Cisco Systems, Inc. (NASDAQ:CSCO) Q4 2023 Earnings Call Transcript

Cisco Systems, Inc. (NASDAQ:CSCO) Q4 2023 Earnings Call Transcript August 16, 2023

Operator: Welcome to Cisco’s Fourth Quarter and Fiscal Year 2023 Financial Results Conference Call. At the request of Cisco, today’s conference is being recorded. If you have any objections, you may disconnect. Now I would like to turn the call over to Marilyn Mora, Head of Investor Relations. Ma’am, you may begin.

Marilyn Mora: Welcome everyone to Cisco’s fourth quarter fiscal 2023 quarterly earnings conference call. This is Marilyn Mora, Head of Investor Relations and I am joined by Chuck Robbins, our Chair and CEO; and Scott Herren, our CFO. By now, you should have seen our earnings press release. A corresponding webcast with slides, including supplemental information, will be made available on our website in the Investor Relations section following the call. Income statements, full GAAP to non-GAAP reconciliation information, balance sheet, cash flow statements and other financial information can also be found in the Financial Information section of our Investor Relations website. Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results and we will discuss product results in terms of revenue and geographic and customer results in terms of product orders unless stated otherwise.

All comparisons made throughout this call will be done on a year-over-year basis. The matters we will be discussing today include forward-looking statements, including the guidance we will be providing for the first quarter and full-year of fiscal 2024. They are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically, the most recent reports on Forms 10-K and 10-Q, which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. With respect to guidance, please also see the slides and press release that accompany this call for further details. Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure.

With that, I will now turn it over to Chuck.

Chuck Robbins: Thanks, Marilyn, and good afternoon, everyone. Fiscal ’23 was a milestone year for Cisco. We delivered on our operational and financial goals while accelerating our transformation. We achieved record revenue and earnings per share in both the fourth quarter and the full year. We also generated strong margins, record operating cash flow and strong shareholder value, returning 10.6 billion via share repurchases and increasing cash dividends. In FY ’23, we delivered nearly 57 billion in revenue, up 11% year-over-year, the highest revenue growth rate in over a decade. Overall, customer demand also remained solid. In Q4, we achieved over 30% total sequential product order growth. The second highest in 20 years with double-digit increases across all customer markets.

As we look to build on this strong performance going forward, we remain focused on the following. First, growing market share in all key areas of our business. Second, driving innovation and extending our leadership by investing in significant new opportunities for growth in AI, cloud and security. Third, delivering long-term sustainable value creation for our stakeholders and fourth, transforming our business model by growing recurring revenue. Consistent with what we said last quarter, we expect to build on our record results delivering modest revenue growth in fiscal year ’24, with the bottom line growing faster than the top line demonstrating operating leverage. Our outlook reflects good visibility and predictability, driven by healthy backlog, ARR and RPO.

We remain deeply committed to building shareholder value and increasing returns to our investors. We will do this through a long-term commitment to greater operating leverage while increasing our annual share repurchases and growing our dividend. Now, let me share additional detail on the quarter and key growth opportunities ahead for Cisco. First, one of our greatest competitive advantages is our pace of innovation. This quarter, we announced new solutions spanning generative AI, hybrid work, security, full stack observability and sustainability. In addition, we remain focused on delivering a more unified and simpler experience for our customers. As I’ve stated in the past, we knew that as our backlog cleared, we would see corresponding market share gains.

With the release of the calendar Q1 results, we gained over three percentage points of market share year-over-year in our three largest networking markets. Campus switching, wireless LAN and SP routing. We expect further share gains in these areas as market share numbers are released for calendar Q2. Second, the acceleration of AI will fundamentally change our world and create new growth drivers for us. While AI has been an important element in our products for several years, this quarter we announced new market leading AI technologies across our collaboration and security portfolios designed to boost productivity, enhance policy management and simplify tasks. We also launched new AI scale infrastructure innovation to allow our customers to process AI workloads more efficiently.

Cisco’s ASIC design and scalable fabric for AI position us very well to build out the infrastructure that Hyperscalers and others need to build AI/ML clusters. This is a huge opportunity for Cisco and we are laser focused on leading and winning in this space. As a result of our innovation in this area, we expect Ethernet will lead in connecting AI workloads over the next five years. To accelerate this transition, Cisco became a founding member of the Ultra Ethernet Consortium, an industry wide effort to drive open large scale Ethernet based fabrics for high performance networking. In June, we launched our next generation Silicon One switching ASICs to support large scale GPU clusters for AI and ML workloads. We are seeing early success in Hyperscale Ethernet AI fabric deployments.

To-date, we have taken orders for over $0.5 billion for AI Ethernet fabrics. We are also piloting 800 gig capabilities for AI training fabrics. Overall, Cisco is committed to helping our customers navigate this transition in a trusted and responsible way to deliver on the full promise of this technology and we are well positioned to win. Next, security remains a top priority. Our AI driven security cloud platform has comprehensive capabilities across the network endpoint and the cloud, helping to simplify security management while increasing efficacy. Our new technologies like XDR, multi-cloud defense and cloud secure access, a secure service edge solution are seeing rapid early adoption. For example, Goldman Sachs has been one of our early adopters of our multi-cloud defense solution.

In addition, we are working with Apple to incorporate Cisco’s secure access solution into iOS and macOS. These innovations, combined with our recent acquisitions, show how we are extending our security portfolio with deep telemetry AI and identity threat capabilities. Given our installed base of 300,000 Cisco security customers, we believe we have the opportunity to accelerate revenue growth in security over the next few quarters. To summarize, we had a phenomenal year. Our fiscal year ’23 and Q4 results demonstrate the strength of our business today and are a solid foundation for future growth. I also want to be very clear on our commitment to increasing shareholder returns through capital return, innovation and strong execution. Last quarter, we committed to operating leverage in Q4 and fiscal year ’24 and our guidance today reflects this.

Today, I want to confirm that this will be our long-term strategy beyond fiscal year ’24. We will also drive a high degree of consistency into our stock repurchase program and will maintain the quarterly levels in the range that we have over the past few quarters. Finally, I want to take a moment to thank our teams who all played an important role in delivering these record full year results and their deep commitment to our — to the success of our customers and partners. With our focus on innovation and our commitment to operational excellence, I have tremendous confidence in our ability to capitalize on the many opportunities ahead. I’ll now turn it over to Scott.

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Scott Herren: Thanks, Chuck. I’ll start with a summary of our financial results for the quarter then cover the full fiscal year followed by our guidance. As Chuck said, we delivered another record quarter driven by focused execution, continued business transformation and the actions we took during the year to mitigate supply issues. We reported our strongest ever revenue, non-GAAP operating margin, earnings per share and operating cash flow in Q4. Total revenue was $15.2 billion, up 16% year-on-year at the high end of our guidance range. Non-GAAP net income was $4.7 billion, up 36%. Non-GAAP EPS was $1.14, up 37%, exceeding the high end of our guidance range. Looking at our Q4 revenue in more detail. Total product revenue was 11.7 billion, up 20%.

Service revenue was 3.6 billion, up 4%. Within product revenue, Secure Agile Networks, our largest product category was very strong, up 33%. Switching revenue had double-digit growth with strength in both campus and data center switching driven by our Catalyst 9000 Nexus 9000 and Meraki offerings. Enterprise routing declined, driven primarily by Access, partially offset by strength in our Catalyst 8000 Series SD-WAN and IoT Routing. Wireless had double-digit growth driven by our Wi-Fi 6 products and Meraki wireless offerings. Internet for the Future was up 3%, driven by growth in our core routing products, including strong growth in our Cisco 8000 offering. We also saw double-digit growth in web scale. Collaboration was down 12%, driven by declines in collaboration devices and meetings partially offset by growth in cloud calling and cloud contact center.

End-to-End security was flat with growth in our Zero Trust offerings offset by a decline in our network security offerings and optimized application experiences was up 15%, driven by growth across the portfolio, including double-digit growth in ThousandEyes and AppDynamics. We continue to make progress on the transformation of our business to more recurring revenue based offerings driven by higher levels of software and subscriptions. We saw solid performance in our ARR of 24.3 billion, which increased 5% with product ARR growth of 10%. Total software revenue accelerated to $4.6 billion, an increase of 17% with software subscription revenue up 20%. 85% of our software revenue was subscription based. Total subscription revenue was 6.6 billion, an increase of 13%.

And RPO was 34.9 billion, up double-digits at 11%. Both product and service RPO had strong growth with product RPO up 12% and service RPO up 9%. Total short-term RPO grew to 17.9 billion. Total product orders were down 14% year-on-year, but grew sequentially by more than 30%. This was against a strong performance in the year ago quarter, where we delivered the second highest orders in absolute dollars in the history of the company. The aging of our backlog has continued to improve as the supply situation normalizes and as expected, increased customer deliveries reduced our year-end backlog to roughly double historical levels as we enter fiscal ’24. Order cancellation rates remain below pre-pandemic levels, which reflects the true demand and criticality of our technologies to our customers.

Total non-GAAP gross margin came in at 65.9%, exceeding the high end of our guidance range and up 260 basis points. Product gross margin was 65.5%, up 420 basis points. The increase was primarily driven by positive pricing and product mix, as we realized the benefits from the actions we took in the prior fiscal year. We also drove productivity improvements with lower freight and logistics component and other costs. Services gross margin was. 67.5%, down 150 basis points year-over-year. Non-GAAP operating margin came in at 35.4%, exceeding the high end of our guidance range and up 300 basis points. This improved leverage was driven by both our strong non-GAAP gross margin and ongoing cost management. Shifting to the balance sheet. We ended Q4 with total cash, cash equivalents and investments of 26.1 billion.

We had record operating cash flow for the quarter of 6 billion, up 62%, driven primarily by strong top line performance and the deferral of our Q4 federal tax payment. Consistent with our prior commentary, the IRS tax relief related to the California floods postponed our current year federal income tax payment until Q1 of our fiscal ’24. Consequently, in Q1 of fiscal ’24, our federal income tax related cash outflows will include an incremental 2.8 billion of payments for these prior quarters. This quarter, we returned 2.8 billion to shareholders comprised of 1.6 billion for our quarterly cash dividend and 1.3 billion of share repurchases. Consistent with our capital allocation strategy that we outlined last quarter, we are committed to increasing shareholder returns through a greater operating leverage while increasing our annual share repurchases and growing our dividend.

Turning to the full fiscal year, we delivered record results in revenue, net income earnings per share and operating cash flow. Revenue for the year was 57 billion up 11% and non-GAAP earnings per share was $3.89, up 16%, demonstrating again the operating leverage that we’ve been driving. In terms of our software metrics, total software revenue for the full year was up 12% at 17 billion, with the product portion up 14%. 84% of software revenue was subscription based, which is up two percentage points. Total subscription revenue was 24.6 billion, an increase of 10%. Total non-GAAP gross margin was 64.5%, down ten basis points. On the bottom line, non-GAAP net income was 16 billion, up 13%. We delivered record operating cash flow of 19.9 billion, up 50% compared to fiscal ’22, driven primarily by strong results, linearity, collections and the federal tax deferral as noted previously.

We returned 10.6 billion in value to our shareholders via cash dividends and stock repurchases. This is comprised of 6.3 billion in quarterly cash dividends and 4.3 billion of share repurchases. We increased our dividend for the 12th consecutive year in fiscal 2023, reinforcing our confidence in the strength and stability of our ongoing cash flows. We continue to invest organically and inorganically in our innovation pipeline during Q4. We closed the acquisitions of Lightspin Technologies, Smartlook and Armorblox. These investments are consistent with our strategy of complementing our internal innovation and R&D with targeted strategic M&A. To summarize, we had a very strong quarter and fiscal year with record results. We executed well delivering double-digit top line growth, profitability and cash flow.

We continue to make progress on our business model shift to more recurring revenue while making strategic investments in innovation to capitalize on our significant growth opportunities. Turning now to our guidance. For fiscal Q1, our guidance is, we expect revenue to be in the range of 14.5 billion to 14.7 billion. We anticipate the non-GAAP gross margin to be in the range of 65% to 66%. Our non-GAAP operating margin is expected to be in the range of 34% to 35% and non-GAAP earnings per share is expected to range from $1.02 to $1.04. For fiscal year ’24, our guidance is as follows. We expect revenue to be in the range of 57 billion to 58.2 billion. Non-GAAP earnings per share is expected to range from $4.01 to $4.08. In both our Q1 and full year guidance we’re assuming a non-GAAP effective tax rate of 19%.

I’ll now turn it back to Marilyn so we can move into the Q&A.

Marilyn Mora: Thanks, Scott. Michelle, let’s go ahead and queue up for questions.

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Q&A Session

Operator: Thank you. Tim Long with Barclays. You may go ahead. Tim?

Tim Long: Hi. Thank you. Yeah, Chuck, maybe we’ll start with kind of the order backlog performance. Sounds a lot better than seasonal in Q4. Could you talk a little bit about what you attribute that to and then maybe looking into next year, doesn’t look like you’re baking a lot of that into either Q1 or the full year. So what’s kind of the expectation for kind of the pull through of those orders into what you’re going to see in revenues in fiscal ’24? Thank you.

Chuck Robbins: Thanks, Tim. So I’ll provide some color, and Scott, maybe you can talk about the conversion of the orders. Look, first of all, we’re obviously dealing in a world that has a lot of dynamics right now, but our teams executed incredibly well. As I’ve said on prior calls, with our sales organization, when you see transitions in sort of customer buying, if it’s getting worse, what we see is that our teams will forecast a quarter and then by the end of the quarter, they would have dropped and/or missed. And then when it’s beginning to stabilize and get better, they tend to actually exceed the forecast. And so what we saw in Q4 was they had their opening forecast. They nailed month one, they nailed month two, and they exceeded month three by several hundred million dollars.

So it was one of those quarters that they actually over-performed what they thought they would do at the beginning of the quarter, which is a positive sign. But again, it’s one quarter. We also had the largest quarter in our history of enterprise software agreements from an orders perspective. So we had a lot of big customers making big commitments, which was a positive thing. If you think about what was going on around the world, I’d say service provider just continued to be weak. Enterprise improved, commercial improved. US enterprise was basically flat. So that was better than we had been experiencing for sure, which is a good sign. Public sector remains steady. And verticals, we saw strength in financial services, transportation and energy.

And we saw some good strength in countries like India and Saudi around the world. So it’s one quarter, but if you compare it to the prior few quarters where the teams had opening forecast that they generally missed by the time we got to the end of the quarter, this was one where I’d say that it was much more stable as we went through the quarter. Scott, do you want to talk about the order conversion?

Scott Herren: Yes. As we think about fiscal ’24, we’ve got pretty good visibility driven by really the business model shift that we’ve talked about. So a couple of data points that I think you already have, Tim. One is current RPO of $17.9 billion. So total RPO approaching $35 billion, of which $17.9 billion is current, meaning it turns into revenue in the next 12 months. We ended the year as we expected with roughly double our normal backlog levels. But that excess backlog will work down in the first half of fiscal ’24 with the majority of that being worked off in Q1, by the way. And we’ve got $24.3 billion of ARR that we get a chance to renew. Now obviously, some of that will already be captured in RPO, but there’s opportunity that’s not already captured in RPO as well. So we entered the year with round numbers, 40% of that top line pretty much already in hand between those three categories. So feel good about the way we’ve — the way we see the year laying out.

Chuck Robbins: Yes. If I could make one more comment, Tim. On the sequentials, we said given that the year-over-years are just sort of difficult to — they don’t really provide a clear view on what’s going on. We’ve been talking about sequentials a fair amount. And I did say in my opening comments that sequentials from Q3 to Q4 were in excess of 30%. To put that in perspective, it’s typically 18% to 20%. And from a customer segment perspective, enterprise was well above that, public sector was well above it. Commercial was pretty close to it and service provider was the low one. However, it was still above historical trends on a sequential basis. So just to try to give you as much color as we can.

Tim Long: Thank you. Very helpful.

Marilyn Mora: Michelle, let’s go ahead and move to the next question.

Operator: Thank you. Amit Daryanani with Evercore. You may go ahead, sir.

Amit Daryanani: Thanks a lot for taking my question. Congrats on a nice set of numbers here. I guess, maybe two things I’d love to get your perspective on. Chuck, when you talk about consistency in capital allocation, can you just expand a bit more on what does that mean? Are you going to think about this as a percent of free cash flow that you’re going to go for buybacks or some other metric? Can you just talk about what does that mean? And how do you intend to deploy the capital allocation would be helpful. And then perhaps somewhat maybe related to that, I guess, when we think about the fiscal ’24 revenue guide that you folks are providing, 7% growth in Q1, I think, 1% for the full year. That sort of would imply back half will decline. So what are you assuming in the back half that gives you that kind of worry that would be helpful? Thank you.

Chuck Robbins: Let me make some just a couple of comments, and I’m going to hand it to Scott and let him answer probably both of these. On the capital allocation and the leverage comments, what I would say is that we’ve spent a lot of time talking to our shareholders over the last few months. And it’s clearly important to our shareholders that we commit to and we deliver on operating leverage in our P&L, and we’ve been doing it, but we haven’t committed to it for long term. So that’s what we’re basically doing today is saying that we are going to continue to commit to do — to provide operating leverage in the P&L as we look to the future. And then on the buybacks, we had also increased — there are two things we wanted to do was increase the amount as well as drive more consistency and predictability for our shareholders.

And so the rate, as I said, that we’ve been running at like the last three quarters is sort of the target that we would be at on a quarterly basis as we go forward. Scott, do you want to add to that and then talk about the revenue guide?

Scott Herren: Yes, will do. And Amit I think you were one of those voices that talked about cap allocation consistency.

Chuck Robbins: I think I remember that.

Scott Herren: At a higher level and also being consistent and what you’ve seen over the last three quarters is that share buyback has been very consistent at $1.25 billion — right around $1.25 billion per quarter. We see that continuing into the future. That’s $5 billion a year in share buybacks. The dividend right now runs round number $6.5 billion. So you add those two together, that’s $11.5 billion of capital return to shareholders. It doesn’t feel like it’s in a bad place, but responding to the need to be both elevated and more consistent in share buybacks is what you’re hearing. You’ve seen us do it already. The difference is we’re verbalizing it in advance now, I guess. And on your revenue guide question, I think it’s easy to get a little confused by the year-on-year growth rates when we’ve had the supply constraints that we’ve had over the last few years.

I mean the reality is some of the revenue that we ended up posting this year, in fiscal ’23, are orders that we took and customers wanted the product back in fiscal ’22. We just couldn’t get it out. We couldn’t get it delivered because of the supply constraints. So the better way to think about this is what’s been the compound annual growth rate from when we started building that backlog and the supply constraints set in, which was the end of our fiscal ’21 through — and I’ll just pick the midpoint of our guide for fiscal ’24. If you do the compound annual growth rate on revenue through that time, it’s right around 5%, which is, as you know, in line with what we see as our opportunity longer term. So I think it’s a little bit tough to track what’s happening.

We just rely on year-on-years because the year-on-years have just been so skewed by the supply chain. If you step back from it and look at endpoint to endpoint that growth rate feels pretty good.

Amit Daryanani: No, that three-year CAGR is really helpful. Thank you.

Marilyn Mora: Great. Thanks, Amit. Next question.

Operator: Meta Marshall with Morgan Stanley. You may go ahead.

Meta Marshall: Great. Thanks. Fantastic kind of data points around the traction with the hyperscalers. When it comes to kind of the $0.5 billion of orders you noted or even kind of the 800-gig trials. Is that with Scheduled Fabric? Is that with Silicon One? Just kind of trying to get a sense of what piece of the portfolio that is. And then just on the Security portfolio, clearly, you’re rolling out a new — a lot of new products, changing some of the sales approaches. Just when do you think we could see an inflection in that business? Thanks.

Chuck Robbins: Yes, Meta, thank you. So on the Ethernet underneath the AI GPU networks, it is Silicon One for sure. And I think for the next 12 months or so, I think we’ll be doing trials. I think we’ll have some opportunities, but there’ll still be a lot of InfiniBand. And that’s why we joined as a founding member of this Ultra Ethernet coalition so that we can up guide the standards and really deliver Scheduled Fabric, to your point, in a very effective way. So we think into FY ’25 and beyond, this thing will begin to shift to more of an Ethernet-based infrastructure. On the Security front, yes, we’ve had some early traction. I mentioned Goldman in the multi-cloud defense, which is a great sign of confidence in that solution.

If you look at our XDR platform, which, candidly, we just went GA with it right at the end of the quarter. And we already took a seven-figure order from a retailer in Europe. So that was positive. We took one of our largest security orders ever. We took an eight-figure security order from a Fortune 10 company in Q4. So there’s some early green shoots, and the teams are executing. The early feedback and early commentary from analysts and customers, et cetera, is positive, but we’ve got to actually deliver on it. And hopefully, in the second half of this year, we’ll see some real positive impact and then ’25 for sure.

Meta Marshall: Great. Thank you.

Marilyn Mora: Next question, please.

Operator: Michael Ng with Goldman Sachs. You may go ahead, sir.

Michael Ng: Hey, good afternoon. Thanks for the question. I just have two. First, it was encouraging to hear about the share gains on campus switching, SP routing and wireless as well as the expectation to continue to grow share. I was just wondering if you could talk a little bit about the sales execution, the product road map there that gives you the most confidence in that continued share growth. And then second, I was just wondering if you could talk a little bit about your expectations as it relates to the trajectory of orders going forward. It sounds like if the backlog kind of gets back to normal levels in the first quarter, you should just grow along with revenue growth as we think about order growth beyond the first quarter, but just would love your thoughts there. Thank you.

Chuck Robbins: Thanks, Michael. On the share gains in the enterprise networking space, which is what you’re asking about, we expect Q2 will be equal to or maybe slightly above the incremental gains that we see when those numbers come out based on some estimates that we have done internally. I would say the thing that is really helping beyond being great products, but we have done a couple of things. Number one, we have begun to deliver on monitoring and then subsequent management of our Catalyst, the traditional Catalyst portfolio with the Meraki dashboard. And that’s a real advantage for customers. It allows them to run a hybrid of the two portfolios. It allows them to have visibility from one dashboard to both sets of portfolios.

And so that’s been really well received. It has been a key driver in significant improvement in our renewal rates on the software side. And while I’m talking about it, I thought I would share one milestone with you. I’ve been asked for a few years, when do we think the software renewals in the enterprise networking space would be meaningful. And FY’24 is the first year, I think, it will be meaningful. So just to give you a perspective on it. We have we expect this year to renew enterprise networking software at close to $1 billion. So the transition that we’ve been going through for all these years is going to hopefully begin to start to pay solid benefits for us going forward. But that’s what’s going on in that portfolio. Scott, you want to talk about orders?

Scott Herren: Trajectory of orders, yes. And, Michael, thanks for that question. What I’d say is, if you remember our commentary from the last call, we said there were kind of three things going on inside product orders. One was the lead times were normalizing, going from being fairly lengthy to going back to a normal level, which, of course, if the lead time yesterday was 30 weeks and today it’s 10 weeks means you don’t have to place another order for 20 weeks. Those are mostly normalized. They will finish being normalized certainly in the first half of fiscal ’24. And so that effect will be dampened. The second is backlog. And as we were still sitting on excess backlog, and we still do, but we’ve obviously been working our way through that and delivering product to customers.

As we get their backlog orders in their hands, they can complete that project and then place the order for the next project. And so that’s also been a little bit of a headwind to bookings, and then it’s whatever is happening in the macro would be the third factor. We think those first two will normalize in the first half of fiscal ’24. Lead times will be normalized, certainly by the time we get to the end of the first half and much of the backlog — the excess backlog will ship out during the first quarter of fiscal ’24. So I think we’ll have a clearer view, and I expect to see more normal ordering patterns. Of course, we don’t guide orders, but I expect to see more normal ordering patterns in the second half of the year.

Michael Ng: Okay. That’s all very helpful. Thank you, Chuck. Thank you, Scott.

Chuck Robbins: Thank you.

Marilyn Mora: Great. Thank you. Let’s go ahead and take the next question.

Operator: Ittai Kidron with Oppenheimer. You may go ahead.

Ittai Kidron: Thanks, guys. High energy, I like this. Chuck, maybe you could look at — talk about the RPO. Very strong performance there, especially when you look at the same metric a year ago. Maybe you can unpack this a little bit in the context of a few metrics, meaning duration of contracts customers are willing to go into now, size of deals that are willing to move into now. I’m just trying to kind of get a little bit into the elements of this significant increase in RPO. Appreciate it.

Chuck Robbins: Yes. Thanks, Ittai. I’ll give you a little color and then I’ll let Scott comment again, too. A lot of this is — we’ve made this transition to — virtually our entire enterprise networking portfolio now is a subscription model. And so that contributes. And Scott can talk about the year-over-year contribution that we’ve seen. But I mean we have $35 billion in RPO. And I think it’s an important thing because when you think about market share and some of the concerns that people have had, you have to remember that we put a reasonable amount of each order in our core networking portfolio on the enterprise side goes into RPO and doesn’t get reported as revenue. It’s ratable. So it’s a headwind to market share. And the other thing that I would point out is that we had a record year at $50 billion — almost $57 billion at a time where we were building RPO to $35 billion and we have the backlog that we have.

So there, we’ve had a lot of solid customer demand. I’d say in Q4, we certainly saw a fair amount of the enterprise networking. As we ship those products, we saw that software come out of backlog as we’ve talked about and moved into RPO. We saw a lot of these enterprise agreements that we did with our customers in enterprise contributed to it as well. Those were reasonably large deals. And Scott, I’ll let you comment anything — any more you want to comment on?

Scott Herren: Yes. You specifically asked about duration. There’s not much change in duration overall, Ittai. So that’s not it. Q4 typically is a quarter where we have more large multiyear transactions. We talk about enterprise agreements and whole portfolio agreements. And so you typically will see a little bit of a bump in Q4 driven by that and then a little bit of a — I’m sorry, an RPO in Q4. And then in Q1, the typically — the typical pattern would see it come down just slightly as we work our way through those. I think the other thing to just bear in mind, we’ve got net RPO growth this year of $3.3 billion, of which product had a net growth of $1.7 billion. If you looked at our current RPO when we began the year, it was about $16.8 billion, which means all of that came out of RPO.

And yet on top of that — yes, short-term. On top of that, we added $1.7 billion. So we added quite a bit of current year sales into that RPO balance. Back to Chuck’s point, that’s revenue that many of our competitors recognize immediately as they ship it. For us, we have the advantage of recognizing it over time, which makes us more predictable, and it gives us greater visibility into where things are headed.

Ittai Kidron: Appreciate the color. Thank you.

Marilyn Mora: Move to the next question.

Operator: Matthew Niknam with Deutsche Bank. You may go ahead sir.

Matthew Niknam: Hey, thank you for taking the question. Two-parter, if I could. First, as we think about fiscal ’24, so you’re forecasting 1% top line growth and about 4% non-GAAP EPS growth with a fairly strong exit rate on gross margin. So is it fair to assume the lift from gross margins may get offset somewhat by some OpEx reinvestment? Just trying to think about the puts and takes there. And then broadly, at the Analyst Day a couple of years ago, I think, Scott, you laid out a 5% to 7% target for both top and bottom line. I’m just wondering if that’s evolved at all in light of some of the greater emphasis on operating leverage that you’re talking about today. Thanks.

Scott Herren: Yes. Matt, on your first question, I think gross margin settling, you saw our guide for Q1 of gross margins in the 65% to 66% range. And I think it settles in there for the full year. So you can do the math with what we’ve projected on the top line. That drops down to a mid-single-digit OpEx growth number, so in line with expectations certainly given the environment of merit increases. It doesn’t provide a lot of incremental investment, but I think that’s in sync with what you’ve seen us do over time. So the long-term model, look, that was opportunity-based. If you look backwards, what you’ve seen is we have delivered the bottom line growing faster than the top line. I think the only difference that you hear from us now is, as I said, we’re articulating it in advance instead of once it’s happened. That’s really the way to think about that.

Matthew Niknam: Great. Thank you.

Marilyn Mora: All right. Thanks, Matt. Michelle, let’s take the next question.

Operator: Jim Fish with Piper Sandler. You may go ahead.

James Fish: Hi, guys. Thanks for the question. Maybe just diving in on the go-to-market side. We’re hearing you guys are looking to move more of the specialist sales teams out and more towards kind of a cross-sell more portfolio kind of motion. Are you doing a larger sales restructuring right now? And is there anything you can do to better package solutions across these multiple segments, especially on the growth segments that are kind of struggling here, as Meta kind of pointed out earlier, with even security. And lastly, on the capital return side. I know you guys get asked about the technology, but — and you talked about potential being strategic and all of that. But how do you feel about the push versus pull of either further acquisitions in either of the key growth segments that you outlined, Chuck, versus possibly even spinning off some of those segments like some of the larger companies you’re starting to see do? Thanks, guys.

Chuck Robbins: Thanks, Jim. That was a lot. Let me tell you a little bit of the history on the specialist model. I’ll tell you what we’re doing in the product portfolio, which allows us to clean up the specialist model a little bit and get them a little more focused. So historically, like — let’s use Security as an example. We’ve had these different products, and we’ve sold them all individually. And therefore you need to compete with those individual competitors. So you need subspecialists, you need specialists in every little area of security. And what we’ve been doing across the portfolio is moving to more of a platform approach. And so it makes it easier to sell. And in certain areas of our portfolio like collaboration and security, we’ve moved to a suite strategy.

So we’re now packaging up the Security portfolio in different suites, which allows for us to sort of optimize the security specialist or actually align them more effectively is probably the best way to say it. And so that’s the work that’s been going on. And I think as we continue to execute on this platform strategy, it certainly simplifies the selling cycle for some of these technologies and I think getting to the suites. We’ve seen it work in collab. This past quarter, we had very strong order growth in collaboration. We had positive order growth in Security as well. And so for collab to be showing positive order growth is really a byproduct of the suites and leading with calling as the lead part of the suite and then also a big focus on cloud contact center, which grew triple-digits last quarter from an orders perspective.

So those are the things that we’re trying to do. We’re trying to get the portfolio put together in a way that makes it easier and requires fewer subspecialists in the field as we move forward. Scott?

Scott Herren: On the cap return question, Jim, I’d just reiterate what I said earlier. With the consistency of buybacks now running right around $1.25 billion per quarter, so $5 billion a year, the dividend consumes another $6.5 billion. That’s $11.5 billion of cap return that we’re committed to. And I do expect to continue to, as you’ve seen us do for the last 12 years, make increases in our dividend payment as you look ahead. So that’s one lens on it. I would say on the M&A and spin-off part of that, we’re constantly evaluating that. We’re constantly evaluating what’s available in the order marketplace. You saw we closed three, albeit small kind of tech tuck-in, but three acquisitions during the quarter. The team’s very active. We’re constantly looking at that space as well as the value in our own portfolio. And so there’s nothing new to report there, but those are constant things that we look at.

James Fish: Helpful color guys. Thanks.

Marilyn Mora: All right. Next question please.

Operator: Thank you. Ben Reitzes with Melius Research. You may go ahead, sir.

Ben Reitzes: Hey, guys, thanks for the question. I wanted to double-click on an earlier question with regard to hyperscalers, the $500 million in AI orders you had a briefing in June. I was wondering, have things picked up in terms of activity there? It seems like maybe it has. And I wanted to see if there’s further traction that you could articulate in Silicon One. Like what kind of activity are you seeing there? And how big a business can this be?

Chuck Robbins: Yes. Well, Ben, welcome and thank you for the question. We have definitely seen traction in the space. Lots of discussions, lots of architectural discussions, lots of input from those customers on what they’d like to see in the next generation of silicon as an example. And the teams are off building that we just delivered in June. As I said earlier, the next-generation ASIC that actually is built for this, but there’s going to be more and more purpose-built silicon over the next couple of years. And the teams are working on that. And those customers are having a great deal of input in how that silicon gets designed. And in some cases, it’s unique to each one. And so that’s the beauty of us having such an advanced silicon capability.

It allows us, if we need to, to actually build unique silicon by customer because these opportunities are so large. In the last call, we talked about the fact that this would probably be 3 to 4 times the opportunity size of the original cloud build-out. And unfortunately for us, as it’s been well documented, we missed the original cloud build-out. But I can say with every bit of confidence right now that as we go through this AI transition to Ethernet, we are super well positioned. We have incredible silicon that they have been using in other parts of their portfolio. We won three more use cases last quarter. We now are installed in 21 use cases across the top six of these providers. And we expect that, that momentum will just continue over the next few years.

I do think that in the short term, InfiniBand is probably going to still be the preferred in most cases, but they are trialing. And we will, much like we already have, we’ll get some opportunities to run Ethernet underneath season. And as we deliver Scheduled Fabric, it will become even more prevalent.

Ben Reitzes: Okay. Thanks a lot, Chuck. It’s good to be back .

Chuck Robbins: Thanks, Ben

Scott Herren: Thanks, Ben.

Marilyn Mora: Thanks, Ben. We’ll take the next question.

Operator: Tal Liani with Bank of America. You may go ahead.

Tal Liani: Yes, hi. I have one kind of big-picture question and one more specific. Maybe I’ll start with the specific question. If I look at the 400-gig Ethernet market share, cloud, if I take Arista and White Boxes, it’s like over 90% of the market, Cisco doesn’t have much of a 400-gig market share by the data. But you are talking about growing market share in 800 gig. Can you talk about the dynamics of 400? And then why was it this way in 400 and how it changes in 800 in your expectations? Second is about the big picture. And I need — I want to understand kind of the numbers. Product revenues last year were $38 billion. Product revenues this year is $43 billion. So that’s $5 billion increase. And the decline in backlog is about $5 billion.

Your implied guidance for next year for product revenues is roughly flat plus. So without the support of backlog, how do you get to product revenues? What are the other parts that could go to product revenues and compensate for the fact that backlog is going to be normal by the end of next quarter or next 2 quarters, maybe? Thanks.

Chuck Robbins: Yes, Tal, thank you for that. And so on the 400 gig to 800 gig, I don’t know that I’ve seen exact reports that you’re talking about on the 400 gig. But our teams — the volume of ports that we’re shipping on 400 gig would imply that that’s a — I don’t know, we’ve had a great deal of success and it’s been growing quite significantly. So — but we obviously had — over the last few years, we’ve been rebuilding or actually building our presence in this space. So it wouldn’t surprise me to see us as a low market share player, but we’ve certainly won our fair share. On the 800 gig, I think it’s just a matter of we’re engaged there. We’re installed already. We’ve got trust with these customers. They’ve seen what we can do. And I think that we’re just in the game at the right time as opposed to where we started. And so I think from now on, it just gives us an opportunity to be there from the beginning as opposed to trying to catch up.

Scott Herren: And Tal, to your question on the math you’re trying to do on product revenue, I think some of this goes back to the answer that I gave Tim earlier. One of the things you have to consider is some of the product revenue we delivered this year was actually demand from the prior year, right? Demand from fiscal ’22 that because of the supply constraints, we simply couldn’t get out the door. Had that not been the case, you would have seen higher product revenue in fiscal ’22 and slightly lower product revenue in fiscal ’23. And you would have seen a steady increase then from ’22 to ’23 and ’23 to ’24. So the things that are driving that are the things that we’ve talked about, right? We continue to see good traction and market share gains in our enterprise networking products.

We are invested early in the AI game and see a great opportunity there. We’re getting early success, although it’s — you’re not seeing a lot of it yet in the P&L, but we’re seeing some pretty early success with our revamped security strategy and the great work that team has done. And so — but instead of trying to do it the way you’re doing it, the delivery has been lumpy, the demand has been less lumpy is probably the right way to think about it.

Tal Liani: Got it. Thank you.

Marilyn Mora: All right. Thanks, Tal. Next question.

Operator: Samik Chatterjee with JPMorgan. You may go ahead.

Joseph Cardoso: Hi, thanks. This is Joe Cardoso on for Samik. Just one question for me. You mentioned double-digit growth across all your customer verticals from an order perspective but also mentioned service provider continuing to be weak. I was just hoping you could touch on what you’re seeing under the hood in service provider. And specifically, if I split it up between telco AI and non-AI cloud, how did those track compared to 90 days ago? And then just quickly, a quick clarification on the $0.5 billion in orders in AI. Any way you can parse it out, like how many customers is reflected in that order number? And then just quickly clarify if that’s all hyperscale or if there’s any Tier 2 cloud or enterprise customers in that mix. Thanks for the question.

Chuck Robbins: Yes. Thank you. So on the service provider side, the first question you asked — let me write my notes down, hold on a second, so I don’t have to ask you for the question again. On SP, I think — I’d say Q4 for the telco side of it, the communications service provider was probably fairly consistent with what it was the quarter before. It’s just relatively weak right now. We see a lot of these customers have — are digesting a lot of the infrastructure that they bought over the next few months. We think that — our team believes that orders will stabilize on the telco side of the business in the second half of our fiscal year. On the cloud side, we believe that they’ll continue to invest. And they kind of invest in six-month cycles.

And we think that in the middle of our fiscal year, we’ll see growth in that investment for the first part of 2025. On the $500 million, it is definitely in the Tier 1 hyperscalers. So I’ll just leave it at that. On the opportunity that we see, we still see — we won three use cases last quarter. And I would say those were primarily non-AI. So there’s still — we’re still winning new use cases in the core infrastructure. And — but we’re in trials in different discussions with most all of them relative to AI fabric.

Joseph Cardoso: Thanks, Chuck. Appreciate the color

Chuck Robbins: Thank you.

Marilyn Mora: All right. Thank you. Next question.

Operator: David Vogt with UBS. You may go ahead.

David Vogt: Great. Thanks guys for squeezing me. I’m not going to belabor the point on orders, but I wanted to ask a question about AI order specifically in terms of your ability to ship to customers and where you are in trials. The reason why I ask is we’ve heard from a lot of companies in the industry that there’s some supply chain considerations that are maybe causing commercial deployments and revenue rec may be pushed out to 2025. So I just want to get a sense for that 500 orders that you referenced in your prepared remarks, how does that flow through? And then along with that, in the guidance Scott provided for fiscal ’24, how much, if any, is AI-related this year? And if not why? And when — going back to my first point, when do we start to see it in your P&L?

Chuck Robbins: Yes. We do not — Scott and I are both looking at each other. We don’t know of any supply chain issues we have around our AI. It’s our standard Ethernet portfolio based on the Silicon One ASIC, and we’re delivering it today. So I don’t think there’s any supply chain issue for us on that front.

Scott Herren: We might be at a bit of a better position than some because it is our own ASICs. It is ours.

Chuck Robbins: On the FY ’24 contribution of AI, I don’t have that information on top of my head.

Scott Herren: Yes. Sorry, I didn’t mean to interrupt you there.

Chuck Robbins: Go ahead.

Scott Herren: Here’s what I’d say, here’s the right way to think about it, David. Those orders — what we see is, within the broader hyperscaler world, which is where a lot of these AI sales are going, they’re obviously in digest mode. I think you’ve heard that from us and all of our peers or what they bought. We do see toward the end of this calendar year, so towards the midyear of our fiscal year, we see them beginning to place orders again for delivery of product that will happen in the second half. So while I don’t want to get into parsing the guide down to that level of granularity, I think what you should expect is it to be something that we’d begin to see show up in the P&L late in the second half.

Chuck Robbins: Yes. What I was going to add, David, is I think until we evolve some of the — get some of the Scheduled Fabric technologies built out, they’re certainly running — they’re running some of these on traditional Ethernet, which is what we’re deploying today. But as we get Scheduled Fabric out and these customers get more comfortable moving from InfiniBand to Ethernet, I think that’s when we’ll start to see the real impact of AI. And maybe it’s late ’24, but I would suspect into ’25 for sure.

David Vogt: Got it. And maybe just a quick follow-up. So Scott, were there orders from AI last quarter in the product order commentary? Are these basically new orders in this most recent fiscal quarter? Is that maybe the right way to think about it?

Scott Herren: Yes. Don’t think of the $500 million as all coming in, in the last quarter. Those are orders to date that we know are going into AI infrastructure. That’s not a Q4-specific comment.

Chuck Robbins: And by the way, a portion of that for sure is deployed. It’s in and running.

Scott Herren: Yes.

David Vogt: Got it. Okay. That’s helpful. Thanks, guys.

Marilyn Mora: All right. Thanks, David. We have time for one last question.

Operator: Thank you. Simon Leopold with Raymond James & Associates. You may go ahead, sir

Simon Leopold: Thanks for taking the question. I wanted to see if you could talk a little bit about what your assumptions are for your campus-related business, and I’m including both switching and wireless LAN. I assume that’s roughly — almost $15 billion of trailing four-quarter sales, somewhere in that ballpark. And I’ve seen market research saying that business declines, some saying it’s growing. And Chuck, you highlighted that $1 billion renewal. Just trying to get my head around how material that is. What’s built into the full year forecast for campus? Thank you.

Chuck Robbins: I’ll make two comments and, Scott, I’ll let you add to it. First of all, as we said, we think that as you see the Q2 calendar year share numbers come out, you’ll continue to see us gain share in that space. And so we would expect to continue doing that. The renewal number that I threw out was close to $1 billion. And Scott, I’ll just let you comment on how you want to break down or if you want to?

Scott Herren: Yes. No, I don’t think there’s a whole lot else to add. We’re encouraged by what we’re seeing in campus. It’s one of the things that that we’ve said all along is as the supply — the backlog begins to be delivered, you’ll start to see more and more of those customer decisions that went to us actually show up in the numerator of those market share equation. That’s exactly what you’re seeing. So I think the concern over the several quarters while we had supply constraints that maybe impacted us more than some of our peers. You should see those unwind as we can now deliver that backlog. The $1 billion of renewal that Chuck — roughly $1 billion of renewal that Chuck talked about, that is a subset of our fiscal ’24 guide.

Chuck Robbins: Yes.

Marilyn Mora: All right. So we’ll go ahead and turn it over to you, Chuck, for some closing remarks.

Chuck Robbins: Thanks, Marilyn. First of all, I want to thank our teams and just say how proud I am of the work that’s gone into the last couple of years to actually deliver the record results that we did. We’re incredibly proud of the share gains that we expected to gain and we are. I’m proud of the team and the new innovation that’s being delivered in areas like AI and security and across the portfolio in observability and core networking and SP routing, all of these areas, the teams are doing an amazing job. And our portfolio is very relevant to the customer priorities that we see around the world. I’ve never seen such consistency around the priorities in virtually every customer around the world. And our portfolio lines up nicely against the key things that our customers are trying to achieve.

I’m also very proud of the team and Scott and the rest of the finance organization for what they’ve done. And we’re very happy to provide clarity on our commitment to our shareholders with the operating leverage and the buybacks and our dividend as we look to the future. So thanks for joining us today.

Marilyn Mora: Thanks, Chuck, I’ll go ahead and wrap this up. Cisco’s next quarterly earnings conference call, which will reflect our fiscal year 2024 first quarter results, will be on Wednesday, November 15th, 2023 at 1:30 P.M. Pacific Time, 4:30 P.M. Eastern Time. This concludes today’s call. And of course, if you have any further questions, feel free to reach out to Cisco’s Investor Relations group. And we thank you very much for joining today’s call.

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