Q3 2024 Cisco Systems Inc Earnings Call
Operator: Welcome to Cisco's third quarter fiscal year 2024 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 Investor Relations. Sir, you may begin.
Welcome to Cisco's third quarter fiscal year 'twenty 'twenty four financial results conference call at the request of Cisco Today's conference is being recorded if you have any objections you may disconnect now.
Sami Badri: Now I would like to introduce Sami Badri head of Investor Relations. Sir you may begin welcome everyone to Cisco's third quarter fiscal year 'twenty for a conference call. This is Sami Badri Cisco's head of Investor Relations and I'm joined by Chuck Robbins, Our chair and CEO and Scott Herren, our CFO and given our recently closed acquisition of Splunk. We are also joined.
Sami Badri: Welcome, everyone, to Cisco's third quarter Fiscal Year 24 conference call. This is Sami Badri, Cisco's Head of Investor Relations, and I am joined by Chuck Robbins, our Chairman and CEO, and Scott Herron, our CFO. And given our recently closed acquisition of Splunk, we are also joined by Gary Steele, the former CEO of Splunk, which is now a Cisco company.
Speaker Change: Hi, Gary Steele, the former CEO of Splunk, which is now a sysco company.
Sami Badri: By now, you should have seen our earnings press release. A corresponding webcast with slides, including supplementary information, will be available on our website in the Investor Relations section following the call. Income Statements, Full GAAP to Non-GAAP Reconciliation Information, Balance Sheets, Cash Flow Statements, and other financial information can also be found in the Financial Information section of our Investor Relations website. Throughout this conference call, we will be referencing both GAAP and Non-GAAP financial results, and will discuss product results in terms of revenue, and geographic and customer results in terms of product orders, unless stated otherwise.
Speaker Change: By now you should have seen our earnings press release.
Speaker Change: Corresponding webcast with slides, including supplemental information will be available on our website in the Investor Relations section following the call.
Speaker Change: 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.
Speaker Change: Unless stated otherwise.
Sami Badri: 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 fourth 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 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.
Speaker Change: 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 fourth 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 forms 10-K and thank you.
Chuck: Which identify important risk factors that could cause actual results to differ materially from those contained in our 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, Jamie.
Sami Badri: 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 explicit public disclosure. I will now turn it over to Chuck. Thanks, Sammy.
Charles H. Robbins: Thanks, Sami, and thank you all for joining us today. We delivered a solid performance in Q3, with organic revenue coming in at the high end of our guidance range. Strong operating leverage across our business drove gross margins to exceed the high end of our expectations, resulting in better than anticipated earnings per share performance. We once again delivered good growth and annualized recurring revenue, remaining performance obligations, and subscription revenue. We have transformed our business model, with revenue from subscriptions now accounting for more than half of our total revenue, even before the addition of Splunk.
Chuck: And thank you all for joining US today, we delivered a solid performance in Q3 with organic revenue coming in at the high end of our guidance range strong operating leverage across our business drove gross margins to exceed the high end of our expectations, resulting in better than anticipated earnings per share performance.
We once again delivered good growth in annualized recurring revenue remaining performance obligations and subscription revenue.
Chuck: We have transformed our business model with revenue from subscriptions now accounting for more than half of our total revenue even before the addition of Splunk.
Charles H. Robbins: With the success of our transformation, we are well positioned to drive long-term growth, powered by innovation across the organization. I want to thank the entire Cisco team as it is through their dedicated efforts that our research and development engine has never been stronger across networking and silicon, observability, security, collaboration, and AI. The strength of our core business continues to produce strong cash flows, reinforcing our ongoing commitment to delivering consistent capital returns. In Q3, we returned $2.9 billion in value to our shareholders through share repurchases and cash dividends in the quarter, with a total of $8.5 billion in value returned year-to-date.
Chuck: With the success of our transformation, we are well positioned to drive long term growth powered by innovation across the organization.
Chuck: I want to thank the entire Cisco team as it is through their dedicated efforts that our research and development engine has never been stronger.
Chuck: Across networking and Silicon Absorbability security collaboration and AI.
Chuck: The strength of our core business continues to produce strong cash flows reinforcing our ongoing commitment to delivering consistent capital returns and.
Chuck: In Q3, we returned $2 9 billion in value to our shareholders through share repurchases and cash dividends in the quarter with a total of $8 5 billion in value returned year to date.
Charles H. Robbins: Q3 was significant for us in two important ways. First, I couldn't be more excited about the successful close of our Splunk acquisition, Cisco's largest ever. Our acquisition of Splunk was completed midway through our Q3 on March 18th, earlier than initially anticipated. Splunk significantly expands our portfolio of software-based solutions, contributing over $4 billion in annualized recurring revenue, and adds to our position as one of the largest software companies in the world. We're thrilled to welcome the Splunk team to Cisco and are very excited about what we can deliver for our customers as we integrate our complementary security and observability capabilities.
Chuck: Q3 was significant for us in two important ways first I couldnt be more excited about the successful close of our Splunk acquisition Cisco's largest ever.
Chuck: Our acquisition of Splunk was completed midway through our Q3 on March 18th earlier than initially anticipated.
Chuck: <unk> significantly expands our portfolio of software based solutions contributing over $4 billion in annualized recurring revenue and adds to our position as one of the largest software companies in the world.
Chuck: We are thrilled to welcome the Splunk team of Cisco and are very excited about what we can deliver for our customers as we integrate our complementary security and observe ability capabilities.
Charles H. Robbins: Our unified platform will revolutionize how customers connect and protect their organizations, using data in new ways to enhance their entire digital footprint. Second, we introduce Cisco HyperShield, our most significant new security innovation with a groundbreaking AI-powered approach to highly distributed security, a first of its kind. Combining security and networking in a way only Cisco can, HyperShield is built into the very fabric of the network, bringing the power of hyperscaler security and connectivity to the enterprise.
Chuck: Our unified platform will revolutionize how customers connect and protect their organizations using data in new ways to enhance their entire digital footprint.
Chuck: Second we introduced Cisco hyper shield, our most significant new security innovation with a groundbreaking AI powered approach to highly distributed security.
Our first of its kind <unk>.
Chuck: Combining security and networking in a way only Cisco can hyper shield has built in the very fabric of the network, bringing the power of Hyperscale of security and connectivity to the enterprise.
Charles H. Robbins: I will talk more about these developments and our innovation momentum in a few moments, but now I'd like to turn to our performance in Q3 and what we're seeing in terms of customer demand. The breadth of our portfolio, together with our many touch points with partners and customers around the world, provides us with differentiated insight into what's happening in our customer base. Based on activations to the cloud, which we track, as well as conversations with our customers and partners, we believe that the products customers have on hand are being steadily deployed in line with the expectations we laid out last quarter. Meaning we currently expect customers to complete the installation of the majority of their inventory by the end of our fiscal year in July.
Chuck: I will talk more about these developments and our innovation momentum in a few moments.
Chuck: But now I'd like to turn to our performance in Q3, and what we're seeing in terms of customer demand.
Chuck: The breadth of our portfolio together with our many touch points with partners and customers around the world provides us with differentiated insight into what's happening in our customer base.
Chuck: Based on Activations to the cloud, which we track as well as conversations with our customers and partners. We believe that the products customers have on hand are being steadily deployed in line with the expectations, we laid out last quarter.
Chuck: <unk>, we currently expect customers to complete the installation of the majority of their inventory by the end of our fiscal year in July.
Charles H. Robbins: At a time when customers are ruthlessly prioritizing their IT investments, we saw product order growth in two of our largest product portfolios, data center switching and campus switching, as well as product order growth in our security and collaboration product categories. Overall, product orders were up 4%, and excluding Splunk, product orders were flat year on year in our customer market. The public sector was strong in EMEA and APJC, but continuing resolution discussions in the U.S. temporarily impacted public sector performance in the Americas.
Chuck: At a time, where customers are ruthlessly prioritizing their it investments we saw product order growth in two of our largest product portfolios datacenter switching and campus switching as well as product order growth in our security and collaboration product categories.
Chuck: Overall product orders were up 4% and excluding Splunk product orders were flat year on year.
Chuck: And our customer markets.
Chuck: Public sector was strong in EMEA and APAC JC, but continuing resolution discussions in the U S temporarily impacted public sector performance in the Americas. We believe this is since cleared with the subsequent signing of the most recent U S. Federal government funding legislation.
Charles H. Robbins: We believe this has since cleared with the subsequent signing of the most recent U.S. federal government funding legislation. While our telco and cable customer demand remains muted worldwide, we are encouraged to see early signs of stabilization and improved performance in web scale in terms of pipeline and orders. Overall, our win rates are stable, and we saw increased strength as we moved through the quarter. This reflects our competitive strength and successful execution and gives us confidence in the long term.
Chuck: While our telco and cable customer demand remained muted worldwide. We are encouraged to see early signs of stabilization and improved performance in web scale in terms of pipeline and orders.
Chuck: Overall, our win rates are stable and we saw increased strength as we moved through the quarter.
Chuck: This reflects our competitive strength and successful execution and it gives us confidence in the long term we.
Charles H. Robbins: We also know that the value of our portfolio is greater than ever, as evidenced by recent sell-side research IT spinning surveys, which show that Cisco is expected to be the only net share gainer within large network budgets over the next 12 months. Now, let's look at our performance in Q3 in more detail.
Chuck: We also know that the value of our portfolio is greater than ever as evidenced by recent sell side research. It spinning surveys, which showed that Cisco is expected to be the only net share gainer within large network budgets over the next 12 months.
Chuck: Now, let's look at our performance in Q3 in more detail.
Charles H. Robbins: We saw revenue growth in security and double-digit growth in observability year-over-year excluding Splunk as customers look to enhance their digital resilience with Cisco's technology. In the past year, we've accelerated our pace of innovation and security, and I'm proud of what our teams have achieved. As I mentioned earlier, last month we introduced Cisco Hypershield, the first truly distributed AI-native cybersecurity solution, which will be built into our networking fabric. This new innovation leverages the recently closed isovalent acquisition to facilitate deployment and software, and the first shipment is scheduled for August this year.
Chuck: We saw revenue growth in security and double digit growth and observe ability year over year, excluding splunk as customers look to enhance their digital resilience with Cisco's technologies.
Chuck: In the past year, we've accelerated our pace of innovation in security and I'm proud of what our teams have achieved.
Chuck: As I mentioned earlier last month, we introduced Cisco hyper shield. The first truly distributed AI native cyber security solution, which will be built into our networking fabric.
Chuck: This new innovation Leverages. The recently closed the Isobutanol acquisition to facilitate deployment in software and the first shipment is scheduled for August this year.
Charles H. Robbins: This launch furthers our vision for the Cisco Security Cloud, which is expected to deliver the industry's most comprehensive, unified platform with end-to-end solutions, making it easier for our customers to protect against the threats of today and tomorrow. Our newest available security solutions, XDR and Secure Access, continue to ramp up quickly with strong customer feedback. Just last week at RSA, we also announced the integration of Cisco XDR with Splunk Enterprise Security, which will give our customers even more value and insight.
Chuck: This launch furthers our vision for the Cisco security cloud, which is expected to deliver the industry's most comprehensive unified platform with end to end solutions, making it easier for our customers to protect against the threats of today and tomorrow.
Chuck: Our newest available security solutions Xdr and secure access continue to ramp quickly with strong customer feedback.
Chuck: Just last week at RSA, We also announced the integration of Cisco Xdr with Splunk Enterprise security, which will give our customers even more value and insights.
Charles H. Robbins: The closing of the Splunk acquisition in Q3 will also enable us to begin driving revenue synergies in our security and observability markets. Upon closing the deal, we identified 5,000 existing Cisco customers who have the potential to become meaningful Splunk customers, and our sales teams are already making those connections. We also see significant opportunities for revenue synergies by leveraging Cisco's robust partner and customer ecosystem in markets where Splunk has limited or no presence.
Chuck: The closing of the Splunk acquisition in Q3 will also enable us to begin driving revenue synergies in our security and observe ability markets.
Chuck: Upon closing the deal we identified 5000 existing Cisco customers, who have the potential to become meaningful splunk customers and our sales teams are already making those connections.
Chuck: We also see significant opportunities for revenue synergies by leveraging cisco's robust partner and customer ecosystem in markets, where <unk> had limited or no presence.
Charles H. Robbins: Earlier this week, Splunk was ranked as the leader in Gartner's Magic Quadrant for security incident and event management, which is a testament to the strength of the offering and the continued business momentum that Splunk has delivered.
Chuck: Earlier this week Splunk was ranked as the leader in Gartner Magic Quadrant for security incident, and event management, which is a testament to the strength of the offering and the continued business momentum that Splunk is delivered.
Charles H. Robbins: We're working on rapid integration, investing in both product integration and go-to-market resources, starting with aligning our Cisco and Splunk sales forces and accelerating channel enablement processes for cross selling and upselling our combined solution. We also continue to capitalize on the multi-billion dollar AI infrastructure opportunity. In web scale, we continue to see momentum, with three of the top four hyperscalers deploying our Ethernet AI fabric, leveraging Cisco validated designs for AI infrastructure.
Chuck: We are working on rapid integration investing in both product integration and go to market resources, starting with aligning our Cisco and Splunk sales forces and accelerating channel enablement processes for cross selling and up selling our combined solutions.
Chuck: We also continue to capitalize on the multibillion dollars AI infrastructure opportunity.
Chuck: And web scale, we continue to see momentum with three of the top four hyperscale is deploying our Ethernet fabric leveraging Cisco validated designs for AI infrastructure.
Charles H. Robbins: In the past two quarters, Cisco has been granted additional design awards based on our 51.2 terabit G200 silicon one AC. We expect these awards to yield orders in fiscal year 25, reinforcing our confidence in our line of sight to $1 billion of AI product orders in fiscal year 25.
Chuck: In the past two quarters Cisco has been granted additional design awards based on our 51, two Terabits G 200, silicon one ASIC.
Chuck: We expect these awards to yield orders in fiscal year 'twenty five reinforcing our confidence in our line of sight to $1 billion of AI product orders in fiscal 'twenty five.
Charles H. Robbins: Additionally, for those leading-edge enterprise customers who seek to be the early adopters of AI, our partnership with NVIDIA will offer easy to deploy cloud-based and on-premise networking solutions for AI inferencing. We believe we are well positioned to be the key beneficiary of AI enterprise application proliferation with the breadth of our portfolio and the vast amounts of data we see. Before I turn it over to Scott, I'd like to share one more update.
Chuck: Additionally, for those leading edge enterprise customers, who seek to be the early adopters of AI, our partnership with Nvidia will offer easy to deploy cloud based and on Prem networking solutions for AI inferencing.
Chuck: We believe we are well positioned to be the key beneficiary of AI enterprise application proliferation with the breadth of our portfolio and the vast amounts of data we see.
Chuck: Before I turn it over to Scott I'd like to share one more update.
Charles H. Robbins: Earlier today, we announced that Jeff Sherrits, our Chief Customer and Partner Officer, is departing Cisco, and that Gary Steele, Splunk's former CEO, has been named Cisco's new President of GoToMarket. Gary is well known for his operational excellence, and in this new role, he will work closely with me to set and execute against our strategic plans and goals for the company. He will continue to lead the Splunk team through the integration process to ensure a seamless integration into Cisco.
Chuck: Earlier today, we announced that Jeff <unk>, our chief customer and partner officer, his departing Cisco and Gary Steele Splunk, former CEO has been named Cisco's, New President of go to market.
Chuck: Gary is well known for his operational excellence and in this new role. He will work closely with me to set and execute against our strategic plans and goals for the company.
Chuck: He will continue to lead the Splunk team through the integration process to ensure a seamless integration into Cisco.
Charles H. Robbins: Gary's operational mindset combined with his intense focus on simplicity and proven ability to drive growth positions him well in this role, and I look forward to working closely with him in this new capacity. I'd also like to take a moment to thank Jeff for all that he's helped Cisco achieve, which is quite a long list of accomplishments in his 24 years here. Moving back to Q3, let me briefly summarize. While our core product portfolio is turning toward normalization as we continue to see customer deployments of shipped equipment progress, we are pleased that our security and observability portfolios have continued to grow and are significantly enhanced by the acquisitions of Splunk and Isovalent.
Chuck: Gary's operational mindset combined with intense focus on simplicity and proven ability to drive growth position him well in this role and I look forward to working closely with him in this new capacity.
Chuck: I'd also like to take a moment to thank Jeff for all that he has helped Cisco achieve which is quite a long list of accomplishments in his 24 years here.
Chuck: Moving back to Q3, let me briefly summarize.
Chuck: While our core product portfolio is turning toward normalization as we continue to see customer deployments of shipped equipment progress. We're pleased that our security and observe ability portfolios have continued to grow and our significantly enhanced by the acquisitions of Splunk and ISIL valent.
Charles H. Robbins: As our customers adopt and deploy AI, they need the infrastructure to power it, the data to develop it, and the security to protect it. And we believe only Cisco can deliver and integrate all three. With our unified platform approach, vast global partner ecosystem, and ability to support hybrid and multi-cloud environments, we will deliver innovation at an unprecedented pace and scale to organizations around the globe. I'll now turn it over to Scott to provide more detail on the quarter and our outlook.
Chuck: As our customers adopt and deploy AI they need the infrastructure to power the data to develop it and the security to protect it and.
Chuck: And we believe only Cisco can deliver and integrate all three.
Scott: With our unified platform approach vast global partner ecosystem and ability to support hybrid and multi cloud environments, we will deliver innovation at an unprecedented pace and scale to organizations around the globe I'll now turn it over to Scott to provide more detail on the quarter and our outlook.
Scott: Thanks Chuck.
Richard Scott Herren: Thanks Chuck. Our Q3 results reflect solid execution with strong margins and a stabilization of orders. Both including and excluding Splunk, our revenue, gross margin, and non-GAAP earnings per share were at or above the high end of our Q3 guidance range. Total revenue was $12.7 billion, down 13% year-over-year. Splunk contributed $413 million in revenue in the partial quarter post-close. Non-GAAP net income was $3.6 billion, down 14%. Non-GAAP earnings per share was $0.88, down 12%. The interest cost of financing the Splunk acquisition slightly more than offset the positive operating impact of Splunk. The net effect was a negative impact of one penny on non-GAAP earnings per share.
Scott: Q3 results reflect solid execution with strong margins and a stabilization of orders, both including and excluding Splunk, our revenue gross margin and non-GAAP earnings per share were at or above the high end of our Q3 guidance range.
Scott: Total revenue was $12 7 billion down 13% year over year.
Scott: <unk> contributed $413 million in revenue and the partial quarter post close.
Scott: non-GAAP net income was $3 6 billion down 14% non-GAAP earnings per share was <unk> 88, <unk> down 12%.
Scott: The interest cost of financing the Splunk acquisition slightly more than offset the positive operating impact of Splunk. The net effect was a negative impact of <unk> on non-GAAP earnings per share.
Richard Scott Herren: Looking at our Q3 revenue in more detail, total product revenue was $9 billion, down 19%, and service revenue was $3.7 billion, up 6%. Networking, our largest product category, was down 27%. We saw declines across all geographic segments due to the continued implementation of inventory by our customers.
Scott: Looking at our Q3 revenue in more detail total product revenue was $9 billion down 19% and service revenue was $3 7 billion up 6%.
Scott: Networking, our largest product category was down 27% we saw declines across most.
Scott: All geographic segments due to the continued implementation of inventory by our customers.
Richard Scott Herren: Bear in mind that our Q3 2023 networking revenues benefited from significant shipments of excess backlog. Security was up 36%, including the benefit received from the Splunk acquisition. Excluding Splunk, security grew 3%, driven by growth in SASE and double-digit growth in our zero-trust offering. Collaboration was flat, driven by growth in our cloud calling and contact center offerings, offset by declines in meetings and devices, and observability was up 27%, driven by growth in thousand eyes network services and the benefit from the Splunk acquisition. Excluding Splunk, observability grew 14% for the quarter. As Chuck said, we have successfully transformed our business model.
Scott: Bear in mind that our Q3 2023 networking revenues benefited from significant shipments of excess backlog.
Scott: Security was up 36%, including the benefit received from the <unk> acquisition.
Scott: Excluding Splunk security grew 3% driven by growth in sassy and double digit growth in our zero Trust offering.
Scott: Collaboration was flat driven by growth in our cloud, calling and contact center offerings offset by declines in meetings and devices.
Scott: And on durability was up 27% driven by growth in <unk> network services and the benefit from the Splunk acquisition.
Scott: Excluding Splunk Absorbability grew 14% for the quarter.
Jack: As Jack said, we have successfully transformed our business model.
Richard Scott Herren: ARR ended the quarter at $29.2 billion, which increased 22% due to continued strong performance and contribution from Splunk. These factors also drove our product ARR growth of 44%. Without Splunk, ARR was $25 billion, up 5%, and product ARR was up 9%. Total subscription revenue increased 12% to $6.9 billion, which now represents 54% of Cisco's total revenue. Without Splunk, total subscription revenue was up 5%, representing 53% of Cisco's total revenue. Total software revenue was up 5% at $4.5 billion, with software subscription revenue up 17%. Without Splunk, Total Software Revenue was down 4%, and Software Subscription Revenue was up 6%. 91% of our total software revenue was subscription-based.
Jack: <unk> ended the quarter at $29 2 billion, which increased 22% due to continued strong performance and contribution from Splunk.
Jack: These factors also drove our product IRR growth of 44%.
Jack: Without swung IRR was 25 billion up 5% and product IRR was up 9%.
Jack: Total subscription revenue increased 12% to $6 9 billion, which now represents 54% of Cisco's total revenue.
Jack: Without Splunk total subscription revenue was up 5%, representing 53% of Cisco's total revenue.
Jack: Total software revenue was up 5% at $4 5 billion with software subscription revenue up 17%.
Jack: Without Splunk total software revenue was down 4% and software subscription revenue was up 6%.
Jack: 91% of our total software revenue was subscription based.
Richard Scott Herren: Total RPO was $38.8 billion, up 21% due to both strong performance and the Splunk acquisition. Product RPO grew 29%. Total short-term RPO was $20.1 billion, up 19%.
Jack: Total <unk> was $38 8 billion up 21% due to both strong performance and the Splunk acquisition.
Jack: Product <unk> grew 29%.
Jack: Short term <unk> was $20 1 billion up 19%.
Richard Scott Herren: Without Splunk, RPO is $35.3 billion, up 10%, with product RPO also growing at 10%. Q3 product orders were up 4%. However, excluding Splunk, product orders were flat year over year.
Jack: Without Splunk <unk> was $35 3 billion up 10% with product <unk> also growing at 10%.
Jack: Q3 product orders were up 4%.
Jack: Excluding splunk product orders were flat year over year.
Richard Scott Herren: We see customer product implementations progressing in line with our expectations, and we expect these deployments to be largely complete by the end of our current fiscal year. Looking at our geographic segments year over year, the Americans were up 6%, AMIA was up 4%, and APJC was down 1%. In our customer markets, service provider and cloud was up 10%, public sector was up 6%, and enterprise was up 2%. Total non-GAAP gross margin came in at 68.3%, up 310 basis points year over year, and above the high end of our guidance range. Product gross margin was 66.9%, up 240 basis points, of which Splunk contributed 70 basis points. The remaining improvement was driven primarily by a favorable product mix and lower freight and other costs.
Jack: We see customer product implementation is progressing in line with our expectations and we expect these deployments to be largely complete by the end of our current fiscal year.
Jack: Looking at our geographic segments year over year, the Americas was up 6% EMEA was up 4% and <unk> was down 1%.
Jack: And our customer markets service provider and cloud was up 10% public sector was up 6% and enterprise was up 2%.
Jack: Total non-GAAP gross margin came in at 68, 3% up 310 basis points year over year and above the high end of our guidance range.
Jack: Product gross margin was 66, 9% up 240 basis points of which Splunk contributed 70 basis points.
Jack: The remaining improvement was driven primarily by favorable product mix and lower freight and other costs.
Richard Scott Herren: Service gross margin was 71.6%, up 430 basis points. Non-GAAP operating margin came in at 34.2%, up 30 basis points, driven by our continued commitment to disciplined spend management. Operating cash flow was $4 billion, down 24%. Shifting to the balance sheet, we ended Q3 with total cash, cash equivalents, and investments of $18.8 billion. Uses of cash during the quarter included a net outflow of $27.4 billion related to our acquisition of Splunk. And in line with our capital allocation strategy, we returned $2.9 billion in value to our shareholders, including $1.6 billion for our quarterly cash dividend and $1.3 billion of share repurchase. Year-to-date, we've returned $8.5 billion in capital to our shareholders.
Jack: Service gross margin was 71, 6% up 430 basis points.
Jack: non-GAAP operating margin came in at 34, 2% up 30 basis points driven by our continued commitment to disciplined spend management.
Jack: Operating cash flow was 4 billion down 24%.
Jack: Shifting to the balance sheet. We ended Q3 with total cash cash equivalents and investments of $18 8 billion.
Jack: Uses of cash during the quarter included a net outflow of $27 4 billion related to our acquisition of Splunk.
Jack: And in line with our capital allocation strategy, we returned $2 9 billion in value to our shareholders.
Jack: Adding $1 6 billion for our quarterly cash dividend and $1 3 billion of share repurchases.
Jack: Year to date, we have returned $8 5 billion in capital to our shareholders.
Richard Scott Herren: To summarize, we successfully completed the acquisition of Splunk, drove strong non-GAAP margins, and increased our operating leverage in the quarter. Turning to our financial guidance, which includes our integration of Splunk, for Q4, our guidance is as follows. We expect revenue to be in the range of $13.4 billion to $13.6 billion. We anticipate the non-GAF gross margin to be in the range of 66.5% to 67.5%. The non-GAAP operating margin is expected to range from 31.5% to 32.5%.
Jack: To summarize we successfully completed the acquisition of Splunk drove strong non-GAAP margins and increased our operating leverage in the quarter.
Richard Scott Herren: Non-GAAP earnings per share is expected to range from $0.84 to $0.86. Our Q4 guidance includes $950 million to $1 billion in revenue from Splunk and a non-GAAP EPS of negative three cents as the interest impact more than offsets the operating benefit. In Q4, we're assuming a non-GAAP effective tax rate of approximately 18%. For fiscal year 24, our guidance is as follows. We expect revenue to be in the range of $53.6 to $53.8 billion.
Jack: Turning to our financial guidance that includes our integration of Splunk for Q4, our guidance is as follows.
Jack: We expect revenue to be in the range of $13 4 billion to $13 6 billion.
Jack: Anticipate the non-GAAP gross margin to be in the range of 66, 5% to 67, 5%.
Jack: non-GAAP operating margin is expected to range from 31, 5% to 32, 5%.
Jack: non-GAAP earnings per share is expected to range from <unk> 84 to 86.
Jack: Our Q4 guidance includes $950 million to $1 billion in revenue from Splunk, and non-GAAP EPS of negative <unk> <unk> as the interest impact more than offset the operating benefits.
Jack: In Q4, we're assuming a non-GAAP effective tax rate of approximately 18%.
Jack: For fiscal year 'twenty four our guidance is as follows we expect revenue to be in the range of $53 six to $53 8 billion.
Richard Scott Herren: Non-GAAP earnings per share guidance is expected to range from $3.69 to $3.71. We're assuming a non-GAAP effective tax rate of approximately 19%. Looking beyond Q4 and into fiscal 2025, in addition to the top line benefits from the Splunk acquisition, there are a few points to bear in mind as you build your model. First, we expect revenue growth to be in the low to mid-single-digit range next year. Second is the interest impact from the acquisition, which we expect to be a headwind of approximately $350 million per quarter, including both the foregone interest from cash off the balance sheet and the additional interest payments on debt.
Jack: non-GAAP earnings per share guidance is expected to range from $3 69 to.
Jack: A $3 71.
Jack: We're assuming a non-GAAP effective tax rate of approximately 19%.
Jack: Looking beyond Q4 and into our fiscal 2025. In addition to the top line benefits from the <unk> acquisition. There are a few points to bear in mind as you build your models.
Jack: First we expect revenue growth to be in the low to mid single digit range next year.
Jack: Second is the interest impact from the acquisition, which we expect to be a headwind of approximately $350 million per quarter, including both the foregone interest from cash off the balance sheet and the additional interest payments on debt.
Richard Scott Herren: Third, we're working to quickly integrate Splunk into our product offerings, go to Market Engine, and expect to invest in OPEX in fiscal 25 to drive those revenue synergies. Given these points, we expect fiscal 25 operating margin to be in line with our Q4 guidance. We'll give more formal guidance as we get to the next earnings call, but I want to make sure you have those three thoughts in mind. And as we've stated, we expect the deal to be non-GAAP earnings per share accretive in fiscal 26 and beyond. Sami, now we move into the Q&A.
Jack: Third we're working to quickly integrate splunk into our product offerings go to market engine and expect to invest in opex in fiscal 'twenty five to drive those revenue synergies.
Jack: Given these points, we expect fiscal 'twenty five operating margins to be in line with our Q4 guidance.
Jack: We'll give more formal guidance as we get to the next earnings call, but I want to make sure you have those three thoughts in mind and as we've stated we expect the deal to be non-GAAP earnings per share accretive in fiscal 'twenty six and beyond.
Sami Badri: Sami, let's now move into the Q&A.
Sami Badri: Thank you, Scott. Before we start the Q&A portion of the call, I would like to remind analysts to ask one question and a single follow-up question. Operator, can we move to the first analyst in the queue?
Speaker Change: Thank you Scott before we start the Q&A portion of the call I would like to remind analysts to ask one question and a single follow up question operator can we move to the first analyst in the queue.
Operator: Thank you. Amit Daryanani with Evercore.
Speaker Change: Thank you Amit <unk> with Evercore you May go ahead.
Speaker Change: Yes.
Amit Jawaharlaz Daryanani: You may go ahead.
Amit: Thanks, a lot for taking my question.
Amit: I'll ask them both at the same time, Chuck it's really nice to hear about inventory digestion thought of being done in audit growth getting back to flat or growing in some of the verticals.
Amit: Let me attack some of the tech companies, they get that talked about a softer macro environment, that's resulting in some pause in spending I'd love to understand kind of away from the inventory digestion that it seems like it's happening what are you seeing from a macro environment and if that is actually starting to improve as well for you folks.
Speaker Change: And then if I could just follow up on a different site. The 1 billion of AI orders that you have.
Speaker Change: Did you say that you believe you can get in fiscal 'twenty. Five can you just talk about is this other wind more coming from the silicon one side are optical switching solution, just any kind of way where do you expect to get these waves that would be helpful. Thank you.
Amit Jawaharlaz Daryanani: Thanks a lot for taking my question. I have two, so I'll ask them both at the same time.
Amit: Thank you Amit I appreciate the questions so from a macro perspective.
Amit: What I would say is it.
Amit: Ironically, we saw the quarter actually slow show slight improvement as we move through the quarter. So at the end of the quarter was actually a little stronger than the beginning.
Amit Jawaharlaz Daryanani: Chuck, it's really nice to hear about inventory digestion sort of being done and auto growth, you know, getting back to flat and growing in some of the verticals. Some of the tech companies, I think, have talked about a softer macro environment that's resulting in some positive spending. So I'd love to understand kind of away from the inventory digestion that seems like it's happening, what are you seeing from a macro environment, and if that's actually starting to improve as well for you folks.
Amit: So we.
Amit: And look we obviously believe that our customers now are on track with the inventory digestion that we talked about last quarter. So that's positive, but we saw the Americas, excluding splunk was up 2%. So that was a positive sign.
Amit: And Europe was flat so that was that was good and when you see campus.
Amit: Switching and data center switching both positive and by the way data Center switching was in the mid teens growth. So customers are investing in these private data centers and.
Amit: And collaboration being positive security being high single digits on the order side it was.
Amit: But we didn't see any different behavior from our customers during this quarter than we'd seen they still are ruthlessly prioritizing what projects they spend money on where they spend their dollars, but we didn't see any fundamental shift in the macro on.
Amit Jawaharlaz Daryanani: And then if I could just follow up on a different side, the 1 billion AI orders that you have to, you know, that you see, that you believe you can get at fiscal 25. Can you talk about, you know, are these other wins more coming from the silicon side or the optical side or the switching solution? Just any kind of where you, where do you expect to get these wins would be helpful. Thank you.
Amit: The second question on the $1 billion of AI It is largely.
Charles H. Robbins: Thank you, Amit. I appreciate the questions.
Amit: Driven by the web scale infrastructure as I said, we had we've got three out of four that are running our AI Ethernet fabric and we also had two or three more design wins during the quarter I believe in the backend networks inside these web scale players. So it's predominantly that however, we are beginning to see enterprise.
Amit: Pipeline.
Amit: Materialize as I said last quarter.
Amit: So that's really what it's made up of and it is both the systems as well as optics.
Amit: Across our across those customers.
Amit: Thank you Amit operator can move to the next question.
Simon Matthew Leopold: Thank you our next caller is Simon Leopold with Raymond James You May go ahead Sir.
Simon Matthew Leopold: Great. Appreciate you taking the question.
Simon Matthew Leopold: I wanted to see if you could give us some metrics. There is some help trying to extrapolate the 5000 customer opportunity for Splunk.
Simon Matthew Leopold: Just give us a better idea of what that could mean from a dollars perspective, if youre able to penetrate it and my follow up is really I am trying to seek a little bit more clarification on this 1 billion AI pipeline, because theres been a lot of debate in the investment community regarding it.
Simon Matthew Leopold: I wanted to I wanted to see if we can get some clarification that when we talk about the context of what's in there.
Simon Matthew Leopold: <unk> in the backend that theres not some extrapolation too.
<unk> and data center applications, so explicitly backend and I think Chuck you are saying that it is mostly switching in the backend with some optics and some silicon one I really would like to clarify that because we're getting a lot of questions. Thank you.
Charles H. Robbins: So from a macro perspective, what I would say is that, ironically, we saw the quarter actually show slight improvement as we moved through the quarter. So the end of the quarter was actually a little stronger than the beginning. So we And look, we obviously believe that our customers now are on track with the inventory digestion that we talked about last quarter.
Speaker Change: Alright, let me let me answer the second one first if you don't mind since I just want to on that one.
Charles H. Robbins: So that's positive. But you know, we saw Americas excluding Splunk was up 2%, so that was a positive sign. And Europe was flat.
Speaker Change: It's a $1 billion of.
Speaker Change: The orders that we have line of sight to a next fiscal year is what I had said on one of the earlier calls maybe last call I think I said, our pipeline was roughly three times that we've that we see but we believe we have good visibility to $1 billion in orders in FY 'twenty five.
Charles H. Robbins: So that was good. And when you see, you know, campus switching and data center switching, both positive, and by the way, data center switching was in the mid-teens growth, so customers are investing in these private data centers. And collaboration being positive, and security being high single digits on the order side. It was, you know, but we didn't see any different behavior from our customers during this quarter than we'd seen before; they still are ruthlessly prioritizing what projects they spend money on, where they spend their IT dollars. But we didn't see any fundamental shift in the macro.
Speaker Change: That is primarily back end and it is a combination of systems that are based on silicon one.
Speaker Change: Potentially some standalone silicon, one, but mostly systems and then optics as well.
Charles H. Robbins: On the second question, the billion dollars of AI, it is largely driven by the web scale infrastructure. As I said, we've got three out of four that are running our AI Ethernet fabric. And we also had two or three more design wins during the quarter, I believe, in the back end networks inside these web scale players. So it's predominantly that. However, we are beginning to see enterprise pipeline materialize, as I said last quarter. So that's really what it's made up of. And it is both systems as well as optics.
Speaker Change: And then there is that we're beginning to see some enterprise use cases, but it's predominantly backend and the.
Speaker Change: And the hyper hyper scaler space.
Charles H. Robbins: Thank you, Amit. Operator, can we move to the next question?
Gary: On the 5000 customers, we basically did an analysis of where we have Cisco has super strong relationships and Splunk doesn't have a presence of 5000 customers and we've now map those two sales teams and Gary you want to make a comment on that because you've been involved in that deeply yes. So we're excited about the fact that basically we've identified these 5000 cars.
Gary: A R square Splunk traditionally has had no footprint.
Gary: And the goal there is to have the Cisco sellers opened the door for this block team. There is also a financial incentives are in place to Incent. The Cisco salaries to support this activity and Thats really thats, one aspect of where we see tremendous opportunity and then second to that obviously, there's a lot of overlap in our core.
Gary: Customers, where the Cisco team may have higher more strategic relationships, where they can extend our footprint assistant helping extend our footprint within an existing splunk base and we're already seeing that activity right out of the gate. So we feel like we're off to a very good start and I'm Super encouraged by the level of collaboration we've seen so far.
Operator: Thank you. Our next caller is Simon Leopold with Raymond James. You may go ahead, sir.
Simon: Thank you Simon operator can we move to the next question.
Simon Matthew Leopold: Great, I appreciate you taking the question. I wanted to see if you could give us some metrics or some help trying to extrapolate the 5,000 customer opportunities for Splunk.
Speaker Change: Thank you. Our next caller is Kelly with Bank of America. You May go ahead Sir.
Simon: Guys.
Simon Matthew Leopold: Just give us a better idea of what that could mean from a dollar perspective if you're able to penetrate it. And my follow-up is really, I'm trying to seek a little bit more clarification on this 1 billion dollar AI pipeline because there's been a lot of debate in the investment community regarding it. So I want to see if we can get some clarification that when we talk about the context of what's in there, it's explicitly in the back end that there's not some extrapolation to the Front End Data Center Application.
Kelly: I'm going to ask my two questions also together.
Simon: <unk>.
Kelly: You have.
Kelly: Great motion security with lots of new products and you have some market reduction to the channel and you have also the opportunity for <unk>.
Give us a sense of timing.
Kelly: How long security grew again only 3%.
Kelly: Explore skin and how.
Kelly: How long does it take.
Speaker Change: To get all the benefits that you're talking about in these three main areas or in general is it something where it could see barely 25 or later in 'twenty five or 'twenty six.
Simon Matthew Leopold: So, exclusively back end, and I think, Chuck, you were saying that it is mostly switching in the back end with some optics and some silicon. I really would like to clarify this because we're getting a lot of questions. Thank you.
Speaker Change: Just a sense of timing of all of these initiatives.
Charles H. Robbins: All right, let me answer the second one first if you don't mind since I just went on that one. It's a billion dollars of orders that we have line of sight on for next fiscal year, as I had said. And on one of the earlier calls, maybe the last call, I think I said our pipeline was roughly three times that of what we see, but we believe we have good visibility to a billion dollars in orders in FY 25.
Speaker Change: Second parties related to it.
Speaker Change: <unk>.
Speaker Change: From the numbers.
Speaker Change: Could you give us enough data to welcome to favorable spot from 2004, and I can take consensus for 2005.
Speaker Change: I think your core Cisco.
Speaker Change: Your your initial.
Speaker Change: Growth expectations for 2005 is about 5% because we need to remove also tobacco contribution this year.
Speaker Change: So Cisco X backlog contribution should grow 5%.
Speaker Change: It's higher than before so the question is are you comfortable with Cisco growing 5% next year give or take and what is the country, but what is the main component.
Speaker Change: This growth thanks.
Charles H. Robbins: That is primarily back-end, and it is a combination of systems that are based on Silicon One, potentially some stand-alone Silicon One, but mostly systems, and then optics as well. And then there's, we're beginning to see some enterprise use cases, but it's predominantly back end in the hyperscaler space. On the 5000 customers, we basically did an analysis of where we have Cisco has super strong relationships, and Splunk doesn't have a presence among 5000 customers. And we've now mapped those to the sales teams. And Gary, do you want to make a comment on that? Because you've been deeply involved in that? Yeah, So
Speaker Change: Thanks for the question so.
Speaker Change: Let's go with that.
Speaker Change: First question and I'll say on the organic Cisco Security front Youre right revenue was up three but as I said, our demand was the highest it's been in.
Speaker Change: A couple of years and it was high single digits. So we're seeing the traction on these new products. They're just ramping right. There are new customers are testing they are implementing and by the way a lot of it is ratable. So you don't you take the orders and then.
Speaker Change: Like close to 80% of our security portfolio was ratable.
Speaker Change: So that actually impacts the time for to transition into revenue.
So that's on the security side, but I think on the security and Splunk side I'll talk about it a little bit.
Gary Steele: Yeah, so we're excited about the fact that we've identified these 5000 customers where Splunk traditionally has had no footprint. And the goal there is to have the Cisco sellers open the door for the Splunk team. There's also a financial incentive or spiff in place to incentivize the Cisco sellers to support this activity. And that's really one aspect of where we see tremendous opportunity. And then second to that, obviously, there's a lot of overlap in our customers where the Cisco team may have higher, more strategic relationships where they can extend our footprint, assist in helping extend our footprint within the existing Splunk base. And we're already seeing that activity right out of the gate. So we feel like we're off to a very good start, and I'm really encouraged by the level of collaboration we've seen so far.
Gary Steele: Thank you, Simon. Operator, can we move to the next question?
Operator: Thank you. Our next caller is Tal Liani with Bank of America. You may go ahead, sir.
Speaker Change: And then I'll, let Gary comment on some of the integration, but we announced our first integration last week at RSA. Our intent is just to continue pushing innovation out we will have more announcements at Cisco live. So I think that Youll continue to see that happen I've always said on the security front, even before spark that we had brought in a new team we've been building new innovation the team has.
Tal Liani: I'm going to ask my two questions also together, they're linked, have [inaudible] You can get just a sense of the timing of all these initiatives. The second part is related to it, if I remove Splunk from the numbers. Can you give us enough data to completely remove Splunk from 24 and I can take the consensus for 25? Then your core Cisco, meaning your initial growth expectations for 25 are about 5% because we need to remove also the backlog contribution this year.
Tal Liani: So Cisco X backlog contribution should grow 5%. It's higher than before. So the question is, are you comfortable with Cisco growing 5% next year, give or take? And what is the contribution? What is the main component of this growth? Thanks.
Tal Liani: So thanks for the question. So on the on the, let's go with the first question.
Speaker Change: Built five new products and solutions from the ground up over the last 12 months as you alluded to just done a phenomenal job.
Speaker Change: And I had always said that second half of 'twenty four I expected you would see an improvement and then in 'twenty five youll see it get to where we really needed to be and.
Speaker Change: And I think Thats still stands you want to comment on the Cisco the integration stuff here.
Charles H. Robbins: And I'll say on the organic Cisco security front, you're right, revenue was up three. But as I said, our demand was hot, the highest it has been in probably a couple of years. And it was high single digits.
Charles H. Robbins: So we're seeing the traction on these new products. They're just ramping right now. Their new customers are testing them, and they're implementing. And by the way, a lot of it is ratable. So you don't take the orders, and then you, you know, close to 80% of our security portfolio is ratable. So that actually impacts the time for it to transition into revenue.
Speaker Change: The things I'm Super excited about is the progress we've made from an integration standpoint, So last week at RSA. For example, we announced the integration between the Cisco Xdr solution and Splunk Enterprise security solutions that bring bringing high telemetry alerts into.
Speaker Change: Splunk Enterprise security Gibbs.
Speaker Change: A splunk customer that much more value in terms of threat detection and this is just a start.
Speaker Change: The element of integration that we can deliver that will ultimately drive growth for the security portfolio broadly, but also block and as we've described earlier our integration strategy really is a strong ground game, meaning we want to move the ball three or at the time and we're going to demonstrate to the industry that we can continue to innovate at a rapid pace as the combined.
Charles H. Robbins: So that's on the security side. But I think on the security and Splunk side, so I'll talk about that a little bit. And then I'll let Gary comment on some of the integration, but we announced our first integration last week at RSA. Our intent is just to continue pushing innovation out. We'll have more announcements at Cisco Live, so I think that you'll continue to see that happen. I've always said on the security front, even before Splunk, that we had brought in a new team.
Speaker Change: And we feel like we're on a really good track to do that.
Charles H. Robbins: We've been building new innovation. The team has built five new products and solutions from the ground up over the last 12 months, as you alluded to, just done a phenomenal job. And I always said that in the second half of 24, I expected you would see an improvement, and then in 25, you'll see it get to where we really need it to be. And I think that still stands. Do you want to comment on the Cisco, the integration stuff, Gary? You bet!
Gary: Thanks, Gary and then on your AI timing question in 'twenty five my suspicion is that that's going to start low at the beginning of the year and it will ramp as we get through the year, So I would be thinking more back half.
Gary: But we'll have to see how these pilots go we'll probably know a little more about we will know more in the next 90 days.
Gary: On that on your second question first of all I. Appreciate the fact that you recognize that.
Gary: Several billion dollars of backlog that we cleared last year.
Gary: Because this is the this is <unk>.
Gary: 25 will be a year, where we're still gonna have strange comparison.
Gary: Comparisons because we're just still coming out of the tail end of this supply chain.
Gary: Situation in this whole digestion issue and the inventory shipments and everything so 26 over 25 will be the year, where you will really hopefully get back to real apples to apples year over year comparisons.
Gary: And while I.
Gary: We arent, giving a breakdown today of the FY 'twenty five.
Speaker Change: So we're spot contribution will obviously have an analyst day in June and we will go into more detail there and Scott do you have anything to add to that or is that good I think you said it right.
Speaker Change: The fact that you recognize the backlog work off it clearly is a headwind on the just the core Cisco when you look at year on year growth rate into fiscal 'twenty five.
Speaker Change: Bear in mind too, obviously Q3 was a tough compare if you remember that we had those three consecutive quarters of revenue growth.
Mid to upper teens Q3 of 'twenty, three and we're comparing to now Q4, and then Q1 of this year.
Speaker Change: And so in addition to doing the year on year growth rates the way Youre doing it you need to think of the backlog impact on the year on year growth rates in both this quarter next quarter and again, a tough compare in Q1 of 'twenty five.
Thank you Todd operator can move to the next question.
David: Thank you David belt with UBS you May go ahead Sir.
Gary Steele: You bet. So one of the things I'm super excited about is the progress we've made from an integration standpoint. So last week at RSA, for example, we announced the integration between the Cisco XDR solution and Splunk's enterprise security solution. So bringing high-telemetry alerts into Splunk enterprise security gives a Splunk customer that much more value in terms of threat detection. And this is just the start of the elements of integration that we can deliver that will ultimately drive growth for the security portfolio broadly, but also for Splunk.
David Belt: Great. Thanks, guys for taking my question, So maybe Scott I want to follow up on that line of questioning from tower.
Scott: Recognize that you have that backlog headwind in 2004.
Speaker Change: But if I just kind of run through what Splunk should be doing versus what they contributed this year. It certainly looks like the backlog.
Speaker Change: Headwind is going to cause corresponds of course is going to be down next year. I know you said, you're going to hold off on giving numbers is that the right math and so basically all of the low single to mid single digit growth.
Speaker Change: Comes from Splunk, and then from a gross margin perspective, obviously sponsors can be a much bigger part of the business.
Speaker Change: Can you maybe walk through you gave us an operating margin framework, but sort of what do you expect from a gross margin perspective, given the strong gross margin profile of Splunk being a bigger part of the business next year versus this year. Thank you.
David Belt: Yes. Thanks, David you remember Q4 Q1 of this current fiscal year or fiscal 'twenty four was really the last quarter, where we shipped a lot of I'll call it excess backlog right Theres always.
David Belt: An ambient level of backlog, but we had a lot of excess backlog that built up during the supply constraints. So when you think about the growth rate from 24 to 25, clearly splunk as a positive on that obviously, adding that to it but you also have to think of this year fiscal 'twenty four having non repeatable bit of excess.
David Belt: Backlog that was shipped in the first quarter of this year I remember first quarter of this year. We grew in the mid teens on revenue. So if you net that out and that's the math that <unk> was doing to say the core business is actually growing in those mid single digits in fiscal 'twenty five.
David Belt: We can walk through I know thats a lot of moving parts there David we can walk through that if you want.
On the gross margins I think the way to think about that we had some benefit in the quarter Splunk itself as a benefit of course we.
David Belt: We had some benefits in the quarter on product mix and some cost savings that I don't think are repeatable longer term. So I talked about the guide for Q4 being gross margins in the 67 66 567 five range for Q4, I think that's the right range as you think about fiscal 'twenty five as well.
David Belt: Thank you David operator can move to the next question.
Meta A. Marshall: Thank you meta Marshall with Morgan Stanley You May go ahead.
Meta A. Marshall: Great. Thanks.
Meta A. Marshall: Maybe first question Chuck if you could just kind of update.
Meta A. Marshall: Where are you kind of conversations with customers are around AI, either in kind of desire.
Meta A. Marshall: And to invest on premise or invest in kind of Cisco security products for preparedness.
Meta A. Marshall: Just impacted by that and then maybe second question for Scott.
Speaker Change: Just as we think about kind of the Opex investment that you guys noted for Splunk.
Speaker Change: How should we think of that versus kind of original targets to have <unk> be kind of accretive.
Speaker Change: One year post close.
Peter: Thank you Peter.
Speaker Change: I would say the conversations I think the web scalar is pretty well understood. So I'll talk about the enterprise and I think most enterprises. There are some that are certainly running pilots that are doing some some work today.
Speaker Change: And we.
Speaker Change: We actually have had some we had a handful of wins in the enterprise space for for infrastructure that was supporting AI build outs I would say there is still very very very early.
Speaker Change: We had.
Speaker Change: Our global customer Advisory Board last week in Canada.
Speaker Change: And I think we had about 60 customers there and they are all still trying to figure out exactly what their use cases are and how the architecture is going to play out. So I would say, it's still super early on the enterprise side.
Gary: And sorry did you want to add something Gary.
Gary: And in terms of the way to think about the Opex comment that I made.
Speaker Change: We talked when we announced the acquisition of Splunk that this is much more driven by revenue synergies and cost synergies.
Gary: There will be cost synergies as we work our way through this but we will.
Gary: Spend in fiscal 'twenty five from this point through fiscal 'twenty five ensuring that we get both the product integration right. The organizational integration right. We have to do channel enablement, we have to train their sales team on Cisco trained the Cisco sales team on spot.
Gary: The investment that goes along with that integration in this fiscal 'twenty five is the year, we will do that.
Gary Steele: And as we've described earlier, our integration strategy really is a strong ground game, meaning we want to move the ball three yards at a time. And we're going to demonstrate to the industry that we can continue to innovate at a rapid pace as a combined business. And we feel like we're on a really good track to do that.
Gary: We said in the first year post acquisition that we would be accretive and cash flow and we will.
Gary Steele: Thanks, Gary. And then on your AI timing question in 25. My suspicion is that that's going to start low at the beginning of the year, and it'll ramp as we get through the year. So I'll be thinking more about the back half. But we'll have to see how these pilots go. We'll probably know a little more about how these pilots go. We'll probably know more in the next 90 days. On that second
Charles H. Robbins: First of all, I appreciate the fact that you recognize that several billion dollars of backlog that we cleared last year. Because this is the last, this is a 25th year. It will be a year where we're still going to have It's a strange comparison because we're just still coming out of the tail end of this supply chain. The situation and this whole digestion issue and the inventory shipments and everything, so 26 over 25 will be the year where you will really hopefully get back to real apples to apples year over year comparison, And while I'm not, we aren't giving a breakdown today of the FY 25, or Splunk contribution. We'll obviously have an analyst stay in June, and we'll go into more detail there, and Scott, do you have anything to add to that,
Gary: That will be accretive in gross margin for <unk>, and we will and that will be accretive in earnings per share in the second year. So think of that as fiscal 'twenty six I know disclosed a little bit early and I think there's this perception that it closed six months early so those times ought to be accelerated we thought the acquisition will close around the end of our fourth quarter that closed around.
Gary: The middle of our third quarter. So round numbers. It was a little more than a quarter early but I think the way to think about that is EPS accretive in fiscal 'twenty six.
Gary: Being cash flow and gross margin accretive in fiscal 'twenty five as we invest in the integration.
Speaker Change: Thank you meta operator next question.
James Edward Fish: Thank you James fish with Piper Sandler you May go ahead.
Charles H. Robbins: No, I think you said it right, and Tal, the fact that you've recognized the backlog workoff, it clearly is a headwind on just the core Cisco when you look at year-on-year growth rate into fiscal 25. Bear in mind, too, obviously Q3 was a tough compare. If you remember that we had those three consecutive quarters of revenue growth in the mid-to-upper teens, Q3 of 23 that we're comparing to now, Q4, and then Q1 of this year, and so in addition to doing the year-on-year growth rates the way you're doing it, you need to think of the backlog impact on the year-on-year growth rates in both this quarter, next quarter, and again, a tough compare in Q1 of 25.
Richard Scott Herren: Thank you, Tal. Operator, can we move to the next question?
James Edward Fish: Hey, guys did want to.
James Edward Fish: Doubleclick question here because of the serious ramp on the Opex side to get to really earnings going down again in 'twenty five if my math is right somewhere around $3 50, a share can you elaborate a little bit further as to why it's going to go be that much do we should be expecting revenue.
Operator: Thank you. David Vogt with UBS.
James Edward Fish: Synergies.
Speaker Change: Already in fiscal 'twenty, five with that initial kind of low to mid single digit growth rate or is that just going to take too much time.
Speaker Change: Year, or so to really get and just not to layer on the question here, but as some of the opex ramp due to the conversion.
Speaker Change: Stock based comp of Splunk to cash comp because historically splunk and Cisco have had two totally different philosophies on compensation.
Speaker Change: Yes, Thanks, Jim.
Speaker Change: The opex ramp.
Speaker Change: <unk>.
Speaker Change: I know, we haven't the Splunk team didn't put out guidance for this fiscal year, but you can look at where their opex was headed and.
Speaker Change: And layer that into the Opex that we have there is some growth year on year. There is some investment it's not it's not a substantial ramp up though in the investment on integration. It's more a question of just pulling the splunk team together with ours as I said, there will be some cost synergies there are likely to come more in the second half of the year, but this wasn't a deal there.
Speaker Change: Was motivated by cost synergies it was much more motivated by revenue synergies I think you will what you said I think is spot on we will see those revenue synergies begin to ramp in the second part of fiscal 'twenty five as they are these are not short sales cycles as we get our team ramped up on how to sell Splunk as we get the Splunk team ramped up on her.
Speaker Change: To sell Cisco and as we get our channel fully enabled to sell that.
Speaker Change: Yes, youre going to see those revenue synergies, but youll thinking you have to think about them more in the second half of the year.
Speaker Change: Yeah, and I think.
Speaker Change: The revenue synergies that we're focused on really are driven around the 5000 accounts that we talked about earlier it sounds cycles on those are six to nine months and so youre not going to see that immediately but that work is happening and we're also seeing tremendous collaboration across the organization, where our sales teams are working together to more.
Speaker Change: <unk> penetrated accounts I think you start to see that in the first half, but its going to layer in youre going to see more momentum as we get to the middle part of the year.
Speaker Change: Thank you Jim Operator next question.
David Vogt: You may go ahead, sir.
Samik Chatterjee: Thank you Sammy Chatterji with Jpmorgan you May go ahead Sir.
David Vogt: Great, thanks guys for taking my question. So maybe Scott, I want to follow up on that line of questioning from Tala.
Samik Chatterjee: Hi, Thanks for taking my question I have a couple as well if I may.
Samik Chatterjee: I know you are talking about.
Speaker Change: Deployments with your customers enterprise customers being higher than what you're shipping to.
Speaker Change: That implies you will take a step up in terms of revenue when that inventory digestion and I was just curious sort of the order trends.
Speaker Change: Had mentioned you'd be back to normal seasonality of auto is maybe more in fiscal 'twenty five but how close are you seeing sort of auto trends have done on a sequential quarterly basis to more normalized sort of seasonal trends is that one thing you in any direction in terms of whether that gap between deployment.
Speaker Change: Your audio is starting to sort of compress.
Speaker Change: Second one just on the quick follow up on the order of $1 billion of target Youre, just trying to understand if you feel like you need one or two more big wins in terms of customers or the land and expand with the existing ones should be good enough to get you to that $1 billion bucket that you have thank you.
Scott: Scott you want to take the sequential one yes on the on the.
Speaker Change: Enterprise deployments, we are seeing that progress.
Speaker Change: One of the things that's been encouraging and we are giving you some of the data on this is where we see it moving more quickly we talked about Wi Fi and how our wireless business is growing.
Speaker Change: The weather.
Speaker Change: Enterprise deployments of all the product that was pushed out as progress more quickly we're seeing demand return.
Speaker Change: Normal seasonality. If you are talking about year on year growth rates is a lot tougher right <unk> got to get to a point, where you actually have a normal quarter.
Speaker Change: We're headed toward now once we get through this inventory consumption at the end of this quarter and then you have to lap it by a year to get through a year on year compare that's that's an apples to apples compare so think of the normal seasonality in terms of year on year growth rates beginning much more in fiscal 'twenty six.
Speaker Change: Sequential standpoint, you'll see that start to happen in the second half of fiscal 'twenty five.
Speaker Change: And then on the AI.
Speaker Change: The $1 billion.
Speaker Change: The $1 billion.
Speaker Change: That we talked about those are actually identified opportunities.
Speaker Change: That our teams have a high degree of confidence. This is not like we didn't set a $1 billion target until people to go find deals theyre deals behind the $1 billion.
Speaker Change: And there are actual wins that we either have already won or we have a high degree of confidence that we will win.
Speaker Change: Theres certainly execution that has to occur between now and whenever we get when we get them done we have to get through the pilots Theres a lot of testing that has to take place. There's power consumption testing that goes on so a lot of that is going on but based on what we know this is what our team's belief today. So this is not this is not some aspiration that we have to go find this is these are opportunities.
Speaker Change: These that have been identified that our teams feel good about.
Speaker Change: Thank you <unk> operator next question.
David Vogt: Now I recognize that you have that backlog headwind in 24, but if I just kind of run through what Splunk should be doing versus what they contributed this year, it certainly looks like the backlog Headwind is going to cause Core Cisco to be down next year. I know you said you're going to hold off on giving numbers. Is that the right math?
Matt Mcmahon: Thank you, Matt Mcmahon with Deutsche Bank, You May go ahead Sir.
Matt Mcmahon: Hey, guys. Thanks, so much.
Matt Mcmahon: One question, one small follow up and I think this has been the theme of the call on the main question actually for Scott You've got leverage now that said just under one turn but the business now has a greater mix of recurring revenue more visibility that that naturally lends itself to so I'm. Just wondering how you think about optimal leverage for the business and uses of excess cash from here.
Matt Mcmahon: And then just on the follow up as we think about low to mid singles growth.
Matt Mcmahon: Next year, well aware of the backlog and the tougher comp that that creates.
Matt Mcmahon: Fiscal <unk> of next year.
Speaker Change: Just as we unpack the networking assumptions are you assuming normal demand and purchasing cadence returns next year once inventories have been digested or is there any incremental caution that's embedded there from a macro perspective. Thanks.
Richard Scott Herren: And so basically, all of the low single-to mid-single digit growth comes from Splunk. And then from a gross margin perspective, obviously, Splunk is going to be a much bigger part of the business. You can maybe walk us through, you gave us an operating margin framework, but sort of what do you expect from a gross margin perspective, given the strong gross margin profile of Splunk being a bigger part of the business next year versus this year? Thank you.
Speaker Change: I'll take the first one.
Matt Mcmahon: Talk about cash first Matt and yes, we moved obviously with the acquisition of Splunk.
Matt Mcmahon: And this data is out there we raised about $13 5 billion of term debt.
Matt Mcmahon: Out there and we actually funded a lot of it with some cash off the balance sheet, but also with commercial paper with the expectation that as rates come down obviously commercial papers and more real time reflection of those lower rates. So it's a way of saving money on that.
Move to a net debt position for the first time and certainly in my career, probably in the first time.
Richard Scott Herren: Yeah, thanks, David. You remember Q1 of this current fiscal year, fiscal 24, was really the last quarter where we shipped a lot of, I'll call it, excess backlog, right? There's always an ambient level of backlog, but we had a lot of excess backlog that built up during the supply constraints. So when you think about the growth rate from 24 to 25, clearly Splunk is a positive on that, obviously adding to it.
Matt Mcmahon: Here at Sysco, probably the first time in the last two decades here at Cisco the use of cash so we talked about splunk being cash flow accretive in its very first year, which is highly unusual for a transaction at that size it will be and so our cap allocation.
<unk> is not going to change and just to reiterate what it is first and foremost support growth.
Richard Scott Herren: But you also have to think of this year, fiscal 24, having a non-repeatable bit of excess backlog that was shipped in the first quarter of this year. Remember, in the first quarter of this year, we grew in the mid-teens on revenue. So if you net that out, and that's the math that Tal was doing to say the core business is actually growing in those mid-single digits in fiscal 25. And we can walk through, I know that there are a lot of moving parts there, David, we can walk through that if you want.
Richard Scott Herren: On gross margins, I think the way to think about that is that we had some benefit in the quarter. Splunk itself is a benefit, of course. We had some benefits in the quarter on product mix and some cost savings that I don't think are repeatable longer term. So I talked about the guide for Q4 being gross margins in the 66.5 to 67.5 range. For Q4, I think that's the right range as you think about fiscal 25 as well.
Matt Mcmahon: Right behind that if that's one one is of course continuing to support the dividend and you'll see we've continued to grow the dividend on a year on year basis.
Matt Mcmahon: Return cash to shareholders through share buybacks, that's been at a steady one in a quarter $1 billion per quarter.
Matt Mcmahon: For the last several quarters, we will continue to do that and to the extent that we have met those three and there still is excess cash will determine whether it makes sense to take that cash and delever or if it makes more sense to return that to shareholders at that time.
Matt Mcmahon: And Matt on the demand normalization.
Matt Mcmahon: Just on what we see today I think we would expect starting in Q1 and beyond we should we should see that normalize obviously with the caveat that there is a lot of hotspots around the world. There are a lot of potential risks out there that are that are happening we've got.
Matt Mcmahon: Elections, all over the world and the most important one perhaps in the United States. So we're certainly going to have to see how all of this plays out but so far based on what we see I think that that's a decent assumption for FY 'twenty five.
Richard Scott Herren: Thank you, David. The operator can move to the next question.
Matt Mcmahon: Thank you Matt Operator next question.
Meta A. Marshall: Where are your kind of conversations with customers around AI, either in the desire to, you know, invest on premises or invest in some kind of Cisco security products for preparedness, or just impact of budgets? And then maybe a second question for Scott, just as we think about kind of the OPEX investment that you guys noted for Splunk, you know, how should we think of that versus kind of original targets to have Splunk be kind of a creative one year post close?
Operator: Thank you. Meta Marshall with Morgan Stanley. You may go ahead.
Meta A. Marshall: Thanks, Meta. I would say the conversations. I think the web scalers are pretty well understood, so I'll talk about the enterprise. And I think most enterprises, there are some that are certainly running pilots that are doing some work today. And we actually have had some, we had a handful of wins in the enterprise space for infrastructure that was supporting AI build outs. I'd say they're still very, very, very early. We had our Global Customer Advisory Board last week in Canada, and I think we had about 60 customers there, and they're all still trying to figure out exactly what their use cases are and how the architecture is going to play out, so I would say it's still very early on the enterprise side.
George Charles Notter: Thank you George Notter with Jefferies. You May go ahead Sir.
George Charles Notter: Hi, there thanks, very much I guess I wanted to ask about gross margin impacts from the inventory digestion.
George Charles Notter: As we look around the space, we've seen companies use tools like stock rotation or rebates to try to push inventory through the channel.
George Charles Notter: Sometimes that can certainly have an impact on margins are you guys seeing any of that in the gross margin results right now.
No we're not George there is very little.
George Charles Notter: Sorry that that in the channel that is something that we continue to own in other words, when we ship it to the channel. It's sold at that point, there's very there's very little stocking that happens inside our channel. So we're not seeing that benefit while we are seeing is of course we've.
George Charles Notter: Put in place the price increases to help offset the higher costs that we saw coming through the supply chain constraints and we've lapped those so there is actually a little bit youll see when our Q comes out a little bit of pricing headwind back to the normal what it had been kind of pre pandemic.
George Charles Notter: But big benefits of course, with the product mix of Splunk coming in and some one off things that we benefited from during the quarter.
George: Thank you George next question.
Richard Scott Herren: Thank you, Meta. Operator, next question.
Charles H. Robbins: And in terms of the way to think about the OPEX comment that I made, you know, we talked when we announced the acquisition of Splunk that this was much more driven by revenue synergies than cost synergies. There's no question there will be cost synergies as we work our way through this, but we will spend fiscal 25, from this point through fiscal 25, ensuring that we get both the product integration right and the organizational integration right. We have to do channel enablement. We have to train their sales team on Cisco and train the Cisco sales team on Splunk.
Speaker Change: Thank you <unk> Kidron with Oppenheimer you May go ahead Sir.
Richard Scott Herren: There's investment that goes along with that integration, and fiscal 25 is the year we'll do that. We said in the first year post-acquisition that we would be accretive in cash flow, and we will. We said that we'd be accretive in gross margin from Splunk, and we will, and that we'll be accretive in earnings per share in the second year. So think of that as fiscal 26. I know this closed a little bit early, but I think there's this perception that it closed, you know, six months early, so those times ought to be accelerated.
Speaker Change: Thanks, I had a question for Gary.
Speaker Change: I guess of depressed Palo Alto, just announced its acquisition of the <unk> business from IBM.
Richard Scott Herren: We thought the acquisition would close around the end of our fourth quarter. It closed around the middle of our third quarter, so round numbers, it was a little more than a quarter early. So I think the way to think about that is EPS accretive in fiscal 26, but still being cash flow and gross margin accretive in fiscal 25 as we invest in the integration.
Speaker Change: <unk> this morning announced the.
Speaker Change: The merger with logged with them. So it seems like the market you're operating in is moving at a very fast pace of consolidation.
Speaker Change: Maybe you could talk about the competitive landscape for your business and.
Why should we not assume that pricing pressures are going to significantly rise in this environment as everybody is trying to fight for footprint.
Operator: Thank you. James Fish with Piper Sandler. You may go ahead.
Yes, no great question.
Speaker Change: There obviously is a lot of activity in this particular market.
One of the things that we feel very good about and check referenced in his prepared remarks earlier is our position in Gardner's magic quadrant, where we stood out as the leader in the Sim market.
Speaker Change: So we have a very strong established market position and our pace of innovation has fundamentally changed over the last couple of years.
Speaker Change: We've continued to deliver very interesting and innovative capability that we think is very high value. So for example last week at RSA, We announced what we call Splunk asset and risk intelligence.
James Edward Fish: Hey guys, I did want to, you know, double click on Mita's question here because it's a serious ramp on the OpEx side to get the real earnings going down again in 25, if my math is right, somewhere around $3.50 a share. And just not to lay around the question here, but is some of the OpEx ramp due to the conversion of stock-based compensation at Splunk to Cash Comp because, historically, Splunk and Cisco have had two totally different philosophies on compensation?
Speaker Change: Critical capability to help organization do self discovery of assets across their environment, and then understand the risks associated with those things coupled with that we're now getting the broad benefited the Cisco <unk>.
Speaker Change: <unk> product line, where we can bring an interesting capabilities like the integration with the xdr solution that we also announced that we feel like while yes. It is competitive we feel like we're incredibly well positioned to continue to drive very important innovation and we've also taken a very different approach than our competitors and we think broad.
James Edward Fish: Yeah, thanks, Jim. On the AuxRAMP, I mean, I know we haven't, the Splunk team didn't put out guidance for this fiscal year, but you can look at where their OPEX was headed and layer that into the OPEX that we had. There is some growth year on year; there's some investment. But it's not a substantial ramp up, though, in the investment in integration. It's more a question of just pulling the Splunk team together with ours.
Speaker Change: About how do you bring together on a single platform the security capabilities that customers want broadly all the way through a durability and it is very difficult across the industry to see anybody taking a position that we have.
Speaker Change: Driving value with respect to pricing, we don't have any fundamental change in our pricing strategy. We're very much focused on driving very good adoption across our customer base and ensuring that they feel like they're getting value every day.
Speaker Change: The capabilities that we're offering are hard to match in the industry. So we're not we're not shifting gears from a pricing point of view.
Speaker Change: Thank you <unk> next question.
Richard Scott Herren: As I said, there will be some cost synergies; they're likely to come more in the second half of the year. But this wasn't a deal that was motivated by cost synergies. It was motivated much more by revenue synergies. I think you will. What you said is spot on. We will see those revenue synergies begin to ramp in the second part of fiscal 25, as these are not short sales cycles, as we get our team ramped up on how to sell Splunk, as we get the Splunk team ramped up on how to sell Cisco, and as we get our channel fully enabled to sell that. So yeah, you're going to see those revenue synergies, but you'll need to think about them more in the second half.
Speaker Change: Thank you Ben Reitzes with Melius Research you May go ahead Sir.
Gary Steele: Yeah, I think... The revenue synergies that we're focused on are really driven around the 5,000 accounts that we talked about earlier. The sales cycles on those are six to nine months. And so you're not going to see that immediately, but that work is happening. And we're also just seeing tremendous collaboration across the organization where sales teams are working together to more broadly penetrate accounts. I think you start to see that in the first half, but it's going to layer in. You're going to see more momentum as we get to the middle part of the year.
Benjamin Alexander Reitzes: Yes, hi.
Benjamin Alexander Reitzes: Thanks for the question.
Benjamin Alexander Reitzes: In the spirit of the two I wanted to ask.
Benjamin Alexander Reitzes: We take let's say $1 billion to $2 billion of today.
Benjamin Alexander Reitzes: Hit from inventory in 2025.
Benjamin Alexander Reitzes: On the prior question.
Benjamin Alexander Reitzes: I just wanted to make sure that I heard it right.
Benjamin Alexander Reitzes: <unk> do you underwrite that the real industry growth is about HERA. The real networking growth is in that mid single digit range that was mentioned in a prior question and.
Operator: Thank you, Jim. Operator, next question.
Benjamin Alexander Reitzes: And then if thats the case I guess just the second one then.
Samik Chatterjee: Thank you, Samik Chatterjee with J.P. Morgan. You may go ahead, sir.
Benjamin Alexander Reitzes: Does it mean at your analyst day, we'll hear more about how 2026 could be a higher single digit growth business for Cisco overall, I mean, youre mixing towards Splunk in software.
Benjamin Alexander Reitzes: And therefore, the math would therefore.
Benjamin Alexander Reitzes: Have you guys on a normalized basis after.
Benjamin Alexander Reitzes: After.
Benjamin Alexander Reitzes: The organic growth is very muted in 2025 accelerating by several hundred basis points to the higher single digits in 2026, if thats true the happy to repeat any of this but hopefully you were able to follow that thank you.
Samik Chatterjee: Hi, thanks for taking my question. I have a couple as well, if I may.
Samik Chatterjee: I know you're talking today about the deployments with your customers, enterprise customers, being higher than what you're shipping. The AI Order 1 billion Target here, just trying to understand if you feel like you need one or two more big wins in terms of customers, or if the land and expand with the existing ones should be good enough to get you to that 1 billion target that you have.
Yes, I got it Ben.
Youre asking me now for fiscal 'twenty six guide at the same time is that is that the right takeaway.
Ben: Youre thinking about it right.
Yes.
Speaker Change: You're lying business the core business of Cisco net out the benefits of.
Richard Scott Herren: Scott, do you want to take the sequential one? Yeah, I will.
Speaker Change: The <unk> acquisition when you look at fiscal 'twenty five but also when you take 24 net out the impact of the excess backlog that we shipped early in fiscal 'twenty four mostly in Q1 is a small amount in Q2 as well and you get to that mid single digit growth of the core business that we've had.
Speaker Change: Youre thinking about that right, we will talk more I'm not going to do it on this call, but we will talk more about fiscal 'twenty six and beyond at our Investor Day in June in Vegas, So hopefully I'll see you there.
Richard Scott Herren: On the enterprise deployments, we are seeing that progress, Samik, and one of the things that's been encouraging, and we've given you some of the data on this, is where we see it moving more quickly. We talked about Wi-Fi and how our wireless business is growing, where the enterprise deployments of all the products that were pushed out have progressed more quickly, and we're seeing demand return. Normal seasonality, if you're talking about year-on-year growth rates, is a lot tougher, right?
Ben: Thank you Ben next question.
Charles H. Robbins: So a lot of that's going on, but based on what we know, this is what our teams believe today. So this is not some aspiration that we have to go find. These are opportunities that have been identified that our teams feel good about.
Richard Scott Herren: You've got to get to a point where you actually have a normal quarter, which we're headed toward now once we get through this inventory consumption at the end of this quarter, and then you have to lap it by a year. To get to a year-on-year comparison, that's an apples-to-apples comparison. So think of the normal seasonality in terms of year-on-year growth rates beginning much more in fiscal 26.
Speaker Change: Thank you <unk> Malik with Citi. You May go ahead Sir.
Richard Scott Herren: From a sequential standpoint, you'll see that start to happen in the second half of fiscal 25, and then all the AI. [inaudible] The Billion Dollars that we talked about are actually identified opportunities that our teams have a high degree of confidence in. This is not like we didn't set a billion as our target and tell people to go find deals. They're deals behind the billion.
Speaker Change: Hi, Thank you for taking my questions. The first one for Gary.
<unk> has been using AI ml for the last year and a half with natural language assistant that Alan.
Charles H. Robbins: And there are actual wins that we either have already won, or we have a high degree of confidence that we will win. There's certainly execution that has to occur between now and when we get them done. We have to get through the pilots. There's a lot of testing that has to take place. There's power consumption testing that goes on.
Speaker Change: <unk> been detection and response.
Speaker Change: Can you talk about how physical data will improve.
Speaker Change: AI capability.
Charles H. Robbins: Thank you, Samik. Operator, next question.
Speaker Change: You bet.
Speaker Change: If you look at the history with block.
Speaker Change: We were very early driving capabilities with machine learning, we launched the MLP Kay.
Operator: Thank you. Matt Niknam with Deutsche Bank. You may go ahead.
Speaker Change: Package in 2017, and we've had a quarter of a 1 billion excuse me a quarter of a 1 million users on that.
Speaker Change: Ben brought adoption. We then extended that when we brought <unk> into the picture delivering an SPL assistant <unk> being our proprietary search language being able to use English to be able to do that we're also.
Speaker Change: Bringing AI directly into the workflow. So think think about store as an example, and how you can bring bring AI into the picture to drive better outcomes.
Speaker Change: From a remediation point of view, so we've been investing across the product line youre going to hear and see more announcements from us over.
Speaker Change: Cisco live as well as at our user conference, which followed Cisco live and the benefit that we're getting and bringing it into Cisco is Cisco had made independently been making a whole set of investments we get to leverage those those asset. In addition to the richness of data that we get so where we benefit from Cisco is.
Speaker Change: Broad rich datasets that exists across networking, where you sort of think lateral movement. How can we leverage that data to do a better job from a detection point of view and frankly that data and insight that we have as a combined entity I think are second to none in terms of the competitive environment.
Speaker Change: We just basically accelerate our AI efforts as part of Cisco and the outcomes, we can deliver to be really important.
Speaker Change: Thank you Michelle.
Speaker Change: Michelle claim within the last question.
Michael: Thank you Michael.
Speaker Change: Goldman Sachs you May go ahead Sir.
Matthew Niknam: Hey guys, thanks so much. One question, one small follow-up, and I think this has been the theme of most of the call. On the main question, actually, for Scott, you've got leverage now that sits just under one turn, but the business now has a greater mix of recurring revenue, and more visibility that that naturally lends itself to. So I'm just wondering how you think about optimal leverage for the business and uses of excess cash from here.
Speaker Change: Hey, good afternoon. Thanks for squeezing me in I, just have two as well.
Speaker Change: First.
I think the guidance this year implies 34% EBIT margins.
Speaker Change: You commented that fiscal 'twenty five can look like the guide for fiscal <unk>.
Speaker Change: I think it's about $1 billion of Opex investments I was just wondering if you could kind of qualitatively talk about where most of those opex investments will lie.
Speaker Change: And then.
Speaker Change: Secondly, last quarter, you characterized the fiscal 'twenty for guidance as as Conservative I believe.
Speaker Change: How would you characterize your initial financial outlook for fiscal 'twenty five thank you.
Matthew Niknam: And then just on the follow-up, as we think about low to mid singles growth next year, well aware of the backlog and the tougher comp that that creates in fiscal 1Q of next year. Just as we unpack the networking assumptions, are you assuming normal demand and purchasing cadence returns next year once inventories have been digested? Or is there any incremental caution that's embedded there from a macro perspective? Thanks.
Michael: Okay, Michael Thanks for the question.
Michael: The year on year again.
Michael: I think what youre struggling with on the fiscal 'twenty five look as expectations. If you just added.
Straight added where the run rate of Cisco spend to what your expectations are or the run rate of the Splunk spend and I'd say a couple of things to bear in mind. There is some onetime benefits that we had.
Michael: This year in our Opex.
Michael: The core Cisco pretty Splunk acquisition.
Michael: Frankly in our variable comp plans.
Michael: <unk>.
Michael: Been a tough year and we've come up short of our plan and so there are some savings in variable comp for this year in fiscal 'twenty for that obviously I don't plan on repeating those in fiscal 'twenty five.
Michael: So there is some.
Michael: Obviously, we will do a merit increase as well so theres. Some small increase that is just kind of the reset of the comp plans and ongoing merit.
Michael: There is some investment as well and the integration, but it's not it's not even approaching the number with the quick math that you just did.
Michael: So that's kind of the way to think about that piece now if you look at the guide for next year.
Matthew Niknam: I'll take the first one. Yeah, I'll talk about cash first, Matt. And yeah, we moved obviously with the acquisition of Splunk. And this data is out there; we raised about 13 and a half billion in term debt that's out there. And we actually funded a lot of it with some cash off the balance sheet, but also with commercial paper with the expectation that as rates come down, obviously, commercial paper is a more real-time reflection of those lower rates.
Michael: How would I say, what I'd say about the guide for next year as I feel with a lot of the tailwind that we're seeing right now so let's just go back.
Michael: Consumption of all of the inventory.
Michael: Shipped to customers that they were working very hard to get implemented is going in line with our expectation. We think we work our way through that headwind, mostly by the end of this quarter, our fourth fiscal quarter.
Michael: <unk> for next year, obviously, the AI opportunity that we've talked about being more second half, but for the full year second half of fiscal 'twenty five but for the full year. That's a tailwind as we look ahead security business is doing what we said it was going to do right.
Michael: We've launched new products, there even before the acquisition of Splunk and those products are getting good traction. So that's a tailwind as we look at next year as well. So I think all in all I feel like it's kind of a down the middle view of fiscal 'twenty five at this point, it's not a formal guide I just wanted to give you a sense of what that looked like and we will do we'll give you a better feel for.
Michael: What the longer term looks like at our Investor Day in June and then we'll give you a more fulsome guidance when we get to our Q4 call in August.
Matthew Niknam: So it's a way of saving money on that move to a net debt position for the first time in certainly in my career, probably the first time here at Cisco, probably the first time in the last two decades. The use of cash, though, you know, we talked about Splunk being cash flow accretive in its very first year, which is highly unusual for a transaction at this size. It will, and so our cap allocation process is not going to change. And just to reiterate what it is, first and foremost, Inc.
Amy: Thank you, Michael and I will now hand over back to Chuck for some closing remarks, thanks, Amy and thanks to all of you for spending time with us today.
Richard Scott Herren: Right behind that, if that's one, you know, 1A is, of course, continuing to support the dividend. And you see, we've continued to grow the dividend on a year-on-year basis and return cash to shareholders through share buybacks. That's been at a steady one and a quarter billion per quarter. For the next several quarters, we'll continue to do that. And to the extent that we've met those three, and there is still excess cash, we'll determine whether it makes sense to take that cash and delever, or if it makes more sense to return that to shareholders at that time.
Amy: I guess I'd say.
Chuck: I am pleased that we're getting to the tail end of the supply chain situation that we've been navigating for the last several years.
Chuck: On track to get this consumption issue behind us as we enter FY 'twenty five.
Charles H. Robbins: And Matt, on demand normalization. Based on what we see today, I think we would expect, starting in Q1 and beyond, we should see that normalized. Obviously, with the caveat that there are a lot of hotspots around the world, there are a lot of potential risks out there that are happening. We've got elections all over the world and the most important one, perhaps, in the United States. So we're certainly going to have to see how all of this plays out. But so far, based on what we see, I think that's a decent assumption for FY 25.
Feel good about the overall demand environment, we saw in Q4, which supports the fact that our customers are getting this digestion done as we look to the future. We obviously are optimistic about AI, both from an infrastructure perspective, a data perspective, as well as a cyber security perspective.
Operator: Thank you, Matt. Operator, next question. Thank you. George Notter with Jefferies. You may go ahead, sir. Hi there. Thanks very much. I guess I wanted to ask about gross margin impacts from inventory digestion.
George Charles Notter: Thank you. George Notter with Jefferies. You may go ahead, sir.
George Charles Notter: No, we're not George; there's very little inventory in the channel that is something that we continue to own. In other words, when we ship it to the channel, it's sold at that point.
Richard Scott Herren: There's very little stocking that happens inside our channel, though we're not seeing that benefit. What we are seeing is, of course, we've put in place price increases to help offset the higher costs that we saw coming through the supply chain constraints, and we've lapped those. There's actually a little bit, you'll see when our queue comes out, a little bit of pricing headwind, back to the normal, what it had been kind of pre-pandemic. But big benefits, of course, with the product mix of Splunk coming in, and some one-off things that we've benefited from during the quarter.
Chuck: Security in General we believe will continue to improve and obviously, we're super excited about the Splunk integration and we're committed to deliver for both our customers and for you.
Chuck: I also just want to quickly thank Jim <unk> for everything he has done at Cisco and also they were very excited to have Gary taken on a new role here and thank you all for being with us today.
Operator: Thank you, George. Next question. Thank you. Ittai Kidron with Oppenheimer. You may go ahead, sir. I had a question for Gary. Just off the press, Palo Alto just announced its acquisition of the same business from IBM. Ek Sabim this morning announced the
Ittai Kidron: Thank you. Ittai Kidron with Oppenheimer. You may go ahead, sir.
Ittai Kidron: Yeah, no, great question. There obviously is a lot of activity in this particular market. One of the things that we feel very good about, and Chuck referenced in his prepared remarks earlier, is our position in Gartner's Magic Quadrant, where we stood out as the leader in the SIM market. As a result, we have a very strong established market position. And our pace of innovation has fundamentally changed over the last couple of years. We've continued to deliver very interesting innovative capability that we think is of very high value.
Ittai Kidron: So, for example, last week at RSA, we announced what we call Splunk Asset and Risk Intelligence. This is a critical capability to help organizations do self-discovery of assets across their environment and then understand the risks associated with those things.
Gary Steele: Thank you, Ittai. Next question.
Gary Steele: Coupled with that, we're now getting the broad benefit of the Cisco security product line, where we can bring in interesting capabilities like the integration with the XDR solution that we also announced. So we feel like, while it is competitive, we feel like we're incredibly well positioned to continue to drive very important innovation. And we've also taken a very different approach to our competitors, and we think broadly about how you bring together on a single platform the security capabilities that customers want, broadly all the way through observability.
Chuck: As a reminder, we will be hosting our 2024 investor day as part of Cisco Live on June four 2020 for Cisco's next quarterly call, which will reflect our fiscal year 2020 for fourth quarter and full year results will be on Wednesday August 14th 2024 at 130 PM Pacific time, 430 PM Eastern time. This concludes today's call. If you have any further.
Gary Steele: And it's very difficult across the industry to see anybody taking a position that we have and driving value. With respect to pricing, we don't have any fundamental change in our pricing strategy; we're very much focused on driving very good adoption across our customer base and ensuring that they feel like they're getting value every day. And the capabilities that we're offering are hard to match in the industry, so we're not shifting gears from a pricing point of view.
Operator: Thank you. Ben Reitzes with Milius Research. You may go ahead, sir.
Benjamin Alexander Reitzes: Yeah, hi. Thanks for the question. In the spirit of the two, I wanted to ask, you know, if we take, you know, like, let's say, one to 2 billion of the hit, you know, from inventory in 2025. And from the prior question, I just want to make sure that I heard it right that you underwrite that the real industry growth is about error; the real networking growth is in that mid single digit range that was mentioned in a prior question.
Benjamin Alexander Reitzes: And then if that's the case, I guess this is the second one, then does it mean at your analyst day we'll hear more about how 2026 could be a higher single-digit growth business for Cisco overall? I mean, you're moving towards Splunk and software. And therefore, the math would therefore have you guys on a normalized basis after, you know, after, you know, the organic growth is very muted in 2025, you know, accelerating by several hundred basis points to higher single digits in 2026. If that's true, I'll be happy to repeat any of this, but hopefully, you were able to follow that. Thank you.
Benjamin Alexander Reitzes: Yeah, yeah, I got it, Ben. And you're asking me now for the fiscal 26 guide at the same time. Is that the right takeaway? You're just thinking about it, right?
Richard Scott Herren: Then, you know, the underlying business, the core business of Cisco, net out the benefits of the Splunk acquisition when you look at fiscal 25. But also, when you take fiscal 24, net out the impact of the excess backlog that we shipped early in fiscal 24, mostly in q1, a small amount in q2, as well. And you get to that mid single-digit growth in the core business that we've had. So I think you're thinking about that, right? We will talk more; I'm not going to do that on this call. But we will talk more about fiscal 26 and beyond at our investor day in June in Vegas. So hopefully, I'll see you there.
Richard Scott Herren: Thank you, Ben. Next question. Thank you. I'll talk to Malek with SIDI. You may go ahead, sir. Hi, thank you for taking my question. The first one for Gary. Gary Splunk has been using AR
Operator: Thank you. I'll top Malik with SIDI. You may go ahead, sir.
Atif Malik: You bet. And so, if you look at the history with Splunk, we were very early in driving capabilities with machine learning; we launched the MLTK. We've had a quarter of a million users on that, so there's been broad adoption. We then extended that when we brought Gen AI into the picture, delivering an SPL assistant, SPL being our proprietary search language, being able to use English to be able to do that. We're also bringing AI directly into the workflow. So think about SOAR as an example and how you can bring AI into the picture to drive better outcomes from a remediation point of view.
Atif Malik: So we've been investing across the product line. You're going to hear and see more announcements from us at Cisco Live as well as at our user conference, which follows Cisco Live. And the benefit that we're getting by bringing it into Cisco is that Cisco has independently been making a whole set of investments. We get to leverage those assets in addition to the richness of data that we get. So where we benefit from Cisco is the broad, rich data sets that exist across networking where you can think lateral movement.
Atif Malik: How can we leverage that data to do a better job from a detection point of view? And frankly, the data and insights that we have as a combined entity are second to none in terms of the competitive environment. So we just basically accelerate our AI efforts as part of Cisco, and the outcomes we can deliver are really important.
Gary Steele: Thank you, Atif. Michelle, can we move to the last question?
Operator: Thank you, Michael Ng with Goldman Sachs. You may go ahead.
Michael Ng: Hey, good afternoon. Thanks for squeezing me in. I just have two as well.
Michael Ng: First, you know, I think that the guidance this year implies 34% even margins. You know, you commented that fiscal 25 could look like the guidance for fiscal 4Q. I think it's about a billion dollars in OPEX investments. I was just wondering if you could kind of qualitatively talk about, you know, where most of those OPEX investments will lie. And then secondly, last quarter you characterized the fiscal 24 guidance as conservative, I believe. How would you characterize your initial financial outlook for fiscal 25? Thank you.
Richard Scott Herren: Okay, Michael, thanks for the question. The year on year, again, I think what you're struggling with on the fiscal 25 look are expectations if you just added, you know, straight added where the run rate of Cisco spend is to what your expectations are the run rate of Splunk spend. And I'd say a couple things to bear in mind; there are some one-time benefits that we had this year in our OPEX for the core Cisco pre-Splunk acquisition, and frankly, in our variable comp plans, which is, you know, it's been a tough year, and we've come up short of our plan.
Richard Scott Herren: And so there's some savings in variable comp for this year in fiscal 24, which obviously, I don't plan on repeating in fiscal 25. So there is some, and then obviously, we'll do a merit increase as well. So there's some small increase, that is just kind of the reset of the comp plans and an ongoing merit. There is some investment as well in the integration, but it's not even approaching the number that with the quick math that you just did.
Chuck: <unk>, please feel free to contact the Cisco Investor Relations Department and we thank you very much for joining the call today.
Richard Scott Herren: So that's kind of the way to think about that piece. Now, if you look at the guide for next year, kind of what I would say. What I would say about the guide for next year is that I feel with a lot of the tailwinds that we're seeing right now, so let's just go back. Consumption of all the inventory that we shipped to customers that they were working very hard to get implemented is going in line with our expectation.
Richard Scott Herren: We think we can work our way through that headwind, mostly by the end of this quarter, our fourth fiscal quarter. That's a tailwind for next year. Obviously, the AI opportunity that we've talked about and you know, being more of a second half, but for the full year, second half of fiscal 25. But for the full year, that's a tailwind as we look ahead. The security business is doing what we said it was going to do, right? We launched new products there even before the acquisition of Splunk. And those products are getting good traction.
Richard Scott Herren: So that's a tailwind as we look at next year as well. So I think, all in all, I feel like it's kind of a down the middle view of fiscal 25. At this point, it's not a formal guide; I just wanted to give you a sense of what that looks like. And we'll give you a better feel for what the longer term looks like at our investor day in June. And then we'll give you more fulsome guidance when we get to our Q4 call in August.
Sami Badri: Thank you, Michael. I now want to hand it over back to Chuck for some closing remarks.
Charles H. Robbins: Thanks, Sami, and thanks to all of you for spending time with us today. I guess I'd say I'm pleased that we're getting to the tail end of this supply chain situation that we've been navigating for the last several years, on track to get this consumption issue behind us as we enter FY25. I feel good about the overall demand environment we saw in Q4, which supports the fact that our customers are getting this digestion right.
Charles H. Robbins: As we look to the future, we obviously are optimistic about AI, both from an infrastructure perspective, a data perspective, as well as a cybersecurity perspective. Security in general, we believe, will continue to improve, and obviously, we're super excited about the Splunk integration, and we're committed to delivering for both our customers and for you. I also just want to quickly thank Jeff Sheritz for everything he's done at Cisco, and they were also very excited to have Gary taking on the new role here. And thank you all for being with us today.
Operator: And thank you for participating in today's conference call. If you would like to listen to the call in its entirety, you may call 1-800-391-9851. For participants dialing from outside the U.S., please dial 203-369-3268. This concludes today's conference call. You may go ahead and disconnect at this time.
Chuck: And thank you for participating on today's conference call, if you'd like to listen to the call in its entirety you may call one $803 919851 for participants dialing from outside the U S. Please dial 2033693 to six.
Sami Badri: As a reminder, we will be hosting our 2024 Investor Day as part of Cisco Live on June 4, 2024. Additionally, our next quarterly call, which will reflect our fiscal year 2024 fourth quarter and full year results, will be on Wednesday, August 14, 2024, at 1.30 p.m. Pacific Time, 4.30 p.m. 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 us today.
Chuck: This concludes today's conference call you May go ahead and disconnect at this time.