Scott Herren: No. I think, what you’re trying to get at is when do we get back to more seasonal patterns, right? Obviously, seasonality went out the window, both going into the pandemic and then coming out of it with those three consecutive quarters of north of 30% growth. We are beginning to see signs of season out, normal seasonality returning. It’s going to be a little complex to see, though, because as supply constraints loosen up. We’ll be able to reduce lead times. We’ve already done that for a handful of product lines. And as we do that, of course, now have an effect on just the current period bookings. So it’s going to be a little bit difficult for you to spot those trends over the next few quarters as lead times normalize.
Ittai Kidron: Very good. Thank you.
Operator: Thanks. Next question with Tim Long from Barclays. You may go ahead.
Tim Long: Thank you. Yes, two quick ones, if I could. Maybe, Chuck, on the cloud vertical, could you talk a little bit — still talking double-digit orders there. Could you kind of just parse out the deceleration in terms of maybe just normalization of extra quarters of ordering versus potential for — there’s been a lot of talk of normalization of spend by the cloud players next year. If you could kind of parse those two out. And then on the software side, just curious if you can update us. It sounds like a lot of hardware converted, which helped. Could you talk a little bit about kind of 9K renewals and maybe any of the other stand-alone software offerings that you think could also help that growth number in the next few quarters? Thank you.
Chuck Robbins: Yes. two good questions, Tim. So on the cloud vertical, I think you’re calling out the right thing that the normalization of the orders is going to probably occur over the next few quarters. In fact, I wouldn’t be surprised to see our trailing fourth quarter rates over the next couple of quarters, maybe even dip negative because of such so much ordering ahead that we’ve seen. But we continue to see real strong demand in general from them. We’ve done a great deal of long-term planning with them. We have some number of orders that aren’t even in book. They don’t even show up in bookings yet because they’re out past our bookings lead time window. So that’s positive. So we continue to see success there. We continue to win franchises, and we feel good about where we are there.
On the software side, what I would say is that the 9k renewals are improving. They’re still not material right now. I think next year, we’ll see that occur. What we did announce is the — this past year is that we are going to manage all of the Catalyst portfolio under the Meraki dashboard, the Meraki platform, and that will be delivered to our customers who have the DNA license and the premium license. So we think that in itself, we’ve already started — we’ve already launched the monitoring capability there and the management. We think we’ll even include — even improve our renewals beyond that. But as we said, we had a record quarter for Cat 9K. So we’re real happy with how it’s performing. Scott?
Scott Herren: Yes. What I’d add to that, Tim, is if you’re looking at software growth, bear in mind, the software subscription growth, the subscription subset of our total software grew 11%. And it’s now 85% of the total. Obviously, with the total only growing 5%, there was a continued decline in perpetual as part of the software license. It’s now — or software revenue. It’s now 15% of our total. So I think we’re getting to a point where the subscription base is getting significantly larger than what’s in perpetual, and that headwind on perpetual will be less of an impact on us going forward.
Tim Long: Okay. Thank you very much.
A €“ Marilyn Mora: Thanks Tim. Next question, please.
Operator: Paul Silverstein with Cowen & Company. You may go ahead, sir.
Paul Silverstein: I appreciate you taking the question. At the risk of asking something you can’t or will not respond, Scott. I was hoping to ask go back to the margin question. Two related questions. One, well, just for clarification, the 50 to 75 basis point product margin improvement, I assume that’s off of the current quarter. Is that the reference point?
Scott Herren: Yes. $50 to $75 off the current quarter. That’s right, by the time we get to Q4.
Paul Silverstein: All right. Now to the subsequent question. Longer term, and I recognize there’s a lot of moving pieces, and it’s a tough environment to predict. But longer term, can you get back to even exceed the almost 67% growth and 34% operating margin from early 2021. Those were — your gross margin was a 15-year high, your operating margin, you would have to go back to 97, I think, the last time you put up that type of number. Obviously, you’re far off those numbers, as is everybody else, from what they were doing a-year-and-a-half ago, through the pandemic. But where do you think you could get back to long term? And related to that, what are your expectations or plans for growing OpEx? I assume you want to drive some degree of leverage in term of the gross margin. Any thoughts you can share — the OpEx growth this quarter, I think, was 4% or 5%. It strikes me as a little bit high. But any thoughts in terms of what your thoughts are going forward.
Scott Herren: Sure. Let me take the gross margin piece of that first. There’s a couple of moving parts, as you know, all inside the gross margins. One is the backlog, some of which is still sitting at pre-price increase levels. We’ll get that shipped out as we work our way through that part of the backlog. Obviously, that will be a tailwind. The increasing component of software built into our revenues will be a tailwind. Will it get back to 65%? I think there’s — for that to happen, we’ll have to see either further cost reductions on the input side, between freight and logistics, which we are beginning to see. While they’re up year-on-year, sequentially, we’re beginning to see some signs of easing in freight and logistics costs as well, but we’ll have to see that.
And we’ll have to see a further reduction in component costs and/or a price increase. So I think it’s — without giving you a quantified number, I think there’s a number of moving parts inside there. More tailwinds as we look ahead, then there are headwinds on that. On the OpEx side, the part of what you see in this quarter, of course, is the normalization of our bonus plans. Last year, bonus plan obviously didn’t pay out so well. As we go into this year and you normalize that, that’s part of the OpEx growth. We did have a slightly bigger than normal annual merit increase cycle. That’s driving some of the OpEx growth as well. I think our focus longer term is, which you’ve heard me say, its balanced profitable growth, right? If you look at our guide for the year, 4.5% to 6.5% growth in the top line, 4.5% to 6.5% on the bottom line.
Long term, we talked about 5% to 7% top line, 5% to 7% bottom line. I think that’s really the way you need to think about it.
