Q4 2022 Cisco Systems Inc Earnings Call
Welcome to Cisco's fourth quarter and fiscal year 2022 financial results conference call at the request of Cisco Today's conference is being recorded if you have any objections. You may disconnect now I would like to introduce Marilyn Mora head of Investor Relations Ma'am you may begin.
Welcome everyone to Cisco's fourth quarter fiscal 2022 quarterly earnings conference call. This is Marilyn Mora head of Investor Relations and I'm joined by Chuck Robbins, Our chairman 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.
Some 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.
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 done 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 2023.
They are subject to the risks and uncertainties 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 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 I will now turn it over to Chuck.
Maryland, and thanks to all of you for joining us today I'm very proud to share that we had a strong into our fiscal year in the midst of an incredibly dynamic environment. In fact, we set several records with our performance. This year, let me first touch on those.
For the full year of fiscal 'twenty, two we delivered record non-GAAP EPS of $3 36 inch record product orders, which fueled our backlog to the highest level ever recorded.
Well as our second strongest year of revenue in the history of the company at $51 6 billion.
We continue to see strong customer adoption of our software and subscriptions driven by the targeted investments we've been making.
We also had record net income, which reflects our operating discipline, despite external challenges, including supply chain and inflation.
Our ongoing business transformation continues to show progress across our Kpis with annualized recurring revenue or <unk> and remaining performance obligations or RPE O boat setting record highs.
These important metrics illustrate the increasing recurring nature of our revenue streams. This combined with a record backlog provides us with enhanced visibility into our business looking forward.
While this was certainly a complex year, we executed well I want to thank our teams for their perseverance determination and unwavering commitment to our customers and our partners.
Our team's commitment to accelerated innovation has put us in a unique position of strength for fiscal 'twenty three and over the long term.
Now I want to be clear on our outlook for fiscal 'twenty three.
We expect strong performance across our portfolio driven by our continued focus on innovation and easing of supply constraints to drive solid topline growth and profitability.
While we anticipated some moderation from the unprecedented product order growth of last year demand signals remain solid.
We do expect to continue to experience higher costs in the short term driven primarily by higher component freight and logistics cost, which is reflected in our Q1 guide however.
However, as you'll see in our annual guidance, we expect this margin pressure to begin to ease as the year progresses.
Long term there are many multi year growth opportunities ahead of us that gives me confidence in our future.
There are currently more technology transitions occurring concurrently than I've seen in 20 years long.
Long term megatrends like hybrid cloud hybrid work security Iot 400 gig and beyond five G. In Wifi six as well as the move towards application Absorbability will likely provide tailwind to our growth.
With our portfolio in such a strong position to help our customers I'm quite optimistic about what's ahead.
Before we discuss the quarter in detail I want to provide some additional color on the supply situation and how we continue to build greater resiliency.
After a challenging April due to the COVID-19 related shutdowns in Shanghai, and the impact on semiconductor and power supplies overall supply constraints began to ease slightly at the back half of the fourth quarter and continuing into the start of Q1.
While the components supply headwinds remain they have begun to show early signs of easing the.
The decisions we made in the multiple actions we have taken over the past two years are helping to improve our resiliency and will help offset cost inflation.
These include adding new suppliers, leveraging alternative suppliers redesigning hundreds of products to use alternative components with similar capability and targeted price increases all of which position us for the future.
These actions along with the tremendous efforts by our supply chain team and the investments we've made in building capacity to meet growth have the potential to drive momentum into fiscal 'twenty three.
Moving to performance highlights in the quarter, we deliver we delivered revenue above the high end of our guidance range and non-GAAP EPS came in at the high end of our guidance range.
We achieved healthy operating margins and generated solid cash flow and returned nearly $4 billion to Cisco stockholders through cash dividends and share repurchases.
With annual product order growth of 14% for the fiscal year, we exited the year with record product backlog.
In addition to our RPM totaled more than $31 billion and when combined with low cancellation rates, which remain below pre pandemic levels. This sets the stage for increased visibility and strong revenue growth as we head into fiscal 'twenty three.
In terms of our product orders this quarter, we delivered the second highest orders in absolute dollars in the history of the company.
It was second only to our performance in Q4 of fiscal 'twenty, one and on a sequential basis. It was up greater than 15% with strong growth in enterprise commercial and public sector.
From an annual growth rate perspective, we clearly face some very tough comparisons from the record orders. We saw in Q4 last year, where we had over 30% growth based.
Based on that the year over year decline was not a surprise nor is it concerning.
It's important to keep in mind that in the near term the rate and pace of our revenue growth is much more a function of component availability than on our quarterly product order growth.
With RP O of over 31 billion, almost 17 billion of which will be recognized as revenue over the next 12 months and a record backlog, we have great top line visibility.
Thanks to the relentless effort of our entire organization the business remained stronger than before the pandemic.
From a demand perspective, we continue to experience solid customer activity beyond our ability to deliver as is reflected in the growth of our backlog that we saw throughout the quarter.
While our business is not immune to macro trends, we will remain disciplined in our operations, while benefiting from robust multiyear investment trends and the technology transitions I mentioned earlier.
Our innovation is helping our customers and partners navigate an increasing amount of complexity and there is a greater sense of urgency to leverage leading edge technologies to deliver on their strategic objectives.
This is leading them to consistently look to Cisco and our unique and differentiated innovation to help them advance their most pressing business priorities.
We recently held our Cisco live customer event in person for the first time in three years and had over 15000 in attendance, including thousands of our largest customers and many more participating virtually.
Our discussions with them focused on strategic projects supply assurance and the critical role Sysco can play to support their long term technology Roadmaps. They did not indicate any fundamental shift in their commitment to technology investments.
Regardless of what the coming quarters may bring we have a proven track record of being able to adjust in difficult environments, our value proposition to our customers remains as strong as ever.
And our web scale business, we continue to see momentum even as the business becomes larger as product orders were up more than 50% on a trailing four quarter basis.
We see significant opportunity ahead as these customers buildout massively scalable cloud networks and increasingly turned to Cisco to help them meet accelerating demand for cloud services.
Our leadership in Silicon optics software and systems enables us to win is hyperscale or value industry, leading performance and innovation.
We are expanding our footprint driven by data center build outs with our silicon one base Cisco 8000 routers, the fastest growing platforms in Cisco's history.
Together with optics from Acacia we have a strong foundation for 400 gig and beyond to re architect the internet with routed optical networking and.
In addition, we recently booked and shipped our first 800 gig systems to one of our web scale customers.
On the Iot front, we also now have more than 200 million connected things on our cloud platform with growth driven by connected car.
We finished fiscal 'twenty, two with product orders in excess of $1 billion and growing double digits.
We continue to make progress on our transformation to more software and subscription based recurring revenue.
A R. R of approximately 23 billion was up 8% with product or are increasing by 13%.
We had strong subscription revenue this quarter driven by our growing portfolio of recurring offers.
While our software revenue was down slightly one supply constraints improve and we begin to increase product shipments, we expect to see an improvement in software subscription and services that are attached to hardware products in our backlog.
The investments we've made in innovation are paying off as our competitive position is very strong in Q4, we introduced several new cloud delivered innovations across our portfolio to help organizations drive productivity and resiliency.
We launched <unk> cloud our platform to help our customers deploy manage and operate their data center networks from the cloud.
In addition, we introduced <unk> and Panopticon, two new cloud native API first tools for faster and better application development.
We also announced App dynamics cloud a next generation version of our observed ability platform for cloud native applications in.
In addition, we shared our strategy to help our customers connect their entire security architecture with our new platform Cisco security cloud, which will be a game changer for them as they look to secure their multi cloud environments with a single cloud delivered security platform.
This is just one part of our broader security innovation cycle build.
Building on the double digit growth we saw in security. This quarter, we are investing across our security business focusing on cloud based offerings best in class AI, driven threat detection and India in security architectures.
These innovations position us well for leadership in the security market.
In summary, we executed well on our strategy and transformation during what remains a very dynamic time.
This led to a strong close to our fiscal year setting several records across our business. Thanks to the solid execution from our teams our market, leading innovation and our continued growth of recurring revenue.
We also took decisive actions to help offset inflation and build resiliency in our supply chain, while investing in our business to position us well for long term growth the.
The power of our technology continues to be a critical driver of economic growth and productivity our results and outlook demonstrate the critical role that Cisco plays as a leader in bringing innovative technology solutions to customers today and into the future.
As we move into fiscal 'twenty three.
We remain guided by our purpose led culture and deeply committed to delivering value for our customers partners and investors as well as continuing to be an amazing place to work for our employees I will now turn it over to Scott.
Thanks, Chuck I'll first provide some detail on our financial results for the quarter Didnt cover the full fiscal year, followed by our guidance.
Our overall Q4 results reflect strong execution in an environment with continuing supply constraints and as Chuck mentioned increased costs reflected in our gross margins.
We were very pleased that our shipment levels were above our expectations and that total revenue of $13 1 billion exceeded the high end of our guidance range as we saw improvement in supply as a direct result of the numerous actions we've taken over multiple quarters.
Our non-GAAP operating margin was 32, 4% down 110 basis points and in line with our guidance.
non-GAAP net income was $3 4 billion down 3% and non-GAAP earnings per share was <unk> 83.
Coming in at the high end of our guidance range.
Looking at our Q4 revenue in more detail total product revenue was $9 7 billion service revenue was $3 4 billion, both flat year over year.
Within product revenue secure agile networks was down 1% switching.
Switching declined in both data center and campus driven by supply constraints.
We saw growth in our catalyst 9000, Nexus 9000, and Meraki switching offerings.
Enterprise routing declined primarily driven by edge edge in SD Wan offset by strength in access.
Wireless had strong growth driven primarily by our Meraki wireless offerings. We also had double digit growth in servers.
Internet for the future was down 10% with strength in web scale revenue offset by declines in cable edge in optical.
Collaboration was up 2% driven by growth in collaboration devices, partially offset by declines in our meetings and calling offerings.
And then security had record revenue with strong growth of 20% driven by strength across the entire portfolio.
Our zero Trust portfolio continues to perform well driven by strong performance in our dual offering.
Optimized application experiences had solid growth of 8% driven by double digit growth in our SaaS based offering thousand eyes.
We continue to make progress on our transformation metrics as we shift our business to more software and subscriptions.
We saw strong performance in our IRR of $22 9 billion, an increase of 8% with product IRR growth of 13% driven by several large software transactions closing during the quarter.
Total software revenue was $3 9 billion, a decrease of 2% with software subscription revenue up 1%.
Bear in mind, we continue to have well over $2 billion of software orders and our product backlog.
83% of the software revenue was subscription based which is up two percentage points year over year.
Total subscription revenue was $5 8 billion an increase of 2%.
Total subscription revenue represented 44% of Cisco's total revenue.
And <unk> was 31 5 billion up 2%.
Product <unk> increased 6% service Rps decreased 1% and our total short term RPI grew 4% to $16 9 billion.
Total product orders in Q4 were the second highest in our history.
While product orders were down 6% for the quarter, it's important to keep in mind that compare against 31% growth a year ago, which was the highest product orders in our history.
On a sequential basis product order growth was up over 15%.
With double digit growth in enterprise commercial and public sector.
Looking at our geographic segments year over year, the Americas was down 9% EMEA down, 4% and a P. J C up 1%.
And our customer markets enterprise was down 15% public sector was down 3% service provider was down 7% and commercial was up 1%.
From a non-GAAP perspective total gross margin came in at 63, 3% down 230 basis points year on year.
Product gross margin was 61, 3% down 370 basis points and service gross margin was 69% up 160 basis points.
And our product gross margin higher component and commodity costs as well as higher freight and logistics related to supply constraints were the predominant drivers of lower than expected margins. We saw increased benefits from the pricing actions, we have taken as well as from mix.
Once again, we had a significant increase in our backlog levels for both hardware and software well beyond our normal historical levels.
As Chuck said, our ending product backlog was a record for the year.
And just a reminder, backlog is not included as part of the $31 5 billion in remaining performance obligations.
It's important to note that the combined total of our backlog and RP O gives us great visibility into our fiscal 'twenty three topline growth.
We ended Q4 with total cash cash equivalents and investments of $19 3 billion op.
Operating cash flow for the quarter was $3 7 billion down 18% year over year, primarily driven by advanced payments and inventory purchases to secure future supply.
And capital allocation, we returned 4 billion to shareholders. During the quarter was comprised of $2 4 billion of share repurchases and $1 6 billion for our quarterly cash dividend.
Turning to the full fiscal year results overall, our financial results were solid in a year, where we faced significant supply constraints rising component and related costs and the war in Ukraine.
Our financial performance was highlighted by strong demand with product order growth of 14%, including two quarters of truly impressive 33% growth.
So our performance was clearly impacted by the supply constraints.
Revenue was $51 6 billion up 3%, while non-GAAP earnings per share were up 4% at $3 36.
In terms of our software metrics total software revenue was flat at $15 1 billion with the product portion of up 2%.
81% of software revenue was subscription based which is up two percentage points year on year.
Total subscription revenue was $22 4 billion, an increase of 2% total subscription revenue represented 43% of Cisco's total revenue.
Total non-GAAP gross margin was 64, 6% down 150 basis points and our non-GAAP operating margin was 33, 6% up 10 basis points.
On the bottom line non-GAAP net income was $14 1 billion up 3%.
We delivered operating cash flow of $13 2 billion down 14% compared to fiscal 'twenty, one driven primarily by advanced payments for inventory purchases to secure component supply.
While these payments had a negative impact on full year operating cash flow. These and our other related actions helped to improve the supply situation in Q4 and future quarters.
From a capital allocation perspective, we returned approximately $14 billion in value to our shareholders via cash dividends and stock repurchases, representing 109% of our free cash flow.
This was comprised of $7 7 billion of share repurchases and $6 2 billion in quarterly cash dividends.
We also increased our dividend for the 11th consecutive year in fiscal 'twenty, two reinforcing our commitment to returning excess capital to our shareholders and our confidence in the strength and stability of our ongoing cash flows.
Our strong balance sheet and overall financial position is clearly a competitive advantage in tough environments.
To summarize we executed well in Q4 and had a solid fiscal year and a highly complex environment, while continuing to make progress on our business model shift and making strategic investments in innovation to capitalize on our significant growth opportunities and expanding addressable markets.
The demand for our products and services is strong as we drive innovation through continued investment and the shift to more recurring revenue delivering growth and driving shareholder value.
Turning to our financial guidance for Q1, we expect revenue growth to be in the range of 2% to 4%.
We anticipate non-GAAP gross margin to be in the range of 63% to 64%.
Our non-GAAP operating margin is expected to be in the range of 31, 5% to 32, 5% and.
And non-GAAP earnings per share is expected to range from 82 to 84.
For fiscal 'twenty three our guidance is as follows we expect revenue growth to be in the range of 4% to 6% year on year.
non-GAAP earnings per share guidance is expected to range from $3 49 to.
$3 56, also up 4% to 6% year on year.
And both our Q1 and full year guidance, we're assuming a non-GAAP effective tax rate of 19%.
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.
Mr Q&A.
Thank you Sami Badri with credit Suisse. You May go ahead.
Hi, Thank you.
I actually had two questions first thing is for fiscal year 'twenty three your revenue growth expectations came in a bit stronger than most street expectations.
And maybe you can just walk us through the composition of the segments and what's driving the strength and maybe which segments may potentially lag some of the stronger segments and then my other question is maybe you could just give us some color on the composition of gross margin regarding pricing and productivity in fiscal <unk> of 22 that would be helpful.
Yeah. Thanks Sami.
Look at the the.
The forecast that we've given you for fiscal 'twenty, three balanced growth again, 4% to 6% growth on the top line, 4% to 6% growth on the bottom line.
Can you start to Peel it back of course, we don't guide at that level, what we have seen as you'd expect.
As again nice demand as Chuck talked about on the call through the end of the fourth quarter, but a little bit different by industry vertical.
Retail not surprisingly under a little bit of pressure.
In the fiscal 'twenty three.
On the gross margin question, we are getting a benefit from price one of the things that we've talked about though is there's a lag.
From between the price increases that we've put in place and what we see actually showing up in reported revenues and I know you know this from prior quarters. Sammy we saw some of that benefit in Q4 and you'll see this in our in.
In our filings and our 10-Q, our 10-K filing for the end of the quarter. Its about a percent up year on year of gross margin driven by price and then of course, the offset coming from higher cost both component costs and freight and logistics.
Got it thank you.
Next question please.
Tim long with Barclays. You May go ahead.
Thank you.
Wanted to ask on maybe two quick ones one on the software business Chuck can you talk about.
About you know kind of flattish performance, but still haven't carrying a lot of backlog there that's been.
The case for a few quarters here. So maybe you can just talk a little bit about you know what do you think it's going to get taken to get to to get this business moving a little bit more aggressively towards that software model.
Then I did want to follow up on the cloud vertical.
Still running.
Really strong orders there can you talk a little bit about you know.
The breadth of portfolio shipping into that growing into the 8-K is strong but any other highlights of strength there that would be great. Thank you.
Thanks, Tim.
So let's start with the software and you're right at the software is flattish are theirs.
There's two things that I would point out we have a we obviously have been transitioning from perpetual software model.
Is.
In decline and that's by design, we wanted decline our perpetual software and increase our as our subscription software and the way I would think about it is our perpetual was down roughly 14% during the quarter.
And we also as Scott said have over $2 billion and it's it's it's actually a higher number exiting Q4 than it was in Q3.
Of software in backlog as you said connected to hardware. So those are two contributing factors, which is why we were we really should be thinking about the IRR situation.
Because that's reflective of.
The C V that we basically had exiting the quarter and it's so that's that's an indicator of future software revenue. So we're comfortable with it and I think once we get through some of the supply chain stuff that will start to see that.
More reflective of what we've been planning on.
On the cloud vertical we continue to win new insertions.
That business is approaching.
3 billion annually now after just two or three short years ago. It was it was pretty close to.
<unk>.
Yeah, nothing and so the teams have done a fantastic job.
It is obviously over the last four quarters has grown 50% from a revenue perspective, it's very supply chain dependent so I wouldn't get too wrapped up about the revenue versus the orders right now I think we'll work our way through that over the next you know four to five quarters, but overall really pleased with where we are.
Okay. Thank you.
Thanks, Tim next question please.
Rod Hall with Goldman Sachs. You May go ahead Sir.
Yeah, Hey, guys. Thanks for the question I guess I wanted to dig into this the order growth a little bit obviously very strong numbers there.
But somewhat inconsistent with the way you know that we would have expected them to come out.
Just wanted to end the thing that's been consistent as you guys are saying.
Over 15% in the quarter, but then down six on a year over year basis, we would have calculated closer to flat like minus one. So we're just curious whether there was any restatement of the July quarter last year, you guys had called out 31% order growth there or anything else going on with the dynamics of these orders that might help it.
To understand that that.
That discrepancy at least in our numbers and I've got a follow up.
Yeah, Rod I saw some folks who thought we would be down 15%. So I think it's just different ways of modeling.
When when we.
We were thinking about this question and we obviously know that 31% and then in Q1 were comparing against 33%. We were trying to find other ways to look at the business to indicate.
The reality of the demand signals so let.
Let me just give you a few of those characteristics.
First of all from a product order perspective, as I said it was the second highest in history, which would be only eclipsed by Q4 a year ago.
And it grew 15% and on a sequential basis, that's actually in range with our historical if you'd go back to if you. If you take out last year, which was an abnormal sequential then it's very much in line. It's in the range of what we've seen for the last 10 years the <unk>.
15%, you had enterprise public sector and commercial all growing in solid double digits on a sequential basis and again growing sequentially off our largest third quarter product bookings ever.
We also have continued growth in the pipeline as we exited Q4.
We saw very good growth in pipeline, which is a good indicator of going forward and the final thing I would tell you is that if you if you.
The way our sales teams forecasted the quarter at the beginning of month three they revised their forecast for the quarter and they finished stronger than they thought they would and we had strength as we exited the quarter and so linearity was solid.
And so we just haven't seen anything that would indicate.
A significant shift in the demand signals from our customers.
Yeah, Rob So there was no to be clear on your question. There was no change in the way we report year on year. It's exactly the same the only other thing that I would add to the comments that Chuck just made linearity in the quarter was was quite strong in fact.
The last week of the quarter was actually the same size as it had been in the prior year in the month to month linearity was exactly in line with last year and with prior year's expectations. So we saw strength right through the end of Q4.
Got you, Okay, and just as a follow up can I ask you guys on the inventory I know inventories moved up quite a bit again or do you think inventory starts to come down next quarter or just curious kind of where we are in that ebb and flow of inventory given the supply shortages and so on.
Yeah, what what's sitting in inventory rod as the rest of the parts that arent under constraint so that as the ones that are constrained free up of course, we can square the sets and get the product shipped out the door to our customers.
It is growing.
It's up about 1 billion year on year is sitting at $2 5 billion. Our advance payments are up as well both of those are a bit of a headwind to cash flows as you saw.
But yeah, it's much more a statement of making sure. We've got everything we need so that as those constrained parts clear up which we saw a little bit of that towards the end of Q4, we can square the sites and get it out the door and in the hands of our customers.
Okay, Great I appreciate it guys. Thank you.
Right next question. Please thank.
Thank you Amit <unk> from Evercore you May go ahead [laughter].
Thanks for taking my questions I have two as well.
Yeah.
Listen I have is just on gross margins on maybe how to think about the EPS guide of 46% from fiscal 'twenty three.
How do you think about gross margins in that backdrop, and then our buybacks embedded in that guide as well.
Yeah. So there's no added buyback in there you know we've talked about our.
Cap allocation policy or our share buybacks have both a systemic component to it that's just offsetting the shares that we issued through our equity plans and an opportunistic component.
The what's our expectation on gross margin through the year of course, we don't guide that for the full year, Amit, but what I'd say is my expectation is as we go through the year and we can work through the backlog will.
We will begin to ship out of that backlog more and more orders that actually reflect the price increases that we put in place last year and as we do of course that'll be a tailwind to margins throughout the year. So I would see margins going up as much as 50 basis points between our first quarter guide and where we end the year.
And then if I could just follow up.
The amount of fear that higher interest rates will not impact enterprise spending across the board.
<unk> guide doesn't seem to suggest you've seen any signs of that but I'd love to get your perspective, what are your customers that the macro environment is changing and really related to that are you seeing any shift in how they procure what they want to buy from you the macro Marvin cadence.
Yeah, It's a good question and we.
We are.
What I would say is that we were not immune to any significant change in the macro that would that result in enterprise spending shifting my comments are just that we haven't seen a materials demand signal change.
As we've entered into Q1.
So that's where we are I think on last call I believe I talked a lot about how I believe that post pandemic.
The view of technology bike.
Our customers.
Much different than it would've been 789 years ago there.
I think if if U S.
I ask our customers if they would pause spending during a crisis they would probably respond when when is they're not going to be a crisis given what we've dealt with the last three years and so in general we don't hear a lot of difference relative to your question around are.
Have we seen any different buying behavior or what are they trying to buy from us in some cases customers are looking for a little shorter rois. So that affects how they think about what products they're buying in.
In these kinds of times in some cases customers are looking ahead to lead times to fiscal 'twenty three budgets.
Trying to better understand what their budgets are going to look like because the shipments and the payments would be in the 'twenty three time frame, but other than that we're not seeing anything significantly different.
Perfect. Thank you and congrats on the nice thing.
Thanks, <unk>. Thanks for that next question.
Thank you meta Marshall with Morgan Stanley Investment Research you May go ahead.
Great. Thanks, a couple of questions for me, maybe just on kind of increasing supply availability I just wanted to get a sense of how much of that do you feel like is just some of them is lagging edge components are starting to become more available on how much of that as a result of kind of redesigns that you've done over the course.
The year that are just kind of giving you more optionality.
And then maybe just a second question for you Chuck just as we've seen.
<unk> correction on a lot of kind of the software space like how does that change your view of the strategic activity. Thanks.
Thanks made up.
So on the first one I'd say that it's a combination of both of those are we as we said earlier, we saw increased volumes in the broker network during the quarter, which candidly was was an opportunity. We took advantage of which is why you saw the higher top line, we were able to get more products shipped to our core.
<unk>, which we obviously, we're very happy about but we had to pay more for those components and we think that'll continue probably over the next 60 to 90 days.
And then we think.
Some of those some of those purchases will begin to become available from the same suppliers that have have have put the excess inventory into the marketplace.
At the same time, we have and I think I said this on our last call. We've had hundreds of product designs redesigns going on.
And two of our high volume products that also have a good margins will begin to ship in the redesign space sort of towards the latter end of Q1, and then into the balance of the year, which we think will be helpful. As well. So it's a combination of both of those things.
And and that's what gives us a little bit of optimism that things will continue to improve during the year.
On the second question on the valuations up I've had this one a few times.
I've been asked if our M&A strategy has changed because of the valuations and I've said that our strategy hasnt changed but the openness to talk to us from some of the.
The companies that thought they had different strategic exits might've changed and so we haven't changed our our strategy, we just think that it potentially.
It creates more opportunity for us with companies that might not have been willing because they thought there was a high flying IPO ahead of them that they may not believe is the case right now.
And the market is obviously, taking a much different view on profitability versus just growth.
Perfect. Thank you.
Thanks, Chuck next question please.
Tally Army with Banc of America Securities You May go ahead.
Hi, guys.
I'm trying to distinguish between the growth next year, which is probably a function of better supplies and backhaul very high backlog in between the spending environment and you started touching on it when when we asked about the enterprise. So let me maybe expand the question about the environment.
When you when you go through your various what you call it used to be called theaters and you'll go through cloud and service providers and enterprise et cetera.
You just take us through your expectations for the spending environments and maybe how long. It takes you know to close deals versus before when you look into the next few quarters I'm trying to understand if the environment as you see today, whether it deteriorates or not at all.
All our way, which are the areas, where we see slow down or not.
And I have a second question just if you can touch on security security was good again was good actually much better and there is improvement throughout the quarters. If you can touch on your position in security.
Great. Thanks, Tal so.
If we.
Yeah.
I think Scott has touched on it the revenue for fiscal year 'twenty three is much more a byproduct of component availability than it necessarily is connected to demand, but I will tell you that our current models.
Would have us exiting fiscal 'twenty three with roughly the same backlog as we're entering FY 'twenty three.
And so.
And then as you look at the different segments that you've described we had small business growth in Q4, I think it was up double digits.
On a global basis, which is which is a good sign that that's continuing to grow and then when we dissect. It you know commercial grew 39% a year ago. So.
Sequentially in double digits.
Apprise was up.
In the mid twenties last year, so sequentially growing in high double digits. It those are good signs for us and then the pipeline growth that we've seen as we exited the quarter.
It says that there's there's still a lot out there.
And so right.
Right now where we're modeling for you know just to.
Things to continue as we see them.
And and taken into consideration.
You know as you as you asked me to go around the regions I think.
Asia and Europe , we had conversations with our team this week and they seem to they continue to be reasonably optimistic as we are in the Americas and so it was pretty consistent story Scott Yeah, Paul the only thing I'd add is as you look at that 4% to 6% growth.
That we've forecasted now for fiscal 'twenty three.
It is absolutely supply constrained so while the supply situation. We saw late in our fourth quarter that we just closed you know there was some easing using doesn't mean, it's over we're going to have supply constraints throughout fiscal 'twenty, three and just a few areas.
Were it not for those we would be growing much more quickly. It's not a case of demand we're not demand constrained we were supply constrained in fiscal 'twenty three.
And when it comes to your answer about service providers and cloud same as the answer for the enterprise.
Meaning you don't expect much of a change as of now in the environment.
No. We don't we don't see anything what I would tell you about the service provider business is that because of the long lead times. We started a process of doing long term planning with them that I've talked about before.
And so we actually have deferred bookings that don't show up anywhere right now approaching half a billion dollars.
That because they are outside of our standard shipment window when they would like to get those so we we've got orders out quarter.
Quarters from now from them that are old noncancelable because of the contracts that we've done so well.
We are we feel good about that momentum, we think that those customers will continue to spend and all of the the trends that we've talked about.
And and given that we just shipped our first 800 gig system.
Two one of the web scale players, we can continue to see them take advantage of these higher speed platforms.
Great. Thank you.
You also asked about security.
They did so.
So we saw I think Scott mentioned this in his we had we had some really good growth and some backlog movement to be honest on the firewall side. So we had a we had a really solid quarter on shipments from a firewall perspective, but we also had strength in our endpoint business, we had strengthened our zero trust business.
And we're continuing to that is the number one investment area for the company this year.
And it is we're continuing to drive I think greater innovation, there and evolve that that portfolio as we've describe strategically. So I think we'll just continue to see improvement, but this quarter did get a boost from us clearance in backlog in the firewall space.
Thanks.
Thanks, Tal next question.
Sounds like <unk> with Jpmorgan you May go ahead.
Oh, Hey, thanks for taking my questions and congrats on the good execution. This quarter I guess I wanted to dive into the order number was a bit Hewitt and historically, you've talked about sort of SMB bushing being a bit more of a leading indicator into enterprise grade.
And look when you look at the order trends right now it does seem like you're seeing setup, but more of a.
So volatility around the enterprise.
Are those related to the commercial segment and so wanted to see if there's.
And that you can help us in terms of thinking about sort.
The trends, we have seen bad and just a second one that is sort of collaboration and it seems like a very tough backdrop who've done it on collaboration or the other.
And so how should we think about sustainability of the good old tape of collaboration.
Yeah. So thank you all are all I'll comment on is the small the small business was again strong as I spoke about just a moment ago I think it's really important when you have these abnormal year over year comparisons for us to find other ways to assess the strength, which is why we looked at the sequential.
Both and sequentially. They were both up in double digits, both commercial and enterprise, which which are against very large quarter a quarter ago.
And so we're comfortable right now that they're moving in as they should be.
Candidly for commercial to grow at all.
After the extreme growth that we had a year ago was actually quite positive. So I actually view that favorably given the strength that they showed a year ago. It was it was probably the highest growth rate, we've had in forever and that space or at least in the last 10 years.
So so overall I think we don't we don't see any sort of significant demand shift as I said earlier on the collab front, it's a little bit like the security message that I gave a few minutes ago, we had a we.
We did clear a lot of device business in the backlog. So the growth is as Scott said in his opening comments was was driven largely by the.
By the device business and offset by some declines we had in meetings and calling but I will say that.
The teams are working really hard on the meetings and calling side those have been strong.
Oh, the Cogs side, it's been strong for us in the past few quarters.
The product portfolio is in really good shape are the net promoter score for our meetings platform is now 64 and that was a million customer responses. So it's a huge.
It's a hugely improved experience and this this year. The teams are really focused on trying to get that back to growth, but we've got a lot of work to do.
Okay. Thank you thanks for taking my questions.
Next question please.
<unk> Kidron from Oppenheimer you May go ahead.
Thanks, a couple for me maybe a first one just supply chain.
I just want to make sure I understand your expectations for vault component availability and maybe you could talk about price changes of components. It doesn't sound like you're assuming any changes in pricing is that correct.
And if there will be a change in pricing what are the odds that you're actually ticked down the prices of your products.
Yeah that the.
I'll start Chuck and Gail you want to you want to jump in.
Let's do that from.
From a component availability standpoint.
Ben the most fluid area of our forecast over the last several quarters and as we look ahead we.
We did see signs of stability during Q4 and as I said you know in the late in Q4 that we just closed we actually saw some improvement in the way that improvement showed up was availability of some of the constrained parts that we have been chasing in the broker network and it obviously when you buy from the broker network you pay a premium for those and you'll see that reflected in that.
And the gross margins I think there'll still be some of that in Q1, you see that reflected in our gross margin guide in Q1, and then it gets better as the year goes on not because I'm not assuming any price declines or any cost declines coming from our suppliers I think the I don't see them lining up to come back and say Hey, good news.
You know Scott and chunk, we're going to charge you less for the component parts.
There may be some benefit in freight and logistics, we will see you know as commercial air lift comes back online.
The benefits will get will be much more from shipping more out of our backlog that are orders that were received after we did the price increases last year.
So as I think about your fiscal year fiscal 'twenty three guidance.
What is the underlying assumption regarding volume component availability exiting fiscal 'twenty three how much better are you expecting it to be in your guidance what's embedded there.
Yeah again, our guidance assumes that we continue to be supply constrained.
For the year as I said, if we could get more supply we would be growing more quickly in fiscal 'twenty. Three so we'll continue to be supply constrained our modeling shows that our backlog as we exit fiscal 'twenty three Chuck touched on this earlier.
We think that the dollar value obviously, it's not the same orders, but the dollar value is roughly unchanged from the dollar value we roll into fiscal 'twenty three with <unk>.
I think we will continue to face component availability headwinds throughout the year.
Would you expect your order.
Growth in fiscal 'twenty, three two exceeds your 4% to 6% top line guidance.
Yeah, we don't forecast order growth as you know attack.
So that's not one that I want to jump into at this point I think that the.
The key takeaway would be we're not demand constrained we're supply constrained as you look at breaking 23.
Thank you Zee Pac things you're doing.
Next question.
Paul Silverstein with Cowen you May go ahead.
Thank you I I know my questions have been touched on in previous comments and responses chalk.
But I wanted to ask you anyway in the Big picture questions one on revenue one.
On margins the first one.
From your comments and the comments from your peers about networking looks like networking demand is in the best shape. It's been in since the bubble in the late nineties and that of course was a bubble.
But it's the supply constraints, it's making it hard to discern what's going on from a competitive landscape standpoint.
And I'm sure you guys are aware I know, it's come up in previous calls, but there's a sense I think created by your competitors rightly or wrongly, but I want to let you respond to that.
Campus Enterprise in particular, which is still core to what you all do.
That you've got competitive pressures.
Any thoughts you can share on what you're seeing in your campus enterprise business, both on the wireline switching and wireless Lan side.
You clearly talked about strength from an order perspective, but I want to let you respond and then I've got a question on margins.
Okay.
First of all I think you know market share is a very difficult thing to assess right now to your point because.
Of everything is sitting in the backlog.
I do believe that Q4 was the second largest cat nine K shipment quarter in the history of the product so that would indicate that it's strong.
And I think as we continue to clear our backlog or are worked through it not clear it but as we work through our backlog.
You'll you'll see some share come out, but I would encourage you to look at market share over a a trending quarter timeframe as opposed to a point in time, because you just never know.
We've got we've got some products that we have been redesigning that we have backlog that will begin to ship in mass that will that will actually flip market share numbers pretty significantly in my competitor is gonna be telling you exactly what I'm, telling you right now.
So it's a it's something that you just got to watch over time.
And so I'm I'm not I mean.
Clearly we have competition in the campus. We have we have very strong competition, we always have.
But given the volume of the products that we're shipping right now I.
I don't I don't feel like we're losing significant share.
Okay and.
Also from good picture perspective.
Once upon a time you.
Networking in general and Cisco in particular was the Canary in the coal mine. When there was a macro downturn you guys were the first to see it networking was the easiest thing to piss off everyone. Let their networks hotter weather enterprise carriers et cetera.
That seems to have flipped where networking is actually not seeing weakness that other technology product markets has seen.
Just want to make sure that I've got that concert right and the real question, though on the margin side, you all were at record or near record.
Gross and operating margin levels going into the pandemic before input cost IC assemblies freight which is the central spikes.
Your thoughts on where you can do with a long term model can get back to one supply chain normalizes I assume that freedom logistics mix. Some pricing will go back to pre pandemic levels will help you and others out.
Assume that the increase in semi IC and input costs are not going back to where they were you'll be able to offset some but probably not all of that with your price increases let me leave you with.
Yeah. So let me take the let me take the networking resilient the resilience of the networking market first and then Scott you can take the margin question.
So Paul the I think you're right and and I've said this repeatedly I think what what's driven this is there are two things number one the pandemic.
Revealed.
The.
The the impact of not keeping your core infrastructure technology up to speed customers struggled.
And I think it made them realize that they had a lot of tech debt that needed to be dealt with.
And they don't want to get that positioning and so that's the first thing, but the second thing is all of these mega trends that I mentioned in my opening comments I mean these customers are re architect their entire infrastructure for the first time in years to deal with hybrid cloud and to deal with you know all of the mobile workers, we see Iot exploding you see all of the climate activity is going to be.
Tailwind to our business because you have to connect all these industrial systems to be able to control them, you've got the shift to 400 gig.
Let me just give I'll give you a data point 400 gig ports were up almost 700% year over year for US. We've got over 1000 customers now that are bought 400 gig and we shipped our first 800 gig. So it's a it just can all these trends continue you got five G. You got Wi Fi six you've got this application observe ability to re architecture of application. So.
It's a combination of the realization of the pandemic brought on around technology that and never letting.
Them get to that point and then these mega trends that are going on as Scott you want to take the gross margin question. Yeah, I think Paul on the gross margin question I think you nailed the trends I.
I don't expect input costs, particularly around semi has to.
To come down I look forward to the day that I come to the office and there is a a message from our semiconductor suppliers, saying hey, good news your prices are going down I, just don't see that happening price will offset part of it I think you've got that part right to I think the other the only thing I would add that probably in your thinking but you didnt say it so I will over the longer term as we.
Mix more software and that will be a tailwind at the gross margin line.
I'll just add.
Add that to your thinking and I think you've got it nailed.
Scott can you get back to that record level.
I don't want to get into forecasting the longer term at that level of granularity right now Paul.
I appreciate it thanks guys.
Thanks, Bob next question.
And balloon with Cleveland Research you May go ahead.
Good afternoon, everyone. Thanks for taking the question.
First one you talked about a.
Backlog expected to sustain.
Current levels exiting fiscal 'twenty three.
I think you said software backlog with north of 2 billion again in the quarter, but what was the product backlog where did that finished the quarter.
Yeah, we didn't give that stat and that's not one that I want to I want to start giving every quarter Ben what we did say qualitatively is it grew again and what I'll tell you as it was up actually up triple digits again on a year on year basis. The overall backlog software backlog is it is a pretty significant headwind to our software growth.
It's well north of the $2 billion that we talked about.
Okay.
And then one other item.
I'm not asking for a forecast on our P. O I guess, that's a precursor to sort of asking for one but when you think about <unk> in that.
Concept of the broader you know, 4% to 6% Rev Guide for the year.
Is the assumption as you ship more to software that are P. O shed consistently outperformed your topline growth how do you think about the relationship with those two metrics longer term.
Yeah, there's a couple of dynamics going on in RP O. So I'd say in general you're right. Obviously duration has an effect on our P O as well.
But it varies a bit by product line. So for the quarter. We just we just announced the 6% product RPM growth.
Had double digit product RPM growth and secure agile networks and optimized app experiences.
And then security almost forgot.
We had high single digit growth in Internet for the future I'd say that the headwind there of course as collab from an RP O standpoint, so longer term I think you'd expect those dynamics to continue and as we turn around the go to market and the sales side of collab that.
That will flip from being a headwind to more of a tailwind on product our PEO growth.
Thanks Scott.
Hmm.
Okay, we have time for one more question.
Simon Leopold from Raymond James You May go ahead Sir.
Thanks for taking the question I've got one sort of short term and one longer term on the short term side.
We heard some anecdotes its multi product projects have been split up because of the supply chain constraints and I don't want to get a sense of whether or not that's something that's happening as a way for you to work around some of the bottlenecks and to get some product projects out the door that might not have an <unk>.
How that might factor into the numbers and in terms of the longer term.
Todd Nightingale had had made a comment in a meeting about Cisco no longer managing to the Org chart and I wanted to see if maybe Chuck you can elaborate on what the implications are by that particular statement. Thank you.
So Simon if I could ask you to clarify for me on this on the short term question I didn't quite understand you're saying that we're breaking up orders or were asking customers to bring our customers are making that decision or what exactly was the question.
Yes, I'm not 100% sure, but I think its customers asking to break apart some larger projects, where they're buying a multitude of components from Cisco and century, saying, let's not wait for the components you can't get shipped me what you can I'll get the other stuff elsewhere.
I've heard these anecdotes and I'm trying to understand how tough.
It is.
Yeah, I I have I have not heard any discussion on that particular topic, but it wouldnt surprise me I mean, if I was a customer or not and if I had a project that I could actually drew.
Drive some constructive ROI by doing part of it then I would split it up to try to get the part that I could get for sure I'll tell you. What we are seeing we are we have customers are being really good with us about telling us what they desperately need and what their okay waiting for they've been really great about saying look I'm not going to I'm not going to come tell you. The sky is falling until you I need everything in backlog.
Tomorrow, but here's what I really need here's what I need. This time here is what I need this time and so we've been working through that a lot with customers and that may be a variation of what you've heard.
So that's the only thing that I could I can think of on the on the Tod comment on the on the on the Org chart I think to come and as we we don't want we don't want to ship our Org chart.
And we talked at Cisco live about a huge number of cross business unit.
Our <unk> technology.
Combinations that we were delivering.
Give you a couple of examples but this is what he's talking about like.
Our secure connect plus.
<unk> that we started shipping includes you know SD Wan technology from the enterprise networking team in and cloud security from the security team brought together in a in a managed.
As a service offer for customers.
There's integration going on between App dynamics and thousand eyes that actually will be bidirectional intelligence that will flow between those two you've got that dynamic is doing the same thing with telos and and other aspects of the security portfolio for that exact.
Reason you've got.
Before Jonathan took on all of the portfolio that Todd had in his own there was a lot of work Todd was doing with jonathan's team around private five G and how do we build private <unk> services through a combination of those so that's that's what Todd is talking about and I think the teams have done a good job of really leading with what the customer needs and not building from the way.
The Org chart built and that's what he's talking about.
Great. Thanks for that clarification.
Thanks Simon.
Good alright, well. Thank you all before we wrap I want to make a few closing comments I just first want to say I'm really proud of what our teams have achieved it's a it's obviously a very dynamic environment and the teams have really shown great execution and great focus.
We did have tough compares and so we worked really hard to try to give you a different way of looking at the demand and we will we'll just we'll let you know if we see anything change when we come back together in the next call, but right now demand remains solid I think customers really do understand the value of the technology brings their strategy.
I also appreciate what our supply chain teams have achieved.
And we're encouraged by what we're seeing and how you know that supply hopefully will continue to ease throughout the year.
The business model transition is really helping us give you more visibility and predictability.
And I'm also proud of how our team has rallied around our purpose are just a couple of comments. This year, we set another record a record high number of employees, who were given back into their communities. Our net zero by 'twenty four targets near term targets were just approved by the science based targets initiative under its net zero standard.
So we're not only committed to our own goals, but also building technology that helps our customers meet their own goals. Lastly, we've been named the number one great place to work in 20 countries around the world.
And on any day I would be proud of that but this is super important right now given the competition for talent around the world and it really does make a difference when we're trying to hire new talent into the organization. It really makes us more resilient than ever and I think we're well positioned for long term growth and I want to thank all of you for spending time with us today. Thank you.
Thanks, Chuck I'll go ahead, and close out the call Cisco's next quarterly earnings call, which will reflect our fiscal year 2023 first quarter results will be on Wednesday November 16th 2022 at 130 P. M Pacific time 430 P. M. Eastern time. This concludes today's call do you have any further questions feel free to.
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