Cisco Systems Inc Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Tal Liani - BofA Global Research - Analyst : I'll ask both my questions together. So cloud orders, cloud and service providers grew 22% ex-Splunk, last quarter, it was only 2%. So what is driving this massive growth in orders? And can you elaborate on the areas where you participate in cloud more specifics of switching, routing, optical, et cetera, where you have strength and the extent, meaning is it all cloud providers, cloud titans? Or are you focused like we have other vendors? Are you focused on certain cloud providers and not others? And my follow-up question is on margins. Very strong gross margin, very strong operating margin this quarter. Talk about the drivers and sustainability of these margins.

Question: Matthew Niknam - Deutsche Bank - Analyst : So my question is mainly around macro. Just wondering, maybe, Chuck, if you can speak to how the macro backdrops evolved over the last three

Question: Michael Ng - Goldman Sachs - Analyst : I wanted to ask about security. It was encouraging to hear about the first seven-figure Hypershield deal in the quarter. Could you just talk a little bit more about that, the nature of that deal I think it was only recently made available, so it feels like it's early days, but maybe you can talk about the reception to that? And then secondly, I think you had mentioned security orders had doubled year-over-year, including Splunk. Could you just give us the organic number as well? And if you could speak qualitatively to the trends, that would be helpful.

Question: David Vogt - UBS Equities - Analyst : First, if I may. You mentioned, I think, Chuck, you mentioned half of your web-scale orders were AI with the other half sort of more traditional front end. Is that sort of what drove the enterprise order growth? Or was there some campus recovery in that number from a product perspective? And then I'll just give you the second one for Scott. On gross margin, appreciate the color on sort of some of the impacts in the quarter. But from a Splunk perspective, was there anything else in the numbers like we're trying to think through kind of the contribution from Splunk subscription versus term licenses? And how should we think about that as we move through the balance of fiscal '25.

Question: Samik Chatterjee - JPMorgan - Analyst : If I can ask both my questions at the same time. Chuck, you mentioned in your prepared remarks, the data center switching portfolio had the third consecutive quarter of strong order growth. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 13, 2024 / 9:30PM, CSCO.OQ - Q1 2025 Cisco Systems Inc Earnings Call Just wondering how you're interpreting that in terms of enterprises are already starting to get ready for their AI deployments? Or do you still believe that's largely in front of you? Just what is that sort of order momentum indicating to you? And then the second one, just on AI autos, you're sounding sort of better in relation to exceeding the $1 billion target. But is there necessarily a implication there in terms of revenue realization in the year? Is revenue realization maybe even a bit higher than you've thought initially in terms of timing?

Question: Simon Leopold - Raymond James - Analyst : Great. First one is, I'd love to get maybe an update or double-click on the partnership you announced with NVIDIA very early in like to sort of get a sense of how that's progressing in terms of traction and where that fits into the pipeline. I did catch that. You mentioned you've got an AI server. Just sort of wondering if that's an outcome of that alignment. And my follow-up is pretty straightforward you've earlier talked about the Splunk opportunities of new potential customers being introduced to Splunk. If you could update us progress there and sort of your line of sight to closing some of those deals.

Question: James Fish - Piper Sandler Companies - Analyst : Scott, for you, just circling back on RPO. What was RPO and products RPO growth at Splunk and then, Chuck, for you, how are you guys thinking about not just enterprise refresh potential, but also the campus refresh opportunity with WiFi 7 availability that you guys, I think, even announced this week. And will that WiFi 7 encourage any campus switch refresh as well. Go ahead. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 13, 2024 / 9:30PM, CSCO.OQ - Q1 2025 Cisco Systems Inc Earnings Call

Question: Meta Marshall - Morgan Stanley - Analyst : Great. Maybe circling back to Michael's question where you answered that kind of organic security growth would have been in kind of the mid- to high-teens if you stripped out of US Federal -- just wanted to get a sense of what was driving some of that strength. Is that data center modernization or just what products are kind of driving some of that upside? And then just second question, just on data center modernization as a tailwind, just where are you kind of seeing kind of prioritization, the most kind of within the data center? Is it kind of around security or updating and switching. Just kind of any commentary around kind of categories you're seeing that data center modernization take place in.

Question: Benjamin Reitzes - Melius Research - Analyst : It's great to be chatting with you. Chuck, I asked this last quarter, and I was wondering if you had any update. I understand that customers are getting ready for AI and feel they need to have the latest and greatest year for it. Are you getting a sense of what they're engaging you for? Do they feel like there's going to be more inferencing? Is there specific applications that they're citing? I think investors would love to know what you potentially are hitching a ride to there on that comment. And then I had a follow-up question for you and Scott is just these performances where the orders move around Splunk, given the excess backlog can be a little confusing for investors. But you said one thing at your Analyst Day, where you're going to grow 4% to 6%. And I know that's next year and beyond. But is there anything happening near term that makes you feel better about that long-term target where you're a mid-single-digit grower? Anything that happened that making you feel better or worse regarding it, that would be great to hear.

Question: Amit Daryanani - Evercore ISI - Analyst : I guess I'll ask a question and follow-up at the same time. Scott, net booking revenues were down 23% this quarter. Just talk about how did that stack up against your expectations? And now that backlog is normalized, should the expectation to grow sequentially for the rest of 2025 and we really help us understand how that grew for the rest of the year? And then over the next three years, are you more excited about hyperscale or Hypershield, one of the big opportunity to ease?

Question: George Notter - Jefferies - Analyst : I just wanted to get some more detail on the gross margin improvement. Any chance you can break out that duty drawdown impact in the quarter? I'd be curious as to what that is. And then, obviously, you also saw quite a sequential improvement in gross margin. Obviously, Splunk was in, obviously, the quarter and last quarter as well. So I think product mix is probably a pretty big factor here. I'm wondering if there was a big difference in terms of the mix of UCS servers or other product lines that kind of drove the day there. Any details would be great.

Question: Aaron Rakers - Wells Fargo Securities, LLC - Analyst : I'll keep two right together here. So on this AI opportunity and as we kind of focus on the backlog converting into revenue, I'm curious of how you see the AI back end possibly leading into front-end opportunities? Have you seen that at all with any of these hyperscale customers? Any kind of color on that front would be great. And then kind of sticking to the AI networking theme. I'm curious as we move forward, how you would characterize the competitive positioning of NVIDIA in the Ethernet back-end network side.

Question: Karl Ackerman - BNP Paribas - Analyst : I have two as well, if I may. Scott, I want to focus first on the general quarter outlook, which implies that OpEx is down about $90 million. I think most of the roughly 10% workforce realignment this calendar year has been completed. And so I was hoping you could address which areas of your business do you believe you need to accelerate investment to drive growth into '25 and '26 versus having some excess cost savings passed on to profitability? And I have a follow-up.

Question: Karl Ackerman - BNP Paribas - Analyst : Sure. Yes. In terms of follow-up, just you spoke about for cloud hyperscalers growing orders triple digits, which is quite amazing and great. But I guess, are these product orders all for top of rack switches or is the growth in AI networking hardware primarily driven by one hyperscaler today which is now to be across silicon and switches?