WHEN: Today, Thursday, February 14, 2018
WHERE: CNBC's "Squawk on the Street"
The following is the unofficial transcript of a FIRST ON CNBC interview with Cisco Chairman and CEO Chuck Robbins and CNBC's Jim Cramer on CNBC's "Squawk on the Street" (M-F 9AM – 11AM) today Thursday, February 14th. The following is a link to video from the interview on CNBC.com: https://www.cnbc.com/video/2019/02/14/cisco-ceo-chuck-robbins-on-q2-results-5g-china-trade-and-much-more.html.
All references must be sourced to CNBC.
JIM CRAMER: Wow. Cisco, what a quarter. David, this was one of the great blowouts for a large Dow company. Also raised their buyback, and boosted the dividend, really pretty incredible. Cisco's Chairman and CEO Chuck Robbins joins us first on CNBC from the company's headquarters. Chuck, it is always great to see you.
CHUCK ROBBINS: Thanks for having me, Jim, David. How are you guys?
JIM CRAMER: Real good, but not as good as you, because you started – you answered Jim Suva's question, I love this, you say, 'It certainly is one of the more complex macro-geopolitical environments that I think we've seen in quite a while,' Different moving parts. 'But to be honest, from the first day of the quarter to the last, we saw zero difference and very steady demand…' How is that possible? Including the government shutdown?
CHUCK ROBBINS: Yeah, Jim, it was an exceptional quarter for our teams. We've -- they're executing incredibly well. We saw tremendous balance around the world. I mean, our Europe, Middle East and Africa orders grew 11% in the quarter. Asia was up 6. The Americas grew as well. So we saw, you know, phenomenal balance there, we saw balance across our technology businesses, and really balance across the customer segments. And again, we were looking particularly in January, because we have the unique situation of having the third month of our quarter in January and we were looking for any sort of shift in demand from our customers. And we just saw nothing. We saw exact same performance in January that we saw in November and December as well. So, really pleased with how the teams have executed particularly in light of all the complexity out there right now.
JIM CRAMER: You know Chuck, you changed your model rather rapidly, and I'm not sure people understand it. For instance, 65% versus 54% of your software is now subscription. Can you tell people what that means for your margins and for your forecasting ability?
CHUCK ROBBINS: Well Jim, what it really means is that we have an opportunity to first of all, for our customers we'll deliver continuous innovation during the life of the subscription. But then from a business perspective, what you haven't seen yet is the opportunity for us you know, in 2021, 2022 when the bulk of this begins to come back up for renewal, we're going to have an incredible base of software that we'll get to renew and that's different than what we've done for last 25 years, which is, you know, really where we've had to sell 80% of the revenue we achieve in any given quarter, we had to sell during that quarter. So this gives us an opportunity to revisit, continue to deliver innovation and then remonetize the software assets that we have sold to our customers.
JIM CRAMER: Alright, but what people don't understand is there was a downgrade the other day— Chuck, I'll do this because you're too much of a gentleman – a downgrade the other day, it was really very ill-advised and it talked about that your forecast might not be that positive. But Kelly Kramer, who is your dynamite CFO, actually talked about margin expansion from the decline in DRAMs and you gave one of the best forecasts for any of the technology stocks. It looks like margin is going up. You have a lot of money. You obviously increased the buyback dramatically, 3% yield and yet you still have $40 billion in cash.
CHUCK ROBBINS: Well Jim, you know, we had balance growth across our security portfolio which was the fastest growth we've seen in our security business in roughly four years. We saw tremendous growth in the applications business, up, you know, 20 plus percent and we saw strong growth in our core infrastructure systems, which you know was one of the big priorities we had a few years ago which is: how do we deliver enough innovation back into our core so we can grow those big franchises in addition to growing the markets we expanded into? And I think we saw the results of that come through this quarter. And obviously our commitment to capital returns are still there, raising the dividend, increasing the buyback. So overall it was a very good quarter for us.
JIM CRAMER: One thing in the conference call people talked about was that you do compete against Huawei in some parts of the country – parts of world, not in China. And you gave an answer I thought was a little circumspective, I just want to drill down a little more. If a major Telecom outfit is trying to choose between Huawei and Cisco, have you noticed a level of discourse which has said 'You know what, we ought to go to Cisco because we need safety and security'?
CHUCK ROBBINS: You know, Jim, what I've said was we haven't seen any material impact from all of the noise in the system around this topic but what I've also said is that we don't need anything else to actually beat these guys or beat enough of our competition in the marketplace, because we have been building tremendous innovation over the last few years. I said yesterday that I think our portfolio right now, the innovation across our portfolio, is as good as it's been in years. So I believe if you look at the numbers and you look at our service provider business in both Europe and Asia where we compete with them, they were both positive. So we were able to compete. We have new technologies coming out this year to support this 5G transition that our customers are about to go through. So we feel very good about our ability to win based on our innovation.
DAVID FABER: Alright, Chuck, it's David. I don't want to get an advertisement from you, but give people a sense as to what you're talking about here when you say innovation and when you say you're able to effectively compete with Huawei or whether it's ZTE in these foreign markets. What would be an example of a win where it was based on the innovation that you're talking about?
CHUCK ROBBINS: Well, if you look at what's happening right now with 5G, we have several customers who are in trials with us around our packet core which is effectively where we terminate the mobile call and convert it to I.P. We have new platforms coming out. Just think for a moment about the capacity and the core networks that is going to be required when you start delivering 1 gig, 2 gig, 3 gig to every end point from mobile devices to IoT devices, to braches. The capacity and the core is going to have to increase significantly. And we have been building next generation platforms for almost 4 1/2 years now, that actually will allow our customers to build that next generation core network to support 5G. So those are examples, but we're also doing it in our enterprise campus switching portfolio. I mean our switching business last quarter, we talked about on the call, was up double digits. And this is a business that three or four years ago, people didn't believe could grow at all. So I think it is -- truly just shows that innovation matters and that's what we're delivering to our customers.
DAVID FABER: You know, Chuck, I'm glad you mentioned 5G of course. We talk about it a lot here. Yesterday our viewers heard about it in the context of John Ledger talking about its importance to allow the Sprint and T-Mobile deal to occur. What are you seeing here in the U.S. in terms of the actual buildout? Can you give us any sense as to a timeline, given the different views we get from the telecom executives and what their plans are?
CHUCK ROBBINS: Well I think what you see happening in the U.S., as well as around the world, is you're seeing in proof of concept trials out there in major markets where they're delivering 5G to next generation mobile devices. We'll be rolling out trials with certain providers here over the next month or so. And then what you'll see is the extension of that to branches, to small business environments. And then I think you'll see the integration of 5G connectivity into the existing networks initially. Because the volume won't require a dedicated separate network. But then as they begin their broad based rollout over you know, 2020 and beyond, they're going to build dedicated 5G backbones in order to actually support the capacity that's needed. And we think that's where we'll begin to see some uplift from that 2020 and beyond when they start to build out these 5G next generation networks.
JIM CRAMER: One last questions. You have a good -- I'd say that you're very close to the trade talks. And we're always trying to figure out where we are in terms of positive, negative. I know you care passionately about intellectual property. I know you think China is important. Worldly guy but also, frankly, I know that you know the skinny. Where do you think we are in terms of getting a deal say in the next five months? Not the next three weeks, the next five months.
CHUCK ROBBINS: Well, I've said all along that I think it's clear that China needs this deal, the U.S. needs this deal. And I think some of the news we've heard over the last few days would support the fact that we're trying to get to a resolution I think from both sides and that's good news. The China market is incredibly important to us. Intellectual property is important to us, but it's important in every country around the world. And in fact you know, some of the most recent intellectual property challenges we've had have been right here in the United States. So we need to solve that globally. but I think as you look forward, I think it's clear that both sides are saying the right things, both sides are negotiating in good faith and I believe that at, you know, a minimum they'll make enough progress to where our President can hopefully extend the deadline and keep negotiating to get to deal in the next couple months and we can move forward and continue the expansion of this global economy that we've seen for the last few years.
JIM CRAMER: Alright – that's fair. And I'll leave it there. That's Chuck Robbins, Chairman and CEO of Cisco. Chuck, congratulations on a really unbelievably great quarter. Great forecast too. Great to see you.
CHUCK ROBBINS: Thank you.
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