Q1 2024 Cisco Systems Inc Earnings Call
Okay.
[music].
Welcome to Cisco's first quarter fiscal year, 'twenty 'twenty, four and 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 Sami Badri head of industrial.
Relations, Sir you may begin.
Welcome everyone to Cisco's first quarter fiscal year 'twenty four quarterly conference call. This is Sami Badri Cisco's, new head of Investor Relations and I'm joined by Chuck Robbins, Our chairman and CEO and Scott Herren, our CFO, having Paul with Cisco on the sell side for 10 years I couldn't be more excited to join the company and I look forward to engaging with you all in my new role by now you should have seen our URL.
Earnings press release, a corresponding webcast with slides, including supplemental information will be available on our website in the Investor Relations section. Following the call. As a reminder, we have simplified how we report products and service revenue in customer markets. Starting this quarter. We are reporting revenue in the following five categories networking security collaboration.
Asian durability and services and we are reporting customer markets and the following three categories enterprise public sector and service provider and cloud.
Also 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 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 2024. 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 I will now turn it over to Chuck.
Thanks, Amy and welcome to Sysco.
Everyone is doing well and thanks for joining us today.
We delivered a solid start to fiscal 2024 with the strongest first quarter results and Cisco's history in terms of revenue and profitability.
Our Q1 revenue was at the upper end of our guided range EPS exceeded the high end of our guidance driven by strength in gross margins and expense control, resulting in strong operating leverage.
Our disciplined expense management and the tailwind from our business model transformation resulted in our highest non-GAAP gross margin and over 17 years and record non-GAAP operating margin. We also returned $2 8 billion in Q1 via cash dividends and share repurchases delivering on our capital return commitments to our shareholders.
As we continue to transform our business towards more software and recurring revenue streams fueled by accelerated innovation, we remain committed to driving operating leverage and shareholder returns.
Now turning to the demand environment.
After three quarters of exceptionally strong product delivery our customers are now focused on installing and implementing these unprecedented levels of products.
The bottleneck that we previously saw in the supply chain has now shifted downstream to implementation by our customers and partners.
Our order lead times and backlog have largely returned to normal levels as deliveries rose the channel inventory, we track it our distributors also steadily declined during this time.
Simply put.
Customers are now taking time to onboard a deploy these heightened product deliveries.
While the macro challenges we have discussed still exist. We believe this implementation phase is the primary reason for the slowdown in new orders, we saw it mostly with our larger enterprise service provider and cloud customers and it was most pronounced in October.
Based on our analysis. We believe this phase is temporary and estimate there was an additional one to two quarters worth of shipped orders in customers' hands still waiting to be deployed.
This has near term consequences for revenue and our outlook for the next couple of quarters, which Scott will discuss shortly however, it does not change our longer term confidence.
We expect product order growth rates to increase in the second half of the fiscal year. We also remain very confident in the foundational strength of our business and future growth opportunities given the criticality of our technologies.
Overall, our win rates are stable cancellation and return rates remain below pre pandemic levels and we have gained market share all of which are testaments to the strength of our portfolio and how it aligns to our customers' most pressing needs.
As we look to enhance our capabilities in higher growth areas in the first quarter of fiscal 'twenty, four we announced our intent to acquire Splunk.
The combination of Cisco and Splunk will create an end to end data platform to enhance our customers' digital resiliency with our complementary capabilities and AI security and observer ability.
The combination of Cisco and Splunk also directly supports our strategic objectives around driving higher levels of growth software capabilities and a R. R.
Together, we will bring trusted innovation leadership and outstanding go to market engine and a world class culture that will help our customers achieve their technology outcomes with innovative products and solutions.
Now, let me comment on our quarterly performance.
As I previously mentioned, we delivered strong revenues in Q1, which was broad based across our product portfolio and driven by our customers' investments in generative AI cloud security and full stack absorbability.
As expected, we continued to gain market share with the release of the calendar Q2 results recording another quarter of year over year gains in three of our largest networking markets campus switching wireless Lan and SP routing.
And web scale, we see continued momentum in AI with three of the top four customers deploying our hyperscale Ethernet AI fabric.
We also already have line of sight to over $1 billion in orders for AI infrastructure from major cloud providers in fiscal year 'twenty five.
To help advance AI, we're working with key GPU in storage partners to create solutions, including Ethernet technologies, GPU enabled infrastructure and joint tested and validated reference architectures with a commitment to open networking for AI.
Collectively we believe Theres, a great opportunity for a broad set of innovations and compute GPU networking software and services to support core and edge AI infrastructure.
According to the 650 group the AI switching market is forecasted to exceed $10 billion in 2027.
Our scalable fabric for AI, coupled with a proven power saving capabilities of Cisco Silicon one put us in a strong position to build out the infrastructure needed for AI clusters, and we are laser focused on winning in this space.
Moving to security, we continue to execute against our product roadmap and strengthen our unified security platform.
Since our Cisco Xdr solution became available. This summer we have added recovery to the response process, giving security teams the ability to snapshot and restore their business critical data at the first sign of a ransomware attack.
With our three new offers around Xdr, Cisco secure access and multi cloud defense, we already have over $500 million in the pipeline across over 1000 customers.
We also launched our new Cisco security firewall solution. This quarter. We are actively engaged in competitive sales with all these products and expect to see meaningful positive results in the coming quarters.
And our collaboration portfolio, we recently introduced a range of truly game changing AI capabilities spanning the entire webex suite as well as new devices for re imagine workspaces at our Webex one event.
Before I turn it over to Scott, Let me briefly summarized three key takeaways.
First as we consider where we're at today. The primary issue with demand is that customers are taking time to onboard and deploy heightened product deliveries.
While we were not immune to the macro we believe this is temporary as our customers and partners continue to tell us that our portfolio is stronger than ever and we have continued to see share gains in key markets.
Second.
We remain confident in our future.
With the incremental multibillion dollar AI infrastructure opportunity, the increasing criticality of security and observe ability.
And what we believe Cisco and Splunk can do together for our customers is truly exciting.
Lastly, you can always count on us to take a disciplined approach regardless of the environment. We remain committed to operating leverage capital allocation and expense management I'll now turn it over to Scott to provide more detail on the quarter and our outlook.
Thanks, Chuck we delivered solid results in Q1, driven by the prior strategic actions, we took to mitigate the supply chain constraints.
For the quarter, we reported strong revenue growth and a record non-GAAP operating margin.
Total revenue was $14 7 billion up 8% year over year at the high end of our guidance range.
non-GAAP net income was $4 5 billion up 28%.
non-GAAP EPS was $1 11 up 29% exceeding the high end of our guidance range.
Looking at our Q1 revenue in more detail total product revenue was $11 1 billion up 9% and service revenue was $3 5 billion up 4%.
Networking, our largest product category drove the increase with 10% growth.
Within networking the growth was driven by switching where campus and data center were both up double digits on the strength of our catalyst 9000, and Nexus 9000 offerings.
This was partially offset by a decline in wireless.
Security was up 4% driven by our zero Trust and threat intelligence detection response offerings.
Collaboration was up 3% driven by growth in calling and contact center, partially offset by a decline in meetings.
Observe ability was up 21% driven by growth across the portfolio, including double digit growth in thousand eyes and App dynamics.
We continue to make progress in our transformation to more recurring revenue based offerings.
We saw solid performance in our <unk> of $24 5 billion, which increased 5% with product IRR growth of 10%.
Total software revenue was $4 4, billion% to 13% increase with software subscription revenue also up 13%.
85% of our software revenue was subscription based.
Total subscription revenue increased 10% to $6 5 billion, which represents 44% of Cisco's total revenue an increase of one percentage point over last year.
<unk> was $34 8 billion up 12% year over year product <unk> increased 14% and service <unk> increased 11%.
Total short term RVO was up 8% to $17 6 billion.
Looking at our product orders by geographic segment year over year overall product orders declined 20% with the Americas down, 19% EMEA down, 13% and a P. J C down 38%.
And our customer markets.
Service provider and cloud was down 38% enterprise was down 26% and public sector was up slightly at 2%.
Total non-GAAP gross margin came in at 67, 1% up 410 basis points year over year at 110 basis points above the high end of our guidance range.
Product gross margin was 66, 5% up 550 basis points.
The increase was driven primarily by productivity improvements with lower freight logistics and component costs.
Favorable mix and positive pricing also contributed to the year over year improvement.
Services non-GAAP gross margin was 69% up slightly.
non-GAAP operating margin came in at 36, 6% up 480 basis points and exceeding the high end of our guidance range.
This improved leverage was driven by both our strong non-GAAP gross margin and ongoing disciplined cost management.
Shifting to the balance sheet. We ended Q1 with total cash cash equivalents and investments of $23 5 billion.
We had operating cash flow for the quarter of $2 4 billion down 40%, primarily due to the $2 8 billion tax payment related to prior quarters, which was associated with the IRS tax relief due to the California floods.
This quarter, we returned $2 8 billion to shareholders comprised of $1 6 billion for our quarterly cash dividend and look like $3 billion of share repurchases.
Consistent with our cap allocation strategy, we are committed to increasing shareholder returns for greater operating leverage maintaining a higher level of annual share repurchases and growing our dividend.
We continue to invest organically and inorganically in our innovation pipeline.
During Q1, we announced our intent to acquire Splunk, which.
Which we expect to close by the end of the third quarter of calendar year, 2024, subject to regulatory approvals and customary closing conditions, including approval by <unk> shareholders.
In Q1, we also closed several acquisitions all of which are highly complementary to our internal R&D in line with our strategy to strengthen our position in cloud security observe ability and AI with targeted strategic M&A.
To summarize we delivered a solid quarter highlighted by top line growth and increased operating leverage that resulted in stronger than anticipated earnings per share.
We continue to make progress in our business model shift to more recurring revenue.
We remain focused on disciplined expense management without losing sight of the strategic investments necessary to innovate and capitalize on growth opportunities.
Turning to our financial guidance as Chuck outlined the bottleneck that we previously saw in the supply chain is now shifted downstream to implementation by our customers and partners.
Most of the supply chain constraints are now behind us and both shipment lead times and backlog have largely returned to normal levels.
Q1 product orders declined 20% as our largest customers are implementing elevated levels of product shipments from prior quarters as we delivered orders from our historically high backlog levels.
As Chuck mentioned, we believe there are one to two quarters worth of shipped orders awaiting implementation by our customers.
Our revenue guidance assumes one to two quarters of lower revenue and then a return to more typical sequential growth rates.
Consequently for Q2, we expect revenue to be in the range of $12 six to $12 8 billion.
We anticipate the non-GAAP gross margin to be in the range of 65% to 66%.
non-GAAP operating margin is expected to be in the range of 31, 5% to 32, 5%.
And non-GAAP earnings per share is expected to range from 82 to 84.
For fiscal year 2024, our guidance is updated as follows we expect revenue to be in the range of $53 8 billion to 55 billion.
non-GAAP earnings per share is expected to be in the range of $3 87.
$3 93.
And both our Q2 and full year guidance, we're assuming a non-GAAP effective tax rate of 19%.
I'd like to thank our teams for their focus and execution. This quarter, we remain confident in the strength of the business and our ability to capitalize on the key growth opportunities ahead.
I'll now turn it back to Sammy so we can move into the Q&A.
Thanks, Scott Michelle Let's go ahead and queue up for questions.
Thank you Tal <unk> with Bank of America, you May go ahead Sir.
Value there.
Yes, sorry, I was on mute now you can hear me.
Yes.
What is your assumption on the growth seasonality.
After the next quarter are we back in your assumptions to normal seasonality or do you expect kind of different seasonality than previous years.
Yes, it's a great question as I said in our when we talked about one to two quarters of.
Hi.
Basically inventory, but shipped product that's at our customers that has not yet been installed I expect the impact to be greatest in Q2 and in Q3, but when you look at order growth, we do see a return to order growth in the second half of the year, both sees both sequentially and year on year as we get there.
So in terms of revenue recognition you expect three Q.
Two the <unk> sequential step that was my question do you expect <unk> to be weaker.
Than previous seasonality or do you expect it to be the same as previous seasonality.
No point standpoint, we don't guide bookings Talbot from a revenue standpoint, I do see sequential increase Q2 to Q3.
Okay.
Thank you alright, Thank you Tom.
Michelle next question.
Yes, Marshall with Morgan Stanley Investment Research you May go ahead.
Great. Thanks, so much.
Maybe just a question on <unk>.
If you see the investment categories kind of changing maybe free.
Orders that you've seen and then when do you see them come back in a couple of quarters I guess I'm just trying to get a sense of how much of the orders we've seen over the last year been catch up investments like campus and data Center and then areas of investment will change as we come back or is this really just inventory digestion in the <unk>.
<unk> categories and kind of investment.
<unk> will stay the same with customers. Thanks.
Thanks for the question I think your latter comment is probably the closest to the truth, we don't anticipate.
Big difference, although I think with the improvements that we've seen in our portfolio in security, we should see security accelerate obviously, we'll continue to update you on the AI opportunity. That's out there. We think that's going to continue to be a driver over the next couple of years, but in general I think it'll it'll look more normal once we get through this.
Great. Thank you.
Alright, Thank you meta.
Michelle next question.
Amit <unk> with Evercore you May go ahead.
Yeah. Thanks for taking my question I guess.
One of the things I think also struggled to understand it.
Conviction you have that this is the implementation pause and not a macro demand centric weakness I'd love to just understand what if you can talk about and why you're so convinced this is a 1% or two water implementation bonds rather than enterprise demand is just getting weaker anything on that front would be helpful. And then I just want to clarify the spot you folks at $1 billion in AI audit.
Two times. The number you gave last time is that correct. Thank you.
Yeah, Okay. Thank you.
So if you'll be patient with me I'll give you a few data points and some context around why we think this this is a an inventory issue that's sitting with our customers.
First of all our customers and our sales organizations have been very clear with us over the last 90 days that this is the issue, particularly our large enterprise.
In our large and our service providers, we talked about that with the service providers prior but it shifted into the enterprise space in a big way.
The other thing is we had our partner summit last week and some of our largest partners unsolicited began their conversations with me by talking about this very issue, which which candidly I knew the customers had talked about it in our sales team to talk about it I was actually surprised to hear it's show consistently at that partner summit. So.
That's sort of a subjective view and then we've done some analysis and there's.
There's three things I'd point out the first is that in.
In certain parts of our portfolio, we actually can.
We can see the timeframe from shipment of a product until the product begins to connect to the cloud back to the cloud like Meraki.
And what we've seen is a one to two quarter delay versus what historically you would see when these these products get shipped how long it takes for them to be activated and connect to the Meraki cloud. So that's the first piece the second is.
We had a very strong quarter in federal U S. Federal.
From an orders perspective.
So we we looked into why big customer like the U S government Department of defense would not have the same issue.
And the reality is is that they have special clauses in their contracts that give them most favored nation status.
When we're actually making shipment decisions and certainly with the department of defense, we prioritize them during the supply chain crisis. So they never had a big influx. They had a very steady flow of products across which explains why there their order numbers look fairly normal.
The third point I would say is that we noticed a serious uptick in Q1, and our transactional advanced services, which is loosely translated to be implementation services.
That grew almost 20% in the forecast for Q2 as is almost double digits again.
So it's clear that customers are asking us to come help them get this done.
I'll give you one final subjective data point, and then I'll talk about the AI stuff.
We had one big partner tell us that they have literally hired 200 people in the last 90 days solely focused on implementing technology for their customers. So there's just so many things that we've learned over the last 90 days clearly this surprised us, but but I think we feel pretty good right now.
I'll make a comment about why I don't think it's macro candidly it might've been easier for me to say it was macro but as we've discussed prior we have the traditional service provider has been has been tough and it remains that way we've talked about elongated sales cycle they remain weak.
We've talked about the in some cases the need for extra signatures, which is pretty normal that's remained but we didn't see it get materially worse in the quarter and so all of that and I'm sorry for the long answer, but I wanted to be thorough all of that is really what led us to believe this.
This is a consumption issue with our customers, so I'm going to pause there.
And then I'm going to answer your AI question [laughter].
What what we gave last time was.
Orders to date, we've taken orders for over $500 million.
For infrastructure to support AI networks, AI Gpus inside the cloud players.
And I'll talk a little bit more about that in a moment. The numbers that we gave today is a forward looking set of numbers, let's say in fiscal year 'twenty five which is when we said we believe that the broad Ethernet build out would occur underneath gpus.
We have already seen we have line of sight to a.
$1 billion plus of orders that our teams feel pretty good that we're going to get and or we'd been designed in already so that's just sort of on a forward looking.
Set of orders that we've identified for fiscal 'twenty five okay.
I'll also just cover real quickly we are now.
We now have our Ethernet fabric deployed underneath Gpus and three of the four hyperscale or major hyperscale or is in the United States.
We also are working very closely with.
AMD, Intel and Nvidia to create solutions, including Ethernet technologies GPU enabled infrastructure joint jointly tested and validated reference architectures.
And I will say, even this week yesterday.
Jenson from Nvidia and four of his four five of his executives came over to see us and we spent 90 minutes together with my executive team.
We believe we have a great opportunity to actually build some integrated solutions between our technology and their technology to actually take to the enterprise. So we're beginning to see the use cases and the enterprise evolve and we think that our partnership with Nvidia in that case.
With our underlying technology and our strength of go to market.
We think will be a winning combination so we're working on that as well. So there's a lot going on in the AI space.
Alright, Thank you Amit Michelle next question.
Thank you Simon Leopold with Raymond James You May go ahead.
Thanks for taking the question I wanted to see if maybe you'd be willing to unpack that the networking segment, a little bit in terms of.
The trends.
And really what I'm trying to get at is understand sort of what what's doing better what's doing worse in that.
That gets datacenter bounced us pretty good, whereas maybe campus is a bit weaker and declining and then hopefully during this transition to a new segmentation you can give us a little bit more color within networking. Thank you.
Hey, Simon Thanks for that.
I would say that the bigger variance that we're seeing I mean right now obviously, if the demand signals are a little bit tough because of the amount of inventory that's out in the field and that we have normalized lead times at this point, we knew that would happen sometime in the first half. That's now happened our lead times are back to where they were pre pandemic.
And our backlog is shipped the supply chain team has done a terrific job getting product out the door. That's what's kind of moved the bottleneck from our level down to our customers' level, but when you start to unpack within networking, we're not seeing at this point a huge difference between for example data center or campus networking, but we are.
Seeing is a little more field based inventory on wireless access points, that's been slightly slower than what we've seen just because of the amount of product thats been shipped out than what we've seen in the rest of the network.
Thank you very much. Thank you, yes, thanks, Sam Alright.
Michelle next question.
Dan <unk> with Nomura Research you May go ahead Sir.
Hey, thanks.
Good afternoon, everyone I wanted to ask about your share repurchase cadence.
Stock, obviously could get hit here.
<unk> been talking about $5 billion in buybacks or so for the year I know some of that starts that dilution.
If you guys are confident in the second half pick up.
Is there any potential that you would be.
Be more aggressive in the upcoming quarter.
And how are you thinking about share repo this year, given current dynamics with the Splunk deal coming thanks.
Yes, as we said on the <unk> transaction, it's going to be outside of the transactional cost that is going to be cash flow positive from the first year forward. So this long transaction does not in any way, having an effect on our capital return either through the dividend or through the.
Through share buybacks, we expect to continue that higher level and consistent higher level of share buybacks.
To continue to show increases in our dividend. We also will obviously look at the opportunity at the chance to be opportunistic on the share buyback I don't I am not going to commit to that at this moment, but that is something that we'll obviously take a look at.
Alright, Thank you Ben.
Michelle next question.
Semi chatterji with Jpmorgan you May go ahead.
Hey, Thanks for taking my question I guess, if I can just clarify one thing post I think Chuck in your prepared remarks, you did say you saw the more pronounced impact on the orders in the month of October and I think Thats, what I heard you say.
Just curious are you implying that you did see an improvement in autos indeed.
A couple of weeks of nothing but it says index, maybe part of Europe.
Conference and that takes a bit more temporary than a longer pause some of the customers and then you did mentioned large block known as really being the ones that are facing the set of inventory installation problem. What gives you so carlo today.
SMB, the smaller customers set up not going through.
It's a similar issue or are you also beefing that in terms of your sort of next couple of quarters, the headwinds that youre thinking about on the revenue, saying thank you.
Thanks, I think my point with October was it.
If you go back to the end of Q4, we talked about on the last call that we had a fair amount of momentum as we exited the quarter, which is one of the reasons, we didn't expect to see this.
And we had our normal year end.
Sales of <unk>.
Moving accounts around moving territories around it getting sort of the sales startup process that happens in the first say six weeks of the fiscal year, which we went through so what we tend to look forward is the middle of the quarter.
And then into October is when we expect to see the actual quarter materialized and everything kind of come together and it just didn't and that's what that was a comment about that it was it was primarily.
We really it was really clear to us in October that.
This was going to be the situation.
Relative to.
Sure.
They're the ones, who are having the consumption issue because they have the most inventory.
You asked how we.
What confidence when we have it is not SMB. If you look at orders we look at we look at a sub segmentation within enterprise now and within service provider et cetera in SMB was fine.
And in fact, the smaller the customer we had the the better their order performance for us in the quarter was so it just followed the trend that the consumption issue was up market and the small to mid size customers didn't feel it.
Okay. Thank you.
Alright, Thank you Sammy Michelle next question.
David felt with UBS you May go ahead Sir.
Great. Thanks, guys for taking my question.
Maybe this is for you I just wanted to impact maybe one of the comments that you made and I know you don't guide to orders, but I think in your prepared remark you said backlog is back at normal levels at the end of the quarter, So or we do assume that the guide for <unk> and the rest of the year. It doesn't include backlog conversion into revenue and then if that's the case to your comment about orders access.
<unk> in the second half I know you don't guide specifically to orders, but you did make a comment that revenues can be up I think sequentially in the third quarter year over year end.
In the fourth quarter sequentially and year over year.
Doesn't that suggests like a pretty steep.
Order acceleration not just an acceleration, but significant positive order trajectory in the fourth quarter and the third quarter I know, it's easy comps, but just some more color there would be helpful. Thanks.
Yes, David we did say that I do we are expecting sequential.
Improvement.
In the second half of the year in both Q3 and in Q4.
Both and again, we don't guide this fit in both orders and revenue as you would expect backlog is normalized at this point.
We knew that would happen in the first half of it and supply chain team did a great job getting those orders in the hands of our customers.
We now need them to implement them, but we've got the orders in the hands of our customers. So we do see sequential increases and as you said as you noted from a bookings standpoint, our order standpoint, the second half is easier compare points. Obviously the reverse is true on revenue in the second half revenue will have very difficult comparable for last year.
Great. Thank you.
Alright, Thank you David Michelle next question.
Mcnabb with Deutsche Bank, you May go ahead.
Hey, guys. Thank you for taking the question.
Just to dovetail one follow up to the prior question that I have just another one on margins just on the prior one.
Is the expectation for a second half improvement in a one to two quarter digestion does that vary at all across the three different customer sets you outlined.
And just on the margins of 36 six on op income margins. This quarter I think the guide implies a 400 to 500 basis point Kip is that due to just the sheer revenue declined sequentially or are there other cost items, we should consider on either gross margin or Oi margin line. Thanks.
Yeah to your to your second question. It is just based on the how the revenues are flowing through the second half of the year I think gross margins. We've said, we'll settle in somewhere in this 65% to 66% range I think at this point it looks like it'll be closer to the higher end of that range for the second part of the year.
So that's the that's the way I see the the year flowing out remind me Matt what was the first part of your question.
Just around the expectation for second half improvement in orders one to two quarters worth of installation is that broad across the three customer sets or does it vary across service provider enterprise and federal.
Yes, right I think we expect I certainly would expect service provider to continue to be difficult through the second half of the year.
Within service provider, we've got both telco and cable, which has one set of market dynamics going on I think that will continue to be a difficult space on the <unk>.
Other side, we have web scale and we do see the web scale orders, while they've got also inventory to work their way through.
Do see line of sight to them beginning to increase their orders again in the second half of the year. So SBA is a bit of a mixed bag, but I think it will continue to have probably the greater impact.
Okay. Thank you alright, thank you Matt.
Michelle next question.
George Notter with Jefferies. You May go ahead.
Hi, Thanks, a lot guys just continuing on that last question.
If I look around the space.
Companies have been dealing with excess inventories for really three quarters now.
And I guess I'm just curious why is this now becoming more evident at Cisco versus a few quarters ago. And then also you mentioned that the issue is spreading more to enterprises, we don't typically think about enterprises.
Inventory.
Infrastructure. So I guess the question for you is.
Has something changed there or is this more distribution channel inventory any insight would be great. Thanks.
Yeah. Thanks George.
I think that.
The reason it's become relevant now is because I mean, we really unloaded.
Our backlog in the last six months I mean, and it was billions of dollars more than what we would normally shipped to customers during that time period. So they.
I think it's just and we know that.
The cloud providers as an example had been buying ahead and they had been doing it for sure to your point.
And all along we are.
We have very sequence to purchasing cycles with those players. So we kind of know when theyre going to start placing their next orders.
On the enterprise, we're talking about the top 200 customers right. These are these are the big customers who actually.
If they're doing a if theyre doing a refresh of our of their infrastructure. They might order 400, 500 switches as an example.
Or they may be doing a branch rollout.
And in some cases to your point it could be sitting with them or they could have a partner who's doing the staging and the partner may be backed up with.
Resources to try to get the staging done so it varies but it could be either one of those were combination of both and George just to put some some data for that.
This data, but I'll repeat it our revenue growth obviously the quarter, we're announcing now product revenue growth was 9%, but if you go back to Q4 product revenue growth was 20% and in Q3. It was 17%. So obviously, we get revenue when we can complete a shipment and get it out the door. It gives you a sense of just how much has been pushed out and as Chuck said in the last two years.
The three quarters.
Alright, thank you.
Thank you George and then Michelle we have time for one last question.
Thank you Michael <unk> with Goldman Sachs. You May go ahead.
Hey, good afternoon. Thanks for the question I just had two.
First on the AI orders 1 billion, what's the feedback from the hyper scaler on your improving position with these customers.
Relative to a few years ago is it selling.
Selling into more disaggregated fashion with Silicon line is it a desire for silicon diversification.
Then the second question just as a follow up on the <unk>.
Order slowdown.
Was that more concentrated in the campus with wireless Lan and wired or data center.
Both just within enterprise specifically thank you.
Thanks, Michael.
<unk>.
On the AI question relative to the cloud players I think that.
Look I think early on.
We regained their footing there because we listened and we showed flexibility with our willingness to disaggregate if they wanted to do so.
And then and we're in.
I can't even remember but.
Numerous use cases across the large web scale players and I think we added another.
Over 10, new use cases last quarter alone, where we had been designed in.
And I think it's so I think that the disaggregation in the flexibility and us listening to them and understanding what they wanted was the reason that we got back in.
And now the feedback is as long as we're performing I think they like our products they like the power savings of Silicon one.
The massive power lower massively lower power consumption.
I think they do like silicon diversity for sure.
And then as you look at the AI infrastructure. That's currently.
Primarily being supported via Infiniband.
They just want to move to more of a standard broad based technology like Ethernet that they can actually have multiple sources.
And so we think that's what's driving that now and now it's just about performing and executing and delivering on what we tell them. We're gonna do Scott you want to take the second yeah, Michael I think I touched on this earlier.
And the question came up I think the way to think about it is.
First of all if you're trying to generalize the trend more broadly across the industry. It may be a little difficult because we've cleared our backlog I think significantly faster than others have but where we saw a differentiation was less between say datacenter infrastructure and campus networking and more between networking and wireless we did see.
Because we've shipped an enormous amount of wireless.
Access points out we didn't see that take a little bit more of an impact just because our customers are sitting on more inventory on hand of that that theyre looking to get installed.
Great. Thank you Chuck Thank you Scott.
Alright, Thank you Michael and Alright. So we'll go ahead and turn it over to you Chuck for some closing remarks.
Yeah. Thank you Sammy and welcome again.
We're proud of the team for their performance in Q1, obviously, a very solid quarter with the exception of this demand issue that we talked about we'll always try to be transparent with you and share with you exactly what we're seeing.
We are we know what's going on we're on top of it and we do feel that it's temporary.
At the same time, we're very confident in our opportunities long term, we're confident in the AI opportunity, we're very encouraged by our improving position in security.
Observe ability.
And we're also very encouraged.
By the the opportunities that will come with the <unk> acquisition I think many of you know that on Monday night, the waiting period for review under the Hart Scott Rodino Act in the U S expired, meaning that we've <unk>.
Secondly pass the antitrust review period in the United States, we're excited about that.
At our partner Summit last night, our last week the feedback on our portfolio right now is probably as good as it's been in a long time.
And also just want to really reiterate our commitment to delivering value to you and our shareholders with via.
The operating leverage capital allocation, and obviously, managing our expenses and times.
When we are when we see challenges like we have right now so thank you for joining us today and I'll turn it back over to Sandy.
Cisco's next quarterly call, which will reflect our fiscal year 2024 second quarter results will be on Wednesday February 14th 2024 at 130 PM Pacific time, 430 PM. Eastern time. This concludes today's call. If you have any further questions. Please feel free to contact the Cisco Investor Relations Department and we thank you very much for joining the call today.
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