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How Cisco’s focus on tech innovation is driving the company’s growth

Cisco Chair & CEO Chuck Robbins joins Yahoo Finance to discuss how Cisco has been able to outpace growth throughout the year, the innovation Cisco is focusing on producing, and the reasoning behind the company’s most recent outlook.

Video Transcript

[MUSIC PLAYING]

BRIAN SOZZI: Cisco wants Wall Street to think of it as the growth company with exposure to fast-growing sectors such as software and hybrid work. That was the pitch to investors on Wednesday afternoon at Cisco's key Investor Day. Joining us for more is Cisco Chairman and CEO Chuck Robbins. Chuck, always nice to see you. Thanks for taking some time this morning here. My question to you is, I think, pretty simple here, do you think Wall Street is misunderstanding Cisco?

CHUCK ROBBINS: Well, Brian, first of all, it's good to be with you, as always. And I think, look, what we tried to do yesterday was basically remind them of what we told them in 2017 and that we actually delivered on our execution there to give them more visibility to this software transformation that we've been driving. When I took over, we had $3.4 billion in subscription software. At the end of last fiscal year, which ended in July, we were roughly around $12 billion.

So we've made a lot of progress. And also to just highlight that so many of our customers right now are on the front end of multiyear investment cycles around, to your point, hybrid work, hybrid cloud, the 5G infrastructure build-out. The progress we've made in selling into the infrastructure of the major cloud providers, you know, Edge, IoT, all of these, we believe, are going to be tailwinds for some time to come.

BRIAN SOZZI: So do you think the Street, Chuck, is just too focused on Legacy Cisco?

CHUCK ROBBINS: Well, I think what we're trying to do is give them the metrics that they actually need to actually think about our valuation in the proper way. And so I don't blame them. I think we just have to make sure we continue to give them the information they need so they understand the transformation.

Scott yesterday announced that we were going to be giving them new metrics around percentage of subscriptions in our revenue, ARR, our RPO metrics. I mean, and all of these are metrics that software companies tend to provide. So I think as we do that over time, and as we execute against what we told them we were going to do, much like we did against 2017, I think we'll be fine.

BRIAN SOZZI: Let's talk some really interesting numbers at Investor Day, Chuck. One that stood out to me, among many, currently your total addressable market, the way you see it, $260 billion. But looking out longer term, you see it reaching $900 billion. How do you close that gap?

CHUCK ROBBINS: Well, I think if you look at what our customers are doing, again, around the areas that we just talked about, this pandemic has really highlighted the incredible need for technology modernization, the need to have your infrastructure ready for this adaptable hybrid work model of the future, to have your infrastructure more ready for the hybrid cloud world where you have applications in public cloud, private cloud, SaaS applications, the distributed world we're going to see with all the employees and apps and data everywhere.

And so I think that as you look at these trends and the fact that we're on early-- we're in the early innings of the 5G transition, we're in the early innings of this 400 gig architectural transition that we see in the cloud providers moving into the enterprise, you know, we just think there's a lot of opportunity for us. And we're really focused on trying to get the technology and the outcomes that our customers are trying to achieve as fast as we possibly can.

BRIAN SOZZI: Yeah, a large piece of that pie that you talked about yesterday, $500 billion market potential future of work and automation. I know you have the Webex platform. Where else do you play in that market?

CHUCK ROBBINS: Well, when you think about the future of work, it's much broader than just Webex. I mean, it's meetings and hybrid work, for sure. But it's video devices. It's new network infrastructure to accommodate. Think of the home office now as a small branch. And you have to look at it and be able to deal with it in the same way you would a small branch.

You need to manage traffic coming out of the home and going to the cloud. You need to be able to do, you know, troubleshooting in your employees' homes in ways that you never had to before. The security architecture that you need for hybrid work is completely different as we go forward. As our employees come back to the offices, there's technology that we can use to ensure the safety around social distancing and other aspects that we want to make sure we're focused on as they come back.

So it's a huge market. And IDC, actually, laid the numbers out. And we think there's a lot of opportunity for us. And that's what we've seen. We saw in Q4 our product order growth was up 31%, the highest we've seen in a decade. And a lot of that was around these categories that make up hybrid work.

BRIAN SOZZI: Yeah, I'm hearing what appears to be a different Cisco starting to materialize. You know, given your, I would say, sharpened focus on software and recurring revenue, are there businesses inside the Cisco portfolio that no longer fit?

CHUCK ROBBINS: Well, Brian, we've always been looking at our portfolio. And we've looked at where we needed to divest businesses, we've done a lot of that since I became CEO, where we need to add new capabilities to our platform. But a lot of our software businesses are connected to, you know, cloud management of a network piece of hardware. So there's a lot of integration.

And if you just think about what I just described in hybrid work, the architecture that's required across security, across collaboration, across networking, across sort of analytics and insights and troubleshooting, I mean, all of those need to be brought together so that our customers-- again, they want the outcome. They don't want to be systems integrators. They just want you to help them get to where they need to be. So we're actually really pleased with the portfolio we have, and we think we're probably in the best shape we've been in a very long time.

BRIAN SOZZI: There was a little disappointment, Chuck, I would say, amongst analysts on the longer-term outlook. So 5% to 7% longer-term revenue growth over the next four fiscal quarters, looking for something similar in terms of earnings per share. Now, the Street was looking for about 9%. Is there something holding the business right now back right now on why you wouldn't be growing quicker?

CHUCK ROBBINS: Well, there's two things we talked about. First is that if you look at that TAM that we discussed, if you look at these major transitions that are occurring, we want to be able to invest for profitable growth. That's our plan. And I'll give you an example. Five years ago, we started investing in new silicon capabilities that led us to build new systems that enabled us to insert into the cloud provider's infrastructure, which we hadn't participated in forever. And so it proves when we invest, we can actually deliver technology that can drive growth.

The second piece of it is for some period into the future, we are experiencing higher costs in our supply chain. So our gross margins are a little pressured by the COGS increases that we see right now. And that's going to be with us for a period of time. So we thought it was prudent, from both an investment area and some of the pressure we see in supply chain, to make sure that we guided appropriately, and that's what led us to the 5% to 7% and 5% to 7%.

BRIAN SOZZI: Are you able to push through--

CHUCK ROBBINS: But we would expect, Brian, over time as supply chain improves, and obviously software is a bigger percentage of our revenue, we would expect that to get better.

BRIAN SOZZI: Have you been able to push through price increases on this environment, just given the inflation you are seeing?

CHUCK ROBBINS: We have done some targeted price increases, but really, at the areas-- only at the areas where we felt them. We're not trying to leverage price increases to drive revenue growth or anything like that. We're really just trying to pass through. And our customers largely understand it right now because, candidly, most of them, if they're in any sort of business that has a supply chain, they're doing the same thing. And so we have been able to push some through.

BRIAN SOZZI: Chuck, what's your read on the global economy here? Since we last spoke, I would say global growth has ticked down a noticeable amount in the US and China. You also do business, of course, in China and Europe. What's your read on the global economy?

CHUCK ROBBINS: I think that, you know, it's healthy. But obviously, the comparisons are going to become tougher as we move forward. So I think you've got to just look at the math and make sure you don't get-- you don't read too much into a mathematical change. But from what we see right now, the spending from our customers is very balanced.

It's balanced across Asia. It's balanced across Europe, in the United States. And it's balanced across our customer segments, enterprise, public sector, service providers, as well as our commercial, or our midsize and small customers down. So from what we see, it seems to be very balanced on a global basis right now.

BRIAN SOZZI: All right. We'll leave it there. Cisco Chairman and CEO Chuck Robbins, always appreciate the time. Have a great week, and enjoy that football this weekend.

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