Q1 2023 Cisco Systems Inc Earnings Call
[music].
Welcome to Cisco's first quarter fiscal year 'twenty 'twenty three 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 first quarter fiscal year 'twenty twenty-three 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.
As is customary in Q1, we have made certain reclassifications to prior period amounts to conform to the current period's presentation.
Income statements full GAAP to non-GAAP reconciliation information balance sheets cash flow statements and other financial information can also be found in the financial information section of our Investor Relations 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 second 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 report on Form 10-K, which identify important risk factors that could cause actual results to differ materially from those contained in the forward looking statements.
With respect to guidance. Please also see the slides and press release that accompany this call for further details.
Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure with that I'll now turn it over to Chuck.
Thank you marilynn and thank you all for joining us today.
We were off to a good start in fiscal 2023, delivering strong results exceeding the top end of our guidance range for both revenue and non-GAAP EPS we.
We delivered the largest quarterly revenue in our history, driven by excellent execution and the actions our team took to remediate our supply challenges.
Given these results along with the strength of our orders our visibility and easing supply constraints.
We are raising our full year outlook, which Scott will cover later.
While we are proactively managing through an evolving and complex market environment. We remain intensely focused on executing on our strategy, including our transition to more software and subscription based recurring revenue.
We achieved software revenue growth of 5% year over year and software subscription revenue grew 11%.
The easing of supply constraints in our ability to deliver hardware is now releasing software subscriptions that were sitting in backlog connecting to unshipped hardware.
Our success is also reflected in our a R R, which exceeded 23 billion, increasing 7% with product. They are are growing 12%.
We also ended the quarter with RP old nearly 31 billion up 3% year over year with product or P O up 5%.
Over 16 billion of the R. P O will be recognized as revenue over the next 12 months with a backlog that remains elevated at near record levels.
These metrics give us increased visibility and predictability and provide additional confidence in our ability to perform through the current market cycle.
It also underscores our unique position, helping customers become more agile and resilient as they continue to navigate a complex set of challenges.
As I've done in the past I'd like to provide an update on supply chain before discussing our Q1 results.
Like you've heard from others in the industry. We are encouraged by what we're seeing with modest improvement in certain component availability shortages continued to ease from last quarter.
The redesign of many of our products has also helped bring supply stability and more resiliency.
Over the last few quarters, you've heard me talk about the actions we've taken to navigate supply constraints. These actions are paying off and are contributing to our results.
We now have greater visibility in the ramp of our customer product deliveries, which in turn gives us greater confidence in our fiscal 'twenty 'twenty three outlook.
Now moving to performance highlights in the quarter.
We delivered revenues of $13 6 billion up 6% and non-GAAP EPS came in at 86 cents, our second highest quarterly non-GAAP EPS in the history of the company.
We also generated 4 billion in operating cash flow and returned over 2 billion to our shareholders.
These metrics show, we remain committed to operating discipline and our balanced capital allocation priorities.
We are continuing to invest in our long term growth opportunities, while also returning capital to shareholders.
In terms of our product orders in the quarter.
It's important to note that the year over year comparison is against an unusually strong period of 34% growth in Q1 of fiscal year 'twenty two.
From a geographic perspective, we saw some emerging cautiousness in Europe . This is driven by a dramatic increase in energy costs and market volatility, which is leading customers to assess their overall spend however.
However, this also presents an opportunity for us as our technologies like Iot Silicon, one and power over Ethernet drove a significant reduction in power consumption.
To provide a normalized perspective, our Q4 to Q1 sequential growth was just slightly below the normal range over the last six years.
It's also important to note that this was the second highest Q1 orders in the history of the company.
We have strong product revenue momentum in key parts of our business, including secure agile networks security and optimized application experiences. We also saw record performance from a number of products, including the catalyst 9000 family Cisco 8000, wireless Milwaukee thousand eyes and duo.
Networking is becoming increasingly critical to every organization.
Led by digital transformation hybrid cloud AI and ml workloads.
This is driving demand for our technologies.
As we've discussed there are also tailwind for our business such as hybrid work 400 gig and beyond five G. Wi Fi six security and full stack absorbability.
We believe these broader technology transitions will require every customer to re architect their network infrastructure and in turn fuel long term growth across our portfolio.
As I speak with customers. They tell me that while they are closely watching the economy. They remain focused on making the right investments across their business to increase their agility and drive greater innovation and productivity.
And our web scale business demand remains solid driven by their growing investments with Cisco to build out AI fabric and massively scalable cloud networks. Once again, we saw strong momentum with our silicon one base Cisco 8000 routers.
We are experiencing robust demand for our 400 gig products and now have nearly 200 customers.
On a trailing 12 month basis web scale orders were up double digits or greater for the eighth consecutive quarter.
Network capacity and demand continues to increase driven by five G. I O T.
Pervasive video and other technology trends I've mentioned earlier.
With our commitment to powering next generation networks, while also driving sustainability, we launched new 800 gig switching platforms built on our silicon one G 100 chip to help meet customers' demand for more programmability bandwidth and energy efficiency.
Let me now touch on our innovation is I'm incredibly proud of how our teams have come together to deliver market leading solutions for our customers.
Security and hybrid work are now more critical than ever we continue to extend our capabilities to enable customers to work more securely anywhere while reducing cost and complexity.
In security, we introduced new data loss prevention firewall and zero trust capabilities across our portfolio and in collaboration we announced more than 40, new innovations to power hybrid work and deliver exceptional customer experiences.
We're also committed to giving our customers more choice.
An example of this is our partnership with Microsoft to bring Microsoft teams to Cisco meeting room devices Baidu.
By doing this we are driving interoperability and demonstrating our openness to meet our customers' needs and provide greater flexibility.
To wrap up we delivered another strong quarter of revenue and non-GAAP earnings growth.
The strength of orders increased visibility and easing supply situation provides us with enhanced visibility and predictability, which underpins the confidence we have in our business and our increased outlook for the year.
Our performance this quarter.
As a testament to our innovation and execution to support our customers. During these complex times.
Additionally, it reinforces Cisco strength durability and discipline in how we manage the business while investing to capture the multi year growth opportunities ahead.
Our portfolio is in great shape, and our business model is resilient with 43% of our revenue now recurring which is very important as we navigate the current macro environment.
The hard work and dedicated commitment of our leadership team and employees over the last few years to transform our business model is reflected in the performance we delivered this quarter.
Combined with the strength of our balance sheet and our position in the market. We have an excellent foundation for delivering long term results I will now turn it over to Scott.
Thanks, Chuck we started the fiscal year with a strong Q1, reflecting solid execution and disciplined management.
We had record total revenue of $13 6 billion exceeding the high end of our guidance range driven by product shipment levels above our expectations and continued improvements in component supply.
non-GAAP operating margin was 31, 8% down 150 basis points in line with our guidance range, primarily driven by higher component costs as well as logistics costs related to supply constraints.
non-GAAP net income was $3 5 billion up 2% and non-GAAP EPS was <unk> 86 up 5% exceeding the high end of our guidance range.
Looking at our Q1 revenue in more detail total product revenue was $10 2 billion up 8% and service revenue was flat at $3 4 billion.
Within product revenue secure agile networks performed well up 12% switched.
Switching revenue grew with double digit growth in campus switching driven by growth in our catalyst 9000 and meraki offerings.
While data center switching modestly declined we saw solid growth in our Nexus 9000 offerings.
Enterprise routing declined primarily from the product transition to our catalyst 8000 series routers, along with constrained supply.
Wireless had very strong double digit growth driven primarily by our Wifi six products in Milwaukee wireless offerings.
Internet for the future was down 5% driven by declines in cable optical and edge.
We saw growth in our Cisco 8000, offering and strong double digit growth in web scale.
Collaboration was down 2% driven by a decline in meetings, partially offset by growth in calling.
End to end security was up 9% driven by a unified threat management and zero Trust offerings.
Zero Trust portfolio continues to perform well driven by strong performance in our duo offering.
Optimized application experiences was up 7% 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 $23 2 billion, which increased 7% with product they are our growth of 12%.
Total software revenue was $3 9 billion, an increase of 5% with software subscription revenue up 11%.
85% of the software revenue was subscription based which is up five percentage points year over year.
We continue to have over $2 billion of software orders in our product backlog.
Total subscription revenue was $5 9 billion an increase of 6%.
Total subscription revenue represented 43% of Cisco's total revenue.
And our P. O was up was $30 9 billion up 3%.
Product <unk> increased 5% and service our P O increased 1%.
Total short term RP O grew to $16 4 billion.
In terms of orders in Q1, we had the second highest Q1 orders in our history.
Although product orders were down 14% for the quarter. It is important to keep in mind that a compare against 34% growth from a year ago.
We continue to have low cancellation rates, which remain below pre pandemic levels.
Looking at our geographic segments year on year, the Americas was down 10% EMEA was down 23% and a P. J C down 10%.
And our customer markets service provider was down 23% commercial was down 14% enterprise was down 13% and public sector was down seven.
Total non-GAAP gross margin came in within our guidance range at 63% down 150 basis points year over year.
Product gross margin was 61% down 280 basis points and service gross margin was 68, 8% up 230 basis points.
And our product gross margin. The decrease was primarily driven by both component costs as well as higher freight and logistics costs related to supply constraints.
This was partially offset by strong positive pricing impact as a result of the actions we took in the prior year as well as some benefit from product mix.
Backlog levels for both our hardware and software continue to far exceed historical levels.
As we navigated a complex supply environment, we were able to increase our shipments this quarter, resulting in about a 10% decrease in total backlog sequentially, which remains the second second highest level we've seen.
Just a reminder, backlog is not included as part of our 39 billion in remaining performance obligations.
Combined our significant backlog in our P. O continued to provide great visibility to our topline.
Shifting to the balance sheet. We ended Q1 with total cash cash equivalents and investments of $19 8 billion operating.
Operating cash flow for the quarter was $4 billion up 16% year over year.
And capital allocation, we returned $2 1 billion to shareholders. During the quarter that was comprised of $1 6 billion for our quarterly cash dividend and approximately $500 million of share repurchases.
All of this is in line with our long term objective of returning a minimum of 50% of free cash flow annually to our shareholders.
We also ended the quarter with $14 7 billion stock repurchase authorization.
To summarize we executed well in Q1, and a highly complex environment delivering better than expected top line growth and non-GAAP profitability.
We continue to make progress on our business model shift to more recurring revenue, while making strategic investments in innovation to capitalize on our significant growth opportunities.
Consistent with that objective, we announced some restructuring actions focused on prioritizing our investments across our highest growth opportunities and right sizing our real estate footprint to help maximize long term value for our shareholders.
Turning to our financial guidance for Q2, we expect revenue growth to be in the range of four five to six 5%.
We anticipate non-GAAP gross margins to be in the range of 63% to 64%.
Our non-GAAP operating margin is expected to be in the range of $31 five to 32, 5% and.
And non-GAAP earnings per share is expected to range from 84 to 86 cents.
For fiscal year 'twenty three our guidance is.
We are raising our expectations for revenue growth to be in the range of four and a half to six 5% year on year. This is up from the prior range of 4% to 6% growth.
non-GAAP earnings per share guidance is expected to range from $3 51 to $3.58.
So up for five to six 5% year on year.
And both our Q2 and full year guidance, we're assuming a non-GAAP effective tax rate of 19%. Our Q2 guidance reflects the increased visibility we have from our significant backlog and the RPI. We have built up with our business model transformation as well as the easing of supply constraints.
The full year guidance rolls forward, our Q1 over performance with a prudent view of the remainder of the year.
I'll now turn it back to Marilyn So we can move into the Q&A.
Thanks Scott.
Let's go ahead and queue up the Q&A.
Thank you meta Marshall from Morgan Stanley You May go ahead.
Great Thanks, and congrats on the quarter.
I was just wondering if you could dive a little bit into more into kind of the commentary that you gave about Europe and there's also kind of what you are seeing in terms of you know our level of activity or a level of approvals needed within the U S that would be helpful. Thanks.
It makes me to.
Yeah, we saw I think Europe is obviously being impacted by the the energy cost and I think that's just forcing companies to take a look at their P&L as you would have to and where they spend their dollars.
And.
We continue to we continue to see it not be quite as colder we had conversations with some of our team members. This week, which is a positive sign.
But the other thing that I called out that I think is an important one is that customers are trying to solve this energy cost issue and a very aggressive way.
And we have several technology areas that can help them do that including our silicon one.
<unk> technology, which powers our networks at much lower power consumption, you've got Iot, where we can connect these energy systems and make them more efficient as well as.
Power over Ethernet, which actually just reduces the power footprint for our customers. So it does also creates some opportunity I'd say, our if I go to Asia Real quick you've got Asia was actually pretty resilient. There clearly are aware of the economic situation, that's going on but we had five regions last quarter that were positive after a big positives a year ago.
Including India.
Which grew significantly after significant growth the prior year. So that was a good sign so Asia is pretty resilient it feels like right now.
And then in the Americas, I'd say, it's a little it's a little mixed.
We have some customers who are powering forward and.
Other customers who are.
Taken a little cautious outlook, we think by December we will have better visibility to the 'twenty 'twenty three budgets, which will be helpful and to your question about more signatures. We have we have seen our customers have implemented a greater signature requirements.
By and large the deals that we have going are getting signed they're just taking a little bit longer than we would expect.
Great. Thank you.
Next question please.
From Bank of America, you May go ahead.
Yeah.
Hi, guys. Thanks, so much.
Great quarter, and I see that the numbers are going up but the question is how much of it is backlog flush and how much of it is the environment, meaning I look at your product gross product where.
Or is it down 14% last quarter, it's down tick.
And the question is how is the environment itself is is the environment weakening from an orders bookings and backlog.
Weakening in what we're seeing is acceleration because of supply constraints are easing.
Or is the environment holding up.
And maybe you can refer to some kind of some of your big Big photo categories to see how the trends are.
Yeah. Thanks Tal so.
This is a question we expected so I'm going to give you a little more detail than I, probably normally woods.
First off the the two quarters. We just finished in the next quarter, we have massive year over year comparisons from prior year. So as we discussed last time, we think it's more important to look at sequential growth as an indicator.
And as I said.
We were we were slightly below our historic.
Quarter to quarter range, roughly a percent so it wasn't significant and not completely out of line certainly a little little lighter than we would expect normally but not significant.
Enterprise and commercial on a global basis were both within the normal sequential range.
Public sector was slightly out of range and service providers just lumpy. So the sequential reflection on service provider is not really valid so it.
So demand was not you didnt fall off a cliff by any stretch in fact U S enterprise after a.
Upper twenty's growth in the prior year, they actually posted.
Low single digit positive growth again.
So that was a positive sign.
Our order linearity within the quarter was in line and remember it was our second largest Q1 orders ever.
So only the.
The only quarter that was bigger was the quarter a year ago. So that's positive.
Now what's your what you're trying to get at and I think everybody is trying to get at is.
Is this year being driven by backlog and then as we go beyond that everything falls apart. So let me give you some data points on this.
Even if our orders are down 10% this year, which is not our forecast.
We will still we project today that we will end the fiscal year.
With two to three times.
Our historic year in normal backlog.
That normal backlog is typically $4 billion to $5 billion, so I'm, giving you.
Actual numbers here.
And then when you couple that with 43% of our revenue now coming from recurring.
Which is reflected in our RPE Oh, that's what gives us a high degree of confidence and a high degree of visibility in the near term. So hopefully that helps you as the answer your question Joe.
Okay. Thank you.
Great. Thanks, Tal next question.
David from UBS you May go ahead.
Great. Thanks, guys for taking the questions. So Jeff maybe just as a point of clarification you talked about the sequential decline was a little bit worse than seasonal but you took down backlog by about 10% it looks like quarter over quarter can you just kind of help square those numbers because that sounds if I just say that you know.
You talked about 13, one last year in the fourth quarter you'd be a little bit below 12%.
David.
You have lost you.
So it wasn't us David are you there.
Can you guys hear me now we can again, we lost you there I got cut off earlier Senate.
Sorry about that yeah, just can you help square the backlog versus the sequential commentary.
Yes.
Actually your quarter things, Yeah, if I look at your quarter over quarter backlog.
Commentary that was slightly below seasonal.
Like you took down the backlog by about 10%. So it seems like there's about six or $700 million of revenue that would lead to kind of triangulate on so you can kind of just walk through that that'd be helpful. Thanks sure yeah. The.
Backlog came down about 10%, leaving us with an ending backlog at the end of Q1. It was the second highest in our history and higher than what we had seen at the end of Q3. So we took a spike up.
More than 10% in Q4 and came back down in Q1, but what Chuck was talking about on the sequential is really about the overall product bookings that came in.
Versus where were standing in backlog so it the flow through of the orders come in and drop into backlog that backlog then converts into revenue. That's the way you got to think about it is less about just the change in backlog convert to revenue growth and more than it does the change in backlog convert to build.
And remember bookings contributes to both backlog and or P O.
Got it and maybe just one final thing on on profitability.
Software comes out of backlog I would imagine that would have been a tailwind for gross margins in the quarter can you kind of quantify what that might have been in the quarter. Given you know obviously, there's some supply chain pressure and and logistics pressures on margin.
Yeah, you said it right longer term the software component continuing to grow and us being able to ship that out of backlog will be a tailwind to margins right now what we're shipping out of backlog is still a lot of aged product. We made great progress by the way on our aged backlog during the quarter.
Not a lot of what we're shipping out still is orders that were received prior to the price increases.
So you see two things happening at once you see the higher cost and the revenues tied to pre price increase sales at the St itself, which obviously is a headwind to margins at the same time, we see more software being shipped out which is a tailwind then that as it continues to be a pretty significant headwind.
61% product gross margin in the quarter in line with what we had seen in Q4.
The good news is where we made good progress on shipping out a lot of that aged backlog, there's still a little bit more to get out in Q2, and so I expect by the end of the year margins to expand from where they are now product margins to expand 50 to 75 basis points.
Great. Thanks, Scott.
Next question please.
<unk> Kidron from Oppenheimer you May go ahead.
Thanks, Paas results a check I want to go back to your answer to <unk> question.
It's very clear that with orders down and your ability to fulfill now much more enhanced that the backlog over the next few quarters. We'll just continue to decline so help us get our hands around what would it be.
What would be a level of decline that wouldn't make you worry versus the level of decline that you would think as.
Our normal pace Ah in going back to historical normal levels, what would be the line in the sand would you say where will you would say more than this we probably have an issue.
But if it's around X then it's perfectly normal and reasonable that that will happen over the next 12 18 months.
Yeah, we we've actually modeled out various bookings scenarios for the year.
And it would have to be significantly worse than what I told you for it to be a concerning Scott do you have any other comments no I think what youre trying to get at is when do we get back to more seasonal patterns right. Obviously seasonality went out the window, both going into the pandemic and then coming out of it with those three consecutive quarters of north.
30% growth, we are beginning to see signs of season out normal seasonality returning.
It's gonna be a little complex to see though because as supply constraints loosen up.
We will be able to reduce lead times, you've already done that for a handful of product lines and as we do that of course that will have an effect on just the current period bookings. So it's going to be a little bit difficult for you to spot those trends over the next few quarters as lead times normalized.
Very good thank you.
Thanks next question please.
Tim long from Barclays. You May go ahead.
Thank you yeah, two quick ones, if I could maybe Chuck on the you know the cloud vertical could you talk a little bit still talking double digit orders. There could you just kind of just parse out you know the deceleration in terms of maybe just normalization of extra quarters of <unk>.
Ordering versus potential for you know there's been a lot of talk of a normalization of spend by the cloud players next year. If you could kind of parse those two out and then on the software side. Just curious if you can update us it sounded like a lot of you know hardware converted which helped could you talk a little bit.
[noise] about kind of nine K renewals and maybe any of the other standalone software offerings that you think could also help that growth number. The next few quarters. Thank you.
Yeah, two good questions Tim so on the cloud vertical I think you're calling out the right thing that the normalization of the orders is going to probably occur over the next few quarters in fact, I wouldn't be surprised to see our trailing.
For quarter rates over the next couple of quarters, maybe even dip negative because of such a so much ordering ahead that we've seen.
But we continue to see real strong.
Strong demand in general from them, we've done a great deal of long term planning with them. We have some number of orders that aren't even in book They don't even show up in bookings yet because there are out past our bookings lead time window. So that's positive. So we continue to see success. There we continue to win.
Franchises and we feel good about where we are there.
On the software side, what I would say is that the the the nine K renewals.
R R.
Our improving.
They're still not material right now I think next year, we'll see that occur.
What we did announce is the.
This past year is that we are going to manage all of the catalyst portfolio under the Meraki dashboard the Milwaukee.
Platform and that will be delivered to our customers who have the DNA license.
And the the premium license. So we think that in itself. We have already started we've already launched the monitoring capability there and the management. We think will even include will even improve our renewals are beyond that but.
As we said we had a we had a record quarter for Cat nine case, we're real happy with how it's performing Scott Yeah, what I'd add to that Tim is if youre looking at software growth bear in mind, the software subscription growth of subscription subset of our total software grew 11% and it's now 85% of the total.
Obviously with the total all in growing 5% there was a.
Continued decline in perpetual as part of the software license. It's now our software revenue. Its now 15% of our total so I think we're getting to a point, where the subscription base is getting significantly larger than what's in perpetual and that headwind on perpetual will be less of an impact on us going forward.
Okay. Thank you very much.
Thanks, Tim next question please.
Paul Silverstein with Cowen <unk> Company you May go ahead Sir.
I appreciate you taking the question at the risk of asking something you cannot or will not respond to Scott I was hoping.
To ask go back to the margin question two related questions. One well just for clarification. The 50 to 75 basis point product margin improvement I assume that's off of the current quarter was that the reference point, yes, 50 to 75 off the current quarter Thats right by the time, we get to Q4 right.
Alright, naphtha something question longer term and.
And I recognize there's a lot of moving pieces in this tough environment protect longer term can you get back to or even exceed it.
Almost 67% growth and 34% operating margin from early 'twenty one those work.
Gross margin was a 15 year high your operating margin you'd have to go back to 97 I think the last time, you put up that type of number obviously, you're far off those numbers as is everybody else from what they were doing a year and a half ago pandemic, where do you think you'd get back to long term and related to that.
What are your expectations or plans for growing off backs I assume you want to drive some degree of leverage in the gross margin any thoughts you can share your opex growth. This quarter I think was four 5% Australia strikes me as a little bit high but any thoughts in terms of what your thoughts are going forward.
Sure Let me take the gross margin piece of that first you know there's there's a couple of moving parts as you know Paul inside the gross margins. One is the backlog some of which is still sitting at pre price increase levels.
We will get that shipped out as we work our way through that part of the backlog, obviously that'll be a tailwind the increasing component of software built into our revenues will be a tailwind you know will it get back to 65%.
I think there is.
That's for that to happen, we'll have to see either further cost reductions on the input side between freight and logistics, which we are beginning to see while they're up year on year sequentially. We're beginning to see some signs of easing in freight and logistics cost as well, but we'll have to see that and we will have to see a further reduction in component costs.
<unk> price increase so I think it's.
Without giving you a quantified number I think there's a number of moving parts inside there.
More tailwind as we look ahead, then there are headwinds on that on the Opex side, you know the part of what you see in this quarter of course is that the normalization of our bonus plans last year bonus plan, obviously, you didn't pay out so well.
As we go into this year and you normalize that that's part of the Opex growth.
We did have a slightly bigger than normal annual merit increase cycle, that's driving some of the opex growth as well I think our focus longer term.
Is which you've heard me say its balanced profitable growth right.
If you look at our guide for the year, four and a half to six 5% growth on the top line four and a half to six 5% on the bottom line.
Long term, we talked about 5% to 7% top line, 5% to 7% bottom line I think that's really the way you need to think about it.
I appreciate it thank you.
Next question please.
George Notter with Jefferies. You May go ahead.
Hi, guys. Thanks, very much I wanted to ask about the the impact of foreign exchange, Obviously U S. Dollar at 20 year highs.
Maybe you can talk about how you're approaching that that conversation with customers internationally are you seeing any diminishment of demand with what's the picture. Thanks, a lot yeah, I'll I'll start with the numbers on that George and you I'm sure. You know this we sell about 90% of our revenue and denominated in USD, but theres not a big translation impact to us.
For the strength of the dollar.
Not insignificant, but it gets offset by the benefit we get on the Opex line. So FX to us from a translation standpoint really hasn't had a material impact you know as we look at the you know you're selling in U S. C with an elevated exchange rate to the dollar. There's no question that is having a bit of an impact certainly.
You know one of the things contributing to.
What Chuck talked about earlier that we're seeing in Europe I'm not only are they battling a high inflation in their own markets, but that that increase.
Cost in local currency to transact as it has been a bit of a headwind.
We've dealt with this we've sold in the U S D. A.
Through the entire history of the company.
Not expecting it to be something that has a lasting impact on us.
Great. Thank you.
Let's go ahead and take our next question. Please.
I'll, let Garry Ani from Evercore you May go ahead Sir.
Yeah. Thanks for taking my questions I guess, maybe.
Maybe the first one.
Touch on the service provider market.
All of the non spiky, but something seemed a bit more.
The rest of the portfolio, we just thoughts on what's happening there and anything you life service provider was his last scale would be helpful.
I didn't I couldn't understand the question.
Can you repeat the question.
Yeah.
Okay.
I was hoping you could talk a bit about this.
With a wider auto decline of 23%.
If you are then you know the rest of the business and then anything over a day between web scale and kind of.
The traditional service providers would be helpful.
Yeah, Amit Thank you for that and I think that the reality around that one is simply if you go back a year ago.
That segment grew 65% I think that's the fundamental issue I don't think there's anything else going on.
Got it.
Just maybe if you can ask you just about the full year guide.
So I did it right.
6% growth against a very difficult compare and I guess, a wasteful guide, but you are assuming.
Assuming much of an acceleration for the rest of the year. Despite comparisons get easier I guess, Chuck is that just being debated.
In spine in your box volume order that give you pause on that did.
Given how easy the compares get I would imagine it looks like the rate of it to the.
No. There's nothing that is giving us pause and that I mean, we guided up the full year and revenue from what had been a guide of 4% to 6% growth of four 5% to six and a half that effectively rolls forward. The outperformance that we had in Q1 into the full year. There's no change in the way we're looking at the second half of the year, either plus or minus but it.
It's a prudent view of what we expect in the next three quarters.
Fair enough. Thank you.
Next question please.
Simon Leopold with Raymond James You May go ahead Sir.
Thank you for taking the question I wanted to see if there were some way you could characterize.
Your own lead time, so if you had customers, placing orders today from Iraqi products for campus switches or data center gear.
What are the lead times for getting the product for your customers and how does that compare to the prior quarter and prior year. Thank you.
<unk>.
Yeah, I'll I'll make some comments and as Scott if you want to add some color feel free.
The range on the products is very wide right now we still have a couple of product areas that we have component issues that were doing some work and I think we've got probably one more quarter.
Before we start improving those we've got other.
Products like we have certain firewalls that are down to three week lead times.
We have oh some of the products, we redesigned that I've talked about before went from 40 weeks to 12 weeks and we will continue to improve I think we made improvements in roughly half of the portfolio have the product families.
Improved during the last quarter and we would we would expect to to continue that progress as we move forward.
And just just as a quick follow up.
If you're showing improvement do you see that affecting your ability to maintain or take market share where perhaps you were more vulnerable when the lead times were more extended.
Yeah, I think the whole market share discussion as is reflected in our backlog I mean that is that's the issue and as we ship it.
You will see us I think you'll see us over the next 12 months gained market share as we have an outsized backlog that will be delivering so I would expect that to have a positive impact.
Thank you very much thanks.
Thanks, Simon next question.
James Fish with Piper Sandler you May go ahead Sir.
Hey, Thanks for the question.
On the restructuring plan I know these things are never easy, but and we have picked up that the collaboration side was seeing some layoffs, but what product areas are being most had uh huh, how should we think about the reduction of head count there overall, what's the strategy to change the direction of some of these growth businesses around that have been kind of struggling.
And by that I really mean, a collaboration side and how much are you guys factoring us this kind of impact into the top.
Topline here on guide thanks.
Yeah. So we're we're a we're actually speaking to our employees tomorrow about this so I'd be reluctant to go into a lot of detail here until we're able to talk to them.
I would say that what we're doing is right sizing certain businesses, we're really focused on resources moving into the like in the enterprise networking space accelerating our platform <unk>.
Strategy, we will be making significant investments in security and beefing up our team there and the AR and the capacity to continue to innovate there those are important areas.
And so if you would.
Understand I'd I'd prefer to wait and talk to our employees tomorrow about it but you can just assume that we're going to we're not actually there's nothing that's a lower priority, but we are right sizing certain businesses and since you asked about collab I'll tell you a little bit about what.
We see incredible strength right now in our calling business.
Our cloud calling business, we see great strength in our cloud contact center business.
And the compares on the meeting side are going to start to make that give us the ability for that to be a much more favorable components, so where I actually am optimistic over the next 12 months about our collaboration portfolio. The team has done an amazing job.
I I truly believe that they they built the best the best platform in the business.
When you look at our devices and the interoperability that the team has been driving with the Microsoft interoperability that is a huge.
Huge thing when you when you from a customer perspective for us to give them that flexibility. So I think they've done a good job and I feel I feel pretty good about that business as we go forward, we just need to rightsize some of the Opex.
And James just to be clear don't don't think of this as and head count action that is motivated by cost savings, but this really is a rebalancing as we look across the board they're areas that that we would like to invest in more Chuck just talked about them security.
Our move to platforms and more cloud delivered products.
But we're also going to maintain our financial discipline as we do that and so this is about just rebalancing across the board in a perfect world you'd have 100% skill match and you can take the people in the areas or the skills in certain areas and just move them to where we need to invest and unfortunately, that's not a perfect world, but we do have a if you look at the number of jobs that we have opened in the areas that were.
To invest it is just slightly lower than the number of people that we believe will be impacted and we're gonna be working really hard to help match our in our employees to those roles to the extent, there's a skill match. So we're going to we're going to work really hard at that.
If I could just follow up quickly on that I. Appreciate the color there guys and understand the sensitivity you guys wanted to ask.
In terms of that $600 million hit so Scott.
Scott should we expect that to actually be the net savings as a result or is that kind of savings actually gonna be lower because you're kind of repositioning some folks yeah. Its really not motivated by cost savings. So the net.
By the time, we get to the end of the year. Our expectation is we have about the same head count that we had at the beginning of the year.
But there's there's two pieces to this one is what we've been speaking about just.
Now how about the head count impact.
There's a second piece of this that's really about right sizing our real estate portfolio and we've got a long tail of small offices distributed around the world that are significantly underutilized and in fact, the unused in some cases, though the second piece of that charge. There there will be two elements to it one that's people related the second.
This will be about right sizing, our real estate portfolio that will generate some savings not much in fiscal 'twenty, three but longer term that will generate some savings.
Helpful. Thanks, guys.
Next question please.
Stomach chatterji with J P. Morgan you May go ahead Sir.
Okay.
Thanks for taking my questions and congrats on the strong spread.
I just had one I think I can go back to the Chuck your comments about seeing hesitation from EMEA customers a bit more given the macro backdrop, there and you spoke about the opportunities that you see at the same time, maybe if I can ask you. When you are seeing hesitation from the customers that are you seeing them prioritize across our portfolio.
When it comes to data center was a sample of social security.
They are reevaluating their standard hesitating in that sense like how EBITDA right.
We didn't got fourth we're doing we see have you ever are getting impacted by that thank you.
Yeah, Sam it's a it's a good question and I would say the first thing I would say is you know Gartner recently came out with a <unk>.
Survey of executives and our customer base and they.
Almost half of them said that their technology investments will be the last thing they cut.
So that's just a backdrop for I think helps how important customers view.
Their technology investments these days.
When we look at our where customers are investing.
Many of them are investing to they're moving forward with their hybrid work investments right and and in creating.
The infrastructure that they need to deal with this new world. We see customers continuing we saw recent survey that talked about customers, who are balancing their private cloud and public cloud workloads and so there's the whole re architecture of the infrastructure to deal with these new traffic patterns as another area I mentioned in Europe with the.
With the power with.
With the energy costs, there's a lot of focus Iot has just been accelerating over the last two to three years and we saw another.
We had a record bookings quarter in Q1 I believe it was a it was really strong where customers are really looking to connect these systems to actually optimize the power consumption and their efficiency.
And again, we see a lot of customers, who are moving who are doing greenfield real estate projects that are really focused on reducing our.
Going to low voltage.
Architectures, which leads them to power over Ethernet, which leads them to restrict rebuilding their infrastructure. So.
And then you got cyber security.
And.
And you've got a full stack observe ability we continue to see five G build outs. There just lots of there's a lot of positive tailwind notwithstanding the short term.
You know a dynamic environment that we're in.
Thank you.
Thank you I think we have time for one more question.
Sami Badri with credit Suisse. You May go ahead Sir.
Thank you very much.
Chuck I wanted to go back to a comment you made regarding market share and some of that sitting in our backlog now if we assumed that there was nothing in the backlog and you know all the numbers that you generated were publicly reported through your financial statements, but that showed that Cisco actually maintained or increased or even loss.
<unk> market share.
You mean, if all our backlog was actually shipped and reported.
Correct, Yeah, I think that'll be true I mean look we operate in lots of different markets. So is that is it true 100% of the market said that'd be difficult for me to say.
But.
I believe that as we ship out the.
You know, particularly our our secure agile networks, our enterprise and networking products, that's certainly going to help as we catch up on our data center infrastructure I think that's gonna help Theres also just reporting dynamics that occur some of our competitors report certain routing products into data center switching and we've reported into routing, which which makes it difficult to ascertain so it's just it's an M P.
Perfect Science on top of that but I do believe that as we.
As our backlog on wines and gets back to normal levels over the next 18 24 months that I think that you'll see.
Oh, I think you will see that dynamic.
Got it so just just to be clear.
That is Cisco gained share I don't know I'm, just just to make sure I heard you correctly.
I think that's right and in certain key areas I mean, not not perhaps across everyone. I'd have to go do the analysis, but in some of the key ones that I know all of you were worried about the answer is yes, and a bigger market than the bigger markets got it.
And then one question just for Scott. So Scott, maybe you could tell us where in fiscal <unk> of twenty-three did shipments begin to start accelerating just because.
We want to kind of understand the trend here going from now through fiscal <unk> and putting into that product gross margin comment into perspective, what what I'm really trying to understand is as shipments start to accelerate how how much will software attached to those.
To those shipments just so I can understand that glide path here of what happens in.
Some of the other segments outside of just secure network agile networks et cetera, right I'm just trying to get this kind of like this poll dynamic that may occur from the other segments related to shipments going out the door got it yeah. So we talked about the overall backlog reduction at about 10% from Q4 to where we ended Q1.
That's a subset of that of course, the software that same percent held pretty much true in software software continues to be well over $2 billion of our overall product backlog.
But it's about it's actually about the same reduction sequentially as we saw an overall backlog so right around the 10% rate I think as you look ahead and try to model out the 50 to 75 bps of improvement that I talked about I think it's gonna be probably a little bit heavier in the second half of the year than it will be in the second quarter you saw the guide for the.
Second quarter.
Yep got it alright, thank you very much.
Now I'll turn it over to Chuck for some closing remarks, thanks, Marilyn and thank you all for joining US today I just want to reiterate as you know we we felt like we had a very strong quarter large quarterly revenue in history as I said earlier the orders the visibility that using in supply chain gives us confidence to raise a year obviously.
We're very focused we're managing the business for growth we are going to go through this process of reinvesting into strategic areas.
And the people impact is difficult and Oh, just want our employees who are listening in today to know that this afternoon and tomorrow, we'll be communicating.
About how we're gonna go about this it's always a difficult decision, but we have a lot of opportunity I'm very optimistic about the future I'm proud of the teams and what they've accomplished and I'm really excited about the the visibility.
And the confidence we have in the near term. So thanks for joining us and we look forward to next time.
Thanks, Chuck Cisco's next quarterly earnings conference call, which will reflect our fiscal year 2023 second quarter results will be on Wednesday February 15, 2023 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 contact us.
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