Q2 2020 Earnings Call
Welcome to just go second quarter fiscal year 2020 financial results conference call at the request Upsets go today's conference is being recorded did you have any objections. 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 second quarter fiscal 2020 quarterly earnings Conference call. This is Marilyn Mora head of Investor Relations and I'm joined by truck Robbins, Our chairman and CEO and Kelly Kramer our CFO.
By now you should've seen our earnings press release a.
A corresponding webcast web slides, including supplemental information will be made available on our website in the Investor Relations section following the call.
Income statement, well GAAP to non-GAAP reconciliation information balance sheet cash flow statement and other financial information can also be found in the financial information section of our Investor Relations website.
Throughout this conference call, we won't be referencing both GAAP and non-GAAP financial results I will discuss product result in terms of revenue and geographic and customer, resulting from the 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 third quarter fiscal 2020, they are subject to the risks and uncertainties that we discussed in detail in our documents filed with the FCC.
Physically 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 called for further details.
Fiscal will not comment on its financial guidance during the quarter loves it has done through an explicit public disclosure with that I'll now turn it over to Chuck.
Thanks, Marilyn good afternoon, everyone.
We told you last quarter and still see now the feedback more customers is that they remain strongly committed to both our products and services. However, like many in our industry, we are seeing longer decision, making cycled across our customer segments for a variety of reasons, including macro uncertainty as well as unique geographical issues. The good news is once this uncertainty passes for <unk>.
Customers, we expect to see spending recovery that's technology continues to be at the heart of all they do.
You'll see our numbers this quarter that we continued to make progress on several key metrics, including our shift to more self weren't subscriptions with 72% of our software now being sold as a subscription.
Well, we still have a lot more work to do I firmly believe we have a tremendous opportunity ahead of us the long term secular growth trends of Fiveg white by six 400 gig and the shift to the cloud remain and we expect to benefit from them.
This is a multiyear transformation, we are managing our business well, while staying focused on helping our customers build simpler more secure and cost effective networks. The broad adoption of multi cloud and modern application environments is changing how the world's largest networks are built operated unsecured and Cisco was at the center this transition.
We've made significant investments in the development of software Silicon and optics the building blocks for the Internet of the future. We believe this strategy will change economics of held the Internet will be built to support Fiveg 400 gig and the demands of the future well, helping our customers innovate and move faster than ever before.
In December we introduce Cisco So we can one.
The first ever single unified Silicon architecture, and the Cisco 8000 carrier class router family built on Silicon, one as well as our new iOS XR seven operating system, we also announced new flexible purchasing options that enable customers to consumer technology. However, they choose.
We also collaborating closely with several of the largest web scale and SP companies throughout the development process their participation in our launch demonstrates their strong support of our strategy as well as our commitment to continued innovation.
Our goal is to accelerate the deployment of next generation Internet infrastructure by offering our customers choices of components White box were integrated systems in a flexible consumption model.
Now, let me share a brief update on our businesses starting with infrastructure platforms.
As the global leader in networking, we believe we're well positioned with our intent based networking portfolio given the strategic investments we've been making over the past several quarters, we've made tremendous progress integrating automation analytics and security across our enterprise networking portfolio well at the same time shifting to a subscription based model.
Great example of our success is the ongoing strong adoption of our catalyst 9000 platforms.
We continue to extend our secure SD Wan solutions as customers move more applications to the cloud to do this we are actively engaging with web scale companies to help our customers extend their watering that works to the cloud and secure their business applications recently, we announced integration with Microsoft Azure virtual win and office 306.
Bob along with a deeper partnership with Amazon Web services to deliver highly secure into in connectivity and better application performance.
Now to security, we had another solid quarter with strength across our advanced threat and cloud based solutions, including do over an umbrella which are important growth drivers of our business.
We continue to see significant opportunity as we execute on our strategy to deliver an integrated security platform.
As the market moves to a multi cloud environment and the need for visibility grows we're benefiting from our strong position as our customers. Most trusted partner our differentiated end to end approach across the network cloud and endpoint is winning customers with 100% of the fortune 100, now using one or more of Cisco security solutions.
This quarter, we expanded our security portfolio from the cloud to the edge, we brought to market an integrated aiotv architecture, providing enhanced visibility insights and threat detection across our customers into our environment. This architecture includes our new software based security solutions cyber vision and our edge intelligence data collection tool to enable our customers to make.
Better business decisions.
Finally applications. There's no question that customers are undergoing a significant workplace transformation and they were turning to Cisco to help them with this transition.
As a global market leader, we believe we're the only company, providing a cognitive highly secure and analytics driven collaboration platform, which is the foundation for their workplace transformation.
This platform is becoming increasingly critical to how enterprises empower their teams by allowing their employees to work more effectively together.
To extend our value proposition, we continue to make strategic investments. For example, we recently brought to market several key webex capabilities, which combine context, AI and machine learning to enable our customers and their teams to further enhance their meeting experiences.
We achieved another strong quarter of growth without dynamics, demonstrating our ability to deliver unique real time AI powered insights from a single pane of glass, providing complete visibility.
Our customers are looking to connect application performance monitoring with infrastructure automation to simplify I see an increase productivity.
Two weeks ago, we announced we are bringing together app dynamics in our inner site workload optimizer to deliver comprehensive visibility of applications and infrastructure, both on Prem and in the cloud using machine learning in AI to proactively remediate problems and optimize user experiences.
To summarize I'm pleased with our business transformation with the new innovative platforms, we're bringing to market. While we continue to experience some pause in customer spending related to the uncertainty in the global macro environment, our long term growth opportunities remain unchanged.
Going forward, we will continue to focus on developing groundbreaking technologies and building a new internet for the Fiveg era that will help our customers innovate faster than ever before I remain incredibly confident that our execution against our strategy will drive profitable growth and generate strong shareholder returns for the long term Oh now I'll turn it over to Kelly.
Thanks, Jack I'll start with a summary of our financial results for the quarter, followed by the guidance for Q3.
Our overall Q2 results were consistent with our expectations, we executed well with strong margins a.
Total revenue was down 12 billion was at 12 million down 4%, our non-GAAP operating margin rate was 33.7% up 1.6 points.
Non-GAAP net income was 3.3 billion flat year over year and non-GAAP, yes.
Having said up 5%.
Let me provide more detail on our Q2 revenue total product revenue was down 6% 8.7 billion infrastructure platforms was down 8%.
Switching revenue declined in both campus and data center, we did see growth with the continued ramp of our Cadnine K and strength of the Nexus.
I didn't decline driven by weakness in service provider.
Wireless declined overall, but we did see strong growth in Morocco.
And are starting to see the ramp of our life.
Data center revenue declined driven by servers offset by strong growth and.
Applications was down 8% driven by decline and unified communications, partially offset by double digit growth.
Security with 9% with strong performance.
Advanced threat and unified management.
Service revenue was up 5% driven by software and solutions.
We continue to transform our business delivering more software offerings and driving more subscriptions.
Her subscriptions were 72% of total softer revenue up seven point year over year.
In terms of orders in Q2 total product orders were down 6% looking at our geography, the Americas was down 8% email is down 1% in a P.J.C. was down 4%.
Total emerging markets were down 7% with the brick plus Mexico down 20%.
And our customer segments public sector was flat, while enterprise was down 7% commercial is down 4% and service provider was down 11%.
Remaining performance obligations or ARPU at the end of Q2 were 24.9 billion up 11%.
From a non-GAAP profitability perspective, total Q2 gross margin was 66.4% up 2.3 points.
Product gross margin was 65.9% up 3.1 point.
And service gross margin was 67.7% flat year over year.
In terms of the bottom line from a GAAP perspective Q2 net income was 2.9 billion S was 68.
We ended Q2 with total cash cash equivalents and investment of 27.1 billion operating cash flow was 3.8 billion flat year over year.
From a capital allocation perspective, we returned 2.4 billion to shareholders. During the quarter that was comprised of 0.9 billion or share repurchases and 1.5 billion for quarterly dividend.
Today, we announced the once an increase to the quarterly dividend.
To 36 cents per share up 3% year over year. This represents a yield of approximately 2.9% based on today's closing.
This dividend increase reinforces our commitment to returning capital to our shareholders and our confidence in the strength and stability other ongoing cash.
We continue to invest organically and Inorganically and our innovation pipeline in early Q3, we closed our acquisition of exit blade designer and manufacturer of advanced network devices aimed at reducing latency in improving network performance.
To summarize we executed well a strong margins any P.S. growth, we're seeing the returns on the investments, we're making it innovation and driving the shift to more software and subscription delivering long term growth and shareholder value.
Let me reiterate our guidance for the third quarter fiscal 20. This guidance includes a type of forward looking information that Maryland referred to earlier.
We expect revenue to decline in a range of minus 1.5% to minus 3.5% year over year.
We anticipate the non-GAAP gross margin rate to be in a range of 64.5% to 65.5%.
The non-GAAP operating margin rate is expected to be in a range of 32.5% at 33.5% and the non-GAAP tax provision rate is expected to be 20%.
Non-GAAP earnings per share is expected to range from 79 cents to 81.
Our guidance does not reflect any potential disruptions on our little supply chain that could result from the Corona virus. We will continue to monitor situation closely I'll now turn it back to Maryland, So we can move into Kuni.
Thanks, Kelly, Michelle let's go out and open the line for questions.
Thank you Tim long from Barclays. You May go ahead.
Oh, thank you.
<unk>.
Just sorry, I'm talking about the macro and that kind of the longer decision process.
[laughter].
Let me.
Hey.
You mentioned a lot of.
Industry drivers going on 40 gig in five six and obviously you got them you router and.
Silicon products out so maybe just talk a little bit about the time that recovery in housing.
<unk>.
Yeah.
This year. Thank you.
Yeah, Tim Thanks, It's a great question. So I think first of all there are many secular growth drivers that or wind up you know the fiveg transition. The 400 gig transition why fysixteen shift to cloud and you know what we're seeing from customers is really just a it's a it's just paulding just trying to see what's going on now what else.
Say is.
That clearly laid in the quarter.
If you look at some of the issues that had been outstanding that we're creating some of the uncertainty like Brexit Yeah, we got closer to resolution.
We obviously got a signature late in the quarter on the first phase of the U.S. try to trade deal and you assume she is now gone through in the U.S.. So hopefully those will.
You don't give our customers a little more viability I when I speak to the customers, they're still fully planning on moving forward. There just a little cautious and trying to see what's going on we obviously have the virus now the we'll see how it plays out.
But overall I don't think its deep.
And we expect that Oh.
Given some of this uncertainty has now dissipated notwithstanding what we see obviously from a virus that to hopefully, we'll see our customers pick up again.
Okay. Thank you.
Thanks, Kim next question please.
Cages bank in test from you'd be asked you May go ahead.
Thank you I haven't I had a big picture question with the December routing announcements on the Casnine came before that a lot of the Cisco strategies, now or I'm selling incremental automation software to lower customer opex that seems to require a significant changing your organization. So how far along are you.
In the sales channel transformation to fit that goal. Thank you.
That's very good question. Thank you I.
We have done a lot of work on the transformation of being able to support the software model.
And the subscription software model in particular, it with the automation and we have if you go back to 2017, when we first launch the catalyst 9000, we announced subscription businesses.
On our enterprise networking portfolio. The second half of this year, we'll have some <unk> a number of a small amount of the early renewals on that so our team has been working hard to be prepared for those renewals and then in fiscal 21, we'll see you know a material number reasonably material number.
Associated with that so I think the sales organization, we run pilots and now we've scaled things were running other pilots and we're scaling things.
And we've got the customer experience organization that Maria Martinez, leading that has been.
Then building out their capabilities. So we have we have more to do but I feel good about the progress we've made and I think that we're in a pretty good position right now.
Next question please.
Simon Leopold from Raymond James You May go ahead.
Thank you very much I'm wondering if maybe you could talk a little bit more about the the service provider vertical given its its been a long running challenge and seems as if maybe to some extent, it's it's less of a focus up for Cisco given that it's such become a smaller part it business, but we want to see if you can maybe talk about how you see this market event.
Actually recovering kind of the timing and the drivers you know maybe double clicking beyond just sort of the fiveg hand, waving if we could get a better understanding of what will drive it when thank you.
I'm in its a lot better just a wave hands.
[laughter].
Let me, let me tell you a little bit I don't think that it's a market that we are ignoring or are we in fact, if you look at the announcements we made in December let me give you a little update on that.
We have all about five years of R&D effort in what we announced in December. So that's a lot of commitment to the market. So we do believe that there will be you know a resurgence I think that I will talk about a five GE and 400 gig as well, but just to give you an update on <unk> in December as you know we launched silicon.
And one.
Which is at the heart of these new systems called Cisco 8000 that we launched and and we also announced that we would be willing to sell our silicon.
You go into a white box or sold just directly to a customer if that's all they like to procure it I would tell you that across the cloud Titans there.
We're engaged with all of them on variations of those architectures several of them were with us at the announcement in December which shows you their belief and what we're doing a we have taken orders for both.
From a different.
[noise] cloud players and so we feel good about the acceptance of that launch the this the 8000 series.
We'll be a.
A fundamental backbone product for Fiveg networks, and I will tell you that we have early wins on IP infrastructure to support Fiveg Rollouts over 30 customers around the world the early or.
Some of those are cell site aggregation backhaul.
Some core wins or most of them are in non standalone, which means there are enhancing their current networks and then they'll look to build standalone networks. As we've said we believe that will start in 2021, where we could begin to see some of that pick up. So we think the 400 gig a transition as well as the five.
Gee build out will be the drivers that we'd be looking for over the next couple of years.
Thank you.
Thanks, Chuck next question please.
Thank you Paul Silverstein from Cowen and company you May go ahead.
All Hall Silverstein your line is open.
Sure. So we're going to use the scope of.
Well I know you most.
Most of the structure was particularly strong this quarter <unk> long standing shrewd, both near term and longer term.
Looking out as the gardens <unk> using I assume some of those through the backup and do room, placing the pending back up can you go back through the drivers what you expect over the next year.
Sure good gross and operating level [noise].
Yeah, sure happy too and Yeah, now, we're really happy about where the about gross margin. The not margins are but as you know polished driven by a few things. This this software transformation has been benefiting us through both a you know you can see it in the in the mix of our products only show you the gross margin wants an acute.
As well as just overall, so we're benefiting from that I'd say the second big driver is on price, we've been very very disciplined on price meaning.
Well, we're taking advantage of of Ray raising prices, where we have plasticity. You know for example on I'm really you know older products at a you know we want to shift to newer products or or where we know we have room to move we've been doing that I think very effectively we've been managing the decline in the pricing.
And the server market fairly while balancing that with the DRAM prices that are going down dramatically. So what you're going to see in the in the a reporting this quarter pollen ariely that you'll see our pricing you know I mentioned in the last quarter's call that pricing was at all times.
Lowest level of impact, meaning that the most beneficial let Ben were right back at 1.1 points on our year over year gross margin to walk. So it's it's still very very good.
For us and more in line or what it was I'd say a couple of quarters before before Q1.
So that's going well DRAM is benefiting us this quarter for sure.
And as you know, that's that's becoming less and less of that.
I have a benefit to us I'm now as we're starting to see the DRAM prices pick back up.
But we again manage that pricing in DRAM cost equation very well so.
Yes in general I think you will you can expect I'm, a little bit more pressure from DRAM pricing a year over year compares getting less which is why I guided what I guided but overall, you're still going to see the goodness coming through from the continued increase my business being software driven.
So, let's just quick follow up you know looking beyond the quarter, we can be on April.
Even the ongoing ship. The software is are you, losing one margins should continue to head up putting a solid quarterly volatility.
Yeah, I mean, again I would say, yes, because what we're doing on the portfolio is more and more software content. So by definition it will be good for US we will always have.
The potential for large swings for things like component costs like like be around plus or minus but as always we'll let you know when those are happening, but yeah I mean.
If you go back and look three years back.
From where we were there to where we are now it is long term just that that shift or the overall portfolio that we've been driving.
Appreciate it thank you.
Next question please.
Jim Suva from Citigroup investment Research you May go ahead Sir.
Thank you very much for the clarity so far and I had been a question that's kind of more broad I don't know if it's a so what's your view, but all the product orders I was just kind of looking and thinking about the product orders you know it looks like the enterprise product orders got incrementally a little more challenged public sector got a little more choice.
Alan service provider marginally improved compared to last quarter year over year can you maybe give us some color on product orders it looks like maybe enterprise a little difficult year over year comps wasn't last year, a big product cycle and enterprise or why are we actually seeing enterprise kind of decline.
Incrementally a little bit worse. Thank you.
Yeah, Hey, Jim Good question, and let me a living to take a crack at it so.
And I look at the segment.
It's it's if I focus on enterprise a lot of it is the Q2 19, I'm really really strong product cycle ramps. We had so if I go back to Q2 19, it was a record.
For for the campus switching for us as well as for collaboration backing teacher 19, no excuse, but but that's what that was I wouldn't say beyond that if I went to isolate.
Overall kind of our regions from a from a bookings point of view you know the the Americas was down 8%.
And if I look at that the U.S. itself was slightly better but in that range and I'd say was driven by two area that was driven by the the routing portfolio largely SP segment that was the biggest driver in the second biggest driver was the decline we're seeing in the in the server market and again, that's directly related to the decline of DRAM.
Flowing through the entire marketing, we thought it last quarter as well so that drove the Americas.
Europe was at minus one basically flat but that.
The biggest driver when I look at Europe was really the UK, we are seeing a slow down because of Brexit and we did see it in the public sector significantly which is always a big growth driver for the UK for us So UK, both enterprise and public sector slowed down for us, which drove your up Europe would've been up two points without the today and then for H.P.J.C. It continues to be there.
Rapid decline of China.
China is as I talked about in the breakfast, Mexico being down China was down again over 30%.
It's still only about 2% of our total business, but it still hurts. The overall I mean in Asia Pac excluding China was up a couple of points as well three points. So.
From a geography those are the key drivers and again to your point, we are you know going up.
Getting some tough compare than our price for both the Kansas Nike ramp a year ago and collaborate had a record quarter.
Thank you that was a great explanation and greatly appreciate it. Thank you so much thanks Jim.
Thanks, Jim next question please.
Eat hike had won from Oppenheimer and company you May go ahead Sir.
Thanks.
Chuck I wanted to dig into applications down 8% on a year over year basis, and I understand the pressure on the unified communication business and it's good to see how do you still growing.
But do you haven't talked Webex right am I to assume that Webex is not growing stuck in the middle here [laughter] help me think about the transformation Amy has been doing over there where we are indexed transformation then.
How should they think about the growth and competitiveness of the platform going forward.
Yes, I think the you know first of all they have re architected all those platforms integrated the back ends and have a very modern set of solutions to take the market.
And we're currently working I was talking to team yesterday, I think theres living workshops with major customers in the next 30 days due to work on plans to get them to the.
The modern portfolio because some customers have been running variations of the stuff that we've had out there for 10 to 15 years.
So we're in we're in good shape in fact, if there was a great analyst report that was written just a couple of days ago about industry analyst about the portfolio and Hell affords common how effective it is right now so I feel good about what they're doing I think if you look back a year ago flushed out.
Collaterals up 24% I mean, it's a huge business to be up that much. So they had a very tough a year to compare against.
But I'm pleased with there are there is competition obviously, there's some good competition in this space, which frankly should just keep making us better but the team is doing I think a really good job kill you want to comment I mean, I'll just give you. The you know I'd say the the largest driver was that you see business and the revenue being down the huge Mike.
40, followed by I'm a bit on the end points on the T P and conferencing was down marginally hardly hardly anything.
The biggest driver was for sure.
On the unified communications.
Hey, good alright, good luck guys.
Next question please.
Thank you, Jeff Qualcomm Numero you May go ahead.
Oh, yes. Thank you very much for taking the question I was hoping that you could on pack, a a sort of a a bit of a bigger downtick, maybe an IP than we were expecting a balanced by a better performance on the services line you sort of help us understand with dynamics are and some of that may be accounting for where.
The software goes I love to understand that a little bit better. Please.
Yeah, I would say I talk about this on the service increase has there's been no change on the accounting side for how we account for software service improvement you know we've been we've been a really driving that Maria Martinez you know that leads the extra customer experience has been relief.
Focused on driving renewal rates and adoption and you've seen our services business from a revenue I perspective pick up over the last four quarters. So I'd say that 5% growth you saw in services is just continued performance by that team to do that I'd say on the infrastructure platform side. It does go back to.
No.
Again, just very very we were peak not P. But we're very very high ramping up of campus switching last.
Last year that so at the tougher compare I mean, it's still growing like crazy, but that's a big driver routing is still down driven by the S.P. segment and then in terms of the last piece from a year ago again, we talk about and you saw that applications was up 24% again, which is all collaboratively.
A year ago as well so.
It's nothing more than then those things I would say combined with Gen that the data Center server market is you know we're starting to feel that you can see what's happening in the market there.
It does that imply Kelly the that 5% services growth rate is is a durable number or should we be thinking it will fluctuate between that and those are the low single digits growth that we've seen.
Well, we certainly are we're certainly trying to make that a sustainable kind of range now we have no desire to have that slowdown, but again, it's it's you know.
The team is doing everything they can their offering new solutions not just you know they're trying to find more ways.
To drive incremental growth versus just the being tied to the maintenance to the product orders and they're driving much more solutions, along softer and everything else. So they're they're working a lot of plays in the services area.
Obviously they are congratulations thank you. Thank you.
Next question please.
Rod Hall from Goldman Sachs. You May go ahead Sir.
Yes, Thanks for fitting me and I I just had a quick question trying to juxtapose the the guidance with the order rates. If you look at as total product orders the rate, where they're down six after downforce or that deteriorated and yet your revenue guidance for the mid point at least your revenue decline.
And is a little better than what the quarter you just printed so you put it down 3.5, and the guide down 2.5, so kind of tailing on Jeffs question. There is.
Is the services, making that up and you know what should we be expecting for product revenue in the guided quarter and then I also I'm, hoping Chuck maybe we'll make a comment on this whole.
Five G investment commentary coming you know coming out of the press that maybe the government. What do you think of that how interested is this going Burke.
Potentially helping.
Deploy U.S., a wireless infrastructure not not the stuff you do today, but actual base stations and things like that could you comment on you know and how you see some of those that commentary how you think that might develop.
Yeah I can go first you know yet your question is a good question Rod, but I would say really the where we ended up at the minus six was I'm not a surprise that's kind of when I gave guidance for the Q2 kind of what the expectation was I would say as you know when we roll up.
When we roll up the guide as we go for Q3, we just you know it's the same process. So we know exactly what's coming off the balance sheet. We have a you know we know exactly what's in backlog.
We know exactly.
You know what we expect.
It is coming in and it's just your.
To your math I think again back to a lot of the decline in the in the order rate was they're a bit of compares but the rest when it when you do the math and add it all up to what you expect to come through for the next quarter. It gives you the the number I guided in the mid point. If you look at that it's very consistent with what our normal Keith.
The Q2 sequential there.
Thanks.
Question around the Fiveg discussions in Washington, or I mean, obviously, they're they're very interested in.
Having us companies participating in Fiveg, and frankly lead in Fiveg and so we have spent a lot of time educating.
Different folks in Washington about.
What technologies actually constitute an entire fiveg networks are you rightly said not the stuff, we have but the radio which is pretty much what we don't have.
But I think that I think the U.S. is in really good shape I think you know we have.
Packet core we've got <unk>, you know cell site radio backhaul, we got the IP routing core we got security.
Yeah, we have obviously, there's a couple of companies in Europe, one in South Korea that provide.
The radio technology. There's also a software players that are out there right now they are building.
You know desegregated opened ran solutions that can be used in the future and so were spent a lot of time, helping them understand that and and working.
Two or just.
Make sure that there's a recognition that there's a lot of technology, that's been built and being built here in the United States that is leading.
These fiveg infrastructures and I actually think the U.S. is in fine shape I think both from a carrier deployment perspective, I think we're in we're in great shape.
And I think we're in good position with the technology I don't think the U.S. government should make investments in these companies, but you know we are certainly working with lots of industry peers.
General both education, and then trying to just make sure that the U.S. does have solutions with combining these European players with a lot of our technologies.
To to make sure that everyone's calling for those solutions.
That's great. Thanks Chuck.
Thanks, Chuck next question please.
Sammy battery from Credit Suisse. You May go ahead.
Thank you I would like to ask about the S.P. orders that were down 11% in the quarter and looking forward to the back half of this year and any kind of forward looking indicator trajectory commentary would be helpful. If you look at two scenarios one scenario seem it assuming a recent telecom.
Consolidation right that we've all heard about last two days and then a scenario where I know consolidation actually happens for the rest of the or should we expect service provider orders to flex positively in one of those scenarios or both of those scenarios as we look at the back half maybe kind of mid tobacco 2020.
That's a that's a tough question to answer we then.
Dealing with challenges in this segment for a long time I think the.
In history history would tell you that when we see consolidation it creates a slowing I'm not sure that this particular, one represents up because I think they're going to be an investment mode and his triggering investment with other players as well.
I think the fiveg build out that all of them or working all we'll we'll probably fuel investment.
I think for us it just depends on how quickly they do that and how soon they decide to build a standalone.
You know Fiveg network for enterprises, I think most of them are looking at their consumer networks unbelieving. They can accommodate them on their existing backbones would perhaps some minor upgrades.
But I think that'll determinant. So I think is more connected to how fast they move on that than it has to do with any of the consolidation or no consolidation right now.
Got it thank you.
Next question please.
[noise] Sanuk Cheddar cheese from JP Morgan you May go ahead.
Hi, Thanks for taking the question I just wanted to see if we can good and don't have been more on that thank you product portfolio. You mentioned already a couple of things on the caused the brought up those revenue momentum. There is quite strong I was just wondering if you can kind of.
Welcome to <unk> box on the cool to that you've kind of seen did actually leads will just got a broader landscape of slowing into place spending and if the good. Okay that is kind of said substantially different from what you seem to the rest of the portfolio is it do you think it's more data collection will be subscription and got a model that you are going with on that portfolio or more kind of fresh that's it.
That's driving that defense and kind of what you're seeing greater so that's still the portfolio.
Yeah, I'll I'll, just say the grocery other cadnine K is unbelievable. So I mean it is a it is a very high double digit number.
I would say.
You know, there's there's no we haven't heard issues I'd say for maybe some of those smaller defeat you know there's a question about subscription that subscription, but we've managed through that but I would say those new products from the 90 to 100 through the 9600 that isn't slowing in the growth rates are very very strong obviously the legacy products that they.
Have have replaced our.
Falling off as you would expect but but we have not seen any slow on the transition as the fast and again, we mentioned this in the early ramp like <unk>, but at this point the percentage of what the Cat and I gave the total campus switching is the fastest ramp of any transition we've done and if you look at the.
Kelly talked about earlier with why Fivesix beginning to ramp that's a subscription model our muraski businesses, a subscription model, which is still growing very well. So I I don't think that subscription model as you can do with I just think in certain cases, some of our larger customers who are watching some of the things going on just decided to just.
Take a pause and take a look at what's happening and then I think they will kick back in.
Okay. Thank you.
Right next question please.
Thank you Tal Liani from Bank of America Securities You May go ahead Sir.
Yes, hi.
I want to ask a broader question, Oh, and I'll call it secular versus cyclical.
You know switching had a small cycle short cycle within you switch stop there was growth acceleration now we see a decline overall in switching and there's probably substitution between new and old.
And routing is also declining and the question I'm I'm asking is.
Off the trends you see today.
You know data center switching campus switching routing service providers.
What is cyclical in what is secular meaning.
When are we going to see a reversal no point in terms of timing, what's going to drive I should say, what's what's going to drive a reversal of the trends in routing what could drive what could drive a reversal in data centers and campuses what are the things that could drive at least a cyclical growth from here or even secular growth so kind of longer though.
Thanks.
And so that's great question I think in the routing spaces simply it's the fiveg backbone build out that we've been talking about for a few years a once that starts I think given the magnitude given the percentage of our routing business that is attributed to service providers I think that's the key as well as us winning.
These Cisco 80000, insertions that we have proof of concepts going on today with a many of the large customers. Both service brought our web scale players.
So I think that's that's about one and I think on the campus I I just think that's.
That's just a timing issue.
I think that a the growth we're seeing in the catalyst 9000 is.
His tremendous.
I think that customers that began to build out there refresh you know given where we are as a percentage of the installed base that we have replaced its got a long road ahead of it I think that are the only reason that we saw a little slowdown is just because customers just decided to paul's the deployments a bit.
But I think that that'll come back when.
This uncertainty.
And the capital spending frees up.
And routing.
Routing I answered first with the S.P. with a five you know the Fiveg back light up you'll get because of how big a percentage service provider represents our routing portfolio.
Okay. Thank you thanks.
Thanks Tal next question please.
Meta Marshall from Morgan Stanley You May go ahead.
Great. Thanks, you know with subscriptions being 72% of softer revenue, which is stated I wondered if you kind of had an update as to how much of a have a headwind that kind of business model transition as you know in the past due to kind of set a couple of hundred basis points, but just any directionally. If that's still about right would be helpful.
Thanks, Yeah, I mean, I again I think.
Back a few years ago before we adopted a new revenue standards. It was it was a bigger impact. It was actually turned 50 is there anyway, just like that with Stacey assay six so six it's come back down to 100 basis, but at this point.
You know we don't even.
You know talk about it that way because we've been ramping so quickly the entire portfolio to that but at Max It would be I'd say 100 beds or so.
Great. Thanks Yep.
We have time for one more question, Michelle Ts up a one more.
Thank you Jim Tisch from Piper Sandler you May go ahead Sir.
Hey, guys. Thanks for squeezing me in.
I'm talking about here today.
He side, we have or say coming out.
So just wondering if we could double click on where we are with you. All know brought together it's as it seems like there are the biggest driver as a business you guys talk little bit more about the contribution of these two specific way to the portfolio and how umbrella specifically is impacting your adoption of secure as Steve Wynn versus some of the other vendors that are out there. Thanks.
Yeah. So I'll give you the sort of the qualitative answer until we can give you something on the data, but I think the security when is the solution or customers looking for.
They they want the integration with their cloud gateways from their branches and so it is a key differentiator for US our teams are working hard on continuing to build that out.
And I think over the next couple of years it'll continue to do it will be even more of a differentiator as we continue to get more and more integration between those two portfolios Kelly Yeah, No I'd say, that's absolutely right and.
In terms of how important number Alan you all are they absolutely are the key growth drivers for us the whole cloud security space for Us and we'll continue to be so and I'd say you know, we recently launched our our security Gateway, which is just starting in <unk> and that'll be all part of our cloud security portfolio as well and expect that to be a huge growth.
Well.
Yep.
All right well, let me just thank everyone for joining us today and I'll, just recap by saying that while we.
Have seen a bit of a pause we actually feel really good conversations I have with our customers I mean, all the things are trying to do I believe our technology is at the heart of whether its rebuilding their applications, whether securing their data transforming their infrastructure in this new era or changing their user experience as well as the way the interface with there.
Customers I think that we're in a very good position help and do that and we feel good about where we are so thank you all for joining us today, and we'll look forward to catching up with you next quarter.
Thanks, Chuck just to wrap the call Cisco's next quarterly earnings conference call, which will reflect our fiscal 2023rd quarter results will be on Wednesday may 13th 2020, 130 PM Pacific time, Fourthirty PM Eastern time, again, I'd like to remind the audience that in light of regulation FD.
We disclose policy is not to comment on its financial guidance during the quarter unless it is done through an explicit public disclosure.
Now plan to close the call. If there are any further questions feel free to contact Cisco's Investor Relations group and we thank you very much for joining today's call.
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