Q4 2020 Cisco Systems Inc Earnings Call
Welcome to just go to fourth quarter fiscal year 2020 financial results conference call at the request of Cisco Systems. Today's conference is being recorded if you have any objections you may disconnect.
No I would like to introduce Marilyn Mora head of Investor Relations. Thank you you may begin.
Thanks to welcome everyone to fiscal fourth quarter fiscal 20 quarterly earnings Conference call. This is Marilyn Mora head of Investor Relations and I'm joined by truck, Robyn, our chairman and CEO and Kelly Kramer our CFO.
And now you should have seen our earnings press release, a corresponding webcast with slides, including supplemental information will be made available on our website in the Investor Relations section following the call.
Income statements full GAAP to non-GAAP reconciliation information balance sheet cash flow 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 discuss product results in terms of revenue and geographic and customer results in terms of product orders unless stated otherwise.
All comparisons made throughout this call will be made on a year over year basis.
The matters, we will be discussing today include forward looking statements, including the guidance, we will be providing for the first quarter fiscal 2021.
They are subject to the risks and uncertainties, including Kogan 19 that we discuss in detail in our documents filed with the FCC specifically the most recent.
Ports on form 10-K, and 10-Q, which identify important risk factors that could cause actual results to differ materially from those contained in the forward looking statements.
With respect to guidance. Please also see the slides and press release that accompany this call for further details.
Fiscal will not comment on its financial guidance during the quarter unless it is done through explicit public disclosure.
In Q2 fiscal 2019.
We completed the sale of our SP BFS business.
Such all of the financial information, we won't be discussing isn't normalized to exclude the S.P. VSS business from our historical results I will now turn it over to Chuck.
Thank you, Maryland.
All of you and your families are staying safe and healthy or ultra remain with everyone who has been affected by the pandemic. We're grateful to those who remain on the front lines working to hope it was impacted during these challenging times.
As we've been preparing for this call. It's all for me some talk to reflect on what we've achieved since I stepped into this role five years ago.
Through the hard work of everyone at Cisco, we have undergone a significant transformation in the midst of some of the most complex times in our history.
I'm so proud of what our teams have accomplished they've demonstrated resiliency determination and compassion as we deliver nor financial commitments brought market, leading innovation to our customers transition or business model driven a culture that is truly show and over the past six months.
It's a school today is more agile innovative and focused.
Through both organic and inorganic innovation, we delivered incredible new technology with new more flexible consumption offers for our customers with more software and subscriptions.
And our financial Analyst Conference in 2017, we laid out key metrics for our transformation.
We set a goal 30% of our revenue to come from software and while we achieved 29% in fiscal year 20, we did achieve 31% in Q4.
We also delivered 51% of our revenue from software and services and if we had 20 exceeding our target of 50%.
Lastly, we now have 78% of our software revenue sold a subscription beating our target of 66%.
With our customers is our guide we have successfully executed against our strategy to help them transform and modernize their organizations.
We launched our intent based networking architecture, using automation and machine learning to help our customers drive simplicity and cost effective management of their networks as customers move workloads to the cloud we're offering fast highly secure access to applications hosted anywhere in the private data center public cloud, we're a SaaS platform with our cloud security integrated with.
Christy wind solution.
We introduced new capabilities across software silicon and optics to help bring to life to internet for the future.
The innovation, we driven in our security portfolio has helped us build the top enterprise security company in the World.
With Webex, we had the most trusted secure platform for remote collaboration for the enterprise.
We're also deliver real time insights for customers and their multi cloud environments to optimize user experience with our insights and observe ability assets like up dynamics.
Over the past few years. This transition has resulted in improvements in our financial performance, including expanding margins and demonstrating continued financial discipline.
Once again I want to thank our teams for what we've achieved.
If the pass your is taught us anything it's the need to always be nimble.
I believe that the changes we've made to our business now put us in a position of strength as we focus on our future.
We're a company that embraces change in we've shown our ability to thrive in any environment.
The past six much of unquestionably reshaped our world.
Industries governments and work have changed dramatically and many of these changes will become permanent.
It's just go we're committed to helping our customers truly digitizer organizations for the future regardless of the challenges are fundamental shifts that we may face.
Like many other organizations. We've also had the opportunity to reexamine our business in our portfolio for this new world.
As I said last quarter, we were going to take time to better understand the short and long term implications of cobot nights team and we now believe we have a better view.
Based on the many conversations we've had with our customers around the world. We believe we have perspective into how they will adapt their technology strategies for the future.
To ensure greater resiliency agility and innovation.
We know how to adapt our business in strategy to align with where our customers are headed.
The changes, we're making to our business reflect how we are leveraging our existing streets investing for growth and unlocking new opportunities.
We will also be very disciplined on our cost structure as we always have been over the next few quarters, we will be taking out over $1 billion on an annualized basis to reduce our cost structure.
At the same time, we're going to rebalance our R&D investments to focus on key areas that will position us well for the future.
More specifically, we will accelerate the transition of the majority of our portfolio to be delivered as a service.
We will also accelerate our investments in the following areas cloud security cloud collaboration key enhancements for education healthcare and other industries increased automation in the enterprise the future of work.
And application insights and analytics.
The same time, we will continue our focus in the following area as many of which had been accelerated by the pandemic.
Multi cloud investment Fiveg and why it by six 400 gig optical networking next generation silicon.
Hi, and more.
These investments will help to find the next phase of our transformation and allow us to bring the best most relevant innovation to our customers in simpler more easily consumable ways.
Im confident that once again, we have the right strategy that will deliver what our customers need from us and we will emerge from this challenging time as a stronger company than before.
Now, let me discuss our performance in the quarter.
While our results reflect the ongoing challenges in the current environment, we executed well as you would expect the pandemic has had the most impact on our enterprise in commercial orders driven by an overall slowdown in spending.
We are seeing customers continue to delay their purchasing decisions in certain areas, while increasing spend in others until they have greater visibility and clarity on the timing and shape of the global economic recovery.
Despite this challenging economic environment.
The pandemic has also triggered a massive and rapid shift to remote operations and automation to maximize personal safety.
With this many customers are increasingly reliance on our broad portfolio of technologies, resulting in another quarter of strong demand for our catalyst 9000 security Webex and other SaaS based solutions.
Throughout fiscal year 2020, we demonstrated operational resilience based on our strong customer relationships, a solid financial foundation differentiated innovation and a compelling strategic transformation built on the strength of our key technology platforms.
Now I'll cover a few highlights from the quarter.
In June we introduced an expanded business resiliency portfolio offering healthcare and education solutions with simpler consumption models and services to accelerate adoption.
We will continue to expand this portfolio to cover areas such as social distancing in the workplace effective virtual employee engagement at scale and pop up connected clinics.
Within our infrastructure platforms business, we continue to see a strong ramp of our catalyst nine K portfolio as many customers take advantage of their employees working from home to refresh their aging infrastructure, enabling them to simplify secure and automate the management of their networks.
Our acquisition of thousand eyes will complement these capabilities by adding deeper and broader visibility and analytics across networks and applications.
Enabling us to deliver the best possible experiences for our customers.
By integrating their SaaS based offering with our Appdynamics application until just portfolio.
And SD when technology, we can.
An unparalleled intelligence and insights at clouds skill driving improved customer experience as well as reliability of their applications.
Security continues to be a top priority for our customers, particularly in this distributed digital world our ability to connect and protect our customers working from anywhere on any device is accelerating the adoption of our comprehensive security portfolio, resulting in double digit revenue growth this quarter.
As more data goes to the cloud and users become more distributed we had good momentum in our cloud security solutions protecting workloads applications and data.
We also continue to expand our capabilities to enable simplification and ultimate automation of our customer security infrastructure.
A good example of this is our secure ex platform.
Which is designed to unify visibility enable automation and deliver consistent experience since our launch six weeks ago. We have over 2100 active daily customers, two thirds of which have to a more products active.
We also delivering secure remote workers solutions that span our endpoint security portfolio combined with the power of our zero Trust architecture with dual any connect umbrella and and for endpoints.
Applications have become a lifeline for so many organizations and this has only increased over the past few months.
As organizations define what their future looks like our collaboration technology will play a key role in evolving how they work transact and connect.
Well, Thanks had strong performance this quarter with double digit growth.
As businesses governments educators in frontline workers everywhere have embraced remote work.
We expect this momentum to continue as we have begun to see the conversion of free trials into paid subscriptions.
At dynamics also achieved another solid quarter. These monitoring tools offer our customers great value by providing real time insights from a single pane of glass to optimize user experience in their multi cloud environments.
As we think about all that we've achieved over the past five years I want to take a moment to acknowledge Kelly Kramer, our chief Financial Officer, who has been an incredible partner to me.
She has played a key role and reshaping Cisco into the company we are today.
I want to let you all know that Kelly has made the decision to retire from Cisco over eight plus years here Kelly has led the effort to improve our financial performance focused on investor confidence and help position Cisco for success.
Kelly and I have been focused on simple clear communication absolute transparency delivering on our commitments and always lining Cisco for future growth.
Kelly has graciously agreed to stay on as CFO until we have her successor onboard and will advise us with the succession process.
I can assure you that with Kelly stand on during the search and with our World Class Finance team, we will have a seamless transition.
Kelly. Thank you so much for your partnership in your friendship.
Will truly be missed.
Now before I turn it over to Kelly I.
I want to reiterate my confidence for what the future holds over the past five years, we have not shied away from making bold moves to position us for long term growth and now is no different.
We are committed to running a strong business as well as leveraging technology for good to solve the world's biggest challenges and create new opportunities for the future.
As we've demonstrated we had helped our customers build resiliency and difficult environments through industry disruptions and in times of rapid growth.
We will also continue to use our position to make our communities and world a better place.
Whether its tackling the global health pandemic, or social and Justice and intolerance, we're committed to our purpose of powering and inclusive future for all.
As we start a new fiscal year I believe we have incredible opportunities in front of us.
We will navigate the pandemic in the most effective way possible, while not damaging the long term prospects for Cisco.
We remain strongly aligned to our customers priorities and deeply committed to delivering long term growth now I'll turn it over to Kelly.
Thanks, Chuck It really has been great and I want to thank you the leadership team and really all osisko.
I also want to thank my finance team, who has an amazing job I'll certainly missed this goes and looking forward to what's next.
I'll start with a summary of our financial results for the quarter. Then couple cover the full year followed by guidance for Q1.
Our overall Q4 results reflect good execution with strong margins in a very challenging environment. Total revenue was 12.2 billion down 9%. Our non-GAAP operating margin rate was 33% of 0.4 points non-GAAP net income was 3.4 billion down 5% year over year, and non-GAAP EPS with 80 cents down 4%.
Let me provide some more detail on our Q4 revenue.
Total product revenue was down 13% to 8.8 billion.
Infrastructure platforms is down 16%. This is the product area most impacted by the code environment, we saw declines across switching routing data center and wireless driven primarily by the weakness we saw in the commercial enterprise markets.
We did see pockets of strength with the continued growth of Cadnine, K, which was up double digits and the ramp of our Wi Fi six products data center was particularly weak with a decline of the market and DRAM pricing.
Applications was down 9% on the positive side, we saw strong double digit growth in webex with the importance of remote working we also saw solid growth in at dynamics analogy software. This was offset by declines and unified communication and pp endpoint.
Security was up 10% with strong performance in network security identity, and access advanced threat and unified threat management.
Cloud security portfolio performed well with strong double digit growth and continued momentum with our duo and umbrella offerings.
This revenue was flat for the quarter.
So we had growth in our maintenance business as well as software into Port services. This was offset by our advisory services, which was impacted by the company.
We continue to transform our business delivering more software offerings and driving more subscriptions.
Where subscriptions were 17% of total softer revenue up eight points year over year.
For many performance obligations are RPL at the end of Q4 work 28.4 billion up 12% RPL for product is up 17% and service was up 9%. The continued growth in our PEO demonstrates the strength of our portfolio a software and services.
In terms of orders in Q4 total product orders were down 10% looking at our geography, the Americas was down 11% EMEA was down 6% and PJC was down 13% total emerging markets were down 19% with the bricks plus Mexico down 26%.
And our customer segments public sector was down 1%, while enterprise was down 7% commercial was down 23% and service provider was down 5%.
From a non-GAAP profitability perspective, total Q4 gross margin was 65% down there a 0.5 points.
Product gross margin was 63.2% down 1.5 points and service gross margin was 76, the 9.8% up 1.9 points year over year.
Our Q4 GAAP tax rate was 16.7%, which reflects a true ups to the annual tax rate.
Just a bottom line from a GAAP perspective Q4 net income was 2.6 billion in EPS was 62 cents.
We ended Q4 with total cash cash equivalents and investments of 29.4 billion operating cash flow was 3.8 billion down 4% year over year.
From a capital allocation perspective, we returned 1.5 billion to shareholders for our quarterly dividend.
We continue to invest organically and inorganically in or innovation pipeline just last week, we closed our acquisition of thousands of this move is consistent with our strategy of increasing investment and innovation in R&D for our growth areas.
I will now cover the full fiscal year results.
We delivered strong margins and grow EPS in a very challenging environment revenue was 49.3 billion down 5% total non-GAAP gross margin was 66% up 1.4 points and our non-GAAP operating margin rate was 33.8% up 1.5 point.
From a bottom line perspective, non-GAAP net income was 13.7 billion down, 1% and non-GAAP EPS was $3.21 up 4%.
GAAP net income was $11.2 billion GAAP EPS was $2.64.
We delivered operating cash flow, a 15.4 billion down 3% normalized for the cash received in Q1 fiscal 19 related to the legal settlements settlement was Arista operating cash flow was flat for fiscal 2000.
From a capital allocation perspective, we returned 8.6 billion to shareholders over the fiscal year, which represents 59% of our free cash flow that was comprised of 2.6 billion of share repurchases and 6 billion for our quarterly dividend.
To summarize we executed well in Q4 in the fiscal year with strong margins in a very challenging environment. We're seeing the returns on investments, we're making an innovation and driving the shift to more software and subscription delivering long term growth and shareholder value. Let me reiterate our guidance for the first quarter fiscal 21. This guidance is subject to the disclaimer regarding.
Forward looking information that Maryland referred to earlier.
We expect revenue to decline in the range of minus nine to minus 11% year over year, we anticipate the non-GAAP gross margin rate to be in a range of 64% to 65% non-GAAP operating margin rate is expected to be in the range of 30% to 31% and the non-GAAP tax provision rate is expected to be 19% non-GAAP earnings per share is expected to.
Ranged from 69 cents, a 71 cents.
I'll now turn it back to Maryland, So we can move into the queue and.
Thanks, Kelly So we'll now open up the Q4 questions and as a reminder, we ask the audience to address one question only so we have time to get through as many as possible. So.
So I'll turn it over to you.
Thank you. The first question is from Sammy Badri with Credit Suisse. You May go ahead.
Thank you very much.
My first question is for the team here and just.
No that.
Thank you percentage of revenue from software and services and how is the guide post given other towing 17.
You guys have a new target.
New range I know you guys do some new products and services.
Investment area I'm, just hoping understands it seems you get may be a new road map or new targets that.
You guys measure you again.
Yes, Amy Thanks for the question then you know it's been a it's been a pretty successful three years as we've been making this transition.
We obviously still have a ways to go to to your question relative to a new target. We were talking about this in the last week or so and we feel like we just need to get through.
The this pandemic cycle that we have and then we'll we'll set some new targets and we'll communicate them to you at that time. So we don't have one yet.
Got it thank you.
Thanks Sami next question please.
The next question is from Mehta Marshall with Morgan Stanley Investment Research you May go ahead.
Great. Thanks.
You refer to kind of changes you're going to make to the portfolio based on conversations you're having with customers do you.
Where do you feel like they are in terms of knowing what they're kind of network architectures are looking like when they come back or just.
How their budgets are looking for the remainder of the year. Thanks.
You know things matter I think that.
When we think about the network architectures I think one thing we know is that the.
Our customers are living in this multi cloud environment and as they went into this work from home environment as I as I said, our last call.
Those who had technical debt and those who had not really invested in modernizing their infrastructure. They they know they will need to do that and though they'll do it a different pieces based on their financial abilities.
I'd say that it's clear that many of our customers do want to consume the technology as a service. So we're currently looking at the entire portfolio to.
I see what.
How deeply we can get into the portfolio relative to delivering as a service and I think we'll have a lot of that.
In the marketplace by the end of the calendar year.
We will also be.
Working with our customers on their network architectures, which are certainly going to be prevalent on a or dependent upon cloud security on the SD Lan and the integration of those so we're going to accelerate that.
As well as.
Helping them navigate this multi cloud world because I do think that we have seen some customers accelerate that shift.
As well so the network architectures that we built 15 years ago as I've talked about just aren't relevant today because of traffic flows are completely different.
And so we'll continue to work with customers and I think it'll be it a different pace just based on how they all come out and how they manage to pandemic.
Great. Thanks.
Next question please.
Thank you. The next question is from Ittai Kidron with Oppenheimer and company you May go ahead.
Thanks.
When you talk about the portfolio and these changes you need to make over there in the acceleration of R&D in some areas.
Can you talk about more specifically what areas you feel you need the most adjustment and.
And also it feels like the pace of technology evolution. It clearly is just keeps accelerating.
So much of that you can do internally and you've been very acquisitive in the past but.
I can't help but feel like you need to moves as much faster and much more aggressive on M&A and I know you. It's been very disciplined from a price standpoint, and clearly a markets like we have todays not necessarily could this have stood out but just given.
The fact that we're moving much much faster.
More open to get a bit more aggressive here on the M&A fun to filling gaps code it sounds like a feels like the longer your weight on this.
Get built the gasoline getting bigger not smaller.
Yeah. It's a great question in your first question around the areas that we feel like we need to invest I think this this pandemic is basically just.
It's just giving us the.
Air cover to accelerated the transition of R&D expense into.
Cloud security cloud colab away from the on Prem aspects of the portfolio.
Clearly, we've got a lot of technology that we're working on today to help our customers over the next 345 years in this multi cloud world that they're going to live in and you'll see more that come out over the next couple of years.
But on the M&A question I think that there's there's clearly a recognition that the valuations of the.
The assets that are attractive have have achieved different levels and so I think that.
We will continue to be disciplined, but I would say that we're open to looking at the current world and the reality that we live in so Oh I think we're open to any and all ideas and we continue to work through.
Different options and we have a list of potential targets that we maintain on a pretty regular basis and so.
The real differences.
There has to be a recognition that the valuations have changed but we'll try to be disciplined and do the right thing at the right time.
Thanks Ittai.
So let's get the next question.
Thank you. The next question is from Jim Suva with Citigroup investment Research you May go ahead.
Thank you very much Chuck and Kelly and Kelly you'll be.
Significantly missed so.
Thank you for that the duration, but looking forward. If my models right, maybe it's wrong. It seems like year over year revenue comparisons get materially easily easier maybe to the team.
400 basis points year over year for the quarter outlook in like with Wal way be.
Pushed out and Cisco will be.
Preferred in many countries, even beyond the United States is walls and coming to factor coming out of kroner virus help me bridge Youre kind of.
Year over year revenue growth and maybe it's still yet to come about why things aren't more positive because the comps are easier walkaway is less preferred Cisco Cisco hasn't come see factoring we're coming out of krona virus. Thank you.
Well I'll comment subjectively and then I'll, let Kelly talked will that about the numbers.
I wouldn't say that we know we're coming out of the girl of ours right now I think that a it feels to me very much like it felt 90 days ago.
And.
And clearly the in the U.S., we have not seen we've seen some areas that have gotten better and obviously some that have not but I'd say in general it feels pretty much the same as it did 90 days ago to us relative to that I think that some of the things you're talking about around service providers around the world and the possibility where we would.
Beginning opportunities that we wouldn't have had before I think some of those are still to be seen but we would share that optimism and we'll have to wait and see how that plays out kill you want to talk about the and then from a compares I mean.
Q1 of 20, So my guide for this next quarter in Q1 at 21, that's that's our our toughest compare to the obviously we had Q3 in Q4 very very tough for us and 20, because the coven. So.
You know.
Comparing to Q1 of 20 right now we still have some a tougher compares but they do get easier the as year goes on assuming that the pandemic ends.
But as you know jam, we forecast based on what we see based on the order rates and and we.
We feel this is a pretty accurate bag.
Thank you so much Chuck and Kelly for the details and Kelly. Thank you so much for your service. Thanks, Jim I appreciate it.
Next question please.
Thank you. The next question is from Paul Silverstein with Cohen you May go ahead.
Thanks for taking my questions, maybe sort of question two clarifications checked your response to Jim's question when you talked about.
Feeling pretty much the same as noted is going you us you're referring to both enterprise and commercial your small medium customers as well as you large customers across the board.
And then with respect to the billion dollar billion dollars that you referenced in terms of coming out of costs will that albeit at of Opex in I. Appreciate there's probably some sensitivities involves head count reduction as expected does but Kelly I'm, hoping you give us sense for the timing and that reduction and the nature of the reductions.
That all in Opex or is some of it out of cost muscle.
Thanks.
Paul Let me just tell you a little bit I'll give you a little sort of a customer segment and around the world view what is felt like the last 90 days or so so maybe that will help a little color.
In the U.S. in particular, I'd say, the we saw.
Some strengthen the very high end of enterprise and then sort of as you go down in the marketplace. We just do the weakness got a little bit worse as you just sort of what straight down the as you would expect a with small business medium business and even smaller sized enterprises that were didn't perform as well as the very a very largest of enterprises, but we did see strengthen the very large.
Enterprise in the U.S., we also saw some strength in federal.
In the U.S. clearly.
And and that was actually really promising because they had a very strong quarter a year ago. So they are they executed really well.
You know service provider around the World. If you look at Asia and Europe, Our service provider business was positive in both of those regions.
And it was just slightly negative in the U.S. It was a primarily Canada and Mexico and the in the Americas that drove the negative here.
So overall that was.
That was a bright spot, particularly outside the United States.
We did see.
You know countries a few countries that actually began to show some some positives and I'm trying to think through like can we can we build a model that says Asia win in first and so they're going to come out first and we did see Japan had a good quarter for us on the demand side Korea had a good quarter for us on demand side, and we're seeing some positives, Germany had a good quarter for us.
And I'd say, if we think about how our European team feels right now they actually feel reasonably okay, not great, great, but but better than they did 90 days ago. The Americas is still sort of the the wildcard I'd say that we see right now so hopefully that gives you a little more color around what we're seeing up and down the stock and then kill you want to yeah sure I'm, a we'll see the.
Cost coming out.
The majority of an Opex I'd say, maybe an 80 20 split will certainly have some in Cogs to.
ER.
Outside on the services side, but mostly an opex and in terms of timing.
We should see a lot of this most of the bulk of this.
Coming out.
You know at the at the end of Q1.
At the end of Q1, and a little bleeding over into Q2, depending on the countries.
Kelly thing if you will be mess. Thanks, Chuck. Thank you Paul appreciate it yes, you will.
Thanks, Paul next question.
Thank you. The next question is from Rod Hall with Goldman Sachs. You May go ahead.
Yes. Thanks for the question I guess I wanted to go back to the linearity of this order trajectory Chuck and Kelly on particularly enterprise I guess, we go back to 2000, and we're starting to commercial order volumes deteriorating into the range. We thought back then and not recession.
We haven't really seen enterprise do that and.
I wonder.
Whether you think that.
That is where we're kind of headed year.
Field like this is not turning in.
Via V shaped recovery, it's more like that we're headed into a recession.
Prolonged recession. So I'm, just curious kind of what you think about their trajectory trajectory those volumes what they look like at the ended the quarter versus the beginning of the quarter.
Well I would say that.
I'll make couple of comments and I'll kick it to kill you give you a little bit more color I think that as Kelly and I looked at where we expected demand to be.
From the beginning of the quarter to the ended the quarter, we were pretty much in line. In fact, it was a slight slight slight bit better than we than we had anticipated at the beginning of the quarter, but I would not get too excited about it being slightly better.
As you can tell from the guide, but and then I think linearity was generally in line, but it was probably a little more back end loaded than we've seen a and we had a lot of big.
Enterprise activity towards the end of the quarters of killing anything to add the only thing I'll add and and.
Kind at.
Touched on this I mean again it is the biggest biggest premier enterprise accounts. They are still investing significantly in lease they had very good order rates, but it does.
As you go down this year than enterprise it did slow down and you know just the and commercial is not surprising you saw the commercial numbers are so I do think it it is related to their they're waiting to see what comes out of the pandemic in their pausing their spend but Dan.
I think this is why seeing the big the big Big account, it's still investing an additional transformation I think gives us confidence that once we do get through this we feel good about how we'll come out of it.
Hey, Nick Okay, I've kind of a follow up.
Sure.
Go ahead rod.
Yes, I just wondered.
If you guys could talk a little bit about the.
Kind of what sort of color you're hearing from the enterprise customers do you think that they because they're investing so aggressively and work for Walmart pulling demand for word out of the back into the year like our their budgets.
Ranging or they just kind of robbing from the back into the year budgets and moving it's where the flooding in the year to compensate for work from home and all that stuff that's going on.
I don't think that I.
Oh I hadn't heard anything about anybody pulling anything forward I think that the larger that companies are the more confident they have and their ability to come out at some point and theyre going to continue to invest to position themselves when they when they come out and the clearly there's some.
Large enterprises that are not investing given depending on which industries that are in but I don't think it was just I think it's just normal investment cycles that certain large companies have just decided they are going to continue to pursue.
And.
And I do think killing made a good point you know as Weve.
Given like the number of software.
License agreements that we did I mean, it says that the portfolio that we have in the strategy we have I think.
Whether it's helping them with application visibility as they move more of the cloud is going to be more more it's going to resonate even more when you think about the security strategy. We have gone to the cloud is going to be more required in the future. We look at this infrastructure transformation as they deal with his multi cloud world and these these new traffic flows I think thats going to.
Super relevant in that obviously, the employee and customer experience that they have which are all areas that we're investing in.
I think when we come out of this those will be even more in demand than they were when we went into it we just got to get to the other side of and then I feel pretty good.
Okay next question please.
Thank you next question is from Simon Leopold with Raymond James You May go ahead.
Great. Thanks for taking the question Kelly, we we'll Miss you.
And your too young to retire.
Thanks, Simon [laughter].
I wanted to follow up Chuck on on the Cadnine K because you did mention.
The strength, there and I guess I'm trying to discern.
Sort of the macro versus the product cycle issues.
And my understanding is that the portfolio's been releasing platforms that are more suited for smaller enterprises just at the time when those are the weakest customers. So if you could help us maybe understand the overall contributions of this product and where you are in the product cycle and maybe even explain what's bad.
Macro related versus normal cycle related thank you very much Simon I'll.
I'll, let Kelly talked about the numbers in a minute, but I'm going to share with you might my instincts on this because I thought about the same thing because the one thing that we know.
Is that.
You know the campus business that we have there there people are in their campus offices. So the whole notion of refreshing upgrades clearly are not top of mind for every customer the way they might have been nine months ago.
However, what I, what I think is that the nine Kay.
As for those customers, who are either in the process of a real commitment the modernizing their infrastructure and they're continuing to do that.
Or they've made a decision than they have the financial wherewithal right now to actually embark on that in the nine K is what they are using to do that in their campus environments and some of them are using this opportunity with no one in their campus environments to upgrade clearly that's on every customer.
But I think what it says is those customers who are still on our older platforms, which we didnt see the growth on.
It's sort of the story, we talked about they havent. They havent committed to refresh they have a committed to that modernization piece and so they're not that part is not accelerating but the nine K has continued to accelerate so it's been a it's been a positive.
Story for US kill you want to know that I think I think you said it well and I think Simon your point is well I mean, so that the products you reference that the cat 9200, which was.
Actually no for the lower end the mid to lower end isn't that commercial segment to your point, but when I look at it.
Individually that product is still revenue is growing like amazing double digits and so that just shows that we're still very early in the transition what [laughter] when the customers are buying they are buying the new portfolio hand over fist and it's just the the cold that impact of the overall and again a legacy products falling off as is really what's driving but that's why.
We have faith.
And feel good about the portfolio when they come out of the environment, Yes, I'm going I think.
To to just comments on top of the number one is we still are still very early in this whole process and then the 9200 I think it's important notes on it as a small business product, but it's also an access layer product and enterprises that goes into branches that goes into in some cases, Warren clauses et cetera. So we will still see some continued.
Demand for that.
Thank you very much.
No that's glad moved to the next question.
Thank you. The next question is from James Fish with Piper Sandler you May go ahead.
Hey, Thanks for that question guys and congrats on the retirement.
For me I thought it raises the question, but house gathered by Chuck you talked about accelerating the transition towards Corp. SAS can you guys give us an update as to where that vast revenue is not the term license can contribution and where are you guys think it could accelerate given the investments and then utilizing.
Ties question from before do you need to acquire to help accelerate it.
Well I'll, let Kelly answer the numbers question. We gave you. The total software number we gave you the present is coming from subscriptions and SAS, but I think you're asking specifically about SAS. So.
And you know look I think that we've made a lot of progress if you do the math on where those software in our portfolio was five years ago, and what percentage of it was coming from subscription and SAS.
I don't know we've we've certainly.
You know.
The increased it significantly over the last four or five years without any major major.
Revenue driving acquisition, so that would certainly help and we continue as I said earlier continue to look at alternatives in that space and you should assume that we will continue to look at them, but will also be disciplined so we'll.
Kill you want to touch on the SAS no. We don't disclose the total fast now I mean again, it's made up of our Webex business a lot of our portfolio due on umbrella insecurity and and and again acquisition Hammer Rocky the hybrid you know where we ship in applies but then it has the SaaS management and.
Like SAP things like thousand either we're adding to our networking portfolio and at dynamic and that's just going to come to accelerate so I think.
You're going to see a twofold later and continue to see us to be those are the type of assets that we haven't acquiring and we'll continue to acquire and and you're seeing internally. This is also how we are developing a product to try to accelerate that but but then.
The growth in the South Barclays and it's been really good for us.
Understood appreciate the color and congrats again Kelly Thanks James.
Next question please.
Thank you. The next question is from Jeff Kvaal with Wolfe Research you May go ahead.
Well. Thank you very much in my congratulations again, Kelly, we look forward to see you in the new role at some point down the road.
I'd like a question and a clarification I think the question. So last quarter, you spent a little bit of time talking with us about traction in the web scale side of things I'm wondering if that traction has seen some follow through if you could update us on that and then secondly for Kelly.
You said, the Opex will come lower by $800 million.
The gross number or is that a net number I take it up 800, but bring some back in the growth year Aries business. Thank you.
Yeah, Joe Thanks for asking the question I would've been in trouble if I'd gotten all of this call not talked about the web scale [laughter]. So we saw another positive quarters. That's one of the areas that was a was really positive for us. It was a third quarter row, where we've had double digit growth.
With the web scale players and again as I said last quarter. It's we have had some traction with the 8-K, some traction with our silicon but nothing.
It's meaningfully move in the numbers yet so it really is just the rest of the portfolio, but as I said I think it it speaks to.
The long term effort that we've put in over the last few years of rebuild in these relationships and I think it speaks to their belief in our strategy going forward.
And we feel good about where we are and Oh, we believe over the next one to two years that they will begin to.
To be meaningful contributors and we're excited about what we what the teams have done.
And on the on the cost out. So it's again, we are litter, we are taking out growth over a billion dollars. So that is growth like anything Jeff there's puts and takes the as we go as we go forward. So you know whether it's things like you know the dollars weaker FX is going to EBIT in the headwind this year, we reset.
The bonus all that kind of assess that'll be puts and takes but that's you know that sudden it's a real cost out that we're taking now as we go through into our planning.
Okay got it. Thank you both very much yep. Thanks, Jeff.
I think we have time for one more question.
Thank you. Our last question is from George Notter with Jefferies. You May go ahead.
Hi, guys. Thanks, very much I guess I wanted to take go back to the discussion of moving more of the business to a as a service model and can you still a little bit more meat on the bone in terms of what areas are you specifically thinking about is you candidates to kind of knew that direction and.
Yes, how do you incentivized customers in those areas also I'm just trying to think about the mechanics to how this works and then.
And then if congrats to carry also thanks.
[noise] literally we're looking at everything I mean, we're trying to that we're looking at everything from our compute portfolio to clearly our software assets are already in the midst of that transition.
And many of them are already being sold at way and we're even looking at how we deliver our traditional networking hardware as a service overtime. So it's it is literally across the portfolio.
And.
Then and we see.
An acceleration of some of the work that's already been underway, obviously to collaboration portfolio has been transitioning to as a service for quite a while we even launched last I don't know two three quarters ago, we launched.
Our hardware as a service in the collaboration portfolio as a pilot.
And we've been working hard on all the operational capabilities in the systems work that needs to be done to do that so it literally is across the entire portfolio.
And.
It will give you an update on the next call for sure.
Right I believe there last questions. Thanks, George I'll turn it back to check all right I just want to recap and just think.
First of all Kelly for everything into the friendship and all that the great work that you've done and reiterate that she is going to stay with us until we actually identify her successor and she will help advisors through that process. So we're excited about her sticking around helping us do that.
I want to thank the team for executing through a really challenging time.
And.
I really want to reiterate that I think the the strategy that we had going in I believe when we come out of the pandemic will be more relevant to our customers than it was six nine months ago. So I'm optimistic about the future and we're going to continue to execute through this and thank you all for joining us today.
Great. Thank you Chuck.
Cisco's next quarterly earnings conference call, which will reflect our fiscal 2021 first quarter results will be on Thursday November 12, 2020 at 130 PM Pacific time, Fourthirty PM Eastern time, again, I'd like to remind the audience than in light of regulation FD Discos policy is not to comment on it.
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