Q2 2021 Cisco Systems Inc Earnings Call
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Welcome to Cisco second quarter fiscal year, 'twenty 'twenty, one financial results conference call at the request of Cisco Today's conference is being recorded if you have any objections you may disconnect now I would like to introduce Marilyn Mora head of Investor.
<unk> Ma'am you may begin.
Welcome everyone to Cisco second quarter fiscal 'twenty 'twenty, one quarterly earnings conference call. This is Marilyn Mora head of Investor Relations and I'm joined by Chuck Robbins, Our chairman and CEO and I'm very pleased to welcome Scott Herren, our CFO by now you should have seen our earnings press release, a corresponding webcast with slides.
Including supplemental information will be made available on our website in the Investor Relations section following the call.
Income statements full GAAP to non-GAAP reconciliation information balance sheets cash flow statements and other financial information can also be found in the financial information section of our Investor Relations website.
Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results and will 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 on a year over year basis.
The matters, we will be discussing today include forward looking statements, including the guidance, we will be providing for the third quarter of fiscal 'twenty 'twenty one.
They are subject to the risks and uncertainties, including COVID-19 that we discuss in detail in our documents filed with the SEC.
Typically the most recent reports on forms 10-K, and 10-Q, which identify important risk factors that could cause actual results to differ materially from those contained in the forward looking statements with respect to guidance. Please also see the slides and press release that accompany this call for further details 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, Marilyn first of all I hope that all of you and your families are safe and healthy. This year is full of promise as vaccines give us a path to healing and recovery.
We're optimistic about the future and look forward to what lies ahead.
This past quarter, our team delivered strong performance with revenues coming in at the top of our guidance range and non-GAAP EPS landing above the high end of our expectations all supported by margin expansion and a further strengthening of our balance sheet.
More importantly, we are seeing encouraging signs of strength across our business as the recovery takes shape with all customer segments showing improvement in year over year growth rates.
Our employees and partners have done a remarkable job executing and innovating throughout the pandemic to help our customers connect secure and automate to accelerate their digital agility and a cloud first world.
We are partnering with them on core issues that are a central to their success business resiliency modernizing their it environments and embracing secure hybrid work over the past year, our customers have relied on our innovation to accelerate their digital and cloud capabilities, while protecting them from an expanding threat environment.
And my numerous conversations with customers. It is clear that our technology will be a powerful engine for their recovery and growth is their technology needs continue to evolve at a rapid pace.
Building on the strength of our broad portfolio, we're focused on six strategic pillars that will deliver highly secure next generation architectures with unprecedented insights automation and visibility.
First we are building networking solutions with built in simplicity security agility and automation that can be consumed as a service.
Second we are optimizing our customers' application experiences, enabling greater speed agility and scale of cloud native applications and Dev ops that deliver the best end user experience.
Third with the future work being hybrid we're delivering highly secure access a safer workplace and the best collaboration experiences no matter, where the workers are at home or in an office.
Fourth with our customers and partners, we are building the internet for the future by transforming connectivity and efficiently meeting the ever growing demand for low latency and higher speeds.
Fifth.
With security and privacy are top priority, we were building integrated high efficacy into and security solutions that are delivered on premise or in the cloud.
Lastly, as apps and workloads move closer to users and devices, we are developing new edge capabilities for a distributed world, while enhancing the developer experience and extending enterprise and carrier networks.
I am confident that this is the right strategy to deliver the innovation and integrated network solutions that our customers need no matter what the future holds.
Now moving to our performance this quarter.
We continue to see signs of gradual improvement led by order growth in our commercial public sector and service provider businesses, which together account for nearly three quarters of product orders the.
The enterprise market remains soft driven by some elongated sales cycles and a continued pause in spending amongst some customers brought on by the pandemic.
From a product revenue perspective, we saw strength in our catalyst nine K datacenter switching security wireless and Webex portfolios.
The transformation of our business to more software and subscriptions continues to show great progress as we achieved $3 6 billion and software revenue with 76% of our software revenue sold as a subscription.
We also saw our sixth consecutive quarter of double digit growth in our deferred product revenue.
We continue to accelerate our pace of innovation delivering unique solutions and digital capabilities as we invest in flexible consumption models.
I am confident in our ability to capture the long term opportunities ahead in areas such as cloud 400 gig five G security hybrid work and next generation applications.
Looking ahead, we are cautiously optimistic as recent surveys of it spending indicate year over year I T budget growth for calendar 'twenty 'twenty one.
And Cisco remains well positioned amongst cio's top forward looking spending priorities, including network infrastructure.
Cyber security software as well as cloud migration and cloud infrastructure.
We're also mindful and vigilant about the uncertainty of the pandemic and its influence in the market, which is not fully behind us yet.
Now, let me touch on infrastructure platforms.
To manage the highly distributed and complex nature of modernizing environments, our customers must fundamentally change how their networks are architected.
To help them achieve this.
We are building a unified cloud native platform suite to deliver secure agile networking are.
A good example of this is our subscription based intent based networking portfolio and is reflected in the momentum of our catalyst nine K family, which saw another quarter of double digit revenue growth.
We're also delivering full stack observe ability from the application to the infrastructure to give our customers greater insights for faster better decision, making.
We are doing this through key elements of our portfolio like inter site thousand eyes, and App dynamics as well as our leading security innovations.
As a global leader in transport network infrastructure, we were playing an important role in helping customers build their networks for the future.
We continue to invest heavily to capture five G 400 gig and Wi Fi six transitions to enable open ran in edge services. This was reflected in our SD Wan portfolio routing five G mobile core platforms optics and automation capabilities.
And our web scale business, we delivered our fifth consecutive quarter of very rapid order growth increasing to triple digits and on a trailing 12 month basis. Our orders grew over 60% as we focus on delivering routing data center switching and optical platforms built on Cisco Silicon, one which had a.
As a better efficiency over other silicon on the market, while we could see our performance vary quarter to quarter due to the timing of large deals we were incredibly confident in our ability to further strengthen our position.
Building a network on silicon one.
Our customers can also save up to 30% of network switching power, resulting in a meaningful reduction in their environmental footprint as well as significant energy cost savings.
Our agreement to acquire Acacia will enable us to deliver leading edge optical technology to meet both the bandwidth requirements and the economics of next generation networks, which is critical to providing high speed connectivity.
This is just another reason why I'm. So confident we will continue to win in the web scale space.
As I've mentioned.
We plan to transition the majority of our portfolio to be cloud driven cloud managed and delivered as a service.
If we can deliver from the cloud we will.
For example, we're looking at offering SD Wan plus cloud security as a service along with creating other new solutions.
We will also provide simplified end to end networking with security reliability control and automation plus seamless on ramp capabilities to the cloud that no one else can deliver.
Moving to security.
We delivered another strong quarter of revenue growth driven by increasing adoption of our next generation cloud based architectures, which can enable fast secure access to applications and data from anywhere.
With the rapid growth in modern applications and more distributed work environments. Our customers are adopting new security architectures as identity and data privacy are increasingly critical.
The recent solar winds breach only highlights the urgent need for advanced threat defense.
Our comprehensive security portfolio offers simplified protection for any workload on any cloud while minimizing your attack surface and automating security policies across an organization's hybrid cloud footprint.
This extends to our secure access service edge framework and Zero Trust architecture, where we have developed a best in class cloud delivered stack across umbrella secure Internet Gateway Meraki SD Wan.
And Bill Taylor.
We're also delivering leading unified detection and response capabilities built on Cisco secure ex our cloud native platform.
Over 5400 customers are already seeing the benefits of this platform since it became generally available last June.
We remain committed to delivering simple integrated and highly effective end to end security solutions delivered on Prem and in the cloud.
Turning to applications, which includes our collaboration portfolio.
We are focused on building solutions that will enable an engaged productive workforce and an intelligent workplace built with secure collaboration automation and insights. Our aim is to deliver the best collaboration experience for our customers no matter where they are.
Our strong momentum with Webex continued resulting in double digit revenue growth I'm. So proud of the work. The Webex team has done to ensure our nearly 600 million quarterly average users are able to stay connected and productive.
In addition, we are connecting over 6 billion calls every month for our customers around the world.
We are bringing incredible innovation to the collaboration market Anthony.
Unprecedented pace.
Our goal is to deliver a 10 X better experience than just in person interactions at our recent Webex. One event, we introduced more than 50, new product and feature innovations integrating security and privacy to deliver inclusive experiences.
Some of the new powerful capabilities, we announced include noise cancellation real time language translation and our Webex desk Pro series platforms.
Our recently announced intent to acquire a cloud based IMI mobile and slight O furthers our vision of building a webex suite of applications as we combine these technologies with our Webex contact center to improve customer interactions.
In summary, our strategy is clear and our business remains strong.
We're executing and innovating with speed and delivered solid results with our Q2 revenue coming in at the high end and earnings coming in above our stated guidance.
As we move into the gradual recovery phase, we believe our customers will continue to turn to Cisco as their partner of choice.
I am so proud of what our teams have achieved the incredible innovation and trusted partnerships. We're building will serve us well in the years ahead.
While the past year as highlighted far too many inequities in our society. We believe in the power of technology to drive more inclusivity and opportunity to underserved populations and communities around the world, which is why we are committed to powering and inclusive future for all.
With our ongoing disciplined approach to investment and innovation, we expect to be in an even stronger position post pandemic as our customers look to deploy their next generation networks at the heart of their organizations.
I firmly believe Cisco is well position to capture the long term growth opportunities ahead and win for years to come.
I'll now turn it over to Scott, our new CFO to walk through our financial results. As you know Scott has strong experience in software and a proven track record of leading successful business model transitions from perpetual licenses to SaaS and recurring subscriptions Scott.
Scott is proving to be a powerful addition to our team and I look forward to partnering with him as we plan. The next phase of Cisco's continued transformation Scott over to you.
Thanks, Chuck let me start by saying how excited I am to join the Cisco team at such a pivotal time in the Companys transformation.
Before turning to our performance in the quarter I thought I'd share my initial observations and key priorities.
I'm impressed by the team here at Cisco and the progress. The company has made on its transformation achieving the goals laid out three years ago of driving 50% of our revenue from software and services.
Also clear that leadership team is unified and focused and that the strategies Chuck laid out earlier in the call will drive our growth over the next several years.
It's an exciting time to be joining the company in this role.
In terms of my key priorities. They include the following driving profitable growth.
Continued disciplined focus on financial management and operating efficiency.
Setting a long term plan to maximize value creation through strategic transformation.
In examining investments both organic and inorganic.
I am also committed to providing you the insight and metrics needed to understand and properly value our business longer term.
Now, let's turn to our results.
I'll start with a summary of our financial results for the quarter, followed by the guidance for Q3.
Our overall Q2 results reflect very good execution with strong margins and growth in non-GAAP net income and earnings per share and a continuing challenging environment.
Total revenue of 12 point O billion came in at the top of our guidance range flat year over year as we see gradual recovery in several key product areas and sequential growth rate improvement in two out of three of our geographies.
Our non-GAAP operating margin was 34, 4%.
Up 70 basis points.
Non-GAAP net income was $3 4 billion up 2% and.
And non-GAAP earnings per share was <unk> 79 cents coming in above the high end of our guidance range and up 3% year over year.
Now, let me provide some more detail on our Q2 revenue.
Total product revenue was $8 6 billion down 1% infra.
Infrastructure platforms was down 3%.
As a reminder, this is a product area most impacted by the Covid environment.
Switching revenue was flat overall we.
We saw solid growth in data center switching was strong growth of the Nexus nine K.
We also saw continued strong momentum of the cat nine K products within campus switching.
Routing declined driven by weakness in service provider.
Wireless had solid growth driven by the continued ramp of our Wifi six products and strength in Milwaukee.
Data center revenue declined driven primarily by servers as we experienced continued market contraction.
Applications was flat overall, we continue to see strong double digit growth in webex, driven by our continuing product innovations and the criticality of remote working.
This was offset by declines in unified communications and TPN points.
Security was up 10% with growth across the portfolio.
Our cloud security portfolio performed well with strong double digit growth and continued momentum of our duo and umbrella offerings.
Service revenue was up 2% driven by growth in our maintenance business as well as solutions support.
And we continue to transform our business delivering more software offerings and driving more subscriptions.
Software subscriptions were 76% of total software revenue up four points year over year as Chuck mentioned earlier.
Remaining performance obligations or our P. O at the end of Q2 were $28 2 billion up 13%.
P O for product was up 17% and for service was up 10%.
The continued growth in our P. O demonstrates the strength of our portfolio of software and services and is another indicator of the broad recovery, we see happening.
In terms of orders in Q2 total product orders were up 1% a significant improvement from Q1.
Looking at our geographies the Americas was down 1% EMEA was up 7% and a P. J C was down 5%.
Total emerging markets were down 14% with the Brics, plus Mexico down 11%.
And our customer segments public sector was up 10% service provider was up 5% and commercial was up 1% enterprise down 9%.
Non-GAAP total gross margin was 66, 9% up 50 basis points.
Gross margins were 66, 6% up 70 basis points and service gross margin was 67, 9% up 20 basis points year over year.
The growth in product gross margin was driven by positive product mix, including some software benefit and productivity improvements partially offset by pricing.
In terms of the bottom line from a GAAP perspective, Q2, net income was $2 5 billion and earnings per share was <unk> 60 cents.
We ended Q2 with total cash cash equivalents and investments of 36 billion up 600 million sequentially.
Operating cash flow was 3 billion down 22% as expected driven by a lower beginning receivables balance for the quarter timing of payments and the restructuring payments.
We expect operating cash flow growth to normalize over the course of the fiscal year.
From a capital allocation perspective, we returned $2 3 billion to shareholders. During the quarter that was comprised of $1 5 billion for our quarterly dividend and $800 million of share repurchases.
Year to date, we've returned $4 6 billion to shareholders, which represents 69% of our free cash flow.
And today, we announced a one cent increase to the quarterly dividend to <unk> 37 per share up 3% year over year.
This dividend increase reflects the 10th consecutive year of increasing our dividend and reinforces our commitment to returning capital to our shareholders and our confidence in the strength and stability of our ongoing cash flows.
We continue to invest organically and inorganically in our innovation pipeline.
During Q2, we announced an amendment to the definitive merger agreement under which we previously agreed to acquire Acacia communications.
We expect to complete the Acacia acquisition in our fiscal Q3 subject to closing conditions, including Acacia stockholder approval.
In addition, we announced our intent to acquire IMI mobile cloud Communications software and services company and <unk> a provider of SaaS based solutions to enhance our webex platform and our new cloud native contact center offerings.
These investments are consistent with our strategy of complementing our internal innovation and R&D with targeted M&A to allow us to further strengthen and differentiate our market position and our focus growth areas to <unk>.
Her eyes, we executed well with strong margins and growth in non-GAAP net income and earnings per share growth. We're seeing returns on the investments, we're making in innovation and driving the continued shift to more software and subscriptions delivering long term growth and shareholder value.
Now, let me reiterate our guidance for the third quarter of fiscal 'twenty one.
This guidance is subject to the disclaimer regarding forward looking information that Marilyn referred to earlier.
Q3 does include an extra week, which occurs every five to six years with.
We've factored this extra week into our guidance for both revenue and expenses, although it's difficult to forecast the impact of the extra week, we have assumed roughly 2% to 3% year over year impact on total revenue growth along with approximately $185 million of incremental cost of sales and operating expenses.
The guidance for Q3 is as follows.
We expect revenue to be in the range of three 5% to five 5% growth year over year.
We anticipate the non-GAAP gross margin to be in the range of 65% to 66%.
The non-GAAP operating margin is expected to be in the range of 33% to 34%.
And the non-GAAP tax provision rate is expected to be 19%.
Non-GAAP earnings per share is expected to range from 80 to 82.
I'll now turn it back to Marilyn So we can move into the Q&A.
Thanks, Scott Michelle Let's go ahead and queue up the Q&A.
Thank you. Our first question comes from meta Marshall from Morgan Stanley You May go ahead.
Great. Thanks.
Maybe I'll just start off for me I, just wanted to get a sense of where you feel like organizations are in planning for a return to work and what the hybrid workplace looks like and you know when do you think that investment will take place in that architecture versus kind of when employees return to the office.
Yeah. Thank you.
Think that the you know what we have been operating under as a premise that custom.
Customers will probably begin to come back to the offices and.
We had been thinking sort of mid to late summer I think if you were watching the news. This morning, you heard some of the New York companies say that they may be September, but I would suspect that as companies look to prepare their offices for the return.
In our case, we've seen significant uptake in Wi Fi six as an example, as they've begun to do.
Get ready for that return, we believe that that will require a switching infrastructure as people come back to the office and began to put load on those wireless networks. We also believe that every every meeting in the future is gonna be a hybrid meeting even when people are back in the office you'll have people in the office and you have people remote and in order to accommodate that.
Suspect most of our customers would be putting video units in every conference room, They have which again will also accommodate the hybrid work model, but will also drive Ah you know bandwidth requirements, which could lead to switching infrastructure. So that's the way we see it playing out over the next few months.
And we would expect that with some of the solutions, we have around worker safety and.
And the and the collaboration portfolio and Wi Fi six build outs that are you know, we'll continue to see some progress from our customers as they prepare to return.
Great. Thanks.
Next question please.
Thank you Jim Suva from Citigroup investment Research you May go ahead.
Thank you very much I'm looking at your guidance I think some investors are asking a little bit about hey, the revenue guidance is up year over year, you know quite impressively.
A little bit easy comps and also an extra week, but the EPS year over year.
There's not much leverage there there are additional Paul sorry, less travel.
That'd be more flow through to the bottom line earnings per share.
Yeah. Thanks, Jim for the question and I think that there's a couple of things you have to bear in mind not only does the extra week in Q3 bring along with it additional revenue it brings along additional.
<unk> spend as well and we touched on this in the opening commentary, it's about $185 million, our expectation is about $185 million of additional spend.
Coming through when you compare year on year coming through from last year. We also have comp plans reset so as you'd expect commissions and bonuses are on a different track this year than they were last year.
In FX the weakness of the dollar is having an effect on us as well and so when you add those up that's what drops through to the to the Cogs and the and the Opex line. We are on track just to get ahead of maybe what what your next question would've been we're on track with the $1 billion of savings that we talked about through the restructuring that continues.
To go well almost all of that is behind us at this point, but there are some year on year things that are that are factoring into our spend rate for this year for this coming quarter.
Thank you Scott and welcome and thanks for the color and details.
Thanks, Scott, it's Jim and Jim. Thank you Thanks, Jim.
Thanks next question. Please go ahead. Thank you <unk> Kidron Oppenheimer you May go ahead Sir.
Oh, Thanks, and good luck Scott in your new role.
I guess I have a couple of questions for somebody declined 9% and orders on enterprise Chuck any can you give us a little bit more color. It seems a little like significant lag relative to the other is when do you expect that toward normalize and improve.
And then perhaps a second question more of a bigger picture one for you. Chuck you know, it's been clearly a very difficult year all around.
Maybe you could give us a little bit more you have a bigger picture perspective that you have here about the company and what ways Cisco here right now different.
And into weight operates and things and moves going forward versus the Cisco over a year ago, just before heading into the pandemic I'm trying to understand kind of the lessons learned and how they're implemented and impacting the company and how should we think about you differently going forward.
Yeah, Todd. Thank you and you know look at first of all I think that if you look at the customer segments, we saw improvement.
Improvement across service provider commercial and public sector, and we saw improvement in enterprise, Although it's still you know negative year over year, but what I would tell you is from a vertical industry perspective, we did see positive movement from industries that are not directly impacted by the pandemic think financial services manufacturing think technicals.
Services.
And then those that are still in the midst of the pandemic continue to struggle hospitality retail transportation energy and so I think from that perspective. It gives us confidence that as we come out of this thing that those industries that are being depressed by the pandemic, we'll obviously look to the future and will recover as well.
So the other thing that I, we've reflected on is that when we came out of the 2008 crisis. We saw commercial lead and then enterprise followed and you know it's just been a really good sign in the U S. Commercial business. This past quarter grew 6% from an orders perspective, which I think is a nice balance and obviously it was 1% globally.
But are seeing that go positive gives us also confidence in the future of the enterprise following.
As it relates to the bigger picture I think we've talked a lot about giving our are.
Our customers consumption flexibility earlier in my comments I I actually outlined six strategic pillars that we're all focused on I'd say that we are super optimistic about the progress we've made in the web scale space, we continue to.
Deliver on our software.
Revenues, which were $3 6 billion this quarter and again, 76% of it coming from software and I think that will only increase so I think that you know those six pillars combined with more flexibility and consumption options for our customers and continued transition to software and a continued focus on web scale and and other growth opportunities as well.
We're trying to do over the next two to three years.
Alright, good luck.
Thanks, <unk> next question.
Thank you Paul Silverstein from Cowen and company you May go ahead.
Thanks for taking my questions. Scott can you tell us what the rate of price degradation was in connection with that.
Thoughts in terms of the mortgage structure at both the gross and operating line.
As to both resiliency and even hopefully better upside and where you can drive that Bob.
Yeah. Thanks, Paul the pricing mix was really in line with what we'd seen over the last several quarters.
You'll see this next week, obviously in the Q, but I'll go ahead and give you the data point. It was one 6% for the second quarter slightly better actually than what we had seen in Q1 and actually modestly better than what we've seen over the trailing four quarters. So pricing mix was as expected during the second quarter I think as you look longer term you know gross margin is going to bounce around a little it always.
Does I think part of what is factoring into our view of gross margin ahead is the the benefit of a greater mix of software and services in there being somewhat offset by some of the supply chain concerns that we have right now, but I think you've seen not just from us but from everyone Who's building products that contain a significant.
The amount of semiconductors, so where we're doing what you would expect us to do on the supply chain front. We are contacting all of our key suppliers on that front, we're leveraging kind of the volume purchase that we have extending that that supply chain further out all with a goal of ensuring we can protect customer shipments. So there's a little bit of a headwind coming in those lines.
From the just the supply at the current supply chain.
It's got across the supply chain commentary, that's transitory issue that's in the past.
We look beyond assuming the world goes back to normal.
Like if you net that out we should be a positive trajectory at some point.
I think that's right I mean are you know we've talked about growing the percent of our business and you've seen Cisco do a really nice job of growing the percent of the business coming from software and services and obviously that comes through at a higher margin.
I appreciate it thank you.
Next question please.
Thank you Pierre <unk> from New Street Research you May go ahead.
Hey, Thank you Paul taking my question Scott I have a question for you on your gross margin.
Checking my mother.
And I think the $66 nine persons you reported this quarter is actually.
A record so I style back as my mother would go to the next.
It goes back quite fast so congratulations.
That's a great stuff on that front.
And my question is actually how.
Should we think about gross margin.
Easiest transition you want to accelerate and continue throughout the cloud are we now in a phase where we should expect gross margins to head to head up overtime with ups and downs of cools, but should we expect like myogenic switch old margin expansion going along with your we'd have transformation.
Yeah again per your model must go back to our fiscal 2006, because this was the highest gross margin we'd reported since second quarter of 2006. So so you're right from that standpoint, and again I would just in terms of where this goes longer term I expect there to be a little bouncing around over the next couple of quarters, given some of the supply chain concerns that that ever.
One that's building product based on semi is a slight headwinds bill from from memory, but.
But I think everyone in the market is going to see that same set of trends longer term again as we drive up the mix of software and services that should have a positive impact on gross margins.
Great and maybe if I have a quick follow up on the same theme you mentioned extending the transition what's up next fall grab for you too to evolving the product portfolio to increase the share Oh stick no G that you did have a as a service and cloud based.
Hey, Pearce, Chuck I'll take that one and Scott's pretty proud of the immediate impact he had by delivering the record gross margins being here a very short time I'm very impressed yeah exactly high impact. So I think on the you know as you look at the as a service offerings. What we're gonna do is take we're taking intellectual property we have in.
Our core enterprise portfolio, we're delivering a lot of that is both cloud delivered as well as you know cloud managed.
Think about what we've done with you know the the whole discussion we've had over the years about the Meraki platform and how we bring those capabilities to the rest of the portfolio, taking technologies like SD Wan and cloud security and integrating those together and delivering those as a service, which frankly are uniquely.
Capability, that's a unique capability that we have and so I think those are areas, where you'll see that continue to move forward.
In addition to you know anything that we've sort of virtualized over the years you can now deliver that as a service anything that's you know pure software. So we're looking at every aspect of the portfolio.
Thanks Chuck.
Thanks, Pierre next question.
Jeff <unk> from Wolfe Research you May go ahead.
Yes, thanks, very much I was hoping to ask two I guess first is.
I'm wondering could you help us understand better the dynamics involved in the web scale progress.
Which product lines and in what type of applications are you going to use that as silicon one story.
And then secondly, I was just wondering if you could help us with the expectation for the durability of the public sector strikes. Thank you.
Yeah. Thanks, Jeff.
So let me start with the second one the durability of the public sector I think two comments on this one clearly their stimulus that's flowing and both in the U S and around the world and I think that'll continue for for some period of time obviously.
And that's certainly helping but the other thing that I think as it has occurred over the last year or is it countries have realized that they they have to invest in infrastructure and digital infrastructure and technology to be prepared for these sorts of crises in the future. So I think that.
Notwithstanding stimulus I think the spending we see post pandemic will be greater than what we saw pre pandemic and and in fact some of these countries have come to the conclusion that they they need to take more dependency on themselves and less on some of their allies, given sort of what we've seen over the last few years and so they're they're beefing up their technology investments.
From that perspective, so I think net.
Once the stimulus goes out I still think you'll see a positive a positive segment for a few years to come.
On the web scale front I'll, just take a minute to explain you know we we actually gave more information today than we than we've given in over the last few years. Many of you have heard me say that this is this was a marathon and we had a lot of work to do.
And what has become clear to me over the last five quarters is that the the work that our teams have put in over the last five years have begun to pay off and so you know this quarter, we saw triple digit growth year over year, and our web scale portfolio as I said in the earlier comments.
The prior four quarters I will tell you that the growth rates range from 17% to 74%. So it's Ben you know it's been up for the last five quarters as we've talked about.
From a portfolio perspective, you asked we're selling you know this that the 8000 series, which we announced in December of 2019, we're.
We're winning 400 gig.
Franchises, we are selling you know some silicon.
We're selling our catalyst nine K candidly, we're selling the rest of the portfolio as well and so it's a it's been pretty broad based relative to what we are selling them but.
We feel good about the investments we've made the hard work we've put in and then the last thing I'll tell you that the the other question you're probably Gonna asked is how material. It is.
From a size perspective, and I'll tell you that last quarter that we just finished it was 25% of our service provider segment.
Over the last four quarters, it's averaged 21% of that S. P segment. So it's a it's gotten to a point where it it's meaningful so that's why we decided to give the additional information today again this business much like the service provider business that we've talked about over the years will have will be big deal driven big customer driven so it will have a tendency to be lumpy, but I think if you.
Look at it over the course of four quarters six quarters eight quarters, it's gonna be it should continue to be positive.
Thank you Chuck congratulations.
Thanks.
Next question please.
Thank you Rod Hall from Goldman Sachs. You May go ahead.
Yeah. Thanks for the question I had two as well one would be I guess one of the most surprising numbers in here is the service provider order growth rate of 5%. That's a huge turnaround from last quarter and I think you. Just gave me part of the answer to that Chuck but just curious if you could dig into that a little bit more color what drove that.
A little bit unexpected for me and then the second thing I wanted to ask it back to you Scott on the FX impact is there any way you could quantify those worth you help us understand how the dollar moves has affected for instance revenue growth year over year, and maybe margins as well just anything you can help us with on quantification there. Thanks.
Yeah.
All right Rod I'll take the first one on the S. P space. So yeah. If you look at what we saw in the quarter from an order perspective, we saw a positive growth in cable, which represents about 15% of segment. We saw triple digit growth in web scale, which is represented 25% of the segment and then our telco business was down and that's roughly 60% of the business and primarily that is because.
You know, where we are in the stages with five G. We have we have roughly 35 customers around the world that we're working on five G solutions with with mobile backhaul with orchestration with packet core and so we're just early in that transition and I think that's that particular sub segment of S. P will.
Begin to.
Show progress for us as we see the core backbone build out as we've been saying over the last few years and the good news is we're seeing the we're seeing the backhaul stuff being built we're seeing the packet core decisions get made which means that the the core network backbone decisions will be made and the fact that we are being you know having some positive success in the web scale space.
This would give me a high degree of confidence that those same products will will bode well in the service provider space. So so I think you know this has been a tough segment for us for many many years and we're hopeful right now with the web scale success, and then with the five G build outs underway that are this could be a tailwind over the next few years for us.
And Rod this is Scott on the FX impact as you know in most markets we price in U S. D. So there's there's a limited impact from FX on the top line, but of course with the weaker dollar we have our employees worldwide.
You pay them in local currency and so when you translate that back it has a it creates a bit of a headwind for us on the on the Opex side I'm I'm I'm hesitant to give you an exact figure on that but just so you can understand the dynamics. That's the way it works and it has created a headwind for us during the second quarter.
Okay. Thank you.
Thanks, Rod next question.
Paul Liana <unk> from Bank of America Securities You May go ahead.
Hello, I have two questions.
One is just a clarification for my understanding in Alaska, and the general way, what's holding up the closure of Acacia.
And what will change now versus the delays we have seen so far.
The easy one.
The second question is I wanted to understand your outlook on a product basis, rather than a vertical.
When you we felt was a legacy switches and routers can you discuss the trends that youre seeing for the next four quarters or the next kind of calendar year.
Where is the change meaning what what are the areas, where you see increased versus the previous four quarters.
So tell him and ask for clarification on the second one before I start. So are you talking about in the enterprise space or are you just you're just talking about where what do we feel good about from a product perspective over the next few quarters in general.
Exactly I I'm I'm I'm trying to understand it at the product level, rather than the vertical level Yep gotcha. Okay. So on the on the Acacia thing I think it's quite clear you know what occurred we we didn't have China approval. We thought we did we didn't have it in time, so we renegotiated the price because our our contract with them had expired.
And you know candidly the performance they put up in the 18 months between our original deal in this deal.
<unk> was pretty astounding. So that you know the price was not was not out of the question and.
And then we subsequently got Chinese approval and I think Scott keep me honest, but I think they have to get shareholder approval and the proxy is out. So we expect that that should happen it'll it'll happen. During Q3 tell so China approvals done there's no more approvals to get it's just up to the shareholder vote. At this point. So we think that that is in pretty good shape.
On the on the second front, let me just run through the portfolio and I'll tell you sort of how I feel about everything right now so I think the if you look at the you know the the masco infrastructure of the service provider portfolio, whatever you want to call it where.
Where does the 8000 is in some of the other stuff that's being built for five G and for 400 gig in these in the mass scale data centers I think that that portfolio is in really good shape and I would expect it to be a very positive contributor not only over the next year, but over the next two to three years.
I think that there is.
If I look at the campus switching infrastructure, you know I think with customers begin to come back they're going to look at upgrading our we've seen we saw significant growth last quarter and demand for Wifi six.
Just to give you a data point that we don't disclose.
Close anywhere, but we had a I think our orders for Wi Fi grew 20% last quarter.
What typically happens is that when you.
When you effectively put a lot of load on Wi Fi Wi Fi six is going to accommodate its going to require an underlying infrastructure upgrade to accommodate it and when you add to that the video load that will likely go on to these customers as they come back to the office and put video in every conference room.
And continue to use video the way they've used it during the pandemic. We think that will also be a driver. So I think we have the catalyst nine K portfolio of Wi Fi six portfolio, we feel good about as well.
The SD Wan technology continues to move forward.
We're seeing good growth there and I think as we deliver that technology as a service integrated with our cloud security I think that's gonna be a differentiator for us.
Within the security portfolio. The teams are working on a couple of very differentiated tracks on strategy I'd say that we need and I'd say, we need another six months or so to see how that evolves, but I feel good about what they plan to do our current portfolio is performing well.
And they just need to execute so we have to see that.
I think the teams have done it you know.
An amazing job on what they brought forward with our with the Webex platform again, you have to remember in the applications space. When there there's probably a view on that that you know when it's when it's not performing the way you would think you've got to remember all the phones are included in that space too. So while webex was up double digits as Scott said.
You've also got the drag of the handset business. It that's that's in there as well.
But I think the Webex work and the pace of innovation in the feature velocity the sweet aspect that theyre looking at a I think the teams are doing a really good job and I think over the next year, you'll see us actually.
That that portfolio will continue to improve and I think we have a chance to take share back.
What did I Miss.
And then we're working on things like full stack observe ability, which are somewhat nascent we're working on our edge service strategy, which is somewhat nascent but and you know.
I feel like the team I think the portfolios in probably as good a shape as it's been in a while and we just have to execute.
Great. Thank you.
Next question please.
Sami <unk> from J P. Morgan you May go ahead.
Oh, hi, Thanks for the question Chuck I just wanted to see if you can dig.
Jacob.
The demand drivers for the security segment here, particularly how have you seen customers responded to the call.
Recent events around solar winds and if we would've expected a bit more momentum in the security segment to you or is that more particularly is it more going to be hardware or software that we should expect the demand from.
Yeah, you know I think that.
Yeah.
What we see across our portfolio as we we had a really good quarter actually in network firewall and cloud security. So it was it was a good quarter across the board across the portfolio.
And I think what you'll see is that are.
You know we're in the early phases I think of any positive impact that you would see from the solar wind build out because most of the customers are going into assess like where am I what have I missed what do I need what caused me to Miss what I missed in and then theyre going to move from there. So I think we're sort of in the midst of that right now with a lot of our customers doing those kinds of assessments.
But you know it's Ben.
From the early parts of the pandemic when we saw V. P. N technology being you know absorbed as much as we could possibly build.
And then the network firewall and then combine that with the cloud security or just it feels like you know customers are consuming whatever security. They can consume right now to try to avoid those sorts of situations. So I would I would see I would think that that will continue to be positive for us.
Thank you.
Next question please.
Thank you Simon Leopold with Raymond James and Associates, you May go ahead Sir.
Thanks for taking the question I wanted to ask first an easy one and then more of a thematic one on the easy side I'll play. It's just wondering if the supply chain constraints in your ability to get components.
If that cost you any any revenue in the quarter. If you could quantify that and then in terms of that broader trend maybe you could help me understand how you see the campus environment.
Good thing because it sounds like you've highlighted a number of positives getting back to work long legs in the cat nine K cycle Wi Fi sounds good, but I have to imagine there are some offsets as well maybe not as many people go back to where legacy products Rolling Oliver just if you could build a bridge on what's going on in campus over the longer term.
Thank you.
It's going to take supply chain, yeah, we didn't really see any impact in our ability to get product out the door during the second quarter.
Team has stayed on top of the supply chain scenario and its been evolving as you know throughout the quarter as.
As we look ahead of Q3 that that is something that is factored into our guide both in the our expectations on the top line and on the gross margin line, but it really hasn't been there in the in the second quarter at least it hasn't been a significant headwind for us.
Yeah, I think that our teams are doing a good job on that are trying to buy ahead trying to build inventory you know our.
And you know.
I think that there's there's certainly some unknowns and is certainly complex, but I think the teams have done a pretty good job navigating it and and it is built into the guide.
On the campus front I think what I described as is actually.
What I would expect for most customers I think some of the the question. You ask is agree is a philosophical discussion that we have a lot in that when customers go back.
What is it going to look like our more employees going to stay at home does that mean, they're going to shrink their footprint does COVID-19 stay with US do people now believe that they want to be they want to maintain somewhat of a social distance in the office, even post COVID-19 until we really get well beyond it and does that mean, you need more footprint, what's the future of shared space our employees comfortable come.
In is sitting in a shared space that someone else occupied the day before or do they want their own space when they come in so that they feel safe in it and I think those are the kinds of things that we don't understand but if I net it out.
I don't think personally this is my own opinion based on customer discussions and everything else I don't think that's some of the earlier beliefs in the pandemic, where you know the early days is like no one's gonna go back to the office because we're actually productive at home I think we sort of moved into that phase where people actually struggled mentally people are it's it's they're not enjoying it one of our employees.
So to me the other day I don't mind, the option of working from home I don't like being forced to work from home.
And so I really believe it's gonna be hybrid where people are going to work from home is in a lot of everybody's sort of landing here, where they can work from home three days a week in a work from the office two days a week or vice versa. The question is what what accommodations does that lead to for customers based on employees, you know concern over space issues concern over future.
Pandemics or other concern that's what we just don't know yet.
But I do believe based on what we've seen with Wi Fi six that tells me customers are getting ready.
And they're upgrading the wireless infrastructure now and in the commercial space, we've seen a fair amount of the follow on with the switching and hopefully we'll see that in the enterprise space beyond this.
<unk>.
Thank you.
Thanks, Simon next question.
Tim long from Barclays. You May go ahead Sir.
Thank you yeah, two affected as well first maybe Chuck on the on the Cat nine K I'm still still doing very well just curious what do you think the impacts will be when some of the kind of earlier adopters are licenses are coming due so kind of you know what impact is that kind of what inning are we in there and then.
Second on the cloud business curious kind of who you who you're winning against there is this against the traditional competitors are you starting to see any you know wins back from white box or or you. Just you know serving to maybe limit where white box.
Can go with a with that cloud customer base. Thank you.
Yeah, Tim Thanks, So on the Cat nine K I think the way I would think about it is it.
The the license you're I think you're really asking about the renewal side of that piece, which in this fiscal year is it.
It's not significantly material and I think I've said on a couple of calls before its really good the size. It is this year because it gives us a chance to test our processes and our renewal value proposition and all that stuff because it's it's meaningful in fiscal 'twenty. Two so the teams are working hard right now to try to to try to get ahead of that and be ready for it.
On the.
On the cloud front, what I would say is it.
We were you know when we announced in December of 2019, we had a launch the future of the Internet launch we talked about that we would be we would sell our customers' systems integrated systems, we would sell them silicon or we would sell them white boxes, I mean, I'm sorry of our software.
And and we have all three of those scenarios actually playing out right. Now so we have customers who have standardized on our systems for 400 gig.
We have customers, who are testing, our silicon and actually putting it in white boxes, which is which is what we would expect them to do.
We have some customers running our software stack on their hardware.
And so.
And you know that the people, we're competing whether they would be quite evident to you shorted me, calling them out I think these are the traditional players that have been successful in that space and you know we talked a lot back years ago about the fact that we missed the first wave and we were going to work hard to be in a position when the 400 gig transition occurred and try to work our way.
Back in in an earn out.
No that business back and I think the teams have begun to do that so I'm really proud of what they've done.
Okay. Thank you.
Okay. We have time for one last question Michelle.
Sami Badri from Credit Suisse. You May go ahead.
Jamie Thanks.
Jamie Your line is open.
Danny are you on mute.
I don't think so Oh there you are here you know.
Four.
Perfect sorry about that.
First question is for Chuck one thing that I think has not come up in this call is anything regarding five G really in about year, three and the telecommunications five G cycle and at this point a lot of people are just trying to understand what's really the effect to the equipment supply chain and how these telecommunication providers are going to consume.
Equipment from the different vendors and then the other question is for Scott.
You do have some M&A that has already closed in fiscal <unk> and there are projections for other closures of deals of fiscal <unk> does any of the guide include acquired or inorganic revenues and you know if you're prepared to give us a break out organic versus inorganic that that'd be helpful.
And let me let me take the five G. I think what Youre seeing right now is the most customer most of our customers that are working on five G. There they've been building out the radio networks, they've been building out packet core capabilities, they've been up building out mobile backhaul and in many cases, they're running.
These hybrid <unk> five G backbones.
With some exceptions, where you have like a stand alone <unk> network that's been built.
And in that in that case, what we participate in in there with the packet core for sure more mobile backhaul and some elements of orchestration.
And.
And what we believe is that over the next couple of years as these providers begin to build out a standalone five G backbones and in many cases to serve up enterprise services that they will be making decisions on core upgrades to support the bandwidth and the traffic that's going to load those networks and I think that's when we believe we would we will see that.
The most of the benefit from.
You know the five G build out so that's kind of where we are right now and.
You know, we're having good success in the areas that we participate based on where they are in the lifecycle of these networks Scott you want to touch on the M&A question sure, saying, we did have a couple of acquisitions that closed during the second quarter, but they were both quite small, but strategically important but not meaningful in terms of adding to the to the Q3 guide.
We've got some some more meaningful ones that we do expect to close during the quarter, obviously acacia would be meaningful.
We've got IMI mobile, which we expect to close during the quarter, which which will have some some level of impact on the on the guide neither of those are factored in at this point so as we get those closed and at this point, it's not exactly certain when they'll close which is why they are not currently factored into the guide as those close will give you some insight into what our expectations are for them.
Got it thank you very much.
Alright, just to wrap up I want to I want to thank everybody for spending time with us today and again, just hope that everybody stays safe as we work through what.
What we were all hopeful is the are the beginning of the recovery and I think that are you know from a business perspective, we continue to feel like that is definitely the case that we are in the midst of a recovery, which gives us a lot of optimism I'm proud of what our teams have done I'm proud of the innovation that we have built during this complicated time you know we have Cisco live.
Coming up at the end of March where there'll be a lot of innovation that we'll be announcing.
And you know based on that and some of the performance that we see in the continued improvement of our business.
I remain fairly optimistic about where.
Where we are right now as we as we come through this pandemic. So we'll look forward to talking to all of you on the next call and Marilyn I'll turn it back over to you. Thanks, Chuck Cisco.
<unk> next quarterly earnings conference call, which will reflect our fiscal 2021 third quarter results will be on Wednesday may 19th 2021 at 130 P. M Pacific time, 430 P M Eastern time.
<unk>, we will be presenting and hosting meetings at several investor conferences over the next few weeks, including the Goldman Sachs Technology, and Internet Conference Tomorrow.
Again, I'd like to remind the audience and in light of regulation FD Cisco's policy is not to comment on its financial guidance during the quarter unless it is John too explicit public disclosure.
We now plan to close the call. If you have any further questions feel free to contact the Investor Relations day.
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