Q4 2019 Earnings Call

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Hello, Mr. Brown.

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I'll be joining your line back into the conference and you may disconnect.

Now I would like to introduce Marilyn Mora head of Investor Relations Ma'am you may begin.

Thanks, Michelle welcome everyone to Cisco's fourth quarter fiscal 2019 quarterly earnings conference call.

This is Marilyn Mora head of Investor Relations and I'm joined by Chuck Robbins, Our chairman and CEO and Kelly Kramer 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 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 <unk>.

Result, and well 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 made 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 of fiscal 2020.

They are subject to the risks and uncertainties that we discuss in detail in our documents filed with the FCC 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.

This call will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure.

In Q2 on October 28, we completed the sale of our SBBS as business and Accordingly had no revenue or expense from that business in Q4 fiscal 2019.

As such all of the revenue non-GAAP in product orders information, we will be discussing today is normalized to exclude the S.P.S. as business from our historical results. We have provided historical financial information for the S.P.B.S.S. business in the slides that accompany this call and on our website to help understand these impacts.

This guidance.

We provided during our Q3 earnings call.

On today's call has been normalized in the same way with that I'll now turn it over to Chuck.

Thank you Marilyn and good afternoon, everyone. Our Q4 results marked a strong into a great year.

Our teams executed well through a very dynamic environment, we delivered significant innovation across our entire portfolio and we continued our business model transition with software subscriptions now at 70% of total software revenue up 12 points year over year.

We delivered strong revenue and double digit non-GAAP earnings per share growth for the full year and in the fourth quarter. We also continued to generate healthy margins cash flow and returns for our shareholders.

Our technology is fundamentally redefining Archie architectures to help our customers manage the complexities of a multi cloud world and transform for the future.

Let me cover some recent highlights across our portfolio.

Starting with infrastructure platforms.

We continue to see strong performance with <unk>.

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Working domains to more effectively secure and manage users and applications across the entire enterprise.

From campus networks and wide area networks to Datacenters and the I O T edge.

We also added several AI and ml software capabilities to improve network management through automation.

A great example of this is our new AI network analytics capability, which delivers greater visibility and insights across the entire enterprise network.

In data center, we continue to execute well as we help enable our customers to securely access their applications and their data anywhere from private to public cloud environments as well as at the edge.

We are innovating across every facet of our portfolio integrating AI automation security and assurance into our Nexus switching platforms and our 400 gig offerings.

This quarter, we delivered datacenter network insights, providing critical analytics and proactive network management capabilities through automation.

To increase our customers ability to troubleshoot and remediate their environments.

We also continue to invest in silicon optics to build a next generation internet for our customers. The recently announced intent to acquire Acacia.

It is a good example of how we are enhancing our silicon and optics portfolio to enable web scale service provider and data center, operator customers to meet today's fast growing consumer demand for data.

Now turning to security, which had an incredible year cyber security continues to be the top priority for our customers driving another consecutive quarter of double digit growth as the industry leader in networking and cyber security, we are investing in and extending our subscription based security innovations across all networking domains in todays zero Trust environment.

By extending our ability to detect threats across public clouds and by protecting the campus branch when and data center against threats. We are the only company, providing an integrated end to end security architecture across multi cloud environments.

Throughout the year, we've expanded our family of cloud security solutions to help secure identity endpoints and the network, which has led to accelerating customer adoption as they move or expand to the cloud. We're also extending this protection from the network to branch offices to roaming users with flexible solutions designed to secure our customers SD when environments.

During the quarter, we were excited to announce the availability of a full web proxy capability on our global SaaS platform umbrella.

To complement our on premise appliances.

Trust plays a critical role as customers access their networking applications and identity plays a critical role in delivering a secure consistent experience no matter, how when or where they connect.

This market dynamic was central to our dual security acquisition, and we continue to see customer momentum.

Customer momentum, reflecting the power of duals differentiated market, leading SaaS platform.

Moving to applications.

Our collaboration business continues to perform well as we execute against our strategy to accelerate the future of work communications and collaboration.

Earlier this year, we shared our vision for cognitive collaboration which we believe is quickly becoming the foundation to deliver massively personalized experiences and transform how we work.

We are leading the market in integrating AI and ml into our enterprise collaboration portfolio, bringing intelligence in context to help our customers work smarter and increase productivity.

Through our AI driven innovations like people insights facial recognition and Webex assistant we're driving expanded collaboration experiences on any device integrated with our customers business process workflows.

Building on these cognitive innovations, we announced our intent to acquire voice CEA.

Our market leading provider of voice based artificial intelligence solutions with voices technology, we will enhance our entire webex portfolio with a powerful transcription service combining AI an automated speech recognition.

To enable more actionable meetings improve productivity and enhance experiences.

We also achieved another outstanding quarter of growth with the App dynamics, demonstrating rapid customer adoption of our differentiated end to end visibility and analytics platform from the end user to the network to the application.

In summary, we had a great quarter and finished the fiscal year 2019, and I'm proud of what our teams have accomplished we are executing well in a time of uncertainty delivering differentiated innovation across our portfolio and extending our market leadership in enterprise networking applications and security.

Our performance reflects our relevance as well as the ongoing value, we're providing our customers as they transform for the future. We are as committed as ever to providing them with the right innovation to drive greater impact and success.

As I look ahead, I could not be more confident about our unique position in the market and the tremendous opportunity in front of US Kelly I'll now turn it over to you.

Thanks, Chuck I'll start with a summary of our financial results for the quarter then cover the full fiscal year, followed by the guidance for Q1.

Q4 was a great quarter across the business, we executed well with strong revenue growth margin net income and EPS total revenue was 13.4 billion up 6%. Our non-GAAP operating margin rate was 32.6% up 1.4 points non-GAAP net income was 3.6 billion up 9% and non-GAAP EPS was 83 cents up 19%.

Let me provide some more detail on our Q4 revenue.

Total product revenue was up 7% to 10.1 billion infrastructure platforms grew 6%.

All of the businesses were up with the exception of routing switching had a great quarter with double digit growth driven by both campus and Dennis there with the continued ramp of the cat nine k. and strength of the Nexus nine k.

We saw solid growth in wireless across the portfolio.

Data center was up with growth in both Hyperflex and servers routing declined due to weakness in service provider.

Applications was up 11% with collaboration and dynamics in I O T software all up double digits.

Security was up 14% with strong performance in identity and access advance threat unified threat and web security.

Service revenue was up 4% driven by software installation support.

We continue to transform our business delivering more software offerings and driving more subscriptions software subscriptions were 70% of total software revenue up 12 points year over year.

When we look at the impact of acquisitions on our Q4 results year over year. There was a 60 basis point positive impact on revenue.

In terms of orders in Q4 total product orders growth was flat looking in our geographies Americas was up 1% EMEA was up 4% and PJC was down 8%.

Total emerging markets was down 8% with the Brics, plus Mexico down 20%.

In our customer segments enterprise was down 2% commercial grew 7% public sector was up 13% and service provider was down 21%.

Remaining performance obligations or ARPU at the end of Q4 was $25.3 billion.

Our PEO is our deferred revenue plus unbilled deferred and represents total committed noncancelable future revenue.

From a non-GAAP profitability perspective, total Q4 gross margin was 65.5% up 2.3 points.

Product gross margin was 64.7% up 2.8 points and service gross margin was 67.9% up 0.7 points.

In terms of the bottom line from a GAAP perspective, Q4, net income was $2.2 billion EPS was 51 cents.

The GAAP results include a charge of approximately $900 million, which is a reversal of a tax benefit recorded in Q4 fiscal year 18, which relates to new US Treasury regulations issued during the quarter related to the tax cuts in jobs Act.

We ended Q4 with total cash cash equivalents and investments of 33.4 billion operating cash flow was 3.9 billion down 4%.

From a capital allocation perspective, we returned 6 billion to shareholders. During the quarter that was comprised of 4.5 billion of share repurchases and 1.5 billion for our quarterly dividend.

In our Q2 fiscal 18 earnings call. We said, we would return 31 billion through share repurchases over the following 18 to 24 months.

As of Q4 fiscal 19, we completed that commitment with share repurchases of $32.6 billion going forward, we will return to our capital allocation strategy of returning a minimum of 50% of our free cash flow to shareholders annually through share repurchases and dividends.

We continue to invest organically and inorganically in our innovation pipeline during Q4, we announced our intent to acquire Acacia and existing supplier that is focused on optical interconnect technologies. This move is consistent with our strategy of increasing investment in innovation and R&D for our growth areas.

I'll now cover the full fiscal year results, we delivered strong revenue growth margins net income EPS and operating cash flow.

Revenue was 51.7 billion up 7% total non-GAAP gross margin was 64.6% of 0.3 points and our non-GAAP operating margin rate was 32.3% of 0.7 points.

From a bottom line perspective, non-GAAP net income was 13.8 billion up 9% and non-GAAP EPS was $3.10 of 20%.

GAAP net income was $11.6 billion and GAAP EPS was $2.61.

We delivered operating cash flow of $15.8 billion up 16% normalized for the tax payments related to the tax cuts and jobs Act and each fiscal year and the cash received in Q1 fiscal 19 related legal settlement with Arista operating cash flow was up 8%.

To summarize we had a strong Q4 and fiscal year, we executed well with strong topline growth and profitability and we're seeing the returns on the investments, we're making in innovation driving the shift to more software and subscriptions delivering long term growth and shareholder value.

Let me reiterate our guidance for the first quarter of fiscal 20. This guidance includes a type of forward looking information that Marilyn referred to earlier.

Note that we have normalized our first quarter guidance to exclude the SPV that's business for Q1 fiscal 19, which we divested in October 20, Eightth 2018.

We have provided historical financial information for the SP VSS business in the slides that accompany this call.

We expect revenue growth in the range of zero to 2% year over year, we anticipate the non-GAAP gross margin rate to be in the range of 64% to 65%.

The non-GAAP operating margin rate is expected to be in the range of 32% to 33%.

Hello, excuse me Mr. Brown, Hello can you hear me.

Hello, Sir.

Hello, excuse me.

Hello. This is one of the conference coordinator Hello can you hear me.

Oh journey back in.

Good morning.

Thanks Kelly.

Michelle Let's go ahead, and tee up and open the line for questions.

And while Michelle is doing that I'd like to remind the audience to limit yourself to one question.

Thank you Rod Hall from Goldman Sachs. You May go ahead.

Yes, hi, guys. Thanks for the question I guess and then ask the obvious one and then maybe pepper in a little bit of detailed color if I can get it done.

The guidance is weaker than I think we had anticipated we know it's a tough macro environment. So just hoping Chuck you would maybe comment on that and maybe juxtapose the change in trend in enterprise orders, which did weaken quite a bit with commercial which seems to be holding up following.

Kind of why that is going on and then Kelly if you can comment on backlog as well I know you guys usually give it in the case it'd be great to get that number as well. Thanks.

Hey, Rod Thanks for the question so.

Let me start by saying first of all that the strategy and the work that we've done on our portfolio and engagement with our customers is absolutely going in the right direction and we continue to make progress and the strategy is working so we're we're quite happy with what our teams have accomplished and where we are right now in that space.

There's there's a couple of things that we saw in the quarter and I'll outline. These then I'll answer Roger question about the enterprise.

First is it we had continued challenges in service provider and I'll double click on that in just a moment.

As you saw in the order growth that Kelly talked about.

And then we did see in July some slight early indications of some macro shifts that we didn't see in the prior quarter. So those are the two things that happen, let me double click on service provider just a bit.

The Americas was generally the same from an order perspective from the prior quarter, So no real shift positive or negative.

Europe was actually positive and the SP space.

In Asia, we saw continued weakening in our China service provider business and we had two massive buildouts in India, a year ago that just didn't replicate this year with the two major players there that's the net of the service provider situation its not more complicated than that.

If you look at our.

Overall business.

Our orders outside of service provider grew mid single digits. So we feel good in this environment about the rest of the portfolio and the work that we're doing those customers.

As it relates to commercial enterprise and public sector, and I'm going to probably give you little more granularity than normal just so you understand what what we believe went on.

You can see that the portfolio that is being sold and all three of those segments is is obviously being well received our public sector business on a global basis was up 13%. So we continue to see success and as you mentioned Rod Global commercial was up seven.

The enterprise business was really.

We saw weakness in China, which was contributed to it we saw some weakness in the UK and enterprise and then candidly in the us as much as I don't want to use compares for an excuse we had two major software deals a year ago that there were tough to compare against so that's really the rest of the business and everything that we see.

It's still very positive and we feel good about where we are.

Thanks, guys, sorry, yeah on Rod on your backlog question. So we are we have since we adopted assay six so six we've been disclosing our ARPU, which is a more meaningful a metric of our future revenue because again with the brand with our bad weather didn't include our subscription businesses. Though didn't include anything on collaboration or security. So RPL has everything it has the deferred revenue the unbilled deferred and any committed future revenue and like we've disclosed in our in our cues. We expect of that 25.3 billion reais by 56% of that fee recognized over the next 12 months.

Okay. Thanks, a lot Kelly yes.

Next question please.

Paul Silverstein with Cowen you May go ahead.

I appreciate it just a follow up on Rob's question, Chuck clarification, I for China was now down or had been down for a while so well less than 3% of revenue and I guess, it's not zero. So you solve exposure yeah, I am surprised that impacted due to the extent you suggested and then I want to ask Kelly about.

The pricing environment I assume there has been no change in what we should expect for margins throughout the year I assume they're going up on both the gross and the operating line given DRAM and given the shift to ongoing shift to software long with a benign pricing environment, but if you could comment on that.

Yes, let me just comment on the China situation I mean, you're right. It's it's down below three it's a it's a it's a small part of our business, but obviously when it falls very dramatically you can still have some impact because it is greater than zero, but long term it's not.

It's not a concern that that I worry about much at this point.

And so that's really the the extent of what we saw there I mean the China.

The China reduction contributed to a point of the of the issue in all of enterprise for us. So it was that significant.

And we definitely saw a significant impact on our business in China.

As it relates to what's going on in the trade War right now yes.

And then Paul on your margin question, So, yes pricing the environment stays good actually we had a very good quarter on pricing. It was less than a point that you will see when we give you the Q so thats been very good.

And again you can see we are benefiting in our gross margins and Oems from the the tailwind from DRAM as we expected and you're seeing that and not only the results, but also as a you know we've been guiding on the margin.

Good morning, Paul.

Next question please.

Thank you Tait has been contested from U.B.S. He may go ahead.

Thank you you, obviously give me give us year over year order growth number every quarter, but I wonder if you could give us a sense of what the sequentials look like versus historical seasonality.

If I have my math right sequential order growth look somewhat in line with seasonality, but your revenue guide is a tad below where you have grown sequentially in recent years I just wanted to confirm that's right and then secondly, you're coming off a strong year of 7% revenue growth I know you don't guide for the year, but expect investor expectation or worse somewhat high and I Wonder if you could comment even qualitatively on how to think about full year.

Revenue growth. Thank you very much.

I guess, so yeah, you're you're right on our sequential down orders I mean, it's it's we've had this phenomenon, it's not a phenomenon, but our Q4 always has a double digit growth in Q4, and our largest quarter from a dollar perspective on orders growth for us so that happens and I again in Q1 at the double digit down so this.

The sequential isn't a change from historical and again the year over year takes into account the kind of the the phenomenon we're seeing now.

In terms of the long term guide a again, we don't give more of the one quarter or I would say.

The trucks earlier points, you know in terms of how we feel about the portfolio and the margins and the uptake we feel good about that you know the macro and the the certain segment issues like an S.P. I mean, I think that I don't foresee that you know I'm not planning on that changing in the near term.

Okay. Thanks Kelly.

Michelle next question.

[noise] Sammy battery with credit Suisse. You May go ahead.

Hi, Thank you I was hoping you could kind of just give us an update on the campus switching Rephresh and then perhaps maybe your view on where it will be next year as you see the campus switching cycle, playing out and maybe even potentially more consistent data center switching deployments play out, especially since were going through some transitions and industry. So I guess, what we what I really wish I understand is where we are in the cycle where are we in like the fifth maybe six maybe even first or second inning. The way you see it and then maybe the equivalent of where we see that for data center switching for your customers.

Yes, Amy Thanks, It's a great question so in the last.

The 120 to 180 days I mean, we completed the the full.

Refresh of our portfolio across switching routing and wireless in the enterprise and we're now in a position where all those who have mandatory subscription so weve.

We've made that transition from a product development perspective, and all those roll out in the marketplace with our customers.

On the Camel's 9000, Q4 was the we added more customers.

In Q4 for the catalyst 9000 than in any quarter. Prior so that continues to move forward favorably.

Into campus, what I would suggest to you is it we're I'd say maybe were in the second inning at this point of this transition that we see from our customers as you know they're all.

They're all rearchitecting their entire.

Enterprise infrastructure to accommodate these traffic flows that are presented from the massive number of cloud applications that they're running.

And so it requires a completely different architecture, which is what this portfolio is built for.

As it relates to data center I think that.

Your next year, you'll probably begin to see some upgrades transitions when the pure 400 gig optics are available.

And one of the things that we believe is a big differentiator for US is that we're extending this policy management.

You know out of the data center into the campus from a campus into the what area from the water into the cloud security portfolios. So we think being able to enable our customers.

To deliver policy from the data center, all the way across the campus to the branch into the cloud is a very unique differentiator for us and we think we'll begin to see customers adopting and deploying that sometime in the next year as well. So that's how we see that playing out.

Got it thanks for your question please.

Thank you tally only from Bank of America, you May go ahead.

Yes, hi, guys.

If you look at the growth this quarter, it's about 1% and then a few quarters ago.

You are welcome you speak up just a little bit yes can you hear me you have does that I guess I would pick it up here you know it's better.

This quarter, you're guiding for 1% growth a few quarters ago, you reported 8%, but you had roughly organically growing youre growing about 4% to 4.5%.

Can you take the 1% did you have now and then build on top of it.

All the things that you are seeing today to see what's the what's the growth that growth environment now that is more sustainable going forward I'm trying I have difficulties to go from four 4.5% to 1% within like three quarters.

And if it's not a major deceleration in the growth environment, what could it be so you mentioned, China. What are the other things that are happening today that are unique to Q1 that are bringing the growth down so much from the levels. We've seen just a few quarters ago.

Hey, Dan I'll take a crack at it I mean at the end of the day. When we are guiding it's it's based on what we're seeing with the you know the orders when on the pipeline and everything else and the biggest driver of the guide where it is.

The massive decline we've seen in service provider over the last two quarters. So that is the biggest driver again like Chuck said, we feel good about the rest of the portfolio from hours perspective growing in the mid single digits, but you know China is part of it but again like we said, it's it's small in comparison, but as he is still a large part of the business and that's that's driving that outlook.

That you're seeing.

So what's the what's the can you quantify this can you quantify what is the decline in the growth related to service providers and I think you mentioned one point is related to China am I correct.

What we're talking about for that is for the orders rate or we just had the numbers right for enterprise being down 2.1 pointed at the global level was attributed just to China alone.

China overall was down over 25% this quarter for us.

Got it.

And.

If I can just have a follow up on China.

We always thought that you're not selling much in China that it's hard to compete in China.

Where where are you where did you have position in China. I know you were selling some routers to service providers, but where are you selling in China and whats being impacted in China. What are the types of products that you're selling into the Chinese market.

Oh, sorry, Yeah, let me just give you color than kill it can give you some numbers I mean tell the the overall Chinese market as I said earlier is certainly not a major play for us, but it is just dropped precipitously in light of the trade discussions.

So it has it has a short term impact and.

If you were we were selling for years, we've sold infrastructure to the to the large carriers in China, which is just it's been slowly declining and we saw it even declined more rapidly last quarter and then what Weve seen is in a state owned enterprises anymore were just being we're being.

And invited to bid we're we're not being allowed to even participate anymore. So those are the enterprises us where the.

The large impact was this past quarter. So it was a it was just a much faster decline of what we.

Candidly expected, yeah, Ana and I would just to add to that so again, we talked about the big impact ahead of enterprise had a it was a the second largest was down answers provider, which is part of our overall service provider being down but from a product perspective, we sell everything there from from.

Oh, you know switches routers, all the way down through security and Rocky products that we sell everything including club in China, and and everything is being impacted.

Thank you Yep.

Thanks, Tom next question.

Thank you Jim Suva from Citigroup investment Research you May go ahead.

Thank you very much Chuck and Kelly, you've been very clear about the softness in revenues.

When offer the outlook when you think about the outlook and a lot of it seems to be service provider a softness that has not been a nude theme you've talked about for the past several quarters, So where we sit today looking out.

Is there a lot of risk that it could get worse or are you kind of looking at this thing we're kinda near a bottom for service provider trends, because it's been chugging, along pretty low and they're starting to sweat their assets potentially or is there still some risk that you have there just kind of thinking about the service provider headwinds or could it get worse or is it you are looking at it and saying Hey, we're calling for a bottom.

Look I think that.

You know when you get into this this area. There there is certainly pressure in the business models across all different types of service providers I think if you look at the.

The early Fiveg Buildouts most of the telco customers, we are particularly in Americas, they're focused on the consumer Fiveg trials today. They are not I mean that is the primary focused and then getting their fiveg consumer networks built out but they also don't.

I would say don't anticipate that being a huge profit driver off of the fiveg transition that's going to come when they build more robust.

Broader fiveg infrastructure.

Where they'll deliver enterprise services and that's going to come after they do the consumer side. So.

You know, it's it's a bit.

Unclear when that will take place I'd say, we're not modeling and don't anticipate any significant improvement.

In this business in the very near term.

And.

You know, we're just gonna have to wait and see it's been a it's been it's a tough business for us for years and it's now it obviously represents a much smaller percentage of our business than it did five years ago, but.

But it clearly was a major point of weakness for us in the last quarter.

Thank you want to add anything to that Gil I think you got it.

Thanks, Chuck Let's go ahead and take the next question.

Thank you James Fawcett from Morgan Stanley You May go ahead Sir.

Great. Thanks, Tom I, just had a couple of questions one related to gross margins and one to the deferred revenue and gross margins Kelly. It looks like you know even though the the August I'm sorry for that quarter was very good is that you're guiding for those to be gross margin to be flat to down a little bit and sequentially. Historically, we've seen at least some improvements. So wondering if you can help parse a little bit what may be going on there and my second question is deferred revenue look actually look quite good. So can you give some insight into how much of that may be yellow days or or software or other aspects.

So we can I get a little bit more color on what's driving that the deferred revenue. Thanks.

So on the margin a yeah, I mean, I'd say the margins are going great. We feel good about I I kept the range in that 64% to 65% to take into account that cutting in of list for of the Terra.

Again, we're going to run the same play that we have for all the other tariffs and well be again, we continue to mitigate we continue to do everything we can do but you know we see that in that range, what I think is pretty good and.

And as you look at that falls down through 'em were actually.

You know doing well and I've actually raise a little bit on the OEM guide so.

Again, I think where we're able to offset the headwinds from terrorists with again continued benefit from the software, which which leads to your point on the deferred revenue Yeah. I mean again, we continue to.

Add two to deferred revenue, which again is why I think you know looking at that ARPU is a key metric, which has both the deferred revenue as well as unbilled deferred when you have month to month contracts. It shows the progress. We've made just to remind you guys. When we adopted assay six or six at the beginning of the fiscal year, we wrote off.

You know 2.8 billion from our deferred revenue balance for the new accounting rules and again, you're seeing as big sequential increases. Since then as we just continue to ramp the portfolio with like for example, the entire enterprise portfolio that all have subscription so.

It's broad based we continue to have great adoption of the new products all with subscriptions, we have great adoption of the delays we had really strong performance of software in L.A.'s in Q4, So it's all going in the right direction, which is again that's why we're we're still despite any macro environment why we're so bullish on on the overall strategy of the company what we're doing on transformation James if I might add to that I know it like three years ago, I think I made a comment on one of the earnings calls that I felt like we had figured out how we can drive a subscription business on top of networking products and now here. We are and we've we've got every product in our portfolio and the enterprise networking now that has mandatory subscription and we really started selling that two years ago. So the first renewal window is really still a year away. So you know that's the team's done a great job that transition has been a good we're on track with what we told everyone in a financial analyst conference, where we'd be relative to our software.

And I think that's what you're seeing show up in New York metrics as well.

Thanks, Chuck next question.

Thank you Tim long from Barclays. You May go ahead.

Thanks.

Sorry. Thank you yeah, just a follow up in another question if I could Chuck you mentioned a little bit of the the weakness was also related to some macro shifts in the month of July could you talk a little bit about that kind of what we are seeing was it deals pushing out scaling down more competition.

Anything like that and then you also had mentioned the move to 400 gig upgrades next year could you talk a little bit about how you think Cisco will fare in these data center deals as we move to 400 gig and that's the strategy to take in house and develop more optics internally do you think that helps as early as that 400 gig transition. Thank you.

Yeah. Thanks, Tim So you know basically we just we just felt a slight difference in July I mean relative to.

You know close rates and just it just wasn't as strong that finishes we would normally expect particularly in Q4 and I think that's what kind of set off the flags were killing Ah.

I'm I've met with 17 customers in the last five six business days and and nothing's changed about how they're thinking about the role of technology and what we do and how we're playing there so.

You know we're we're monitoring is we're watching it we'll see obviously I think what we've seen in the markets in the last few weeks and what we hear from some of the other players would indicate that others have seen similar things some a lot worse.

And and I do feel very good about our position and where we are and the level of criticality that we are playing with our customers now versus.

You know five six years ago, and I think that so I feel good about that piece, but that's really that's really what we felt and we'll just have to see how it plays out and whether we get any resolution on some of these major geopolitical issues that are sort of lingering out there I've said for like 18 months that I've been amazed at the resilience of the economy.

And hopefully it can bounce back pretty quick if a if we get to some.

To give more clarity on some of these issues, which I think people are just.

I think they're just hedging their bets relative to some resolution on some of the stuff.

And then the second question was around Oh around the 100 gig and RMBS flight Yeah. I'll tell you we have a I feel good about it number one were.

We're in the game, we have our technology Roadmaps mapped out our teams have made these acquisitions, which allows us to.

Have you know good control of our.

Components that go into these products, we've talked to lots of customers, including the web scale providers, who are very supportive of where we're headed and what we're doing there is supportive of the strategy. They liked the acquisitions.

And so we feel good that will be a will be in a good place in a much better position to compete in this transition.

Than we were last time around so I feel good about where we are.

Okay. Thank you.

Next question please.

Simon Leopold from Raymond James You May go ahead.

Thank you for taking the question I know you don't want to guide beyond the quarter, but maybe if you could help us sort of level set how to how to think about the year given that I think you're facing a pretty tough comparison in October .

So guiding zero to 2% seems to set a new level, but if I just apply normal seasonality through the balance of the year.

It would look like a year over year growth rate should come back somewhat in the January through July quarters.

Just want to see how how we should think about really the full fiscal year trending.

Yeah, Hey, Simon I think the way you're looking at I mean again, we don't guide and again, there's a lot of unknown out there, but I will say the way you're thinking about kind of the right way I think the way you're thinking about the second half certainly you get more normalized compares on there in the second half but.

I I think the way we're looking at it is very rational.

Thanks, and just a quick do you have a metric for a percent of revenue that's recurring I think you've given in the past and now with the fiscal year over hope you maybe have that number.

Yeah, and Osama we stopped when we had that we stop this fiscal year on that when we adopted a six so six because a lot of our recurring subscriptions like for example, DNA you know what the Cadnine Kay.

Because of the accounting it changes how we have to recognize it. So that's why really the metric that that we talk about now is how much of our software revenue subscription base of recurring isn't as meaningful.

Okay. Thanks for taking the questions sure.

Thanks, Simon next question.

Thank you, Jeff Kvaal from Nomura Instinet, you May go ahead.

Thank you very much Kelly you had mentioned a little earlier that you're taking the operating margin up.

A shade and I'm wondering if you could comment about how you are making the magic happen there in light of a little bit of a lower revenue trajectory than we all might AFFO for.

A few months ago, and then just just to clarify your your capital return plan sounds like it's going to be mostly about the dividend here rather than rather than buybacks going going forward.

Okay. Thanks.

Yeah sure. So on yeah, I'm, a probability on Oh, and I think it's not magic right. It is we are where were working the gross margins hard with you know like we talked earlier and then we're also working or the Opex side hard as always as you know as well our engineering teams do a really good job of a rebalancing their portfolios and making sure. They are investing in the right stuff and we are constantly driving for efficiency. So you know it's it's it's good old fashioned running the business and executing well despite the top line. So that's how that's happening and on the capital allocation.

Yeah. So if you go back to when we dig a tax reform back in Q2 of 18, and we announced the big buyback you know we had a 31 billion authorization. Then we said we'd use that 31 billion. We did effectively use that up through then the up till now the the 18 months and so now since we've really gotten our balance sheet, where we want it in terms of you know we reduced our debt we brought our cash balance from 74 billion back then now that 33 billion.

We've reduced our debt from 35 down to 25, we're going to get back to our normal strategy, which is being very opportunistic when our stocks down like on days like today and buying.

But but really balancing between both the dividend and the buyback to be at least 50% of our our free cash flow.

Okay. Thank you.

Thanks.

Kelly.

Chuck.

Certainly our last question okay.

Thank you Samik Chatterjee from JP Morgan you May go ahead.

Hi, Thanks for squeezing me in here I just wanted to follow up on the guidance you guys mentioned the service provider weakness, that's kind of what's driving the weakness in the guide. Although this seems to be a broader concern here from investors are native to slowed on enterprise spending. So just wanted to get your thoughts, particularly given the change in the business towards kind of higher software subscription mix, how should we think about level as you can pull to drive growth, even if enterprise spending does kind of see a slowdown next to you and just a quick follow up at Cisco live the team had talked about a major refresh of the collaboration portfolio. So just wanted to see what the early response to that refresh has been thank you.

Yeah, I think one thing that is I think important to look at is when when we talk about enterprise spending and when many companies talk about enterprise spending that would be a <unk>.

And in some cases, a combination at a minimum of our enterprise and commercial business and in some cases people would just include public sector in there and that sort of a view.

And that when you put it all together it was actually quite healthy the orders were quite healthy.

We just we just set a little bit in July have a feel that we just didn't close as strong as we would like and so we felt like there were there was even more that we could have done and it just didn't feel like a normal Q4, finishing it felt a little bit like some of the macro issues, maybe a manifesting themselves. So that's that's really what we what we saw there and then kill you want to.

Talk about the other software and the.

Yeah, I mean again just on the software I think again, because more and more again, even despite you know like I talked about the write off of deferred revenue at the adoption of sick. So six even despite that the amount of of of revenue softer revenue coming off the balance sheet.

<unk> continues to grow as we put more and on the balance sheet. So that helps buffer helps buffer when you do go through any tough macro issues. So you know I think.

Well continue to add to that and it will continue to help help soften want ever there is any kind of macro slowdown but.

It's it's it's helping maintain a kind of the growth that we do see going as well as margin.

So any feedback on the collaboration portfolio, so sorry about that I'm sorry.

Yeah, I think that what a Amy and the team have been doing is really.

They've been refreshing new elements of the portfolio with in units.

Tumors are viewing it favorably because it continues to perform really well for a decent sized business.

Okay. Thank you that's it thank you.

So I want to I just want to thank everybody for joining us today I am look we're four years in and I'm really proud of what our teams have accomplished I mean, we've come a long way in four years.

And I don't actually judge where we are based on this quarter I think the or the quarterly guidance I think that what weve built and.

The portfolio and the innovation and the value that we bring to our customers is sustaining and and we'll continue to do that with our customers going forward.

We have a strong record of our execution.

I have high conviction in the portfolio and I think we're well positioned for long term growth opportunity. So thanks, all of you for spending time with us today and thanks for the questions.

Thanks, Chuck Cisco's next quarterly earnings conference call, which will reflect our fiscal 2014 first quarter results will be on Wednesday November 13, 2019 at 130, P.M. Pacific time for 30 PM Eastern time, again, I'd like to remind the audience that in light of regulation FD Cisco's policy is not to comment on its financial guidance during the quarter unless it is done through an explicit public disclosure.

We now plan to close the call. If you have any further questions feel free to contact the Cisco Investor Relations group and we thank you very much for joining today.

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Okay.