Q3 2020 Earnings Call
Welcome to just goes third quarter fiscal year 2020 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 Marilyn Mora head of Investor Relations Ma'am you may begin.
Thanks, Michelle welcome everyone to Cisco's third quarter fiscal 2020 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 flights, 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 will be referencing both GAAP and non-GAAP financial results and well just got caught up result in terms of revenue and geographic and customer result in terms of product orders unless stated otherwise.
All comparisons made throughout this call will be on a year over year basis.
Matters, we will be discussing today, including forward looking statements, including the guidance, we will be providing for the fourth quarter fiscal 2020.
They are subject to the risks and uncertainties, including those related to cold in 19 that we discussed in detail in our documents filed with the FCC specifically the most recent reports on forms 10-Q.
Which identify important risk factors 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.
Fiscal will not comment on its financial guidance during this quarter or during the quarter unless it is done through an explicit public disclosure Chuck I'll now turn it over to you.
Thanks, Maryland.
Well, we just started I want to express my gratitude and appreciation for all the frontline workers, who are fighting this pandemic everyday to keep so many safe.
I also want express my simple to use for those who waltzer lives in the families that have endured the deepest planes from the impact of this tragic situation. We're in today.
It's truly is unlike anything any of us I've ever experienced.
As you can imagine we've been focused on helping our employees customers partners and communities.
We currently have 95% of our global workforce working from home, which was a seamless transition for us as we already had a flexible work policy.
And we build the technologies that allow organizations to stay connected secure and productive.
Well, those 5% who must be in the office to do the roles were clearly focused on their health and safety and are taking all of the necessary precautions.
During the crisis, many of our customers and partners had been under enormous pressure as they face cash flow challenges.
This is why we introduced a variety of free offers and trials for Webex and security technologies as the dramatically shifted into our workforces to be remote.
In addition, we announced two and a half a billion dollars in financing with the new business resiliency program through Cisco capital to all financial flexibility.
And support their business continuity.
This will help customers and partners access to technology, they need now invest for recovery into for most of the payments until early 2021.
This pandemic is highlighting so many inequities that already existed and he's exacerbating these problems.
I'm proud to say the Cisco is committed nearly $300 million to date to support both global and local pandemic response efforts, including providing technology and financial support for nonprofits first responders and governments.
We're also donating personal protective equipment to hospital workers, including in 95 masks and facials Threed printed by Cisco volunteers around the world.
I'm so proud of our teams who have been relentlessly focused on these efforts and continuing to identify how we can be innovative to hope those most in need.
I, particularly like to call out or 80.
Webex security and supply chain teams, along with our partners and suppliers, who have been working around the clock to ensure we're doing all the weekend to keep organizations around the world up and running.
Getting back to our communities.
Thank you.
Now turning to our third quarter performance.
Despite the challenging environment, we're all operating in we delivered a solid quarter and financial performance in the midst of the greatest financial crisis of our lifetime.
Well, we're not immune to the impacts of the global pandemic, we believe our underlying business fundamentals and financial position remains strong.
As we look at the quarter it very much reflected the journey of the pandemic.
In March we were performing ahead of our expectations as companies focused on building resiliency in the rights you environments.
Then in April we began to see a slowdown across the business as countries across the world were locked down.
Well parts of our portfolio had been more impacted than others. We believe our leadership from a product innovation and operational perspective remain solid.
Well, there's so much uncertainty now we believe our role has never been more important.
And our responsibility has never been greater as much of the world is running on Cisco's technology from networking to collaboration to security to stay connected secure and productive.
Organizations more than ever must focus on resiliency and agility.
And those who had invested in digital capabilities, we're able to make this shift more seamlessly.
While we cannot predict when it's going to happen. One thing. We believe is that the demand for our products and services will be strong when we emerged from this situation.
We believe the transition in our own business model through our shift to more software and subscription based offerings is paying off.
We saw continued strong adoption of our SaaS based offerings and now have 74% of our software that is subscription.
65% a year ago.
We also believe we remain well positioned over the long term to serve our customers and create differentiated value aligned to cloud.
Fiveg, why Fivesix and 400 gig.
Our business model diversified portfolio and ability to continue to invest in key growth priorities gives us a strong foundation to build even stronger customer relationships.
As we prepare for the future.
We will closely partner with our customers to modernize their infrastructure secure their remote workforce and their data through our innovative solutions that will serve as the foundation for their digital organizations.
Next I'll turn to the performance of our business segments, starting with infrastructure platforms.
The world going online practically overnight.
The demand on networks has never been greater with users looking for secure connectivity reliable performance and consistent experiences.
This has led to our customers evaluating how to expand their capacity quickly how best to protect their teams and how to keep their day to secure while keeping their business productive.
It is also requiring enterprise I T to rapidly set up deploy and provision mobile offices or mobile health care clinics.
What I've seen I T teams do around the world what they've made possible it's simply astonishing.
Our strategy and value proposition are clear.
We are powering the world's ability to stay connected productive and secure while automating many of these capabilities.
Our intent based networking architecture was built for environments like this.
For industries like health care public services financial services and service providers, especially.
Having network infrastructure tightly integrated with security is mission critical.
In Q3, we offer new cloud based cobot 19 bundles for tell a worker mobile health care and pop up branch used cases through our partners and service providers.
Customers modernize their network infrastructure, we saw continued strong customer adoption of our subscription based catalyst 9000.
As customers look too quickly skill remote access capabilities to keep their employees safe and their businesses running.
We continue to execute on our secure cloud skill SD win strategy by investing in innovation and partnerships to help enterprises accelerate their multi cloud strategies.
As an example, we're now integrating with our umbrella secure internet gateway to give our customers flexibility to use best of breed cloud security with our industry, leading SD Wan solution.
Our partnerships across web scale providers like Kws Azure and our most recent announcement with Google Google Cloud.
Allow us to offer a truly multi cloud network fabric.
As bandwidth in SaaS application demand increases, we're enabling our customers to securely connect branches and interconnected different cloud providers to enable consistent application performance and user experience.
Moving onto the security, which is always at the heart of everything we do.
In Q3, we saw solid growth, reflecting increased demand for our robust solutions to secure the rapid growth in remote workers and their devices.
Being the largest enterprise security company in the World, we are uniquely position to safeguard our customers wherever they work.
We are the most comprehensive integrated end to end portfolio in the industry across the network cloud applications and endpoints.
As I mentioned earlier, we provided extended free licenses for key security technologies that are designed to protect remote workers, including Cisco umbrella.
Zero Trust security from duo industry, leading secure network access from Cisco any connect and endpoint protection from our Amp technology.
We're also supporting our customers on their multi cloud journey by enabling them to secure direct internet access cloud application usage and roaming users.
We are only two quarters into our secure internet gateway transition and we're already seeing strong adoption from existing and new customers.
Building on the investments we made an innovation partnerships and acquisitions. We also introduced secure ex.
This is the industry's broadest cloud based security platform connecting the breadth of our portfolio and our customers security infrastructure by providing unified visibility automation and simplified security across applications the network endpoints and the cloud.
Turning to applications.
Teleworking and collaboration tools have become a lifeline for businesses and their people to stay connected and product and productive with security and privacy being more critical than ever.
Our portfolios at the center of our customer strategy for empowering teams and increasing productivity as 95% of the fortune 500 use our collaboration portfolio today.
We take a security first approach to remote working and provide highly secure cloud based collaboration solutions with integrated end to end encryption, while protecting our customers privacy.
Throughout the quarter, we invested in scaling our platform at an unparalleled speed to deliver a highly secure consistent experience and ensuring business continuity for our customers.
We're now running our Webex platform at three times the capacity, we were running out in February to manage the dramatic increase in usage growth.
We had well over 500 million meeting participants generating 25 billion meeting minutes in April more than tripled the volume in February.
We also added many new prospects through free Webex trials that we anticipate converting to revenue in the future.
With applications at the core of every business and the surge in demand for monitoring tools that provide real time business insights and optimize user experiences in multi cloud environments.
Dynamics continues to perform well, particularly in this environment.
As I wrap up I, just want to reiterate how grateful I am to have our teams are resources and our operational resiliency. During this time.
I also want to commend the heroic efforts of IC organizations and teams around the world, who have had to digitize their operations and support remote workforces at an unprecedented speed and scale.
This crisis has highlighted the importance of having highly resilient globally scalable infrastructure technologies to keep the world running.
And this is what we build.
We are providing innovative solutions that help our customer support business continuity drive productivity and ensure a highly secure work environment.
We believe we will emerge from this crisis stronger than before.
With our accelerated innovation cycle refresh portfolio and significant progress on our shift to more software and subscriptions, we were in a better position today than in past times of uncertainty.
Our confidence is further supported by our strong balance sheet to invest for the future and our proven ability to execute no matter the environment.
I also believe are incredible culture has been amplified during this time.
And I'm, so proud of what our teams have achieved.
I am confident Cisco is resilient and we are built to last regardless of what the future brings Kelly on I'll turn it over to you.
Thanks, Chuck I'll start with a summary of our financial results for the quarter followed by guidance for Q4.
Our overall Q3 results reflect good execution strong margins and non-GAAP EPS growth in a very challenging environments.
19 did have an impact on our financial results and business operations this quarter, especially in our supply chain, where we saw.
Factoring challenges a component constraints.
Total revenue was 12 billion down 8%, our non-GAAP operating margin rate was 34.9% up 2.7 point non-GAAP net income of 2.4 billion down 2% year over year and non-GAAP EPS was 79 cents up 1%.
Let me provide some more detail in our Q3 revenue.
Oh product revenue was down 12%.
Thanks.
Infrastructure platforms was down 15%.
The area that was most impacted by the supply chain challenges.
Switching revenue declined in both campus and in data Center, we did see strong growth at the continued ramp of the cat.
Routing declined in both ferrous matter and in enterprise.
Data center revenue decline driven by continued market contraction impacting both actually within Hyperflex offerings.
Wireless declined overall, but we did see strength in Atlanta, My wife, I six products and sell it.
Applications was down 5% driven by declining unified communication and TP endpoints.
We did see growth in conferencing as we saw strong uptake with the Covidien.
We also saw strong double digit growth and at dynamics in higher T. software.
Maturity was up 6% with strong performance and unified set management identity and access and advanced.
Cloud security portfolio performed well with strong double digit growth and continued momentum with our dual an umbrella offerings.
Service revenue was up 5% driven by software and solutions support.
We continue to transform our business delivering more software offerings and driving more subscription.
Software subscription first any for 4% of total software revenue of nine points year over year.
In terms of orders in Q3 total product orders were down 5% during the quarter. There was a slowdown in April as we saw the impact of the covert 19 environment.
Looking at our geography, the Americas, it's flat EMEA was down 4%, an ERP JC was down 22%.
Total emerging markets were down 21% with the bricks lessen Mexico down 29%.
Our customer segments public sector was up 1%.
Enterprise was down 4% commercial was down 11% and service provider was down 3%.
Many performance obligations RPL at the end of Q3 were 25.5 billion up 11% portion related to product was up 25%.
And the non-GAAP profitability perspective, total Q3 gross margin was 66.6% up two point.
Product gross margin was 65.8% up 2.1 points and service gross margin was 68.9% up 1.6 planes.
The increase in product gross margin was driven by productivity with continued memory cost savings and positive mix, partially offset by pricing.
In terms of the bottom line from a gap perspective Q3, net income was 2.8 billion NCPS with 65 cents.
We ended Q3 with a total cash cash equivalents and investment of 28.6 billion.
Operating cash flow was 4.2 billion down 2% year over year.
We have a very strong balance sheet healthy free cash flow generation and the ability to quickly access capital markets. This is a competitive advantage in a challenging environment.
Our commitment to our capital allocation program remains unchanged, we intended to continue to deliver long term value to our shareholders through the return of a minimum of 50% of our free cash flow annually. In Q3, we returned 2.5 billion to shareholders. During the quarter that was comprised of 1 billion or share repurchases and 1.5 billion for a quarterly dividend.
To summarize we executed well with strong margins and non-GAAP EPS growth and a very challenging environment. We're seeing the returns on the investments, we're making an innovation and driving the shift to more software subscriptions delivering long term growth and shareholder value.
Let me reiterate our guidance for the fourth 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 8.5% to minus 11.5% year over year.
Anticipate the non-GAAP gross margin rate to be in the range of 64% to 65%.
Non-GAAP operating margin raise expected to be in the range of 31.5% to 32.5% and the non-GAAP tax provision rate is expected to be 20%.
Non-GAAP earnings per share is expected in the range from 72 cents to 74 cents.
I'll now turn it back to Maryland, So we can move into the Q.
Thanks, Kelly Michelle Let's go ahead and plan to open up the line for questions and as a my usual quarterly reminder, Oh, we ask that you stick to one question. So we have time to get to others Michelle.
Thank you, Maryland, our first question comes from Paul Silverstein with Cowen and company you May go ahead Sir.
Oh I'm torn whether ask you both the infrastructure decline so let me focus on that.
So I can tell you maybe you could comment on pricing.
And then the other aspects of the fargo's more performance, but what else you all the infrastructure side.
All right given that so many organizations shipments work from home that's likely to persist to some degree what's your outlook in terms of the benefits from the work from home.
The need for your solution for robust conductivity, but also the central negative aspect.
Employers within the four walls the enterprise how does that impact campus with your wireless Lan if you could or any of your cruise ship.
Yeah, Paul Thanks for Thanks for your question in your you're spot on it and how you should think about it look from.
When we look at our customers working from home, there's clearly collaboration capabilities that I discussed around Webex is clearly more security.
That needs to be deployed.
And then the question about.
When they return to the office and how much how many people return to the office and what does that mean to the infrastructure supporting their campus environments is certainly one that we're going to be watching.
I will tell you that I've had a lot of customers who are not at the.
You know centre of this crisis.
Realized during this pandemic that that they have a fair amount of technical debt and they have a lot of aged equipment.
And so we don't know what the timeframe is but many of them have said. This is going this is a wake up call and this is going to actually give us air cover to talk to our senior leadership team about upgrading and building out a more more robust modernized infrastructure. So again different customers will be able to do that at different paces.
Based on how they are impacted what their capital situation is but [noise].
That's how we think about a going forward and what's your plays out until you want to talk at all about pricing or yeah.
So yeah, Paul I'm pricing, we again continue to have a strong margins this quarter.
But I will say some of the dynamics, we did benefit still this quarter, because we had built absent inventory on the on memory.
At the lower prices. So we benefited greatly from that which you'll see in VSBA pricing they get a little bit worse, so pricing to your question.
Paul a from a gross margin rate on product year over year. It drove minus 1.9 points on pricing, which is slightly worse than it was year over year last quarter and certainly for the quarters ahead.
One even before that even so but overall very very strong productivity again, driven by memory and cost savings as well as positive software mix until you may want to talk about the correlation between the infrastructure platforms revenue number in the supply chain.
Yeah, I mean like I said in my prepared remarks basically the the.
Majority, if not all of our supply chain challenges that we had with both components and the factory is being impacted was on the infrastructure platform side, So that certainly drove.
A very large chunk of.
That revenue.
Yeah, I personally that Chuck can you compare this true ups.
In 20 years go to the bubble.
Well I don't think and compare it to the bubble because we were at the epicenter of that one so that when felt a lot different [laughter] and this one we're sort of were.
Secondary collateral damage I would say.
But.
I think the difference here.
Is.
The the broad based.
Challenges that this thing has represent as as presented to customers around the world.
And but what we all know that the response from the fed.
The response from Congress on stimulus and a in the commitment.
To the economic acceleration or the attempt to slow the economic deceleration is certainly at a level, we've never seen before so I.
I think that.
Like everybody else, depending on the availability of testing the about availability of therapeutics and clearly at some point when we get a vaccine I.
I do believe that the one difference that I see in this one is it just came upon us so quickly.
And so consistently around the world that I do think customers are now stepping back in and asking themselves what do I need to do to harden my infrastructure into better prepare my business for the next time something like this happens.
Great. Thanks, Chuck next question please.
Thank you Ittai Kidron from Oppenheimer and company you May go ahead Sir.
Thanks, and I'm glad to hear everybody is doing okay older workers as well. Thanks for the hard work there I guess I had a question about applications. You know just given the push with Webex and have dynamic so it's a little bit surprised it was down year over year.
Basis, I guess I couldn't give me a little bit more transparency hearing give us kind of.
A better understanding of the relative revenue levels off Webex and Appdynamics versus date unified IP, but it's clearly declining and overshadowing dose businesses I'm trying to understand how close are we to a bottom in the declining businesses, where the growth in the growth businesses can find or would be transferred.
Right, but on an overall product category.
Yeah, I think it's I'll, let me give you some color than Kelly can give you some metrics, but I think if you look over the last couple of years. It at the applications business and collaboration I think they performed.
[music].
Reasonably well.
Yeah as you think about what would happen with Webex. This time, what I will tell you is that our number one priority was to get customers up and running.
And so we have Ah, we really have three categories of opportunity from customers that as I said in my prepared remarks that we believe will convert to revenue in the future. So we have enterprise customers.
Many of whom already had licenses, who who need more licenses a and they've exceeded their usage and we'll go back and we'll work with them to clean that up in the future, but again, our priority was getting them up and running and just allowing them to be productive.
Second is we had a.
A number of.
A new customers enterprise customers commercial customers.
Who took advantage of Webex and deployed for the first time and a in a in the 90 day free trial programs that we put out and then there was a third category, which are more the individual free accounts that the customers would sign up for online I'd say the first two categories represent the majority of what we believed to be the revenue opportunity going forward.
But that's something we'll see in the future and and wasn't really reflected in in the quarter that we just announced so kill you want to make any comps.
Yeah, I mean to thing I'll say in terms of just helping you think through the size of relative size of of these pieces.
No of application smart monitoring and Apple analytics, you know the at the business is that they said growing double digits Super strong very good but still fairly small in terms of the percentage of the overall applications and then on the same thing for Dow T. software. So it comes down to clad traditional collapse and then when I break that.
Down the biggest chunk of total collapse is the unified communications and that is why we are seeing the.
That pressure on which we have been sitting right in the endpoints.
So so that's going to be with us for a while as that goes you know, we're clearly I'm trying to transition there with some you know some of the things of the teams are building there.
But the that's a big question that will continue down for a while I would guess, but again conferencing a strong like Chuck said the yeah. The revenue. This is the revenue we're talking about when we look at the demand and when I look at to the uptake the significant uptake we had on the offers we had during this last quarter I'm just using our normal what we have.
Back to convert from a free to paid is going to be a nice tailwind for us over the next few quarters here.
Got it and when you say endpoint, it's just to clarify mostly.
Oh, that's not the right way to think about this that's really think led the biggest driver. Okay. Good luck. Thanks. Thanks.
Next question please.
Thank you Rod Hall from Goldman Sachs. You May go ahead Sir.
Yes, hi, guys. Thanks for the question I.
That's all I've got two one is regarding the order volumes I wondered if you guys could juxtapose. The fact that the U.S. is kind of surprisingly flat after being down 8% last quarter and then also the commercial order acceleration on the downside is could you guys dig into regional effect is that mostly a P.J. APAC, that's driving that or is.
Well it also weaken the U.S. and then the second question I had is on the 2.5 billion dollar financing plan that you guys announced I don't know Kelly could you give us some idea of how that affects cash flow like is it affecting cash flow in this quarter and then how should we expect it to unwind into cash flow over the next few quarters. Thanks.
So I really want to give a little color on the Americas in commercial and then you can give some metrics and talk about the financial plant of the programs.
So rod on the America's deal we had a.
It was certainly stronger than what we saw in July and Asia, and Europe, and frankly, if you just look at the timing of the pandemic you can see Asia got hit early so we saw the the more consistent declined in the business.
Well, we did see in the Americas in in the U.S. is we saw obviously strengthen webex and security as more as a customers you know executed on their business continuity. We also saw strength in service provider as a they built out capacity. So we saw strength in cable we saw strength in the web scale business.
And.
And just to.
Just to comment on the web scale space, which we haven't talked about in a while we've been talking for years about how that was a marathon and that we had been investing both in our innovation as well as in the relationships with those customers and we have had the second quarter in a row of robust growth in in that so part of the market.
Please.
Which which frankly is the beginnings of us seeing.
The results from the years of hard work and reestablishing ourselves there. So I'm really proud of what the teams have done so that's been a bright spot in the last two quarters.
On commercial if you think about a commercial or you know midsize enterprises small medium businesses and they have been disproportionally impacted by.
This pandemic so it's not a surprise that that that business is going to be.
You know hit a little bit hard here harder than others and Kelly you any color to add on that and then talk about the financial financial planning a program yeah.
Yeah, and also just to add to the U.S. just to add switching was also up and strong and the American U.S. Americas as well on commercial it's it's a similar story all of the Geo is were down but it was down a leased in the Americas, followed by EMEA and the biggest shrunk by far it was down in a P.J.C. So it's directly really.
Added to the kind of the the geographical look like when you look at overall, how the orders.
In terms of the capital business Resiliency program, a we really just launched the at the end of April Ah. So like the weaker before the quarter ended so nothing impacted that in the quarter. So in Q4, there will be us I'd say, a small amount <unk> yeah, we have a pipeline that we're going through.
You know the early signs of the pipe that we're looking at there's a there's a big intake interest for smaller commercial customers, who havent really done financing like a lot of health care system small health care systems, a lot of small colleges.
But so that there's a pipeline there so we'll start to see that convert in Q4 from a from a cash flow.
Perspective, I don't expect a huge impact will be some impact in Q4 and slightly more in Q1.
But then they get back on a normal payments in the and the January month, So oh, well be watching that and hopefully that's helpful to those are those customers I haven't leverage out in the past, but no impact this quarter and it will be a small impact I think in Q4.
Okay. Thank you.
Great next question please.
Thank you Jamie Badri from Credit Suisse. You May go ahead Sir.
Hi, Thank you very much I know you stated that rowdiness boasts down for ASP and enterprise. They also mention solid progress with web scale customers for two consecutive quarters.
Some of the big shifts you have made.
To work from home and also given the fact, you're launching new products and just December of 2019, how are the products like the series 8000 performed during the entire shifts are you seeing things accelerate adoption of product accelerate or has that option than a bit slower than your expectations and maybe just a general update on the product.
Yeah. Thanks, I guess the good news is it the success we've seen in the web scale space last two quarters hasn't hasn't even seeing the impact of the 8000, yet so the it's in trials in a lots of customers still you know they have very extended evaluation periods before they deployed but I will tell you it's doing incredibly well.
In those trials were very optimistic about what the teams of Bill we feel good about it our service provider business was up mid single digits in orders in the Americas in Q3, which indicates you know obviously to.
The the capacity build outs that some of them, we're seeing as well as that web scale business. So we'll see how it goes but right now we're very optimistic and feel good about where we are without platform.
And there are more versions of that platform coming so were you know, we've just announced first couple of members of the family.
Great. Thanks very much.
Thanks, Chuck next question please.
Thank you Sandy Chatterjee from JP Morgan you May go ahead.
Hi, This is Joe credits on Personnels challenges.
I just wanted to get your thoughts around some of your accumulations given the macro backdrop that typically as you look at called Whitehall sex or 400 gig are you seeing acceleration I can demand or vice versa push out there versus your expectations about 90 days ago, given the changing environment. Thanks.
So I think what.
What we see happening with five GE is a little bit mixed but generally there is a tendency for our customers to want to sort of put their foot on the accelerator.
I think you heard similar customers that are looking for permits and you know with regional governments around the United States and other places.
They're not sure they're going to be able to get that done during this pandemic you've got other customers, who are saying that they actually are not having a problem, but it's.
It's a.
So we think generally there's going to be an acceleration.
Particularly as.
Our service provider customers also realize that some element of this work from home scenario will not go away.
And so we're going to be a continuing in the future to work in these very hybrid worlds.
We're going to have even a much broader distribution of where our their users will be working from a and a and I think that that's the reason that they want to continue to accelerate the <unk>.
The deployments in the a and the strategies around Fiveg.
Let's say a Wi Fi six I don't see any big significant shift.
On the cloud, we upped <unk> I've had mixed.
Feedback from customers I think that in general.
It's probably a tailwind to cloud, but there are some customers that believe they have a cloud strategy in this doesn't miss this they don't understand why this would change how they go about it so.
But it will as it as it relates to our strategy.
We are going to continue to accelerate those technologies that help our customers use the with the cloud more effectively.
We are going to as our customers some of our customers are going to need opex.
Offers.
In the future given capex restraints. So we're working on a balance of our portfolio to be delivered.
In both Opex and Capex models to give customers a flexibility that they need.
And we're definitely going to continue to accelerate the development at work around our security portfolio as it relates to remote work and and cloud connectivity, because we think that's only going to accelerate as well.
Next question please.
Thank you meta Marshall from Morgan Stanley You May go ahead.
Great. Thanks, you know understanding the end of March and beginning of April were largely work from home or business continuity focus with customers, but you know as we get into kind of those new normal do you feel like customers have had an initial signs of what revised budget look like budget outlook for looking like for 2020 or customer.
We're still relatively uncertain that you're talking.
That's a very good question I think that.
Like I think we went through a a search for a few weeks where customers were solely focused on business continuity and getting themselves.
Prepared for this work from home environment, and then I think they took a breath for a couple of weeks and then they step back in a and I could even see it and how we worked as as a company. We were solely focused on the immediate virus response getting our teams up running give them our customers up and running making sure we had investments in the community and all those things and then frankly.
We.
We took a breather and now even my calendar is and the things that we're focused on are much more sort of the traditional business issues and how we move forward.
I think our customers are in the same mode. I think again, they don't business continuity. They took a few weeks to figure out okay based on this what how do I reprioritize.
The projects that I have a that I had planned for the rest of year and I think every customers at a different phase right now on how they're deploying it in is going to be very.
Industry specific as to who moves forward I'll give you a few examples.
So we're working very closely with higher education, because you see in the news the discussion around whether students will be on campus in the fall.
As one of the heads of one of the biggest systems in the United States told me they use anything and everything they could get students online back in March and now they need to go a step back and actually build the real robust long term architecture that they need and we're working with them to do that I mean health care is one that they're going to.
Make investments I think tele health is here finally.
And then I think that's going to change forever and I think that those that that industry will continue to work and build out.
A more robust architecture to support Tele health as opposed to what we put together as quickly as we could with them over the last few months you got the hospitality leisure travel that are going to struggle.
Which is one of the big reasons, we wanted to make sure. We got our financing program out there candidly is if they need to make investments. During this time, we want to help them do that.
Not only as of the right thing to do but the remember afterwards that we were partners to them during their tough time.
And I think you see financial services moving ahead, so it's going to vary greatly by industry, but I think we're going to have better visibility in the next 60 days or so.
Great. Thank you.
Next question please.
Thank you tell Liani from Bank of America, You May go ahead Sir.
Hi, guys.
Services was the one of the only areas that grew up both sequentially and year over year.
And the question is why don't we see the pack. So first of all what are the drivers for that and what happens we see why don't we see the impact of Koby 19, we're hearing from others.
Its customers are less willing because of the uncertainty to sign on contracts just had a longer than one year. So they see.
The part of declining in services and I, just I would like to get an update on the stuff space and how long does it take it to follow that trends and infrastructure platforms and the other products.
Hi, Paul that's a good question. So I would say yeah, we had another strong quarter in Q3 and again it has been driven by like their solution supporting their software support that continues to be a big driver of it.
But your point is of what you're going from other companies is absolutely true and what's happening to us I would say that I expect pressure and my guide for Q4, I have some pressure to services, there and where we're seeing it is on things that are.
Linking our advanced services, our proactive services consulting side of things those things that are either discretionary or you only make progress when you're actually in the in Ah.
Enterprises those are seeing pressure that I think we'll see translating like hitting milestones are doing projects.
In terms of the maintenance there is there is a lag usually on on infrastructure maintenance you want to orders drag is usually a leg for awhile. So we'll start to feel maybe a little bit of that and the upcoming quarters, but overall, that's a very solid business and and.
You know we've gone through cycles like this before and we always come out pretty strong on that but.
I think your point Fairpoint.
Yes.
Great. Thanks, Tom next question.
Thank you next question comes from Ahmed.
Daryanani from Evercore, Let me go ahead Sir.
Thanks for taking my question guys I'll.
Fairly cone question together you guys is how to Cisco stock up the spine works of the past recessions like a OID on ninth example, up so we really helpful to maybe get your perspective on how do you think Cisco handled and performs through the cycle was this Botswana and well you got to do get to the one house, that's good different and perhaps better it's not a positioned to matters. This correction.
Most of the past ones would be helpful.
I think that.
We're better positioned.
For sure and you would expect me to say that.
But I do believe it I think that.
You know we've spent the last few years driving a significant refresh across our enterprise portfolio across our service provider offerings are fiveg packet core capabilities.
Our security portfolio is robust.
We spent the last two years rebuilding and modernizing the webex architecture as well as unifying the user interface.
We've now gone through.
You know two months of building out capacity on a global basis Webex was the largest platform in the world in February and now it's three times what it was then so we've built that out.
And I think that a if you look at the software content in our and our product portfolio and the percentage of our revenue that that represents in the percentage of that that's coming from subscriptions and SAS versus where we were in 2008.
I think all of those things just position us.
More effectively than than perhaps we would've been back then.
So I feel good about where we are and I think that our balance sheet is strong.
Obviously, our ability to navigate this financially is strong.
So I feel I feel good.
And I wasn't running the company in 2008, clearly, but I was here.
And.
It just feels like we're fortunate that we've spent the last few years due in complete refreshes on <unk> on almost all of our technology. So we have very relevant new offers for our customers right now.
Right next question please.
Thank you Jim Suva from Citigroup investment you May go ahead Sir.
Thank you.
Can you talk a little bit about enterprise.
The orders that trends, maybe the monthly cadence and importantly, the color or commentary you have as enterprises are working from home on what their employees keeping their networks up and running potentially delaying things how does that kind of looked as you go forward because it seems like a typical request for proposals might be little bit.
Different discussions now what I mean as say for example, it does this help see a come and see Cisco little more to give you more visibility to hey, you know Chaplin things return back to normal and three or six months or some points Hey, do we have built up of more visibility that we what we currently have if you could just help us with <unk>.
Enterprise some commentary that'd be great.
Yeah. Thanks, Jim I will tell you this.
The number of emails that I've gotten from my peers.
From on virtually every industry about what our teams did to help them.
You know us many of them, saying, we had to get a 150000 people up and running remotely over VPN and you guys helped us do that overnight and for that were gracious or.
A rail webex and how they couldn't be running their business right now if it wasn't for Webex and I mean, so we hosted a.
An advisory board call with about 50 of our.
Strategic customers around the world.
Last week or the week before I can't remember exactly when it was at this point.
And the they spent like the majority of the.
First a third of the call just going through stories of gratitude around what our teams have done and I'll tell you that because I think what's what's happened is to your point Jim.
I think there is a tendency during these times you want to go you want to work with companies that you believe are strong are solid and are great partners and are going to do whatever it takes to make you successful during these times and I think thats, what our customers believe we do.
I think again as I said earlier, you're going to have some customers right now that are going to look at their infrastructure. The Ceos are looking at and saying I will never be this unprepared for something like this again.
And if there's a wave two coming in the fall many of them may say, we need to work on a lot of this right now I don't know that yet.
But we think there could be I talked earlier about.
What we see in certain industries, where there will be investments like higher Ed.
Right now frankly, there's there's K through 12 contingency plans being made even though I know.
Most K 12 institutions would much rather be teaching those kids in schools.
For obvious reasons, but it's also not a definite that there will be going back into the classroom in the fall. So that's that's happening.
The pharmaceuticals in the and the drug manufacturers are working to beef up their infrastructure for all the research building up their cyber infrastructure for obvious reasons. So there's a lot of things that are going really well, but then again you have industries that are.
Our.
At the heart of this crisis, who I wouldn't expect to make significant investments until we get to the other side.
Thank you so much for the details it's greatly appreciate it.
Thanks, Jim Banks Jan next question. Please.
Thank you appear fair I guess when you Street Research you May go ahead Sir.
Thank you.
My question.
<unk> I'd like to come back to you just a very last comment you made it you made you say some industries.
Hi, getting hit very hard now and they seem to be for them to to make to make investments before we get on the on the other side of the crisis.
And so what I'm trying to figure out where it is.
How much.
How much of the of the economy. He is already in a situation to fitting that pain.
Getting 80 bed yet.
And how much you could I mean.
Yes, and actually I trees kind of getting into that stage. It maybe three months I'll even in six months from now because as you say, though that it enterprises I like maintaining continuing T I actually umo into moda, making the right spending to keeps it business running but maybe three to six month, they're going to actually start getting.
Well most of my propane recessionary environment, how things that business as well.
So my question is really.
How how much how we into that already what percentage of you could I mean has been hurt and what does that you couldn't be helped further down the line.
Yeah up here, it's a very good question I'm Gonna give you just my pure instinct on this.
I think that any customer who potentially could be at risk in three to six month is already pausing Oh I don't think that anybody is gonna be aggressive right now because.
Any of us can see.
If we have liquidity issues, we have solvency issues. We have anything that is three to six months away were my peers were all planning we're working on that right now no one's waiting so I think most of the impact that you'll see in the next six or nine months I think.
Those customers were impacted let me say that way they know they're impacted.
I will tell you from our perspective, if you map.
The industries that we believe we'll continue to invest against.
Our customer base, there's a good correlation that a lot of the industries that we believe we'll invest are already.
A large percentage of our customer makeup so whether you look at public sector.
Service providers financial services.
Higher education I mean, these are all big pieces of business for us and we think that all those and others will will also continue to invest so.
It's mix, but to answer your specific question anything anyone who is going to be in trouble three to six months from now is already pausing and has already been impacted.
That's right. Thanks.
Yeah, so thankful that.
Thanks, Pete here, we have time for one more question.
Thank you Tim long from Barclays. You May go ahead Sir.
Thank you for squeezing in truck wanted to ask about a competition kind of a twofold question here number one.
As you think about some of the the pieces of your business, where you know some competitors.
I've been trying to take share enterprise networking comes to mind.
With several companies or or or focus on gaining share. There. What do you think this major endemic disruption does.
Two others ability to maybe disrupt the high market share you have and then Conversely, if you think about some of the markets, where you know Cisco has a real opportunity to gain share. It sounds like cloud would be one of those you guys is doing well.
But do you do you think theres any or any of the markets, where you are poised to take some share that are impacted either either positively or negatively. Thank you.
Yeah, It's it's that's a great question.
I think you even heard from some of our competitors on their earnings calls where they had planned on entering markets and they've acknowledged it is going to be more difficult to do that during this time.
In in areas, where we have good market share and again I'll remind you that in those areas like in the campus. We have probably the most robust portfolio. We've had in a decade. So we're we're very in very good shape with a portfolio and I think.
Again customers.
Your in times like these they want to go with people They trust in though and I think that will work in our favor.
We will but on the in the areas to your point.
Where we can take share.
I think I'm certainly the web scale play that we've been running for the last four four and a half years I think is one area over the next year I think in the service provider space with the eight thousands and recapturing some routing share or because of those portfolios and both of those sorts of customers.
They will continue doing the evaluations in the new deployments because they have to because they have they have just requirements that are increasing on a daily basis.
And I think that in the in the carrier space with Fiveg and.
And the.
The access networks, the backhaul network storage the core networks with the thousands of our other technology, we've come out with I actually I think we can take share there as well so.
I feel good about where we are the things that we are in control of right now I think.
We're in a pretty good position.
Okay. Thank you Chuck.
Alright, Thanks, Tim and that was the last question of our call.
Yes, So let me just a close quickly by first of all thinking all of you for being with US and just telling you all that we.
We hope that you're safe in your family Safe and you continue to be safe.
I also want to just reiterate our gratitude for.
The frontline workers and these are the healthcare workers the first responders.
Some of our colleagues locally who were in the homeless camps, helping.
Try to stem the tide of this pandemic flowing through those kinds of environments.
Those people, who live paycheck to paycheck, who.
Our struggling right now you know our thoughts and prayers are with everybody in our gratitude is especially with those who are on the front lines.
We look forward to getting to the other side of this.
And we look forward to doing our part.
In helping our customers in helping society actually thrive as much as possible. During this very difficult time, so thanks for being with US today on our call.
Thanks Chuck.
Cisco's next quarterly earnings call, which will reflect our Q4 2020 and annual results will be on Wednesday August 12 at 130 PM Pacific time for three 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 finance.
So guidance during the quarter unless it is done through an explicit public disclosure.
We now plan to close the call you have any further questions feel free to contact Osisko Investor Relations group and we thank you very much for joining today's call.
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