Cisco Systems Inc Q3 2016 Earnings Call Transcript

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

Question: Simona Jankowski - Goldman Sachs - Analyst : Hi, thank you very much. I just wanted to clarify your guidance for the July quarter. How much of the revenues embedded in that guidance comes from acquisitions that closed in the last year, just so we can get a sense for the organic trends in the business. And then when we think about the 3% growth in bookings in the quarter, how much of that was benefited by the extra week in the quarter?

Question: Ittai Kidron - Oppenheimer & Co. - Analyst : Thanks, and congrats on great execution. First question is with regards to the data center. I hear your comments with regards to the macro impact on it, but it's five quarters in a row now where that business is stuck between the $800 million to $850 million in revenue. And this business has accounted for about one-third of your growth in the past few years. So, if you can us a little bit more color as to why isn't this moving, that would be great. The second question with regards to the gross margins, I have to go back all the way to 2010 to find product gross margins that are equal to those that you just reported. Can you just give us a little bit more maybe of a framework to think about what is really changing in the portfolio, whether it be through mix or change in the competitive environment, anything that can justify the increase in gross margins and how sustainable you think that is.

Question: Vijay Bhagavath - Deutsche Bank - Analyst : Yes, hi, thanks. Hi, Chuck, hi, Kelly. You did clearly better than feared results. Congratulations to you and your team. My question is as follows. This is Chuck. Heading into the back half, what gets you most excited in terms of new product refresh opportunities? And then, now that your security business honestly is starting to turn the corner, especially versus the peer plays, would you double down on security investments both organically and [a money]? Thanks.

Question: Steve Milunovich - UBS - Analyst : Your switching and routing businesses were both down. How concerned are you about that? Do you think your new product portfolio is yet to impact that? Do you believe your losing share or it's the markets? And then, finally, what is the impact on your services businesses, in other words, how much of that is maintenance that could be impacted by declining hardware? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 18, 2016 / 8:30PM, CSCO.OQ - Q3 2016 Cisco Systems Inc Earnings Call

Question: Jim Suva - Citigroup - Analyst : Thank you. And congratulations, Chuck and Kelly, to your team there at Cisco. One thing that stood out was the very impressive gross margins this quarter. If I calculated it correctly, it looked like it was around 65.2%. And that was meaningfully above -- I think your guidance was 62.5% to 63.5%. Can you help us to understand what were the factors to drive it higher? I know the guidance all included an extra week. And then for the outlook, are there any type of swing factors we should be aware of and the causes of why it will be lower than the reported gross margins just from this quarter? And, again, congratulations to you and your team.

Question: Pierre Ferragu - Sanford C. Bernstein & Co. - Analyst : Hi, good evening. Thank you for taking my question. I just wanted to come back on what you said about your stuff in hyperscale, web-scale clients. If I get that correctly you had revenues up 31% there. Could you give us a sense of what made most of this revenue and most of these growth? Was that mostly switching, routing, anything else? And then if we exclude that very strong performance on that segment, what did the rest of enterprise look like in terms of, so you were down 2% over all? I assume that is web-scale at 31%. Probably the rest is enterprise, was down quite significantly. And, lastly, could you help us quantify any of the macro impact? You mentioned about enterprise in this quarter and in your guide for next quarter, I don't know -- maybe in points of revenues or whatever, do you have a sense of how much you've lost because of the uncertain macro environment? Thanks a lot.

Question: Brent Bracelin - Pacific Crest Securities - Analyst : Thank you for taking the question. Chuck, I wanted to follow up on services revenue. I get there was a clear benefit of an extra week but this now marks, I think, the second quarter in a row of upside coming from the services segment. I imagine most of the return of double-digit growth was the extra week. My question is, are you seeing a broader increase in services driven by digitization or solutions selling trends? And if so, do you expect the services recovery to potentially be a leading indicator for a future product recovery? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 18, 2016 / 8:30PM, CSCO.OQ - Q3 2016 Cisco Systems Inc Earnings Call

Question: Mark Moskowtiz - Barclays Capital - Analyst : Yes, thanks, good afternoon. I just want to see if we can talk a little more about the cloud. You talked about the ACI momentum. How should we think about the mix of just cloud revenue for Cisco in terms of how much is going into public cloud versus private cloud as the run rate improves? And then is there any change in terms of public cloud versus private cloud related to margin, either from a gross margin perspective or operating margin perspective that we should be aware of? Thank you.

Question: James Faucette - Morgan Stanley - Analyst : Great, thank you very much. I just had a clarification. You talked about ACI hitting about $2 billion annualized run rate. And I think our notes have suggested it was at a similar level the last couple of quarters, at least you gave a similar level. I just want to make sure our notes are right there. And then, really, my question is around acquisitions. You guys clearly have been quite active doing acquisitions and doing a lot of what looked to be pretty promising technology related acquisitions. Should we expect the current pace to persist or are we going through an accelerated period that you think that we're pretty close to slowing down from? Thanks.

Question: Paul Silverstein - Cowen and Company - Analyst : Thanks very much. Chuck, going back to the question about the top 10 web 2.0, I don't think you have ever broken it out, at least in my memory. But if routing is 15% of your total revenue, and service provider typically, if I remember the numbers correctly, are 80% of routing. That would REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 18, 2016 / 8:30PM, CSCO.OQ - Q3 2016 Cisco Systems Inc Earnings Call suggest that the web 2.0 guys are somewhere in the range of 15% of total revenue, if I'm looking at the current numbers correctly. Is that in the ballpark?

Question: Paul Silverstein - Cowen and Company - Analyst : I'm basing it off of -- if routing is 15% of total and service provider is 80% of routing again, that would suggest that traditional service providers, being the bulk of your routing revenue, are somewhere in the order of 12% of total revenue. I recognize it by more than just routing. If I saw the service category correctly in terms of 30% of total bookings -- maybe I misread the number -- that would suggest the web 2.0 guys -- let me just ask the question directly. Can you give us any sense for how large the web 2.0 category is?

Question: Paul Silverstein - Cowen and Company - Analyst : In that 15% range?

Question: Paul Silverstein - Cowen and Company - Analyst : Let me ask you a simple question, and I think you mentioned it before. But can you give us any insight of the linearity of the quarter?

Question: Tal Liani - BofA Merrill Lynch - Analyst : Hopefully you can hear me. I have just one clarification. The tone of the previous conference call was very different. It was about the very weak environment and we didn't speak about the growth trends. The tone of this conference call is so much more positive in a very similar business environment. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 18, 2016 / 8:30PM, CSCO.OQ - Q3 2016 Cisco Systems Inc Earnings Call So, what happened in the last three months that makes you so much more positive about -- everything you have done basically also before, very little is new now -- what makes you so much more positive now versus three months ago in a similar environment? Or unless maybe the environment has gotten better.

Question: Simon Leopold - Raymond James & Associates, Inc. - Analyst : Great. Thank you. I wanted to go back to the web-scale vertical a bit. I know that is beating a dead horse a little on this call. But I wanted to see if you could talk about the bigger trend around the white box competitive threat, because it seems apparent that there is not the dramatic shift to white box that many had feared. But maybe it has yet to happen. So if you could talk how you're countering the threat or the substitution effect of those web-scale customers building or buying unbranded switches, rather than your products. Thank you.

Question: Brian White - Drexel Hamilton - Analyst : I'm wondering if you could walk us through what you've seen so far with the Inspur relationship in China. I see China revenue decelerated but it still grew very strongly at 22%. And also the Ericsson relationship -- it sounds like you've got some big deals in the quarter, or a few deals in the quarter. Maybe just highlight if you feel like that relationship is still on track for this $1 billion by 2018. The reason I ask, obviously Ericsson had a very soft March quarter. Thank you.