Q1 2025 Cisco Systems Inc Earnings Call
Speaker Change: Welcome to Cisco's first quarter fiscal year 2025 financial results conference call. At the request of Cisco, today's conference is being recorded. If you have any objections, you may disconnect.
Speaker Change: Now I would like to introduce Sami Badri, Head of Investor Relations. Sir, you may begin. Good afternoon, everyone. This is Sami Badri, Cisco's Head of Investor Relations, joined by Chuck Robbins, our Chair and CEO, and Scott Herren, our CFO.
Speaker Change: Cisco's earnings press release and supplemental information, including GAAP to non-GAAP reconciliations, are available on our Investor Relations website. Following this call, we will also make the recorded webcast and slides available on the website.
Speaker Change: Throughout today's call, we'll be referencing both GAAP and non-GAAP financial results. We will discuss product results in terms of revenue, and geographic and customer results in terms of product orders, unless stated otherwise.
All comparisons will be made on a year-over-year basis.
Speaker Change: Please note that our discussions today will include forward-looking statements, including our guidance for the second quarter and fiscal year 2025.
Speaker Change: These statements are subject to risks and uncertainties detailed in our SEC filings, particularly our most recent 10-K report which identifies important risk factors that could cause actual results to differ materially from those contained in our forward-looking statements.
Speaker Change: 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. Now, I'll turn it over to Chuck.
Chuck Robbins: Thanks, Sami, and thank you all for joining us today. Cisco delivered a strong start to fiscal 25, delivering 13.8 billion in revenue for the first quarter, coming in at the high end of our guidance range.
Chuck Robbins: The strength of our recurring revenue streams is helping to fuel our profitability. Non-gap EPS of 91 cents exceeded the high end of our guidance range, driven by the highest non-gap gross margin we have seen in more than 20 years, which was further enhanced by Splunk.
Chuck Robbins: The combination of Cisco and Splunk and our team's great execution are both driving our strong operating leverage.
Chuck Robbins: The strength of our operating performance and free cash flow in Q1 fueled a return of $3.6 billion in value to our shareholders through share repurchases and cash dividends, delivering on our commitment to consistent capital returns.
Chuck Robbins: Building on the growing demand we saw at the end of fiscal year 24, product orders grew 20% year-over-year in Q1 and were up 9% organically.
Chuck Robbins: This is an acceleration of the 14% product order growth we saw just 3 months ago and is a clear sign of normalizing demand for Cisco's innovation.
Chuck Robbins: Now let me share some details on our first quarter, starting with the demand environment. Enterprise product orders were up 33%, driven by particularly strong performance in the Americas and EMEA across a broad range of customers.
Chuck Robbins: We saw continued strong momentum in service provider and cloud, with product orders up 28%, driven by triple-digit growth in web scale.
Chuck Robbins: In Q1, our WebScale customers placed AI infrastructure orders in excess of $300 million.
Chuck Robbins: Our AI pipeline continues to be strong, we have earned more design wins, and remain confident that we will exceed our target of $1 billion of AI orders this fiscal year from web scale customers.
Chuck Robbins: After a very strong Q4 last quarter, public sector orders were up 2% year-over-year in Q1. Federal spending in the U.S. was lower year-over-year due to continuing resolutions discussions, the impact of the Fiscal Responsibility Act, and the diversion of funds within U.S. Federal.
Chuck Robbins: It's important to note that we believe the deals we are working on with U.S. Federal customers are simply delayed, not lost.
Chuck Robbins: In both EMEA and APJC, year-over-year public sector order growth was strong.
Chuck Robbins: Now let me share some data on demand through the lens of our products to provide some incremental color.
Chuck Robbins: Our networking portfolio saw double-digit product order growth overall driven by switching, wireless, and internet infrastructure.
Chuck Robbins: Looking at data center switching in particular, we have seen three consecutive quarters of double-digit order growth and an acceleration from Q4 into Q1. This shows our competitive strength in this key market and the power of our Nexus brand in the build out of private cloud infrastructure by our customers.
Chuck Robbins: We expect this momentum to continue as customers are showing significant interest in our 400GB and 800GB switches based on SiliconOne.
Chuck Robbins: Security orders more than doubled year-over-year driven by the advanced threat intelligence capabilities of Splunk. Excluding Splunk, growth in security product orders was driven by our renewed security strategy and new product pipeline which continues to be well received by customers and analysts.
Chuck Robbins: We continue to see momentum around our new security products like XDR, Secure Access, and Multicloud Defense with now over 1,000 customers deploying these products thus far.
Chuck Robbins: In Q1, we had a marquee win for over 75,000 cloud security seats with a multinational IT services and consultancy company.
Chuck Robbins: The customer largely replaced an SSE competitor with our solution and moved from planning to implementation in 120 days, highlighting how fast our teams can implement our solutions at scale. We also booked our first seven-figure Hypershield deal in Q1.
Chuck Robbins: Collaboration product orders grew double digits again driven by demand for devices and our cloud WebEx suite. Finally, in observability, orders were up high single digits driven by our network assurance solution, Thousand Eyes, and Splunk observability.
Chuck Robbins: I'd also like to highlight some of the progress we've made integrating Splunk. We now have a dozen updated data integrations between Cisco and Splunk across our security and networking portfolio, including Secure Firewall, Catalyst Center, SD-WAN, and ICE.
Chuck Robbins: We continue our joint selling motions between Cisco and Splunk, including a Cisco Secure Network Analytics and XDR alongside Splunk's SIEM, offering enhanced capabilities to the Security Operations Center.
Chuck Robbins: We also continue to build our market-leading observability solutions to accelerate full-stack observability for the enterprise.
Chuck Robbins: Overall, our Q1 results highlight continued strong demand for Cisco technologies, driven by the need for modern, resilient networks as AI begins to scale.
Chuck Robbins: Findings from our new global AI partner study show that IT partners around the world are anticipating a transformative wave of AI technology demand driven by infrastructure, cybersecurity, and customer experience, which they expect to fuel the majority of their revenue over the next four to five years.
Chuck Robbins: With the breadth of our portfolio, we are uniquely positioned to capitalize on this AI technology demand as customers are investing in their critical infrastructure to prepare for AI.
Chuck Robbins: In fact, there are three distinct but connected pillars to the AI networking opportunity for Cisco, which we have outlined on a slide as part of our quarterly materials.
First, AI training infrastructure for web scale customers.
Chuck Robbins: AI networks demand scalable, programmable, low-power switches with advanced load balancing and observability. These characteristics in our products are driving hyperscalers to deploy the Cisco 8000 with Cisco's SiliconOne G200 for maximum power efficiency in their back-end AI training networks.
Chuck Robbins: As further proof, we also want a new SuperSpine AI networking use case with one of our WebScale customers this quarter.
Chuck Robbins: Second, AI network connectivity. This quarter we booked further platform sales with global enterprise customers who are leveraging our technology platforms to modernize and automate their network operations to prepare for large-scale connectivity to AI applications.
Chuck Robbins: Our technology platforms across switching, routing, security, and observability will help enable our customers by leveraging cutting-edge innovations like AI-powered robotics and unmatched supply chain visibility.
Third, AI Network Inference and Enterprise Clouds
Chuck Robbins: Most of the CIOs and technology leaders we talked to say that their organizations are planning full-gen AI adoption within the next two years. Yet only 13% of organizations say their infrastructure is ready for AI today, according to the Cisco AI Readiness Index.
Chuck Robbins: To help our customers prepare, we have announced two new additions to our data center infrastructure portfolio.
Chuck Robbins: a new NVIDIA-based AI server and AI pods, including NVIDIA's AI Enterprise Cloud Native Software platform, and managed through Cisco Intersight to simplify and de-risk AI infrastructure deployment.
Chuck Robbins: Our new AI server is expected to begin shipping next month and our AI pods are orderable this month.
Chuck Robbins: In addition, HyperFabric, our fabric-as-a-service solution, which is expected to be available in early calendar 2025, further simplifies infrastructure deployment and management while providing real-time visibility into network performance.
Chuck Robbins: With these solutions, we are bringing the power of open, hyperscale AI networking to the enterprise.
Chuck Robbins: In our collaboration portfolio, we recently introduced the Webex AI Agent, AI Agent Studio, and Cisco AI Assistant features for Webex Contact Center.
Chuck Robbins: These solutions use advanced conversational intelligence and automation to improve overall customer satisfaction. We have seen strong initial interest from customers and will continue to strengthen our collaboration products, increasing AI capabilities.
Chuck Robbins: We are also enhancing our own productivity by using AI in our services and customer experience organization.
Chuck Robbins: Over 60% of our Technical Assistance Center support cases are now touched by AI-enabled automation, backed by our expertise for faster resolutions, which is leading to higher customer satisfaction scores.
Chuck Robbins: In addition, our internal AI assistant for TAC works alongside our engineers to improve quality and speed timed resolution while allowing our people to work on more complex and creative problem solving.
Chuck Robbins: To summarize, as we look at what's occurring with AI, there are three key things happening. First, there is significant investment in back-end AI networks with hyperscalers focused on training.
Chuck Robbins: Second, as enterprises look to adopt and deploy AI, they need to modernize and secure their infrastructure to prepare for pervasive deployment of AI applications.
Chuck Robbins: Finally, the combination of mature back-end models with enterprise AI application deployment will lead to increased capacity requirements on both private and public front-end cloud networks.
Speaker Change: Cisco is already playing a major role across all three of these significant opportunities and are uniquely positioned to win with the breadth of our product portfolio and our trusted customer relationships. I'll now turn it over to Scott to provide more detail on the quarter and our outlook.
Scott Herren: Thanks Chuck. We executed well in Q1 with strong order momentum, margins, and operating cash flow.
Scott Herren: For the quarter, total revenue is at the high end of our guidance range at $13.8 billion, down 6% year-over-year. As a reminder, Q1 of Fiscal 24 was the last quarter of significantly elevated backlog shipments.
Scott Herren: Non-GAAP net income was $3.7 billion and non-GAAP earnings per share were above the high end of our guidance range at 91 cents.
Scott Herren: Looking at our Q1 revenue in more detail, total product revenue was $10.1 billion, down 9%, and service revenue was $3.7 billion, up 6%.
Speaker Change: Networking was down 23%, primarily driven by the elevated level of shipment we saw a year ago. As Chuck said, we saw strong order growth across our networking products as customers have worked down inventory and deployed the networking products we shipped them last year.
Speaker Change: Security was up a hundred percent, primarily driven by growth in our threat intelligence, detection, and response offerings, which includes the offerings from Splunk, Network Security, and SASE.
Speaker Change: are excluding Splunk, security grew 2% and our security portfolio was particularly impacted by the delays in spending in US Fed.
Speaker Change: Collaboration was down 3% driven by declines in our on-prem WebEx suite and collaboration devices, partially offset by growth in our contact center and CPaaS offerings.
Speaker Change: Observability was up 36%, driven primarily by Observability Suite and growth in Network Assurance offerings. Excluding Splunk, Observability grew 1% for the quarter.
Speaker Change: Looking at our recurring metrics, ARR ended the quarter at 29.9 billion, which increased 22%, with product ARR growth of 42%.
Speaker Change: Total subscription revenue increased 21% to $7.8 billion, representing 57% of Cisco's total revenue.
Speaker Change: Total software revenue is up 24% at $5.5 billion with software subscription revenue up 35%.
Speaker Change: Total RPO was $40 billion, up 15% year-over-year. Product RPO grew 24% and total short-term RPO was up 15% to $20.3 billion.
Speaker Change: Q1 product orders were up 20% year-over-year. Excluding Splunk, product orders were up 9% year-over-year.
Speaker Change: Looking at our product orders across our geographic segments, the Americas was up 17%, EMEA was up 26%, and APJC was up 25%.
Speaker Change: In our customer markets, Enterprise was up 33%, Service Provider and Cloud was up 28%, and Public Sector was up 2%.
Speaker Change: Total non-GAAP gross margin came in at 69.3 percent, up 220 basis points year over year, and exceeding the high end of our guidance range and reaching the highest level in more than 20 years.
Speaker Change: Product gross margin was 68.9%, up 240 basis points, driven by Splunk, favorable product mix, productivity improvements, and the one-time benefit of duty drawback, partially offset by price.
Services gross margin was 70.3% up 130 basis points.
Speaker Change: We continued our focus on profitability and financial discipline with non-GAAP operating margin above the high end of our guidance range at 34.1%.
Speaker Change: On the bottom line, Q1 non-GAAP net income was $3.7 billion and earnings per share were $0.91.
Speaker Change: From a cap allocation perspective, we returned $3.6 billion to shareholders during the quarter, comprised of $1.6 billion for our quarterly cash dividend and $2 billion of share repurchases.
Speaker Change: We continue to invest organically and inorganically in our innovation pipeline.
During Q1, we closed two software acquisitions.
Speaker Change: DeepFactor to accelerate innovation in the Cisco Security Cloud and augment our secure access offerings.
Speaker Change: and robust intelligence, which brings enhanced protection for AI models throughout their lifecycle, from development to production.
Speaker Change: Additionally, we announced our intent to acquire Deeper Insights AI to expand our customer experience team's technology footprint and engineering talent, accelerating innovation and momentum of Cisco's CX AI capabilities and services.
Speaker Change: These investments are highly complementary to our internal R&D and align with our strategy to strengthen our position in security and AI with targeted, strategic M&A.
Speaker Change: To summarize, we started the fiscal year with a solid quarter, highlighted by strong order growth, margins, and non-GAAP EPS.
Speaker Change: We remain focused on making strategic investments and accelerating innovation across our business to best capitalize on the significant growth opportunities we see ahead, all underpinned by disciplined expense management.
Speaker Change: It's this powerful combination that continues to fuel our strong cash flow generation, as well as our ability to return significant value to shareholders.
Speaker Change: Turning to our financial guidance for fiscal quarter Q2, our guidance is as follows. We expect revenue to be in the range of $13.75 billion to $13.95 billion.
Speaker Change: We anticipate non-GAAP gross margins to be in the range of 68% to 69%.
Speaker Change: Non-GAAP earnings per share is expected to range from $0.89 to $0.91.
Speaker Change: For Fiscal Year 25, our guidance is we expect revenue to be in the range of $55.3 billion to $56.3 billion.
Speaker Change: Non-GAAP earnings per share guidance is expected to range from three dollars and sixty cents to three dollars and sixty six cents.
Speaker Change: In both our Q2 and full year guidance, we're assuming a non-GAAP effective tax rate of approximately 19%.
Sami, let's now move into the Q&A.
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 question in the analyst's queue?
Speaker Change: Thank you. Taliana, you may go ahead from Bank of America.
Hello.
I'll ask both my questions together.
Speaker Change: So, cloud orders, cloud and service providers grew 22% explunk, last quarter it was only 2%.
Speaker Change: So what is driving this massive growth in orders and can you elaborate on the areas where you participate in cloud?
Speaker Change: More specifics of switching, routing, optical, etc. Where you have strength and the extent, meaning is it all cloud providers, cloud patents, or are you focused, like we have other vendors, are you focused on certain cloud providers and not others?
Speaker Change: And my follow-up question is on margins, very strong gross margin, very strong operating margin this quarter. Talk about the drivers and sustainability of these margins. Thanks.
Speaker Change: Okay, thank you Tal. Thanks for being with us and thanks for the question. So I'll take the first one, which is service provider and specifically cloud orders. So if we step back and look at our service provider business, we were
Speaker Change: We are pleased. I think first and foremost starting with cable it continues to be under pressure, but it's also the the smallest portion of the
Speaker Change: of the business and is less impactful as it gets smaller. On the Telco side, we actually saw some probably low single-digit growth in Telco, which was positive to see.
Speaker Change: We saw some real Some activity occurring in both Europe and in APJC which was encouraging as well And then we moved to cloud or the web scale
Speaker Change: customers. That's where we had order growth in excess of 100%.
Speaker Change: And what I would tell you is that four of the six largest players were all, each, in excess of 100%. So it was not, you know, concentration in one customer. It was actually four different customers all above triple-digit growth for us.
Speaker Change: When we look at areas where we participate, you mentioned routing, switching, optical, etc., and we participate in all of those. I did call out that we took orders in Q1 for AI and web scale in excess of $300 million.
Speaker Change: putting us well on track for the billion and to exceed the billion for the year.
Speaker Change: We participate, I'll start with AI. We participate, when we talk about AI, it's primarily, it's systems, underpinning GPUs and back-end networks.
Speaker Change: I talked about a superspine wind which would be systems that are actually interconnecting clusters in the back end and then we also provide both systems and optics that are providing that same connectivity as well as the connectivity required from the back end to the front end.
Speaker Change: to our customers in the way that they would like to consume the technology, whether it's by our silicon, by our systems.
Speaker Change: customers, so we still saw strength in the traditional cloud side as well.
Scott Herren: and we're pleased with the performance that we showed there. Scott, do you want to take the margin call? Yeah, Tal, the margins were very strong. Of course, we had non-GAAP total gross margins of 69.3%, as Chuck said earlier, the highest that we've had in 20 years.
Scott Herren: The product non-GAAP gross margin is 68.9, up 240 basis points. So a handful of things driving that. Obviously, the year-on-year increase includes the addition of Splunk, which is favorable at the gross margin line, of course.
Scott Herren: It also, we had other favorable product mix built into that. A nice job continues to be done by the team on what I'll call productivity enhancement. So, continuing to drive cost out of the cost of goods sold line.
Scott Herren: The supply chain team has done a really nice job on that front. That is sustainable. We did have a one-time benefit in Q1 in the cost of goods sold line for a project that's been on flight for several years around duty drawback. So these are components that we imported that incurred a tariff.
Scott Herren: They were built into final product and then subsequently exported when that happens of course you get the ability to get a return on that We've been working to get a return of the tariff that you paid at the point of import
Scott Herren: been working on this project for some time. During the quarter, those filings were accepted, and so we got a one-time benefit that's fairly substantial in Q1.
Scott Herren: Having said that, on the back of the great work the team has done, as I look at the next three quarters of the year, and you see this in our Q2 guide, I would expect to see gross margins continue to settle into this range of 68 to 69 percent for the full year. And that, of course, will be a tailwind op margin as well.
Speaker Change: Thank you, Tal. Michelle, you can go to the next question.
Speaker Change: Thank you, Matt Knicknow with Deutsche Bank, you may go ahead sir.
Matt Knicknow: Hey guys, thanks so much for taking the question. So my question is mainly around macro. Just wondering maybe Chuck if you can speak to how the macro backdrops evolved.
Matt Knicknow: over the last three months. And then, you know, maybe to double click on that as a quick follow-up, as it relates to the election, just wondering if there's any hesitation, any impact in terms of buying behavior across different verticals, given some of the uncertainty around U.S. elections intra-quarter. Thanks.
Thanks, Matt.
Speaker Change: So, on the macro front, I think, you know, first and foremost, I would say that
Speaker Change: Scott mentioned the U.S. federal challenges and that will tie into your second question so I'll cover a little bit of that there.
Speaker Change: I think the U.S. federal business was impacted by the continuing resolution pressure and then also the Fiscal Responsibility Act which expires at the end of this calendar year.
Speaker Change: Both of those put pressure on federal. I think we've heard that from some of our peers and their earnings announcements. If you normalize out or if you actually look at our product orders.
Speaker Change: without Splunk. So the organic product order growth, and you just remove the U.S. federal year-over-year, the rest of the world was up in the mid to high teens, so...
Speaker Change: And what that tells you is that we saw very balanced strength.
Speaker Change: around the world. Geographically, we saw, you know, good strength in Europe, good strength in Asia. Without U.S. Fed, we saw good strength in the United States. We saw really strong recovery in enterprise. We're pleased with that. I discussed already the
Speaker Change: And so I think the only real vertical I would call out is the U.S. federal issue that I just explained. I don't think there's anything else that we've seen relative to the elections at this point.
Speaker Change: No, and the thing to think about, Matt, about the delays that we're seeing in U.S. Fed is they are delays.
Speaker Change: This is not deals that were lost through that. It's pressure that's being put on by the funding of continuing resolution in the Fiscal Responsibility Act.
Speaker Change: So we do see some of those coming back as we get past the continuing resolutions. It looks like the Republicans will carry both.
Speaker Change: and the White House, and so I would expect to get a budget in place relatively soon. So I do think we'll see. Those aren't lost transactions. And just to emphasize a point that Chuck just said, total product order growth
Speaker Change: organically and excluding the impact of U.S. Fed is up mid to high teens. So I think in line with what you would have expected. A lot of strength everywhere else. Yeah.
Matt Knicknow: Thank you, Matt. Michelle, we can go to the next question.
Speaker Change: Thank you. Michael Ng from Goldman Sachs. You may go ahead, sir.
Michael Ng: Hi. Good afternoon. Thank you very much for the question. I wanted to ask about security. It was encouraging to hear about the first seven-figure Hypershield deal.
Michael Ng: in the quarter. Could you just talk a little bit more about that, the nature of that deal?
Speaker Change: I think it was only recently made available, so it feels like it's early days, but maybe you can talk about the reception to that.
Speaker Change: And then secondly, I think you had mentioned security orders had doubled year over year, including Splunk. Could you just give us the organic number as well, and if you could speak qualitatively to the trends, that'd be helpful. Thank you.
Speaker Change: Thanks, Michael. So on your first question around HyperShield, this was a very large financial institution that was part of the early adopter planning, and that's what we're seeing. This is a very high-impact solution that actually is very effective in some of the most
Speaker Change: I'd say advanced data centers in the world. So we we see very large customers that have been deploying it So we're going to see I think a little
a gradual uptick in customers adopting it.
Speaker Change: to help these customers get up and running. So we're really pleased to see that, because when a large bank makes a commitment like that, that tells you the technology's real, and in many cases, they will lead the rest of the enterprise in actually deploying these new security technologies. So that's a good sign. On the security orders,
Speaker Change: We had a bit of the same issue that we had with U.S. Federal on the overall product order growth.
Speaker Change: U.S. Federal is our largest, well, it contains our largest customer in the world and probably our largest security customer in the world. And so our security orders were up in the mid, low to mid single digits.
Speaker Change: without Splunk, the organic ones, and then, but without U.S. Federal, it tracked with the product data we gave you a few minutes ago. So organic security orders.
Speaker Change: If you normalize out the federal year over year impact with a continuing resolution and the fiscal responsibility act, they were up in the mid to high teens as well.
Speaker Change: We crossed 1,000 customers that have deployed these new technologies that we rolled out over the last 12 to 15 months, so we're pleased with the adoption that continues to occur there.
Speaker Change: And I think if you look, if you listen to the analyst or follow the industry, I think there's a broad-based belief that our innovation pipeline and the technologies that we've been bringing to bear are going to be highly impact for our customers and I would say there's more to come, so stay tuned.
Speaker Change: Thank you, Mike. Michelle, we can move to the next question.
Thank you. David, vote with UBF. You may go ahead.
Speaker Change: Great, thanks guys for taking my question. First, if I may, you mentioned, I think, Chuck, you mentioned half of your web scale orders were AI with the other half...
sort of more traditional front end.
Speaker Change: Is that sort of what drove the enterprise order growth, or is there some campus recovery in that number?
Speaker Change: from a product perspective and then I'll just give you the second one for Scott on gross margin. Appreciate the color on sort of some of the impacts in the quarter.
Speaker Change: But from a Splunk perspective, was there anything else in the numbers? Like we're trying to think through kind of the contribution from Splunk subscription versus term licenses and how should we think about that as we move through the balance of fiscal 25. Thank you.
Speaker Change: So thanks, David. If I interpret your first question right, I think what you're asking is, was the non-AI portion of the cloud spend responsible for the enterprise growth that we saw?
Speaker Change: and so I'm going to try to answer this. So when we talk about the enterprise segment
Speaker Change: We don't include any technology sold to the WebScale customers regardless of what it is. So the enterprise segment is simply enterprise customers buying whatever they buy from us.
Speaker Change: So that growth that we saw in enterprise was purely them.
Speaker Change: of all of the web scale purchases from us were in the internet infrastructure space. There was a smattering on the non-AI side that would be attributed to sort of classic enterprise technologies, but it was very small in the context of what they procured from us. Most of it was...
Internet Infrastructure Systems.
optical routing, switching, et cetera.
Speaker Change: On the gross margin, this is what I was touching on earlier, David. We did have favorable product mix in there, and Splunk was a part of that, that drove the margins. There was a one-time benefit in Q1 that I just touched on around duty drawbacks. So, a project we've had in place for some time.
Speaker Change: getting a refund of basically import duty that we had paid, tariffs that we had paid on.
Speaker Change: Components that we imported built into product and then turned around and exported and you're allowed to get those back It's taken a while to get that all that paperwork pulled together Documented and and then get it approved and actually get the refund that that happened in q1 So we had a one-time benefit. That's a catch-up from a couple of years of those
Speaker Change: that's not repeatable throughout the rest of the year. There's a small tail of that, a little bit in Q2 and a little bit more in Q3 and Q4.
Speaker Change: The team has also done a really nice job continuing to drive cost out across the board.
Speaker Change: That's another thing that's driving our view now of gross margins.
kind of maintaining in the 68% to 69% range.
Speaker Change: through the end of the year. So think of Splunk being a benefit, that's not new news. I think what drove the outperformance in the quarter was much more about the one-time impact of the duty drawback project.
Speaker Change: Thank you, David. Michelle, we can move to the next analyst.
Speaker Change: Thank you. Sami Chatterjee with J.P. Morgan. You may go ahead, sir.
Speaker Change: Thanks for taking my questions. If I can ask both my questions at the same time. Chuck, you mentioned in your prepared remarks the data center switching portfolio had the third consecutive quarter of strong order growth. Just wondering how you're interpreting that in terms of.
Speaker Change: are already starting to get ready for their AI deployments, or do you still believe that's largely in front of you, just what is that sort of order momentum indicating to you? And then the second one, just on AI orders, you're sounding.
Speaker Change: sort of better in relation to exceeding the one billion target, but is there necessarily an implication there in terms of revenue realization in the year? Is revenue realization maybe even a bit higher than you thought initially in terms of timing? Thank you.
Speaker Change: Thank you. So on the data center switching side, I think, you know, what it shows is that clearly our customers continue to be balanced between which workloads they move to the public cloud and which they move, they build into the private infrastructure. We do see customers that are in, that are generally
Speaker Change: modernizing their infrastructure. We talked about this last quarter. We see enterprise customers who are, even when they're unsure about
Speaker Change: what AI applications they may deploy 6, 9, 12 months from now, they do know that they need modern infrastructure to be prepared to do so, and we're seeing them forward invest to get ready for it.
Speaker Change: but this has been this has been the same pattern we've seen for a few quarters now and so I think it's it's to some extent in preparation for it but you're the last part of your first question I would say that the majority of this build-out is still way ahead of us.
Speaker Change: on the enterprise side. On the second question relative to AI orders and the fact that I think we're on track to exceed the 1 billion dollars
Speaker Change: The one comment I'd make on the orders, and I'll let Scott speak to the revenue implications. I think that, you know, these customers...
Speaker Change: It's a very dynamic market, and they have a lot of rapidly changing requirements.
And so, as we see...
Speaker Change: These opportunities arise and we get designed in. So when we get the design wins, as we talk about, then ultimately they become bookings and then ultimately they become revenue. In many cases, a design win.
Speaker Change: means that they have confidence that we can actually design a piece of silicon that they're looking for, we put it into a system, we deliver the system. And so the timing varies depending on what we want from them.
Speaker Change: And so that's why you're going to see this stuff show up in our guidance, and you're going to see it show up as we continue to execute. And you've heard me talk about the need to continue to execute on several calls in a row in this space, but I feel really good about the job the team is doing right now.
Speaker Change: So that'll lead to the answer to the revenue question, Scott, that you... Yeah.
Scott Herren: Yeah, and on the revenue question, as Chuck said, this is a bit dynamic in terms of shipments. Obviously, we don't get revenue until we ship the product out the door, and there's a
Scott Herren: a number of factors that goes into that, most of which are not within our control. We do see, though, this driving revenue, consistent with what we've said in the past, Samiq, driving revenue for us more in the second half of the year. The majority of the revenue that we get from that will be in the second half.
Speaker Change: Thank you, Sameek. Michelle, we can move to the next analyst.
Speaker Change: Thank you. Simon Leopold with Raymond James. You may go ahead.
Simon Leopold: Great, thanks for taking the question. First one is I'd love to get maybe an update or double-click on the partnership you announced with NVIDIA very early in 2020.
Simon Leopold: like to sort of get a sense of how that's progressing in terms of
traction and where that fits into the pipeline.
Speaker Change: Catch that, you mentioned you've got an AI server, just sort of wondering if that's an outcome of that alignment. And my follow-up is.
Speaker Change: pretty straightforward is you've earlier talked about the Splunk opportunities of new potential customers being introduced to Splunk. If you could update us on progress there and sort of your line of sight to closing some of those deals. Thank you.
Speaker Change: Yeah, thanks, Simon. So on the NVIDIA partnership, I think we're still we're still really early on bringing these solutions to market. So if you think back
Speaker Change: A couple of quarters back, we announced HyperFabric, which is a fabric as a service solution to bring sort of that public cloud simplicity to AI workloads in the enterprise, and that'll be shipping in the first portion of calendar 2025.
But we did announce this quarter.
Speaker Change: Two new platforms. We announced our AI Compute platform that is the first phase of that is based on NVIDIA GPUs. And we announced AI Pods, which are also based on NVIDIA GPUs. Over time, you'll see us support other GPUs as the market changes.
Speaker Change: demands, but that partnership is still going fine. It's still early and I think 2025 is when we'll start to see enterprise real deployment of some of these technologies.
Speaker Change: On the second one, the Splunk Customers Update, I would say we continue to see good progress.
Speaker Change: If you really think about where we are with Splunk we have I think we closed the acquisition in March We're in November, so that's about eight months, and if you ask Gary
Speaker Change: He would tell you their average sales cycle is nine months, so we haven't even gotten... And we didn't start this initiative until probably into the second quarter that they were a part of us. So, I think it's still super early. What I would tell you is that we've...
Speaker Change: The criteria that we used to identify these customers was based on certain attributes of the customer that would lead them to be a viable Splunk candidate.
and we've added about 1,500 more customers to that list.
Speaker Change: But the other thing that I think is really a positive sign is we have hundreds of Cisco partners now that have been trained on Splunk, that are building out Splunk practices, and in some cases have actually gone out and made strategic acquisitions of Splunk partners to accelerate and bring them into their business. So on that front, we're super positive about how that's progressing as well.
The only thing I'd add to that is...
Speaker Change: from a just overall perspective on Splunk integration. It's progressing in line with our expectations on the top line and in the ARR in particular, and actually ahead of our expectations on profitability at this point. So Splunk overall is tracking quite well for us.
Speaker Change: Thank you, Simon. Michelle, we can move to the next analyst.
James Fish with Piper Sandler, you may go ahead sir.
Speaker Change: Hey guys, um, Scott for you, just circling back on RPO, what was RPO in products, RPO growth, Explonken, and then Chuck for you, how are you guys thinking about not just enterprise refresh potential, but also the campus refresh opportunity with Wi-Fi 7 availability that you guys I think even announced this week?
Speaker Change: and will that Wi-Fi 7 encourage any campus switch refresh as well. Thanks guys.
Speaker Change: Go ahead. Yeah, Jim, on the RPO, we don't actually, we're not going to continue to break out with and without Splunk, and that's partly because of what I just said. This integration is going well. We've launched several products now that are joint products of both Cisco and Splunk.
From an organizational standpoint, we've
Speaker Change: brought in all of the GNA functions and are quickly adopting that are integrating across the product lines.
Speaker Change: So it's getting harder and harder to say what's Splunk and what's not Splunk. That line is just getting blurrier and blurrier each quarter. So I don't plan on breaking that out. I would tell you, of course, without Splunk, it still is a positive growth rate that's in sync with where we've been historically. But I really want to get away of trying to draw that line for you.
Yeah, Jim, on the campus refresh, I think our overall...
Speaker Change: Enterprise networking business was was very strong during the quarter So we are continuing to see that refresh you mentioned Wi-Fi 7 That we did announce the high-end versions during the quarter This is a big
Speaker Change: It's a big first step for us because it's one of the first platforms that we've had that you can deploy and run under an on-prem management system or a cloud management system with the same license and use the same hardware. So that's been something we've been working on for a while.
Speaker Change: is hardware portability between both on-prem and cloud. But we see that we see customers continue, because if you think about the AI deployment...
Speaker Change: When you think about, you know, starting first in the back end of AI, which we've seen, and then as you see these pervasive deployment of AI applications in the enterprise, that's going to have
Speaker Change: Dual impact. Number one, it's going to create that front-end network pull that we talk about because the enterprises are going to be connecting back to the cloud to take advantage of their models.
Speaker Change: And then it's also going to continue to pull the refresh in the enterprise side, because they're going to need their networks modernized to be able to run edge-based versions of AI, etc. So we think the refresh opportunity is real for some period of time, and in large part will be driven by this AI wave.
Speaker Change: Thank you, Jim. Michelle, we can move to the next analyst.
Speaker Change: Thank you. Mita Marshall with Morgan Stanley. You may go ahead.
[inaudible]
Great, thanks.
Speaker Change: Maybe circling back to Michael's question where you answered that kind of organic security growth would have been in kind of the mid to high teens if you stripped out kind of U.S. federal, just wanted to get a sense of kind of what was driving some of that strength, you know, is that data center modernization or just what products are kind of driving some of that upside? And then just second question, just on, you know, data center modernization as a tailwind, just where are you kind of seeing,
Speaker Change: prioritization the most within the data center? Is it kind of around security or updating, switching? Just kind of any commentary around kind of categories you're seeing that data center modernization take place in. Thanks.
Thanks, Mita. I think...
When you look at the security
Speaker Change: performance if you just put U.S. Fed to the side. I think we're seeing the impact of these new products between XDR, secure access, multi-cloud defense.
Speaker Change: We've seen over a thousand customers now deploy those new technologies that we didn't have in our portfolio 18 months ago We see hyper shield with very positive early feedback and that's not a big contributor to the order side yet But I think it will be and it creates
It creates
Speaker Change: a mindshare pull from our customers because it's so innovative that sometimes it leads them to look at the rest of the portfolio again.
We also have completed a
Speaker Change: a refresh of the low-end firewall in the most recent quarter.
Speaker Change: We've had the high-end was refreshed in 2024. In the early part, the mid-range was refreshed in the latter part of 2024. So, I mean, there's a lot that has been going on that I think is contributing to that energy insecurity.
Speaker Change: In general, I think the market, the analysts, the customers all believe that where we are today versus where we were three, four years ago in security is just fundamentally different.
Speaker Change: On the data center side, the data center modernization that I've been talking about was largely around switching infrastructure, but I think the HyperShield
Speaker Change: Momentum that we're feeling at least from a mindshare perspective with customers would suggest that that security is is a massive opportunity in that space
Speaker Change: As we've talked about, if you start with a fundamental assumption that the bad actors are in your infrastructure, then the thing you need to do is stop that east-west traffic in the data center. And that's one of the key roles that Hypershield plays. So I think that's a big focus area for our customers as well. But most of what we've seen happening...
Speaker Change: When we talk about data center modernization and the momentum that we've seen there has fundamentally been around switching.
Speaker Change: Thanks, Mita. Michelle, we can move to the next analyst. Thank you. Ben Reitzler, Familias Research. You may go ahead.
Ben Reitzler: you know, the latest and greatest year, you know, for it. Are you getting a sense of what...
Speaker Change: What they're engaging you for, is it, you know, they feel like there's going to be more inferencing, is there specific applications that they're citing? You know, I think investors would love to know what you potentially are hitching a ride to there on that comment. And then...
Speaker Change: I had a follow-up question for you, and Scott, it's just...
Speaker Change: You know, these performances where the orders move around ex-blanc, you know, given the excess backlog, can be a little confusing for investors. But you said one thing at your analyst day where you're going to grow 4% to 6%, and I know that's next year and beyond.
Speaker Change: But is there anything happening near-term that makes you feel better about that long-term target where you're a mid-single-digit grower? Anything that happened that's making you feel better or worse regarding it, that'd be great to hear. Thanks.
Hey Ben, thanks. So on the
Speaker Change: On the first question relative to AI in the enterprise in particular, I think we're all seeing customers focus on customer experience. That's one of the big early applications that virtually every enterprise that we engage with is looking at, including Cisco and everybody else. So everybody's focused on that.
Then the second I think is largely they are building
Speaker Change: different applications that are contributing to automation and efficiency, like we've talked about with robotics or supply chain management. We also see a lot of AI activity around deeper engagement with a customer, so customer experience on the support side, but then
Speaker Change: upselling, cross-selling customers. We see a lot of focus on that, on understanding purchasing trends.
Speaker Change: And in those cases, what we see customers doing, and this is leading to my belief about what's happening in the AI shift right now.
Speaker Change: is customers are needing to leverage the value provided by the foundational models.
Speaker Change: But they also need to be able to train their custom data, and then the inferencing applications are actually making calls into both of those data sets, obviously, and we think that's going to lead to...
Speaker Change: The front end network build out that we've talked about a lot in addition to the back end, it also is leading some customers to build out some of this data center modernization in their private clouds, and it's leading them to think about modernizing their overall infrastructure for edge-based versions of that over time. So that's generally what we're seeing.
Speaker Change: I'll make a quick comment on the second one, then I'll hand it to Scott. I would say that as we continue to see more and more success,
and more progress relative to the web-scale customers.
of the AI solutions that we're delivering and our team's
Scott Herren: and exceeding those numbers, then that contributes to my confidence in the next few years. Scott.
Speaker Change: No, I think you said it right, Chuck. The way I think about that is it is hard right now, Ben, to compare.
Speaker Change: The year-on-year product order growth rates because of what happened last year with all the inventory digestion that needed to go on
Speaker Change: sequential product order growth rates look like and get a better sense of The demand that we're seeing coming back into that marketplace and as we lap these more normal, you know Nor demand is normalizing as we lap these more normal demand quarters
Speaker Change: you'll begin to see something that fits into the pattern that is going to be easier to discern what's happening overall from demand standpoint. I would say the investments that we're making in AI, the investments that we're making across the networking portfolio with some of the platform work that we're doing in Wi-Fi 7 that we just launched yesterday is a combined platform product, same product that could be
Speaker Change: run with either platform in the back end to control it.
Speaker Change: Those investments are paying off and so I feel good about what we put out obviously we put those numbers out
Speaker Change: We wanted to be a little bit conservative with them to ensure that as we got to 26 and 27, we not only hit those, but had a chance to overachieve on that. And right now, I'd say the investments that we're making in that space to drive growth are paying off.
Speaker Change: Thank you, Ben. Michelle, we can move to the next analyst.
Speaker Change: Thank you. Ahmed Dariani from Evercore. You may go ahead, sir.
Thank you. Bye-bye. Bye.
Speaker Change: Thanks for taking my question. I guess I'll ask my question and follow up at the same time. You know, Scott, net working revenues are down 23% this quarter.
Speaker Change: to talk about how did that stack up against your expectations and now that backlog is normalized, should we expect it to grow sequentially for the rest of fiscal 25? It would be really helpful to understand how that grows for the rest of the year. And then Chuck, over the next few years, are you more excited about hyper-scale or hyper-shield? Which one is the better option for this period of time? Thank you.
Speaker Change: Yeah, I got to say, Ahmed, I'll start on the first one, but there was some background noise as you were asking the question. I'm not sure I got the entire question, but it started with...
Speaker Change: You know, networking revenue being down 23%. Of course, remember, that's comparing to Q1 and 24, where we had a very substantial shipment of excess backlog, basically backlog that had built up during the supply constraints that we cleared very quickly. Q1 of 24 was the third of three consecutive quarters with very heavy backlog shipment into it.
Speaker Change: If you net that out, and I think we did some of that math for you on the last call.
Speaker Change: gives you a better sense of what's happening in network demand. It's trending in line with our expectations.
Speaker Change: I'd say AI has been a bright spot for us. The bookings that we're seeing inside AI haven't yet turned into revenue, but we certainly are seeing good momentum from that standpoint. DC switching, as Chuck just pointed out, has continued to be strong for us.
Speaker Change: So, feeling good overall relative to our expectations about what we're seeing in networking. And if I missed the second part of your question, we'll circle back to you afterward and get to it.
Speaker Change: And then your second question relative to am I more excited, I think you said about hyper shield or hyper fabric. I know they were both hyper words, so those are probably the two you mentioned.
Speaker Change: I am equally excited, I think, from a security perspective and a strategic security perspective. Our large enterprise customers are incredibly optimistic about what Hypershield means for them.
Speaker Change: But from an AI application deployment perspective, our customers are very excited about what HyperFabric will mean to them. So if you think about two of the most important objectives our customers have, which is East-West Data Center.
Speaker Change: security, and secondly how do I simplify the deployment of AI applications. These are two very core technologies to both those things that we think will be important to our customers for the next few years.
Speaker Change: All right, Ahmed, thank you. Michelle, we can move to the next analyst.
Speaker Change: Thank you. George Notter with Jefferies. You may go ahead, sir.
George Notter: Hi guys, thanks very much. I just wanted to get some more detail in the gross margin improvement. Any chance you can break out that duty drawdown impact in the quarter, I'd be curious as to what that is. And then...
George Notter: Obviously, you also saw quite a sequential improvement in gross margin. Obviously, Splunk was in, obviously, the quarter and last quarter as well. So I think product mix is probably a pretty big factor here. I'm wondering if there was a big difference in terms of the mix of UCS servers or other product lines that kind of drove the day there. Any details would be great. Thanks.
Sure
Speaker Change: I talked about gross margin improvement during Q1 in particular having a one-time benefit from the duty drawback. It's a couple of years of duty that we've been working through this process of.
Speaker Change: Not just getting the filings together, but getting it all approved and getting the cash back.
Speaker Change: I would say that was a substantial contributor to the benefit we saw in Q1.
Speaker Change: somewhere between probably a half point and a point of improvement just driven by that. There will be a tail of those now that we've got that process in place.
Speaker Change: It'll be significantly less as we look at Q2, Q3, and Q4.
Speaker Change: On the product mix front, we definitely got a benefit from Splunk coming in, not surprisingly, as you know. They had gross margins, product gross margins in the 80% range. That's been a tailwind to us overall. There's also favorable product mix across some other product lines inside there, and that will continue.
Speaker Change: The team has also done a really nice job driving cost out, as I said earlier, I give credit to our supply chain and our product teams on continuing to drive
cost out of that cost infrastructure.
Speaker Change: I would point out that pricing is back to the normalized trend that we had seen pre-pandemic, which is, you know, somewhere between a point and two points of headwind, exactly as we saw kind of pre-pandemic. So no change from a pricing standpoint.
George Notter: Thank you, George. Michelle, can we move to the next analyst?
Speaker Change: Thank you. Erin Rakers with Wells Fargo. You may go ahead.
Erin Rakers: Yeah, thanks for taking the questions. I'll keep two right, you know, together here. So, on this AI opportunity, and as we kind of focus on the backlog converting into revenue,
Erin Rakers: You know, I'm curious of how you see, you know, the AI backend possibly leading into front-end opportunities. Have you seen that at all with any of these hyperscale customers? Any kind of color on that front would be great. And then, you know, kind of sticking to the AI networking theme, I'm curious as we move forward, you know, how you would characterize the competitive positioning of NVIDIA in the Ethernet backend network side. Thank you.
Thanks, Aaron. So, on the back and the front end...
Speaker Change: topic which has been pretty popular lately. The way I think about it is that there's meaningful investment today going into the back-end training models as we all know.
Speaker Change: And then I think that the enterprise is actually looking at two different things that are going on there. Number one,
They're updating their infrastructure to prepare for AI.
Speaker Change: And then they're preparing for pervasive deployment of AI applications. And I think that what that will do, in my opinion, is that will then subsequently drive a lot of the front end.
Speaker Change: capacity need because those customers will be leveraging both the backend and the frontend capacity of the cloud infrastructure to actually deliver their own AI apps. And so
Speaker Change: I think we're continuing to see investment in the front end. Customers continue.
Speaker Change: to make those decisions where they want to run workloads in the cloud. They haven't stopped moving workloads to the cloud, so we still see that happening. But I do think that enterprise AI pervasive deployment will be the most meaningful driver of the increased capacity demand on the front-end networks.
Speaker Change: When you look at the competitive positioning of NVIDIA, we live in a world where we have great customers, great partners that we also compete with. There are several examples that are out there. NVIDIA we have partnered with meaningfully. I talked about it earlier with the products that we've built.
Speaker Change: that includes their technology, not only GPUs, but in some cases their software layer.
Speaker Change: But obviously with Spectrum X there are areas where we're going to compete and I think that look we got 40 years of building
Speaker Change: Highly featured Ethernet and a lot of experience with our customers using it
We're seeing this success in the back-end networks.
Speaker Change: I think the other thing that many of our largest customers also want is vendor diversity. And so I think all of those things combined with our own silicon and our ability to bring our own intellectual property up and down the entire stack puts us in a pretty good position competitively.
Speaker Change: Thank you, Aaron. Michelle, we can move to the next analyst.
Speaker Change: Thank you. Carla Ackerman with BNP Paribas. You may go ahead.
Thank you. I have two as well, if I may.
Speaker Change: Scott, I want to focus first on the JNN Recorder Outlook, which implies that OpEx is down about $90 million.
Speaker Change: I think mostly, most of the roughly 10% workforce realignment this calendar year has been completed and so I was hoping you could address
Speaker Change: Which areas of your business do you believe you need to accelerate investment to drive growth into 25 and 26 versus having some excess cost savings pass on a profitability and I have a follow-up
Speaker Change: Do you want to go ahead and ask your follow-up now, Carl?
Thank you.
Yeah, I'll start with the OPEX and then...
Chuck Robbins: Chuck, let you talk about the cloud partners that are growing, triple digits.
Chuck Robbins: On the OPEX, there is growth. Of course, you've got to remember Q2 of this year will compare to Q2 of last year when we did not have Splunk as part of the company. We closed Splunk in the middle of our Q3. So a lot of what you see driving the year-on-year growth rate in OPEX is simply the addition of Splunk.
Chuck Robbins: We talked about when we did the the restructuring that it was not necessarily about driving cost savings There are some cost savings coming out of it, but that was not the motivating factor It was more about finding efficiencies across the company and turning around and reinvesting those in the fastest growing parts of our business
Chuck Robbins: namely AI and security, and you see some of the great results coming out of that. So think about those as the two areas we're investing, but the year-on-year growth rate in OPEX being driven mostly by the addition of Splunk.
Chuck Robbins: And then on your second question, Carl, I think we are pleased that four out of the six largest were all in excess of 100% growth.
Chuck Robbins: And I would say that it was not just one customer on the AI infrastructure front.
Chuck Robbins: We'll continue to keep plugging away, but it was pretty balanced and we're pretty happy with the distributed nature of the business in that segment.
Speaker Change: All right, thank you, Carl. I'm going to hand it over to Chuck for some closing remarks.
Chuck Robbins: The innovation that our teams are delivering as well as the strong execution that that we've seen in the first quarter this year Really got us off to a strong start
Chuck Robbins: I think that as we talk about this whole AI transformation that's happening, I think, again, there are three big areas that we're focused on. Number one is the infrastructure required in the back-end networks.
Chuck Robbins: to help our customers continue to build these training models. I think the second is we look at the enterprise space.
Chuck Robbins: And again, we see upgrades and refresh opportunities for customers who are preparing for AI. And then we see the ability to work with them and their data centers with this simplistic deployment of AI applications that we're going to enable.
Chuck Robbins: And then the final area is continuing to work with the cloud providers and the enterprise
private data center and the front-end requirements
transition as well.
Chuck Robbins: We think that the breadth of our portfolio gives us a great opportunity. We also think that our continued momentum in security, notwithstanding what happened in U.S. Federal this quarter, gives us a high degree of confidence. And we look forward to talking to all of you again next quarter. Thank you.
Speaker Change: Cisco's next quarterly call, which will reflect our fiscal year 2025 second quarter results, will be on Wednesday, February 12, 2025 at 1.30pm Pacific Time or 4.30pm Eastern Time.
Speaker Change: This concludes today's call. If you have any further questions, please feel free to contact the Cisco Investor Relations Department, and we thank you very much for joining the call today.
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