprehensively disclose its trade association membership and does not disclose its trade association payments nor the amounts used for lobbying.
For example, Cisco is a member of the Chamber of Commerce, which has spent more than $1.2 billion on lobbying since 1998, yet shareholders currently have no way to know how much of Cisco’s trade association contributions are being used to lobby on its behalf. Without transparency and accountability, corporate assets can be used to promote public policy objectives that can pose risks. For example, Cisco has the sustainability program for use of greenhouse gas emissions and joined a 153 companies in signing the American Business Act on Climate Pledge yet the Chamber of Commerce has aggressively attacked the EPA Clean Power plan to address climate change.
Now, this thing [ph] match our Company’s values, does the Chamber’s position on climate change present reputational risk for our Company? Proxy advisor ISS supports this proposal, noting that Cisco does not provide comprehensive disclosure on its lobbying expenses, nor does it provide disclosure of its payments or oversight mechanisms related to the Company’s trade association participation. Our request for disclosure is a call for transparency and accountability in the spending of shareholder resources. We urge shareholders to vote for this proposal. Thank you.
Thank you. The Board of Directors recommends shareholders vote against this proposal for the reasons set forth in the Company’s proxy statement. As the next item of business, Holy Land Principles have given notice of proposed resolution in accordance with our bylaws and the rules at the SEC. Is Dr. William Smith here? Please come forward and present your reservation. You have also five minutes. Thanks.
Unidentified Company Representative
Good morning, Mr. Chairman and everyone here. I rise to move proposal number five on behalf of the Holy Land Principles, Inc. My name is Dr. William Smith Jr. By way of introduction and explanation, let me first state this: The Holy Land Principles are pro-Jewish, pro-Palestinian and pro-Company. The Principles do not call for quotas, reverse discrimination, disinvestment, divestment or boycotts. The Principles do not take any position on potential solutions to the Israeli, Palestine issue. The Principles do not try to tell the Palestinians nor the Israelis what to do. The Holy Land Principles only call for fair employment by American companies in Palestine/Israel. Let me repeat that. The Holy Land Principles only call for fair employment by Cisco and other American companies doing business in the Holy Land.
The Holy Land Principles are based on very effective Mac Bride Principles for Northern Ireland. Initially, American companies resisted the Mac Bride Principles. However, now 116 companies have signed the Mac Bride Principles. The Mac Bride Principles have been passed into law by 18 states, many cities and towns, and passed into U.S. law.
Our proposal today calls on Cisco to disclose the breakdown of its workforce Israel/Palestine, using the nine job categories which are utilized in the U.S. Department of Labor’s EEO-1 Report, Equal Employment Opportunity, which are: One, officials and managers; two, professionals; three, technicians; four, sales; five, office and clerical; six, craft workers, skilled; operatives, semiskilled; laborers, unskilled; and nine, service workers.
No company that is part of the hiring practices and believes in transparency should have any difficulty complying with these sort of very moderate and a reasonable request. It’s good for Cisco, good for Cisco’s employees in the Holy Land. Good for shareholders, consumers and stakeholders, and I believe it’s in the American way. Please vote for this proposal by the Holy Land Principles. Thank you.
Thank you. The Board of Director recommends the shareholders vote against this proposal for the reasons set forth in the Company’s proxy statement. As our next item of business, Heartland Initiative has given notice that the proposed resolution in accordance with the bylaws and the rules of the SEC. Is Sam Jones here? Great, please come forward. You’d also have five minutes.
Ladies and gentlemen, thank you for allowing me to make a few remarks concerning Heartland’s shareholder resolution. I’ve got five minutes in the southern axis. So, I am going to try and get through this as quickly as possible. To begin, as someone who’s followed this issue for 17 years, I want to commend Cisco for the positive role it has played vis-à-vis the people of Israel and Palestine.
Since 1995, you’ve invested billions of dollars in the Israeli ICT sector and over $15 million in the fledgling Palestinian ICT sector through critically needed seed funding and venture capital. And during and since his time as CEO, Mr. Chambers has personally dedicated his own time to championing the efforts to build bridges and prosperity in Israel and Palestine.
Cisco is also rightly recognized more broadly as a standard-bearer in corporate social responsibility, especially as evidenced by the Company’s adoption of the UN Guiding Principles on Business and Human Rights used to assess and respond to risk associated with human rights violations. It is precisely because of emerging risk to Cisco’s sterling reputation in Israel and Palestine that Heartland filed this resolution. My organization was established in part to advise American companies of the reputational, financial and sometimes legal risks associated with doing business in Israeli occupied territories, those being the West Bank, including East Jerusalem, the Gaza Strip, and the Golan Heights.
To be clear, the international community including the United States does not recognize the extension of Israeli sovereignty into these territories. These emerging risks for Cisco are created by two factors. First, Cisco continues to impressively expand its footprint in Israel, including its recent digital agenda partnership with the Israeli government and its continued role of national fiber to the home network. Second, the Israeli settlement enterprise including the business activities that sustain it is illegally and exponentially expanding on Palestinian land with an increase of 300% growth between 2011 and 2012 alone under Prime Minister, Netanyahu.
It should be noted that not only our Israeli settlements foundationally illegal under international law, but the ICT sector is essential to the settlement enterprise. Israeli ICT firms do not differentiate between clients inside Israel’s internationally recognized borders and those in the settlements. They maintain property and equipment such as 3G towers built on Palestinian land and they provide broadband access to settlement based businesses and settlers. As noted in Human Rights Watch’s report, Occupation, Inc.: How Settlement Businesses Contribute to Israel’s Violation of Palestinian Rights, business activities like these conducted in or with the settlements contribute to violations of international human rights and humanitarian law.
Such activities directly support the settlement enterprise’s financial sustainability and infrastructural expansion. In other words, they incentivize settlement growth. As Cisco’s business grows, so will the Company’s risk of being in direct or indirect business relationships with such settlement based entities or those servicing the settlements. For example, Cisco recently sold its CRS-1 core router to HOT Telecommunications and Israeli firm that holds a special permit from the government to provide cable TV and telecommunication services to the settlements. Such business activities may conflict directly with Cisco’s commitment to uphold the UN Guiding Principles. The principles recognize the conflict affected areas including military occupations like Israel’s present heightened risks of business involvement in human rights abuses and consequently call for advanced due diligence processes to ensure companies are not contributing to human rights violations.
A careful review of Cisco’s public statements and reports does not suggest that advanced due diligent processes are currently in place as it relates to possible business activities with the settlement enterprise. Further, due to its business activities with settlement service providers such as HOT Telecommunications, Cisco risks inclusion in a soon to be released UN data base of companies doing business in or with the settlements, which may put the Company’s excellent reputation at risk.
The formation of an ad hoc committee to reassess business policies and criteria for determining whether and when the Company will initiate, conduct or terminate business involvements with Israel’s settlements including within its supply chain and to annually report to shareholders on meeting these policies is an important first step. I thank you again and encourage you to vote for resolution number six. Thank you.
Thank you. The Board of Directors recommends the shareholders vote against this proposal for the reasons set forth in the Company’s proxy statement. We were apprised in advance of this meeting that two shareholder representatives wish to make statements regarding this proposal and the prior proposal. Since they provided us advance notice, we’ll allow them to read their statements. Any further comments or questions will need to be submitted on the cards and could be addressed during the question-and-answer period. In order to keep the meeting on schedule, please keep the aggregate time of the comments to four minutes. Is Julie here, I mean present to make a statement.
I’m here to recommend a no vote on resolution five and six. My name is Julie Hammerman, and I am the Executive Director of JLens, a responsible investing network that owns thousands of shares of Cisco. We would like to caution our fellow shareholders and our Company’s leadership about the manipulation of shareholder advocacy taking place here today by the backers of resolution five and six. If resolution five, the Holy Land Principles, looks really about employment determination, it would mention the many underrepresented groups women, LGBT, people of African origin and many more who face employment determination by the tech sector including in the over 90 where Cisco has operations. However, resolution five mentions only one country, Israel, and only one underrepresented group Arabs.
If resolution six, the Heartland Initiative was truly about human rights and peace building, it would express concerns for the many complex and human rights violations occurring around the world and promote positive actions that facilitate compromise, co-existence and peace. Instead, these resolutions aim to create an embracing controversy surrounding Cisco’s successful business partnerships with Israel and to ultimately pressure companies like Cisco to divest their ties with Israel.
This is the agenda of the anti-Israel boycott divestment and sanction movement of campaign that has been strongly condemned by the U.S. government for being discriminatory. We ask our fellow shareholders to no for both resolutions. We ask our fellow colleagues and responsible investing to recognize that a vote to abstain only embolden to these types of campaigns and threatens the good reputation of our responsible investing communities. And lastly, we ask our Company’s leadership to see these resolutions for what they are and to continue to make Cisco the standard-bearer for how companies should operate around the world with great sensitivity. No company has done more than Cisco to lay the economic foundation for peace between Israelis and Palestinians including Cisco’s significant investment over the past decade to build the Palestinian tech sector.
As authentic responsible investing practitioners, as genuine advocates for peace and as long-term Cisco’s shareholders, we applaud your efforts. Thank you.
Thank you. So, Mr. Sheldon Erlich is here as well.
Unidentified Company Representative
Political attacks on companies like Cisco, Intel, Hewlett Packard take the forum of anti-Israel and anti-free speech arguments. Although the proposals five and six -- four and five, whatever they are, claim not to involve boycott divestment and sanctions, I just want to quote something from Bret Stephens who writes foreign affairs column for the Wall Street Journal. It all but goes without saying that the ultimate objective of the BDS movement isn’t to, quote, end the occupation but to end that Jewish state. Anyone who joins that movement or fights with it is furthering the objective willingly or not. Thank you.
Thank you. We will now go on each of the discussed items of business. If you have returned your proxy cards voted by telephone or voted via the view the internet, it is not necessary for you to go by ballet unless you wish to change your vote. If you have not already returned your proxy cards voted by telephone or voted by the internet or wish to change your vote, please raise your hand to receive a shareholder ballet.
As soon as you’ve completed the shareholder ballets, please pass them to the aisle for collection and submission to the Inspector of Election. The polls are now close for each item of business presented at this meeting. Please pass the ballets there and we’ll take a few moments to tabulate the ballets.
Okay. Mr. Dunlop, would you please provide me with the Inspector of Election’s report? According to the preliminary report of Inspector of Elections, each of the person nominated as Director has been elected. Each nominee received a support of at least 86% of the shares voted with approximately 96% average support. Each nominee also received the support of at least 61% of the Company’s outstanding shares. The advisory resolution regarding executive compensation has been approved with the support of approximately 94% of the shares voted. Approximately 68% of the outstanding shares voted for this proposal. The proposal to ratify the appointment of PricewaterhouseCoopers as the Company’s independent registered public accounting firm has also been approved with the support of approximately 98% of shares voted. Approximately 84% of the shares -- outstanding shares voted for this proposal.
The shareholder proposal submitted by the Unitarian Universalist Association was not approved with approximately 65% of shares voted voting against this proposal. Approximately 24% of the outstanding shares voted for this proposal. The shareholder proposal submitted by Holy Land Principles was not approved with approximately 96% of the shares voted voting against this proposal. Approximately 3% of the outstanding shares voted for this proposal. The shareholder proposal submitted by Heartland Initiative was not approved with approximately 98% of the shares voted voting against this proposal. Approximately 2% of the outstanding shares voted for this proposal.
I’ll now turn the meeting back over to Chuck Robbins.
Thanks Evan. The matters for which this annual meeting of the shareholders was called to consider have been completed. Since we have received no notice of any other business to come before the meeting, the 2016 annual meeting of shareholders is hereby adjourned.
I will now proceed with a brief business overview presentation. If you have a question you would like to ask, please write your question on the cards that were provided and pass your card to the aisle. Representatives will walk down the aisle during the presentation to collect your question cards and the online audience can also submit their questions, and the Q&A session will follow my presentation.
So, first of all, I’d like to say that this presentation will contain forward-looking statements. And as always, you can go to our 10-K and 10-Q for a better understanding of the risks in the business and also we’ll talk about non-GAAP financial information here. And there is a correlation between GAAP and non-GAAP that’s located on the investor relations website.
First of all, I think it’s important for us to level set and go back for the year that we just completed at the end of July and just look at the key metrics and I’ll point out that these metrics are taking into consideration the disposition of the set-top-box business that we sold in November of last year. So, these are normalized without that business in it. So, our revenue was up 3% at $48.7 billion. You can see non-GAAP EPS with our intention to continue to grow earnings faster than we do revenue, was up 8%. We showed continued strength in gross margins of 64.6; our non-GAAP operating income at $12 billion, which is 31% of revenue. So overall, it was a pretty good year for us. And I think that these numbers represent the fact that we continue to operate our business very effectively.
As we look back at FY16, some of the highlights where we had incredibly strong revenue in Q4, we did have record earnings per share, and as I said, we had very consistent profitable growth. And we also began embarking on a really important transition for the Company. As many of you probably hear as you keep up with the business community and particularly the tech industry, there is a significant focus on software, on cloud and on recurring revenue models from a shareholder perspective. And we really began in earnest this movement last year and had some good results in the transition to having software represent a higher percentage of our business, as well as our desire to continue delivering our technology in a way in which our customers would like to consume it, and that is many cases they like to buy as a service, which actually is very good from a shareholder and investor perspective, because what it does is it provides recurring and more predictable revenue stream. So, we began that journey and will continue that in FY17.
We saw momentum driven by innovation and security in our next gen data center. We also saw strength in collaboration, as well as solid performance in our services business. We also maintained our ongoing commitment to our shareholders by driving strong shareholder returns. You can see the data on the continued increase in our dividend. We made a pretty significant increase last year in our dividend, I believe we increased it over 20% about a year ago and we also continue to drive our share count down, you can see the difference from FY03, all the way through to FY16, and then keeping with our commitment to return over 50% of our cash flow to our shareholders. You can see that over the last five years, we’ve ranged anywhere from 52% to 120% in FY16 and particularly it was at 70%. So, we continued to fulfill that commitment that we’ve made as well. Our total shareholder return, these data points are as of the end of our fiscal year, one year was 11% and our three-year TSR was at 32%.
Now, we finished our first quarter of fiscal year 2017, so we thought we’d give you a little bit of an update. And then I’ll talk a little bit about what we see happening with our customers and how that leads us to the focus areas in our business moving forward and what we see going into the future.
We saw a strong quarter in Q1, even though there was a challenging environment for us. And the two specific areas that we called out on our last earnings call that we saw some challenges were continued stress in the emerging countries and we also saw -- for various reasons, we saw a slowing of capital expenditures in some of our large service providers during the quarter. But overall, our team executed incredibly well given these challenges that we faced. We continued to expand profitability and we continued to invest in key priority areas like security, like IoT, like cloud, and we also continued to just focus on recurring revenue, where we saw our deferred revenue grew double digits. And our deferred revenue that was contributed by software and our SaaS offers was up 48% in Q1, so real acceleration around the business model transition that we talked about. And we will continue to accelerate our pace of innovation and momentum in the areas like the Internet of Things, our collaboration portfolio, our security portfolio, analytics, as well as innovation in the core networking portfolio, which is a critical element of what our customers are looking for as they build out these next generation digital infrastructure solutions.
I believe we are in the midst of the biggest technology transformation that we’ve ever seen. We have built Cisco based on 18 billion connections to the internet, and we believe by 2020 that could be 40 billion, by 2030, it could be several hundred billion connections. Every customer around the world is looking at the implication of the technology and they’re moving now. Everything is going to be connected, absolutely everything. Companies are moving, cities are moving and countries are moving. We have formal engagements around the world at the head of state level in France, Italy, Germany, UK, Israel, Saudi, India, where we are actually the partner and John has been leading a lot of this effort for us around this digital acceleration for these key countries. We are the partner for them as they look at how technology fundamentally changes GDP, drives entrepreneurship, job growth, delivers healthcare, education and helps them drive inclusion and other initiatives in countries all around the world. We launched Washington DC, as the first White House smart city initiative partnering with Cisco in the United States just last quarter.
So, this is happening. This is no longer a discussion about what’s possible. Everything is happening and our customers are moving now. And what they’re looking for, they’re fundamentally thinking about how this technology changes their core business models. The example I give as we talk to elevator companies and they connect elevators. And then the question becomes, do they sell elevators or do they sell vertical movement as a service. Every company around the world or every city or every country is looking at how this technology differentiates their ability to drive revenue and to differentiate them competitively from other cities, other countries and other companies and it is happening now. And they’re all trying to move with speed.
Every CEO around the world understands the power of technology or every country leader around the world, every mayor. They understand the power of technology. They may not understand exactly how it should be deployed or what it means for them, but they know they need to move. They’re trying to move at greater speed, they’re trying to leverage technology for greater efficiency and they’re looking at how this technology gives them more agility, and they have to be able to move -- they have to be able to shift, because the world we live in is moving faster than any time we’ve ever seen. The geopolitical landscape, the economic transitions, they’re happening faster than they ever have before.
So, we have to have an element of agility just like our customers do. We see this happening across all industries. We see smart cities that are being implemented around the world to deal with traffic congestion, to deal with parking, intelligent traffic lights. Everything in these cities are going to be connected, smart spaces, lighting systems, building security systems, everything in our buildings are being connected. We’re seeing it in retail where the technology will enable the retail customer to actually know exactly where you as a consumer are in the store, you’ll know exactly what you’re looking at when you’re standing in a certain spot and they could dynamically deliver a coupon at that moment in time in retail because of what the technology enables. It’s changing healthcare. We finally believe that healthcare is going to move and adopt technology to drive tremendous productivity here in the United States, and we’re also using technology around the world to deliver healthcare at a fraction of a cost in the rural areas where otherwise it wouldn’t be available. It’s happening in every industry all around the world and it is happening now.
And this is represented in my opinion by these data points. This is from Q3 of this year. 57% of the new devices that were connected to the internet were either vehicles or IoT connections. Only 43% of them were phones or tablets. Think about that. 57% of the connections might have been a refrigerator; it might have been a vending machine or a vehicle. And we made an acquisition this year called Jasper. Just to give you some data points, this is a platform that terminates connections from IoT devices and we now have 10 million vehicles around the world connected to this platform. We’re adding over 1 million devices per month to this platform, and we have 300 enterprise customers that are actually taking advantage of connections on this platform to fundamentally change their business. So, it’s happening now.
So, what does that require us to do? It requires us to move with tremendous speed. Our customer expectations are changing. They actually are focused solely on the business benefit of the technology that we can provide. As a technology provider and for those of us who have technology backgrounds for long periods of time, we love the technology, we just love it. And our customers have always loved it, and they still love it, but they only care about what it does for their business, there is only care about. I actually talk to our teams about it, I call it technology paradox, because never have our customers cared more about the technology than what it can do for their business, and never have they cared less about the details of the technology. They just want to get to the benefit that they’re seeing and that requires us to move with tremendous speed. It requires us to drive more innovation than we have in our history, and also it is going to require us to provide tremendous flexibility and how our customers consume our technology.
Many of our customers are quite happy to buy it the way they always have. But many of our customers now would like to consume it as they use it, would like to buy it as they need it, and this is going to require us to continue to drive flexibility into our models. And more than ever before, simplicity trumps features. Simplicity in the technology is the highest order priority for our customers, simplicity, because they are trying to get to the business benefit and if it’s too complicated, they can’t get there. So, everything we do now, we are building in these four basic premises to as characteristics of the technology; it has to be simple, it has to be intelligent.
We’ve built these networks for three decades. The network actually sees everything. It’s actually the only element in all of technology, it seems everything. And we need to leverage that and provide that intelligence to our customers through analytics, and everything we do, we are going to make that happen. Just like they want it simple, they want it automated. They want to be able to enter different configuration commands and have it deployed at thousands of devices all at once. They want to have their applications actually be able to automatically impact the underlying technology infrastructure that we provide. And more than anything else, they want it secure. This is their number one, number two and number three priority. And the good news is David Goeckeler and the team have built an unbelievable security portfolio that is resonating incredibly well with our customers today. And that leads us to engaging with our customers around their priorities and then how our focus areas correlate to those. So, what our customers are saying is I’m not sure what I’m going to do in the next five years, but I know that I need a technology infrastructure that’s ready for this digital transition, and that’s what we do.
Our underlying network is the core, because our customers, there is no perimeter anymore, there is no fixed enterprise, it’s everywhere, it extends to Starbucks, it extends in the Amazon, it extends to the vehicle, it extends to the mining operation. The only thing that’s consistent across that is the network. And that’s where so much of the capabilities over the next decade are going to have to exist, because it is lead pervasive piece. Our customers want to move with more agility, which means they need more agility with their applications and that’s where our next generation data center solutions come in.
No customer is questioning whether they need video anymore; no customer is questioning whether it’s important for your employees or for their customers to communicate in a rich collaborative environment. And we are connecting people through our collaboration portfolio more effectively. We are connecting the internal employees, we are connecting supply chains, we are connecting our customers to their customers more effectively. And this is critical when it comes to IoT in this digital-ready infrastructure, because it is a combination of the data, the people, the things and the processes and how we change this in order to help our customers achieve the benefit from all that’s happening in the technology arena. And there will be billions of new connections. And that’s why the Jasper platform and our continued focus on how we build out all the analytics and all the connectivity capabilities for our customers, billions of new connections. And our customers want to quickly get to the insights and the value of those connections and understanding how they can actually change their business, because of something new that’s connected to the network. And a lot of that’s going to have to happen very close to that connection.
We talk about the fact that lot of this information is going to perishable, it’s going to have a have a limited value timeframe. So, pushing the network, and pushing that capability all that way out near that connection is actually what we do and it’s in our wheelhouse.
And then our customers care deeply about brand value and trust. All of you have read stories about customers who have had challenges from a security perspective, and not only the economic challenges that they face but the brand value, that’s what they care about. They want to maintain that level of trust and that’s where our security portfolio is so important. And then, the flexibility that they are all looking for is reflected in how we deliver all of our services from the cloud and also how we help our customers navigate all of the cloud offers that are out there for them.
And like we always have, we’ll focus on multiple levers for innovation. And no one has the capability that we have across all of these areas. We have a very significant internal innovation budget, the R&D that goes on inside of Cisco, building new platforms, building the security portfolio. But we also have the ability to acquire and we’ve made some great acquisitions in the last year, CloudLock in the security space, the Jasper portfolio, the CliQr, all of these acquisitions help us continue to build out our portfolio that really bring this technology to life for our customers. But perhaps the one area that is going to truly differentiate us in the next 5 to 10 years is our ability to partner. We have what I would argue is the most impressive partnership ecosystem in the world, and we’ve expanded that and we’re going deeper with strategic partners. Many of you have seen the Apple partnership that we announced where we did development on our side, they did development on their side, and the combination of those two efforts actually brought innovation for our customers. We’re doing the same with sales force. We’re having that discussion with IBM.
And when you look at this next generation of connectivity, we’re going to do this with some really unusual partners. For Cisco, industrial partners, companies like Philips, companies like Hitachi, like FANUC, the robot company that build robots for manufacturing. And then fourth, we also have the ability to do deep investments. We have over $2 billion invested in startups around the world, which is part of our country digitization effort and it’s also a great way for us to see some of the bright ideas that technologists all around the world have about how the technology can change the way we think about the future. And then finally, there is this evolving notion of doing this in a co-development environment with our customers and with our partners where we jointly iterate like what I said we did with Apple. And these are the five things that we can do that I think uniquely differentiate us.
So, as we look ahead, we will continue to focus on software; we’ll continue to leverage our software capabilities. There is a bit of a misunderstanding about Cisco. We’re viewed as a hardware company, but 80% of our engineers are software engineers. So, we’re going to continue to focus on bringing forth the value of the software assets that we have here. We’ll continue to focus on driving this business model transition where we will continue to provide our technology to our customers in the way in which they want to consume it, which will lead to more predictable recurring revenue streams in the future for us. And we’ll continue to focus on balancing our innovation and our investments, but we also will continue to focus on our responsibility on a global basis as a corporate citizen. And I’m really proud of what the teams have accomplished. And we released our CSR annual report, I think actually in conjunction with this meeting, and a couple of data points.
I would say, we touched 78 million individuals around the world the past 12 months, 78 million through economic empowerment, through healthcare, through education. We had 35% of our employees who actually gave of their time, money or expertise in the last year, 187,000 hours of time that was given back. We actually have eclipsed 1 million students that we’ve educated through our Cisco Network Academy program and because of the need for more education, we’re going to try to make that 2 million in the next five years. And then finally, we reduced our Scope 1 and Scope 2 Greenhouse gas emissions by 34% over the last decade and we’re going to continue to focus on that and many other things as we move forward. And we remain committed to shareholder value creation.
I’m confident in our future. We’re focused on accelerating our growth. We’re obviously going to continue to drive operational excellence, competitive advantage, continue this aggressive transition to software and subscription, but we also will remain very committed to maximizing shareholder return.
So with that, I want to thank all of you for spending time with us here today. I want to thank you for attending. And we’ll now open it up for Q&A.
A - Unidentified Company Representative
Your first question is it’s now been a year since you’ve taken over as CEO, what has changed and what are you most excited about today and in the future?
It’s been great. I’ve been I think officially 16 months in the job now. And first and foremost, John gave me a tremendous organization. We had so many great things that this Company has been built on, just like what I was just talking about the culture of giving back and the culture of innovation. I think the thing that for me is the pace of change has accelerated over the last 12 months. I think that -- and I think that’s what is going to continue to do. And the external dynamics that we deal with relative to our business are incredibly complicated. But we stay very focused on the things that we can control. And I think that whether it’s the operational excellence that the team runs when we run through all of our financials and our metrics and trying to drive the business in the way that we’ve committed, all the way through to the innovation lifecycle and the innovation pipeline that the teams are building out right now, I’m very excited about the future. When you talk about going from 18 billion devices to 400 billion to 500 billion devices, then that’s a great opportunity for us over the next decade.
Unidentified Company Representative
The next question is from somebody in the room. If Trump declares a tax holiday, how would this change Cisco’s strategy? Would this bring more jobs to U.S. or would Cisco by U.S. companies or return money to shareholders?
Well, there are -- so there is a couple of things that are pretty important, potential changes that we could see in the corporate finance arena for us. The first is a shift on repatriation of foreign earnings and that’s not being positioned as a tax holiday, it would be a permanent solution, which we would be very happy with and that would certainly give us more flexibility. And we’ve talked about -- it gives us flexibility across M&A; it gives us flexibility across dividends; it gives us flexibility across buybacks. And then there is also tax reform. And lower corporate tax rates really are the levers for investment in an operating environment, and that’s actually where I think the jobs get created through that model, because we’re able to invest more, we’re able to put more money into innovation and put more money into as well as returning some portion of that to our shareholders as well. So, we’re optimistic and we’ll see how it plays it out.
Unidentified Company Representative
The next question is U.S. relations with China may be on trouble, what fraction of Cisco’s products are made in China, and what relations do you see there?
Well, I think that first of all, we manufacture in I want to say 12 different countries around the world. So, we have a very distributed supply chain. We’ve invested in China from a relationship perspective. And overall, I think that as well as we could relative to our business and the partnerships in China, we’ve actually been very pleased with how it’s played out over the last year. And we’ll continue to do all the things that we can to ensure that our business in China is successful going forward.
Unidentified Company Representative
Next question is regarding your positions with Arista's lawsuit infringing Cisco’s IP regarding the ITC traffic [Technical Difficulty ] which has took place?
Mark, would you like to comment on that? Yes, I’ll hand you a microphone.
You’re quite welcome.
We have brought actions against Arista Networks because of basically a wholesale copying or intellectual property in a way that if you don’t take action in a case like this that means you’re never going to defend your intellectual property. There were two trials in the International Trade Commission, Washington, one on six patents, one on five. The one on five wrapped up last spring, infringement was found on two and the exclusion order was put into effect barring the importation of Arista products for their components. Arista says they have a work around for that and they’ve brought to the Customs Bureau, which said well looks like work around, so you can start bringing products back in that are changed. We disagree as to whether that’s an effective work round and are trying to overturn that at this time.
The second ITC case wrapped up last Friday with finding by the Administrative Law Judge of infringement of two additional Cisco patents. And we expect an exclusion order on those within several months. And finally, we’ve brought an action over the user interface because they intentionally used our command line interface; our help screens or responses to help screens, and the user manuals, and that is going to the jury today, so within a day or so we ought to know what the result is on that and I would never make a prediction as to what a jury will do, but I think we’ve done a very good job laying out the case.
The purpose there is really to protect your intellectually property and make them into a legitimate competitor that is competing on the basis of their own features and not on the basis of what we’ve innovated and built. And we’re going to continue to invest in innovation here, and then to protect our innovation if people try to steal. So, thanks for the question.
Unidentified Company Representative
How does keeping 60 million [ph] in offshore banks benefit me as a shareholder? Are you expecting to increase your dividend going forward?
Yes. I think that’s -- it’s somewhat redundant to what we talked about a few minutes ago that we’ve been borrowing against that base and actually paid the dividend over the last couple of years. And we’re obviously optimistic and we think that if we’re able to bring that -- those funds back to the United States, then we would look at a combination or at the options of dividends, buybacks, M&A activity, and the teams are working through those scenarios as you would expect right now.
Unidentified Company Representative
The tech industry in Silicon Valley has traditionally had a lot of -- a lack of diversity of employees. Can you speak to how Cisco can change that statistic?
We’re trying. We’ve had a huge focus on this over the last decade and I will tell you that I feel like in the last 24 months we’ve begun to make I think substantial progress. One of the things that I tell my peers when they want to talk about how we’ve done and what we’ve tried, what I tell them is don’t try anything that -- don’t try the top 16s that everybody says work, because they don’t, because we’ve all tried those for the last few years and they haven’t worked.
So, the great news is, is that in many cases the technology itself and the data and the analytics give us the ability to actually do things differently. So, just one quick example, our teams came up with -- today when you go to an interview of -- or you have a job opening and you want to try to make sure you have diverse candidates, you just look at okay how many do I have and is that enough, and then you go to the interview process and see what happens. Today, what we’re trying to do is, wherever our job is located, we’re looking at the location, we’re looking at the skill sets and then we have actually gained access to data that tells us in that geography for those skills what is the pool of candidates that should exist there, and then giving us a more scientific approach to how we look at this going forward. So that’s one example of how our teams are innovating in the space. And I’m actually cautiously optimistic that we’re going make a lot of progress on this over the next few years.
Unidentified Company Representative
Okay. Now, another question came in. Why do you think Cisco will be successful in shifting its but to more software and subscription?
Well, the great thing is because that’s how our customers want to buy it, right? I think, I’ve joked with our teams that it’s rare where what we want to do as a business and what our customers would like to see us do and what our shareholders would like to see from us which is more recurring revenue all of those actually line up. And so, if we can’t do that, then we probably haven’t done so well, which is why I think the numbers that we talked about just a few minutes ago, the 48% growth to -- there is close to $4 billion now. And think about software companies that have subscription businesses that are sitting on $4 billion of unbilled deferred revenue. I mean there is some -- it’s actually -- we’ve moved the needle significantly in last year, which gives me confidence in the future.
Unidentified Company Representative
Great. Thank you. So, here is a last question -- and we’ve received several from online as well as in the room. Last question is looking ahead, what makes you confident about Cisco’s future?
Well, first of all, I think that this transition is digital transformation that’s occurring in cities, countries and companies all around the world. The first thing that has to be done is you have to build out a robust intelligent secure network to actually connect all these devices and then off that network you can deliver a level of intelligence, analytics and capabilities that actually have to be delivered from the network in order for our customers to achieve the benefit that we are seeing. They have to build out this infrastructure. They need the agility that next generation datacenter services are going to provide; they need to connect all their people; they need to do it securely. And we have the portfolio and we have the ecosystem around the world and we have the partnerships that I believe our customers would like to see from us. And perhaps most importantly, they trust us and they look to us to actually be their partners as they go in this journey. So that’s why I’m confident and we look forward to the future together.
So, I want to just take a moment and thank you once again for spending time with us today. If we didn’t get to your questions, feel free to reach out via email or call our Investor Relations teams, and we’ll make sure that we get those answered for you. So, thank you very much.