Cisco Systems, Inc., Meraki, Inc. - M&A Call - NasdaqGS:CSCO

NasdaqGS:CSCO

David McCulloch made several announcements and provided updates throughout the transcript of the M&A call. Here is a detailed list of his statements:

1. Introduction:

   • "Good morning, everybody. This is David McCulloch, Director of Corporate Communications with Cisco. Thank you for joining us for this morning's conference call. We'll be starting in just a couple of minutes."

2. Conference Call Announcement:

   • "Good morning, everyone, and welcome to this conference call announcing Cisco's intent to acquire San Francisco-based Meraki, a leader in cloud networking. Meraki products and technology offer midmarket customers easy-to-deploy, on-premise networking solutions that can be centrally managed from the cloud."

3. Introductions:

   • "This is David McCulloch, I'm Director of Corporate Communications at Cisco. And I'm joined today by Rob Soderbery, the Senior Vice President of Cisco's Enterprise Networking Group; by Hilton Romanski, Head of Business Development at Cisco; and by Rob Salvagno, Vice President of Business Development at Cisco."

4. Logistics for the Conference Call:

   • Provided details on how to access the call and submit questions.
   • "A press release with information on today's announcement can be found on the websites of both companies at www.cisco.com and at meraki.com."
   • "A replay of this Cisco WebEx conference call will be available later today on the Cisco Investor Relations website at investor.cisco.com."
   • Instructions for asking questions during the call.

5. Forward-Looking Statements Disclaimer:

   • "This presentation, and the matters that both companies we'll be discussing today, include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995."
   • "Any forward-looking statements in this release and on this conference call are based on limited information currently available to Cisco, which is subject to change, and Cisco will not necessarily update the information."
   • "Unauthorized recording of this conference call is not permitted."

6. Turnover to Robert Soderbery:

   • "And at this point, I'd like to turn the call over to Robert Soderbery, Senior Vice President of Cisco's Enterprise Networking Group. Good morning, Rob."

7. Moderating Questions and Answers:

   • "Terrific. Thank you, Rob. Thank you, Hilton. Thank you, Rob. We would like to turn to answering some of your questions now."
   • Moderated questions from analysts and provided them with the opportunity to ask questions.
   • "Okay, thank you. And let's go to a few of our call-in joiners. We're going to start with a question from Rod Hall at JPMorgan."

8. Closing Remarks:

   • "Terrific. Well, thank you, Rob. Thank you also to Hilton and to Rob Salvagno for joining us this morning."

   • "As a reminder a recording of today's call will be available later today at investor.cisco.com, that is our Investor Relations website. Thank you, all, for joining us this morning, and thank you for your questions."

Robert Soderbery, the Senior Vice President of Cisco's Enterprise Networking Group, provided insights on the acquisition of Meraki by Cisco. Below are the detailed points he discussed:

• Introduction to Meraki: Meraki provides a new way to serve midmarket customers who have similar IT needs as larger organizations but lack the same IT resources. They struggle with mobility, security, BYOD, and cloud issues. Meraki offers a simple, secure networking solution that reduces TCO and provides a comprehensive feature set, including wired, wireless, security, mobile device management, and L4 to L7 services.

• Strategic Fit: Meraki aligns with Cisco's strategy of solving customer business challenges by delivering intelligent architectures built on integrated products, services, and software platforms. Meraki's innovative, integrated software platform, including a cloud-enabled OS for devices and a hosted management solution, complements Cisco's vision.

• Market Opportunity: Meraki addresses the $5 billion midmarket, which is growing faster than large enterprises. Cisco has a relatively lower share in this market, and acquiring Meraki accelerates growth rates and opens a large, attractive market with an optimized product offer.

• Financial Benefits: The margin and growth economics of Meraki's business, along with the mix of products and services, fit well into Cisco's financial model.

• Product Portfolio Expansion: While Meraki started as a wireless provider, it has broadened its portfolio to provide a complete set of access solutions. Cisco intends to position Meraki's cloud platform as a primary networking solution for midmarket customers.

• Deal Insights: The acquisition was not opportunistic but driven by strategic intent and a shared vision with the Meraki senior team. It offers time-to-market advantages and differentiation over competitors. For Meraki, it enables global scale and impact much faster than on a standalone basis.

• Technology Synergy: The Cisco and Meraki portfolios provide a complete offer to the market. Cisco's enterprise products offer deep, rich features suitable for larger enterprises, while Meraki focuses on the core capabilities required for mid-sized and smaller enterprises.

• Innovation Model: Meraki's cloud-based model enables a high-velocity innovation cycle, allowing it to rapidly release new features to customers. The development methodology is coupled with a tightly linked inside sales and channel model.

• Global Reach: Cisco intends to invest in and build on the Meraki cloud platform to further extend its capabilities and provide geographic reach across the globe.

• Customer Examples: Meraki's solutions enable customers, such as retailers, school districts, and healthcare providers, to leverage technology for business advantage. For example, Applebee's uses Meraki products to manage guest Wi-Fi access and deliver targeted promotions.

• Complementary Offerings: Meraki's solution is complementary to Cisco's Identity Services Engine (ISE), delivering a similar value proposition in the midmarket with a different ease-of-use paradigm.

• Product Overlap: While there is some overlap between Meraki's products and Cisco's portfolio, customer choice is always provided. Cisco leads with its enterprise offers for large enterprises and Meraki for midmarket enterprises.

• Cloud Networking vs. SDN: Meraki provides a complete management facility hosted in the cloud that integrates deeply into its hardware platforms. It offers simplicity and ease of use, making it ideal for midmarket customers who prioritize easy consumption of networking technology.

• Addressing Market Segments: Meraki's technology is highly strategic for the midmarket, where it transforms how organizations solve networking challenges, address business enablement, and reduce operating costs.

• Sweet Spot Customer: The sweet spot for Meraki is the 1,000-person company, which has sophisticated IT needs but a limited IT department. However, Meraki also serves larger and smaller customers with similar challenges.

These points summarize the key insights provided by Robert Soderbery during the M&A call.

Rob Salvagno provided insights into the Meraki acquisition, highlighting the technology, business model, and customer base of Meraki:

1. Technology and Business Model:

   • Meraki brings together its technology, business, and passion for developing great software and technology with Cisco's market-leading network portfolio, sales channel, and global reach.
   • Meraki has built a fast-growing, software-centric business that provides strong gross margins and recurring revenue.

2. Company Overview:

   • Meraki is a private company offering networking solutions via cloud-managed access points, routers, and switches.
   • It has more than 20,000 customer networks deployed in over 143 countries.
   • Headquartered in San Francisco, with offices in New York, London, and Mexico.
   • The company is growing quickly and has more than 330 employees.

3. Customer Value Proposition:

   • Meraki’s rich feature set and intuitive management compel thousands of customers to deploy Meraki.
   • Many of these midmarket customers are not currently Cisco customers.
   • Meraki enables retailers to replace cash registers with tablets and smartphones while maintaining PCI compliance.
   • School districts can realize learning efficiencies with tablets in classrooms without adding IT staff.
   • Enterprises can empower employees to bring their own devices without increasing management complexity or compromising security.

4. Customer Example:

   • Highlighted Applebee's as an example of a Meraki customer.

   • Applebee's network spans hundreds of thousands of restaurants across the U.S., all managed via the Meraki cloud by a centralized IT staff.

   • Meraki devices are installed by restaurant managers without the need to send IT on-site, enabling guest Wi-Fi access while controlling content filtering, application firewall, and bandwidth controls.

   • Targeted promotions are delivered via customized splash pages, and Meraki has become the standard for all Applebee's restaurants.

Hilton Romanski, who at the time was the Vice President of Cisco's Corporate Development Group and later became the Senior Vice President and Chief Strategy Officer, provided the following comments during the M&A call:

1. Transaction Details:

   • Cisco will pay approximately $1.2 billion in cash and retention-based incentives to acquire Meraki.
   • The acquisition will be funded using Cisco's cash and cash equivalents, which stood at $45 billion at the end of the last quarter.
   • The acquisition has been approved by both Cisco's and Meraki's boards of directors and does not require further shareholder approval.

2. Valuation Considerations:

   • The valuation took into account Meraki's differentiation as a business built around the cloud, its financial performance (a $100 million annual bookings run rate and triple-digit growth), the value expected from scaling the business within Cisco, and comparisons to other high-growth software-based companies and transactions.

3. Closing Timeline:

   • The transaction is expected to close in Q2 FY '13, subject to regulatory approvals.
   • Upon closing, Meraki will form the new Cloud Networking Group within Cisco, led by Sujai Hajela, VP-GM of the Wireless Networking Group, with Sanjit continuing to lead the Meraki team.

4. Business and Technology Benefits for Cisco:

   • Meraki's technology differentiation, built around the cloud, allows for rapid introduction of new features and ease of use and deployment.
   • Meraki's customer focus on midmarket customers with lean IT organizations has resulted in strong market traction.
   • Meraki has attractive margins and a recurring revenue model, which is accretive to Cisco immediately.
   • Meraki's business combines a high-velocity development methodology with a tightly linked inside sales and channel model.
   • Meraki has a strong team with expertise in software development and cloud-based business models.

5. Correction on Revenue Run Rate:

   • Corrected his previous statement to clarify that the revenue run rate is a $100 million bookings run rate, not revenue.

6. Exclusive Dialogue with Meraki:

   • The process was driven exclusively and deliberately by Cisco, beginning in September, and was not competitive.
   • Cisco believes the valuation is well within the range of comparables seen in the public markets and recent transactions.

7. Retention Mechanisms:

   • Retention mechanisms include cash consideration and stock incentives for the Meraki management team and employees, aligning their interests with Cisco shareholders.

In summary, Hilton Romanski provided detailed insights into the financial aspects of the acquisition, the strategic fit between Cisco and Meraki, and the expected benefits for both companies and their customers.