Q4 2021 Cisco Systems Inc Earnings Call

Welcome to Cisco's fourth quarter and fiscal year 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.

Thanks, Michelle welcome everyone to Cisco's fourth quarter fiscal 2021 quarterly earnings conference call.

This is Marilyn Mora head of Investor Relations and I'm joined by Chuck Robbins, Our chair and CEO and 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 made on a year over year basis.

The matters, we will be discussing today include forward looking statements, including the guidance, we will be providing for the first quarter and full year of fiscal 2022.

Our subject to the risks and uncertainties, including COVID-19 that we discuss in detail in our documents filed with the SEC specifically 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.

You'll 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.

Thank you Marilyn and good afternoon, everyone I hope you're all.

The remaining healthy and staying safe.

Our team at Cisco ended fiscal 2021 with an incredibly strong finish.

We had an outstanding Q4 performance and fiscal year revenue, reflecting strength across our portfolio.

Customer segments and geographies.

Our product order growth was the highest we've seen in over a decade, and we're continuing to see strong customer reception to the accelerated investments in software and subscriptions.

This great momentum is reaffirming our position as the worldwide leader in technology that powers, the internet and the digital enterprise.

As I think about our achievements over the past year three things stand out to me.

First the exceptional execution of our teams we achieved these results through the extraordinary efforts of our leadership team our partners and most importantly, our people around the world.

Who operated with incredible speed and at an unprecedented scale to deliver this growth.

Second our transformation and strategic investments are paying off.

The benefits of our shift to software and subscriptions are clear and they are helping both Cisco and our customers move with greater speed and agility.

And third the power of our portfolio. The groundbreaking innovation, we're investing in today will serve as the foundation for our customers futures.

These three factors position us exceptionally well for growth as we enter our next fiscal year as evidenced by our results this quarter.

We are more confident than ever that we are in a strong position to help our customers be successful.

As we look forward, we are laser focused on providing our customers. The technologies they will need to successfully navigate highly dynamic environments at an incredibly rapid pace.

With the rise of Covid variance and the inconsistent pace of vaccine deployment around the globe organizations must be resilient and adaptable as we've seen how quickly the world around us can change.

While this may impact certain short term plans like return to office for many one thing is clear there is tremendous demand for Cisco technology.

No matter, how or when the global recovery takes shape, we are executing on our vision of rebuilding a better world one that is digital sustainable inclusive and highly secure.

I believe we're at a pivotal moment in our company's history as we have a massive opportunity to transform what has been the traditional office and define the future of hybrid work.

As our customers look to create safer hybrid workplaces as well as collaborative and engaging experiences for their customers and employees, we believe they're becoming increasingly reliant on Cisco technologies to help them with their transformation and resiliency.

Enterprises are increasingly seeking digital and cloud enabled services, which is driving demand for our solutions and leading to new and expansive market opportunities for Cisco we were in a unique leadership position to build and deliver innovative cloud to edge infrastructure platforms that our customers need.

The depth and breadth of our hardware software silicon and optics solutions, we are helping companies solve their biggest challenges.

Whether it's adopting modern application architectures shifting to hybrid work in hybrid cloud <unk>.

Securing their enterprise are meeting their ESG goals, Cisco is helping our customers thrive in a hybrid world.

These industry dynamics helped drive our strong fourth quarter performance.

The momentum we saw in Q3 accelerated through Q4, as we delivered robust revenue growth increased earnings strong margins and record operating cash flow.

We also generated strong double digit growth in product deferred revenue, reflecting the success of our transformation around driving subscriptions and recurring revenues, which increases our visibility into future performance.

We are seeing it budgets grow as companies begin to implement their critical future plans and business confidence increases however.

However, we do recognize that uncertainty remains around COVID-19, and we are closely monitoring the delta variant and its impact on customer spending right.

Right now, we're not seeing any additional impact to our business aside from the component shortage, we've been facing over the past several months.

Moving to the performance of our customer segments as I mentioned, we delivered the highest product order growth in over a decade with growth of 31% driven by strength across all of our end markets. This.

This outstanding performance is also ups over 17% from our pre Covid Q4 levels in fiscal year 2019.

We saw double digit growth in every one of our customer segments. The strength is being driven by stronger customer investment and substantial network upgrades to help modernize and secure their environments to support the new way of working.

Specifically in our enterprise business, we had the best quarter in terms of product orders in over a decade and saw very strong order growth of 25%.

We also had our third consecutive quarter of acceleration in our commercial service provider and public sector businesses with all of these segments showing growth in excess of 20%.

And our web scale business, we saw increased momentum delivering record performance with over 160% order growth.

On a trailing four quarter basis orders grew over 80% due to customers adopting products across the portfolio and early traction of our 400 gig solutions a huge testament to the investments we have made and accelerating innovation and the differentiated value, we're bringing to these customers.

From a product portfolio perspective, we also had a very balanced performance as.

As customers prepare for office reopening and hybrid work they are increasing their investment across our networking cloud security and unified communications portfolios.

In Q4, we saw double digit revenue growth in campus switching catalyst 9000 high end routing wireless and in our zero Trust solutions, along with strength in our security endpoint portfolio. We also had very strong adoption of our Acacia optical solutions, driven by increasing customer demand for leading edge technology.

To address their growing bandwidth requirements.

The transformation of our business to more software and subscriptions continues to show tremendous progress as we achieved over $4 billion in software revenue in Q4, an increase of 7% sequentially and up 6% year over year.

Within that subscription revenue grew 9% in Q19% for the full fiscal year.

For perspective software represented 31% of our business in Q4 and for the full year when combined with our services business. They represent over 53% of revenue clearly highlighting the success of our continued business transformation.

In addition to delivering strong financial results our innovation engine continues to accelerate.

Over the last year, we introduced an impressive number of new capabilities across our entire portfolio. While also doubling down on more flexible consumption models, including our core networking capabilities as a service highlighted by the recent launch of Cisco plus.

Our new Cisco plus solutions deliver cross portfolio technologies to help solve our customers' biggest needs with faster time to value our.

Our initial network as a service offerings deliver hybrid cloud technologies and will later expand to a broader catalog of services built and delivered with our partner ecosystem.

Cisco plus improved speed agility and scale with on demand solutions that intelligently adapt to our customers' business needs.

While still early days and its launch Cisco plus directly aligns with our transformation goals around driving more subscription based recurring revenue via the cloud.

Our unique strengths and proven strategy give us the confidence to move at a more accelerated pace.

You will see us continue to invest in our key growth areas and technology shifts like hybrid cloud hybrid work five G. Wi Fi six edge security and cloud native architectures to extend our technology leadership positions.

You will also see us deliver even more strategic golfers to enable our customers to thrive in a cloud first digital world.

These include full stack observe ability to improve their digital experiences by providing visibility and insights across their entire technology stack and secure access services edge or SaaS E designed to enable seamless secure access to applications anywhere the user's work.

Given the momentum we're seeing in our business, we have more conviction than ever that we're investing in the right areas and will continue to extend our competitive advantages and drive growth.

Before I turn it over to Scott for more details on the quarter and our expectations for the next fiscal year, Let me give you an update on the supply environment.

While we are seeing increasing demand for our technology. We are also continuing to manage through the component shortage challenges. The nearly every company is experiencing.

Our world class supply chain team as always is doing an incredible job navigating this complex situation by working with our global suppliers to meet customer demand as quickly as possible.

Looking ahead, we expect the supply challenges and cost impacts to continue through at least the first half of our fiscal year and potentially into the second half.

In summary demand for our technology is very strong and our strategy is more relevant than ever this allows us to deliver greater value to our customers partners and communities as we all adapt to new ways of living and working.

I am very encouraged by the recovery trajectory across the board and with our momentum.

I am confident in our strategy and investments I feel great about the innovation, we're driving in our portfolio.

And I'm incredibly proud of what our teams and partners have achieved I'll look forward to building on these insights with a more comprehensive deep dive on our multiyear vision and strategic growth drivers at our virtual Investor day on September 15th and I hope you'll join us.

Thank you again for your time and with that I'll turn it over to Scott for additional detail.

Thanks Chuck.

Our fourth quarter reflects a strong close to our fiscal year with significant momentum across our business we.

We saw robust customer demand demonstrating the third consecutive increase in product order growth and solid execution by our teams.

I'll provide some detail on our financial results for the quarter then cover the full fiscal year, followed by our guidance.

Q4 was a very strong quarter in a very dynamic environment we.

We executed exceptionally well with greater than 30% product order growth year on year and more than 17% order growth versus our pre Covid Q4 fiscal 19 product bookings driven by strength across our portfolio.

In fact, it was the strongest product order growth rate in over a decade.

We also had strong results across revenue net income earnings per share and as Chuck said earlier record operating cash flows.

Total revenue increased to $13.1 billion up 8% year over year coming in at the high end of our guidance range for the quarter.

We saw strength in a number of product areas and across all geographies.

Our business continued to recover well and build momentum with sequential revenue growth of 3%.

Our non-GAAP operating margin was 33, 5% up 50 basis points.

Non-GAAP net income was $3.6 billion and non-GAAP earnings per share was <unk> 84 cents, both up 5% year over year and exceeding the high end of our guidance range.

Now, let me turn to provide more detail on our Q4 revenue.

Total product revenue was $9.7 billion up 10%.

Service revenue was $3.4 billion up 3%.

Infrastructure platforms performed very well with revenue was up 13%.

All businesses saw double digit growth with the exception of datacenter.

Switching had strong growth driven by double digit increase in campus switching led by our catalyst nine K and Meraki switching offerings.

We also had solid growth in our data center switching portfolio with the Nexus nine K products.

Routing grew driven by both the service provider and enterprise markets as we saw strong adoption across our portfolio, including robust uptake of our Cisco 8000 platform.

Wireless had strong growth driven by the continued ramp of our Wi Fi six products and our Meraki wireless offerings.

Data center revenue declined driven primarily by servers as we expanded experienced continued market contraction.

Applications were down 1% driven by a slight decline in our collaboration portfolio.

However, recurring subscription revenue within our Webex suite grew 9% in Q4.

We also saw solid growth in Iot software App dynamics cloud contact center, and our cloud calling platforms.

Security was up 1%, our cloud security and zero Trust portfolios performed well with greater than 20% growth as we had continued momentum in our duo and umbrella offerings.

Our security recurring subscription revenue grew 13% in Q22% for the full fiscal year.

In both applications and security we are seeing strong revenue growth in the strategic areas that we and our customers are investing in.

We continue to transform our business delivering more software offerings and driving growth in subscriptions and recurring revenue.

Software revenue was 4 billion, an increase of 6% subscriptions were 81% of total software revenue up three points year over year.

Software subscription revenue grew 9% in Q19% for the full fiscal year.

As we continue to increase our software subscriptions were driving higher levels of recurring revenue.

Additionally, the strength of our portfolio and transition to more software and services is driving growth in remaining performance obligations or our P O.

At the end of Q4, our P O crossed the 30 billion Mark at $30.9 billion up 9%.

Carpio for product was up 18% and service was up 3%.

Approximately 53% of the total RPE O is short term, meaning it will be recognized as revenue in the next 12 months.

As I mentioned, we had exceptionally strong order momentum in Q4 as total product orders were up 31% with strength across the business.

Looking at our geographies the Americas was up 34%.

<unk> was up 24% and a P. J C was up 29%.

Total emerging markets were up 25% with the Brics, plus Mexico up 37%.

And our customer segments commercial was up 41%.

Service provider was up 40% <unk>.

Enterprise returned to growth and was up 25%, while public sector was up 22%.

Non-GAAP total gross margins came in at 65, 6% up 60 basis points year over year.

Gross margin was 65% up 180 basis points and services gross margin was 67, 4% down 240 basis points, which was in line with our expectations as we do see variability from quarter to quarter.

The increase in product gross margin was driven by productivity improvements from lower freight and other costs, partially offset by relatively modest price erosion.

As we discussed last quarter, we continue to manage through the supply chain constraints seen industry wide due to component shortages we have.

Closely partnering with our key suppliers, leveraging our volume purchasing and extended supply commitments as we address the supply challenges and cost impacts, which we expect will continue at least through the first half of our fiscal year and potentially into the second half.

Our number one ranked global supply chain team continues to perform at a world class level.

When you look at the impact of acquisitions on our Q4 results year over year. There was a positive 210 basis point impact on revenue and no material impact on our non-GAAP earnings per share.

From a cash perspective operating cash flow for the quarter was a record $4.5 billion up 18% year over year, driven by strong cash collections.

We ended Q4 with total cash cash equivalents and investments of $24.5 billion up approximately $900 million sequentially.

Yeah.

In terms of capital allocation, we returned $2.4 billion to shareholders. During the quarter that was comprised of $1.6 billion for our quarterly cash dividend and $791 million of share repurchases.

We continue to invest organically and inorganically in our innovation pipeline.

During Q4, we closed five acquisitions Cana security socio labs, slide Oh, Sedona systems and involve you.

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 in our key growth areas.

Turning to the full fiscal year results overall, our financial results were solid in a very challenging global pandemic environment with strong operational execution.

Revenue was $49.8 billion up 1%.

Total non-GAAP gross margin was 66, 1% up 10 basis points and our non-GAAP operating margin was 33, 5% down 30 basis points.

From a bottom line perspective, our non-GAAP net income was flat at $13.6 billion and non-GAAP earnings per share was $3.22.

We delivered operating cash flow of $15.5 billion flat compared to fiscal 'twenty.

From a cap allocation perspective, we returned $9.1 billion in value to shareholders over the fiscal year, which represents 61% of our free cash flow.

That was comprised of $6.2 billion in quarterly cash dividends and $2.9 billion of share repurchases.

We also increased our dividend for the 10th consecutive year in fiscal 2021 reinforcing our commitment to return capital to our shareholders and our confidence in the strength and stability of our ongoing cash flows.

We remain firmly committed to maintaining a strong balance sheet to fuel, our organic and inorganic growth initiatives as well as continuing our cap allocation strategy of returning a minimum of 50% of our free cash flow to shareholders annually.

To summarize we had a great Q4, and a solid fiscal year with strong operational execution.

We're seeing returns on the investments, we're making in innovation and driving the continued shift to more software and subscriptions driving more recurring revenue delivering growth and driving shareholder value.

Now, let me provide our forward looking guidance.

Were pleased to initiate the additional practice of providing an annual outlook to complement our regular quarterly look ahead for fiscal year 2022.

Successful transformation, we've been executing around driving a higher proportion of our revenues from subscriptions recurring in deferred revenue is affording us additional visibility into our outlook for future growth.

Please note our guidance is subject to the disclaimer regarding forward looking information that Marilyn referred to earlier.

Our financial guidance for Q1 is as follows.

We expect revenue growth to be in the range of seven five to nine 5% year on year.

We anticipate the non-GAAP gross margin to be in the range of 63.5 to 64, 5%, reflecting the continuing increase in supply chain costs. We are incurring as we protect shipments to our customers.

Our non-GAAP operating margin is expected to be in the range of 31, 5% to 32, 5%.

Non-GAAP earnings per share is expected to range from 79 to 81.

Our financial guidance for the full year fiscal 'twenty two is as follows we.

We expect revenue growth to be in the range of 5% to 7% year on year.

Non-GAAP earnings per share is expected to range from $3.38 to $3.45.

Also up 5% to 7% year on year.

And both our Q1 and full year outlook, we're assuming a non-GAAP effective tax rate of 19%.

Looking ahead, we're excited to host our Cisco virtual Investor Day on Wednesday September 15th 2021, which we will webcast live and hope you can join us.

I'll turn it back to Marilyn so it can move into the Q&A.

Thanks, Scott Michelle Let's go ahead and queue up the Q&A line.

Thank you Sammy Chatterji from J P. Morgan you May go ahead.

Hi, Thanks for taking my question I guess, Chuck Scott just wanted to kind of get your thoughts on.

In terms of the timing of getting a full year guide out here I would think most all other companies would have said this is with the supply chain uncertainty. This is probably not the right time to get a full year guide out. So definitely appreciate the full year guidance and I wanted to understand what's providing that high visibility you mentioned the transformation, but also how is.

The auto how are the auto is feeding into that visibility and what are you kind of baking in in terms of supply chain in that full year guide overall, how much of a focus what are you baking in them some headwinds into that full year to date from a supply chain perspective. Thank you.

Yeah, that's a great question to make thanks for that and it really is one of the benefits of the transformation, we're making as we move to more and more of a software and services and recurring revenue base.

We have greater visibility you know one of the stats that we just talked about is our remaining performance obligations of $30.9 billion of which 53% of that will turn into revenue in the next in the next 12 months. We also have a good feel for what other renewals are going to come up and what our renewal rate is as we work our way through that so we have a.

Pretty good sense of a big chunk of our revenue and how it's going to grow. We also have a good view of our pipeline and what that looks like a head and.

One of the one of the things that I would say about that pipeline is it's one of the it's we've seen.

Year on year growth in the pipeline for Q1 better than we've ever seen in the last several years. So if we see good growth in the pipeline as well. So it's when you add all that up that's what gives us the confidence to give a full year guide.

What I, what I would say is you know the to your question about supply chain and what's your assumption on supply chain. The way to think about that is that's the difference between the high end and the low end of the guide we expect the supply chain to impact us through the first half of the year and then you know at the low end of the guide we think we continue to have supply chain and.

<unk> through most of the second half as well with some clear up at the end at.

At the high end of the guide we think that we begin to clear up the supply chain issues supply and demand comes back more into balance earlier in the second half. So that's the that's that's why we gave the full year guide I think it is certainly we have the confidence with the visibility we have and what's and what's baked into that based on some of the uncertainty that's still out there with.

The supply chain.

Okay. Thank you.

Thanks, Amit we'll take the next question please.

Meta Marshall from Morgan Stanley Investment Research you May go ahead.

Great. Thanks, maybe coupling onto that question.

How should we think about kind of the incremental 150 basis point sequential gross margin decline in the guidance and just you know how much of that is incremental supply chain impact and you know where do you expect to abate that to either price changes or supply chain improvement to improve that throughout the year.

Yeah.

Yeah. Thanks, Thanks matter for that what we you know when you look at the Q4, our gross margin obviously it came in better than what we had expected and what we had guided to and there was really favorable product mix built into that some of that being driven by a good quarter for software as you heard on the call earlier.

Looking ahead, we've taken several steps to ensure that we can continue to have supply and deliver products to our customers. They are in the midst of their own transformations, they're all in the midst of doing the things they have to do to adapt to a world. That's not only a hybrid work world, but one you know with the rise of the Delta variant that it is.

It's added complexity, it's it's not a hey, the world is going to go back to normal at some point, it's I need to continue to have this kind of flexibility ahead. We're trying to support that you know that and at the same time, there's supply and demand imbalances in some of the key components around semiconductors in memory and some of the same things you hear from others.

Others of our peers that turns into higher component costs as we buy from those suppliers.

We are also to ensure even greater supply going to brokers to get additional supply from versus what we can get directly from our suppliers and in some cases qualifying second sources, where we have to each of those obviously drives cost and it takes a while for those costs. We've been in that process through Q4, it will be in it through Q1.

It takes a while for those costs to flow through our standard costing system and show up in the cost of goods sold.

There's a little bit of unfavorable product mix headwind as well in Q1 as we have a good sense of the products that don't have those same impacts that we will be able to ship that are sitting in backlog. So that's that's what's driving that sequential change.

As you know we did put in place a price increase very selective very targeted only on the products, where we were seeing the higher component costs.

That went into effect August 7th.

But we always honor quotes that are out there for 30 days beyond that pricing because many of those quotes were produced before the price increase increase was put in so you know scrolled 30 days ahead from August 7th before the first orders come in with those higher prices and then it takes a while for those orders to come in get get built and shipped back out to <unk>.

Customers and for us to realize the benefit of that on the top line. So think of those price increases as being something that will we will feel more of the benefit of in Q2 and Q3 versus what we see in Q1.

Okay. Thanks.

Next question please.

Paul Silverstein from Cowen you May go ahead.

I appreciate it Scott pick up on the previous two questions. If I looked at your annual guidance.

It's stronger revenue, it's almost 1 billion above the consensus number Etfs is more in line slightly like did not meaningfully but the difference obviously is gross margin or opex.

Appreciate that cognex elevated at your cost structure as well as all of your peers can you give us any granular insight in terms of translating the revenue upside that you are looking at that you're expecting relative to the more modest.

EPS outlook for the year in terms of gross margin versus Opex.

Yeah, Paul It really is gross margin driven and Theyre still there continues to be uncertainty on the <unk>.

When the supply and demand gets back into balance on many of those components.

That's why you see the range that we put out there at 5% to 7% and that that ripples through to the bottom line as well I think that you know the only other comment I'd add on that front I don't want to get into parsing it down to the various elements of it.

At least at this point, but theres still uncertainty and given that uncertainty and this being the first time, we've given your annual guidance. It's prudent we were trying to be prudent with the guide we put out there as well.

Scott with respect to Opex.

Land to grow Opex more modestly than revenue youre going out you're looking at some pretty healthy revenue growth. This year will you restrained your opex growth below revenue to try to drive some leverage.

Yeah, I'll I'll start and Chuck you may want to add onto this the way that that you see the guidance laid out five years to 7% growth on the topline and 5% to 7% growth on the bottom line. We're looking at at balanced profitable growth and I think that's the way you should expect us to to run the business going forward is balanced profit.

Growth, 5% to 7% on both the top and bottom line is a pretty strong performance certainly relative to where we've been over the last few years and so again I don't want to I don't want to get into Paul I know, what you're what you're poking at I really don't want to get into parsing down the elements of that but the core principle is balanced profitable growth.

Paul can I ask you what I'm.

I'm glad Paul go ahead.

Just one last question on this is there any reason why your cost structure from a gross margin perspective, you know, we envision going back to the 20 <unk> century and getting beyond Tobey is there any reason why your gross margin structure would not go back to where it was if not better I recognize you've got mix and other factors that influence one way or the other from quarter to quarter, but.

As a general proposition should we expect the gross margin structure returned to what it was pre COVID-19.

That is our expectation Paul overtime, I mean, you know again I don't want to I don't want to predict that for this fiscal year, just given some of the uncertainties in the supply chain, but it is our expectation that it gets back there and over the longer term as we continue to build a bigger mix of software into a revenue stream that should also provide a bit of a tailwind to our margins.

I appreciate it.

Paul Michelle next question.

Aaron Rakers from Wells Fargo, you May go ahead.

Yeah. Thanks for taking the question and congrats on a good quarter I wanted to kind of ask the supply chain question, a little bit differently as you see the order momentum in the pipeline build commentary that you laid out obviously, it's quite positive how are you assessing kind of the perishability of demand are you seeing any signs where.

Customers might be double ordering or you know how how do you just think about that in a in the function of the guidance that you've laid out.

Yeah. Aaron this is Chuck. Thank you for that look we've you know we expect it to be asked about pull ahead I think there's a couple of things that I would say Ah. We obviously cant calculate that directly we've looked at several indicators our pipeline analysis channel orderings, our salesforce opportunity movement order cancellation rates future pipeline build.

And we don't see any signs of ordering well ahead of needs other than lining up with what our lead times are.

And you know we have customers at large carriers large telcos cloud players, who who have you know 12 to 18 to 24 month capacity plans and so they look at our lead times and they are going to order into that.

Based on what they have but we would not say there was a significant amount of pull ahead other than dealing with the lead times and the other thing that I would just.

Highlight is it you know Scott pointed out earlier.

After the real strong order growth we saw in Q4.

We're sitting with you know the best start from forecast pipeline perspective that we've had in several years, so that would lead us to believe that.

This is a you know a trend that we should see continued for a little while.

Great. Thank you.

Alright, Great next question please.

Thank you.

Tim long from Barclays. You May go ahead.

Thank you could you just dig into the to the software angle a little bit numbers seem pretty strong yet you know the applications and security lines trail a little bit.

On the product side. So could you just parse that through for US and then second just did want to follow up on that cloud piece that was so strong in the quarter. Chuck any other color you can give that on that it sounded pretty broad based but I'm assuming some of your peers also the sort of last question saw a little bit more advance.

More longer lead time orders or is there anything else in that in that huge cloud number. Thank you.

Yeah. Thanks, Tim So on the applications front you know we we expected are that you guys might want to ask about that and there's a couple of things to.

Keep in mind in both applications and security the order rates were certainly higher than the revenue rates. So that's the first thing I would tell you the recurring subscription portion within each of those businesses were also very positive as Scott said in security within web I mean in collaboration within applications, where the sweet the recurring.

She is with them with a suite revenue was up 9% in Q4, 16% for the year, we had solid growth in I O T F D cloud contact center cloud calling.

What's also in there if you will recall is there's phones in handsets and there's some on Prem software that's associated with collaboration and some of those were impacted by supply chain, but the the future growth areas actually for us.

Looked really good on the security front.

Cloud Security Zero Trust over 20% the security recurring subscription revenue up 13% in Q4 up 18% for the year. So that was solid as well and again our next generation firewall demand was really good but some of the legacy products and the supply chain created a little bit of a revenue headwind there.

But again orders were stronger than the revenues, we would expect those to normalize over the next few quarters.

As we get to web scale.

This is a.

I have to tell you that preparing for this call are reflected over the last five six years of having this discussion right.

And and I always said that we would start talking about web scale. When it was meaningful and I guess I can now declare it meaningful.

You know we made multiyear investments are building the Cisco 8000, with new silicon the optics and software.

And we had phenomenal growth and it was 160% order growth this quarter over almost 30% order growth a year ago in the same quarter in the the customers are really adopting.

Our entire portfolio, including the enterprise side, but over half of that business landed in their cloud infrastructure.

We also see 400 gig taking off.

And.

And really in in and mean in a meaningful way I'll give you a couple of stats on that because someone's probably going to ask it.

In Q4 of 400 gig ports, our orders were up 668% and for the year 400 gig Port orders were up 831%. We have over 400 customers that are deployed and we've taken orders for almost 180000 ports total so it's a it's it's really moving forward and I think you know those are.

The things that are and we won several franchises in the cloud web scale space. We continue to do proof of concepts. We're in we're in validation and certification stages and others. So.

You know, we always said that we missed the first transition with these players and that we wanted to be prepared for this next architectural transition and I think our teams have done a great job putting us in a good position.

Okay. Thank you very much for the color.

Thanks, Tim next question.

Thank you Rod Hall from Goldman Sachs. You May go ahead Sir.

Great. Thanks for the question.

Pork chopped a lot of work. So I had two questions for you one is regarding the order growth I'm curious about linearity there that last time, we bought three handle on that was back in 2010. When you guys were exiting the GSE, but it seems like those orders could accelerate from here and I'm curious, whether you think that.

You know a possibility or you know how probable and acceleration is from that 31% growth rate and then I I wanted to come back to this pricing commentary and.

I'm curious what the durability of these prices is what's your intention would be once these component costs. These underlying costs go down will you flex the prices right back down again.

Do you expect to sustain themselves a little bit longer just curious what you.

What's your plan on pricing would be is as these underlying cost change. Thanks.

Let me, let me start and I'll, let Scott comment on the the pricing issue as well.

You asked a couple of questions there rud on on linearity just to to give you the quarter. It started hot and ended hot right at it.

Was it was from day one to the end. So this was not like we were 5% growth until the last month and then it accelerated it was it was pretty consistent throughout the entire quarter.

You mentioned.

The ability to accelerate I, certainly wouldnt expect 31% order growth to be the new standard, but but I think that there are certainly going to be.

It just feels like our customers are dealing with there theyre coming out they're making decisions about.

Modernizing their infrastructure and their technology assets to deal with this new hybrid work and I think now what they're seeing is that with the delta variant they're understanding that this may not be a one this may not be one move back to the office right. This is going to have to they're going to have to be resilient.

You have to build adaptability in for future because we could have the next variant six months from now and I think that's what customers are thinking through.

Right now the <unk>.

Comment I'd make on pricing and then I'll, let Scott talk about the durability of the Miss.

One one thing that as we talk about gross margin in the quarter. We just finished.

The pricing element of gross margin was actually at the very low end of our normal range, which means we're holding pricing with our sales teams, which is a good sign.

Now so so once these things start flowing through if that trend continues then we would certainly see the favorable impact that we expect Scott Yeah. I think that's right I think Rob the other way that I'd ask you to think about the price increases we just announced on August 7th those are really they're not they're not motivated by driving.

Top line as much as they're motivated by offsetting some of the cost increases we're seeing now there's a lag effect right. It's going to take time before we see those prices show up actually in our revenue stream, but they're really motivated by that and so we'll continue to assess as we always do.

We need to make another price adjustment up or down we will continue to make those assessments going forward. So it's I don't think about them as being motivated though by topline by topline drivers, it's really motivated by offsetting some of the higher cost that we're seeing.

But the other thing I would just close on this one is it.

We have a price increase.

Methodology that we deploy on a regular basis for different portfolios. We just don't talk about on earnings calls every time, but we so this is a this is a muscle we have that we that we actually use on a fairly regular basis when when the conditions warrant it.

Okay, great. Thank you.

Next question please.

Thank you Sami Badri from credit Suisse. You May go ahead.

Thank you.

My first question is on your gross margins and just the cost of products and the question really is just around how much of these cost inputs and Cisco control versus how many of them are not controllable at all right. So that's kind of the first question.

And then second question is going back to some of your wins with the series 8000.

How much of these wins are completely new deployments versus you're going head to head with an incumbent we're going head to head with other competing vendors for those deployments right of our existing replacement or new deployments.

That'd be great. Thank you.

Sure Sami I'll I'll start on the cost of goods sold it's overwhelmingly driven by the component costs and the AR and the contract manufacturing cost to do the the various levels of assembly inside there.

<unk> you know something that we have the ability to flex it to flex up or down so I would think of that as being significantly driven by some of the factors that we've talked about with the imbalance of supply and demand.

And Sami on your second question it's.

It's really difficult to say, which ones are new.

Which ones do we compete with an incumbent but I will tell you. We're in we're competing with incumbents on every one of them.

Because I mean, you know even if it's a new architecture, they're building they have incumbents, who are certainly competing with US. These are all super competitive.

And you know our teams have built some great technology and so it's.

And as you know and the cloud providers, they like diversity in their supply chain. They like diversity from a supplier perspective, and Oh, one other data point are meant to give earlier when Tim asked about the cloud business that we gave on the call last time I want to make sure we share with you again web skill comprised 30% of our service providers.

But from an orders perspective for the quarter.

Got it thank you.

Thanks, Chuck next question.

Simon Leopold from Raymond James You May go ahead Sir.

Thank you very much for taking the question.

I think you've sort of alluded to 31% order growth not being sustainable.

Give us some idea of what you see is really the sustainable or more normalized level and also if you could comment on your purchase order commitments because I'd assume that the substantial commitments you've made help you lock in and secure pricing. When you made those commitments and represents I guess a way a controller.

But the headwind as we think about the full year model I want to make sure I'm understanding that correctly. Thank you.

Sure I'll start on the second part of that and then I'll, let Chuck weigh in on the on the order growth.

You know it clearly as we locked in some of that some of the work that we did on supply and particularly going after components that are particularly at an imbalance between supply and demand where we locked in both right. We looked at both the cost that would come in for that and what the committed delivery schedule was on those so we haven't we.

Have a good sense of that for a subset of our components you know, they're still going to be fluctuation in some areas memory is a good example, where there's going to continue to be fluctuation in pricing and we'll continue to monitor that you saw us you've seen us in the past make price adjustments based on memory cost increases and I would expect that to be kind of an ongoing process there.

But for the ones that we locked in which were the I think the ones that are.

They have the greatest imbalance in the in the highest demand both for us and for our competitors, we locked in both from that standpoint.

Yeah and on the on the order side I you know that's a difficult question to answer what I would what I would say is that.

So this is the first time, we've given a long range guidance or our annual guidance on both revenue and EPS, we had the investor day coming up on the 15th where we're going to talk about the key growth drivers in our business and we're also going to begin to share new metrics that'll give you a flavor of the business in a different way. So I think that that's what.

You know as we as we spend time on that day I think the drivers of growth will will be clear to you and.

<unk> bookings will only be one metric that we'll look at relative to future performance.

Thank you.

Next question please.

No John from N. K M Partners you May go ahead Sir.

Thank you very much for taking my question.

In terms of the order strength.

Do you have any way of parsing out any kind of double ordering or forward pull that always from your customers and have you adjusted for that and I have a follow up.

So far as I was saying earlier, we what we've looked at is we've we've we've compared.

You know a lot of the our pipeline pull ahead activity, we looked at our future pipeline, we've looked at order cancellation rates and we just don't see anything so based on what we know now we certainly think customers are placing orders further in advance because of lead times, which is just logical but but that's base.

<unk> you.

When you see the order growth we saw in Q4, and then you see the forecast pipeline that we see going forward. It would suggest that our you know theres still.

A fair amount of demand out there for hardware, we're staying on top of that as much as possible. So you can imagine and you know Chuck talked earlier about some of the data points. We're looking at to try to get a feel for it order cancellations would be one indication of double ordering from us and another party that's order cancellation rates have actually come down.

Honestly, our return rates are looking at the pipeline and the pipeline growth. So we're not seeing it at any material level I think the other thing the other data point, we gave us the growth of commercial so if you look at the orders.

Overall order growth commercial was up 41% and I think where you might expect to see some of what you're talking about is actually in the enterprise segment or an S. P.

We saw significant growth in commercial and I don't think you'd expect to see as much of that kind of a double ordering process happened in that that customer size.

I appreciate that Chuck if I could ask you a big picture question.

You know before COVID-19 happened I think you had mentioned that for the first time virtually every product line and Cisco that would probably be a product had been repriced to the extent how much of the <unk> that you'll see the function of <unk>.

Refresh cycle that is taking place across all your product lines, what's the total new you know a yugo.

For example, like edge cloud, which I think is gonna be a total new network architecture, that's never been deployed.

It sounds like the new phase of growth so how much of the.

The strength, you're seeing is a function of just the.

Let's see.

Kind of a new phase of growth.

But you.

What I would say is there are several.

Transformations that are occurring are transitions that are occurring across our customer base that we're just well positioned for I mean, if you think about whats whatsapp.

What's happened with five G. In Wifi six this whole move now to hybrid work the whole re architecture of infrastructure to support hybrid cloud.

This 400 gig transition that we spoke about earlier.

I mean these are all things that.

You know we have been working on our portfolio. So I think the refreshed portfolio and the new innovation that has been brought forward is just timely.

Because we're on the front end of some of these big transitions that we've been talking about for several years.

So I think that's really what's driving it.

Teams have a you know at the Investor and Analyst day on the 15th of September we're going to have our engineering leaders talking about what all they've done and what the future looks like and what the innovation pipeline looks like and.

You know I I feel really good about what what they've built but we have a we have a lot of a lot of plans for new technology and new capabilities.

I appreciate the answer thank you.

Thank you next question please.

James Suva.

Global markets you May go ahead Sir.

Thanks, very much it's Jim Suva I had one question that the long term full year outlook, our sales and EPS is greatly appreciated and I noticed that the big difference and shows a lot of conviction, but on the EPS. You know normally you also have some stock buyback going in but some companies include stock buyback.

Back in their EPS guide some don't so what I'm wondering is on your EPS Guide does it include some normal stock buyback I know this year was different when you bought them. A case you have for about four and a half billion in COVID-19 and such but I was kind of wondering about how we should think about that E. P. S. Does it include stock buyback or what are the components of that E. P. S.

Growth that match sales you know great question, Jimmy It's only assumes that we are share buybacks offset dilution. So think of that as you're doing your own modeling think of the share count to be roughly flat to where it ends this year.

Gotcha. Thank you so much for the clarification is great to hear all the details.

Okay.

Thanks, Jim next question.

Jeff <unk> from Wolfe Research you May go ahead.

Oh, thanks, very much I'm, hoping to get a little bit of a clarification to the software growth trajectory Ah yeah. It sounds like it was a great year overall, the fourth quarter close as well as you'd like and if we can.

Talk about what the trajectory you can expect for software growth in 2022 that would be splendid.

I'll start with some color and then Scott you can chime in I think look we we continue to add more software capabilities across the portfolio, we continue to transition.

We've transitioned a lot of our portfolio to subscription based even for the hardware side of the business.

Most of the acquisitions that we do come in as subscription or SaaS software businesses. So you know we we would expect to continue just as move towards becoming a greater percentage of our portfolio.

And you know and in the next.

Couple of years, we think we also will see you know some of the.

The renewal volume will start kicking in on top of it as well, but it's already the transformation has already made a big difference Scott and I were looking at last quarter. When we did guidance for Q4.

You know, having the software revenue that came off the balance sheet.

Significantly altered positively what we were able to guide from a revenue perspective in Q4 versus what we would've done five or six years ago I mean, it was meaningful.

And so we're going to continue to invest in this and this capability, we're going to continue to drive software. It's a huge important part of the business. The teams have done a great job Scott Yeah, Jeff What I'd say is it 4 billion of software revenue over the last 90 days, we were one of the biggest software companies in the World. I mean, you know annualize that or look at the trailing 12 months makes us.

Certain you know somewhere in the top 10 and software companies in the world.

Hosted 6% overall growth and 9% growth in subscriptions, even off that base I think the software business is actually doing quite well for us if the what's underneath your question is that what you saw in applications.

I'll go back to what we said earlier about what's happening in applications.

Underneath that you got to remember that includes the entire collaboration portfolio. So not just the software pieces and not just the recurring software pieces, there's hardware elements. There. There's some legacy on prim elements. There both of those were headwinds in the subscription software revenue piece of both applications and security we saw double digit growth.

We had nice growth year on year for the full year in both of those so I actually feel good about where we're headed on that.

Great and then a quick clarification do you all plan to update annual guidance every quarter for us.

We will assess it every quarter and update as needed I you know the big variable in there of course is what happens with supply chain and when do we start to see a little more balance come to supply and demand across some of our key components and I think that'll that will dictate when we've got a good view for updating.

Thank you both very much.

Thanks, Joe Thanks, Jeff and we've got time for one more question.

Thank you Ben Bolan from Cleveland Research you May go ahead Sir.

Thanks for getting me in at the end also I focused a little bit on on.

On software.

A few specific items the first.

I'm curious how you think about your average contract duration and whats youre, saying on an average invoice duration as you shift more to software any high level implications you see for cash flow over time.

The second item is.

Curious if you've seen any trends with early renewals from that early DNA customers, what what's happened at those renewals.

And then the last piece.

How do you think about longer term, making sure you're driving good utilization and consumption of the software licenses within the customer base. Thank you.

Yeah, Okay, Yeah, you managed to get in three there.

On the on the one question limit I'll talk a bit about duration first you know you see in our AR and our remaining performance obligations you see the nice growth you know 39 billion in total our P. O is a record for us what I'd say is underneath there. The short term it was about 53% of that.

They're growing somewhat balanced slightly more growth in long term debt and short term, but that's what you'd expect given that many of you know over the short term is just the next 12 months. So the first year. The long term is anything beyond that so it's not surprising to see long term grow a little bit more we're not seeing a big change in duration overall and maybe I'll go ahead and hit the last one.

And Chuck and then leave the D&A question for you as we look at the renewal rates and the actions we have to take on a renewal basis, obviously growing and becoming much more important to US ahead, and obviously renewals are dependent on adoption. So we've put in place various specific processes to understand where our customers are on usage and on a.

Adoption and you've got a if you don't drive the adoption you don't get the renewal and so we're attacking it at that level I think the team has done a nice job getting some headlights on that some early warning and getting ahead of of ensuring that we actually get the adoption we need.

Yeah, that's that's connected to the DNA renewal thing because we actually have customer service I mean, our customer success specialists that are in the field that are working with customers every day, we've got a virtual tell US you know an inside.

Inside organization also doing customer success. So the adoption piece is really important as it relates to DNA.

You know we've had sort of a handful in the first half of this year of those renewals that'll come through.

More in the second half and in fiscal 'twenty, three is where it's actually you know.

<unk> a much more meaningful number and our teams have been working on the underlying processes. The metrics the process the systems measurements and the engineering teams have been working really hard on.

Continuing to evolve the offer to ensure that there is enough innovation going forward that will we will optimize our our opportunity on the renewal side of it. So it's a bit early and I'd say you know maybe second half of next year, we can get our this fiscal year. We can give you a little more on that and then into fiscal 'twenty. Three is when it's when it's a decent size number.

Great. Thank you for the question.

Yes.

And some closing remarks.

I'll close with all entities.

Hum.

So you know I'm really proud of our team I'm really proud of the performance and we're certainly pleased with the demand that we've seen I'm Super happy with the transformation. We believe our investments are paying off our software business. The work, we're doing with the web scale in the cloud providers and across the portfolio I think our technology will help our customers deal with this.

This emerging focus on resiliency and agility and adaptability.

And then most of all I want to thank our teams for the incredible execution not only in Q4, but over the last 12 to 18 months during a very complicated time and I'd like to also just remind you and encourage you all to join US on September 15th for the Investor Day. Thank you. Thanks Chuck.

So Cisco's next quarterly earnings conference call, which will reflect our fiscal 2020 to first quarter results will be on Wednesday November 17th 2021 at 130 P. M Pacific time, 430 P. M. Eastern time, again, I'd like to remind the audience.

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 will now plan to close the call do you have any further questions feel free to contact the Cisco Investor Relations group and we thank you all very much for joining today's call.

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