Q2 2025 Cisco Systems Inc Earnings Call
Speaker Change: Welcome to Cisco's second 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. Now I would like to introduce Sammy Badri, Head of Investor Relations. Sir, you may begin.
Speaker Change: On its financial guidance during the quarter plus it is done through an explicit public disclosure now I will turn it over to Chuck Thanks, Amy and thank you all for joining US today, we saw strong results in Q2 with revenue margins and earnings per share all coming in at or above the high end of our guidance ranges.
Speaker Change: Our positive topline performance was supported by strong demand for our technology generating double digit growth in annualized recurring revenue remaining performance obligations and subscription revenue, which accounted for 56% of our total revenue in the quarter.
Speaker Change: Importantly, our AI infrastructure orders with web scales in Q2 surpassed 350 million, bringing our year to date total to approximately $700 million and we're on track to exceed $1 billion of AI infrastructure orders in fiscal year 'twenty five.
Speaker Change: In Q2, we returned $2 8 billion in value to our shareholders totaling $6 4 billion year to date.
Speaker Change: Today, we also announced an increase to cisco's dividend and our board authorized an additional 15 billion and share repurchases all demonstrating our commitment to returning value to shareholders through consistent capital returns now I'll provide some insight into the positive demand environment. We saw during the quarter new product orders grew 29% up 11%.
Organically, excluding splunk, marking our fourth consecutive quarter of accelerating order growth.
Speaker Change: This is a testament to the power of our portfolio and the value we bring to our customers.
Speaker Change: Enterprise product orders were up 27% with double digit growth across all geographic segments. We continue to see very strong momentum in service provider and cloud with product orders up 75%.
Speaker Change: Driven by Triple digit growth in web scale three of the top six web scales. Each grew orders in the triple digits in two of the six each grew more than 50%. This shows our increasing relevance to this high growth customer market as they scale their infrastructure for AI.
Speaker Change: Within S. P. A cloud orders from telco customers grew more than 20% with.
Speaker Change: With continued demand indicated as they reinvest in their core networks to be ready for AI connectivity.
Speaker Change: Public sector orders were up 13% with growth in all geographies as governments around the world turn to Cisco as their trusted Andrew and partner, particularly as they develop and deploy sovereign AI clouds to digitally transform government services.
Now some color on demand from a product perspective.
Speaker Change: Networking product orders grew double digits, driven by switching enterprise routing web scale infrastructure and industrial networking applications and our Iot products.
Speaker Change: Campus switching orders were up double digits, and we expect our campus switching portfolio as well as our Wi Fi seven access points to gain traction with increasing return to office policies.
Speaker Change: We also continue to see robust order growth for data center switching this being our fourth consecutive quarter of double digit growth. We expect this to continue as our 800 gig Nexus switches based on our 51 dot two terabyte silicon one chip become available in April for AI cloud build outs.
Speaker Change: We're also starting to see growth in AI orders from enterprise customers is this large market opportunity starts to open up and enterprises seek seamless installation and security partners for production environments that leverage their proprietary data.
Speaker Change: In Q2, we signed several AI system deals where customers bought our integrated systems, including Nexus Ucs and additional solutions to power of the AI applications, they're deploying today.
Speaker Change: Additionally, our recently launched Cisco, a I pod product consisting of Cisco hardware and software is beginning to gain early traction, making it easier for partners to sell and customers to deploy AI infrastructure.
Speaker Change: I also want to call out the strong performance of our industrial Internet of things product solutions comprised of our Ruggedized catalyst products, which we sell to industrial and manufacturing customers.
Speaker Change: In the first half of fiscal year 'twenty five orders grew more than 40% and in Q2, we saw growth of more than 50% signaling an acceleration as customers prepare for the deployment of AI powered robotics and industrial security.
Speaker Change: As the United States take steps to onshore strategic infrastructure, such as semiconductor fabrication plants manufacturing and scaled AI power sources, we have the market leading secure networking portfolio to help connect and protect these capital intensive investments at scale, our security orders more than doubled again this quarter driven by the.
Speaker Change: Its data management analytics and threat detection capabilities of Splunk and by demand for key products like our refreshed firewall.
Speaker Change: 12 months, both Cisco secure access and xdr have gained more than 1000 customers combined and approximately 1 million enterprise users each.
Speaker Change: Even before it's in full production hyper shield is also seeing solid momentum in Q2, we booked a major platform deals with two fortune 100 enterprise customers, who are leveraging hyper shield to deploy security into the network and a fundamentally new way.
Speaker Change: A third platform deal involving multiple Cisco products and services was spearheaded by Splunk, which shows the success of our joint and cross selling motions.
Speaker Change: Since <unk> became a part of Sysco almost 11 months ago, we continue to integrate our businesses and fuel synergies without disrupting momentum during the quarter. We also integrated talose into Splunk newly released enterprise security eight Dato solution and App dynamics into Splunk on Prem log observer.
Speaker Change: I'd also like to highlight some key innovation, we launched in the quarter continuing.
Speaker Change: Continuing on the Splunk side, we rolled out Splunk on Azure, Splunk, Federated analytics, and AI assistant for Splunk Absorbability.
Speaker Change: And a major launch last month, we unveiled AI defense, our latest security breakthrough purpose built for enterprises to develop deploy and secure AI applications with confidence.
Speaker Change: AI defense Leverages, our unmatched network visibility to safeguard against the misuse of AI tools data leakage and increasingly sophisticated threats.
Speaker Change: By delivering security at the network level in a way only Cisco can we're offering enterprises, consistent and reliable protection for their AI applications.
Speaker Change: The response to AI defense has been phenomenal from our early access customers with general availability in March.
The launch of AI defense coincided with our AI summit, where we brought together several technology luminaries AI pioneers and leaders from close to half of the fortune 100 to discuss the opportunities and challenges of AI and explore crucial topics such as policy and ethics advancements in silicon and breakthroughs in data science with well over <unk>.
Speaker Change: 60000 online registrants.
Speaker Change: AI security is top of mind for our customers, especially in light of the emergence of new AI models. These have reinforced that the battle for AI leadership will be on a global playing field with competition fueling innovation speed to adoption and scale all of which further accelerate the demand for and adoption of AI network infrastructure data.
Speaker Change: Capacity investments and best in class AI security and all of our tailwind for Cisco.
Speaker Change: At Cisco live EMEA. This week, we launched our first data center smart switch with embedded programmable Gpus built on silicon one the.
Speaker Change: The smart switch combines both networking and data processing in a single high capacity multifunctional device to simplify data centers and make them more efficient to meet the performance demands of AI.
Speaker Change: We also introduced agile services networking, a new silicon one based architecture, which incorporates optics assurance and automation for service providers as they evolve their infrastructure to offer new services and deliver enhanced connectivity to their end customers.
Speaker Change: Overall Cisco's innovation engine has never been more powerful in line with that it is worth reiterating that we framed the Cisco AI opportunity in three distinct but connected pillars.
Speaker Change: First AI training infrastructure for web scale customers combinations of our Cisco 8000, Silicon one opt.
Speaker Change: Optics and optical systems are being deployed by five of the largest web scales in their back end training networks.
Speaker Change: Second AI inference, and enterprise clouds, our Nexus switches Nvidia based AI servers, AI pods, and hyper fabric and AI defense software are designed to simplify and Derisk AI infrastructure deployment and bring the power of open Hyperscale AI networking to the enterprise.
Speaker Change: And third AI network connectivity.
Speaker Change: Customers are leveraging our technology platforms across switching routing security and observe ability to modernize secure and automate their network operations to prepare for pervasive deployment of AI applications.
Speaker Change: This combined with mature backend models will lead to increased capacity requirements from both private and public Brunnen cloud networks.
Speaker Change: We also continue to fuse AI into many of our products with AI assistance and production across our security and collaboration platforms and developing a gentle capabilities across the portfolio.
Speaker Change: In addition, we are using advanced AI across customer experience to maximize customer value and boost productivity.
Speaker Change: In Q2, we launched the renewals agent and Egencia AI driven solution co developed with Mistral that streamlines renewal proposals, we launched a new assistant to help customers digitize and Derisk network change management, and we added predictive analysis as well as proactive technical support to our network security products to greatly reduce time.
Speaker Change: The resolution.
Speaker Change: These are important milestones as we build towards Agentic AI led customer experience.
Speaker Change: Before I close I want to touch on an announcement, we made earlier today, Gary Steele, our president of go to market and former CEO of Splunk will be departing Cisco at the end of the quarter for an external CEO opportunity <unk>.
Speaker Change: <unk> leadership has been instrumental in ensuring a successful integration of Splunk into Cisco as we've said the Splunk integration has gone extremely well with revenue in line with our expectations and profitability well ahead of expectations. So Gary has really done a terrific job.
Speaker Change: In addition, during his time as our president of go to market. He also helped evolve our sales and go to market motions to drive growth and align with the needs of our customers and partners today and for the future.
I want to thank Gary for his partnership leadership and unwavering commitment since we announced our intent to acquire Splunk 18 months ago.
As a result of this we are immediately launching an internal and external search for a new go to market leader and Gary will stay with Cisco through the end of Q3 to ensure a smooth transition.
Speaker Change: Now, let me summarize the quarter there is clear demand for Cisco's technologies, which has accelerated as evidenced by our strong results.
Speaker Change: Our pipeline of product innovation is accelerating as we build security deep into our networking products the.
Speaker Change: The strength of our performance enabled our capital allocation model to return significant value to our shareholders.
Speaker Change: Lastly, we believe our strong execution and momentum position us well as we enter the second half of fiscal year 'twenty five Scott over to you for more details on the quarter and our outlook.
Scott: Thanks, Chuck we delivered a strong quarter with revenue and earnings per share above the high end of our guidance ranges, coupled with solid margins and operating cash flow.
Scott: For the quarter total revenue was $14 billion up 9% year over year non.
Scott: non-GAAP net income was $3 8 billion and non-GAAP earnings per share was <unk> 94.
Scott: Looking at our Q2 revenue in more detail total product revenue was $10 2 billion up 11% and service revenue was $3 8 billion up 6%.
Scott: Networking was down 3% with growth in wireless and switching offset by a decline in servers.
Scott: Want to note that our Q2 24 included the last portion of elevated backlog shipments.
Scott: Security was up 117%, primarily driven by growth in our offerings from Splunk Sassy and network security <unk>.
Scott: Excluding Splunk security grew 4%.
Scott: Collaboration was up 1% driven by growth in contact Center C pass offerings and collaboration devices, partially offset by a decline in our on Prem Webex suite offerings.
Scott: And observe ability was up 47%, excluding splunk absorbability grew 3% for the quarter.
Scott: Looking at our recurring metrics total <unk> ended the quarter at $30 1 billion, an increase of 22% with product they are our growth of 41%.
Scott: Total subscription revenue increased 23% to $7 9 billion and now represents 56% of Cisco's total revenue.
Scott: Total software revenue was up 33% at $5 5 billion with software subscription revenue up 39%.
Scott: The total RPE O was $41 3 billion up 16%.
Scott: Product RP O grew 25% and total short term or P. O was up 17% to $21 billion.
Scott: Q2 product orders were up 29% year over year, excluding splunk organic product orders were up 11% year over year.
Scott: Looking at our product orders across our geographic segments Americas was up 30% EMEA was up 24% and.
Speaker Change: N a P J C was up 35%.
Speaker Change: And our customer markets service provider cloud was up 75% enterprise was up 27% and public sector was up 13%.
Speaker Change: Total non-GAAP gross margin came in at 68, 7% up 200 basis points year over year coming in line with our guidance range.
Speaker Change: Product gross margin was 67, 7% up 250 basis points, driven by Splunk and productivity improvements, partially offset by pricing.
Speaker Change: Services gross margin was 71, 6% up 110 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, 7%.
Speaker Change: Shifting to the balance sheet. We ended Q2 with total cash cash equivalents and investments of $16 9 billion.
Speaker Change: Operating cash flow was $2 2 billion up 177%, primarily driven by higher tax payments in the prior year.
Speaker Change: From a cap allocation perspective, we returned $2 8 billion to shareholders. During the quarter comprised of $1 6 billion for our quarterly cash dividend and $1 2 billion of share repurchases.
Speaker Change: Given the confidence we have in our business today and into the future. Our board has authorized an additional $15 billion for share repurchases.
Speaker Change: The total outstanding authorization to approximately $17 billion.
Speaker Change: We're also raising our dividend by one penny to <unk> 41 per quarter, which represents our 14th consecutive annual increase.
Speaker Change: We continue to invest organically and inorganically in our innovation pipeline.
Speaker Change: During Q2, we closed the acquisition of deeper insights to expand our customer experience teams technology footprint and engineering talent accelerating innovation and momentum of Cisco CX AI capabilities and services.
Speaker Change: This investment is highly complementary to our internal R&D and aligns with our strategy to strengthen our AI positioned with targeted strategic M&A.
Speaker Change: To summarize we had a great quarter with top and bottom line performance exceeding our expectations.
Speaker Change: Driven by strong order growth and margins.
Speaker Change: We remain focused on making strategic investments in innovation across our business to best capitalize on the significant growth opportunities. We see ahead.
All underpinned by disciplined spend management.
Speaker Change: It is this powerful combination that continues to fuel our strong cash flow generation as well as our ability to return significant value to our shareholders.
Speaker Change: Before we move to the outlook I want to provide some high level context related to the recently proposed U S tariffs.
Speaker Change: And our guidance, we have accounted for the added cost driven by the increased tariffs on China and the proposed tariffs on Mexico and Canada.
Speaker Change: This is a dynamic environment, but one that we have spent a significant amount of time planning for leveraging the strength of our best in class global supply chain team as well as the flexibility and agility, we have built into our operations over the last few years.
Speaker Change: We are prepared to take actions to mitigate the impact as and when tariffs go into effect.
Speaker Change: Turning to our financial guidance for fiscal Q3, our guidance is as follows.
Speaker Change: We expect revenue to be in the range of $13 9 billion to $14 1 billion.
Speaker Change: We anticipate non-GAAP gross margin to be in the range of 67% to 68%.
Speaker Change: non-GAAP operating margin is expected to be in the range of 33% to 34%.
And non-GAAP earnings per share is expected to range from 90 to 92.
Speaker Change: For fiscal year 'twenty five our guidance as we expect revenue to be in the range of 56 billion to $56 5 billion non.
Speaker Change: non-GAAP earnings per share is expected to range from $3 68 to $3 74.
We're assuming a non-GAAP effective tax rate of approximately 19%.
Sami: Sami, let's now move into the Q&A.
Sami: Thank you Scott before we start the Q&A portion of the call I'd like to remind analysts to ask one question and a single follow up question Michelle can I move to the first analysts in the queue.
Speaker Change: Thank you Simon Leopold with Raymond James You May go ahead Sir.
Simon Leopold: Thanks for taking the question.
Simon Leopold: It might be a difficult one to answer and I appreciate the comment on tariffs, but maybe the bigger issue around the federal government is all the noise around the <unk>.
Simon Leopold: And so I'd love, if you could drill down on your federal exposure and the scenarios you're envisioning. If there are major layoffs from the U S government employment. Thanks, No I've got a quick follow up.
Simon Leopold: Okay. Thanks, Simon for the question.
Speaker Change: Look we have obviously been following this very significantly and I think it's important to understand that this effort is really about driving efficiency and productivity in government, which in many many cases is actually.
Speaker Change: Delivered via the use of technology. So we think that there could be some positives for us it's important to know that the federal U S. Federal business is less than 10% of our total business first of all in.
Speaker Change: And the other thing to keep in mind is at 75% of our U S. Federal business comes from the D O D.
Speaker Change: And most of this activity is actually occurring on on the civilian side of the business. So.
We had a we still had a reasonable quarter I'd say when the executive orders came out.
Speaker Change: Initially we saw a flurry of confusion I would say and then we've seen a lot of our large deals that we've been working on sort of get back on track and everything seems to be progressing as we expected as you look out to Q3 and Q4, we're not modeling in any materially higher performance oriented material lower performance in federal and what we saw last quarter.
Speaker Change: <unk>.
Speaker Change: Thank you Simon.
Speaker Change: Go ahead, please yes.
Speaker Change: There's been increasing noise around the technology known as co package optics, and given Cisco's, let's say ingredients, having opex vertical integration switching routing just wondering how you're thinking about that in your longer term strategy. Thank you.
Speaker Change: I think Simon way, we think about it is that the way we go to market with the web scales. Today is that we sell them systems with integrated optics, we sell them, you'll standalone optics optical systems or silicon. So however, the market evolves, we will continue to evolve our offerings and evolve our portfolio.
Speaker Change: To just meet them, where they are and how they want to procure our products.
Speaker Change: Thank you Simon Shockwave move to the next analyst.
Marshall: Thank you meta Marshall with Morgan Stanley You May go ahead.
Speaker Change: Great. Thanks.
Speaker Change: Chuck maybe if I could ask to start just kind of what you're seeing from customers on kind of propensity to spend clearly a very good quarter, but just kind of as we've entered into the year.
Speaker Change: More.
Speaker Change: A resolution.
Speaker Change: Administration, but maybe less resolution on kind of directionality, you just kind of what you're hearing from customers.
Speaker Change: And then second just on <unk>.
Speaker Change: Clearly you're seeing a lot of strength on the datacenter side I've kind of spoke to kind of sustain some of that on the campus side, but just.
Speaker Change: How are you seeing kind of strength broaden out to the campus portfolio. Thanks.
Speaker Change: Yes, I think if you look thanks Mitra I think if you look across the board. We had we had relatively strong demand across geographies across the portfolio.
Speaker Change: And with the exception of the U S. Federal discussion that we had earlier largely across segments as well.
Speaker Change: We saw public sector strength outside the U S and both Europe was up high single digits, I think and in Asia, We saw good performance as well.
Speaker Change: So we saw it there we've seen it in the campus and we talked about double digit demand for campus switching.
Speaker Change: Solve similar in enterprise routing saw good demand for wireless.
Speaker Change: And then the fourth consecutive quarter of double digit demand growth in the end date in our <unk> portfolio, our data center switching which predominantly goes into private cloud infrastructure into the enterprise.
Speaker Change: And then obviously the the web scale performance that we saw with five out of our actual I'm sorry, three out of the six growing over 100% year over year two of the six grown over 50% year over year. So it was very balanced and so far I think that despite the geopolitical risk despite the uncertainty this.
Speaker Change: Going on in them and in the U S and in the marketplace around the World I think the one thing our customers understand is that their need to continue spending on technology.
It.
Speaker Change: It's just there and they are there.
Speaker Change: There's so much change going on right now from a technology perspective that there's both excitement about the opportunity in.
Speaker Change: And candidly there is a little bit of fear of slowing down too much and and letting your competition get too much ahead of you. So we saw we saw solid demand.
Speaker Change: Thank you Nader and I want to remind analysts SaaS one question and a follow up question at the same time, Michelle that can move to the next analyst.
Speaker Change: Thank you Ben Reitzes with Melius Research you May go ahead Sir.
Yeah, Hey, Thanks, a lot guys and congrats on the quarter. It's good to see you guys with the momentum.
Speaker Change: Hi, Chuck.
Speaker Change: We've got a lot of questions very recently about new switch that you just put out.
Speaker Change: <unk> 9300 next session.
Speaker Change: This program will switch market.
Speaker Change: It looks like Theres, a lot of strong prospects. There just wondering if you could talk a little bit more about that product.
Speaker Change: And maybe why you went with AMD.
Speaker Change: For the product and what that means for year.
Speaker Change: Versus your Nvidia products and my follow up just.
Speaker Change: It is with regard to the overall comment.
Speaker Change: Of just overall demand just sounds so much better than a few quarters ago.
Speaker Change: I just wanted some emailed to view that do you still think people are getting ready for AI or I don't know if I heard that from you. This time that you think you were thinking in the last few quarters people were getting ready for AI and it picked up in this just sounded like a little more firm.
Speaker Change: But I was just wondering for a little more color on that hopefully that didnt run onto long Sammy.
Speaker Change: But I'll pass it back to you.
Speaker Change: Thanks, Don now we got we got both Com.
Speaker Change: Look first and foremost I want to just thank the team and in our product organization, because the innovation that they've been delivering over the last 12 to 18 months has been at a pace that we haven't seen in a very long time.
Speaker Change: You know we saw we've seen a lot of the collab space in the security space a lot in the silicon space and then in the web scale infrastructure and now I think what you referenced as the switch where the GPU and it is a is a great example of the innovation that we are going to drive in our core networking portfolio.
Speaker Change: And so it's.
Speaker Change: Can't speak to exactly why the team chose the the a M. D. P. You other than I'm sure. They did an analysis and thought it was the best solution for us.
Speaker Change: But this is a real.
Speaker Change: It's a breakthrough product because it allows us to kandi.
Speaker Change: Candidly, we can take security out of these these appliances that they come in and put it where it belongs which is everywhere.
Speaker Change: Security needs to be deployed everywhere and it is this really allows us to integrate security deeply into the network and at the speed of the network. So what this allows us to do.
Speaker Change: As.
Speaker Change: You can run network services or security services on these Gpus and the network at the speed of the ASX as opposed to moving as traffic to a central place, where you're going to be limited by the processing power of a single box.
Speaker Change: And so the first use case as you are aware is hyper shield, which we announced and we had a couple of big fortune winds in the prior quarter.
Speaker Change: Even as we're just building out the final capabilities on hyper shield, so that's going to be the first.
Speaker Change: Deployment, if you think about the use case you could put one of these switches sitting at between zones in a data center.
Speaker Change: And running all the traffic through it at at line speed and doing security inspection via hyper shield to protect different zones from east West threats. So it's we think it's got a lot of potential and this is just for just the first service or first use case that the teams have come up with.
Speaker Change: On your second question.
Speaker Change: We absolutely believe that a lot of this demand is being driven by.
Speaker Change: Customers preparing for AI, we even think a lot of the telco demand that we see is are the telcos building out their networks to be prepared to deliver AI as a service or AI driven services and so while I didnt call. It out it. It's one of the pillars that we talk about relative to our role in AI and we do.
Speaker Change: We think there is a there's an acceleration of companies that are just trying to get prepared for what theyre going to need it it's clear that agentic AI.
Speaker Change: Work streams are going to put more capacity onto the network.
Thank you Ben Michelle clean move to the next analyst.
Matthew: Thank you Matthew <unk> with Deutsche Bank, You May go ahead Sir.
Matthew: Hey, guys. Thanks, so much for taking the question just maybe to dovetail on the on the prior question you talked talk about enterprises investing a little bit more in AI and I'm, just wondering as they've come into the new calendar year.
Matthew: What you're seeing and hearing specifically from enterprise customers on the AI front and how meaningful it is.
Matthew: For your business today, and then just as a follow up maybe for Scott you did about 68, 7% on the gross margin front. This past quarter I think the guide implies a step down to between 67% to 68% and wondering maybe what informs that view.
Matthew: So much.
Matthew: So I'd say what were seeing on the enterprise side relative to AI is is it still.
Matthew: Customers are still in very early days and they all they all realize they need.
Matthew: To figure out exactly what their use cases are.
Matthew: We're starting to see some spending though on specific AI, driven infrastructure and and we think as we get AI pods out there we got hyper fabric coming we got AI defense coming we have hyper shield in the market.
Matthew: And and we got this new GPU switch, they're all going to be a part of the infrastructure to support. These AI applications. So we're beginning to see it happen, but I think it's also really important to understand that.
Matthew: As the enterprises leverage their private data their proprietary data and they'll do some training on that and then I'll run influence obviously against that we believe that opportunity is an order of magnitude higher than what we've seen in training to date. So we'll.
Matthew: We're going to continue to innovate and build capabilities to put ourselves in a better position to to be a real beneficiary. As this continues to accelerate but as of today, we feel like we're in pretty good shape.
Matthew: And Matthew on your question on gross margin the guide at 68, 67% to 68% for Q3 and by the way I think it settles in in that range for the full year, what's built into that and driving the step down from where we were in Q2 as we have in this as was noted in.
Matthew: In my commentary upfront, we have built and the cost of the proposed tariffs that we've seen so far so the additional 10% in China.
Matthew: The 25% on Canada, and Mexico, Canada has no.
Matthew: A negligible impact on us.
Matthew: And the steel and aluminum we've quantified those out again, assuming that the March one date.
Matthew: I think it's such a fluid environment right now, it's very difficult to say whats actually going to happen, but I wanted to protect the guide.
Matthew: Sure that we built in the 25% that's been proposed.
Matthew: I will tell you we've got our supply chain team that over the last several years has built a lot of muscle around.
Matthew: The tariff that we had in China, and how do we work with work our way around that.
Matthew: From the time that was first imposed to where we are now our mitigation activities have reduced our exposure there by about 80%.
Matthew: So we've gained planned out several scenarios and steps we can take depending on what actually goes into effect will start to take those those.
Matthew: Those steps to mitigate the impact of the tariffs what I built into the cost of goods sold Thats, where the tariffs will hit as the full effect of 25% in Mexico, Canada, and the additional 10% in China with no mitigation at this point, but no mitigation built out at this time.
Speaker Change: Thank you, Matt Sheldon can move to the next analyst.
Jimmy: Jimmy <unk> with Jpmorgan you May go ahead Sir.
Jimmy: Hey, Thanks for taking my questions I guess, maybe I'll follow up on that tariff question to start off.
Jimmy: You do mention you're embedding in the cost of the data aspect I think we're getting a lot of questions I'll try in terms of how to think about demand so Chuck or Scott I mean, any thoughts in terms of how you've seen enterprises to enterprise customers respond on a demand BSS to previous staffs and how does that inform your view in terms of what can you expect for <unk>.
Jimmy: And set up are you seeing any pull forward from customers to <unk> status in the first place and then for my follow up I think it's about more about the hyperscale around DEA momentum you're seeing there.
Jimmy: You are seeing strong momentum in auto is but what is maybe if you can give us some insights on deployments, we can see the strong capex numbers or guidance from them, but.
Jimmy: Is there any acceleration or set up more on track in terms of deployment be iterative to what do you expect thank you.
Jimmy: Yes.
Jimmy: On the first question, we're not seeing any evidence of customer pulling demand ahead, I think the tariff environment is very fluid right now it's a very dynamic environment. While everyone is taking note I think until we know what's actually going to go into effect. It will be very difficult for our customers to decide what to do I think the other thing that.
Jimmy: As we look at the steps, we would take to mitigate the impact of demand.
Jimmy: There are a number of steps, we can take to offset the cost.
Jimmy: Obviously would have price as a lever, but theres a number of considerations that we have to go through before we got there right now I don't envision that we would look to do first is make some of the changes we need to make inside the supply chain to mitigate the impact of whatever tariff regime gets put into place so not seeing any evidence of any pull ahead in demand.
Speaker Change: Yeah, So Mike I think on the question relative to the web scale demand versus their deployments I think that there.
Jimmy: I think the bottom line is it <unk>.
Set with all of these customers and they've looked at me and said if you can build more we will buy more.
Jimmy: So I think that a couple.
Jimmy: Couple of them had initial targets for or how many units. They wanted in 2025 and that number has already gone up by 50%. So I think the deployments R.
Jimmy: We're moving very rapidly and on track and we continue to respond to all of their demand and frankly, the changes that they make as our strategy evolves on a its very dynamic its a very dynamic market.
Speaker Change: Thank you Simic, Michelle you can move to the next analyst.
Speaker Change: Thank you Kelly <unk> with Goldman Securities You May go ahead Sir.
Speaker Change: Hi.
Speaker Change: Great quarter, but I have a question about maybe the weaker parts.
Speaker Change: If my math is right and I'm not sure. It's right signings clarification Splunk was down 11% this quarter year over year, maybe I have my numbers are totally wrong safety cannot clarify what's happening with Splunk and give us an update on.
Speaker Change: On the trends.
Speaker Change: And the second question is security and observe ability.
Speaker Change: It's supposed to accelerate it accelerated last quarter can you talk about the trends this quarter and kind of the good parts of the bad parts of the growth. Thanks.
Speaker Change: Okay I'll take the first one and then Chuck we can we can tag team on the second if you want on that I'm not sure what math, you're doing Kyle I think one thing that is not visible to you with the math that you've got in front of you is the end of Splunk.
Speaker Change: Quarter of their fiscal year by the way this would've been the end of January was the end of their prior Q4 sides with every enterprise software company of course Q4 is the biggest quarter of the year and in fact, it gets back end loaded so that there. The week 13 of that that Q4 is the biggest week of the quarter. The way the calendar fell this year are.
Speaker Change: Fiscal quarter ended on January 25th So that last week of January that was historically Splunk is Q4 actually is not captured in our Q2 results that will flow into our Q3 results that may be what's throwing you off on the math Splunk is still growing double digits, that's really right in line with our expectations Mark.
Speaker Change: We are ahead of our expectations on the topline and as profitable well ahead of when we expected it to be profitable response, performing quite nicely for us.
Speaker Change: Yes.
Speaker Change: On the security front, what I would say tell us that.
Speaker Change: Look we had always said we expected to see the acceleration.
Speaker Change: In the second half of this year, we saw.
Speaker Change: The last four quarters of growth from a demand perspective in organic security, which is a good sign.
Speaker Change: And.
Speaker Change: What we've launched is all this new innovation that just takes time to ramp but I can give you a couple of data points. If you just look at two of the of the product Cisco secure access and xdr beats.
Speaker Change: Between those two we now have those deployed at over 1000 customers in each of them are actually supporting over 1 million enterprise users each.
So we're seeing the success of just they just need time to ramp. We've also launched hyper shield said earlier, we want to fortune 100 enterprise customers this past quarter and Theres a great deal of excitement. If you look at AI defense, where the AI summit that we did recently.
Speaker Change: There's I think there's about 20, some odd customers who are interested in going to proof of concept with US right now on it we had almost half the fortune 100, there for that event. So I feel good about where we are it will turn into it'll turn into greater demand as we just continue to scale. These products.
Speaker Change: Thank you Tal Michel can move to the next analyst.
Speaker Change: Amit <unk> with Evercore ISI you May go ahead Sir.
Michael: Alright. Thanks This is Michael.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Question on the 700 million so far this year.
Speaker Change: Namely switching and optical lenses, where you're seeing.
Speaker Change: And then just curious if youre expecting any can be very strong.
Speaker Change: We are converting into revenue this fiscal year is that we're not in fiscal 'twenty.
Speaker Change: Thanks, Sumit I'll take the first one Scott you can think of the revenue.
Speaker Change: On the 700 million in AI orders it's.
Speaker Change: It's a combination of systems silicon optics and optical systems.
Speaker Change: I think if you break it down it's about half is in silicon and systems.
Speaker Change: And.
Speaker Change: But it's a it continues to accelerate and I'd say the teams have done a great job on the Silicon front, we've invested heavily in more resources. There. The team is run in parallel development efforts for multiple chips that are staggered and their time frames. They worked hard they are increasing the yield which is a positive thing.
Speaker Change: And so you know.
We feel good about it but it's a combination of all those things that we're selling to the customers scuttled revenue side, yes, Amit it's no different than what we've said all along about when we expect this to turn into revenue we knew the orders would come in well ahead of the actual ship dates we do expect to see this revenue begin to ramp in the second half of the year and that's consistent with what we've said.
Speaker Change: From the start.
Speaker Change: Thank you for the questions and Michelle we can move to the next analyst.
Speaker Change: Thank you our next caller is Jim fish with Piper Sandler you May go ahead Sir.
Jim Fish: Hey, guys nice quarter.
Jim Fish: Working off a few things you guys just talked about here.
Jim Fish: Can you just first give us an update as to the actual penetration of the 6500 large customers you guys expected between Cisco and Splunk to jointly go after at any further bundling plants you have it beyond what you just announced and then secondly to the last question.
Jim Fish: What are you guys seeing from where youre winning within the data center between the Silicon one approach versus sort of a systems approach with your AI wins with lot of additional color. There. Thanks guys.
Jim Fish: Okay.
Speaker Change: Thanks, Jim so on the on the Splunk side I would say it's still early these are these are still you know.
Jim Fish: Long sales cycles and.
Jim Fish: Well, we're continuing to make progress we are having wins I mean, they are clearly out there. We also have seen the benefit of the portfolio coming together with large customers doing are our broad based what we call WP as in better inclusive of spark now Neil Cisco Wpa's that are inclusive of Splunk, and we talked about the <unk>.
Jim Fish: <unk> team that had a deal that they were leading that actually expanded the Cisco footprint. So we are beginning to see that and we'll continue to see it as we go forward I think youll see.
Jim Fish: As we as we get into the next couple of quarters, Youre going to see more and more cross selling sales incentives that the teams are putting in place that I think will continue to accelerate that and on the second question. I think it was about how theyre looking at systems versus silicon and silicon, Yeah, I think that by and large it systems.
Jim Fish: Actual just raw silicon sales are still very small as a percentage of the total business. So the general method of of consumption is just to buy the systems.
Jim Fish: Thank you Jim Michelle they can move to the next analyst.
Jim Fish: David though with UBS you May go ahead Sir.
David: Great. Thanks, guys for taking my question. So I'll give you both obviously at the same time, so I'm just trying to square up your comments about the strength you're seeing across the business.
David: Looks like ex Splunk enterprise orders may be decelerated, a little bit sequentially and the strengthened I guess it looks like the Americas. There was mostly SP cloud and then the second question I have is maybe longer term there's been a high number are a large number of project announcements over the last couple of weeks with some pretty big announcements and maybe the white box OEM space with some big win.
David: As well so maybe anything you can touch on from a competitive perspective on how you're thinking about maybe these mega projects that have been announced maybe the risks out there from some of these other alternatives like <unk> and then some of these wins that have been announced by some of the OEM market and how you're thinking about the landscape.
Yep.
David: Okay.
David: First of all only enterprise you know we've had four quarters of continued recovery.
David: Was a little slower growth year over year than it was in Q1, but it's important understand I think Q2 over Q1 was up 29%, we literally took over $1 billion more in orders in Q2 than Q1. So I don't think theres anything should be overly concerned about right there.
David: And we saw real good strength in it.
David: In Asia in double digits.
David: Europe was close to double digits in U S. Enterprise just had a bunch of big deals in Q1 that I think just kind of slowed them down a little bit for Q2.
David: The only other one these other deals I mean, if you look at technologies like deep Sea, we think there's as not deep seek in particular, but we think as we see more of this democratization of the of the access that is going to just facilitate.
David: A faster advancement of AI applications in the enterprise first of all <unk>.
David: Secondly.
Speaker Change: I think we are we ran our AI defense model I think we did 50 prompts and the team. This was <unk> 48 hours of this thing being out and I think they proved every time that they could jail break this thing.
David: Pretty easily so I think we've got to be careful as well.
David: And the final thing I'd say on a lot of these unique deals out there. These bigger deals I think we will.
David: We're having success in the web scale space and I think if if if we're being chosen in that space I think we'll have a real good opportunity to play in these other emerging opportunities as they come about as well.
Michelle Simic: Thank you David Michelle can move to the next analyst.
Speaker Change: Antoine <unk> with New Street Research you May go ahead Sir.
Antoine: Alright. Thank you so much for taking my questions. So I'd like to.
Speaker Change: Question regarding traction from enterprise customers and AI could.
Speaker Change: Could you provide some additional color on where you are seeing Ethernet cable into medium enterprise segment, what kind of cluster size, let's use cases, which verticals.
Speaker Change: And then as a threat.
Speaker Change: Got it.
Speaker Change: I'd love to hear your perspective, given what Youre hearing from from these customers in terms of data center space and in particular access to power.
Speaker Change: Potentially being a bottleneck through to roll out infrastructure this year.
Speaker Change: Yes.
Antoine: Thanks Antoine.
Speaker Change: I think that we're not thinking about it from massive clusters that the enterprises are going to build they're certainly building clusters to do training on their own models or they're renting space from one of the major <unk>.
Speaker Change: <unk> providers to to actually do their training and then pulling that back and the infrastructure. We're talking about is really to support the inferencing side of it and I think by and large to be candid the customers who have bought like Nvidia Gpus. So far have just bought the whole stack from them.
Speaker Change: And so we think that'll be an emerging opportunity in the future.
Speaker Change: Not really Ethernet under Gpus in the enterprise today has a bit of it hasnt been a major opportunity to date now we believe with the Nvidia partnership the hyper fabric stack the AI pods, the things that we're building.
Speaker Change: We think that as we integrate that stack together and they have these reference architectures to build that we think that that will lead to our networking equipment being combined with Nvidia Gpus and that's how we'll accomplish that in.
Speaker Change: In the in the future and candidly I don't think there's there hasn't been a lot of concern over the power issue in.
Speaker Change: In the enterprise like it has been in the web scale space.
Speaker Change: Thank you Antoine Michelle claimed move to the next question.
Speaker Change: Aaron Rakers with Wells Fargo you May go ahead Sir.
Aaron Rakers: Yes, thanks for taking the question and congrats on the quarter I'll stick with the AI team personnel.
Aaron Rakers: My quick follow up on the AI side I think in the prepared comments you had mentioned that Youre 51.2 T. Silicon will come out I think it was April timeframe as you think about that 50% into your business on the AI orders being tied to switch and silicon <unk> silicon.
Aaron Rakers: Would you say that that is kind of point of inflection by the majority of your AI wins are tied to that 51 to two silicon or just kind of trying to understand kind of the opening up of this monetization opportunity and then as a follow up I'm just curious.
Aaron Rakers: On the campus side.
Aaron Rakers: Kind of.
Help us appreciate maybe the Wi Fi seven upgrade cycle that youre, starting to see or how youre thinking about that thank you.
Aaron Rakers: Yeah I think on.
The comments, we made on the why on a 51, two really was more of an enterprise comment.
Aaron Rakers: And the Nexus portfolio, but it is silicon one based and so those chips will be used in the in the eight thousands as an example, but this is a.
Aaron Rakers: If you get back to the Silicon discussion that we had earlier.
Aaron Rakers: That team is designing multiple silicon architectures based on the use cases on the customer do they need deep buffers do they not need deep buffers.
Aaron Rakers: It's really is at a low latency application I mean these are they are all of these things come in to play as they develop different.
Aaron Rakers: Pieces of silicon for that marketplace. So we'll continue to develop and 51 not to us.
Aaron Rakers: And then beyond and they're already working on the subsequent chips that will that will continue to crank up the speeds in these data centers on.
Aaron Rakers: On the campus side I think that.
Aaron Rakers: We're continuing to see.
Aaron Rakers: The suite the campus switching infrastructure as I talked about earlier and it's early days on Wi Fi seven I'd say customers are getting ready to begin deploying I think we're going to move into that over the next two to three quarters, where we will see a full transition both in the traditional on Prem access points and then also in the cloud managed.
Speaker Change: Thank you Erin Michelle we can look to the next analyst.
Speaker Change: Karl Ackerman with BNP <unk> you May go ahead Sir.
Speaker Change: Thank you.
Speaker Change: In enterprise networking I think a couple of quarters ago customer lead times bottom out at just a few weeks.
Speaker Change: Is the greater visibility and support of your April quarter outlook from enterprises, and even telco operators.
Speaker Change: Coming from just a return to normal order patterns or.
Speaker Change: Our lead times extending out beyond the quarter across those customers as you begin to introduce.
Speaker Change: AI pause in Hyperscale and perhaps some on Prem service offerings. In addition to that.
Speaker Change: Yes.
This is just normalization of ordering we haven't had any lead time pressure at all.
Speaker Change: Yes, we're not seeing a plus behind that question Karl as is the demand that we're seeing today a function of extended lead times like we saw a couple of years ago. That's not the case our lead times are not extended.
Michelle Simic: Thank you Carl Michelle we can move to the last question.
Malik: <unk> Malik with Citi. You May go ahead Sir.
Adrienne Colby: Hi, it's Adrienne Colby for us yes.
Adrienne Colby: Thank you for taking the question.
Speaker Change: Earlier this week, you announced some offerings geared towards traditional service providers I was just.
Adrienne Colby: Wondering if you could help us size this cost pressure.
Adrienne Colby: And understand where these customers are in terms of their embrace of AI. What are some of the key issues that this does helping them Jeff.
Adrienne Colby: Okay.
Scott you want to you want to.
Adrienne Colby: Comment on the size of the telco segment overall.
Adrienne Colby: Overall.
Adrienne Colby: Telco had a good quarter in the last quarter, we have that's actually a continuation of what we saw in Q1.
Adrienne Colby: And what we hear from telco.
Adrienne Colby: Particularly in international.
Adrienne Colby: They are in anticipation of demand on their networks driven by AI doing the same thing that we hear enterprises doing they know theres increased load coming in many cases, they've sweat those assets for some time because of the the state of the financials in that industry and theyre coming back to the table to build out their networks in anticipation of the increased demand.
Adrienne Colby: I think we'll continue to see that for some period of time.
Adrienne Colby: By its nature and the size of the telco.
Adrienne Colby: Customers that we have can be a little bit episodic a little bit big deals in one quarter and not in the next so it's not something that I would expect to see on a steady state, but we're seeing good demand right now as they see the same thing the same exact trend that enterprises see theres network load coming we need to be ready for it.
Speaker Change: I think thats right I think the other thing that we see.
Speaker Change: Some of the European operators are looking at delivering AI as a service.
Speaker Change: We see a lot of them planning for AI edge applications that are sitting at the edge of their networks that theyre managing for customers et cetera. So there is there they are preparing for sure.
Speaker Change: Thank you Adrian and I want to hand, it over to Chuck for some closing remarks.
Chuck: I just want to thank everybody for joining us today and I want to thank our teams I'm really proud of these results and the teams have been doing a really great job both on the innovation front and engaging with our customers. We clearly live in a very dynamic world and as Scott said earlier as the impact of these potential tariffs become more clear.
Chuck: Our teams will take the appropriate steps to mitigate where we can.
Chuck: I do feel good about our momentum again, the product innovation and this particularly the innovation in our core portfolio and how it's translating through to customer value clearly the AI tailwind as well as the integration that has occurred so far relative to Splunk and just the team's peer out execution.
Chuck: I'm confident in the steps we've been taking I think it'll lead to durability of the performance and.
Chuck: We want to just continue to deliver for our customers deliver the right technology, the right value and be a trusted partner for them. So thank you for being with US and we will look forward to talking to you soon.
Chuck: Cisco's next quarterly call, which will reflect our fiscal year 2025 third quarter results will be on Wednesday may 14, 2025 at 130 PM Pacific time, 430 PM. Eastern time. This concludes today's call. If you have any further questions. Please feel free to contact the Cisco Investor Relations Department and we thank you very much for joining the call today.
Chuck: Thank you for participating on today's conference call. If you would like to listen to the call in its entirety you may call. One 803 956236 for participants dialing from outside the U S. Please dial 203369.
Chuck: 3270, Thus concludes today's call you may disconnect at this time.