Q1 2021 Cisco Systems Inc Earnings Call
Welcome to Cisco's first quarter.
Well, you're 2021 financial results conference call.
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 first quarter fiscal 2021.
Quarterly earnings Conference call. This is Marilyn Mora head of Investor Relations and I'm joined by Chuck Robbins, Our chairman and CEO and Kelly Kramer, our CFO by now you should have seen our earnings press release, a corresponding webcast with slides, including supplemental information will be made available on our website.
In the Investor Relations section following the call.
As is customary in Q1, we have made certain reclassifications to prior period amounts to come from to conform to the current period presentation.
Income statements full GAAP to non-GAAP reconciliation information balance sheets.
Cash flow statements and other financial information can also be found in the financial information section of our Investor Relations Web site.
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.
Product orders unless stated otherwise.
All comparisons made throughout this call will be on a year over year basis.
The matters, we won't be discussing today include forward looking statements, including the guidance, we will be providing for the second quarter of fiscal 2021.
They are subject to the risks and uncertainties, including.
Opened 19 that we discuss in detail in our documents filed with the FCC specifically the most recent report on form 10-K, which identifies important risk factors that could cause actual results to differ materially from those contained in the forward looking statements with.
With respect to guidance. Please also see the slides and press release.
That accompany this call for further detailed fiscal.
Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure with that I'll now turn it over to Chuck. Thanks.
Thanks Marilyn.
First I want to start off by saying I hope everyone, a safe and healthy also want to thank our employees for their dedication to our customers.
Their relentless focus on innovation.
<unk> is off to a solid start in fiscal 2021 and I'm proud of these results. Our teams are executing with excellence and we continue to make steady progress on our shift to a software and subscription driven model. We are encouraged by the signs of improvement in our business as we continue to navigate the pandemic and other macro uncertainties.
Our focus is on winning with a differentiated innovation portfolio long term growth and being a trusted technology partner for our customers.
Over the last few quarters, we've successfully adjusted to new demands, while making necessary changes and shifts within our business.
We remain closely aligned with our customers to provide them with a mission critical technology they need to stay.
Zunil and move towards adopting new hybrid work models.
In fact, we see many great opportunities ahead as every company and every industry is accelerating its digital first strategy.
Our customers are rethinking, how they support and serve their customers and their employees.
Need speed agility and simplicity.
Many customers.
To me that they are compressing years of work into just a few months. This.
This is why we are driving new innovation that helps our customers connect secure and automate their environments at a faster pace than ever before.
With the right technology and tools, we can be even more effective and productive and thats, what we intend to deliver for our customers.
Going forward, we are folks.
Sure on building innovation that helps our customers and Cisco thrive in a hybrid cloud world.
As we think about the next few years there are six key areas. We are focused on.
First is delivering optimized application experiences for our customers. The application is the lifeline for all organizations and is increasingly how end users access.
Because their products and consume their services.
Second is continuing to deliver the secure networking capabilities at Cisco is trusted for as a service offering even greater simplicity and automation.
The third area is focused on helping communications provider succeed with significant architectural transitions like 400 gig and Fiveg.
These will be done with the combination of our software assets silicon and optics capabilities as well as complete integrated systems, we will deliver these technologies on Prem.
As well as from the cloud.
Fourth is accelerating the future of work as many enterprises look to adopt new hybrid work models with more remotely distributed worker.
Then before we.
We are focused on helping them deliver consistent experiences whether working remotely or in the office from connectivity to collaboration to security.
Fifth is supporting our customers with their mission of securing everything they do we will continue to deliver the end to end intelligent security architecture.
Turning to keep their data private and.
There are people secure.
And the final area is around developing edge technologies that allow application developers to run distributed applications, while securely accessing and managing distributed data.
We believe that these key areas will drive our growth and success over the coming years.
Now, let me share more on our Q1 results.
As I mentioned earlier.
Workers saw encouraging signs of improvement in certain areas of our business.
Some large customers who are already in the midst of modernizing their infrastructure continue to do so as we've seen with the ongoing success of the catalyst 9000.
Webex, our security solutions and business Resiliency offers also saw strong growth as our customers are trusting us with their most critical.
<unk> projects.
We are succeeding and transforming our business model with 78% of our software revenue now sold as a subscription and we saw double digit growth in our deferred product revenue.
As I mentioned on the last call you will see us deliver more of our technology as a service to provide more choice and flexibility across our entire portfolio.
Our new technology pipeline remains strong as we continue to accelerate our pace of innovation and our recent partner summit, we introduced a number of new technology solutions that help our customers adapt accelerate and simplify their operations through new agile automation platforms.
Relative to our infrastructure platforms, our cat nine K. family.
Family of switches and Meraki cloud based platforms continued to perform well as our customers build highly secure resilient scalable networks as the foundation for their digital strategies.
Our customers are also increasingly running applications across multiple cloud environments and this requires next generation architectures with automation security and insights.
We recently announced new cloud and SDN platform innovations to help our customers connect secure and automate across their hybrid environments with greater visibility into their applications.
We are making great strides with our web scale customers with our fourth consecutive quarter of strong double digit growth. This.
This reflects their belief in our side.
That'd be going forward and their ongoing commitment to invest with us to build out their future architectures.
We also continue to help our customers operate in a multi cloud environment and optimize our overall cloud experience.
In Q1, we extended these capabilities through Cisco's cloud on ramps solutions, which deeply integrate cloud services from eight up yes.
Google and Microsoft to better enable end to end visibility and manageability of their distributed applications.
In security, we delivered another solid quarter of growth driven by our broad cloud native portfolio.
Secure ex which offers a simplified security experience saw strong adoption as it has been.
Split across more than 4000 organizations Synta became globally available in June.
As our customers employees remain working from home they are looking to bolster their existing security efforts with unified user and endpoint protection.
We continue to benefit from the shift to cloud based security capabilities and had robust growth in our secure remote worker.
Our offer that includes duo umbrella and any connect.
Our customers are also looking for highly secure high speed low latency connectivity to the internet.
This is leading to the convergence of networking and security services in the cloud to securely connect any user device to any application to provide the best experience.
Our World Class Security team recently delivered new innovations, including extended detection and response zero Trust and secure access services edge by.
By combining our leading solutions SD when an umbrella with our new secure internet gateway capabilities, our customers can deploy solutions to enable their users to simply.
And securely access cloud workloads and SaaS applications.
Moving to our collaboration portfolio.
Business continuity and resiliency remain top of mind for our customers.
Organizations are focused on creating flexible work environments to drive productivity, while ensuring their employees remain safe.
Your work will be a hybrid model with employees both in the office and at home and we are leading in this area.
Our collaboration portfolio is empowering organizations and teams to be more productive and secure as they adapt to new business health care and learning models.
We are providing seamless collaboration with anyone anywhere while enabling consumers.
Different experiences for hybrid workplaces, and continuing our leadership and security.
Cisco Webex saw significant increase usage in solid adoption as customers look to us for a flexible work solution that also enables privacy and security.
Whether at home or in the office, our customers need a solution.
That brings together meetings, calling file sharing and messaging with a simple and highly secure user experience.
Last month alone Webex had nearly 600 million participants almost double the number we had in March.
We recently launched a new returned to office solutions that provide actionable workplace analytics.
[noise] Ics with Webex room, navigator and integrated collaboration device sensors that help ensure a safe working environment.
We're also accelerating our innovation with new offerings, such as Webex legislate to keep critical functions of global governments running along with capabilities like breakout rooms, virtual huddle spaces and.
And noise cancellation.
We are reimagine in every aspect of the collaboration experience with built in AI technology security and integrated work flow applications to create a more intelligent work environment and to improve productivity.
Lastly, atdynamics our customers are moving to highly distributed cloud native applications.
Lititz, which require greater observe ability and insights.
By combining app dynamics and thousand eyes are cloud based networking monitoring platform, we are delivering full stack observe ability to help our customers better manage their applications and improve their digital experiences through end to end visibility deep insights and automated.
Good action.
Now I want to share more on our CFO transition.
On our last call I shared that our CFO Kelly Kramer has decided to retire from Cisco.
Today I am excited that Scott Herren will be joining sysco as our new executive Vice President and Chief Financial Officer, beginning December 18th.
Most recently.
Not served as CFO for Autodesk he brings an incredible background in software and help lead auto desks successful business model transformation from perpetual licenses to SaaS and subscription software.
As we continue our strong progress on our business model shift and sell more of our solutions as a service Scott.
Lots of depth of expertise in this area will help us accelerate our transition.
He also has strong experience operating and complex global business environments at scale and a track record of profitable business growth focused team building and prudent financial controls.
I have no doubt that he will contribute to and foster the culture we are.
We're also proud of here at Cisco.
I want to thank Kelley once again for being such a great partner and for the role. She has played in our transition we will certainly miss or but were very excited to have Scott in this role and as part of our team.
In summary, we are encouraged by the start to the year I'm proud of our progress both in our own transformation and in how we are empowering customers.
Celebrate their own digital strategies.
We have a clear vision and strategy and I feel very good about our portfolio and the innovation we're driving.
Our customers want partners, they can trust as well as choice and flexibility in how they purchase consume and implement technology based on their own individual needs. These.
These anchors of trust innovation.
And choice our core to who we are at Cisco.
As we focus on growing our business, we remain guided by our purpose to power an inclusive future for all.
We know that pervasive access to technology and connectivity directly impacts economic growth and enables key core human needs like healthcare and education.
We know.
Two technology can help solve some of the world's biggest challenges and we are more committed than ever to building an inclusive future in which everyone can thrive.
I will now turn it over to Kelly.
Thanks, Chuck I also want to congratulate scar on his new role I've had the chance to spend some time with that and I'm Super excited I think this is a very positive news for sysco and he'll be a great addition to.
The team also thank you Chuck it's been a great time working with you over the years.
Now, let me provide a summary of our financial results for the quarter followed by guidance for Q2.
Overall Q1 results reflect good execution was strong margins in a challenging environment total revenue was $11.9 billion down 9% year over year.
Our non-GAAP operating margin rate was 32.7% down 0.9 points non-GAAP net income was 3.2 billion down 11% and non-GAAP EPS was 76 cents down 10%.
Let me provide more detail on our Q1 revenue total product revenue was down 13% to 8.6 billion.
With infrastructure platforms was down 16% as a reminder, this is a product area most impacted by the current environment. We saw declines across switching routing data center in wireless driven primarily by the weakness we saw in the enterprise and commercial market. We continued to see growth and the cat maintain the ramp of our wife I fix products data center revenue decline.
Driven by servers.
Applications was down 8%, we did continue to see strong growth in webex with the importance of remote working this was offset by declines in unified communications and tele presence endpoints.
Security was up 6%, our cloud security portfolio performed well with strong double digit growth and continued momentum.
With our duo and umbrella offerings.
Service revenue was up 2% driven by growth in our maintenance business as well as support services.
We continue to transform our business delivering more software offerings and driving more subscriptions software subscriptions were 78% of total software revenue up seven points year on year.
Remaining performance obligations, our IPO at the end of Q1 were $27.5 billion at 10%.
For product pick up 15% and service was up 8%. The continued growth in our IPO demonstrates the strength of our portfolio in software and services.
In terms of orders in Q1 total product orders were down.
5% looking at our geography, the Americas was down 5% EMEA was down 1% and PJ fee was down 14% total emerging markets were down 15% with the Brics plus Mexico down 19%.
And our customer segment, the public sector was up 5% enterprise was down 15%.
On commercial was down 8% and service provider was down 5%.
From a non-GAAP profitability perspective, total Q1 gross margin was 65.8% down 0.1 points product.
Product gross margin was 65.3% down 0.8 points and service gross margin was 67.1% up 1.7 points year over year.
In terms of the bottom line from a GAAP perspective, Q1, net income was $2.2 billion SQL 51 cents.
GAAP results include restructuring charges of 602 million related to the plan, we announced in Q1.
We ended Q1 with total cash cash equivalents and investments of 30 billion operating cash flow was 4.1.
$1 billion up 14%.
From a capital allocation perspective, we returned 2.3 billion to shareholders. During the quarter that was comprised of 1.8 billion of share repurchases and 1.5 billion for our quarterly dividend.
Let me reiterate our guidance for the second quarter of fiscal 21. This guidance is subject to the disclaimer with.
Regarding forward looking information that Marilyn referred to earlier we.
We expect revenue to be in the range of flat to minus 2% year over year, we anticipate the non-GAAP gross margin rate to be in the range of 64% to 65%.
Non-GAAP operating margin rate is expected to be in the range of 32% to 33% and the non-GAAP tax provision rate is expected to be 19.
Percent.
Non-GAAP earnings per share is expected to range from 74 to 76 cents.
Ill now turn it back to Maryland, and we can move into the cuajone.
Thanks, Kelly, while the operator is queuing the line for a Q on a I'd like to remind the audience as I do every quarter that we ask you to address one question only so we have adequate time to.
To take as many questions as possible Michelle I'll turn it over to you.
Thank you.
Good wine from Oppenheimer you May go ahead.
Hey, guys.
Good to see some stability in the business.
Yes.
Well Thanks for me Chuck's on.
When you look at the enterprise orders.
Quite significantly down.
Sure we gather from your tone that you think that reverses, whereas the the bottom on order patterns.
And as you look through the rest of the fiscal year is a sequential improvement that you're looking for and then Kelly just clarification on ARPU.
Can you tell.
Lets if duration how duration is changing its hard to reconcile this ah if do if the duration is changing from quarter to quarter.
Hey, Thanks for the comments and a question so on the enterprise side I'm not too concerned about it honestly, we had we did have some a pretty significant compares from the year earlier, which.
Contributed to that but.
The thing that I would call out is we saw a pretty significant improvement in our commercial orders I think that were minus 23 last quarter in the midst of the whole SMB meltdown that we knew was going on and it was minus eight this quarter and I will tell you in the U.S. It was even a greater.
Improvement from that so that's that gives us a fair amount of optimism I think the enterprise thing is going to be fine there.
There is.
You know again, we just said we had some compare issues that I think just resulted in the math, but I don't I don't see any thing that concerns me there.
And on our IPO.
That the duration hasn't changed much since we started.
Readiness out over a year ago about half slightly more than half of the total balance will get recognized in the in the next 12 months and the rest is longer term.
Very good and it's been a pleasure Carolyn good luck going forward I appreciate it.
Next question please.
Thank you Paul Silverstein from Cowen and company you May go ahead Sir.
Sorry, Bruce Kelley just want to thank you for your help over the years you all good things going forward.
In terms of questions first off.
Kelly can you update us on what you're seeing in pricing environment and.
The bigger question is talk to the student you just made in terms of improvement in commercial as well as enterprise Youve.
We've been talking for a while obviously about the benefit from remote work as well as the offset the challenges presented by assuming we go back to the 21st century theres going to be organizations that leave a certain percentage of their workforce at home.
And with fewer or smaller offices headquarters branch.
Now fewer workers in those offices, one would think that would be a challenge for.
Or switching and enterprise for outing in wireless Lan access points any insight you can offer on that particular dynamic from a longer term perspective, let me let me take that first and then Kelly can get to the pricing question. So.
Paul I think if you look at commercial a lot of that recovery was actually driven by collaboration and security on a global basis and so we feel good about that I think that we also talked about the cat nine K. continued to show strength with double digit demand.
Growth and it and so what what we think is going.
Going to happen is when when customers go back they are going to.
Ensure that they have robust infrastructure, they're going to need to deal with social distancing issues, we think that in our collaborators at folio, you're going to see customers put high definition video and every conference room, we have technology that we built in that I I've actually seen working this week.
We have sensors in the units that not only will you have high definition video, but we have sensors in the units that actually monitor how many people are in a room and a you get warnings if you're exceeding whatever capacity to company has defined for that room and we so we think that the safety aspect of it will be helpful. Too. So you know I.
I think it's still TBD.
Where d. on what really happens in this space because I think 90 days to 120 days ago. You. There was this belief that we were going to shutdown every headquarters building in the world and.
And now I think people know that it's going to be a balance going back so we.
We got the Cat nine came Wi Fi six which are the future modern.
Modern platforms that the company has been move into that.
Continue to show strength, and so while we have to wait and see where we're optimistic about it.
And Kelly pricing, yes, sure on pricing and thanks for the kind words, there Paul I appreciate it and I'm pricing I'd say, our Q1 pricing is in our normal range from a product gross margin walk perspective, you know the rate impact the number that we usually talk.
Talk about it was down 1.8 points, which as you know is in our normal kind of operating range and again as a reminder, weve analyzed all of the price increases we did a year ago for the list for Terra. So now this is kind of.
Where were stated, but I'm happy to see where we are this quarter on pricing and even sequentially from Q4, it's better so were stable.
If you do similar things.
Thank you Thanks, Paul Michelle next question. Please.
Thank you Rod Hall, you May go ahead and from Goldman Sachs.
Thanks for the question I wanted to start off with the mismatch I guess, if the order rate and the the guide even at the top end of.
Guided revenues flat that your orders were down 5%. So wondering if you guys could.
Just kind of connect those two dots for us help us understand why that is.
And then I know, Jeff you said, you're not that concerned by the enterprise orders I mean, they did deteriorate quite a bit could you go into a little bit more detail on that what is it that even though the.
Deteriorated you think it's just a short term effect or kind of what's going on within that enterprise segment would be great. Thanks a lot.
So yeah I mean.
Orders versus revenue I mean, it's really just timing of when.
When things aren't and whatnot I mean, it's no different than.
And.
And we go through we know what's coming off the balance sheet with all the software we know what's in our backlog. So it's really it's really just the year over year compares so I feel good about about the guide and and you're seeing that in there.
[noise] Onea on the enterprise front I think the real thing that I would point out was there were like there are just a couple of significant.
Transactions.
And we see in our pipeline, we see the we see a robust pipeline right now we see large transactions showing up again in the funnel, which is positive and so you know if you look at across.
The core infrastructure enterprises are going to upgrade the core infrastructure, they're going to build out a robust on.
Adam collaborate I mean on Prem, meaning you know hardware video units when they go back into the offices because everyone. Every meeting is going to have remote attendees in it you're going to have to have an a virtually every conference room. So that's that's positive everybody's moving to this when re architecture with SD Wan and cloud security.
So I think it's.
The short answer is rod is at its it's largely a couple of big deals a year ago, and we see the funnel strengthening so it's.
That's what gives me the optimism looking forward.
Okay. Thanks, guys good working any color thanks Frank.
Next question please.
Thank you meta Marshall.
From Morgan Stanley Investment Research you May go ahead.
Great. Thanks, Chuck I just wanted to ask maybe how linear already was during the quarter you are pretty downtrodden on the initial earnings call heading into fiscal Q1, just when did you start to see that uptick and then.
Maybe just you know our customers need to be back in the office in order to start thinking about orders or if they just accommodated in are starting to make orders while still from out. Thanks.
Yes, so I would say that when we did the last earnings call. We had seen actually good demand in the first couple of weeks of the quarter, but clearly it was a couple of.
And so we you know we it was not a anything that would given us a trend, but it started the quarter started it stayed.
It was very linear it was not a.
We sell we sell a decent performance from the beginning and it stayed pretty pretty consistent throughout so that was a good sign for us.
And the.
Well I'm sorry, what was the second question.
The.
Well in terms of whether people are needing to physically in the office in order to start thinking about order now you know what I. What I think has happened is I I think customers have come to grips with the fact that that this thing is going to be with us for some period of time, obviously, we're we're optimistic like everybody else is some of that.
Vaccines in some of the therapeutics and all will ultimately help you know we're balancing that obviously with the current you know peaks that were seeing all around the world.
But I think customers is basically said it we're not sure when it's going to get better, but it's going to get better and I can't sit around and do nothing so what I, what I kind of had a.
Was hopeful was going to happen.
Which I think we did see this is it.
We had customers who we're super focused on getting their employees working from home productively and getting their security set up.
I think everyone race to do that.
And then I think they took a pause which is what we felt in our last quarter in.
In orders and then I think they re prioritize what they were going to be spending money on and I think.
Happened started seeing some of that come back and that's it it's sort of exactly what I expected, but we needed to see it and we'll see if it continues but.
You know, we're all dealing with the same macro environment everybody is relative to this this virus, but but that's that's sort of how it played out any comments Kelly on the linearity good.
Good morning.
Great Thanks and.
We've been talking with you guys.
Thanks, Jack Thanks, Kelly next question.
Tim long from Barclays. You May go ahead.
Thank you I'll offer a good luck to you Kelly as well.
Just wanted to ask on the cloud vertical Chuck you mentioned kind of fourth quarter. Another strong can.
Talk a little bit about.
You know were what products, you're seeing strength, there and what kind of breadth across that.
Customer base, you are seeing that strength and then just a quick follow up if he could on the public safety sector being up anything specific or more sustainable to that vertical being one of the better perform.
You just thank you.
Thanks, Tim Yeah in the in the cloud vertical the web scale space I think what I've said historically is that you know we've been rebuilding these relationships and we began to see them buying our broader portfolio as a result of them, believing in both the fact that we're going to be there with them and that we were investing in.
Former technology that was being built the way that they want to consume it and aligned to the architectures that they want to build what.
What I will tell you now is that last December we we had a launch where we talked about disaggregating our software our hardware and that we would sell our silicon our optics, we would sell our software standalone we.
We would sell integrated.
Techsystems, whatever our customers wanted and I can tell you that we have now won in the web scale space across every one of those facets and so we've seen really good progress and I would say now some of the new technologies that we.
That we built and had been testing and positioning are starting to show up.
Thats very well in the <unk> in the account so we're very pleased with that.
On the and the pipeline looks very strong so on the in fact, one other comment on that in the U.S., we sell service provider flat and that and a lot of that was strength in it the MSD see web scale space and.
Europe, we saw you know high.
High teens growth than we saw really good im SDC web scale strength, there as well.
On the public sector that was reasonably consistent around the world and a lot of it was you know there is a lot of stimulus that was put into the system by lots of governments around the world.
Our federal government federal spending in the us with strong.
Along.
We saw a K through 12 building out.
A lot of infrastructure for while students are not there.
E rate was strong for sure and we think that will stay strong.
And then we saw some spending from the cares act in the local in municipal governments, but and the.
Teams, we spend some time with the the leader, particularly US this week and.
I think he remains fairly bullish so.
Okay. Thank you.
Next question please.
Thank you Jim Suva from Citigroup investment Research you May go ahead Sir.
Thank you and.
Kelly you will truly be missed please keep in touch for either Chuck or Tele can you help us reconcile a bridge the gap between public sector orders were up 5% enterprise was down 15% why would one be so much stronger than the other so I look back on the year over year.
Comps and last year enterprise orders were down seven public sector was flattish. So we actually have comps that don't explain it either so can you just explain that are different purchasing decisions because everyone's being effective in the world by coated. So if you can just help us kind of reconcile that a little bit that'd be great well I think a lot.
Thats, what I, just described right public sector around the world So a lot of stimulus.
And.
And in the US in particular, we saw strength and we saw everything from.
Department of defense spending to the local municipal spending.
States were were slightly weak.
But the federal government was good local muni was good E rate kicked in the new the new E rate program kicked in Jim, which which contributes a lot when that gets going.
And that sort of early in its next wave and so and then we just said you know the strength in public sector in Germany.
And so I think it was just you know.
More consistency basically.
And say well outside the U.S., obviously, some health care in inside the U.S. through there's there's a lot of health care in there.
In public sector, particularly outside the U.S.
Thank you so much for the details and clarifications, Chuck and by by Kelly. Thank you then thanks, Jim Thanks, Dan next question. Please.
Thank you Kelly from Bank of America, You May go ahead Sir.
Hi, guys.
Your Uh huh.
I'm trying to reconcile your comments to your numbers last quarter, you sounded pretty downbeat highlighting some issues. This quarter you sound a lot better.
On the and you talk about growth initiatives on the other hand.
I look at your numbers infrastructure platforms are down 16% year over year 15.9, that's a 16 and it's worse than all of your competitors. If I, just look at switching and routing and juniper and Arista.
On a global basis without getting into.
But he tells us a composition.
You are down more than they are and the question is.
Why is it down so much versus competition do you feel that there is also a share issues market share shifts issues.
Can you give us some context about areas.
Where.
You feel that you're growing share maintaining share in areas, where you see some challenges.
Yeah, I'll give you a.
My quick perspective cell and then Kelly can add to it you know if you. If you look at what really drove that this it was compute and a lot of it is sort of the pricing that came through.
Impute, which neither of those comps.
Competitors you mentioned have.
Also just you exposure to data center campus, just this past quarter, we talked about the broader exposure. We have I think would be the two things that I would call out kill you have anything the only other thing I'd call out is some of those companies that you mentioned has different compares than we do from a year ago as well but.
But Chuck hit it right I mean again data center, the compute business as the has a big impact isn't that the DRAM pricing every route pricing down on her that hurts. It and then again I can't the stuff.
But.
Thank you yep. Thanks.
Thanks, Tom next question please.
Yes.
Dhanani from Evercore you may Sir.
Yes. Thanks for taking my question guys. I guess my question would be on the topline guide and check as I think about the jonquiere the expectation of sales being flat year over your horses I think what it seemed last few quarters of down 10, 11% you know I think skeptics would say well your compares like easy which mathematics.
They are but it would be helpful to understand what do you think are the top two three vectors. That's driving this improved revenue trajectory in Jan and to the extent you can touch on the durability of these these metrics as we go forward that would be helpful. No human Yeah, I'll start and you can add I just say this again back to the to the earlier point, we have been consistently show.
Nothing other revenue mix. So as you see every quarter and you can see it in our RPL, we are getting more and more of our revenue coming off the balance sheet with the software mix. We have continued to make progress as you can see on the services side, where services are still growing for us in software and services together, it's become a much bigger part of our portfolio. So that benefits us on the revenue guide in terms of.
The strength that we see yes. This Q1 revenue, although we beat you know what we beat it was still a tough Q1, we feel better about what we see in the orders profile in again the growth drivers are the same growth driver that John talked about we see real momentum in collaboration on the Webex side, we see real momentum and security and we're just I mean.
Yes, that's kind of what what is driving it I don't know, Jeff anything else and I think also you know the web scale in the service provider Fiveg Buildouts are we were.
We feel like those are going to continue but I mean, that's the short term guide is a combination of.
You know.
What's coming off out of the ARPU, what's in backlog and then.
No. We obviously assist the forecast its teams put forward in.
And then we put the kilian Chuck factor on it. So it is and it is math to some extent, but I think that some of the things that we talked about earlier the things that are given us I mean, it's hard to say super optimistic because the numbers still aren't where we want them to be but relative to where.
Sure. We were 90 days ago on how we felt or the uncertainty that we felt we certainly feel like we have a little more visibility now.
Perfect. Thanks on a nice quarter, guys and best of luck Kelly. Thank you very much.
Next question please.
Thank you Samik Chatterjee from Jpmorgan you May go ahead.
Hi, Thanks for taking the question Chuck in your prepared remarks, you outlined kind of six focus areas as you align the business to where you're seeing customer demand comes back. If you can share how you're thinking about it relative to kind of investing organically versus where you might kind of need M&A to fill in those priorities and just.
I didn't hear it in your prepared remarks anything in relation to plan to more like having hardware as a service as some of your dealer said trying so like what are your updated thoughts here. What are you seeing in terms of customer demand for those kind of markets.
So it's a great question, so I think on the organic versus inorganic I should.
I should probably clarify that you.
You know our strategy there hasn't changed and I think my comments were either misstated or misconstrued last time at some folks thought that we were we were thinking about some significantly larger acquisition strategy, our our acquisition strategy hasn't changed just to be clear.
But we'll we'll use a combination I would say that.
Right now they're there we have we're probably at the peak of internal innovation that we that I've seen for a long time.
If you look at the platform play that the work that our service provider Masco infrastructure group is doing and some of the the wins, we're seeing there the fiveg backhaul and packet core wins that we're seeing and the.
Right you know at least the architectural.
Progress were making whenever our service provider customers start building out their fiveg core standalone infrastructure, we we feel good about where we are.
So it'll be a combination of both and.
But again it hasn't changed as you think about as a service.
Service I I do want to delineate between this because there's there's this.
This.
Offer in the marketplace today from some of the some of our competitors.
Around consumption based.
As a service and that's largely around compute.
And so.
I see us with a similar offer but more more of what I'm talking about is looking at what aspects of our intellectual property can we pull can we integrate together and can we deliver as a cloud service. So.
I'm not necessarily talking about selling Ethernet switch ports, one port at a time right. We're really talking we're really talking.
And about delivering our core intellectual property for example.
Take SD when cloud security secure internet gateway and deliver that capability for customers as a service in the future, which is high value very differentiated those are the kinds of things. We're thinking that we're working through right now and you'll see those kind offers come out from us over.
Over the next you know 369 12 months.
Okay.
Thank you.
Thanks, John next question.
Thank you Aaron Rakers from Wells Fargo, You May go ahead.
Aaron we can't hear you.
Oh, sorry about that I was on mute.
Congrats on the quarter and also good luck Kelly I guess my question is building on the last question as we think about the CFO announcement Tonight, and we think about subscription now being 78% of the software revenue.
How do we think about the progression of deepening subscription across the product.
Folio and how do we think about the renewal cycle those subscriptions as we move forward. Thank you.
It's a good question. So I think you you're going to see us continue to add more software assets, both organically and Inorganically as you know and most all of those solutions are.
Sold as a service so I think you'll see increases from that perspective I.
I think that.
You'll see.
On the on the renewal front, we have a a focused effort right now I think if you look at our core.
Portfolio, where we drove mandatory subscript.
Well it means the first meaningful.
The renewal cycle comes about a year from now or next middle of next year and our teams are working on that right now as we speak.
We currently have renewal motions in place across collaborate across security et cetera. So I think what a what I would say is that.
Will.
We'll be looking.
Looking at more and more of our technology being delivered from the cloud and as a service so you'll see that contribute to it as well.
And you know, we're just going to continue to move forward and and I would say I would say you're going to continue to see software and services tick up as a percentage of our overall business going forward.
Thanks, Aaron next question please.
Thank you Simon Leopold from Raymond James and Associates, you May go ahead Sir.
Thank you much for taking the question Kelly also send my congratulations on a wherever you go next in thanks for the help in terms of the question I wanted to see if you could.
A little bit about the maturity of the campus refresh in terms of the opportunity in front of you for the cat nine K as well as whether you're seeing a benefit from renewals on DNA subscriptions I assume you are sort of coming up on that first round of three year subscriptions coming do you can elaborate on.
On those two thanks.
Yeah. Thanks, Simon I would say on the campus refresh I mean, when you look at why five six you look at the Cadnine K stuff. We're still we're still early on honestly.
And you know, there's we have a we have a large installed base out there and so that that's a multiyear transition that we.
We expect you know will go on for some period of time.
Going forward on the DNA renewals stuff, that's what I was talking about earlier, that's really it is the first real wave of it hits.
Sometime in 21, because if you remember we launched that in.
I think we announced that in the summer of 2000.
Sales and 17, Kelly is that right and so that was the beginning of fiscal 18.
And so when we get to the end of fiscal 21, and you had a lot of early adopters and we you know we didn't hit scale till sort of the middle of the next year. So you are really talking about you know getting into a fight 22, when we'll start to see that come about.
Great. That's helpful. Thank you.
Next question please.
Thank you James fish from paper Sandler you May go ahead Sir.
Hi, Thanks for the question and congrats again on the retirement Kelly you know, we're starting to see signs of Fiveg course, spending and Chuck you alluded to it here on the call and also more about the desire for open ran up and Cisco enable more.
The open ran infrastructure what are you guys hearing about timing for Fiveg core spending and in terms of materiality now that the first mid band spectrum auction as through in the second is coming up and how are you feeling about the products that across infrastructure competitively.
For Fiveg. Thanks.
Well, Jim I would say that the active overran projects around the world. We are we are deeply in the middle of and have a.
Actually seen a lot of benefit from one in Japan.
And and.
Theres Theres a couple others going on in other places and we're in the midst we're in the middle of the pack a core.
Side of it we're in the middle of backhaul were in the middle of infrastructure to support it we're in the middle of orchestration layers and so our teams continue to work on building out our overall stack for how we how will play in that open ran space over time.
As it relates to you know the Fiveg stuff, you're right, where we were we're.
Sourcing benefit today is we're winning a lot of backhaul opportunities, we're winning a lot of packet core I think we had seven more wins in between those two in the last quarter.
And I would say the the core standalone build outs.
We're going to largely be dependent upon the enterprise service delivery that we've talked about historically and I still think.
Probably.
I think we're starting to see some early stuff going on around the world, but I think in earnest I would say that's going to be.
Notwithstanding pandemic and everything else, it's probably going to be you know starting middle of next year.
And it will take several years, but again there is a lot of variables that could move.
But either way.
Understood. Thanks Chuck.
Okay. We have time for one more question Michele can you take the last question.
Thank you Sameer foundry from credit Suisse. You May go ahead.
Thank you very much for fitting me in.
I just wanted to touch up a little bit on the public.
Like sector order strength is this something that can consistently be growing from a product orders and strength perspective, and at least the upcoming quarter, though wasn't just strong this quarter because the government's fiscal year.
Closed in the September quarter, and therefore, there was a big uptick offsetting some of the dynamics and then I.
As a kind of a follow up here is there have you have you guys been able to go through the commercial and the federal segments and determine whether heres funding or stimulus funding was able to fund some of the reversals and dynamics that you guys saw in the quarter.
And then that essential OLED.
Just a better guide to what consensus was modeling.
I think if it does two questions that will be great.
Thanks, Sami I'd say on public sector, we feel pretty good about it actually and.
When we talk to our leaders around the world.
That's that is one area that is pretty consistent and most of them feel feel pretty good about.
In particular in the US were too it's a big piece of the business regardless of administration right. It's a there's different priorities, but they're they're all dependent upon tech and.
So thats good only commercial and federal segments, I think what I would say is it.
I would say in commercial I would assume that there was some aspect of that but I think.
Looking at.
The collaboration and security spending I think just a lot of those mid size enterprises were really just putting themselves in a position to continue operating in this new in this new world. We're living in right now as much as anything I'm not sure. It's significant I'll, let Kelly comments, he or she thinks but we.
We did have a you.
The comment that I made earlier that our.
Our federal team did say that stimulus was positive E rate was positive and then we saw some local muni.
Buying that was there was they felt like was and the customers are telling which was connected to the cares Act.
And that's probably the extent of what I've heard on this and we heard we often hear that from the European team Thats already here, we got a lot of.
Benefit from.
The stimulus and again when I look at the orders were then within.
We expected a globally I mean again kind of it is in getting this thing it's in security and collaboration so working from home during school from home and like Chuck said, the K through 12 education globally is very favorable.
Got it. Thank you yep. Thank you.
Thanks Sami.
Okay, I'll turn it over to me over the last comments you.
I think you know first thing I'll say is that I'm I'm really proud of our team and how hard they're working and how committed they are to our customers and making sure that we're taking care of them. During these complex times and obviously, we're trying to take care of our cars our employees.
During these complex times, but I'd I really want to just focus on thinking Kelly.
Been a a an incredible partnership we've had a lot of fun and I think that there's a lot of love in the Investor community for you we're going to Miss you, but we are excited about Scott, but Kelly. Thanks for everything you've done. So I. Appreciate your check it's been great working with you and again I do appreciate everybody.
On the industry and it's been great relationship, but Scott I think its great that Scott is coming is going to be fantastic for the company, but thanks for everything Chuck and Kelly actually helped us make that choice. So you guys can feel good that she she helped us that the candidates and and was a very very supportive on scotts.
On the decision for Scott. So thank you all for joining us today, and we'll look forward to talking to you again next quarter.
Thanks, Chuck Thanks, Kelly So in closing Cisco's next quarterly earnings conference call, which will reflect our fiscal 2021 second quarter results will be on Tuesday February nine 2021 at.
At 130, P.M. Pacific time, 430, P.M. Eastern time, again, I'd like to remind the audience that in light of regulation FD Cisco's policy is not to comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. We now plan to close the call, but if you have any further questions feel free as always to reach out to the Investor Relations.
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