The operator introduces the Cisco third quarter fiscal year 2024 financial results conference call and introduces the speakers, including the Head of Investor Relations, CEO, CFO, and the former CEO of recently acquired company Splunk. The earnings press release and webcast are available on the website, along with financial information. The call will discuss both GAAP and non-GAAP financial results and will provide guidance for the fourth quarter and full year of fiscal 2024. The speakers will also address forward-looking statements, which are subject to risks and uncertainties outlined in SEC documents.

In the second paragraph, Chuck Robbins, CEO of Cisco, discusses the company's strong performance in Q3 and their focus on innovation and long-term growth. He also highlights the successful acquisition of Splunk and the company's commitment to returning value to shareholders. Q3 was significant for Cisco as they completed their largest acquisition and exceeded their expectations.

In the third quarter, Cisco acquired Splunk, expanding their portfolio and solidifying their position as one of the largest software companies in the world. They also introduced Cisco Hypershield, a groundbreaking AI-powered security solution. The company is seeing steady customer demand and expects customers to complete the installation of their inventory by the end of the fiscal year. Despite customers prioritizing their IT investments, Cisco saw product order growth in data center switching, campus switching, security, and collaboration.

In the fourth paragraph, the company discusses their overall product orders, noting a 4% increase and flat year-on-year performance excluding Splunk. They mention strong performance in the public sector markets in EMEA and APJC, but temporary impacts in the Americas due to government funding discussions. The company also highlights signs of stabilization and improved performance in the telco and cable industries. They express confidence in their competitive strength and successful execution, as well as the value of their portfolio. In terms of Q3 performance, they saw growth in security and observability, with double-digit growth in the latter excluding Splunk. The company also mentions recent innovations in security, including the introduction of Cisco Hypershield and their acquisition of Isovalent.

Cisco's recent launch of XDR and Secure Access solutions further advances their vision for the Cisco Security Cloud, providing customers with a comprehensive platform to protect against current and future threats. The integration of Cisco XDR with Splunk Enterprise Security and the upcoming Splunk acquisition will bring added value and revenue opportunities. Splunk's recent ranking as a leader in Gartner's Magic Quadrant for security incident and event management highlights their strong offering and business momentum. Cisco is actively working on integrating Splunk's products and sales teams, as well as capitalizing on the AI infrastructure market with their Ethernet AI fabric and 51.2 terabit G200 Silicon One ASIC.

In summary, Cisco expects their recent awards to result in more orders in fiscal year '25 and their partnership with NVIDIA will provide easy-to-deploy solutions for AI inferencing. They also announced a new President of Go-to-Market and thanked their departing Chief Customer and Partner Officer. The company's security and observability portfolios have seen growth and the recent acquisitions of Splunk and Isovalent have enhanced their offerings. As customers adopt and deploy AI, Cisco is well-positioned to provide the necessary infrastructure, data, and security.

In the paragraph, Cisco's CEO Chuck Robbins discusses the company's belief that they are the only ones who can deliver and integrate all three aspects of their unified platform. He then hands over to CFO Scott Herren who provides details on the company's Q3 results, which show solid execution, strong margins, and a stabilization of orders. The company's total revenue was $12.7 billion, with networking down 27%, security up 36%, collaboration flat, and observability up 27%. The growth in security and observability was driven by the acquisition of Splunk.

In the third quarter, Cisco's observability grew by 14%, excluding Splunk. The company's ARR and product ARR also saw strong growth, driven by both performance and the contribution of Splunk. Total subscription revenue increased by 12%, with software subscription revenue up 17%. However, without Splunk, total software revenue was down 4%. The company's total RPO also saw significant growth, driven by both performance and the Splunk acquisition. Product orders were up 4%, but flat without Splunk. Geographically, the Americas, EMEA, and APJC saw growth, while in customer markets, service provider and cloud, public sector, and enterprise were up. Non-GAAP gross margin also saw improvement, driven by a favorable product mix and lower costs.

In the third quarter, the company reported a non-GAAP operating margin of 34.2%, an increase of 30 basis points due to disciplined spend management. Operating cash flow was $4 billion, down 24%. The company ended the quarter with $18.8 billion in cash, cash equivalents, and investments. They returned $2.9 billion to shareholders through dividends and share repurchases. The company expects revenue to be between $13.4 billion to $13.6 billion in the fourth quarter, with a non-GAAP gross margin of 66.5% to 67.5%. For fiscal year 2024, they anticipate revenue to be between $53.6 billion to $53.8 billion and non-GAAP earnings per share of $3.69 to $3.71. They expect revenue growth in the low-to mid-single-digit range for fiscal year 2025, driven by the benefits of the Splunk acquisition.

The CFO of a tech company discusses the impact of a recent acquisition on their financials, including an expected headwind of $350 million per quarter due to interest. They also mention plans to integrate the acquired company into their offerings and invest in OpEx to drive revenue synergies. The deal is expected to be accretive to earnings in fiscal '26 and beyond. During the Q&A portion of the call, analysts are reminded to ask one question and a single follow-up question. The first analyst asks about the macro-environment and inventory digestion, while the second asks about the $1 billion in AI orders expected in fiscal '25 and which areas of the company are expected to contribute to this growth.

In response to a question about where the company expects to see growth, Chuck Robbins explains that they have seen slight improvement in the quarter and believe customers are on track with inventory digestion. The Americas showed a 2% increase, while Europe was flat. Campus and data center switching were positive, with data center switching seeing mid-teens growth. Customers are still prioritizing their IT spending, but there has been no major shift in the macro environment. Regarding the $1 billion in AI, it is mostly driven by Webscale infrastructure, with some enterprise pipeline materializing. This includes both systems and optics across customers. The next question is from Simon Leopold with Raymond James.

The speaker asked for clarification on the potential 5,000-customer opportunity for Splunk and how it could translate into dollars. They also asked for clarification on the $1 billion AI pipeline and whether it includes front-end data center applications or is primarily focused on back-end systems. The speaker confirmed that the pipeline is primarily back-end and includes systems based on Silicon One and optics. They also clarified that the 5,000 customers were identified through an analysis of Cisco's strong relationships and mapping them to sales teams.

Tal Liani asked two questions about Cisco's growth in the security sector and the timing of their initiatives in this area, as well as the impact of Splunk on their growth numbers. He also mentioned that excluding Splunk, Cisco's core growth expectations for 2025 are around 5%.

Chuck Robbins, CEO of Cisco, responds to a question about the company's growth and the contribution of its security division. He mentions that while the demand for security products is at its highest in years, revenue growth is only at 3% due to the time it takes for orders to transition into revenue. He also mentions that Cisco and Splunk have announced their first integration and more innovation can be expected at Cisco Live. Gary Steele, CEO of Splunk, comments on the progress of the integration between the two companies. Robbins expects to see an improvement in the second half of 2024 and significant growth in 2025.

At RSA, Cisco and Splunk announced their integration, which will bring high telemetry alerts into Splunk's Enterprise Security solution. This will provide Splunk customers with more value in terms of threat detection, and is just the beginning of the integration strategy. The integration is expected to drive growth for both companies. CEO Chuck Robbins believes that the adoption of AI will start low in 2025 and ramp up throughout the year. The backlog from last year will continue to impact year-over-year comparisons until 2026. More details on the contributions of Cisco and Splunk will be provided at the Analyst Day in June.

Scott Herren and Cal are discussing the impact of backlog on Cisco's core business and the year-on-year growth rate for fiscal year 2025. They also mention the tough compare in Q1 of 2025 and the backlog impact on growth rates in the current and next quarter. Sami Badri asks a question and David Vogt follows up on the backlog headwind and the potential impact on Splunk's contribution to growth and gross margin. Chuck Robbins clarifies that the excess backlog was shipped in Q1 of the current fiscal year.

The speaker discusses the impact of backlog and supply constraints on Splunk's growth rate for fiscal years 2024 and 2025. They also mention that the core business is growing in mid-single digits in fiscal year 2025 after accounting for non-repeatable backlog from the first quarter of this year. The speaker also talks about the gross margins for the quarter and fiscal year 2025, noting some benefits in the quarter that may not be repeatable in the long term. They then move on to answer a question about customer conversations around AI and OpEx investments for Splunk.

The speaker discusses the current state of AI adoption in enterprises, stating that while some are running pilots, it is still very early in the process. They also mention the recent acquisition of Splunk and the expected timeline for integration and synergies, stating that the company will focus on revenue synergies in the first year and expects to see accretion in cash flow, gross margin, and earnings per share by fiscal year 2026. The acquisition closed earlier than expected, but the timeline for integration and accretion remains the same.

During the Q&A session, Meta asked about the impact of the Splunk acquisition on earnings per share (EPS), and Chuck explained that while the deal will be EPS accretive in fiscal year 2026, it will still be cash-flow and gross margin-accretive in fiscal year 2025 due to investment in integration. James Fish also asked about the expected OpEx ramp and whether it was related to potential revenue synergies starting in fiscal year 2025. Chuck confirmed that there will be some growth in OpEx, but it is not a substantial ramp-up and the deal was motivated more by revenue synergies than cost synergies.

In the second half of fiscal year 2025, Cisco expects to see revenue synergies from the Splunk acquisition as the teams learn how to sell each other's products and the channel becomes fully enabled. These synergies will primarily come from the 5,000 targeted accounts, with sales cycles of 6-9 months. There is already collaboration between sales teams, but momentum will increase in the middle of the year. The company expects order trends to return to normal seasonality in fiscal year 2025. There is a $1 billion AI order target, but no further details were provided.

The speaker is asking if the company needs more big customer wins or if expanding with existing customers will be enough to reach their $1 billion target. The response mentions progress in enterprise deployments and normal seasonality for year-on-year growth rates. The $1 billion target is based on identified opportunities with a high degree of confidence, not just a goal to find deals. There is still work to be done to execute and complete these deals.

The speaker discusses the company's current financial situation, including the recent acquisition of Splunk and the resulting increase in leverage. They mention the use of commercial paper to take advantage of lower interest rates and the shift to a net-debt position for the first time in the company's history. They also address the expected growth for the next year and the potential impact of the backlog and tougher comps in the first quarter.

The company's use of cash will not change with the acquisition of Splunk, and their main priorities are supporting growth, paying dividends, and buying back shares. They expect demand to normalize in the first quarter of FY '25, but there are potential risks. There have been no gross margin impacts from inventory digestion.

The speaker discusses the competitive landscape in the market of security information and event management (SIEM) and mentions recent acquisitions by other companies. They also mention their strong position in Gartner's Magic Quadrant and their focus on innovation.

The speaker discusses a new product, Splunk Asset and Risk Intelligence, which helps organizations discover and assess risks associated with their assets. They also mention the benefits of integrating with Cisco Security's XDR solution. The speaker believes they are well-positioned for innovation and have a unique approach to bringing together security and observability on a single platform. They do not plan to change their pricing strategy and believe their capabilities are hard to match in the industry. In response to a question, they confirm that they expect a $1-2 billion hit from inventory in 2025 and believe the real industry growth for networking is in the mid-single-digit range.

The question is directed to Gary Steele about how Cisco data will improve Splunk's AI capabilities. Splunk has been using AI/ML for the past year and a half with natural language assistant SPL and event detection and response. The speaker asks for a big-picture explanation of how Cisco data will enhance Splunk's AI capabilities. Gary Steele mentions that Splunk has been early in driving capabilities with machine learning and launched the MLTK package in 2017, with a quarter of a million users.

The company has seen broad adoption of its products and has extended its offerings to include an AI assistant and integration with workflows. They are making investments across the product line and will be making more announcements at upcoming events. The company benefits from Cisco's investments and access to rich datasets. The combined entity is expected to accelerate AI efforts and deliver strong outcomes. The last question asked about the company's OpEx investments and the initial financial outlook for fiscal '25.

Chuck Robbins is responding to a question about the expected spending for Cisco in fiscal year 2025. He mentions that there were some one-time benefits in their operating expenses this year, but they will not be repeated in fiscal year 2025. He also mentions investments in integration, but they are not significant. He then discusses the tailwinds they are experiencing, such as the consumption of inventory and the AI opportunity, which will be a tailwind for the full year. The security business is also performing as expected, with new products gaining traction.

Cisco's fiscal year 2025 outlook is positive with a tailwind and a down-the-middle view. They will provide more information at their Investor Day in June and give a formal guidance in August. The supply chain situation is improving and they are optimistic about AI, data, and cybersecurity. They are excited about the Splunk integration and thank Jeff Sharritts for his contributions while welcoming Gary to his new role. Cisco's next quarterly call will be on August 14, 2024.

The speaker thanks the participants for joining the conference call and provides information on how to listen to the full call. The operator also thanks the participants and provides a phone number for those who want to listen to the call again. The call is then concluded and participants are free to disconnect.

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