The paragraph is a transcript from Cisco's Second Quarter Fiscal Year 2025 Financial Results Conference Call. Sami Badri, Cisco's Head of Investor Relations, introduces the call featuring Chuck Robbins, Cisco’s CEO, and Scott Herren, the CFO. The discussion includes both GAAP and non-GAAP financial results with a focus on product revenue and orders by region and customer type. Forward-looking statements and guidance for future financial performance are also covered, with a note on associated risks detailed in SEC filings. Chuck Robbins reports strong Q2 results, with revenue, margins, and earnings per share meeting or exceeding guidance expectations.

In the second quarter, the company experienced strong demand for its technology, resulting in double-digit growth in recurring and subscription revenue, which made up 56% of total revenue. AI infrastructure orders with webscalers exceeded $350 million, predicting over $1 billion in orders for fiscal year '25. The company returned $2.8 billion to shareholders this quarter, totaling $6.4 billion year-to-date, and announced a dividend increase and a $15 billion share repurchase. New product orders rose 29%, or 11% excluding Splunk, marking a fourth consecutive quarter of growth. Enterprise product orders grew 27% with double-digit increases across all regions, while Service Provider & Cloud product orders surged 75%, led by triple-digit growth in webscale. Orders from telco customers rose over 20%, indicating strong demand as they enhance their networks for AI connectivity.

The paragraph highlights growth in Cisco's public sector orders, driven by governments adopting Cisco's solutions for sovereign AI clouds. Networking product orders have surged, with double-digit growth in switching, enterprise routing, webscale infrastructure, and IoT products, particularly due to the increasing return-to-office policies. The demand for data center switching remains robust, with expectations of further growth as new AI-focused products, such as the 800 gig Nexus switches, become available. Cisco is experiencing growth in AI orders from enterprise customers, facilitated by several AI System deals and increasing traction for the Cisco AI POD product. The company's Industrial IoT solutions, particularly ruggedized catalyst products, are also performing well with industrial and manufacturing customers.

In the first half of fiscal year '25, Cisco experienced significant order growth driven by the deployment of AI-powered robotics, industrial security, and onshoring efforts in the United States. The company's security orders surged, fueled by advanced analytics and products like a refreshed firewall. Cisco Secure Access and XDR gained over 1,000 customers each. Hypershield, despite not being fully launched, secured major deals with Fortune 100 companies. The integration of Splunk into Cisco continues to enhance collaborative sales and innovation, integrating tools like Talos and AppDynamics with Splunk's solutions. Cisco also launched new innovations such as Splunk on Azure and AI Defense for securing AI applications.

The paragraph discusses Cisco's AI Defense, which provides network-level security for AI applications and has been well-received by early users. With its general availability set for March, the launch was highlighted at an AI Summit attended by industry leaders, focusing on AI challenges and innovations. The growing demand for AI infrastructure and security fuels Cisco's developments, including a new data center smart switch and Agile Services Networking, both based on Silicon One, to enhance data center efficiency and service provider infrastructure. Cisco’s innovation continues to drive its leadership in the AI space.

The paragraph outlines Cisco's strategic approach to AI through three interconnected pillars: AI training infrastructure for webscale customers using Cisco's hardware and systems; AI inference and enterprise clouds using products like Nexus switches and Nvidia-based servers to streamline AI infrastructure deployment; and AI network connectivity to modernize and automate network operations for AI applications. Cisco is also integrating AI into its products, enhancing Customer Experience with AI Assistants, the Renewals Agent co-developed with Mistral, and tools to digitize and manage network changes. These initiatives aim to boost productivity and customer value by transitioning towards AI-led customer experience solutions.

Gary Steele, President of Go-to-Market at Cisco and former CEO of Splunk, will leave Cisco at the end of the quarter for a new CEO role. He was crucial in integrating Splunk into Cisco, meeting revenue expectations and exceeding profitability goals. Steele also helped evolve Cisco's sales and growth strategies. Cisco is now searching for a new Go-to-Market leader. The company's demand and product innovation are strong, returning significant value to shareholders. Cisco reported strong quarterly results, with revenue at $14 billion, a 9% increase year-over-year, and non-GAAP earnings per share at $0.94.

In the recent quarter, Cisco reported a total product revenue of $10.2 billion, an 11% increase, and service revenue of $3.8 billion, up 6%. While Networking experienced a 3% decline, with Wireless and Switching growth offsetting a drop in servers, Security revenue surged by 117% due to Splunk, SASE, and Network Security offerings, but grew 4% without Splunk. Collaboration grew by 1%, and Observability by 47%, or 3% excluding Splunk. Recurring metrics showed a 22% increase in Total ARR to $30.1 billion, with product ARR up 41%. Subscription revenue climbed 23% to $7.9 billion, making up 56% of total revenue. Software revenue rose by 33% to $5.5 billion, with subscription revenue up 39%. Total RPO increased 16% to $41.3 billion, with Product RPO up 25%. Product orders grew 29% year-over-year (11% excluding Splunk), with geographic growth in the Americas (30%), EMEA (24%), and APJC (35%). By customer markets, Service Provider & Cloud rose 75%, Enterprise 27%, and Public Sector 13%. The non-GAAP gross margin rose to 68.7%, with product and services margins also improving, driven by Splunk and productivity, albeit partially offset by pricing pressures. The non-GAAP operating margin exceeded the guidance range at 34.7%.

In Q2, the company reported strong financial performance, ending with $16.9 billion in cash, cash equivalents, and investments. Operating cash flow rose 177% to $2.2 billion. The company returned $2.8 billion to shareholders through dividends and share repurchases. The Board authorized an additional $15 billion for share repurchases, and dividends were increased to $0.41 per quarter. The company acquired Deeper Insights to enhance its AI capabilities. Overall, strong order growth, margins, and disciplined spending fueled cash flow and shareholder returns. The guidance also accounts for the impact of proposed U.S. tariffs on China, Mexico, and Canada.

The paragraph outlines a company's strategic planning and financial guidance amidst a dynamic market environment. The company has prepared to manage the impact of potential tariffs by leveraging its global supply chain and operational flexibility. Financial expectations for fiscal Q3 include projected revenues between $13.9 billion and $14.1 billion, a non-GAAP gross margin of 67% to 68%, a non-GAAP operating margin of 33% to 34%, and non-GAAP earnings per share between $0.90 and $0.92. For fiscal year 2025, expected revenue ranges from $56 billion to $56.5 billion, with non-GAAP earnings per share between $3.68 and $3.74, and a non-GAAP effective tax rate of approximately 19%. During a Q&A session, Simon Leopold from Raymond James inquires about federal exposure and the potential impact of U.S. government layoffs, to which Chuck Robbins responds.

The paragraph discusses a company's focus on improving efficiency and productivity in government through technology, noting that less than 10% of their business comes from the U.S. federal sector, with 75% of that from the Department of Defense. Despite initial confusion following executive orders, their business deals are back on track, with stable expectations for future performance. The conversation shifts to co-packaged optics technology, where Cisco plans to adapt its offerings to align with market demands. The paragraph concludes with a transition to another analyst, Meta Marshall from Morgan Stanley.

In the paragraph, Chuck Robbins discusses the strong demand for technology across various geographies and sectors, despite geopolitical uncertainties and market challenges. He highlights robust performance in public sectors outside the U.S., particularly in Europe and Asia. The demand is strong in campus and enterprise technology sectors, including campus switching, enterprise routing, and wireless. Robbins emphasizes the continuous growth in the Nexus portfolio for data center switching, with significant year-over-year growth in web scale performance. Despite global uncertainties, customers recognize the necessity of investing in technology due to ongoing technological changes and opportunities.

In the paragraph, the conversation takes place during a conference call where Ben Reitzes from Melius Research asks Chuck Robbins about a new product, the 9,300 Nexus switch. Robbins expresses gratitude to the product team for their recent innovation efforts, noting significant advancements in various domains such as collaboration, security, silicon, and web-scale infrastructure over the past 12 to 18 months. He highlights the new switch with a Data Processing Unit (DPU) as an example of innovation in the core networking portfolio and discusses the strong prospects of the programmable switch market. Additionally, Robbins addresses the improving demand and ongoing preparations for AI integration, which have intensified over recent quarters.

The paragraph discusses the decision to use AMD's Data Processing Units (DPUs) to enhance network security by integrating it throughout the network at high speed, similar to ASICs, rather than relying on centralized processing. The first use case, Hypershield, aims to provide security inspections between data center zones to protect against threats. The demand for such technology is partly driven by companies, including telcos, preparing their networks for AI capabilities, indicating a broader trend of organizations gearing up for AI-driven services.

In the paragraph, the discussion is about the early stages of enterprise investment in AI. Enterprises are starting to spend on AI-driven infrastructure, but are still determining specific use cases. The company is introducing new technologies like AI pods, HyperFabric, AI Defense, Hypershield, and a new DPU switch to support AI applications. The potential for leveraging private and proprietary data for AI applications is seen as a significant opportunity, larger than current training applications. The company plans to continue innovating and believes it is well-positioned to benefit as AI adoption accelerates.

In the paragraph, Scott Herren addresses a question about gross margins, saying they are projected to be around 67% to 68% for Q3 and likely to remain in that range for the full year. He explains that this projection includes considerations for proposed tariffs, including a 10% tariff in China and a 25% tariff on Canada and Mexico, though the impact from Canada is minimal. The tariffs on steel and aluminum are also factored in, assuming a March 1 start date. Despite the uncertainty in the tariff environment, Herren emphasizes having a supply chain team that has effectively mitigated past tariff impacts, reducing exposure by 80%. This mitigation is not accounted for in the current cost of goods sold projections, which factor in the full proposed tariff effects. Samik Chatterjee from JPMorgan continues the discussion by expressing interest in understanding how these tariffs might also affect demand.

In the paragraph, Scott Herren and Chuck Robbins discuss the impact of tariffs on enterprise customers and hyperscaler demand. Scott Herren notes that there is no evidence of customers advancing their demand in anticipation of tariffs due to the fluid tariff environment. He mentions that their strategy to handle potential tariffs includes making supply chain adjustments rather than immediate price changes. Chuck Robbins adds that there is a strong demand from webscale customers, stating that if they can produce more, these customers are willing to buy more.

The paragraph contains an exchange between various analysts and executives during an earnings call. Sami Badri finishes, prompting the operator to introduce Tal Liani from BofA Securities who questions the perceived decline in Splunk's performance, suggesting an 11% year-over-year drop, and seeks clarification on this and on the trends in security and observability. Scott Herren responds by explaining that the perceived decline may be due to the timing of Splunk's fiscal quarter. He notes that the end of January, which used to be part of Splunk's Q4, is not included in their current Q2 results due to calendar timing, and that it will be captured in Q3 instead. Despite this, Splunk is still experiencing double-digit growth.

The paragraph features a discussion involving Chuck Robbins and analysts regarding the performance of certain products and future expectations. Splunk is performing better than expected, showing profitability ahead of schedule. On the security front, there is noted growth in demand and new innovations are being ramped up. Cisco Security and XDR have been deployed at over 1,000 customers, supporting over 1 million enterprise users each. New offerings like Hypershield have led to securing two Fortune 100 customers, and there is strong interest in AI defense, evidenced by a successful AI Summit event. The paragraph also includes questions from Amit Daryanani about significant AI orders, asking whether these will convert into revenue this fiscal year or the next.

The paragraph discusses a company's $700 million in AI orders, which comprise systems, silicon, optics, and optical systems. Half of these orders are for silicon and systems, and the company has made significant investments in resources for silicon development, leading to increased yield. Revenues from these orders are anticipated to ramp up in the latter half of the year. The discussion shifts to a Q&A session, where Jim Fish from Piper Sandler inquires about the penetration of large customers following Cisco's acquisition of Splunk, as well as insights into their strategy for AI wins in data centers. Chuck Robbins responds that it's still early for Splunk and long sales cycles are ongoing, but they are making progress and achieving some wins.

The paragraph discusses Cisco's integration of Splunk into its portfolio, noting benefits from collaborations with large customers. They anticipate continued growth through cross-selling and sales incentives. When differentiating between systems and silicon, it's mainly about systems, as sales constitute a small percentage. The operator then calls on David Vogt from UBS, who asks about the strength of Cisco's business, mentioning potential deceleration in enterprise orders and regional strengths. He also inquires about competition and risks from recent project announcements involving white box ODMs and alternatives like DeepSeek.

Chuck Robbins discusses the enterprise market's recovery, noting a 29% increase in orders from Q1 to Q2 and strong growth in Asia and Europe. He highlights the impact of AI advancements and the importance of democratizing access to facilitate AI applications. He mentions the success of their AI defense model in quickly identifying vulnerabilities. Robbins also expresses optimism about their success in the web scale space and emerging opportunities. Sami Badri then transitions to the next analyst, Antoine Chkaiban, who asks about traction from enterprise customers in AI.

In the paragraph, Chuck Robbins addresses Antoine's question regarding Ethernet use in the enterprise segment, focusing on its application in AI infrastructure. He explains that enterprises are not necessarily building massive clusters on their own but may be using major GP providers to handle training and then applying that training to their infrastructure, primarily for inferencing. So far, enterprise customers have tended to purchase complete stacks, including Nvidia GPUs. With the Nvidia partnership, there are emerging opportunities for integrating networking equipment and GPUs through reference architectures like hyper fabric stack and AI pods. Furthermore, the power availability issue, which is more significant in the web-scale space, has not been a major concern within enterprise environments. After Robbins' response, Sami Badri transitions to the next question from Aaron Rakers at Wells Fargo.

The paragraph discusses the rollout of 51.23 silicon, expected around April, and its significance for AI-related business, particularly in relation to switch and Silicon One silicon orders. Chuck Robbins comments that the 51.2 technology is primarily focused on enterprise use within their Nexus portfolio and is part of the Silicon One design. He mentions the ongoing development of various silicon architectures to meet different customer needs, focusing on aspects like latency and buffer requirements. Regarding campus technology, the transition to WiFi 7 is beginning, with expectations of a full deployment in the next two to three quarters, affecting both on-premises and cloud-managed access points. The conversation then shifts to the next analyst, Karl Ackerman from BNP Paribas.

In this discussion, Karl Ackerman asks about the impact of customer lead times and order patterns on Cisco's enterprise networking segment, specifically with the introduction of AI pods and offerings like Hybridshield. Chuck Robbins and Scott Herren clarify that the current demand is not due to extended lead times but a normalization of ordering. Adrienne Colby, stepping in for Atif Malik, inquires about Cisco's offerings for traditional service providers and their readiness for AI. Scott Herren responds, noting that the telco sector had a strong quarter and is preparing for increased network demand driven by AI, similar to enterprises, while also managing financial constraints.

The paragraph discusses how telecommunications companies are preparing for increased network demand, with some European operators planning to offer AI services and applications at the network edge. Chuck Robbins expresses confidence in his team's innovation and engagement efforts, highlighting the positive impact of AI developments and the integration with Splunk. He acknowledges the dynamic environment and potential challenges, such as tariffs, but remains optimistic about the company's momentum and commitment to providing valuable technology and maintaining strong customer relationships.

The paragraph announces the date and time for Cisco's next quarterly call for their fiscal year 2025 third quarter results, scheduled for May 14, 2025, at 1:30 p.m. Pacific Time. It also provides information on how to contact Cisco Investor Relations for any further questions and offers a phone number for those who want to listen to the call in its entirety. The call concluded with the operator thanking participants and informing them they may now disconnect.

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