Cisco Systems, Inc. (NASDAQ:CSCO) Q4 2024 Earnings Call Transcript

Cisco Systems, Inc. (NASDAQ:CSCO) Q4 2024 Earnings Call Transcript August 14, 2024

Cisco Systems, Inc. misses on earnings expectations. Reported EPS is $0.536 EPS, expectations were $0.85.

Operator: Welcome to Cisco’s Fourth Quarter and Fiscal Year 2024 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 introduce Sami Badri, Head of Investor Relations. Sir, you may begin.

Sami Badri: This is Sami Badri, Cisco’s Head of Investor Relations, and I’m joined by Chuck Robbins, 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 available on our website in the Investor Relations section following the call. Income statements, full-GAAP to non-GAAP reconciliation information, balance sheets, 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’ll 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 on a year-over-year basis. The matters will be — the matters we’ll be discussing today include forward-looking statements, including the guidance we’ll be providing for the first quarter and full-year fiscal 2025. They are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent report 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.

I will now turn it over to Chuck.

Chuck Robbins: Thanks, Sami, and thank you all for joining us today. We had a strong close to fiscal ’24, delivering $13.6 billion in revenue for the fourth quarter, coming in above the high end of our guidance range and $53.8 billion in revenue for the year, coupled with growth in annualized recurring revenue, remaining performance obligations and subscription revenue. We also generated excellent margins boosted by Splunk. Our gross margin of 67.5% was the highest for Cisco in 20 years. We saw steady demand as we closed the year with total product order growth of 14% and growth of 6% excluding Splunk, indicating that the period of inventory digestion by our customers is now largely behind us as we expected. We’ve also been investing to accelerate critical innovation in key areas with Hypershield and hyperfabric for AI being two outstanding examples.

Q&A Session

With Splunk now part of Cisco, we believe we have an unmatched capability to unlock the full power of the network with market leading security and observability solutions to deliver even greater value for our customers. We have hit the ground running since we brought the Splunk and Cisco teams together, integrating powerful new customer solutions and beginning to realize early synergies. We know that our biggest competitive differentiator is the power of our full portfolio. This is why earlier today, we announced that we will be bringing our networking, security and collaboration teams together as one organization with Jeetu Patel stepping into an expanded role as Chief Product Officer to lead this group effective immediately. As we complete the full integration of Splunk into Cisco, the Splunk product line will also integrate into this new organization at the right time, bringing our entire product portfolio together as one team.

With this new organization, our products will come together in a more integrated way than ever before, positioning us to deliver incredibly powerful outcomes for our customers. Looking ahead, we remain laser focused on growth and consistent execution as we invest to win in AI, cloud and cyber security. To focus on these key priority areas, today, we announced a restructuring plan to allow us to both invest in key growth opportunities as well as drive more efficiency in our business. Now let me share some details on our fourth quarter. We delivered solid performance in Q4 with revenue coming above the high end of our guidance range. Strong operating leverage across our business once again drove non-GAAP margins above the high end of our expectations, resulting in earnings per share also coming in above the high end of our guidance range.

We continue to focus on growth in our recurring revenue streams, annualized recurring revenue, remaining performance obligations and subscription revenue all showed solid growth and subscriptions made up 56% of our revenue in the quarter. We also continued to deliver on our commitment to consistent capital returns. In Q4, we returned $3.6 billion in value to our shareholders through share repurchases and cash dividends, bringing the total to $12.1 billion in value returned in fiscal ’24 or 119% of free cash flow. In terms of customer demand, as I mentioned earlier, we saw steady demand in Q4. This resulted in double-digit product order growth across all geographies and strength in all customer markets despite persistent macro uncertainty. Public sector demand was particularly strong worldwide, driven by federal spending in the U.S. and strength in APJC.

Enterprise demand returned to strength in the quarter with solid performance in the Americas and EMEA and even stronger results in APJC. We signed several $100 million plus transactions in the quarter with global enterprises, who are leveraging the breadth of our technology platforms to modernize and automate their network operations and deploy next-generation machine learning and AI applications. I’d like to highlight one of the largest deals we signed in the quarter with a leading global logistics company to advance their efforts in creating the world’s most flexible, efficient and intelligent logistics network. Cisco’s technology platforms across switching, routing, security and observability will enable our customer to automate network operations with cutting edge innovations like AI-powered robotics and unmatched supply chain visibility.

We also signed our first cross portfolio agreement that includes Splunk with a major automotive company in this quarter. AI is transforming every aspect of our customers’ IT environments. They need to modernize their infrastructure, harness the full power of AI and data and improve their cybersecurity posture, all while building agility and resiliency across their entire digital footprint. Our customers continue to put their trust in Cisco and we are very well-positioned to be their strategic partner for this era. In-service provider, while our telco and cable customer demand remain muted overall amid continued industry wide pressure, we saw strength in EMEA, driven by investment in AI operations and autonomous networks by service providers to help them monetize their B2B offerings.

We are also encouraged to see signs of stabilization and improved performance in webscale in terms of pipeline and demand with double-digit order growth. To provide some incremental color, let me share some data on demand through the lens of our products. Excluding Splunk, security product orders grew double-digits. Collaboration product orders grew double-digits. In our networking portfolio, data center switching also saw double-digit product order growth and enterprise routing, campus switching and wireless orders were also strong with wireless orders greater than $1 million, up more than 20% year-over-year as customers look to enhance their office environments. Across the breadth of our portfolio and global customer base, our product order results demonstrate strengthening demand as our customers focused on their next top priority technology investments.

While customers continue to ruthlessly prioritize their investments, our product order results demonstrate that our customers continue to look to Cisco as they focus on their most important technology initiatives. Now turning to look at our product categories in more detail. We saw revenue growth in security and double-digit growth in observability year-over-year, excluding Splunk as customers look to enhance their digital resilience with Cisco’s technologies. We’ve had extremely positive feedback from customers with early access to Hypershield, the first truly distributed AI-native cybersecurity solution built into the fabric of the network. Hypershield furthers our vision for the Cisco Security Cloud, which is expected to deliver the industry’s most comprehensive, unified platform with end-to-end solutions, making it easier for our customers to protect against evolving threats and we look forward to making it available this fall.

Our new security solutions, XDR and Secure Access are continuing to gain strong traction. We added over 230 new XDR customers in Q4. Early in the quarter, we announced the integration of Cisco XDR with Splunk Enterprise Security. And at the Black Hat Cybersecurity Conference earlier this month, we announced the availability of Talos Incident response for Splunk customers, enabling access to the full suite of proactive and emergency services to help prepare for, respond to and recover from a breach. We also continue to capitalize on the multi-billion dollar AI infrastructure opportunity. We have now crossed $1 billion in AI orders with web scale customers to date with three of the top four hyperscalers deploying our Ethernet AI fabric, leveraging Cisco validated designs for AI infrastructure.

We expect an additional $1 billion of AI product orders in fiscal year ’25. As I shared at our Investor Day in June, this momentum is being fueled by multiple use cases in production with the hyperscalers, several of which are in AI. In addition, we have multiple design wins with roughly two-third of these in AI. Over and above the web scale AI opportunity, we believe we are well-positioned to be the key beneficiary of AI application proliferation in the enterprise. Our hyperfabric AI cluster solution created with NVIDIA helps our enterprise customers build infrastructure to run generative AI models and inference applications. The on-premise solution will guide users from design to validated deployment to monitoring and assurance when it becomes available later this fiscal year.

We are also enhancing our own productivity by using AI in our services and customer experience organization. We have a robust AI and automation framework that touches at least 50% of our service requests. In addition, we are incorporating AI assistance into our products so that our customer and partners have efficient options to access support. Before I hand it over to Scott, I want to take a moment to thank our teams for all their hard work to close out the year and their relentless focus on our customers. In closing, while we’re pleased with our performance in a dynamic environment, we know we have to drive strong execution to be successful in the growing markets we serve. We believe this will result in strong growth and profitability as we enter fiscal 2025.

I’ll now turn it over to Scott to provide more detail on the quarter and our outlook.

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. Our Q4 results reflect solid execution with strong margins and strength in orders as customer buying patterns begin to return to normal. For the quarter, total revenue was above the high-end of our guidance range at $13.6 billion, down 10% year-over-year comparing against our strongest quarter ever in the fourth quarter of fiscal ’23. Float contributed approximately $960 million in revenue for the quarter, in line with our expectations. Non-GAAP net income was $3.5 billion. Non-GAAP earnings per share was above the high-end of our guidance range at $0.87. The interest impact from financing the Splunk acquisition more than offset the positive operating impact of Splunk.

The net effect was a negative impact of $0.04 on non-GAAP earnings per share for the quarter. Looking at our Q4 revenue in more detail. Total product revenue was $9.9 billion, down 15% as we move through the final quarter of customer inventory issues and services revenue was $3.8 billion, up 6%. Networking, our largest product category was down 28% when compared to our Q4 ’23 networking revenues, which benefited from near-record shipments of excess backlog. Security was up 81%, including the benefit from Splunk. Excluding Splunk, security grew 6%, driven by competitive wins and growth in SASE and double-digit growth in network security. Collaboration was flat, driven by growth in our cloud calling and CPaaS offerings, offset by declines in meetings and devices.

Observability was up 41%, driven by growth in our observability suite, our Splunk observability offering and 1000 hours Network services. Excluding Splunk, observability grew 12% for the quarter. Looking at our recurring metrics, ARR ended the quarter at $29.6 billion, which increased 22% due to continued strong performance and contribution from Splunk. These factors also drove our product ARR growth of 43%. Without Splunk, ARR was $25.3 billion, up 4% and product ARR was up 9%. Total subscription revenue increased 17% to $7.7 billion, which now represents 56% of Cisco’s total revenue. Without Splunk, total subscription revenue was up 2%, representing 53% of Cisco’s total revenue. Total software revenue was up 15% at $5.3 billion, with software subscription revenue up 25%.

92% of our total software revenue was subscription-based. Without Splunk, software revenue was down 5% due to declines in perpetual license software as we move to more subscription-based software arrangements. Software subscription revenue was up 2%. Total RPO was $41.0 billion, up 18% due to both strong organic performance and the addition of Splunk. Product RPO grew 27%. Total short-term RPO was up 17%. Without Splunk, RPO was $37.5 billion, up 8% with product RPO also grew at 8%. As Chuck said, Q4 product orders were up 14% year-over-year. Excluding Splunk, product orders were up 6% year-over-year, indicating the period of inventory digestion by our customers is now largely behind us. Looking at our product orders across our geographic segments year-over-year, Americas was up 15%, EMEA was up 12% and APJC was up 16%.

In our customer markets, public sector was up 20%, enterprise was up 13% and service provider cloud was up 5%. Total non-GAAP gross margin came in at 67.9%, up 200 basis points year-over-year and exceeding the high-end of our guidance range. Product gross margin was 67.0%, up 150 basis points, largely driven by Splunk and favorable product mix, offset by price. Services gross margin was 70.3%, up 280 basis points. Non-GAAP operating margin came in at the high-end of our guidance range at 32.5%. Shifting to the balance sheet We ended Q4 with total cash, cash equivalents and investments of $17.9 billion. Operating cash flow was $3.7 billion. Consistent with our capital allocation strategy, we returned $3.6 billion to shareholders comprised of $1.6 billion for our quarterly cash dividend and $2.0 billion of share repurchases.

We took advantage of market conditions to increase our share repurchases during the quarter. Turning to the full-fiscal year. We delivered strong margins and increased our operating leverage. Revenue at $53.8 billion made fiscal ’24 Cisco’s second strongest year on record as compared to the all-time high revenues of $57 billion in fiscal ’23, which benefited from significant shipments of heightened backlog. Splunk contributed approximately $1.4 billion in revenue after the close of the acquisition in March of this year. Non-GAAP earnings per share was $3.73, exceeding the high-end of our guidance range, down 4% year-over-year. Splunk was $0.04 dilutive to full-year earnings, including the impact of financing costs. In terms of our recurring metrics, total software revenue for the full-year was up 9% at $18.4 billion, with the product portion also up 9%.

Software subscription revenue was up 15%. 89% of total software revenue was subscription-based. Without Splunk, total software revenue was up 1%. Total subscription revenue was $27.4 billion, an increase of 11%. Without Splunk, total subscription revenue was up 6%. As Chuck mentioned, total non-GAAP gross margin was 67.5%, up 300 basis points and the highest in 20 years. On the bottom line, non-GAAP net income was $15.2 billion. Operating cash flow was $10.9 billion. As a reminder, cash flow was impacted by the timing of large tax payments in fiscal ’24 compared to fiscal ’23. In the year, we returned $12.1 billion in value to shareholders through cash dividends and share repurchases. It was comprised of $6.4 billion in quarterly cash dividends and $5.8 billion of share repurchases.

We increased our dividend for the 13th consecutive year in fiscal ’24, reinforcing our confidence in the strength and stability of our ongoing cash flows. To summarize, we executed well in Q4 and the fiscal year. We exited the year with order levels improving as customers largely completed the implementation of record Cisco product shipments. Further, as Chuck mentioned, we are realigning our expenses to better capture the opportunities ahead. As part of our announced restructuring plan, we expect to impact approximately 7% of our global workforce with total estimated pre-tax charges of up to $1 billion. Turning to our financial guidance. For fiscal Q1, our guidance is as follows. We expect revenue to be in the range of $13.65 billion to $13.85 billion.

We anticipate the non-GAAP gross margin to be in the range of 67% to 68%. Non-GAAP operating margin is expected to be in the range of 32% to 33%. Non-GAAP earnings per share is expected to range from $0.86 to $0.88. And in Q1, we’re assuming a non-GAAP effective tax rate of approximately 19%. For fiscal year ’25, our guidance is as follows. We expect revenue to be in the range of $55 billion to $56.2 billion. Non-GAAP earnings per share is expected to range from $3.52 to $3.58. And we’re assuming a non-GAAP effective tax rate of approximately 19%. Sami, let’s now move into the Q&A.

Sami Badri: Thank you, Scott. Before we start the Q&A portion of the call, I would like to remind analysts to ask one question and a single follow-up question. Operator, can we move to the first analyst in the queue?

Operator: Thank you. Our first caller is Meta Marshall with Morgan Stanley. You may go ahead.

Meta Marshall: Great. Thanks so much. Chuck, I just wanted to maybe start with you in terms of what you’re seeing in terms of budget prioritization from customers. Clearly, they’re coming out of a digestion period, but just any sense of how they’re balancing different enterprise or initiatives, particularly trying to balance AI initiatives? And then maybe second, just for Scott, is the full-risk embedded in the fiscal ’25 guidance, just any clarification? Thanks.

Chuck Robbins: Thanks, Meta. Yes, I would say if you look across the portfolio, just if I go around the world a little bit on the demand side, from a geographic perspective, it was very balanced at Americas and Europe up 6%, Asia up 8%. This is — these all these numbers are excluding Splunk that I’m going to talk about real quickly. The segments enterprise was plus 3%, cloud and SP was plus 2% and then public sector was plus 15%. And so we saw a pretty balanced strength there. But across the technology portfolio, it was incredibly balanced. So we saw double-digit growth, as we said in security, double-digit growth in collaboration. And then in the networking space, I think it’s important to point out the switching business and the enterprise — the enterprise switching and the enterprise routing businesses were both up high-single-digits and the wireless business was up double-digits.

And again, I think Scott had in his remarks that the number of $1 million transactions in wireless alone was up 20% year-over-year. So we saw super balanced demand across the portfolio. The one thing I would say that we heard for the first time this quarter that we haven’t heard before is that customers — enterprise customers are now actually upgrading their infrastructure in preparation for AI. And in some cases, they’re taking some of the dollars that they’ve set aside for AI to actually spend it on modernizing their infrastructure in order to get ready for that. And you saw that with some of the examples we gave in these platform sales, the large logistics company that we have that actually bought the cross-portfolio solution, the whole platform, Cisco platforms and they’re looking to enable AI-powered robotics, AI-powered supply chain visibility, et cetera.

So we think we’re beginning to see customers actually prepare for AI applications, even though in many cases, they may not know the full range of what they will be deploying, but they know they need to be ready. So that’s kind of what we saw.

Scott Herren: And Meta, I want to make sure I got your second question right. Did you say it’s the full-risk embedded in fiscal ’25 guidance?

Meta Marshall: Just the layoffs that were announced, just whether that is fully embedded, the savings from the 7% cut are embedded in the fiscal ’25 guidance.

Scott Herren: Yes, it is. And it’s a good place to kind of explain a little bit more detail what that — what that action is about. It’s not about cost saving. So the answer is yes. It’s embedded in the guide, but it’s much more about finding efficiencies across the company so that we can pivot more resources, much like we did last year into the fastest growth areas within the company, which are pivoting more into AI, pivoting more into cloud and pivoting more into cyber security. So think of it more as reallocating versus being in pursuit of cost savings. But yes, it’s all built into the guide.

Chuck Robbins: Yes, Meta, I would just add on that one that there — we actually are shifting hundreds of millions of dollars into AI, into AI networking for cloud, into AI infrastructure, silicon and cyber. So it’s a — it’s a meaningful shift, but we feel like the market is moving so quickly we have to do that.

Sami Badri: Thank you, Meta. Operator, next question.

Operator: Thank you. Tal Liani with BofA Securities. You may go ahead, sir.

Tal Liani: Hi, guys. The last question a little bit stole my thunder somewhat, but I want to ask it anyway. On one hand, there is always a correlation between business cycles and restructuring. And here you see a company that is improving on all fronts with orders growing and still you are announcing a major 7% restructuring. Is there anything in the environment that makes you more cautious? Is there anything that drives the timing of this restructuring ahead of what is expected to be a good year? So I’m wondering what can we learn from your view on the environment given the timing of restructuring? And…

Chuck Robbins: Let me — I’m sorry. Go ahead.

Tal Liani: Okay. I’ll just ask my second question together. It’s a quick one. On security, great performance finally improving. Was there any implication of what we’ve seen with CrowdStrike? Have you seen any change in purchasing behavior or any different dynamics among customers because of what happened with CrowdStrike? Thanks.

Chuck Robbins: Thanks , Tal. Let me just make a comment on the restructuring and Scott, you can talk a little bit about it, and then I’ll take the security question back. So on the restructuring, the answer to that is no, there’s nothing else out there. We had tremendous demand across the portfolio. It was very broad based and it was very consistent. It really is about ensuring in a rapidly moving markets that we serve that we’re able to shift resources into the most important areas. So that’s really it. Scott, anything to add?

Scott Herren: Just — Tal, this is just a continuation of what you’ve seen us do. And we talked at Investor Day about having already pivoted on the R&D front, little more than 50% of our R&D spend into those three areas, into AI, cloud and cyber security. Obviously, networking continues to be incredibly important to us and we’ll continue to support that space as well. But it’s looking for efficiencies as we — as we look across the company really in every way so that we can take those resources and allocate them into the fastest growing spaces. I think it’s — think of it as more of just the financial discipline that you’ve always seen from us. I mean, if you just look at the year we just closed, obviously, it was a challenging year on the top line for revenue and yet we reported the highest operating margin in the history of the company. So this is just more of the financial discipline that I think you’ve noticed for.

Chuck Robbins: And then on the security question, yes, Tal, if you think back to — go back about a year, what I had said, I felt like what happened is that we would start seeing improvement in the second half of fiscal ’24. We were high-single-digits in Q3, we were double-digits in Q4, and I said we should see the real momentum kick in ’25. And I think that’s what we’re feeling the beginning of that. As it relates specifically to CrowdStrike, it’s hard for me to say, I will tell you that we added 230 more XDR customers, we’re pushing 600 customers on that platform, which is a — it’s a pretty significant decision when customers make that decision. So that’s encouraging. And candidly, the secure access product that is the cloud edge security solution is actually ramping even faster than XDR did.

So the teams have done a great job with this innovation. We have 2,200 customers now that are using our AI assistant in security. And so that’s very encouraging as well. So we’re really optimistic about what the teams have been doing in this space.

Sami Badri: Thank you, Tal. Michelle, we’ll go to the next question.

Operator: Thank you. Samik Chatterjee with JPMorgan. You may go ahead, sir.

Samik Chatterjee: Hi, thanks for taking my question. And before I ask the question, congratulations to Jeetu on the expanded role as well. Maybe just starting off with the AI orders, Chuck, I think you mentioned you already cumulatively crossed $1 billion and are on track for the $1 billion next year. Maybe if you can give us some sense on what’s the current sort of run rate that you’re hitting relative to the $1 billion target you have for next year? And as you sort of get more visibility in terms of some of these deployments, how are you thinking about the orders, timing of the orders translating into revenue? And I have a follow-up. Thank you.

Chuck Robbins: Samik, could you ask a follow-up now, please?

Samik Chatterjee: Okay. On the follow-up, I was just really going to more ask about what’s embedded in terms of the guide relative to the Splunk growth versus the core business? And if we are sort of calculating it right, it looks like Splunk’s growth was about 5% in the quarter, looks a bit more subdued than sort of the double-digit growth I think everyone was expecting. So any guide — any sort of thoughts on why it was a bit more subdued if I’m doing the math right and how to think about sort of what’s embedded in the guide for fiscal ’25? Thank you.

Chuck Robbins: Yes. So on the AI orders, we did talk about the fact that we crossed $1 billion to date in the web scale space, which is solid. And at Investor Day, we talked about the number of design wins we’ve had, which are wins where we have received the go ahead from these customers that they’re going to go with us assuming we execute and deliver on the design as they have spected. And so we’re only 2.5 weeks into the year, so it’s hard to say right now how those are going to flow throughout the balance of the year. But I will say that one of the absolute largest players in this space actually told us last week that they are releasing orders in one of those design wins. So one of those design wins will start to generate orders in the near future. So I think things are playing out as we expected. And candidly, it’s just up to us to execute and deliver on what they’ve asked us to deliver.

Scott Herren: Yes. And Samik, on Splunk, as we said in the opening commentary, it’s progressing right in line with our expectations that the focus of that transaction was much more about driving revenue. Of course, it’s a long sales cycle. We’ve already seen, as Chuck mentioned, double-digit number of deals that have closed with our two sales forces selling together. So the momentum in the field is good, Splunk. The better metric for Splunk, we talked about revenue because that obviously shows up in the P&L. The better metric for them is ARR and their ARR is continuing to grow in double-digits, which is right where it was the last time they reported as a public company. So continuing to see good momentum and beginning to see the green shoots of the sales force is really selling together.

We’ve also done a fair number of product integrations. And I think Chuck talked about several of those in his piece of the script. And so what’s going to happen over time is it’s going to be harder and harder to say what is with these integrated product sets, what is Splunk revenue and what is Cisco revenue. I will tell you, we’ve built in the full impact of where we expect the combined company to be. But I think defining longer-term, how much of that is allocated to historical Splunk and how much that’s allocated to historical Cisco is going to get tougher and tougher. So what I’d tell you is it’s built — it’s performing well. We’re already seeing good signs of the sales forces selling together and it’s built into the guide.

Chuck Robbins: Yes, I think that’s really important, Scott, because we said that Splunk typically has a six to nine months sales cycle. And we closed I think over 10 of these cross-sell deals that were worked between the Cisco sales force and the Splunk sales force last quarter, which was promising and we also, as I said in my comments, we did the first cross-portfolio agreement that would have traditionally been a Cisco offer to one of our largest customers in the U.S. and we actually transacted it with Splunk included in that. So we’re beginning to see what we would have expected at this point and maybe even a little ahead of what I would have expected at this point.

Sami Badri: Thank you, Samik. Michelle, we can move to the next question.

Operator: Thank you. George Notter with Jefferies. You may go ahead, sir.

George Notter: Hi, thanks very much, guys. I wanted to ask about putting the organization together, networking, security, collaboration. Can you talk a bit about what’s driving that integration? I assume you’re going to talk about the need for products to be integrated, especially as we leverage AI, leverage big data sets. But can you walk through kind of the precise motivations driving it? Thanks.

Chuck Robbins: Yes, George, thank you. You nailed it. Actually, you could answer for me. I think the — if you look at what our biggest competitive differentiation is in the marketplace, it’s really when we do deep cross integration across the portfolio and we’re delivering on a platform strategy for our customers. And I felt like with the pace at which the AI revolution is moving and what our enterprise customers need from us. And candidly as security and networking continue to become more tightly intertwined, I just felt like it was important for us to have a single leader. And if you look at what Jeetu has accomplished in his four years here when he took on the collaboration business originally, I think everybody remembers what the portfolio was like then versus what it’s doing now with double-digit growth this quarter.

And obviously in the security portfolio, he’s done exactly as we had expected. And I think we have a great networking team and I think his focus on execution, innovation and sense of urgency, I think is going to be really welcome there. And so we look forward to seeing what that — what the teams accomplished and the innovation that they’ll deliver in the future.

George Notter: Thank you.

Chuck Robbins: Thank you.

Sami Badri: Thank you, George. Michelle, can we move to the next question?

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

Amit Daryanani: Good afternoon. Thanks for taking my question. I guess maybe to start with, Chuck, your commentary around customer demand patterns kind of getting back to normal, the orders showing positive growth all sound really good. Maybe you could just contrast that and help us frame that versus your guidance for overall revenues being up 3% inclusive of Splunk. There’s obviously a fear that Cisco is losing share. Maybe you can just talk about how to think about your revenue growth, what headwinds you have for maybe backlog normalization that should be factored into this 3%, 3.5% revenue guide? That would be really helpful to sort of understand. And then perhaps just as a follow-up, Scott, can you just quantify what sort of cost savings are you expecting from this reduction program?

I realize none of this will flow to the bottom-line. It sounds like you want to invest it back in the business. But just to frame it up, what sort of savings on a gross level maybe you expect from these cost reduction initiatives? Thank you.

Chuck Robbins: Yes, Amit, on the first one, we’ve talked about this in the past. The headwind that we have for fiscal ’25, we talked about this back at the — on the Q3 call and again at our Investor Day, we still have a tough compare in Q1, as you know. Q1 of fiscal ’24, the year that just ended, we had significant amount of product shipments from excess backlog. Round number is $4 billion of shipment, we included in those Q1 numbers. And obviously, you can only ship that backlog once. So we don’t get to ship that again in Q1 of this year. That not only creates a dislocation in what the growth rates are for Q1, but it impacts the entire year as well. So one of the things that we talked about on the last call was if you looked at our growth rate of the core business and said X backlog and X Splunk, you can do the pencil math and see what is that growth rate.

And it’s in that same range that we gave you for the long-term growth rate. So that’s what’s kind of underneath the positive news that we’re seeing around demand returning to normal patterns, but then the headwind that creates to revenue growth for the year in the guide. On the cost reductions from the actions that we’re taking, it really is a case, much like it was last year of us finding those efficiencies across the company and really reallocating. So think of it as much more of a reallocation process than it is a cost savings process. That’s — this is the same financial discipline you’ve seen from us for the last couple of years. And as I said in answering the question earlier that the kind of the hallmark of that is when you look at a year, which was a tough year in terms of revenue production and with the discipline that we have, we still delivered the highest operating margin we have in the company — in the history of the company.

So think of it that way. We need to pivot more resources into the fastest growth areas of our business and we’re doing it by finding efficiencies and then reallocating those costs.

Sami Badri: Thank you, Amit. Michelle, we come up to the next question.

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

Simon Leopold: Great. Thank you for taking the question. I’m — I’m interested in maybe unpacking a little bit of the $1 billion of incremental AI orders you talked about for fiscal ’25. And what I’m sort of trying to understand is, are you looking at this as sort of more of the same, meaning very similar in the customer mix and product mix of the first $1 billion or are we expecting the beginning of maybe enterprise adoption for inferencing or what’s the nature of that incremental $1 billion? And then my follow-up is quick and probably one that might be a little bit trickier to answer. But what are you budgeting for fiscal ’25 OpEx? I think we’re all trying to get to that one way or another. Thank you.

Chuck Robbins: Thanks, Simon. So I’ll take the AI one. I would say that it doesn’t have a meaningful amount of enterprise built into it. It’s — we are beginning to see the enterprise pipeline build a bit, but it’s mostly predominantly the same thing that we’ve talked about in the past, which is a web scale infrastructure space. So if the enterprise picks up materially somewhere along the way, then that number could be higher. The other thing I’d point out is, I also believe over time, it’s going to be — it’s going to get more and more difficult to really identify orders that are AI related because as I said earlier, we’re beginning to see enterprise that are enterprises now that are updating their infrastructure as a result of AI.

So does that count as an AI order or not? But anyway, we’re going to — we’re going to stay pretty pure to how we measured them so far as we — as we continue to update you on these numbers, but I think that’s how it’s going to play out over the course of the year.

Scott Herren: And Simon, on your second question, obviously, for the full-year, we don’t guide at that level. We guide — we’ve given you revenue, we’ve given you what — what to expect on EPS. But for Q1, we also gave you the ranges for gross margin and op margin. And you know there’s in below the op margin line in OI&E, we’ve talked about the interest impact of the money that we spent to acquire Splunk. And I think you understand what that looks like. So what I’d give you as an additional modeling point is when you look through the year, we talked about the Q1 guide being gross margin in the 67% to 68% range and op margins being in the 32% to 33% range, it stays pretty well in that range for the full-year as well.

Sami Badri: Thank you, Simon.

Simon Leopold: Thank you.

Sami Badri: We will move to the next question.

Operator: Thank you. Matt Niknam with Deutsche Bank. You may go ahead.

Matt Niknam: Hey, guys. Thanks so much for taking the question. On the point around the platform approach, maybe, Chuck, if you can speak to where the platform approach is resonating more across your different customer sets within enterprise, SP and public sector? And how much of these purchasing decisions, primarily around bundle — buying networking and security adjacent to one another. How much of this is actually being done in unison today and where do you think that goes over time? Thank you.

Chuck Robbins: Thanks, Matthew. I think that, look, these are happening primarily in the large enterprise and in the large public sector customers. That’s where we see it. In the quarter, we had large enterprise and large public sector customers that actually executed on these nine figure deals. So it’s happening across a broad array of customers in different industries. And I would say that when it comes to security and networking, you’re seeing it particularly in the — at the cloud edge. As you know, when you see SD-WAN and the cloud security coming together. But we’re also beginning to see it and we’re going to actually drive it in the data center with Hypershield where you have security embedded deeply in the network. And I think that one of the — one of the key benefits of the organizational change that we made is that you’re going to see more and more innovation that is going to actually come from us where the security and the network are more tightly connected in the future.

Scott Herren: And Matt, what I’d add to the second part of your question kind of how much of the large deals and where does that go? Just a quick data point for you. We talked about product order growth ex-Splunk being at 6%. If you netted out these large — we call them whole portfolio agreements. If you netted those out of both years, actually the product order bookings growth goes up modestly. Think of it as being in the same range. So while it was a good quarter for that, it always is in Q4, it’s not the outsized driver of our growth. We’re seeing growth really across the board.

Sami Badri: Thank you, Matthew. Michelle, we can move to the next question.

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

Ittai Kidron: Thanks, guys. A couple of questions for me. First, Doug, in your prepared remarks, you had in the slides 4 examples of $100 million platform deals, multiple platforms, I guess, within each single customer. Maybe can you talk about where these — all of these customers were naturally big Cisco customers before these renewals and deals. So I guess the question is, where is the incremental value, in what product areas do you see yourself really gaining more from a footprint when you’re coming with these platform deals? And the second question relates to the cloud order growth, only two points, if I’m getting that right, not all that impressive this quarter. Maybe you can unpack that a little bit more. Thank you.

Chuck Robbins: Yes, thanks Ittai. You’re right. Most of these large platform deals are existing customers for sure. In some cases, these are the first — this is the first time we’ve done one and in some cases, it’s a renewal of one we did three, five years ago. So it varies. And I would say in all the customers, I’d say the big thing is probably an expansion for us now is the — is the real recognition that the security portfolio is much more robust and the innovation that’s been driven in that platform, I think is one of the advantages that the customers are really seeing through these platform deals that we’re seeing. But also, again, I think when you get into the use cases, it’s really important to understand that some of them are actually doing these now in preparation for these AI workloads like the AI-powered robotics example that we gave earlier.

On the cloud order growth, that 2% was a combination of service provider and traditional service provider and cloud, the hyperscalers. And so if you look at the hyperscalers, we saw very significant growth in the second half of the year and in Q4. We said double-digits. I would just say it was meaningful and it was really refreshing to see. And as Scott said earlier, we feel like this digestion period is behind us now as we — as we had hoped and thought it would be by the end of Q4. And so we hope to see normal buying behavior in the hyperscalers over the coming quarters.

Ittai Kidron: Thank you.

Sami Badri: Thank you Ittai. Thank you, Ittai. Michelle, next question.

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

Jim Fish: Hey, guys. Thanks for the questions here. You guys are reducing 7% of the workforce, but based on your comments, Scott, it sounds as though that is kind of the gross number. So is there a way to think about sort of that net number by year end and how many employees are actually affected? And as a follow-up, obviously, Gary has been now in his role for a bit longer and you guys are starting a new fiscal year here. So how are you guys thinking about changes to the sales efforts or compensation structures with this kind of ongoing restructuring and meanwhile is kind of push more towards a platform sale? Thanks, guys.

Scott Herren: Yes, Jim, I’ll start. I think the — again, think of that as the reduction that we’re doing as much more of a reallocation versus a headcount savings. In some cases, the efficiencies that we’re going to get will be from by moving into lower cost locations. So it’s not as easy to do the math to say like, hey, if you were 90,000 heads before and 7%, I expect you to be at whatever the math works out to. Some of that is not going to be just a one-for-one headcount change, it’s going to be savings that come by putting more work into lower cost locations. So it’s — I don’t think the math is going to help you as you try to build out your model.

Chuck Robbins: Yes, I think from Gary’s perspective, he’s not on the call with us today, but I think he’s focused on — we’re putting in cross-sell incentives for the — for Splunk on the Cisco sales force. We’re going to be — we’re going to incent the security sellers inside Cisco. We’re looking at the Splunk sales force over time being able to sell the security portfolio from Cisco. But he’s focused on simplicity. He’s focused on more frontline quota carrying reps. He’s focused on investing in more capacity in the enterprise space where these platform deals are more prevalent, more systems engineering and a real doubling down on the focus on core networking and infrastructure. So I think you’re going to see a real — a real renewed effort to get the team’s focus not only on some of the software assets and security, but really doubling down on core networking.

Sami Badric: Thank you, Jim. Michelle, we can move to the next question.

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

Ben Reitzes: Hey, guys. Thanks for the question. I wanted to ask you, Chuck, a little bit more about the getting ready for AI, the uptick in orders where you see folks getting ready. Did you mean like some of the wireless orders where they’re anticipating using apps or did you mean that they’re anticipating doing training on top of some LLMs? I just wanted a little more if you had any insight as to what they’re really using it for and which area of your portfolio that you’re really seeing it in? And if you’re getting a sense like for what they’re really prepping for? And then — oh, sorry. And then my follow-up is — my follow-up is just with regard to NVIDIA. So a follow-up there is, with regard to your orders, it sounds like enterprise is small with regard to the AI orders, but wondering if you’re seeing any interest in the NVIDIA partnership yet? Thanks.

Chuck Robbins: Thanks, Ben. So on the enterprise AI, what I would say is some customers like these platform deals that we talked about, they’re buying the entire portfolio to refresh their infrastructure to actually because they have applications that they’ve already identified like the ones we were referencing earlier. In other cases, they are updating their data center infrastructure and their core network infrastructure to be ready for smaller training models on their own private data and or inference. It just varies across the board. And I think to be honest with you, a lot of customers are — would tell you that we’re not really sure exactly what the applications are going to look like, but I know one thing for sure is it I need to have a modern and up-to-date infrastructure to be prepared for that.

So I’m just going to go in and see where do I — where do I need to make those investments. In some cases, I may need to update my switching infrastructure. In some cases, it may be new wireless. We saw data center switching in double-digits as well. So I think it — I think it was fairly broad based. And then I’d say on the NVIDIA partnership, it’s too early. We’re not even in early field trials yet with that solution. So I don’t think there’s a lot to share yet.

Sami Badri: Thank you, Ben. Michelle, we can move to the next question.

Operator: Thank you. Aaron Rakers with Wells Fargo. You may go ahead, sir.

Aaron Rakers: Yes. Thanks for taking the questions. Sticking on the AI theme, I’m just — as we think about this $1 billion of orders, I think last quarter you talked about line of sight into the $1 billion going into fiscal ’25. I’m curious if you can unpack that a little bit in terms of, are these back end network deployment, competing against Arista, internal switching offerings from the cloud guys? And is it switching? Is it Silicon One, full switch? Is any kind of granularity you can give between within that $1 billion orders? And then I’ll say my second question. As we think about the split contribution in the fiscal ’25. If we annualize the fourth quarter contribution, to me, it’s going to lead me to think that core Cisco is kind of flattish kind of embedded in your guidance for the full-year. Is that fair? And if so, how are you thinking about the networking growth for the full-year guide? Thank you.

Chuck Robbins: Yes. So on the $1 billion, I would say it is primarily back end and it is a combination of both Ethernet and optics. We have a very robust optics business and it is competing with the players that you would suspect that we would compete with. In some cases, it’s a system from us. In some cases, it’s a — perhaps it’s a white box solution. But one of the big advantages we have is that we can actually sell them silicon, we can sell them, we can help them build white boxes or we can sell them integrated systems and it’s a combination of all those things as well as optics. And then on the second one, you want to take?

Scott Herren: Yes, well, Aaron, and this is back to what I was touching on earlier that if you remember, Q1 of fiscal ’24, the compare point for our current quarter, also had a pretty significant amount of excess backlog clearance in it. We talked about it at Investor Day that it was in the $3.5 billion to $4 billion range of clearance that happened in Q1 a year ago. Obviously, that won’t repeat in Q1 of this year. So while we’re seeing a nice normalization of demand across the board, we’ve got that year-on-year headwind compare of not being able to have the significant backlog clearance again in Q1 of this year. You can add that to your math and you’ll get a different outcome on what’s happening in the core.

Chuck Robbins: Yes. Thanks, Aaron.

Sami Badri: Thank you, Aaron. Michelle, we can move to the next question.

Operator: Thank you. Our next question is Atif Malik with Citi. You may go ahead.

Adrian Colby: Hi, it’s Adrian Colby for Atif. With regards to the inventory levels normalizing and a bit to the prior question, how should we think about the quarterly trends in the business? Are we sort of back to a scenario with regular sort of prior seasonal dynamics or as the business mix has evolved, are things changing? And also as we think about fiscal year ’25, how should we think about the January dynamic with Splunk? It looks like historically that was a pretty strong quarter for Splunk.

Chuck Robbins: I’ll answer the first and then Scott, you can take the second. The — we believe that we are finally back to normal ordering patterns. And we were talking about it as we’re getting ready for this call and it’s literally been four years that we’ve been going through this and with — between COVID and then the supply chain shock and then having to deal with this digestion challenge at the end. So we’re quite happy to be here. But we feel like we are back to normal ordering patterns. So it should be — should be like it was prior to the pandemic. Scott?

Scott Herren: Yes. And on the January dynamic on Splunk, like most enterprise software companies, not only do they get back end loaded into what was previously their fourth quarter, the January quarter that you talked about, but they also get very back end loaded within that quarter to the very end of it, right? And you see that with almost all enterprise software companies. The one bit of normalization that we’ve had to do is we brought Splunk in, our fiscal quarters don’t actually end on the last day of the month. They end on the last Saturday of the month of that quarter. And so there’s typically a tail of two or three days that would be the normal end of the Splunk quarter that doesn’t fall into the end of our quarter. So it will be a muted impact on our second — that January quarter is our second quarter. It will have a muted impact because we’ll lose two or three days, which are two or three big days out of our Q2. Some of that will bleed over into Q3 for us.

Sami Badri: Thank you, Adrian. Operator — Michelle, we can move to the next question.

Operator: Thank you. Karl Ackerman with BNP Paribas. You may go ahead.

Karl Ackerman: Yes, thank you. You indicated that inventory digestion for hyperscale and enterprise networking is largely behind you. Though, Scott, I think you noted in your — in general that price was somewhat of a headwind to product revenue in the quarter. Could you speak to the rate of change in the improving order visibility since the beginning of this year? In other words, as visibility improved from three months to say six to nine months? And then second, do you anticipate the pricing environment stabilizing or improving from here as you look to your fiscal ’25 revenue outlook? Thank you.

Scott Herren: I would say on the — on the ability to look out and see the demand side, notwithstanding some unforeseen shock, I think the teams are back to their normal visibility. I think that — I’m trying to even remember what it was. It’s been so long ago since we had it. But I think the — they clearly have much greater visibility over the next 90-day period. That’s — we’ve seen that the last couple of quarters. And obviously with this final Q4 where we think that the issue is behind us. I think going-forward, you’ll see it. And I think we’ll continue to see greater visibility into the outer quarters relative to where we were over the last couple of years.

Chuck Robbins: Yes. And on price stability, Karl, if you go — you got to go back away as Chuck just said. But if you go back to where we were before the supply chain issues and then of course, the price increases that we had to put in place because our cost went up significantly. And then it took a while, as you remember, for those price increases to turn into orders, those orders to work-through the backlog and get shipped out. We’ve now sort of lapped the point where we’ve gotten to price stability. So expect to see price impact back where it’s always been historically. It’s typically — every deal we do is a competitive deal, all right. And so there’s always some price competition around that, but expect it to be in the range that it was historically somewhere in that — anywhere from 0.5% to 1.5% per quarter.

Sami Badri: Thank you, Karl. I now want to hand it over back to Chuck for some closing remarks.

Chuck Robbins: Thanks. I want to thank all of you for joining again today. We appreciate you being with us. I want to thank our teams, our customers and our partners for helping us with a strong finish to the challenging year. As we stated, we think the inventory digestion is complete and we’re now returning to a more normalized demand environment. I’m encouraged by the broad based demand that we saw in the quarter across the — and the continued progress we’re making with our customers around AI and particularly cyber security as well as core networking and beginning to see that it is actually getting a lift from AI in the enterprise space. We’re very pleased with the progress we’ve made with Splunk with the early traction and some of the wins.

You can count on us for continued financial discipline as you always have seen. And you can always also count on us to continue to invest in the future as we’re doing in AI infrastructure, networking, silicon and cyber to drive future growth and future profitability. So thank you for being with us and we look forward to seeing you all soon.

Sami Badri: Thank you all for joining us. Cisco’s next quarterly call, which will reflect our fiscal year 2025 first quarter results will be on Wednesday, November 13th, 2024 at 1:30 p.m., Pacific Time, 4:30 p.m., Eastern Time. I’ll hand it over to Michelle.

Operator: Thank you for participating on today’s conference call. If you would like to listen to the call in its entirety, you may call 866-510-4837. For participants dialing from outside the U.S., please dial 203-369-1943. This concludes today’s call. You may disconnect at this time.