Cisco Systems, Inc. Price & Performance (CSCO)

So it was very balanced. And so far, I think that despite the geopolitical risk, despite the uncertainty that's going on in the in The U. S. And in the marketplace around the world I think the one thing our customers understand is that their need to continue spending on tech [indiscernible] is just there and they're There's so much change going on right now from a technology perspective that there's both excitement about the opportunity and candidly there's a little bit of fear of slowing down too much and letting your competition get too much ahead of you. So we saw solid demand. Thank you, Meta. I just want to remind analysts to ask one question and a follow-up question at the same time.

Thank you. Ben Reitzes with Melius Research. You may go ahead, sir.

Yes. Hey, thanks a lot guys and congrats on the quarter. It's good to see you guys with the momentum. Chuck, we've got a lot of questions very recently about new switch that you just put out, the 9,300 Nexus. And This programmable switch market Looks like there's a lot of strong prospects there. Just wondering if you could talk a little bit more about that product and maybe why you went with AMD for the product and what that means for your versus your NVIDIA products? And my follow-up just is with regard to the overall comment of just overall demand just sounds so much better than a few quarters ago. I just wanted some the view that do you still think people are getting ready for AI Or I don't know if I heard that from you this time that you were thinking the last two quarters people were getting ready for AI and it picked up and this just sounded like a little more firm.

But I was just wondering for a little more color on that. Hopefully, that didn't run on too long, Sammy. Okay.

But I'll pass it back to you.

Thanks, Ben. No, we got them both. First and foremost, I want to just thank the team in our product organization because the innovation that they've been delivering over the last twelve to eighteen months has been at a pace that we haven't seen in a very long time. We saw we've seen a lot in the collab space in the security space, a lot in the silicon space and then in the web scale infrastructure. And now I think what you referenced this switch with the DPU in it is a great example of innovation that we are going to drive in our core networking portfolio And so it's I can't speak to exactly why the team chose the AMD DPU other than I'm sure they did an analysis and thought it was the best solution for us. But this is a real it's a breakthrough product because it allows us to candidly, we can take security out of these [indiscernible] appliances that they come in and put it where it belongs, which is everywhere. Security needs to be deployed everywhere and this really allows us to integrate security deeply into the network and at the do is you can run network services or security services on these DPUs in the network at the speed of the ASICs as opposed to moving this traffic to a central place where you're going to be limited by the processing power of a single box.

And so the first use case as you are aware is HyperShield, which we announced and we had a couple of of big fortune wins in the prior quarter. Even as we're just building out the final capabilities on HyperShield. So that's going to be the first deployment, if you think about the use case, you could put one of these switches sitting at between zones in a data center and running all the traffic through it at at line speed and doing security inspection via HyperShield. To protect different zones from East West threats. So it's we think it's got a lot of potential and this is just the first service or first use case that the teams have come up with. On your second question, we absolutely believe that a lot of this demand is being driven by customers preparing for AI. We even think a lot of the telco demand that we see is are the telcos building out their networks to be prepared to deliver AI as a service or AI driven services. And so while I didn't call it out, it's one of the pillars that we talk about relative to our role in AI.

And we do think there's an just trying to get prepared for what they're going to need. It's clear that Agentic AI work streams are going to put more capacity onto the network. Thank you, Ben. Michelle, can we move to the next analyst?

Thank you. Matthew Niknam with Deutsche Bank. You may go ahead, sir.

Guys. Thanks so much for taking the question. Just maybe a good dovetail on on the prior question.

You talked Chuck about enterprises investing a little bit more in AI. I'm just wondering as they come into the new calendar year, what you're seeing and hearing specifically from enterprise cost for your business today? And then just as a follow-up maybe for Scott, you did about 68.7% on the gross margin front this past quarter. I think the guide implies a step down to between 67% to 68%. I'm wondering maybe what informs that view? Thanks so much.

So I would say what we're seeing on the enterprise side relative to AI is it's still Customers are still in very early days and they all realize they need to figure out exactly what their use cases are We're starting to see some spending though on specific AI driven infrastructure. And we think as we get AI pods out there, we got hyper fabric coming, we got AI defense coming, we have HyperShield in the market. And we got this new DPU switch they're all going to be a part of the infrastructure to support these AI applications. So we're beginning to see it happen. But I think it's also really important to understand that as the enterprises leverage their private data, their proprietary data, [indiscernible] they'll do some training on that and then they'll run inference obviously against that We believe that opportunity is an order of magnitude we'll we're going to continue to innovate and build capabilities to put ourselves in a better position to be a real beneficiary as this continues to accelerate. But as of today, we feel like we're in pretty in shape. And Matthew, on your question on gross margin, the guide at 68%, 67% to 68% for Q3 And by the way, I think it settles in, in that range for the full year.

What's built into that and driving the step down from where we were in Q2 is we have and this was noted in the in my commentary upfront, we have built in the cost of the proposed tariffs that we've seen so far. The additional 10% in China the Canada has no there has a negligible impact on us. And the steel and aluminum, we've quantified those out again assuming the March 1 date. I think it's such a fluid environment right now. It's very difficult to say what's actually going to happen. I wanted to protect the guide and ensure that we built in the 25% that's been proposed I will tell you, we've got a supply chain team that over the last several years has built a lot of muscle around the tariff that we had in China and how do we work our way around that and And from the time that was first imposed to where we are now, mitigation activities have reduced our exposure there by about 80% So we've game planned out several scenarios and steps we could take depending on what actually goes into effect. We'll start to take those those steps to mitigate the impact of the tariffs.

But what I built into the cost of goods sold, that's where the tariffs will hit. Is the full effect of 25% in Mexico, Canada and the additional 10% China. With no mitigation at this point, but no mitigation built in at this time. Thank you, Matt. Michelle, we can move to the next analyst.

Sami Chatterjee with JPMorgan. You may go ahead, sir.

Hi. Thanks for taking my questions. I guess maybe I'll follow-up on that tariff question to start off. You do mention you're embedding in the cost of the tariffs, but I think we're getting a lot of questions in terms of how to think about demand. So Chuck or Scott, I mean, any thoughts in terms of how you've seen enterprises enterprise customers respond on a demand basis to previous tariffs? And how does that inform your view in terms of what would you expect for demand? And sort of are you seeing any pull forward from customers to avoid some of these tariffs in the first place? And for my follow-up, I think it's more about the hyperscaler and the AI momentum you're seeing there. You're seeing strong momentum in orders, but What is maybe if you can give us some insights on deployments, we can see these strong CapEx numbers or guidance from them, but is there any acceleration or sort of more on track in terms of deployment PS relative you expected?

Yes, Sumik, on the first question, we're not seeing any evidence of customer pulling demand I think it's the tariff environment is very fluid right now. It's a very dynamic environment. While everyone is taking note, I think until we know what's actually going to go into effect, it will be very difficult for our customers to decide what to do. Think the other thing that as we look at the steps we would take to mitigate the impact of demand, there are a number of steps we can take to offset the cost. We obviously would have price as a lever, but there's a number of considerations that we have to go through before we got there. Right now, I don't envision that. What we would look to do first is make some of the changes we need to make inside the supply chain to mitigate the impact of seeing any evidence of any pull ahead in demand. Yes. Tamika, I think on the question relative to the webscale demand versus their deployments, I think that they're [indiscernible] I think the bottom line is that I've sat with all these customers and they've looked at me and said, if you can build more, we will buy more.

So I think that a couple of them had initial targets for for how many units they wanted in 2025 and number has already gone up by 50%. So I think the deployments are are moving very rapidly and on track and we continue to respond to all of their demand and frankly the changes that they make as their strategy evolves on it. It's very dynamic. It's a very dynamic market. Thank you, Samek. Michelle, we can move to the next analyst.

Thank you. Taliani with Boulton Securities. You may go ahead, sir.

Hi. [indiscernible] Great quarter, but I have a question about maybe the weaker parts.

If my math is right and I'm not sure it's right, so I need clarification. Splunk was down 11% this quarter. [indiscernible] Maybe my numbers are totally wrong. So if you can clarify what's happening with Splunk and give us an update on on the trends? And the second question is security and observability It's supposed to accelerate it accelerated last quarter. Can you talk about the trends this quarter and kind of the good parts and the bad parts of the growth?

Thanks.

Okay. I'll take the first one and then Chuck, we can tag team on the second if you want. On the I'm not sure what math you're doing, Tal. I think one thing that is not visible to you with the math that you've got in front of you is The end of Splunk's quarter, their fiscal by the way, this would have been the January was the end of their prior Q4. So as with every enterprise software company, of course, Q4 is the biggest quarter of the year. And in fact, it gets back end loaded so that the week of that Q4 is the biggest week of the quarter. The way the calendar fell this year, our fiscal quarter ended on January 25.

So that last week of January that was historically Splunk's Q4 actually is not captured in our Q2 results, it will flow into our Q3 results. That may be what's throwing you off on the math. Splunk is still growing double digits. It's growing right in line with our expectations, modestly ahead of our expectations [indiscernible] So Spot's performing quite nicely for us. [indiscernible] On the security front, what I would say, Tal, is that we had always said we expected to see this the acceleration In the second half of this year, we saw The last four quarters of growth from a demand perspective in organic security, which is a good sign, And what we've launched is all this new innovation that just takes time to ramp, but I can give you a couple of data points. If you just look at two of the of the products Cisco Secure Access and XDR, Between those two, we now have those deployed at over 1,000 supporting over 1,000,000 enterprise users each.

So we're seeing the success of just they just need time to ramp We've also launched HyperShield. I said earlier, we won two Fortune 100 enterprise customers this past quarter and there's a great deal of excitement If you look at AI Defense with the AI Summit that we did recently, there's I think there's about 20 somewhat customers who are interested in going to proof of concept with us right now on it. We had almost half the Fortune 100 there for that event. So I feel good about where we are. It will turn into greater demand as we just continue to scale these products. Thank you, Tal. Michelle, can we move to the next analyst?

Amit Dariani with Evercore ISI.

You may go ahead, sir.

Great. Thanks. This is Michael for sharing one for the comments. Just a quick question on the $700,000,000 ai order so far this year. Are these mainly switching in optical wins? Or are you seeing one of these other products? And then just curious if you're expecting any of these, you know, you've seen some very strong AI orders Are we expecting it to start converting into revenue this fiscal year? Or is that more of a fiscal twenty six time Thanks, Amit. I'll take the first one. Scott, you can take the revenue. On the $700,000,000 in AI orders, It's It's a combination of systems, silicon, optics and optical systems. And I think if you break it down, it's about half is in silicon and systems. [indiscernible] but it's continues to accelerate and I'd say the teams have done a great job on the silicon front We've invested heavily in more resources there. The team is running parallel development efforts for for multiple chips that are staggered in their timeframes. They worked hard. They were increasing the yield, which is a positive thing. And so so we feel good about it, but it's a combination of all those things that we're selling to the customers.

Scott, on the revenue side? Yes. Amit, it's no different than what we've said all along about when we expect this to turn into revenue. We knew the orders come in well ahead of the actual ship dates We do expect to see this revenue begin to ramp in the second half of the year and that's consistent with what we've said from the start. Thank you for the questions. And Michelle, we can move to the next analyst.

Thank you. Our next caller is Jim Fish with Piper Sandler. You may go ahead, sir.

Hey, guys. Nice quarter.

Working off the few of the things you guys just have talked about here. Can you just first give us an update as to the actual penetration of the 6,500 large customers guys expected between Cisco and Splunk Cisco jointly go after in any further bundling plans you have beyond what you just announced? And then secondly to the last [indiscernible] What are you guys seeing from where you're winning within the data center between the silicon one approach versus sort of the systems approach with your AI win Would love additional color there. Thanks, guys.

Thanks, Jim. So on the Splunk side, I would say it's still early. These are still long sales cycles.

We'll we're continuing to make progress. We are having wins. I mean, they're clearly out there. We also have seen the benefit of the portfolio coming together with large customers doing Our broad based, what we call WPAs and that are inclusive of Splunk now the old Cisco WPAs that are inclusive of Splunk. And we talked about the Splunk team that had a deal that they were leading that actually expanded the Cisco footprint.

So are beginning to see that.

And we'll continue to see it as we go forward. I think you'll see as we get into the next couple of quarters, you're going to see more and more cross selling sales incentives that the teams are putting in place that I think will continue to accelerate that.

The second question, I think it was about how they're looking at systems versus silicon. Yes. What's the difference in silicon?

Yes. I think that by and large it's systems. Actual just raw silicon sales are still very small as a percentage of the total business. So the general method of consumption is just to buy the systems. Thank you, Jim. We can move to the next analyst.

David Vogt with UBS. You may go ahead, sir.

Great. Thanks guys for taking my question. So I'll give you both obviously at the same time. So I'm just trying to square Chuck your comments about the strength that you're seeing across the business, because it looks like ex Blunk enterprise orders maybe decelerated a little bit sequentially And the strength in, I guess, it looks like The Americas was mostly SP and cloud. And then the second question I have is, maybe longer term, there's been a high number or a large number of project announcements over the last couple of weeks with some pretty big announcements from maybe the white box OEM space with some big wins as well. So maybe anything you can touch on from a competitive perspective on how you're thinking about maybe these bigger projects that have been announced maybe the risks out there from some of these other alternatives like deep sea seek? And then some of these wins that have been announced by some of the ODM market and how you're thinking about the landscape?

Thanks.

Okay. So first of all, only enterprise, we've had four quarters of continued recovery. It was a little slower growth year over year than it was in Q1, but it's important to understand, I think Q2 over Q1 was up 29%. We literally took over $1,000,000,000 more in orders in Q2 than Q1. So don't think there's anything to be overly concerned about right there. And we saw real good strength in in Asia in double digits and I think Europe was close to double digits. And U. S. Enterprise just had a bunch of big deals in Q1 that I think kind of slowed them down a little bit for Q2. On these other deals, I mean, if you look at technologies like DeepSeq. We think as not DeepSeq in particular, but we think as we see more of this democratization of the of the access that it's going to just facilitate a faster advancement of AI applications in the enterprise first of all. Secondly, I think we ran our AI defense model I think we did 50 prompts and the team this was in forty eight hours of thing being out and I think they proved every time that they could jailbreak this thing pretty easily.

So I think we got to be careful as well. And the final thing I'd say on a lot of these unique deals out there, these bigger deals, I think we're having success in the webscale space. And I think if we're being chosen in that space, I think we'll have a real good opportunity to play in these other emerging opportunities as they come about as well.

Thank you, David. Michelle, we can move to the next analyst.

Antoine Chikavan with New Street Research. You may go ahead, sir.

Hi. Thank you so much for taking my questions. So I'd like to follow-up on the question regarding traction from enterprise customers in AI. Could you provide some additional color on where you are seeing Ethernet shipments in the enterprise segment? What kind of cluster size? What use cases which verticals? And then as a follow-up, I'd love to hear your perspective on what you're hearing from new customers in terms of data center space and in particular access to power as potentially being a bottleneck to rollout infrastructure this year?

Thank you.

Thanks, Antoine. Yes, I don't think that we're not thinking about it from massive clusters that the enterprises are going to build. They're certainly building clusters to do training on their own models or they're renting space from one of the major GPU providers to actually do their training and then pulling that back. And the infrastructure we're talking about is really to support inferencing side of it. And I think by and large, to be candid, the customers who have bought like NVIDIA GPUs so far have just bought the stack from them. And so we think that will be an emerging opportunity in the future is not really Ethernet under GPUs in the enterprise today hasn't been a major opportunity to date. Now we believe with the NVIDIA partnership, the hyperfabric stack, the AI pods, the things that we're building We think that as we integrate that stack together and they have these reference architectures to build that we think that that will lead to our networking equipment being combined with NVIDIA GPUs and that's how we'll accomplish that in the future. And candidly, I don't think there's hasn't been a lot of concern over the power issue in the enterprise like it has been in the webscale space.

Thank you, Antoine. Michelle, can we move to the next question?

Aaron Rakers with Wells Fargo.

You may go ahead, sir.

Yes. Thanks for taking the question and congrats on the quarter. I'll stick with the AI theme first and then I'll throw out my quick follow-up. On the AI side, I think in the prepared comments you had mentioned that your 51.2T silicon will come out, I think it was April timeframe.

As you think about that 50% of your business on the AI orders being tied to switch and silicon one silicon How would you say that that is kind of a point of inflection like the majority of your AI wins are tied to that. 51.22 silicon or just kind of trying to understand kind of the opening up of this monetization opportunity. And then as a follow-up, I'm just curious like on the campus side, just kind of Help us appreciate maybe the WiFi seven upgrade cycle that you're starting to see how you're thinking about that?

Yes. I think on the the comments we made on the $512,000,000 really was more of an enterprise comment. In the Nexus portfolio, but it is silicon one based. [indiscernible] the $8,000 as an example, but this is if you get back to the silicon discussion that we had earlier, these That team is designing multiple silicon architectures based on the use cases on the customer. Do they need deep buffers? Do they not need deep buffers. I mean, it's really is it a low latency application? I mean, these are all of these things come into play as they develop different pieces of silicon for that marketplace. So we'll continue to develop and 51.2 is And then beyond and they're already working on just subsequent chips that will continue to crank up the speeds in these data centers. On the campus side, I think that continuing to see the campus switching infrastructure as I talked about earlier It's early days on the Wi Fi seven, I'd say customers are are getting ready to begin deploying. I think we're going to move into that over the next two to three quarters where we'll see a full transition both in the traditional on prem access points and then also in the cloud managed.

Thank you, Aaron. Michelle, we can move to the next analyst.

Karl Ackerman with BNP Paribas.

You may go ahead, sir.

Thank you.

Within Enterprise Networking, I think a couple of quarters ago, customer lead times bottom out at just a few weeks.

Is the greater visibility and support of your April core outlook from enterprises and even telco operators coming from just a return to normal order patterns or Our lead times extending out beyond a quarter across those customers as you begin to introduce AI pods and HyperShield and perhaps some on prem service offerings in addition to that. Thank you.

It's just normalization of ordering. We haven't had any lead time pressure at all. Yes. We're not seeing what's behind that question, Carl, is is the demand that we're seeing today a function of extended lead times like we saw a couple of years ago. That's not case. Our lead times are not extended. Thank you, Carl. Michelle?

Can move to the last question.

Atif Malik with Citi.

You may go ahead, sir.

Hi. It's Adrienne Colby for Athif.

Thank you for taking the question. Earlier this week, you announced some offerings geared towards traditional service providers.

Just wondering if you could help us size this customer segment for Cisco understand where these customers are in terms of their embrace of AI are some of the key issues that Cisco is helping them adjust?

Scott, you want to comment on the size of the telco segment for us? Yes.

So telco had a good quarter in the last quarter. That's actually a continuation of what we saw in Q1 And what we hear from telco particularly in international is they are in anticipation of demand on their networks driven by AI.

Doing the same thing that we hear enterprises doing. They know there's increased load coming. In many cases, they've sweated those assets for some time because of the the state of the financials in that industry.

And they're coming back to the table to build out their networks in anticipation of the increased demand I think we'll continue to see that for some period of time. Telco by its nature and the size of the telco customers that we have can be a little bit episodic, a little bit big deals in one quarter and not in the next.

So it's not something that I would expect to see on a steady state, but we're seeing good demand right now. As they see the same thing, the same exact trend that enterprises see.

There's network load coming, we need to be ready for it. Yes, I think that's right. And I think the other thing that We see some of the European operators are looking at delivering AI as a service. We see a lot of them planning for AI edge Apple a they are preparing for sure.

Thank you, Adrian. And I want to hand it over to Chuck for some closing remarks.

I just want to thank everybody for joining us today and I want to thank our teams I'm really proud of these results and the teams have been doing a really great job both on the innovation front, engaging with our customers We clearly live in a very dynamic world. And as Scott said earlier, as the impact of these potential tariffs become more clear, our teams will take the appropriate steps to mitigate where we can. I do feel good about our momentum. Again, the product innovation and and this particularly the innovation in our core, the portfolio and how it's translating through to customer value, Clearly, the AI tailwind as well as the integration that has occurred so far relative to Splunk. And just the team's pure out execution. I'm confident in the steps we've been taking think it will lead to durability of the performance and we want to just continue to deliver for our customers, deliver the right technology, the right value and be a trusted partner for them. So thank you for being with us and we look forward to talking to you soon. Cisco's next quarterly call, which will reflect our fiscal year twenty twenty five third quarter results, will be on Wednesday, 05/14/2025, at 01:30PM Pacific Time, 04:30PM Eastern Time.

This concludes today's call.

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