Cisco's fourth quarter fiscal 2023 quarterly earnings conference call is being led by Marilyn Mora, Head of Investor Relations, Chuck Robbins, Chair and CEO, and Scott Herren, CFO. The call will include forward-looking statements and guidance for the first quarter and full-year of fiscal 2024. Income statements, full GAAP to non-GAAP reconciliation information, balance sheet, cash flow statements and other financial information can be found on the Investor Relations website. All comparisons made throughout the call will be done on a year-over-year basis.

Cisco achieved record revenue and earnings per share in both the fourth quarter and the full year of FY '23. Customer demand remained solid, with total product order growth of 30% in Q4. Going forward, Cisco is focused on growing market share, investing in AI, cloud, and security, delivering long-term sustainable value creation, and transforming its business model. The company expects modest revenue growth in FY '24, with the bottom line growing faster than the top line, and is committed to increasing shareholder value through greater operating leverage, repurchases, and growing its dividend.

Cisco announced new solutions in the areas of generative AI, hybrid work, security, full stack observability and sustainability, and gained over three percentage points of market share year-over-year in their three largest networking markets. They also announced new AI technologies to boost productivity, enhance policy management and simplify tasks, and have become a founding member of the Ultra Ethernet Consortium to drive open large scale Ethernet based fabrics for high performance networking.

Cisco launched its Silicon One switching ASICs to support large scale GPU clusters for AI and ML workloads and has taken orders for over $0.5 billion for AI Ethernet fabrics. They are piloting 800 gig capabilities for AI training fabrics and have developed a security cloud platform with comprehensive capabilities across the network endpoint and the cloud. They have also been working with Apple to incorporate Cisco's secure access solution into iOS and macOS. In addition, they are committed to increasing shareholder returns through capital return, innovation and strong execution.

In its fourth quarter, Cisco reported record-breaking revenue, non-GAAP operating margin, earnings per share, and operating cash flow. The total revenue was $15.2 billion, up 16% year-on-year, and non-GAAP net income was $4.7 billion, up 36%. Product revenue was 11.7 billion, up 20%, and service revenue was 3.6 billion, up 4%. Secure Agile Networks, Switching, Wireless, and Enterprise Routing all saw double-digit growth, with the latter being driven by Access, Catalyst 8000 Series SD-WAN, and IoT Routing. Cisco plans to maintain the quarterly levels of its stock repurchase program.

Cisco saw growth in its core routing products and web scale, as well as double-digit growth in ThousandEyes and AppDynamics. ARR and software revenue increased 5% and 17%, respectively, with 85% of software revenue being subscription based. Total product orders were down 14% year-on-year, but increased sequentially by more than 30%. The aging of the backlog has improved as customer deliveries increased, reducing the year-end backlog to double historical levels. Order cancellation rates remain below pre-pandemic levels, indicating the importance of Cisco's technologies to customers.

The company had a strong quarter, with total non-GAAP gross margin up 260 basis points and non-GAAP operating margin up 300 basis points. Operating cash flow was up 62%, and the company returned 2.8 billion to shareholders in the form of dividends and share repurchases. For the full fiscal year, the company achieved record revenue, net income, earnings per share and operating cash flow.

In the fiscal year of 2023, software revenue increased 12%, with 84% of it being subscription based, and 10% non-GAAP gross margin. Non-GAAP net income was up 13%, and the company returned 10.6 billion in value to shareholders via dividends and repurchases. The company also made strategic investments in acquisitions and innovation. For the first quarter of fiscal 2024, the company expects revenue to be between 14.5-14.7 billion, non-GAAP gross margin to be 65-66%, non-GAAP operating margin to be 34-35%, and non-GAAP earnings per share to range from $1.02 to $1.04.

In Q4 of the fiscal year, the sales team exceeded their forecast by several hundred million dollars, which is a positive sign. Chuck Robbins attributes this success to the team's ability to anticipate customer buying trends and adjust their forecast accordingly. Scott will provide more detail on the conversion of orders into revenue for the upcoming fiscal year.

In the most recent quarter, enterprise software agreements were at an all-time high, while service provider orders remained weak. US enterprise orders were flat, but there was strength in financial services, transportation, energy, India, and Saudi. The current RPO is $17.9 billion and the ARR is $24.3 billion, with 40% of the top line already in hand between those three categories. This gives the company good visibility for the upcoming fiscal year.

Chuck Robbins responds to Amit Daryanani's questions about Cisco's capital allocation and fiscal '24 revenue guide. Robbins states that he will hand the questions over to Scott and then proceeds to do so.

Cisco has been talking to shareholders and committed to providing operating leverage in the P&L. They have increased the amount of buybacks and are aiming to be more consistent and predictable with them. Share buybacks are currently at $1.25 billion per quarter and the dividend is at $6.5 billion, totaling $11.5 billion in capital return to shareholders. Supply constraints have made year-on-year growth rates confusing.

Chuck Robbins answers Meta Marshall's questions about Cisco's Ethernet, AI GPU networks, and security portfolio. He states that the Ethernet networks are using Silicon One and that there will be trials for the next 12 months. He also states that they are rolling out new products and changing the sales approach for the security portfolio, but that it will take some time to see an inflection in that business.

Cisco Systems has seen success in their share gains in campus switching, SP routing and wireless and are looking to continue to grow their share. They attribute this success to their sales execution and product road map. They have also seen positive results in their security offerings with multi-cloud defense and XDR platform. They expect to see more positive impacts in the second half of the year and into FY '25.

Chuck Robbins and Scott Herren discuss the share gains in the enterprise networking space, which is driven by delivering monitoring and management of the Catalyst portfolio with the Meraki dashboard. Additionally, the software renewals in the enterprise networking space is expected to reach $1 billion in FY'24. They also comment on the trajectory of orders, which is driven by three things: the backlog, revenue growth, and product orders.

Chuck Robbins and Scott Herren discussed the factors that have been affecting Cisco's bookings, such as lead times normalizing, backlog, and the macro environment. They expect to see more normal ordering patterns in the second half of the year, and Chuck Robbins discussed the strong performance of Cisco's RPO, which could be attributed to customers being willing to enter into longer contracts and larger deals.

Chuck Robbins and Scott Herren provide insight into the significant increase in RPO seen in Q4. This increase is largely due to the transition to a subscription model for their enterprise networking portfolio, as well as large multiyear transactions and enterprise agreements with customers. There has been little change in duration overall.

Scott Herren discussed the company's net RPO growth of $3.3 billion for the current year, of which $1.7 billion was product growth. He noted that the company has the advantage of recognizing revenue over time, making them more predictable. Herren then answered a question about fiscal '24, forecasting 1% top line growth and 4% non-GAAP EPS growth, with gross margin settling in the 65-66% range. He also reaffirmed the 5-7% growth target for both top and bottom line.

Chuck Robbins explains the history of the specialist model and how Cisco is restructuring it to make it more focused. He also outlines how the product portfolio is being adjusted to allow for this restructuring and how it will affect the go-to-market strategy. Lastly, he addresses the potential for further acquisitions or spinning off segments in terms of capital return.

Cisco is transitioning to a platform approach for its security products, which allows them to sell more effectively with fewer specialists. This quarter, collaboration and security both saw positive order growth, likely due to the suite strategy. Cisco is committed to returning $11.5 billion in capital to shareholders annually, with a consistent $1.25 billion buyback per quarter and a dividend payment of $6.5 billion.

Cisco has seen an increase in activity with hyperscalers regarding AI orders, and is working on the next generation of purpose-built silicon for them. They are also able to build unique silicon for each customer if needed.

Chuck Robbins discussed Cisco's position in the cloud build-out and their ability to transition to Ethernet. He mentioned that they have already been installed in 21 use cases across the top six providers and that they expect their momentum to continue. Tal Liani then asked a specific question about Cisco's 400-gig market share and why it was that way in 400 and how it changes in 800. He also asked a big-picture question about Cisco's product revenues and backlog.

Chuck Robbins and Scott Herren answer a question about how Cisco can get to product revenues without the support of backlog. Robbins mentions that Cisco has had success in the 400 gig and 800 gig markets and is engaged in the 800 gig market. Herren explains that product revenue from this year was actually demand from the prior year, due to supply constraints, which would have resulted in higher product revenue in the prior year and slightly lower product revenue in the current year. He also mentions that the increase in product revenue from year to year is driven by factors such as supply and demand.

Chuck Robbins states that the service provider side of the business has been relatively weak in the fourth quarter and that customers are currently digesting a lot of the infrastructure they purchased. He also mentions that the telco side of the business was consistent with the quarter before. Lastly, he mentions that the company has seen double-digit growth across all customer verticals from an order perspective, and that the $0.5 billion in orders in AI included customers from both hyperscale and Tier 2 cloud or enterprise customers.

Chuck Robbins and Scott discussed the orders they have seen in the telco and cloud sides of the business. They have seen three use cases win in the core infrastructure last quarter, and they are in trials and discussions with most of the Tier 1 hyperscalers regarding AI fabric. They do not have any supply chain issues around their AI and are already delivering it. Scott and Chuck did not provide any information on how AI orders will flow through in the guidance for fiscal '24.

Scott Herren and Chuck Robbins discuss the supply chain issues related to AI orders. Herren states that they are in a better position than some due to their own ASICs. Robbins suggests that the impact of AI will be seen in late '24 or '25 when the Scheduled Fabric technologies are built out. Herren clarifies that the $500 million in AI orders is not all coming in the last quarter but will be seen in the second half of the fiscal year.

Chuck Robbins and Scott Herren discussed the company's assumptions for their campus-related business, which includes switching and wireless LAN. Robbins noted that they expect to gain market share in Q2 and the renewal number was close to $1 billion. Herren added that they are encouraged by what they are seeing in campus and the backlog of supply is beginning to be delivered to customers, which will lead to an increase in market share.

At the end of the conference call, Chuck Robbins thanked the team for their work in delivering record results and for their commitment to shareholders with operating leverage, buybacks, and dividends. He also discussed the relevance of Cisco's portfolio to customer priorities. The next quarterly earnings conference call will be on November 15th, 2023. Questions can be directed to Cisco's Investor Relations group.

Participants in today's call can listen to the call in its entirety by dialing (866) 405-7294 from the US or (203) 369-0606 from outside the US. The call has now concluded and participants may disconnect.

This summary was generated with AI and may contain some inaccuracies.