Cisco's Chuck Robbins On VMware's Shortcomings, The HP Split And The Future Of Cisco-SimpliVity

Q4 Afterglow

Cisco Systems new CEO Chuck Robbins on Wednesday night delivered strong financial results for the company's fourth quarter, including revenue of $12.8 billion, up 4 percent, and non-GAAP earnings of $3 billion, or 59 cents per share, beating analysts' estimates for both sales and profits. The company also reported 19 percent growth in its channel-driven U.S. commercial business. In his first interview with CRN after officially stepping into his post as Cisco's new CEO on July 26, Robbins talked about where some of Cisco's competitors are falling short, his hyper-converged infrastructure plan and how channel partners contributed to the company's results. Edited excerpts of the conversation follow.

Cisco saw 200 percent growth in ACI during the quarter. Did the Elliott Management turmoil at EMC and VMware help that along?

When you look at [software-defined infrastructure] and ACI [Application Centric Infrastructure], I think the bottom line is that we built a solution that’s very relevant to use cases within our customers that they can see, and it’s actually a technology you can implement and scale across the physical and underlying networking architecture that you can see a vision to actually expand beyond the data center into the rest of the network. I think that's why customers are embracing it. We can actually put ACI in, we can implement it, we can drive it to scale, and I don’t think that VMware has proven that they have that capability. Our customers are buying in: The fact is that we added 1,400 more [Nexus 9000] customers this quarter, we added 330 more APIC customers this quarter, our [Nexus 9000/Nexus 3000] business was up 100 percent year over year. I think customers believe in what we're doing and they're buying into the vision.

Are you seeing any increased sales traction against Hewlett-Packard as a result of its split and all the changes coming there?

When you look at our performance in UCS [Unified Computing System] as an example, this past quarter we became No. 1 in market share across all of the Americas. Prior to that, we had been No. 1 in the U.S., but we were No. 2 across all the Americas. So we continue to take share in that space. We continue to be successful. I would say our competitive position continues to improve.

Who's the most challenging competitor for Cisco now as a company that want to drive the digital age?

I'm going to tell you and you're going to think this is dodging it, but I'm not. I think there are a lot of good point product competitors, and good competitors always make us better, but I think as it relates to really building out an architectural approach to helping our customers think about the next enterprise IT architecture that they're going to need to enable them to derive the value from all these connections, I honestly believe we're uniquely positioned to help them do that, and I think that is reflected in our performance right now, which is very uniquely differentiated from our peers and our competitors in the tough micro environment we're operating in.

Does Cisco need its own hyper-converged infrastructure product line, or is the SimpliVity partnership sufficient -- because it seems like that's expanding?

The hyper-converged space and the storage space are two areas we're asked about often. As we think about the overall IT architecture that our customers are going to be looking for in a few years, so far our partnerships have been very successful on both the storage side as well as with the SimpliVity side on the hyper-converged, and so [for now] our customers are pleased with those solutions and what they're providing to them as it relates to what we need to do -- and again, on the storage side, we've had relationships with EMC, NetApp, we launched the converged infrastructure space with VCE, we have relationships with Hitachi, IBM and other storage players -- so for now we're very happy with the partner model, and we'll see how things evolve over time.

How does Cisco intend to keep routers and switches relevant in the growing cloud era?

If you think about our Intercloud fabric, what it really is, is leveraging the network to ensure that workloads move between private and public cloud with the appropriate policy and the appropriate security, and so I think the network in the future is going to be more relevant than ever. Customers really need a hybrid cloud environment, and if you think about that in the context of the Internet of Everything, digitization and this massive connectivity of all these new devices, there's going to be a significant need simply to connect. So we're seeing growth with our wireless portfolio, with Meraki and the access space, we saw our access switching portfolio perform very well, as we see continued connections with collaborations, more secure infrastructure, IoT and higher-speed wireless enablement, and we saw our high-end routing, which is reflective of more video on the network. You think about going from 50 billion to 500 billion devices -- I think by 2019, we're seeing the traffic on the Internet is going to triple.

And you see the need for the network accelerating?

Based on everything we see now, we're entering this second wave of the Internet and connectivity, and I think it's going to require lots of analytics, automation, hyper-distributed infrastructure with our customers, where the data is going to exist everywhere and the network is going to be incredibility relevant to help our customers actually unleash the value of that data, because it's going to exist all over, and it's going to be a combination of public cloud, private clouds. It's going to require networking to navigate how that works.

Will we ever see double-digit switching or routing revenue growth ever again?

We will definitely see routing and switching continue to be relevant. I think we'll see an improvement in the performance of those portfolios as we continue to see customers move to this digital phase, because they're all moving to digital, every customer is trying to think about how IT not only enables their strategy but fundamentally defines their business strategy. Every IT organization today is trying to move from spending 75 percent of their time doing systems integration work to spending 75 percent of their time working on strategic value of the technology to their businesses -- which creates a tremendous opportunity for our partners, because they're going to be looking to us and our partners to actually deliver more integrated, more completely architected solutions to them so that they can get to the benefit of the technology faster. The shift from the internal IT organization moving to more strategic elements inside the business gives us a great opportunity to bring more architected, pre-integrated solutions, which is really a great profit opportunity for our partners all over the place.

But I can't get you to commit to double-digit growth?

I'm sorry, what'd you say?

I said, "but I cannot get you to commit to double-digit growth?"

Have I talked about this hyper-distributed infrastructure that our customers are going to need to build out? [Laughter.]

Regarding potential security acquisitions, can you talk about what holes the channel partners are telling you they would like to see filled there?

We were actually talking this morning about the number of headlines that talked about [Cisco] being acquisitive in security, and we were trying to think back to what comments led to such an aggressive view, but when you look at security, I wouldn't call out any particular gaps we're thinking about. We just know that it’s a very fragmented market. We know that ultimately our customers need an overall architectural approach to security. … Q4 was our strongest quarter ever with security enterprise license agreements, which means our customers are beginning to really understand and agree that it requires an architectural approach. As we look at that architecture, we'll assess where we are, where there are gaps, and we'll use a combination of building it ourselves, buying it -- where do we need to partner, where do we need to make some strategic investments -- and see how markets mature, and where, frankly, is there an opportunity to even do some co-development with certain partners if necessary.

How long do you think it will be before the majority of the partners have the majority of their Cisco revenue coming from software versus hardware?

I think it depends on which part of the portfolio we are talking about. We have a lot of partners that have been very active with us in collaboration, where we saw 14 percent revenue growth, and we saw our deferred revenue driven by software and subscriptions up over 20 percent, and the partners were certainly a part of that. We have seen an acceleration of enterprise licensing agreements both across security and collaboration, where partners play a key role, and they have obviously been moving forward with us there. In security now, we announced that 47 percent of our security business is software, and that is all flowing through partners as it always has. So I think that we are in the midst of a transition and it is going to be a multiyear journey. The intent is not to arbitrarily drive our business to all software. The intent is for us to evolve our portfolio in line with what our customers need from us.

Cisco grew commercial business 11 percent. How much credit for the growth of that business should go to the channel?

The global commercial grew 11 [percent]. U.S. commercial grew 19 [percent]. And as I stated it was the 23rd consecutive quarter of growth in U.S. commercial. And I think 16 of those have been double digits. A great deal of the credit should go to them. Our partner ecosystem is one of the biggest assets and one of the greatest competitive differentiators that we have, and I think they are a huge reason that we have been able to grow in this space.

It's funny, when we talk to companies that we may be considering acquiring, the first thing they go to almost without exception is they get so excited about having access to our ecosystem and our go-to-market capabilities. All of our competitors are envious of our partner ecosystem and our go-to-market capabilities. So I think that not only in commercial but across the board over the last few years, our partners have been a big key to our success and our ability to really maintain a fairly consistent performance level over multiple years.

What percentage of the commercial business goes through the channel now?

I am going to estimate, but I would assume that it is very near to 100 percent. I couldn't think of an exception, honestly.

You said on the [earnings] call that Cisco is going to be moving more quickly. How are you going to ensure the channel keeps pace with you?

We have been transitioning and going through different market transitions for years, and I think that our partner community has proven that they can move with us, whether it is when we got into voice way back, as we moved into video, as we moved into the data center, as we moved into the converged infrastructure space and then even ACI with almost 700 partners that have been trained on our SDN solutions already.

I'm actually not concerned. I think we have to do our part in making sure that we provide the tools, the education to keep them up to speed as to where we are headed, but I have no doubt that our partners will be moving just as quickly as we will.

Looking at the overall business, what would you say is the most important thing you saw channel partners doing that helped drive growth in the quarter?

If you look back historically, I think that the alignment that we have between the channel partners and our own sales force [is key]. When we do a good job of making sure that we are on the same page from an education perspective, from a compensation perspective, incentives, training, strategy, communication, whenever we do that, we do better together. I think that the partners have done a good job.

In fact, we have a lot of partners that actually lead us in certain markets. When we start moving into new markets we provide education, we provide tools, we provide training. But honestly, we continue to see some of our best partners that actually move very rapidly and actually lead us into different elements of how we can be successful in those markets. And I think that is a big piece of what makes us successful.

What is an example of a market where the partners are leading Cisco?

When I look at cloud and what Dimension Data has done, they actually had a very well thought out global footprint that we then used as one of the inputs into how we established our Intercloud strategy.

When I look at IoT -- Internet of Everything -- and analytics, look at what WorldWide Technology has done, and how they have built an analytics capability that complements our networking, and then integrates in with our networking. So those are a couple of examples of great partners that have actually helped us think through and define our strategy in certain areas.

Cisco just closed the MaintenanceNet acquisition. How and when will partners begin to see that roll out, and what impact will it have on the channel?

As we think about our move into software with our partners, and our move into recurring revenue with our partners, one of the key things we need to do is to build up the operational capabilities to ensure that together, we can drive the appropriate adoption and renewal services, so that all of us can maintain an ongoing profitable business. So I thought the team was brilliant in making the decision to come back and recommend that we buy MaintenanceNet so that they could actually accelerate the infrastructure that we need to help our partners build out those capabilities as well. I think we closed it last week or the week before. Debbie Dunnam [senior vice president of worldwide services sales and global customer success], who has been a longtime presence in the partner community and understands what they need very well, is driving that integration, and I think that as fast as she can push it, the partners will see benefits from it.

We heard the phrase "operational discipline" a few times. Can you give some examples of new ways Cisco will be demonstrating operational discipline?

My focus around operational discipline for us is just to manage the business more dynamically, make faster decisions based on the information and the changes that are occurring in the market. In many cases historically, we would make changes tied to our fiscal year, and I don't think the market is going to wait for us to necessarily wait for the end of the fiscal year to make certain changes, so it's really a desire for us, when we have the information we need to make a decision, let's make it. That applies to everything from internal policy to how we operate with our employees, when there's something we're doing from a business perspective that doesn't make sense and we need to change it, let's change it. When our partners are telling us there's something we need to do differently to help them be successful, let's change it. So that's all I'm trying to get to is a point of, once we understand the issue, once we understand what we need to do, let's just do it.

On the call you talked about the "infectious energy emerging at Cisco." Can you give one example of how channel partners might see that manifesting?

I think this is a byproduct of me not being a dull person, obviously. [Laughter.] I think there's a lot of energy around looking to the future, there's a lot of energy around believing in the opportunity. When we think about the partners and we think about Cisco, we don't delineate. I've spent a lot of time with partners as they come in and out of San Jose or as I travel around the world right now, so our intent would be to just like we do if we build training for our own sales force, we're going to deliver that training to our partner community, so if we can drive energy inside the company, we want to drive that same energy within our partner ecosystem, because candidly, we view it as one large extended family, so I think you'll see we're excited and looking forward to everything in the future.

With the departure of Edison Peres, partners are concerned that the trusted executive link they had to the cloud business will be gone. How do you address those concerns, and who should partners be looking to as their new channel cloud champion?

First of all, obviously Edison (pictured) [senior vice president of Cisco's Cloud and Managed Services Partner Organization, who recently disclosed plans to retire] and I had a long, long, relationship, and we worked very closely together 15 years ago in actually building a lot of the profitability programs that partners like today and believe in today, so they have an advocate today at the top of the company now that they should feel very good about. And I also think as you put on your [CRN Top 25 Disrupters of 2015] list, No. 2, I would also say that Nick Earle, [Cisco's senior vice president, global cloud and managed services sales] is a tremendous advocate for the partner community, and he will be working diligently with our partners on our cloud strategy. I think you have more advocates inside the company than you can even imagine.