The paragraph is an introduction to Cisco's First Quarter Fiscal Year 2025 Financial Results Conference Call. Sami Badri, Cisco's Head of Investor Relations, starts the session by introducing key executives, including Chuck Robbins, CEO, and Scott Herren, CFO. Cisco's financial results, available on their Investor Relations website, will be discussed, comparing year-over-year performance using both GAAP and non-GAAP measures. The discussion includes forward-looking statements, with associated risks detailed in SEC filings. Cisco won't comment on financial guidance mid-quarter without public disclosure. Chuck Robbins reports a strong start to FY25 with $13.8 billion in revenue, meeting the high end of projections.

The paragraph highlights Cisco's strong financial performance, driven by growth in recurring revenue and subscription revenue, with 57% of total revenue now from subscriptions. The company's non-GAAP EPS exceeded expectations due to high gross margins supported by their collaboration with Splunk. Cisco returned $3.6 billion to shareholders through buybacks and dividends. Product orders rose 20% year-over-year in Q1, signaling a rebound in demand, particularly in the enterprise segment, service provider, and cloud sectors, with notable growth in webscale AI infrastructure orders. The public sector orders also increased slightly year-over-year.

The paragraph discusses the company's order growth and demand through its product portfolio, despite lower year-over-year results in U.S. federal deals due to fiscal issues. EMEA and APJC regions saw strong public sector growth. The networking portfolio experienced double-digit growth, notably in data center switching, indicating competitive strength with products like 400 gig and 800 gig switches. Security orders more than doubled, driven by Splunk's threat intelligence and new security products like XDR, Secure Access, and Multicloud Defense, gaining significant traction. A major win included over 75,000 cloud security seats with a global IT services firm, and the first substantial Hypershield deal was secured in Q1.

The paragraph discusses Cisco's growth in collaboration product orders and observability, driven by demand for their Cloud Webex Suite and solutions like ThousandEyes and Splunk Observability. It highlights the integration progress between Cisco and Splunk, enhancing their security and networking portfolio through joint efforts. The company sees strong demand for its technologies, particularly as AI scales, with findings indicating that IT partners expect AI to drive significant revenue growth in the coming years. Cisco's portfolio is well-positioned to meet this demand, focusing on AI networking opportunities with infrastructure designed for scalability, programmability, and advanced observability features.

The paragraph highlights Cisco's advancements in AI networking solutions. It details the deployment of the Cisco 8000 with Silicon One G200 for enhanced efficiency in AI networks and mentions a new Super Spine AI networking success with a webscale customer. The text discusses further enterprise platform sales aimed at modernizing networks for AI connectivity. According to Cisco's AI Readiness Index, only 13% of organizations have AI-ready infrastructure, prompting Cisco to introduce new data center solutions, including an Nvidia-based AI server and AI PODs managed via Cisco Intersight, set for release soon. HyperFabric, a future service offering for simplified infrastructure management, is also mentioned. These initiatives aim to integrate AI capabilities into enterprise networks.

The company is enhancing its cybersecurity and collaboration solutions with AI technology. Their distributed AI-native cybersecurity solution, Hypershield, and Splunk's Asset and Risk Intelligence help customers protect against threats and comply with regulations. New AI features in their Webex Contact Center improve customer satisfaction. AI is also being used internally to automate support processes, enhancing efficiency and allowing staff to focus on complex problems. Key trends in AI include significant investment in training by hyperscalers, the need for enterprises to modernize infrastructure for AI deployment, and increased capacity demands on cloud networks.

Cisco demonstrated strong execution in Q1, achieving high order momentum, margins, and operating cash flow. The company reported total revenue of $13.8 billion, a 6% year-over-year decrease, largely due to a previous period of elevated backlog shipments. Non-GAAP net income was $3.7 billion, with earnings per share at $0.91, surpassing guidance. Product revenue was down 9% at $10.1 billion while service revenue rose 6% to $3.7 billion. Networking revenue dropped 23% due to high shipments the previous year. However, security revenue surged 100%, boosted by growth in threat intelligence, detection, and response offerings, including contributions from Splunk. Excluding Splunk, security grew 2%. Collaboration revenue decreased by 3%, with declines in on-prem Webex and collaboration devices offset by growth in contact center and CPaaS offerings. Observability revenue increased 36%, driven by the Observability Suite and Network Assurance. Excluding Splunk, Observability grew 1%. Cisco's Annual Recurring Revenue (ARR) was $29.9 billion, marking a 22% increase, with product ARR up 42%.

In the recent financial quarter, Cisco experienced significant growth, with total subscription revenue increasing by 21% to $7.8 billion, accounting for 57% of its total revenue. Software revenue rose by 24% to $5.5 billion, and software subscription revenue grew by 35%. Total remaining performance obligations (RPO) reached $40 billion, a 15% increase, while product RPO rose 24%. Product orders increased by 20% year-over-year, or 9% when excluding Splunk. Geographic segments saw growth, with the Americas up 17%, EMEA up 26%, and APJC up 25%. Enterprise, service provider and cloud, and public sector customer markets also showed growth. The non-GAAP gross margin of 69.3% was the highest in over 20 years. Cisco maintained a non-GAAP operating margin of 34.1% and reported a non-GAAP net income of $3.7 billion, with earnings per share at $0.91. The company’s cash and investments totaled $18.7 billion, and operating cash flow increased by 54% to $3.7 billion. Cisco returned $3.6 billion to shareholders, including $1.6 billion in dividends and $2 billion in share repurchases, while continuing to invest in its innovation pipeline.

In the first quarter, Cisco completed two software acquisitions to enhance its security and AI capabilities. The acquisitions were DeepFactor and Robust Intelligence, with a planned acquisition of Deeper Insights AI. These strategic moves aim to accelerate innovation and reinforce Cisco's position in the market. Financially, the company reported strong performance and outlined its disciplined expense management strategy. For the second fiscal quarter, Cisco projects revenue between $13.75 billion to $13.95 billion, with non-GAAP earnings per share estimated at $0.89 to $0.91. For fiscal year 2025, revenue is expected to be $55.3 billion to $56.3 billion, with non-GAAP EPS between $3.60 to $3.66, accounting for a 19% non-GAAP effective tax rate. The summary ends with a transition to a Q&A session led by Sami Badri.

During the Q&A portion of a call, Tal Liani from Bank of America asked about the substantial growth in cloud orders, which grew 22% excluding Splunk compared to 2% last quarter. He inquired about the specific areas of cloud participation, such as switching and routing, and whether the company's focus is on all cloud providers or certain ones. He also asked about the strong gross and operating margins and their sustainability. Chuck Robbins responded, highlighting significant growth in the cloud segment, particularly with webscale customers, with four out of the six largest players each experiencing over 100% order growth. He also noted that cable remains a small and pressured part of their service provider business, while telco saw slight growth, particularly in Europe and APJC.

The paragraph discusses the company's participation in areas like routing, switching, and optical technology, particularly in AI infrastructure and webscale networks. In Q1, the company secured over $300 million in orders related to AI and webscale, aiming to exceed $1 billion for the year. Their strategy includes providing systems that support GPU-based networks and leveraging their own silicon as a competitive advantage. Less than half of their webscale business involved AI, with traditional cloud services also performing well. Margin performance was strong, with the highest non-GAAP total gross margins in 20 years at 69.3%, partly due to favorable product mix and the addition of Splunk.

The paragraph discusses the achievements and strategies of a company in improving productivity and reducing costs, specifically through enhancements in the supply chain and gaining a substantial one-time benefit from a duty drawback project. This benefit involved reclaiming tariffs on imported components used in products eventually exported. This project positively impacted the cost of goods sold in the first quarter. As a result, the company expects its gross margins to stabilize between 68% and 69% for the full year, aiding operating margins. The paragraph concludes with a transition to questions, focusing on the macroeconomic environment and its potential impacts, including uncertainties related to U.S. elections.

The paragraph discusses the impact of U.S. federal budgetary pressures on business, specifically citing the continuing resolution and the Fiscal Responsibility Act as factors affecting U.S. federal product orders. Despite these challenges, the company experienced strong growth in product orders globally, particularly in Europe, Asia, and the non-federal U.S. market, with mid-to-high teens growth when excluding U.S. federal figures. The delays in U.S. federal transactions are attributed to budgetary pressures, but these deals are expected to resume once budget issues are resolved. There is optimism about resolving these delays with a new budget due to anticipated political developments in the U.S. government.

In the paragraph, Michael Ng from Goldman Sachs inquires about a recent significant deal involving Hypershield, a security solution, and its reception. Chuck Robbins responds by highlighting that the deal involved a large financial institution as an early adopter, signifying high confidence in the technology. Robbins notes that big customers are deploying Hypershield and anticipates a gradual increase in adoption, supported by a specialized customer assistance program. Additionally, Robbins addresses a question about security order growth, mentioning challenges with U.S. federal orders, which include their largest customer and substantial security orders.

The paragraph discusses the recent performance and customer adoption of security orders and technologies, highlighting growth and innovation within the company. Organic security orders, excluding U.S. federal contributions, experienced significant growth, with more than 1,000 customers deploying new technologies in the past year. The company is optimistic about its innovation pipeline and expects more impactful developments for customers. The discussion then shifts to a Q&A with David Vogt from UBS, who inquires about the contribution of AI and traditional webscale orders to enterprise growth and asks for insights into gross margins, particularly regarding Splunk's impact. Chuck Robbins responds by clarifying a question about the role of non-AI cloud spending in enterprise growth.

The paragraph discusses the enterprise segment's growth, emphasizing that it excludes technology sold to webscale customers. Most webscale purchases were related to Internet infrastructure. Scott Herren talks about favorable product mix and the impact of Splunk on gross margins. A one-time benefit in Q1 from a duty drawback helped margins, although it won't repeat annually, with small effects lingering in the subsequent quarters. Continuous cost reduction efforts are expected to maintain gross margins between 68% and 69% through the year.

In the paragraph, Samik Chatterjee from JPMorgan asks about the order growth in the data center switching portfolio and its implications for AI deployment readiness among enterprises. Chuck Robbins responds that the growth indicates that customers balance workloads between public cloud and private infrastructure, and many are modernizing their infrastructure in anticipation of future AI applications. Despite uncertainties about AI applications, enterprises are investing in modern infrastructure to prepare for future needs, a trend observed over several quarters. Additionally, on AI orders, there's an implication of potentially exceeding revenue targets, suggesting stronger-than-expected revenue realization.

The paragraph discusses the progress and future outlook of a company's enterprise side build-out and AI orders. The speaker mentions that the majority of the build-out is still ahead, and they expect to exceed $1 billion in AI-related orders. Securing design wins is crucial, as it indicates customer confidence in the company's ability to deliver needed silicon systems, eventually leading to bookings and revenue. The speaker emphasizes the dynamic nature of the market and the need for continuous execution. Scott Herren adds that revenue is realized upon shipping products, with most revenue expected in the year's second half. The transition to the next analyst follows.

In the paragraph, Simon Leopold asks for an update on a partnership with Nvidia and its impact, as well as on opportunities related to Splunk. Chuck Robbins responds by stating that the Nvidia partnership is still in its early stages, introducing AI solutions like Hyperfabric, AI compute platforms, and AI PODs with Nvidia GPUs, with expectations for enterprise deployment in 2025. Regarding Splunk, Robbins mentions progress in customer acquisition since acquiring the company, noting that they've been integrating for about eight months, just shy of Splunk's average nine-month sales cycle.

The paragraph discusses the early stages of an initiative involving Splunk, emphasizing the positive developments and integration progress. Approximately 1,500 new customers have been identified based on certain attributes, and many Cisco partners have been trained in Splunk, with some making strategic acquisitions to enhance their business. Scott Herren notes that the integration of Splunk is meeting topline expectations and surpassing profitability expectations. During a Q&A session, James Fish asks about RPO growth at Splunk, while Chuck Robbins is asked about the enterprise and campus refresh opportunity with the announcement of Wi-Fi 7. Scott Herren mentions that they won't separately report RPO figures for Splunk, highlighting successful integrations and joint product developments between Cisco and Splunk.

In the paragraph, the speaker discusses the integration and blurred lines between Splunk and other G&A functions, acknowledging that distinguishing between them has become increasingly difficult, though growth remains consistent. Chuck Robbins then highlights the strength of the enterprise networking business, particularly with the introduction of Wi-Fi 7, which offers flexible deployment options with both on-prem and cloud management. This adaptability is crucial as AI applications become more widespread, requiring modernized networks for effective operation. The ongoing refresh in enterprise networking is expected to persist, driven by the increasing integration and deployment of AI technologies.

In the paragraph, Chuck Robbins discusses the factors driving organic security growth, excluding the U.S. federal sector. He attributes this growth to new products like XDR, Secure Access, and Multicloud Defense, which have been adopted by over 1,000 customers in the past 18 months. Robbins highlights Hypershield's innovative nature, which, although not significantly impacting orders yet, garners customer attention. He also mentions the recent refresh of both low-end and high-end firewalls in 2024 as contributing to this growth. Overall, the security market and customer perception have notably evolved compared to three or four years ago.

In the paragraph, there's a discussion about data center modernization, emphasizing the role of security, particularly through a product called Hypershield, that helps prevent east-west traffic in data centers. The conversation then shifts to an analyst named Ben Reitzes from Melius Research, who inquires about the impact of AI on customer demands, specifically if they are preparing for increased inferencing and applications. He also seeks clarification on a previous statement about the company's growth expectations of 4% to 6% annually and if there are any short-term developments that enhance confidence in reaching this mid-single-digit growth target.

In the paragraph, Chuck Robbins discusses the impact of AI in enterprise settings, highlighting that many companies, including Cisco, focus on enhancing customer experience as an early AI application. He mentions the development of AI-driven applications aimed at automation, efficiency, and deeper customer engagement, such as customer support, upselling, and cross-selling. Robbins notes the importance of utilizing foundational AI models while also incorporating custom data, which is driving both front-end network expansion and data center modernization. This shift is prompting enterprises to upgrade their infrastructure, including private clouds and edge-based systems.

The paragraph discusses the positive outlook and confidence in the future success of AI solutions and networking investments, particularly in Wi-Fi 7. Despite challenges in comparing year-on-year product order growth rates due to past inventory issues, the speakers note improvements in sequential growth rates and anticipate more normalized demand patterns. Investments in AI and networking are considered successful, with a cautious optimism about exceeding projected goals for 2026 and 2027. The conversation shifts to the next analyst question from Amit Daryanani of Evercore.

In this paragraph, Scott Herren and Chuck Robbins respond to questions about networking revenues and future opportunities. Scott explains that the 23% decline in networking revenue is largely attributed to an unusually high backlog shipment in Q1 of fiscal '24, which has now normalized. AI is highlighted as a promising area, though its bookings haven't yet translated into revenue. DC switching remains robust, and overall, Scott feels positive about aligning with expectations in networking demand. Chuck responds to a question about future prospects between Hyperscale (or Hypershield) and Hyperfabric, expressing equal excitement about both opportunities.

In the paragraph, two key technologies, Hypershield and Hyperfabric, are highlighted as crucial for addressing customers' objectives related to data center security and AI application deployment. Large enterprise customers are optimistic about Hypershield for security, while excited about Hyperfabric for AI deployment. The focus then shifts to a financial discussion, where George Notter from Jefferies inquires about the factors contributing to a gross margin improvement. Scott Herren explains that the improvement in Q1 was significantly aided by a one-time benefit from a duty drawback process, which provided a margin increase of 0.5 to 1 point. He notes that such benefits will be much smaller in subsequent quarters.

The paragraph discusses the positive impact of Splunk's high product gross margins on the company's overall financial performance, noting a favorable product mix and successful cost reduction efforts by the supply chain and product teams. The full-year gross margins are expected to settle between 68% and 69%. Pricing has returned to pre-pandemic trends, presenting a slight headwind. Following this, Aaron Rakers of Wells Fargo asks about the potential for AI back-end investments to lead to front-end opportunities, particularly with hyperscale customers, and the competitive position of Nvidia in Ethernet back-end networking. Chuck Robbins responds by highlighting significant current investments in back-end AI training models and contrasting enterprise focus.

The paragraph discusses the increasing demand for cloud infrastructure due to the deployment of AI applications. It highlights that companies are investing in both front-end and back-end capacities to support AI workloads, which continue to move to the cloud. Nvidia is mentioned as a significant partner and competitor, especially in providing technology like GPUs and software layers. The speaker emphasizes the importance of vendor diversity and mentions their firm's strong competitive position due to its experience, intellectual property, and comprehensive technology stack. Finally, the transition to another analyst, Karl Ackerman from BNP Paribas, is indicated.

The paragraph discusses the financial and strategic outlook for a company, focusing on changes in operating expenses (OpEx) and areas for future investment. The company's OpEx is expected to decrease by about $90 million due to a workforce realignment, while significant investments will be made in AI and security. This is partly influenced by the recent acquisition of Splunk, which impacts year-on-year OpEx growth. Additionally, there is a notable increase in product orders from cloud partners, particularly in AI networking hardware. The restructuring aims to create efficiencies and redirect resources to high-growth areas rather than just cost savings.

Chuck Robbins discusses Cisco's solid performance, highlighting significant year-over-year growth among their largest customers, particularly in AI infrastructure. He expresses satisfaction with the balanced nature of the business in that segment. Robbins thanks Cisco teams for their innovation and execution, which contributed to a strong start to the year. He outlines three key focus areas: backend network infrastructure for AI training models, enterprise upgrades and AI application deployment, and collaboration with cloud providers and enterprise customers on AI transition support. Robbins emphasizes the potential of Cisco's portfolio and security momentum and conveys confidence moving forward.

The paragraph announces that Cisco's next quarterly call for fiscal year 2025 second quarter results will be on February 12, 2025, at 1:30 P.M. Pacific Time (4:30 P.M. Eastern Time). It concludes today's call and provides contact information for the Cisco Investor Relations department for further questions. Additionally, it offers details on how to listen to the entire call via phone, including numbers for both U.S. and international participants.

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