The operator introduces the Cisco conference call and hands it over to Sami Badri, the Head of Investor Relations. Badri is joined by CEO Chuck Robbins and CFO Scott Herren. The earnings press release and corresponding webcast with slides are available on the company's website. Both GAAP and non-GAAP financial results will be discussed, and all comparisons are year-over-year. The discussion will include forward-looking statements and guidance for the third quarter and full year of fiscal 2024, which are subject to risks and uncertainties. Further details can be found in the accompanying slides and press release.

Cisco's Q2 performance met expectations and saw strong operating leverage and margins. The company returned $2.8 billion to shareholders and announced an increase in dividend payout rate. The acquisition of Splunk will support their transformation strategy and make them one of the largest software companies. The demand environment is cautious and uncertain, leading to a more conservative forecast.

The company has experienced delays in customer deployment of products and weak demand from telco and cable service providers. They are adjusting their expenses and investments accordingly. Progress is being made in customer inventory absorption, but it is taking longer than expected. The company expects full implementation of shipped products to be completed by the end of fiscal 2024. The number of large orders for wireless products has increased, indicating that customers are preparing for larger deployments. The company's services revenue has also increased and non-hardware revenue in security and collaboration has grown.

Despite challenges, the company's win rates and market share remain stable. The CEO is confident in the company's portfolio and growth opportunities. The company announced new capabilities in networking, security, collaboration, and observability at a recent event. They also have a partnership with Nvidia to offer AI infrastructure solutions. The company will sell these solutions through their global channel with support from key partners.

Cisco is seeing success with their hyperscale Ethernet AI fabric, and there is potential for further growth in AI workloads. They are also making progress in their security solutions, including the introduction of Cisco Identity Intelligence and AI-powered features. They have also expanded their AI-powered ThousandEyes platform and introduced a new application for monitoring digital experiences. More announcements and investments are expected in the next 6 months.

The company's generative AI innovations are enhancing their platform capabilities and allowing operations teams to focus on important tasks while minimizing tool sprawl and improving performance. The pending acquisition of Splunk will further strengthen their data platform and help customers achieve their technology goals. The company expects to close the acquisition in the late first or early second quarter of 2024. Despite a cautious macro environment and challenges in the Service Provider sector, the company remains committed to disciplined operations, strong portfolio growth, and driving long-term value for shareholders and customers.

In the second quarter, Cisco saw solid execution and strong margins, with total revenue at $12.8 billion, down 6% from last year. Non-GAAP net income was $3.5 billion, down 3%, and non-GAAP earnings per share was $0.87, above the high end of guidance. Product revenue was $9.2 billion, down 9%, while service revenue was $3.6 billion, up 4%. Networking, the largest product category, was down 12%, while security and collaboration were up 3%. Observability saw strong growth of 16%. ARR increased 6% to $24.7 billion, with product ARR up 9%. Subscription revenue now represents 50% of total revenue, up 6 percentage points from last year. RPO was $35.7 billion, up 12% year-over-year.

In the second quarter, Q2 product orders decreased by 12%, an improvement from the previous quarter as customers work through previous shipments. The Americas, EMEA, and APJC regions all saw declines in product orders compared to the previous year. Service Provider & Cloud, Enterprise, and Public Sector markets also saw decreases in orders. Non-GAAP gross margin increased by 280 basis points, driven by lower costs and favorable product mix. Non-GAAP operating margin also increased, exceeding expectations. The company is realigning investments and expenses and expects to impact 5% of its workforce. The balance sheet shows strong cash reserves and $2.8 billion was returned to shareholders through dividends and share repurchases. The company plans to continue share repurchases at the current level throughout fiscal 2024.

The company is focused on increasing shareholder returns through operating leverage, share repurchases, and dividend growth. They have confidence in their business and have raised their dividend by $0.01 per quarter. They are progressing towards a more recurring revenue model and investing in innovation. The proposed acquisition of Splunk is expected to close ahead of schedule. The company has adjusted their guidance for the second half of the year due to macro uncertainty, customer absorption, and weakness in the Service Provider market. They expect revenue for Q3 to be $12.1 billion to $12.3 billion and for fiscal year '24 to be $51.5 billion to $52.5 billion.

The non-GAAP earnings per share guidance for the company is expected to range from $3.68 to $3.74, assuming a non-GAAP effective tax rate of 19%. The Q&A portion of the call will begin, with analysts being reminded to ask one question and a follow-up question. The first analyst asks about the lower revenue guidance for the full year compared to 90 days ago, and the CEO explains that it is due to macro uncertainty and customers pushing back orders. The analyst also asks about the recent Nvidia announcement and its impact on Cisco, to which the CEO responds that it is difficult to determine the percentage of impact from each factor.

The speaker believes that the elevated inventory levels should be consumed by the end of the fiscal year. They are hopeful that SP telcos and cable companies will begin investing again in 2025. The macroeconomic situation and SP telco investments are uncertain. The second half of the year has been reset due to these factors. The Nvidia partnership includes Ethernet technology. The analyst asks about weakness in data center or edge investments, and the speaker mentions that customers are still investing in cybersecurity. The speaker also mentions that enterprises are prioritizing AI and there is uncertainty about where the budgets for AI are coming from.

The company saw a 16% growth rate and positive collaboration in the last quarter. They are still dealing with the hybrid work situation, but had a strong quarter with their devices and video device businesses. Customers are investing in their customer experience and application rearchitecture, leading to opportunities in observability and network rearchitecture. The challenge is implementing the large amount of networking they shipped. In the enterprise, there is a emerging pipeline for AI use cases, particularly in financial services. Some customers are holding back budget to invest in AI once their strategy is fully developed. The analyst asks about the company's fiscal year 2019 revenue levels.

The speaker explains that the 5% to 7% growth target they set a few years ago was based on the total addressable market (TAM) of their products, but due to supply chain issues, it has been difficult to compare revenue year-on-year. They also mention the potential for using margins and pricing to regain market share in the event of a strategic transaction in the market.

The speaker discusses their company's long-term growth plans and mentions the current inventory as a major obstacle. They also mention potential changes after the acquisition of Splunk. Another speaker addresses the issue of share loss and states that they have actually gained share in some markets. The next analyst asks a question about the company's order trajectory.

The speaker, Chuck Robbins, responds to a question about the decline in orders this quarter and when they expect orders to turn positive again. He also discusses the use of AI clusters by web-scale operators and whether they will choose multiple vendors or stick with one. He believes that currently, these clusters are homogeneous and it is too early to tell if there will be a benefit to mixing vendors.

Chuck Robbins, CEO of Cisco, is asked by Tal Liani from Bank of America about the company's security strategy and market growth. Robbins explains that they have been consistent in their belief that security will accelerate in the second half of the fiscal year. He mentions positive indicators such as the success of their new innovations and a high demand in the Americas. He also hints at upcoming innovations in the next 6 to 9 months. The operator then moves on to the next speaker, Sami Badri.

Samik Chatterjee from JPMorgan asks Cisco CEO Chuck Robbins about the drivers of demand and if there will be a sharp rebound in fiscal '25. Robbins mentions a shift in customer caution and the push out of forecasts, indicating more caution in the system. He also discusses the impact of the Nvidia partnership on their AI order target of $1 billion, stating that the pipeline of AI opportunities continues to grow.

In the paragraph, Chuck Robbins discusses the current state of the company's pipeline and mentions that it has almost tripled since the last report. He also notes that this growth is not due to the Nvidia partnership. In response to a question about the HP, Juniper deal, Robbins mentions that there is a lot of noise in the industry but it is too early for customers to express concerns. He also confirms that the $3 billion in AI pipeline is expected to kick in during fiscal year 2025, with most of it likely in the second half of the year.

The speaker responds to a question about customers moving quickly, stating that the company is still in the early stages of planning. They expect the majority of $1 billion in orders to turn into revenue in fiscal '25. The next question is about inventory digestion, and the speaker explains that it primarily affects enterprise and commercial customers, with cloud providers having excess inventory. The speaker also mentions that there may be a lag between when products are shipped and when they are connected due to management issues.

The company has visibility on some aspects of their portfolio and they are seeing a shrink in the time frame between shipments and connectivity, which they believe will extend through the end of 2024. Gross margins are expected to settle in the range of 66% to 67% for the remainder of the year due to various factors such as freight costs and component pressure. The majority of supply chain constraints are behind them. The revenue guidance for the fourth quarter implies a 1% increase from the previous quarter.

The company is experiencing a normal backlog and is cautious about future growth. They are working with partners and using transaction services to help accelerate the clearance of inventory from the channel. They may also offer partner incentives to assist with this process. The company is also working on the Nvidia AI deal, with the expectation that their Ethernet will be used in the solutions sold through their channels and sales teams.

The lack of skilled resources at both the partner and customer level is hindering progress in certain cases. The company has implemented incentives to try and accelerate progress. However, there is no pressure on cancellations or stock rotation. The future of software subscription renewal rates is expected to remain strong due to a focus on customer success and driving adoption. Revenue growth in categories outside of networking, such as security and collaboration, is also contributing to this trend.

The speaker, Chuck Robbins, discusses the trade-off between margin growth and headcount reduction, stating that they are disciplined in both areas. He also mentions the value customers see in their technology compared to competitors. On the topic of AI, he mentions the success of their Silicon One product and its use in cloud providers and the enterprise data center. He expresses confidence in their readiness for the transition to AI and sees it as a potential tailwind for the company.

During a recent earnings call, Cisco CEO Chuck Robbins and CFO Scott Herren were asked about the company's presence in the webscale market. Robbins stated that the company is currently designed into 21 use cases for webscale players, and that they are focused on providing dual sourcing and resiliency at the silicon level. Herren added that AI is a long-term tailwind for the company.

James Fish from Piper Sandler asks Scott Herren about the potential impact of supply chain changes on gross margins and if any cost savings from reductions will be offset by new hires. Scott explains that price increases were implemented to offset higher costs from suppliers, but there haven't been significant cost decreases yet. He also mentions that operating expenses are expected to be modestly down for the full year.

Cisco's next quarterly conference call, which will impact their fiscal year '24 third quarter results, will take place on May 15, 2024 at 1:30 p.m. Pacific Time, 4:30 p.m. Eastern Time. The call has concluded and for any further questions, individuals can contact Cisco Investor Relations. The operator thanks participants for joining and provides a number to listen to the call in its entirety. The call has now ended and participants can disconnect.

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