Scott Herren: Yes. Campus is doing well for us. And the supply chain €“ while I don’t want to leave the perception that supply chain just got better. Our supply chain team and our product engineering teams have worked pretty relentlessly over the last several quarters with product redesign, with qualifying alternative components, with working with our suppliers to get to their subcomponents to make sure we could free this up so that the increase in supply that’s leading to some of the share gains that we’re talking about is the result of a lot of hard work by a lot of people inside the company. And I think, frankly, it puts us in a better position than many of our peers in the industry right now from a supply chain standpoint.
But €“ the longer answer. The short answer is, yes, we’re doing quite well in that space. And as we continue to deliver what we’ve just laid out as our guidance for the second half of this year, I think you’ll continue to see share gain grow for us.
Amit Daryanani: Got it. That’s really helpful. And I can just ask you really quick on your back half guidance is obviously fairly impressive. But in April quarter, you’re sort of implying gross margins will be down 130 basis points year-over-year, I think, for the April quarter. Can you just talk about how much of a downtick you think is cyclical, things like the supply chain and logistics and so on versus structural? And what do you think normalized gross margin could look like for the company if supply chain is truly normalized? Thank you.
Scott Herren: Yes. The midpoint of the guide for the April quarter is about a 10 basis point improvement from the quarter we just announced. So we do see gross margins improving, and it’s largely driven by €“ it’s less driven by cost. We’re seeing some reduction in costs around logistics, in particular, but component costs are kind of staying where they are in most cases. It’s more driven by the fact that as we ship the backlog more and more of what we ship, reflects the price increases that we put in place last year. So I think you’ll see gross margins potentially continue to expand from where they are, maybe as much as 50 basis points in Q4.
Amit Daryanani: Perfect. Thank you.
Marilyn Mora: Great. Thank you. Next question, please.
Operator: Thank you. Paul Silverstein with Cowen, you may go ahead, sir.
Paul Silverstein: Thanks. Chuck and Scott, I appreciate that you all addressed in your prepared remarks the visibility demand trend issue. But €“ so my apologies, but I’d ask you to revisit, especially in your enterprise business, including government and U.S. federal, I’m sure you and your team are aware of what your competitors have served. I know, Chuck, you just addressed the market share issue. But can you give a bit more color in terms of validity of the demand trends and the visibility that’s translating into.
Chuck Robbins: Well, as I said, the €“ our enterprise and commercial business, which is reflective of how most of our peers represent enterprise, that was up double digits sequentially, which is in line with our historical. And public sector actually performed better than €“ it was above our historical ranges during the quarter. So the other thing I would point out is that our quarter itself from a linearity perspective was quite normal, and we actually had a €“ we’re unique in that we had the January month in our Q2. And one of the questions that we had was what’s going to happen to budget as we enter into calendar €˜23. And we clearly €“ we actually finished stronger than we started the quarter. So those are just a few data points for you.
And I think if you look at what our customers are focused on right now, I mean think about some of their top products. They have got a complete rearchitecture of their applications to be cloud native running in both public and/or private clouds. They are having to rearchitect their infrastructure to actually deal with the changing traffic patterns that multi-cloud brings to them. They are dealing with hybrid work and how do I transform our IT infrastructure for that. They are dealing with cybersecurity threats on a massive scale, and they are also all focused on sustainability, which is leading to our IoT business growing significantly as we connect industrial systems for our customers. So if you think about those big five trends, we’re actually in the middle of those with all of our customers.
So we feel good about where we are. And the last thing I’ll say is that I was in Tokyo and Singapore last week and at the same time, A lot of our €“ my leadership team were in Amsterdam for Cisco Live Europe, and no one is talking about cutting technology spending right now. Everybody seems very committed to it. I think the underlying power of technology as it relates to all of our organization strategy is just too strong right now.
Paul Silverstein: Right. And Scott, back on the margin question. I appreciate you got to walk before you run, but you’re now 3 percentage points roughly below peak on both gross and operating in terms of the initial recovery, any thoughts for how much of the 3 percentage points? Can you visually get back to 67 gross? Can you get back to 35 operating and it’s just a function of time or because of the price increases with respect to semis or other things, that’s just a bridge too far?
Scott Herren: Yes. I mean as you talk long-term, there is a number of tailwinds that will come into gross margin, so not necessarily talking about our guide for fiscal €˜23, but longer term, there are several things that are going to be a tailwind there. One is continuing to work our way through the backlog and reflect the price increases. I think we will continue to see leverage and logistics costs, both from a reduction in the freight cost per kilo but also in the mix of how we shift between what has supply airfreight and what will go in the ocean. So I think we will see some leverage there as well. I don’t see a lot of our component providers outside of commodity areas like memory lining up to reduce cost to us, right? So I think it will be the combination of mix that will be beneficial to us and some cost leverage in the non-component areas that will drive that north.
Paul Silverstein: So you think you can get back to 67, 35?
Scott Herren: Yes. So are you asking me for a 5-year forecast on gross margin, Paul, is that where you’re going?
Paul Silverstein: Yes, long-term. Long-term, can you get back to that model?
Scott Herren: Long-term, there is definitely leverage to push it back to where it’s been historically, for sure, and if not beyond.
Paul Silverstein: Thanks, Scott.
Scott Herren: Thank you.
Marilyn Mora: Thanks, Paul. Next question, please.
Operator: Thank you. Meta Marshall with Morgan Stanley, you may go ahead.
Meta Marshall: Great. Thanks. I’m assuming as you’re having conversations with customers, they are looking for more flexible subscription methods and part of your subscription transition has kind of been evolving kind of the ELA model or kind of the subscription model you guys have had. And I just wanted to get a sense of where you think you are on some of the kind of subscriptionization of some of your products and whether you are seeing a big impact to that right now and then just maybe just some commentary about how you see the M&A environment currently? Thanks.
Chuck Robbins: Meta, thank you. So we are probably, I’d say, still in the early innings of transitioning the traditional portfolio to subscription models. The team is working hard on that right now. And we will just continue to keep you updated. But I think we’re several quarters away from really having anything to speak about relative to the size of that business, but we’re working hard on being able to deliver that. And the key is to give customers flexibility. That’s what €“ over the last 7 years or so, we have disaggregated hardware and software and silicon. We virtualized software to run on x86 appliances. So we want to give our customers whatever kinds of flexibility that they would like. So that’s the first part. On the M&A side, I would say our strategy, as you would expect, has not changed.
I think the market dynamics have changed, and I think that the longer valuations remain somewhat muted from their peaks. I think some of the companies are probably coming to more of a real position on what €“ how long these valuations may exist and were prior valuations even realistic in the first place. So we continue to stay aware of what’s going on. We continue to scan the marketplace, but our strategy remains the same.
Meta Marshall: Great. Thanks.
Marilyn Mora: Thanks, Meta. Next question, please.
Operator: Thank you. Simon Leopold with Raymond James, you may go ahead, sir.
Simon Leopold: Thanks for taking the question. I wanted to see if we could talk a little bit about the trends you’re seeing in data centers. In the prepared remarks, I think you mentioned Campus was good, but data center was weak. And I guess maybe I’m looking for not just the switching part of it, but your UCS business. And what are the broader trends? How much of that is reflective of hyperscale slowing versus the broader market, just trying to unpack that a bit? Thank you.
