Cisco (CSCO) Q1 FY27 Earnings Call Transcript

Operator00:00

Welcome to Cisco's first quarter fiscal year 2027 financial results conference call. At the request of Cisco today's conference is being recorded if you have any objections you may disconnect.

Operator00:05

Now I would like to introduce Sami Badri Head of Investor Relations sir you may begin.

Sami Badri00:22

Good afternoon everyone. This is Sami Badri Cisco's Head of Investor Relations and I'm joined by Chuck Robbins our Chair and CEO and Mark Patterson our CFO. Cisco's earnings press release and supplemental information including GAAP to non-GAAP reconciliations are available on our investor relations website.

Sami Badri00:37

Today's call is also being live streamed on YouTube, LinkedIn, and X. Following this call, we will also make the recorded webcast and slides available on the website. Throughout today's call, we'll be referencing both GAAP and non-GAAP financial results.

Sami Badri00:50

We will discuss product results in terms of revenue and geographic and customer results in terms of product orders, unless stated otherwise. All comparisons will be made on a year-on-year basis. Unless stated otherwise.

Sami Badri01:11

Please note that our discussion today will include forward-looking statements including our guidance for the second quarter and fiscal year 2027. These statements are subject to risks and uncertainties detailed in our SEC filings particularly our most recent 10-K report which identify important risk factors that could cause actual results to differ materially from those contained in our forward-looking statements.

Sami Badri01:23

With respect to guidance please also see the slides and press release that accompany this call for further details. Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure.

Sami Badri01:25

Now, I'll turn it over to Chuck.

Prepared remarks

Chuck Robbins01:41

Thanks, Sami, and thank you all for joining us today. I'm pleased to report that Cisco delivered an impressive start to fiscal 27. We're executing against our strategy and seeing growing demand as customers invest in the infrastructure they need for the AI or SI era.

Chuck Robbins02:01

What gives me the greatest confidence is not just the results we're seeing today but also the opportunities we see ahead. In Q1, we delivered record quarterly revenue of 18.5 billion up 24% year over year and record non-GAAP earnings per share of 1 dollar and 40 cents up 40% year over year.

Chuck Robbins02:06

These are our strongest top and bottom line growth rates in over 15 years.

Chuck Robbins02:21

We are demonstrating strong operating leverage and enhanced earnings power with earnings growing faster than revenue. As a result of this strong performance, we are significantly increasing our fiscal year 27 guidance, which Mark will cover shortly.

Chuck Robbins02:35

Our probable growth generates robust cash flows and fuels consistent capital returns to our shareholders. In Q1, we returned 3.7 billion in value through dividends and share repurchases representing 95% of free cash flow.

Chuck Robbins02:44

Our strong start to fiscal year 27 demonstrates the criticality of networking and security together as agentic AI accelerates.

Chuck Robbins02:54

As customers look to manage increasing traffic, costs, and threats, they are turning to Cisco for our networking expertise, security, and observability solutions and services.

Chuck Robbins03:14

They trust us to help scale, secure, and optimize their environments for the agentic AI era ahead. The depth and breadth of our portfolio enables us to support our customers however they choose to deploy AI, whether in the public cloud, through Neo clouds or sovereign clouds, on premise or at the edge.

Chuck Robbins03:29

We believe we are still early in the networking super cycle driven by AI deployments with enterprise adoption just beginning. In Q1, we saw strong demand with total product orders growing 21% year over year on top of 13% growth a year ago.

Chuck Robbins03:44

We saw strong demand excluding hyperscalers with product orders up 14% year over year on top of 9% growth a year ago. We also saw double digit growth across all geographies and customer markets.

Chuck Robbins03:56

Enterprise product orders in Q1 were up 15% year over year on top of 4% growth a year ago with double digit growth across all geographies and in networking and security.

Chuck Robbins04:09

Public sector orders were up 13% year over year on top of 12% growth a year ago. We saw double digit public sector growth in the Americas and APJC as well as in networking security and collaboration.

Chuck Robbins04:25

Product orders from service provider and cloud customers continue to be broad based growing 47% year over year. This is on top of 44% growth a year ago with triple digit growth in APJC and double digit growth in the Americas and EMEA.

Chuck Robbins04:38

We continue to see healthy demand from telcos with orders up approximately 20% year over year in Q1 on top of 24% growth a year ago. Turning to demand across our product categories.

Chuck Robbins04:56

Networking product orders grew 28% in Q1 delivering our ninth consecutive quarter of double digit growth. In fact we saw double digit growth across every product family service provider routing compute enterprise routing wireless data center switching and campus switching.

Chuck Robbins05:10

These broad based results support our view that we are in the early stages of a multi-year multi-billion dollar networking super cycle as I referenced earlier and we are executing with focus and urgency to capture this incremental opportunity.

Chuck Robbins05:23

Overall our hyperscaler business continues to show strong momentum with AI infrastructure revenue projected to grow to 9 billion in fiscal year 27 more than double fiscal year 26 levels.

Chuck Robbins05:33

Hyperscalers are now deploying our scale across networking architecture and production environments as they extend coordinated AI workloads across data centers.

Chuck Robbins05:44

This architecture combines our Silicon One P200 deep buffered systems market leading Acacia coherent optics and open line systems with multi-rail optical systems coming soon.

Chuck Robbins06:02

Together these products provide a single unified compute fabric with deep programmability and embedded security. In Q1 we secured three new AI design wins two were for our P200 powered systems and data center interconnect and scale across use cases.

Chuck Robbins06:23

The third was for 1.6 terabit optics for a scale out use case. In addition to hyperscaler demand we saw accelerated growth in AI infrastructure orders from Neo cloud sovereign and enterprise customers in Q1 with Nexus data center switches tagged for AI deployments up 47% year over year.

Chuck Robbins06:44

During the quarter we announced a new partnership with Super Micro which expands our secure AI factory with NVIDIA. By integrating Super Micro's high density liquid and air cooled compute into an NVIDIA cloud partner compliant full stack architecture we're delivering more efficient end to end infrastructure for massive AI workloads.

Chuck Robbins06:59

As agentic AI expands security threats are becoming more complex and conversations around sovereignty are intensifying. Our focus is delivering trusted sovereign solutions to help customers scale their data center build outs with confidence.

Chuck Robbins07:10

During the quarter together with AMD and Humane we announced that AMD GPU based AI infrastructure built on Silicon One based systems is now in production in Saudi Arabia.

Chuck Robbins07:23

This enables Humane to offer GPU as a service across training and inference use cases. To meet our customers evolving needs we also introduced our sovereign critical infrastructure portfolio in Europe a year ago.

Chuck Robbins07:32

This portfolio spans networking security compute collaboration and observability and can be configured for on-premise air gapped environments.

Chuck Robbins07:44

In Q1 we expanded to Canada with additional countries to follow. giving government agencies and critical infrastructure providers more control, choice, security and resilience.

Chuck Robbins07:58

Customers are also focused on modernizing their workplaces for humans and agents we continue to see robust demand for our campus networking solutions in Q1 with 14% year over year growth in product orders.

Chuck Robbins08:17

Our next generation portfolio continues to ramp faster than prior product launches and we believe we are still very early in this refresh cycle. Orders for our industrial IoT portfolio grew approximately 50% year over year in Q1 and have now grown at double digit rates for 10 consecutive quarters.

Chuck Robbins08:39

Now shifting to security orders excluding Splunk were up in the mid teens within our security platform orders for firewalls grew over 30% for the third consecutive quarter Cisco AI Defense is helping customers guard against unmanaged AI use across the enterprise and is protecting more than 2 trillion tokens per month.

Chuck Robbins08:52

Our work with Workday Agent Passport ServiceNow and Defense Claw with NVIDIA OpenShell demonstrates how we're expanding our ecosystem and building trust into the use of agents in daily operations.

Chuck Robbins09:12

Earlier this week we announced that we are integrating Anthropic's Claude Mythos cybersecurity model into Cisco AI Defense for adaptive AI red teaming. This provides automated continuous testing across enterprise systems empowering defenders to stress test AI systems with frontier adversary reasoning.

Chuck Robbins09:26

Turning to Splunk the platform is helping solve some of the most pressing challenges organizations face in the AI era. A Splunk study found that urgency to deploy agents is outpacing enterprises ability to monitor and secure them.

Chuck Robbins09:38

With Splunk we deliver a Commendata platform that enables customers to monitor and enforce guard rails on agent behavior while also helping them understand and manage tokenomics.

Chuck Robbins09:57

This gives them greater confidence and predictability as they look to optimize both the business value and the cost of AI. In collaboration with the leading hyperscaler Splunk is exploring how AI agents can help security teams investigate threats and coordinate responses more efficiently while keeping analysts in control.

Chuck Robbins10:33

This builds on our strategy to strengthen security operations as threats go grow more complex we'll have more to share later this month now on to our innovation We are focused on four often overlapping objectives Number one simplifying network operations number two scaling infrastructure for agentic AI number three reimagining security and trust for agentic AI and four delivering intelligent workplace experiences Last quarter we highlighted Cisco Cloud Control as a breakthrough in simplifying operations.

Chuck Robbins10:44

Since launch more than 6,000 customers have signed up and can increase productivity by accessing multiple Cisco and partner products through a single user interface.

Chuck Robbins11:05

We are building integrations within the platform including AI Canvas Cisco IQ and the recently launched Cisco Model Foundry. Cisco IQ now has more than 17,000 customers nearly doubling quarter over quarter and visibility into 23 million devices accelerating vulnerability tracking from days to minutes.

Chuck Robbins11:18

To scale infrastructure and improve the efficiency of AI factories we recently announced plans with NVIDIA to develop the ultra dense small form factor pluggable or USFP optical module.

Chuck Robbins12:27

We expect USFP to deliver 4x the bandwidth density and 1.3 times the power efficiency of current models we also plan to create an open industry USFP specification to drive adoption our advances in security and trust are ongoing as we continue to introduce resilient and quantum safe innovations we've expanded support for live protect across more of our campus networking portfolio extended quantum readiness to Wi-Fi 7 access points and plan to provide quantum safe communications across most of our core portfolio by the end of this calendar year we continue to develop intelligent workplace experiences recently launching Claude managed agents and dialogue an agentic harness in Webex our teams continue to drive this work forward through their innovation productivity and commitment to leveraging AI tools at the start of fiscal 27 we provided an AI agent for every employee we expect to continue accelerating AI adoption helping our employees execute at speed now I'll turn it over to Mark for more detail on the quarter and our outlook

Mark Patterson13:29

Thanks Chuck I'm proud to report that we delivered another record quarter exceeding the high end of our guidance across revenue operating margin and EPS while also delivering strong operating cash flow for the quarter total revenue of 18.5 billion was an all-time high up 24% year on year non-GAAP operating margin rose to 37.8% and non-GAAP earnings per share was $1.40 up 40% year over year demonstrating continued operating leverage total product revenue was 14.7 billion up 32% year over year and services revenue was 3.9 billion up 1% year over year product revenue growth was led by networking accelerating to 43% year over year growth and brought with broad strength across the portfolio led by triple digit growth in AI infrastructure and double digit growth in data center switching and campus networking.

Mark Patterson13:45

Security delivered a strong quarter up 7% reflecting growth in Splunk network security and SASE collaboration was up 8% with double digit growth in devices and growth in contact center.

Mark Patterson14:53

Turning to our recurring metrics total RPO was 46.2 billion up 8% with product RPO up 7%. total ARR ended the quarter at 32.7 billion an increase of 4% with product ARR also up 4% total subscription revenue represented 44% of Cisco's total revenue total software revenue was 6.1 billion up 8% Q1 product orders were up 21% year over year with broad based strength across geographies technologies and customer markets all geographies saw double digit growth with the Americas up 18% EMEA up 12% and APJC up 57% across customer markets growth was led by service provider and cloud up 47% We also saw strength in enterprise and public sector which were up 15% and 13% respectively.

Mark Patterson15:10

Total non-GAAP gross margin came in at 65.6% slightly above the midpoint of our guide. and down 250 basis points year over year as hardware revenue growth significantly outpaced software and services revenue growth.

Mark Patterson15:25

Non-GAAP product gross margin was 63.7% down 350 basis points primarily driven by higher hardware mix and elevated memory costs. partially offset by productivity improvements and price increases.

Mark Patterson15:33

Non-GAAP services gross margin was 72.9% up 220 basis points.

Mark Patterson15:48

As hardware continues to increase as the percentage of our overall revenue mix and with hyperscaler revenue expected to more than double year over year in FY27 we are driving record scale and profitability in our business.

Mark Patterson16:14

In FY27 we expect AI hyperscale revenue to represent 12% of total revenue up from 6% in FY26 At the same time total headcount has declined by a low single digit percentage driving an expected revenue per employee increase of approximately 19% based on our updated FY27 guidance.

Mark Patterson16:31

The acceleration of these outsized growth opportunities balanced with financial discipline enables us to increase our operating margin from 34.8% in FY26 to an expected 36% in FY27.

Mark Patterson17:09

Our non-GAAP tax rate was 18.5% for the quarter shifting to the balance sheet we ended Q1 with total cash equivalents and investments of 15.8 billion operating cash flow was 4.4 billion up 36% driven by strong revenue growth and net income from a capital allocation perspective we returned 3.7 billion to our shareholders during the quarter comprised of 1.7 billion for our quarterly cash dividend and 2 billion through share repurchases.

Mark Patterson17:27

There is 6.1 billion remaining under our share repurchase program. We remain focused on making strategic investments in inorganic innovation to capitalize on the significant growth opportunities we see ahead as well as complementary M&A opportunities.

Mark Patterson17:38

In Q1 we closed the acquisition of Wide Field Security to accelerate our Splunk agentic SOC and help stop identity threats at machine speed.

Mark Patterson17:50

These investments continue to be underpinned by our commitment to discipline spend management. It is this powerful combination that continues to strengthen the robust earnings power of our business.

Mark Patterson18:05

Support strong cash flow and enable us to return significant value to our shareholders. In summary we achieved record performance for the quarter with top and bottom line results that exceeded our expectations.

Mark Patterson18:14

This performance reflects our accelerated pace of innovation across our portfolio strong order momentum and disciplined expense management.

Mark Patterson18:26

Looking ahead you can expect us to remain focused on delivering durable growth and maintaining financial discipline while driving operating leverage and continued capital returns.

Mark Patterson19:09

Turning to guidance for fiscal Q2 our guidance is as follows we expect revenue to be in the range of 18 billion to 18.2 billion we anticipate non-GAAP gross margin to be in the range of 65% to 66% non-GAAP operating margin is expected to be in the range of 36% to 37% Non-GAAP earnings per share is expected to range from $1.34 to $1.36. We are assuming a non-GAAP effective tax rate of approximately 18.5%. Our raised guidance for fiscal year 27 is as follows.

Mark Patterson19:27

We expect revenue to be in the range of 74.8 billion to 75.8 billion non-GAAP earnings per share is expected to range from 5 dollars and 47 cents to 5 dollars and 53 cents Sammy let's now move into the Q&A

Sami Badri19:39

Thank you Mark before we start the Q&A portion of the call I'd like to remind analysts to ask one question and a single follow-up question at the same time operator can we move to the first analyst in the queue

Operator19:45

Thank you sir Amit Daryanani with Evercore ISI your line is open

Amit Daryanani20:37

Yep, thanks a lot. Good afternoon everyone and congrats on some really impressive numbers. Um I guess maybe to start with you know you folks are raising your fiscal 27 AI revenue target to 9 billion from I think it was seven and a half billion last quarter could you spend a little bit of time on what's changed in the 90 days is it just larger deployments at existing customers or you have better visibility with TSMC in terms of allocation love to understand like what's getting better is there any skew on Silicon One versus optics that would be helpful uh and then my follow-up really you know Mark on your side the back half guide implies revenues will actually accelerate really well to like 19.3 billion run rate versus the 18.1 in Q2 but I think EPS uptick in the back half is a bit more muted at a buck 38 uh can you just talk about the puts and takes in the back half that's happening under the revenue line that would be really helpful thanks and congrats again

Chuck Robbins21:10

Hey this is Chuck I'll take the first one thank you and thank you for the kind words teams are doing a fantastic job I think on the 9 billion I think it's being 90 days in having a little more clarity we had solid you know order growth in Q1 and we're just further along in the year and so I think it's nothing more than just continued strength in the flow from the from our those customers and the and 90 days more visibility that that gave us the confidence to raise it from seven and a half to nine Mark on the second one

Mark Patterson21:58

Yeah sure Amit just to give you a little bit of color obviously you know second half we do have tougher comparison a little bit less visibility than we would have in Q2 anyway but overall I think if you kind of just take a step back you know FY26 was a record year for us on both the revenue side as well as EPS and growing the top line 12% and the bottom line 14% and both of those with our updated guide you're seeing significant acceleration so the top line moving from 12% all the way up to 19% and the bottom line moving from 14% growth to 27% growth so really strong operating leverage and really good acceleration off of what was a record year last year Thanks.

Sami Badri22:03

Thank you, Amit. Michelle, can we move to the next analyst in queue?

Operator22:09

Thank you, sir. Ben Reitzes with Melius Research, your line is open, sir.

Ben Reitzes23:01

Yeah, hey guys, thanks. It's a pleasure to be speaking with you and some nice results here. Um Chuck could you talk about your exposure to the Neo cloud space and whether that's in the AI revenues you're guiding to and you know there's some folks that think that that could decelerate you know as they try to see what their funding situation is like throughout the year and wondering what your exposure is there and then just overall with regard to the campus cycle my follow-up is with regard to where are we in it you know is there why would it decelerate you know from here in terms of the campus upgrades given all the security concerns that are out there just a little more color around where we are in that cycle that would be great and thanks again guys

Chuck Robbins24:25

Thank you Ben so I would say I would characterize our Neo cloud exposure to being relatively immaterial we certainly have business with them but we've been very conservative relative to the credit situations and to answer the second part of that question the Neo clouds we do not include in our AI revenue that's simply the hyperscalers secondly on the campus cycle I think you're right we are you know we saw very strong results across the enterprise networking portfolio this quarter I think double digits across all of networking all the networking categories in the campus switching side I believe that we are in the quarter we saw of the switching we sold only 9% was really coming from the new portfolio and so again we see this being very early and I think your assumption relative to the impact of Mythos and some of the upgrade stuff I think are quite accurate we don't anticipate any meaningful change in likely just more customers looking at modernization for bandwidth reasons relative to their rollout of agentic as well as just security issues and modernization relative to the post Mythos era.

Sami Badri24:31

Thank you, Ben. Michelle, can we move to the next analyst in queue?

Operator24:36

Thank you. Tal Liani with Bank of America. Your line is open.

Tal Liani25:33

Hi guys, I hope you can hear me um I have two questions first Chuck you said that the prepared remarks that this is a multi-year we're at the beginning of a multi-year cycle and the question is what gives you the confidence to say and you know the alternative would be this is just a cycle where at the peak of a cycle etc I'm just giving kind of the alternative view so what gives you the confidence to think that this is a multi-year cycle and this is not just peak cycle of spending by hyperscalers And the second question that is we speak a lot about campus but can you talk about the readiness or the deployment of enterprise networks for AI meaning are you seeing enterprises preparing for AI updating networks or what are your expectations on that front thanks

Chuck Robbins25:53

Thank you, Tal. So we do think it's a multi-year cycle and we think that it's obviously billions of dollars and let me give you five drivers that I think are the key to why I have a high degree of confidence around the sustainability of this growth.

Chuck Robbins26:06

First is the hyperscale success we've had 18 AI design wins in the last five quarters and obviously we raised the AI guide to 9 billion more than double what it was last year so that's the first that we expect to continue.

Chuck Robbins29:10

The second is the campus network refresh and modernization we saw we've seen double digit order growth multiple quarters we're still in the very early stages less than 10% on the transition so that's the second big driver the third and connected to that but more broad is the post mythos opportunity we're beginning to hear customers that are attributing orders to early mythos implications we heard it in Europe as an example with service providers relative to the managed services CPE that they're needing to upgrade for their customers but and while customers want to move fast they want to do this right so they're taking the appropriate time to plan to design the right architecture because they know if they're going to go through doing this they gotta get the architecture exactly right so that's the third the fourth is sovereign infrastructure we all know that countries around the world beginning in Europe are looking for infrastructure that they feel like they have operational control over and we are fortunate that we're one of the few companies that has maintained a robust on-premise portfolio so we're able to deliver we announced a year ago sovereign critical infrastructure for Europe we expanded and launched it for Canada I recently pre-announced it in India and we'll continue to roll it around roll it out around the world in addition to the work we're doing with sovereign cloud providers like Humane G42 and other sovereign nations the fifth and final one is this acceleration we're seeing of the hybrid data center architecture with our enterprise customers so our enterprise customers will be running AI applications in the cloud but they are also investing heavily in private data centers they want to run open weight and open source models in their own data center they want to train on their own data in their own data centers and that's why we've seen nine out of the last 11 quarters we've seen double digit order growth in our enterprise data center networking business so we feel like each of these areas all five of these are each are multi-year multi billion and they're all they all feel like they're in relatively early stages so that's what gives us the confidence on the sustainability and I think on the readiness of the enterprise for AI I think it's a lot of what I just described as well as a real focus on agentic security agentic identity agentic observability as well as just the new security architecture that's needed for the AI era and so I was at one of the major banks in New York just a few hours ago before earnings and we had a long discussion about this very topics and I think that's generally what we see going on.

Sami Badri29:15

Thank you, Tal. Michelle, can we move to the next analyst in queue?

Operator29:20

Thank you. Meta Marshall with Morgan Stanley. Your line is open.

Meta Marshall29:58

Great. Thanks. Um just a couple of questions just in terms of um the strength in the Asia PAC orders this quarter I assume kind of most of that is due to the sovereign clouds but just wanted to kind of get any further detail there and then just on the security business and kind of what you're seeing there in terms of the Splunk business I know we've had some you know license to subscription transitions if you could just kind of give an update as to where we are there and kind of the impact of that to the security growth thanks

Chuck Robbins30:46

Thanks Mita I'd say APJC did show incredible growth and you know it was very balanced if you look across the segments we had enterprise in excess of 30% public sector in excess of 70 service provider and cloud in triple digits so it was and it was all theaters all architectures all segments and again I think it to your point it was sovereign demand public sector demand telco investment and great performance in the campus networking side and so we see them also focused on the last day of support opportunity and some of the post mythos refresh early activity as it relates to what was the second question again

Meta Marshall30:46

Security

Chuck Robbins32:23

Oh yeah security sorry I'll let Mark talk a little bit about the Splunk numbers but we actually saw some really good signs this quarter on the security front so the first is that our core Cisco security ex-Splunk order growth was 15% which is the best it's been in probably three years we saw the firewall business which is something the team's worked hard on refreshing and really becoming competitive again we saw the third consecutive quarter in excess of 30% growth and then our zero trust secure access portfolio this is a product that didn't exist three years ago we now have 5400 customers we added almost 800 more customers in Q1 and that is that's a technology that is zero trust and there's also an element of it that is AI defense related and at the AI defense layer we're now protecting 2 trillion tokens per month and we're approaching 500 customers that have AI defense and so we're seeing good activity there we're using Splunk as a platform for AI security and we're also seeing customers really buy into the security and networking coming together on monitoring workloads east west traffic segmentation with technologies like HyperShield and Live Protect and so we see a lot of good positive momentum and security front Mark you want to talk about Splunk and just the data there

Mark Patterson33:28

Yeah and just to add one data point to the Asia-Pac question that you had you know we saw really good strength and several countries actually within Asia Japan really strong China Singapore Korea and then Australia as part of that as well and they had a really good quarter too so really good breadth in terms of the overall growth and then on the security front you know I think as we exited last year and we gave you the outlook for this year we said that you know Q1 to really expect kind of low single digit revenue growth and that Splunk would turn positive and begin to improve as we move through the year as well as the overall security number to really improve as we went through the year so I'd say with the 7% that we posted in Q1 I think we're at or really really a little bit above the expectations that we set out for the year and we feel good about you know turning the corner on both of those and starting to see improved growth as we move through the year

Sami Badri33:32

Thank you, Mita. Michelle, can we move to the next analyst in queue?

Operator33:37

Thank you. Joseph Cardoso with JPMorgan. Your line is open, sir.

Joseph Cardoso34:23

Hey, good afternoon, gentlemen, and thanks for the questions here. Um for the first one wanted to just get a temperature check on the supply side of things I think over the last couple of quarters you sounded pretty confident around your ability to secure what you need and then some probably and was just curious you know with a couple more months of visibility on the bell any change on that front particularly around things around silicon memory and whether you're seeing anything tightening and then as the second question and maybe this is piggybacking off of Amit's earlier question you know gross margins are holding up much better than envisioned even relative to the two are looking at the 2Q guide there I was hoping you can maybe help bridge between pricing cost and mix behind that and then as we think about the larger AI target for the year any way to think about gross margin progression through fiscal 27 and how we should be thinking about the exit run rate and the puts and takes thank you

Mark Patterson34:28

Yeah, let me take the first one and then I may get you to just repeat the second one real quick

Mark Patterson34:28

I got it for you

Mark Patterson35:30

The the first one just around supply we feel really good you know the team's done a great job and really leveraging our financial strength and looking all you know up and down the supply chain whether it's silicon it's PCBs it's power supplies it's memory and optics as well and really engaging where we need to in terms of long term strategic supply agreements you saw a new multi-year memory agreement that we entered into this quarter so big increase obviously in our advanced purchase commitments as a result we're seeing you know not a lot of issues at all really in terms of supply the biggest one there is probably optics and I think that we see that improving here over the next quarter but overall feel really good about the supply that we have and the ability to meet not only the raised guide for the year but I think that if demand turns out to be stronger we can probably meet that as well so and the second one I'm sorry

Mark Patterson35:36

He was asking he said gross margins are holding up better than perhaps were expected what are the contributors to staying where

Mark Patterson36:08

Yeah I think so we still have the same you know headwinds in terms of component prices and mix is is is the big thing in terms of hardware growth just in general really outpacing the software growth that you're seeing I think that for the year most of the expectations were for a gross margin number at just under just shy of the 65% and we were comfortable with that for the full year.

Sami Badri36:15

Thank you, Joe. Michelle, can we move to next analyst in queue?

Operator36:20

Thank you. Simon Leopold with Raymond James. Your line is open.

Simon Leopold37:02

Thank you very much for taking the questions. First one I wanted to ask was you guys have shown some real progress with the AI back end success within the systems value can you give us a rough idea of the mix between top of rack switching in the spine versus the routing use for scale across rough order of magnitude split is all I'm looking for and then as the follow-up I'm just wondering if you could update us on how much of your growth has come from price changes versus unit growth I know it's not precise but also rough idea of that would be appreciated thank you

Chuck Robbins37:47

Yeah I'll take the first one then Mark you can take the second one we don't I don't have the breakdown exactly between those technologies I think the way I would think about it is in the last five quarters we've had 18 design wins and we've had them across you know scale out architectures both systems and then scale across and systems as well as optics we talked about in the prepared remarks two wins with the P200 for scale across and then a 1.6 terabit scale out optics win and so we just we're actually active in all the places that you mentioned we just haven't given those numbers at that level of detail so Mark you want to talk gross margin

Mark Patterson38:20

And maybe just to reiterate you know we've talked about just the split between optics and systems being roughly 50 50 that'll vary on any given quarter but that that continues to be sort of what we're seeing um you know in terms of the price versus unit and Simon appreciate that you mentioned it it's certainly an imperfect science but I think that the estimate that we gave you a quarter ago was that we expected revenue to be impacted about five points for the full year I think that's probably a pretty good estimate still for the year

Sami Badri38:24

Thank you Simon Michelle can we move to the next analyst in queue

Operator38:29

David Vogt with UBS your line is open sir

David Vogt39:30

Great thanks guys for taking my question. So maybe Chuck the first question I know you don't want to be on this AI order treadmill but just by just really quick math it looks like we had a little bit of a sequential downtick in AI orders taken from hyperscalers in the quarter I know the industry is somewhat lumpy and not linear can you maybe talk to kind of how you're seeing that develop as the year progresses and characterize kind of like the depth of your conversations because I think later in the deck you talked about potential wins for not only P200 but G200, G300 and other programs so just love to kind of get your thoughts on how those conversations are progressing and I'll give Mark my follow-up quickly you know Mark maybe just a follow-up Simon's question I'll just kind of take your AI revenue guide it looks like you know the incremental growth coming from AI revenue today is about two points faster than we thought 90 days ago and pricing is relatively the same is it sort of the assumption that campus is kind of that incremental driver that kind of rounds out the upside to the outlook versus 90 days ago is that the right way to think about kind of the moving parts in the revenue guide thank you

Chuck Robbins40:55

Yeah, David, on the AI order front, I'd say on a year over year basis, we saw really nice growth and I think if you look back at last year I don't remember the exact number but it was a billion and some change in year one in first quarter and then we ended up at 9.3 billion as it escalated during the year so while I don't expect there's normal linearity in this business at all I think you're right it's going to be lumpy and there's going to be some quarters that are going to be big others that are going to be smaller and that's why we made the decision just to go to the revenue side so that it's just cleaner and we don't get into these gyrations about what how many orders did you take in week seven of Q1 some color around the different technologies obviously the P200 is being very successful we've had lots of wins with the G200 and the scale out space as we talked about I will say that we've begun to ship the G300 now and it's now in labs which is a really good sign for us and we feel really good about that and obviously we continue to have more wins in the optic space the design win we had this quarter at the 1.6 terabit optic was a client side win and it was our first client side optics win at this particular hyperscaler so we feel good about the continued progress that we make in that space

Mark Patterson42:01

Yeah David just coming back to you on the numbers so you know we we've taken our guide up to 19% on the top line about eight points of that growth is is attributable to hyperscale and 11 points then would be attributable to our ex hyperscaler more sort of our core business so if you break down you know the overall guide we raised by two and a half billion 1.5 billion of that was hyperscale and a billion dollars was our core sort of ex hyperscale business and in terms of what's driving it you know you mentioned campus but it's much broader than that it's not just campus I think if you look at really all of the product families within networking for example every one of them grew double digits this past quarter so we also saw double digit growth across every region and double digit growth across every market customer market as well so it's broad based and the core continues to do quite well

Sami Badri42:05

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

Operator42:12

Thank you. Carl Ackerman with BNP Paribas Exane, your line is open, sir.

Unidentified speaker42:36

Hi, this is Sam Feldman on for Carl Ackerman. Thanks for taking my question. So we believe that Silicon One is primarily integrated into your AI products while enterprise products rely on external silicon. First has there been any change in thinking to the fiscal 29 integration timeline and then second what does the nine billion of AI sales imply with respect to your mix of internal silicon

Chuck Robbins42:47

Okay I would let me answer the first one then I'm not sure I know the answer to the second one

Chuck Robbins43:22

Yeah yeah so on the first one we do have now Silicon One that has begun to be implemented in portions of our enterprise networking portfolio and the fiscal year 29 target of having all of it converted is still on track so we're we feel good about where we're headed with that on the second question you asked the split between Silicon One revenue and non Silicon One revenue obviously in the hyperscaler space and the 9 billion that's other than optics it's 100% Silicon One based platforms so

Sami Badri43:28

Thank you Sam Michelle can we move to the next analyst in queue

Operator43:33

Thank you Johnny Conte with Deutsche Bank your line is open

Unidentified speaker43:55

Yeah thank you for giving me some time to ask some questions congrats um perhaps one on P200 and scale across you won three P200 scale across design wins with separate hyperscalers my question is is what's the catalyst to Silicon One winning the sockets and how big could scale across become as the model gets larger

Chuck Robbins44:43

Thank you Johnny I think that it's about performance it's about power consumption and it's you know and I think that's it I mean it's really about performance and power and the and also there's just this whole focus on diversity of silicon inside this space and I'd say if you want to talk about the size of this market we did a study and we think that the bandwidth requirements are going to increase 14x in this space so the TAM is is quite large and continues to grow so we see this as a great opportunity and we're really optimistic and pleased with the number of wins that we're getting with the P200

Mark Patterson45:05

Yeah and the only thing I'd just add is I think as you look at our offering it's probably the most complete offering in the industry with silicon the Acacia optics optical multi-rail to come and calendar 27 so I think we do a really we really measure up quite well here

Sami Badri45:09

Thank you Johnny Michelle can we move to the next analyst in queue

Operator45:15

Thank you Atif Malik with Citi your line is open

Unidentified speaker45:40

Hi it's Adrian Colby for Atif Malik thank you for the question I wanted to ask about the optic side of the business I know in the past you've talked about Acacia at about a 1 billion or a little bit above that order run rate didn't know if you could talk to if that's expanding and then hoping to get a little bit of an update on the timing of Cisco's newer multi-rail line system and also timing around the USFP product thank you

Chuck Robbins45:51

Yeah, so thanks, Adrian, for the question. I think on the optic side, yeah, we see this as a really sizable

Chuck Robbins46:14

Opportunity for us and seeing a ton of growth there. we actually had a billion dollar quarter just last quarter on the optic side so it's growing substantially Q1 was a record Q1 for us as well and really see the demand increasing there as we move forward

Chuck Robbins46:32

And the USPF platform is still a couple years out probably a few years out and the multi-rail system is I think Mark mentioned earlier is the first few months of calendar 27.

Sami Badri46:37

Thank you Adrian Michelle can we move to the next analyst in queue

Operator46:42

Thank you Ben Bollin with Cleveland Research your line is open sir

Ben Bollin47:35

Thanks good afternoon everyone I appreciate you taking the question could you talk about what we should expect from services it's kind of come off its lows but really not intensifying or accelerating any thoughts on you know when and how that gets better and then as a follow-up a little bit of a bigger picture question it does seem like there's some high level thoughts that raw material capacity adds are happening in the kind of picks and shovels for material side of things but maybe the volume of data center shells that come online into 2027 well I guess 2028 and beyond maybe there's more questions there curious how you think about the potential imbalance where maybe we are in an oversupply situation from a raw material perspective and don't have anywhere to put that stuff in 2028 and beyond thanks

Mark Patterson48:09

Yeah, I'll take the first one Ben thanks for the question. So on the services piece you know we've seen significant uptick in hardware revenue actually grew over 50% for Q1 and the thing with services is it's ratable and our hyperscalers don't attach a lot of services as well so but what you're going to see is that business is going to continue to improve we broke into the positive territory this quarter I'd look for that to have some continued improvement as we move through the year

Mark Patterson48:44

And on the demand side from a data center perspective and especially as we get out to 28 and beyond I actually don't foresee I think the geopolitical side of it's going to get worked out and I think that I think given the demand that we see today these data centers are going to get built and so I don't think we don't feel like there's much risk on the resources side and anything that would surprise us relative to the data center build out over the next two years

Sami Badri48:48

Thank you Ben. Michelle can we move to the final analyst question?

Operator48:53

Thank you Michael Ng with Goldman Sachs your line is open sir

Michael Ng49:36

Hi good afternoon thanks for the question um first for Mark I was just wondering if you could just provide a little bit more color around the margin outlook for the second quarter and for the full year um I think it was better than expectations despite you know the growing hardware and hyperscale mix so you know what's been coming in better and then Chuck just as a follow-up I was just wondering if you're seeing any early signs of demand shifting outside of the United States for data center AI networking just given you know the results of the midterms and the risk of capacity becoming harder to originate in the US thank you

Mark Patterson50:42

Hey Michael so I'll take the first one yeah I think that you know the two big factors obviously impacting gross margin are the component costs increases that we we've been seeing there's a lot of efforts to combat that including some of the price increases that that you've seen but also these long term agreements that we're entering into to get supply and in some cases prices as well and then there's the mix but offsetting that is really a number of productivity improvements that we've had around memory as well as just the scale and efficiency that we're able to drive at this much higher revenue level than we've seen in the past I actually think that that that gross margins are pretty much right on target you know we were just slightly above the midpoint of our guide for Q1 and I think that most have expectations of a full year gross margin of just shy of 65% and I think that's a reasonable expectation I think that we should be you know right on there

Chuck Robbins51:32

On the data center question that you have, we have not seen a shift of demand that we expected in the United States to go outside the country uh as of yet and I I candidly don't expect that to be the case. I think you've got a combination of you still have you know plenty of states that that have not declared moratoriums. You have uh obviously you gotta have the energy right in those states, but we've also seen some of the at least one of the governors uh has come out and said that they're open to data center builds, they just need to be done in the right way with concern and commitments to the community, concerns and commitment to maintaining uh energy costs and things of that nature. And I I think this is too important to our country.

Chuck Robbins51:53

And it's uh it's too important to the industry uh it'll get resolved uh and I think that the last thing we want is for data centers to end up being built outside the United States and I think that's uh I think that's how this will end up but obviously there's a lot of political dynamics in it right now so but thank you for the question.

Sami Badri51:58

Thank you Mike I'm going to hand it over to Chuck for some closing remarks.

Chuck Robbins52:23

Yeah I just want to thank everyone for joining us today uh and I want to reinforce just how confident I am in Cisco's future and candidly the sustainability of the performance that that we've seen We're executing really well against our strategy. The teams are doing a great job. We're delivering strong results, and we're seeing the investments that we made over the past several years, in some cases, a decade, they're leading into real momentum.

Chuck Robbins52:56

The other thing I would point out is that this business is more efficient and has greater scale than anything I've seen um if you just look at our revenue based on the guide we put up today and you go back two years we're going to generate 19 billion in incremental revenue and we're going to do that with less headcount than we had at the beginning two years ago and so the efficiency that we're seeing is is just unprecedented and the teams are doing an incredible job of scaling the business and also driving productivity.

Chuck Robbins53:25

Um I also gain a lot of confidence from what I'm hearing from our customers and our partners we are truly in the very early stages of a multi-year networking super cycle and we're confident in our ability to continue capturing the opportunity that it represents for Cisco I believe we have the right strategy we have the innovation the right team and we're focused on translating that into sustained profitable growth I want to thank our teams for their continued execution and thank our customers partners and shareholders for their trust and Sammy I'll turn it back over to you

Sami Badri53:38

Thank you Chuck Cisco's next quarterly call which will outline our second quarter fiscal year 2027 results will be on Wednesday February 10th 2027 at 1 30 PM Pacific Time 4 30 PM Eastern Time.

Closing

Operator53:40

This concludes today's call.

Operator53:47

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Operator54:11

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