Q3 2025 Cisco Systems Inc Earnings Call
Welcome to Cisco's third 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 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, Scott Herren, our CFO and Mark Patterson, our Chief strategy Officer.
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 slides available on the website.
Today's call will be referencing both GAAP and non-GAAP financial results.
Discuss product results in terms of revenue and geographic customer results in terms of product orders unless stated otherwise all comparisons will be made on a year over year basis. Please.
Please note that our discussion today will include forward looking statements, including our guidance for the fourth quarter and fiscal year 2025. These.
These statements are subject to risks and uncertainties detailed in our SEC filings, particularly our most recent 10-K. Thank you reports, which identify important risk factors that could cause actual results to differ materially from those contained in our forward looking statements with respect to guidance. Please also see the slides and press release that accompany this call for further details.
I 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: Thanks, Amy and thank you all for joining US today Q3 was another strong quarter for Cisco with revenue margins and earnings per share all above the high end of our guidance ranges.
Chuck: We also generated solid growth in annualized recurring revenue remaining performance obligations and subscription revenue, which all support our future performance.
Chuck: In addition, we received AI infrastructure orders from web scale customers in excess of $600 million in Q3, bringing our year to date total to well over 1 billion, surpassing our original fiscal year 'twenty five AI order target a full quarter early.
Chuck: The performance of our core business continues to produce strong cash flows underpinning our commitment to deliver consistent capital returns in Q3, we returned $3 1 billion in capital to our shareholders through share repurchases and dividends with a total of $9 6 billion in value returned year to date.
Chuck: Our overall strong performance was the result of accelerated product innovation and solid execution by our teams driving sustained demand for our technologies total.
Chuck: Total product orders grew 20% year over year or 9% on an organic basis, excluding splunk despite.
Chuck: Despite the uncertain macro environment. This demonstrates the valuable outcomes, we're delivering for customers in the era of AI.
Chuck: Looking at demand in more detail by customer market I'd also like to remind you that Q3 of fiscal year 'twenty. Four included six weeks of sport contribution.
Chuck: Enterprise product orders were up 22% year over year in Q3, driven by double digit growth in the Americas and a P. J C.
Chuck: Public sector orders were up 8% with growth in all geographies as governments around the world continue to trust Cisco is there, India and technology partner.
Chuck: Notably U S. Federal orders grew double digits in Q3 after a challenging first half.
Chuck: During the quarter, our AI powered cloud managed Milwaukee for government networking solution also achieved fed ramp authorization from the U S government.
Chuck: Product orders from service provider and cloud customers continue to be strong up 32% year over year, driven by triple digit growth in web scale with three of the top six web scale or is each growing orders in the triple digits.
Chuck: Now some color on demand from a product perspective.
Chuck: Networking product orders grew double digits, driven by web scale infrastructure enterprise routing switching and our industrial Iot products.
Chuck: Campus switching orders grew high single digits in Q3 against the tougher prior year compare demonstrating the continued demand for our campus portfolio to enterprise customers.
Chuck: We also saw triple digit sequential growth in orders for our Wi Fi seven portfolio in Q3.
Chuck: Year to date orders for our industrial Internet of things portfolio comprised of Ruggedized catalyst products grew 35% year over year extra.
Chuck: Our strategic infrastructure and manufacturing begins to onshore to the United States Cisco is well positioned to help connect and protect these capital intensive investments at scale.
Chuck: Our data center switching orders are up double digits year to date compared with the same period last year. Cisco was recently ranked as a market leader in Gartner Magic quadrant for data center switching this.
Chuck: This is a testament to our ability to address the full range of data center switching use cases, and our vision to simplify operations, while enhancing security, which is essential for critical application deployments.
Chuck: As I mentioned earlier.
Chuck: AI infrastructure orders, we have received from web scale customers were exceptionally strong in the quarter exceeding 600 million in bringing our year to date total to well over our $1 billion target for fiscal year 'twenty five.
Chuck: As expected the product mix of these orders was more than two thirds and systems with the remainder in optics, demonstrating the growing importance of our technology to web scale customers or their AI training use cases.
Chuck: Hey, I orders from enterprise customers continued to show momentum is this large nascent market opportunity starts to unlock.
Chuck: Enterprises are seeking simple seamless scalable and secure solutions for their AI deployments, which we are ready to deliver through our expanding partnership with Nvidia.
Chuck: During the quarter, we announced our intent to create a cross portfolio unified architecture, where in video will enable Cisco silicon one to become the only third party silicon that is included as part of the Nvidia spectrum ex Ethernet networking reference architecture.
Chuck: Cisco will also build interoperable systems, combining nvidia spectrum silicon with Sysco operating system software, allowing customers to simultaneous standardized Cisco networking and video technology in the data center across brought it back in networks.
We also announced the Cisco secure AI factory, with Nvidia, which will embed security into in.
Chuck: From the application to the workload to the infrastructure using solutions like Cisco AI, the pits and hybrid mesh firewall, enabling enterprise customers to build and secure data centers to develop and run AI workloads.
Chuck: Yesterday, we announced a new multi phased investment program in the Kingdom of Saudi Arabia.
Chuck: Saudi Arabia announced a new AI company Humane, and we will be a strategic technology partner contributing to their AI infrastructure build outs.
Chuck: This partnership aligns with Saudi vision 2030, contributing to the kingdom transformation into a diversified digital economy and enhancing its global and regional competitiveness in the AI era.
Chuck: In addition, we are joined the AI infrastructure partnership alongside Blackrock Global infrastructure partners M. G ex Microsoft Nvidia X AI and energy partners, GE, <unk> and Nextera energy as it seeks to invest in secure efficient and scalable infrastructure to support AI workloads, we are.
Chuck: Also announced an expanded collaboration with <unk> 42, the UA based global technology group to advance how secure AI infrastructure and innovation can be scaled across public and private sectors. These.
Chuck: These investments and partnerships highlight our market position as a global leader in preferred partner and AI networking solutions as well as our commitment to collaborating across the industry to create a strong global ecosystem for AI.
Chuck: Additionally, we expect the sovereign AI cloud opportunity to ramp in the near term and that Cisco will be a core system provider for these significant AI training and inference cluster build outs.
Chuck: As we look at the opportunity to AI presents for Cisco. It is worth reiterating that we frame it in three distinct but connected pillars.
Chuck: First AI training infrastructure for web scale customers combinations of our Cisco 8-K, Silicon one optics and optical systems are being deployed by five of the six largest web scale.
Chuck: Second AI inference, and enterprise clouds, our accelerated innovation in hardware and software coupled with our in video partnership is designed to simplify and Derisk AI infrastructure deployment for the enterprise.
Chuck: And third AI network connectivity.
Chuck: Customers are leveraging our technology platforms to help modernize secure and automate their network operations to prepare for pervasive deployment of AI agents and applications with a <unk> network is fundamentally constrained and will require ultrafast low latency energy efficient networks, which we can deliver.
Chuck: Shifting to security orders grew in high double digits in Q3.
Chuck: Our security orders included a large multi year deal with a major financial services company for Splunk security and observed ability platforms, which was driven by our combined sales force there.
Chuck: This was a win per spot from an industry competitor and is a strong proof point of our go to market synergy. This was also the largest deal ever for Splunk.
Chuck: Our recently launched security products of secure access xdr in hyper shield collectively added over 370, new customers in the quarter.
Chuck: The majority of our new Hyperscale enterprise customers are bundling it with our new in 9300 smart switch because of our unique ability to embed security directly into the fabric of the network.
Chuck: Now I'd like to comment on some highlights from our accelerating innovation pipeline safety and security will be the defining challenge of Egencia Guy and we recently introduced several innovations designed to help security professionals harnessed the power of AI, while keeping security at the forefront. These include.
Chuck: Cisco Xdr correlating attack telemetry across network endpoint and cloud using new AI powered solutions to empower security teams to understand complex threats in seconds.
Speaker Change: <unk> AI develop advancements for Cisco xdr in Splunk to simplify threat detection and response.
Speaker Change: Our new partnership with service now, which will integrate their security operations capabilities with Cisco AI defense.
Speaker Change: And the launch of Foundation AI.
Speaker Change: Team of leading AI and security experts focused on developing cutting edge technology to address the fundamental security issues of the AI era with novel open source tools, including the first reasoning model to enhance security applications.
Speaker Change: Just last week, we introduced Cisco's quantum network entanglement chip, a revolutionary prototype, making real world quantum networking applications possible in order to speed up the future of quantum computing.
Speaker Change: These applications will solve complex customer challenges and drive innovation across industries from supply chain optimization to accelerating drug discovery.
Speaker Change: In addition, we are using gen AI and <unk> systems across our customer experience organization to maximize customer value delivered great experiences boost productivity and create capacity.
Speaker Change: Today over 60% of support cases are touched by AI, driven automation, which is driving up the proportion of complex cases, we can solve within one day.
Speaker Change: In addition, low severity cases have reduced as more customers are using our AI support assistant.
Speaker Change: Also our AI renewals agent has enabled us to increase the capacity of our renewals specialists as.
Speaker Change: As you can see.
Speaker Change: We are driving an enormous amount of innovation and I look forward to showcasing even more new customer centric solutions at Cisco live next month.
Speaker Change: Before I turn it over to Scott I'd also like to share some important organizational announcements.
Speaker Change: After careful consideration Scott has made the decision to retire at the end of fiscal year 'twenty five.
Speaker Change: As many of you know Scott joined US in 2020 during a period of great uncertainty around the world and he has been instrumental in driving our transition towards more software and recurring revenue.
Speaker Change: This has driven greater predictability for our business and increase shareholder value and I want to thank Scott for all that he has done for Cisco I am grateful for his partnership as we've managed through many unprecedented situations together.
Speaker Change: I'm happy to share that beginning day, one fiscal year 'twenty six Mark Patterson, our current Chief strategy Officer.
Mark Patterson: Will serve as Cisco's, New Chief Financial Officer, and marks nearly 25 years at Cisco. He has held leadership roles in finance strategy and operations. He also spent over a decade and sales working enrolls that spanned every customer segment and geography.
Mark Patterson: Most recently, leading our corporate strategy development and incubation organization Mark's focus has been on connecting our longer term strategy and investments with our immediate and urgent growth opportunities.
Mark Patterson: The breadth of his experience along with his deep knowledge of Cisco and our customers partners and investor community uniquely positioned him to help accelerate cisco's growth in this new role.
Mark Patterson: I'm also excited to announce the promotion of <unk> Patel to President and Chief product Officer.
Mark Patterson: Under <unk> leadership over the past nine months, he has unified our product vision and strategy and vastly accelerated our innovation pipeline focusing on delivering even greater value for our customers and our partners.
Mark Patterson: We also announced the appointment of Kevin Weil, Chief product Officer of open AI to Cisco's Board of directors yesterday.
Mark Patterson: These announcements further our confidence and Cisco's long term success and durability in the era of AI.
Mark Patterson: To summarize the quarter, we're seeing clear demand for our technology across our customer markets. Our innovation pipeline continues to accelerate as we few security deep into our networking products and our strong performance is fueling our capital allocation model returning significant value to our shareholders.
Mark Patterson: Now I'll turn it over to Scott for more detail on the quarter and our outlook.
Scott: Thanks Chuck.
Scott: 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.
Mark Patterson: For the quarter total revenue was $14 1 billion up 11% year over year.
Mark Patterson: non-GAAP net income was $3 8 billion and non-GAAP earnings per share was <unk> 96.
Mark Patterson: Looking at our Q3 revenue in more detail total product revenue was $10 4 billion up 15% and services revenue was $3 8 billion up 3%.
Mark Patterson: Networking was up 8% with growth across most of the portfolio led by double digit growth in switching in enterprise routing, partially offset by a decline in servers.
Mark Patterson: Security was up 54%, primarily driven by growth in our offerings for Splunk and SaaS.
Mark Patterson: Collaboration was up 4% driven by growth in devices Webex suite in our C pass offerings.
Mark Patterson: And observer ability was up 24%.
Mark Patterson: Looking at our recurring metrics total <unk> ended the quarter at $30 6 billion, an increase of 5% with product they are growth of 8%.
Mark Patterson: Total subscription revenue increased 15% to $7 9 billion and represents 56% of Cisco's total revenue.
Mark Patterson: Total software revenue was up 25% at $5 6 billion with software subscription revenue up 26%.
Mark Patterson: Total <unk> was $41 7 billion up 7%.
Mark Patterson: Product RP O grew 10% in total short term <unk> was $21 1 billion up 5%.
Mark Patterson: Q3 product orders were up 20% year over year, excluding Splunk product orders were up 9% year over year.
Mark Patterson: Looking at product orders across our geographic segments. The Americas was up 27% EMEA was up 4% and a P. J C was up 21%.
Mark Patterson: And our customer markets service provider and cloud was up 32% enterprise was up 22% and public sector was up 8%.
Mark Patterson: Total non-GAAP gross margin came in at 68, 6% up 30 basis points year over year coming in above the high end of our guidance range.
Mark Patterson: non-GAAP product gross margin was 67, 6% up 70 basis points, driven by productivity improvements and Splunk, partially offset by pricing.
Mark Patterson: non-GAAP services gross margin was 71, 3% down 30 basis points.
Mark Patterson: The impact of tariffs on our gross margin was favorable to what was estimated in the guidance we provided last quarter.
Mark Patterson: We continue our focus on profitability and financial discipline with non-GAAP operating margin at 34, 5% above the high end of our guidance range.
Mark Patterson: We recorded a non-GAAP tax rate of 17, 5% for the quarter, which was favorable by one five percentage points compared to what was assumed in our guidance.
Mark Patterson: Primarily due to an increase in tax benefit from the foreign derived intangible income deduction and onetime benefits.
Mark Patterson: Shifting to the balance sheet. We ended Q3 with total cash cash equivalents and investments of $15 6 billion.
Mark Patterson: Operating cash flow was $4 1 billion up 2%, primarily driven by revenue and earnings growth.
Mark Patterson: From a capital allocation perspective, we returned $3 1 billion to shareholders. During the quarter comprised of $1 6 billion for our quarterly cash dividend at $1 5 billion of share repurchases with $15 4 billion remaining under our share repurchase program.
Mark Patterson: We continue to invest organically and inorganically in our innovation pipeline.
Mark Patterson: During Q3, we closed the acquisition of snap attack, which adds capability to Splunk and helping organizations power the security operations center of the future.
Mark Patterson: To summarize we had another solid quarter with top and bottom line performance exceeding our expectations driven by strong order growth and margins.
Mark Patterson: 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.
Mark Patterson: Powerful combination that continues to fuel our strong cash flow generation as well as our ability to return significant value to our shareholders.
Mark Patterson: Turning to guidance, while we've seen some progress on tariffs there continues to be uncertainty.
Mark Patterson: Our guide assumes current tariffs and exemptions remain in place through the quarter. He.
Mark Patterson: These include the following.
Mark Patterson: China at 30%, partially offset by an exemption for semiconductors and certain electronic components.
Mark Patterson: Mexico, and Canada at 25% for the components and products that are not eligible for the current <unk>.
Mark Patterson: MCA exemptions.
Mark Patterson: Other countries at a base rate of 10% until the end of the 90 day pause on July nine.
Mark Patterson: And then reverting to country specific reciprocal tariffs, partially offset by an exemption for semiconductors and certain electronic components.
Mark Patterson: And finally, a small impact from tariffs on steel and aluminum and retaliatory tariffs.
Mark Patterson: We will continue to leverage our world class supply chain team to help mitigate the impact where appropriate through the flexibility and agility, we have built into our operations over the last few years.
Mark Patterson: The size and scale of our supply chain provides us some unique advantages as we support our customers globally.
Mark Patterson: For fiscal Q4, our guidance as we.
Mark Patterson: We expect revenue to be in the range of $14 5 billion to $14 7 billion.
Mark Patterson: We anticipate non-GAAP gross margin to be in the range of 67, 5% to 68, 5%.
Mark Patterson: non-GAAP operating margin is expected to be in the range of 33, 5% to 34, 5%.
Mark Patterson: non-GAAP earnings per share is expected to range from 96 to 98.
Mark Patterson: And we're assuming a non-GAAP effective tax rate of approximately 18%.
Mark Patterson: For the full year fiscal 'twenty five our guidance as we expect revenue to be in the range of $56 5 billion to $56 7 billion and.
Mark Patterson: And non-GAAP earnings per share is expected to range from $3 77.
Mark Patterson: The $3.79.
Sami: Sami, let's now move into the Q&A.
Mark Patterson: Thank you Scott.
Speaker Change: 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.
Operator can we move to the first analysts in the queue.
Meta Marshall: Thank you Sir meta Marshall with Morgan Stanley You May go ahead.
Meta Marshall: Great Thanks, and congrats on the quarter.
Speaker Change: Maybe two questions for me just one what are you seeing in terms of customer buying behavior right now just given the uncertainty kind of with some of the tariffs that you laid out and just whether you saw any pull forward.
Meta Marshall: Potentially and in April.
Meta Marshall: And then just maybe as a second question.
Meta Marshall: Just any commentary around public sector and federal kind of around around the same questions. Thank you.
Speaker Change: Yes. Thank you I'm going to I'll give you some commentary and then I'll ask Scott to give you some data points on this pull ahead issue, but I'd say on the customer behavior perspective.
Speaker Change: First of all we haven't seen any meaningful.
Speaker Change: The change in how Theyre and Theyre purchasing and so we haven't seen any customers really fundamentally slowing down they are still committed to the technology transition I think the AI transition is.
Speaker Change: So important that are they're going to continue to spend until they absolutely have to stop and I think that as of right now there's still comfortable.
Speaker Change: As it relates to pull forwards look I think.
Speaker Change: I'm sure there was a an order here or there from a customer who decided to pull forward pull something forward because they were concerned about tariffs, but we looked at a ton of data points.
Speaker Change: To see if we saw any signs of broad based pull ahead business and we did not and I'm going to ask Scott real quick to share some of those data points and then I'll answer public sector, yes. Thanks Chuck.
Speaker Change: I should remind you too made is that we do.
Speaker Change: Didn't motivate a lot of pull ahead by talking about price increases if you remember the way we talked about the impact of tariffs was.
Speaker Change: The number of levers we have a great world class supply chain team once the tariff scenario stabilizes there are steps that we can take to mitigate it as you've seen us through with the China tariffs from the first Trump administration and only after that would we consider prices. So we didn't we didn't build a strong motivation, but we looked at after speaking to our channel partners who also.
Speaker Change: Didn't see any buy ahead or delay behavior by the way and our own sales team. We looked at channel inventory, which you would think would go up it did not it actually was down.
Speaker Change: We work closely with the web scales, we understand not just what they have on order, but what they have on hand actually web scalar inventory on hand went down during the quarter.
Speaker Change: We looked at Meraki Activations, we know when a serial number ex leaves the factory floor and when it gets activated when we had built up some inventory at our customers you recall that period of time between shipment and activation extended its stayed right where it was which was back in line with where it was pre pandemic. So there is no indication there.
Speaker Change: Of course, we look at linearity and.
Speaker Change: In particular to see if we saw a spike in the third month, which if you recall the reciprocal tariffs were announced on April 2nd.
Speaker Change: And so if there was some buy ahead activity, we would have seen a heavier month three we did not see that we saw the exact same linearity that we had seen historically there.
Speaker Change: And we look at our pipeline for pull of heads or push outs nothing out of the ordinary there.
Speaker Change: I'd say the last metric as we look at when a customer orders today, but request the future ship date.
Speaker Change: Always a little bit of that that happens, but we look to see was there a pattern of a lot of orders that came in with a future ship date and there was nothing out of the ordinary either so we really don't see any signs of any notable pull ahead or for that matter pushout.
So maybe let me cover the public sector suggest I know, we put this in the AR and the corresponding slides I think but global public sector was up 8%. If you just look at the organic growth it was up 3% globally.
We saw in the U S. We saw strength in federal Ironically so.
Speaker Change: We saw double digit order growth in U S. Federal this quarter.
Speaker Change:
Speaker Change: And candidly that was with our biggest still slipping out so that was positive I would say theres still continues to be stressed on the civilian side, obviously with agencies that have been shut down with employees, who are worried about their jobs. There is a lot of just human capital concern on the civilian side, but.
Speaker Change: It's also important to remember that that's about a quarter of our federal business.
Speaker Change: 75% of it is intelligence and department of Defense.
Speaker Change: Overall, we were pleased with our with public sector during the quarter.
Meta Marshall: Thank you meta Michelle can we go to the next analyst.
Speaker Change: Thank you Kelly with Bank of America, You May go ahead Sir.
Meta Marshall: Hi.
So this year mid <unk> growing capex by 70% and we see very strong growth across the board and the question is.
Meta Marshall: No.
Meta Marshall: Only now ramping networking, but the question is whether that 2025 do you think is a peak year.
Meta Marshall: Capex would likely slowdown carrying any slow down what happens to Cisco.
Meta Marshall: <unk> named where cloud Capex is slowing down.
Speaker Change: Hey, Tal thank you.
First of all I don't know that I would suggest that the cloud capex, particularly on a global basis as you see the announcements that were made in the middle East. This week, we're seeing sovereign cloud strategy is being built around the world. So I think that on a global basis I don't think that will be the case.
Speaker Change: And in talking to these customers I don't anticipate that they have a huge demand for slowing down I think that.
Speaker Change: You may see a different balance between there.
Speaker Change: Investments on capital to serve enterprise customers leveraging these models through influence and other things but.
Speaker Change: I don't.
Speaker Change: I don't anticipate it's going to be.
Speaker Change: The 2025 is going to be a peak year I think this has many years to run.
Speaker Change: And Collyn just remind you on the tail end of building out all of the public cloud infrastructure for training there is significantly.
Speaker Change: Gently larger opportunity in enterprise AI right as they build out the capability to do inferencing inside their own data centers. So I think there is a.
Speaker Change: Aggregate the AI opportunity has several years to run at this point.
Thank you Tal Michelle we can move to the next analyst.
Speaker Change: Aaron Rakers with Wells Fargo you May go ahead.
Speaker Change: Yes, Thanks, Danny and congrats on the quarter and Scott on the future retirement.
Speaker Change: I guess I'll ask my kind of two quick questions.
Speaker Change: In conjunction here, so what I think.
Speaker Change: Checking the prepared comments you referenced a large sovereign deployment opportunity that is coming here soon I guess the first question on that is that.
Speaker Change: Is that currently in your order book that $600 million you saw this last quarter and if not how do you think about the size of those opportunities and then a quick follow on is I think this last quarter you launched or you started shipping your 51 <unk> I think it's the G 200 silicon.
Speaker Change: Can you just give us an update of what youre seeing in the data center switching side and if that really becomes the catalyst here as we look out over the next couple of quarters. Thank you.
Speaker Change: Yeah. Thanks, Erin so.
Speaker Change: Thank you you're referencing the the humane.
Speaker Change: Announcement that we made yesterday or that the Saudis made early this week they announced the creation of this company we've been working with them on this for months.
Speaker Change: And and the short answer is there is there's absolutely no orders and the 600 million from them. They are just are just getting started we've got.
A team of people returning to the Middle East next week to spend more time with them.
Speaker Change: It is important to note on humane. The CEO there is an individual named Terry a man.
Speaker Change: And just to.
Speaker Change: To give you some background on Terek. He was the CTO at reliance Geo when we built built that network with them over the course of several years and then he was the CEO of rocket in when we built with him to open ran mobile network in Japan.
Speaker Change: And so we've been engaged with terex since he actually moved into Saudi Arabia.
Speaker Change: And he is a good friend an old friend, we've been doing large scale projects with them for a dozen years now. So so he knows us we know him well and we're looking forward to that opportunity. So I think that that's not included in any of our forecasts from our sales teams or anything at this point.
Speaker Change: On the second point the G 200, chip I would say it is at the heart of the.
Speaker Change: Any of these systems orders, so I made comment that of the 600 plus million two thirds of it was systems.
Speaker Change: And those systems would be based on the G 200, and I would tell you that right now.
Speaker Change: Those customers are telling us that if we could if we could get more capacity out they would buy more.
Speaker Change: So it's a it's actually doing well right now and we've got a number of other chips that are in various stages of the process for the next generation platforms. We're also looking forward to.
Speaker Change: Thank you Erin and Michelle we can move to the next analyst.
Shannon Chatterji: Thank you Shannon Chatterji with Jpmorgan you May go ahead.
Speaker Change: Hey, Good afternoon. This is Joe Cardoso on for Sonic.
Speaker Change: Also wanted to follow up on the Middle East announcements.
Speaker Change: Maybe to partner.
Speaker Change: How can you elaborate on how Cisco looking to participate here, particularly as it relates to the portfolio and I know, it's early days, but any early insights that you can share in terms of timing and magnitude of these opportunities for your company as kind of investors are looking to embed it potentially into the model and then as a follow up thank you.
Speaker Change: <unk>.
Speaker Change: Do you want to go in and ask your follow up Joe will just get them both.
Speaker Change: Yeah, Yeah, sure and a follow ups actually just more on the enterprise vertical, particularly campus. Obviously your orders are coming in on the enterprise vertical like just curious if you could flesh out what are you hearing from customers on this front and the momentum that you're seeing in kind of the order backlog here orders slash backlog here.
Speaker Change: And how you're thinking about the opportunity around the recovery relative to last spoke 90 days ago.
Speaker Change: Okay.
Speaker Change: So on the on the Middle East front.
Speaker Change: I will just tell you that Tariq made a comment to me that they are behind and they're going to catch up so I think they're going to they're going to spend.
Speaker Change: A lot of money and I think youre going to spend it as quickly as they possibly can.
Speaker Change: It's hundreds of billions of dollars at the end of the day that they will be spending if you go to the humane.
Speaker Change: Their website and scroll down they list their initial strategic partners. So you can see.
But our discussions with them have been around the networking compute security and observe ability.
Speaker Change: So that's a that represents.
Speaker Change: Pretty good opportunity for us.
Speaker Change: And I think.
Speaker Change: There'll be as big as any of the major web scales in the in the United States is how I would think about it on.
Speaker Change: On the enterprise campus right Yeah, we are.
Speaker Change: We saw strong orders in campus switching we saw the triple digit sequential growth in orders for Wi Fi seven we saw really strong growth in our enterprise routing portfolio this quarter. So.
Speaker Change: So we still see customers investing heavily in modernizing their infrastructure and the general belief and feedback that we're getting from these customers is.
Speaker Change: As they get ready to rollout agenda K I in particular, the network is absolutely going to be key.
Speaker Change: Because of the real time nature of this communication and and they all want to make sure that while they may not know exactly what those applications are going to look like right now.
Speaker Change: They absolutely know theyre going to need the most modern network. So they can have and I think that's what's driving it right now.
Speaker Change: Thank you Joe Michelle we can move to the next analyst.
Michael: Thank you Michael <unk> with Goldman Sachs. You May go ahead.
Speaker Change: Hey, good afternoon. Thanks for the question and congratulations Scott on the upcoming retirement I really appreciate all your time and help throughout the years.
Speaker Change: As it relates to my two questions first I was just wondering if you could.
Speaker Change: Talk a little bit more about the networking orders.
Speaker Change: In the quarter or how.
Speaker Change: How much of that was.
Speaker Change: The broad recovery in things like campus.
Speaker Change: How much did the the product cycle of Wi Fi seven contribute and could we expect that to.
Speaker Change: Continue.
Speaker Change: Over the next 12 to 18 months here, So and then second just a housekeeping question.
Speaker Change: I was wondering if you could just share the organic.
Speaker Change: Revenue growth rates for the company and the segment ex <unk>. If you have that offhand. Thank you.
Speaker Change: Okay I think on the.
Speaker Change: On the on the networking.
Speaker Change: Order strength I think it was it was across the board.
Speaker Change: As I was saying earlier I think we saw it in the enterprise switching space we saw it in.
Speaker Change: And you know we saw growth in data center switching we saw it in we saw strong growth in enterprise routing we saw that.
Speaker Change: The triple digit sequential growth in Wifi, seven I do think to your point, it's a 12 to 18 month cycle I think once they once customers begin this I mean, it just it's a standard upgrade cycle that we see that we've seen historically I think the way to think about it as you know.
Speaker Change: We've talked about the fact that theres, a theres a window when there's sort of a timeframe where we typically.
Speaker Change: Deliver refreshed products, whether its the Wi Fi portfolio or the campus switching portfolio.
Speaker Change: And so when when when that begins as well and that'll also.
Speaker Change: <unk> enhanced that that ongoing opportunity I think as we go to as we look to the future. So Scott do you want to talk a little organic rep. Yeah.
Michael: And Michael Thanks for the.
Speaker Change: Our comments answer the question.
Speaker Change: First of all I should say Splunk is performing in line with or actually slightly ahead of our expectations on both revenue and profitability consistent with what we told you last quarter.
Speaker Change: Integration has gone really well the people side of integration is pretty much complete at this point across all functions.
Speaker Change: The product integration continues to go along well and this is the quarter that we actually lapped the acquisition during during Q3 and so at this point, it's part of the run rate I don't really plan on breaking out organic versus inorganic from this point forward it gets harder and harder given the level of integration we've done across the board to split that out so.
Speaker Change: Not really planning on giving that that data point given that it's just part of our overall run rate at this point.
Speaker Change: Thank you Michael.
Speaker Change: We can move to the next analyst.
Speaker Change: Matthew Mcminn with Deutsche Bank, You May go ahead Sir.
Matthew Mcminn: Hi, Thanks, so much for taking this.
Speaker Change: Question and Scott. Thank you again for your help over the last couple of years my questions on web scale. So obviously, you're continuing to see very impressive growth here.
Speaker Change: Maybe Chuck if you can talk to what's driving some of the sustained success the pace of transition away from Infiniband towards Ethernet.
Speaker Change: And maybe some of the bigger differentiators that are helping you win incremental share across these hyper scaler. Thanks.
Speaker Change: Yeah. Thanks Matthew.
Speaker Change: Look I think it's been it's been the intent of these customers from day, one to move away from Infiniband in the gating factor was how soon do they feel good about the technology and they they feel very good about the technology and how it is enabling them to run these training models over.
Speaker Change: Over native Ethernet or some enhanced Ethernet that we are delivering.
Speaker Change: That.
Speaker Change: We've talked over the last few years about their desire to have silicon diversity, which we think was one of the key reasons that we got in originally and now we are delivering high quality products.
Speaker Change: And the time frame they need them.
Speaker Change: If you look at.
Speaker Change: What they're looking for.
Speaker Change: And these products from their partners.
Speaker Change: There's really sort of you have a system that has software and has silicon and then other components.
Speaker Change: And the real high value pieces of this are the operating system and the silicon.
Speaker Change: And as many of them are transitioning hard into running their own.
Speaker Change: Proprietary operating systems on these platforms. It's imperative that you have silicon if you want to be competitive long term in this space.
Speaker Change: And so we're very fortunate that we made the acquisition in 2016, we have a great team that's been developing silicon one they're very close to these customers. They work with them every day.
Speaker Change: And I think the silicon is the key differentiator that is it's really I mean, we're delivering high quality systems and everything else. So they want the services the experienced supply chain all those things that matter deeply but at the end of the day. If we didn't have the silicon it would probably make it virtually impossible for us to be to be successful long term here.
Matthew Mcminn: Thank you Matthew.
Speaker Change: Can we move to the next analyst.
Speaker Change: Amit <unk> with Evercore ISI you May go ahead Sir.
Amit: Yeah. Thanks for taking my question I guess I have two as well.
Speaker Change: Got it.
Speaker Change: Chuck you know your AI orders at $1 billion. It came in I think a quarter ahead of what you had expected and it looks like you're seeing some continued momentum as you go forward with sovereign at enterprise you talked about.
Speaker Change: I'm just wondering how should we think about the growth rates as you move forward on AI audio AI revenues. It would be helpful. Just kind of phased that frame that out a little bit in terms of the forward growth rates and then if I could just follow up for Scott.
Speaker Change: July quite a guy that's got if I'm, if I'm not mistaken it implies revenues are up three.
Speaker Change: Three 4% sequentially, but operating margins are down 50 basis points, maybe just flesh out why the margins are coming down in July while revenues are going up in.
Speaker Change: And best of luck in your retirement as well thank you.
Speaker Change: Okay.
Speaker Change: Thanks, Amit Oh, Yeah orders, how do you think about the growth I would say just one thing to remember is that these these are big customers that are and these orders are nonlinear in nature. So.
Speaker Change: What we will see how it goes but I mean last quarter, we did 350 or something like that this quarter, we exceeded 600 and as I said earlier.
Speaker Change: If we could actually if we could increase capacity they would take more so I think if we're able to execute and increase capacity, we should be able to continue to see this ramp as long as we're delivering and executing which is one thing I've said all along is we have to execute because if we if we missile with these customers then.
Speaker Change: We are we sit on the sidelines for a while so we are the teams are working really hard.
Speaker Change: And I think that's how I'd think about it it's nonlinear orders and as.
Speaker Change: As long if we can continue to increase the capacity then we'll continue to see that that.
Speaker Change: That business improve Scott you want to talk about July sure, Yeah, and Youre doing the math right. Amit first of all thanks for what you said you're doing the math right on margins. The biggest difference you can see it's actually in the gross margin line that falls through to the op margin line and Thats really a full quarter.
And I laid out the assumptions for you in the opening commentary on tariffs, it's a full quarter of the tariffs being in effect and we reflected the full cost without mitigation.
Speaker Change: And that's the big driver that we see sequentially going from Q3 to Q4.
Speaker Change: Still feel good about putting up the midpoint of the guide at 11% EPS growth.
Speaker Change: Thank you Amit Michelle we can move to the next caller.
Simon Leopold: Thank you Simon Leopold with Raymond James.
Simon Leopold: Thank you very much for taking the question I'll ask both upfront.
Simon Leopold: First one is that Chuck I think last quarter, you had sort of alluded to an upcoming campus refresh.
Simon Leopold: We think cisco's sort of do what I'd like some help with is understanding the maybe historic perspective, when you when you've had these refreshes.
Simon Leopold: Think about that because when I reflect on the.
Simon Leopold: And the last one.
Simon Leopold: 2017, 2018 that occurred when you were shifting customers to subscription so I feel like that's a tough.
Simon Leopold: Metric to use to understand the potential.
Simon Leopold: And then the follow up maybe a bit simpler which is how.
Simon Leopold: How do we think about the impact of tariffs understanding their changing every day, but given everything we know after July night, what would be the effect of tariffs based on the July 9th enter the pause.
Simon Leopold: Yeah, Simon I think your first of all I think your point relative to the 2017 kick off of the campus refresh is a very valid one.
Simon Leopold: So it's hard to it's hard to say, we've also seen some strength over the last 12 months and the.
Simon Leopold: Enterprise campus business so.
Simon Leopold: What I would tell you, though as we look to.
Simon Leopold: To really drive this.
Simon Leopold: Over the next 12 24 months I think that what's most important to our customers right. Now is that we we embed security deep into the network and so what youre going to see is youre going to see a focus on enabling agentic AI.
Speaker Change: And enabling security and security services in the network. So that our customers can do this in line, which is going to be necessary for us to solve the AI problem I'll tell you I had a discussion with the CSO of a fortune 100 company a couple of weeks ago, Gee too and I work together.
Simon Leopold: And.
Speaker Change: We started talking about security and she stopped us and said listen if you can't paint a picture for me.
Speaker Change: Define an architecture for me multi year architecture that has me removing every physical firewall for my infrastructure that I don't want to talk to you because if it's not embedded in the traffic flows it's never going to happen, it's not going to work.
Speaker Change: So what I would tell you on this is just envision that we're going to deploy security everywhere else through the <unk>.
Speaker Change: Work infrastructure and that plus AI I think will give customers reasons to really look at these platforms.
Speaker Change: And Simon on your second question on the impact of tariffs. After July night, I mentioned in the opening commentary that we've built in to our forecast that underpins. The guide for Q4 and expectation that on July nine those that exist that pause.
Speaker Change: Ends and we go back to the reciprocal tariffs that were announced on April 2nd.
Speaker Change: With the two exemptions the U S MCA exemption still in place in the semiconductor and certain electronic component exemption still in place. So we've reflected that in the guide for Q4, I think it's a little bit hard right now to predict what is going to happen on July 9th and what agreements get put in place between now and then but just wanted to protect the downside in the guide.
Speaker Change: Thank you Simon Michelle we can move to the next analyst.
Speaker Change: Thank you James fish with Piper Sandler you May go ahead Sir.
James Fish: Hey, guys nice quarter and Scott Congrats on your upcoming retirement here and look I don't want to rain on I'm afraid here, but if I look at networking here a return to growth, but it was also against a very easy compare and even still down versus a couple years ago.
James Fish: It really isn't substitution area of existing non AI networking real estate with some of these web scales and enterprises growing our rates are calling out why should why isn't that sort of growing faster.
James Fish: Then even the 8% on the comp here and then just following up on Simon's question before.
James Fish: Follow up can.
Speaker Change: Can we just get an update us to the exposure between data center versus campus, but then within networking.
Speaker Change: How we should think about the price per port kind of playing out here as we're seven eight years now down the road. Thanks guys.
Speaker Change: On the first one I think the short answer is is that most of this AI infrastructure has not begun to flow through revenue yet Scott I don't know if you want to kind of that's right. We said all along that we thought.
Speaker Change: When we put the $1 billion target out for the year that was a sales target not a revenue target, but we said we thought that would begin to convert to revenue in the second half of the year and we saw that again the first piece of that in Q3, and we expect to see a bit of it again in Q4 and I think all of the data center versus campus I mean, clearly the data center with the ink.
Speaker Change: The higher speeds, you're going to see a higher per port.
Speaker Change: Cost, but you're going to see much higher volumes into campus. So I think there.
Speaker Change: They sort of normalize each other out over time.
Speaker Change: Thank you Jim Michelle we can move to the next analyst.
Speaker Change: Thank you David vote with UBS.
Speaker Change: Mhm.
Speaker Change: Thank you this is Andrew for David.
Speaker Change: Wanted to ask a question about the texture of the $600 million of AI orders, you mentioned that there they tend to be non linear very large customers and I'm wondering if you're starting to see bigger orders is a large component of that $600 million.
Speaker Change: And we're at with the customers, where you're having the most success or are you really seeing sort of a to choose kind of large growing orders across a number of customers that you mentioned you had three growing triple digits and the follow up question I wanted to ask is just.
I'm not sure if I missed it but could you give an estimate of roughly what you think the impact of tariffs are in your guidance for Q4 for gross margin. Thanks.
Speaker Change: Yes.
Speaker Change: Yeah, Andrew I think you nailed it you almost answered the question for US I mean, we have three of the six that grew triple digits. So I think it's fairly balanced.
Speaker Change: I will tell you that we.
Speaker Change: Uh huh.
Speaker Change: When I when I look at these customers, we are seeing acceleration across all of them. So it's a it's all positive but there.
Speaker Change: In this case, we had three that were just Super high growers next quarter may be a different story, so we'll see but it's pretty balanced.
Speaker Change: And then on your question on the tariff impact in the guide.
Speaker Change: What I wanted to do is make sure you understood. The assumptions that were built into it. So we work through those China, 30%, Mexico, and Canada, where it is not eligible for the U S. MCA exemption at $25 10.
Speaker Change: 10% everywhere else until July 9th and then reverting back to the reciprocal tariffs and then a small impact on us for the tariffs on steel and aluminum and retaliatory. That's all built into the guide I haven't broken out and quantified the dollar value of that goes with that and I'm, a little reluctant to because it's the puck keeps.
Speaker Change: Moving on this but what I wanted you to understand is that everything that we know today.
Speaker Change: The impact of those has been built into the guide for Q4.
Andrew Michel: Thank you Andrew Michel you can move to the next analyst.
Karl Ackerman: Thank you Karl Ackerman with BNP Paribas you May go ahead Sir.
Karl Ackerman: Yes. Thank you.
Karl Ackerman: I have two and I'll just ask them at the same time as well place so.
Speaker Change: The extended partnership with Nvidia is an endorsement of your silicon one family.
Speaker Change: I think underscores your opportunity as enterprises deploy AI compute.
Speaker Change: I was hoping you could quantify your.
Speaker Change: Your AI order for enterprise at are incremental to the $1 billion of.
Speaker Change: Target you have for cloud.
Speaker Change: And then second.
Speaker Change: When might silicon one offer co packaged optics solutions as you seek a brought in your data center switch offering.
Speaker Change: Yeah.
Speaker Change: Yeah. Thanks Carl.
Speaker Change: I would say first of all I'd say the Nvidia partnership. We are we've had a couple of phases of the announcements and a lot of the.
Speaker Change: The solutions that we're going to deliver to the enterprise are still to be delivered so most of them start rolling out like 60 days from now and then they'll just then there'll be flowing after that so first thing I wanted to just clarify is we haven't seen a lot of upside yet in the enterprise from that.
Speaker Change: I would say the enterprise AI orders, it's a little more difficult for us to flag. These but we have been trying to do so so that we had a we have a.
Speaker Change: Our baseline and what I will tell you is that we're definitely seeing acceleration.
Speaker Change: It's in the it's in the hundreds of millions of dollars not in the billions yet that were seeing.
Speaker Change: But again Theres a lot of dependence on the Salesforce flagging. These things properly when you get into that scale.
Speaker Change: With the number of enterprise customers that we have.
Speaker Change: On the Silicon one.
Speaker Change: CPO question I.
Speaker Change: I think it's a it's important to remember that we demonstrated CPO in 2023.
Speaker Change: And at the time, there wasn't a significant amount of customer demand for it for lots of reasons.
Speaker Change: But we have a team of people that are working on it where we will embrace it I think that you know it's going to be driven by customer.
Speaker Change: Desire and I think that's going to be driven by a combination of power benefit as well as speed requirements.
Speaker Change: And as soon as customers are asking for it will be first in market ready to deliberate.
Michelle: Thank you Carl Michelle we can move to the next analyst.
Speaker Change: Thank you <unk> Malik with Citi You May go ahead.
Adrienne Colby: Hi, it's Adrienne Colby.
Adrienne Colby: Thank you for taking the question it's been a while since you talked about your AI pipeline versus your AI waters. So I was hoping you could update us on what that part of the funnel is looking like and secondly, I was hoping with the departure of Gary's here. If you could update us on the fix there for me kind of go to market.
Adrienne Colby: Yeah. So we.
Correct correct me, if I'm wrong, Scott, but we don't we don't give out pipeline for AI at this point. So we did that a long time ago and again it was the $1 billion target in the pipeline stuff was really to give you all more confidence that we were serious in this space and I think the results have now said that these customers are taking a seriously so.
Adrienne Colby: We won't be doing all of that on an ongoing basis and then yeah. We named a new head of go to market Oliver Tusa, who was.
Adrienne Colby: Most recently running our.
Adrienne Colby: Europe Middle East Africa region, and before that was running our global partner organization.
Adrienne Colby: Before he came to Cisco he was the CEO of a partner. So he is a really deep understanding of our.
Adrienne Colby: Of our go to market model and he win we announced him a week ago, we could go yeah yeah.
Adrienne Colby: Thank you.
Adrian Michel: Adrian Michelle we can move to the next analyst.
Sebastian: Thank you Sebastian <unk> with William Blair You May go ahead.
Sebastian: Yeah. Thanks for taking the question I wanted to ask about your networking business and in particular, your hyperscale customers and in particular, the usage of the white box given that Cisco can provide that broad range of offerings from a chip to white box full system can you maybe just comment on whether you see white box eating up a big part of the spending.
Sebastian: <unk> and AI, that's driving that share shift or something else that's happening.
Sebastian: Well, what I would say is that.
Don't think we've seen a meaningful shift between.
Sebastian: What they buy from us versus when they buy white boxes.
Sebastian: To your point when when they want to buy white box as we can work with them to actually integrate our silicon and actually manage the process for them and help deliver that product.
Sebastian: But we see the predominance is still buying systems.
Sebastian: And and I think it's just up to every every one hyperscale or has a different set of.
Sebastian: Of.
Sebastian: Issues that lead them to the answer and in some cases some of them have had an answer or two years ago that now has changed and they're doing it a different way. So I don't I'm not sure there's a real clean answer across the customer base and just a quick reminder, Sebastian we said this earlier, but of the more than $600 million in orders that we took during Q3.
Sebastian: Two thirds of those were systems as opposed to optics and optical so we're seeing the shift to systems that we had predicted in the Q2 call.
Speaker Change: Thank you Sebastian I'm now going to hand, it over back to Chuck for some closing remarks.
Speaker Change: Yeah, Let me just thank all of you again for joining and reiterate how pleased I am with our progress and how proud I am of what our teams have done I'd also like to once again. Thank Scott. He has been a great partner for me for the last five years, helping drive the transition and as I said earlier dealing with some pretty conflict situations over the years.
Speaker Change: I'm excited to have mark step into the role a mark and I have worked closely together for 18 years. So are we a he has a great set of experiences here at Sysco and will bring a lot into the role. Thank you Chuck as we look ahead I think the the AI opportunity for US. We believe is a is a strong one we think we're well.
Speaker Change: <unk>, we believe that because we from a technology and a portfolio perspective, we play across a full stack.
Speaker Change: We have networking we have security, we have silicon, which I think are all very important we have secure AI solutions that were delivering into the marketplace.
Speaker Change: We also have the partnerships and the investments we have the Nvidia partnership which is delivering critical solutions for our customers.
Speaker Change: This week, we announced the humane partnership.
The AIP investments the <unk> 42 partnership and there are more to come.
Speaker Change: And I think the other thing we have is we have global presence we have customer trust.
Speaker Change: We have the ability to understand both the cloud customers as well as the enterprise customers and the public sector customers. So when it gets.
Speaker Change: When these sovereign clouds are being discussed we have a unique perspective across all of those segments, we understand what they need and long term partnerships. We have a great team that are delivering right now strong execution, great results I'm really proud of what they've done so well look forward to talking to you soon and Sami I'll hand, it back to you.
Speaker Change: Thank you Chuck Cisco's next quarterly call, which will reflect our fourth quarter and fiscal year 2025 results will be on Wednesday August 13th 2025 at 130 PM Pacific time, 430 PM. Eastern time. This concludes today's call do you have any further questions. Please feel free to contact the Cisco Investor Relations Department and we thank you very much for <unk>.
Speaker Change: The call today.
Speaker Change: 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 808 765258.
Speaker Change: <unk> been dialing from outside the U S. Please dial 033.
Speaker Change: 3693998.
Speaker Change: Includes today's call you may disconnect at this time.