Cisco Systems, Inc.

Welcome to Cisco's first quarter fiscal year 2021 financial results conference call. At the request of Cisco, today's conference is being recorded. If you have any objections, you may disconnect. Now I would like to introduce Marilyn Mora, Head of Investor Relations. Ma'am, you may begin. Thanks, Michelle. Welcome everyone to Cisco's first quarter fiscal 2021 quarterly earnings conference call. This is Marilyn Mora, Head of Investor Relations. and I'm joined by Chuck Robbins, our chairman and CEO, and Kelly Kramer, our CFO. By now, you should have seen our earnings press release. A corresponding webcast with slides, including supplemental information, will be made available on our website in the investor relations section following the call. As is customary in Q1, we have made certain reclassifications to prior period amounts to conform to the current period's presentation. Income statements, full GAAP to non-GAAP reconciliation information, balance sheets, cash flow statements, and other financial information can also be found in the financial information section of our investor relations website. Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results and we'll discuss product results in terms of revenue and geographic and customer results in terms of product orders unless stated otherwise. All comparisons made throughout this call will be on a year-over-year basis. The matters we will be discussing today include forward-looking statements, including the guidance we will be providing for the second quarter of fiscal 2021. They are subject to the risks and uncertainties, including COVID-19, that we discuss in detail in our documents filed with the SEC, specifically the most recent report on Form 10-K which identifies important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. 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. With that, I'll now turn it over to Chip.

Thanks, Marilyn. First, I want to start off by saying I hope everyone is safe and healthy. I also want to thank our employees for their dedication to our customers and their relentless focus on innovation. Cisco is off to a solid start in fiscal 2021, and I am proud of these results. Our teams are executing with excellence, and we continue to make steady progress on our shift to a software and subscription-driven model. We are encouraged by the signs of improvement in our business as we continue to navigate the pandemic and other macro uncertainties. Our focus is on winning with a differentiated innovation portfolio, long-term growth, and being a trusted technology partner for our customers. Over the last few quarters, we've successfully adjusted to new demands by making necessary changes and shifts within our business. We remain closely aligned with our customers to provide them with the mission-critical technology they need to stay resilient and move towards adopting new hybrid work models. In fact, we see many great opportunities ahead as every company in every industry is accelerating its digital first strategy. Our customers are rethinking how they support and serve their customers and their employees. They need speed, agility, and simplicity. Many customers have shared with me that they are compressing years of work into just a few months. This is why we are driving new innovation that helps our customers connect, secure, and automate their environments at a faster pace than ever before. With the right technology and tools, we can be even more effective and productive, and that's what we intend to deliver for our customers. Going forward, we are focused on building innovation that helps our customers and Cisco thrive in a hybrid cloud world. As we think about the next few years, there are six key areas we are focused on. First is delivering optimized application experiences for our customers. The application is the lifeline for all organizations and is increasingly how end users access their products and consume their services. Second is continuing to deliver the secure networking capabilities that Cisco is trusted for as a service, offering even greater simplicity and automation. The third area is focused on helping communications providers succeed with significant architectural transitions like 400 gig and 5G. These will be done with a combination of our software assets, silicon and optics capabilities, as well as complete integrated systems. We will deliver these technologies on-prem as well as from the cloud. Fourth is accelerating the future of work. As many enterprises look to adopt new hybrid work models with more remotely distributed workers than before, we are focused on helping them deliver consistent experiences, whether working remotely or in the office, from connectivity to collaboration to security. Fifth is supporting our customers with their mission of securing everything they do. We will continue to deliver the end-to-end intelligence security architecture designed to keep their data private and their people secure. And the final area is around developing edge technologies that allow application developers to run distributed applications while securely accessing and managing distributed data. We believe that these key areas will drive our growth and success over the coming years. Now let me share more on our Q1 results. As I mentioned earlier, we saw encouraging signs of improvement in certain areas of our business. Some large customers who are already in the midst of modernizing their infrastructure continue to do so, as we've seen with the ongoing success of the Catalyst 9000. WebEx, our security solutions, and business resiliency offers also saw strong growth as our customers are trusting us with their most critical projects. We are succeeding in transforming our business model with 78% of our software revenue now sold as a subscription, and we saw double-digit growth in our deferred product revenue. As I mentioned on the last call, you will see us deliver more of our technology as a service to provide more choice and flexibility across our entire portfolio. Our new technology pipeline remains strong as we continue to accelerate our pace of innovation. At our recent partner summit, we introduced a number of new technology solutions that help our customers adapt, accelerate, and simplify their operations through new agile automation platforms. Relative to our infrastructure platforms, our Cat9K family of switches and Meraki cloud-based platforms continue to perform well, as our customers build highly secure, resilient, and scalable networks as the foundation for their digital strategies. Our customers are also increasingly running applications across multiple cloud environments, and this requires next-generation architectures with automation, security, and insights. We recently announced new cloud and SD-WAN platform innovations to help our customers connect, secure, and automate across their hybrid environments with greater visibility into their applications. We are making great strides with our web-scale customers with our fourth consecutive quarter of strong double-digit growth. This reflects their belief in our strategy going forward and their ongoing commitment to invest with us to build out their future architectures. We also continue to help our customers operate in a multi-cloud environment and optimize their overall cloud experience. In Q1, we extended these capabilities through Cisco's cloud on-ramp solutions, which deeply integrate cloud services from AWS, Google, and Microsoft to better enable end-to-end visibility and manageability of their distributed applications. In security, we delivered another solid quarter of growth driven by our broad cloud native portfolio. SecureX, which offers a simplified security experience, saw strong adoption as it has been deployed across more than 4,000 organizations since it became globally available in June. As our customers' employees remain working from home, they are looking to bolster their existing security efforts with unified user and endpoint protection. We continue to benefit from the shift to cloud-based security capabilities and had robust growth in our secure remote worker offer that includes Duo, Umbrella, and AnyConnect. Our customers are also looking for highly secure, high-speed, low-latency connectivity to the Internet. This is leading to the convergence of networking and security services in the cloud to securely connect any user or device to any application to provide the best experience. Our world-class security team recently delivered new innovations, including extended detection and response, zero trust, and secure access services edge, By combining our leading solutions, SD-WAN and Umbrella, with our new secure Internet Gateway capabilities, our customers can deploy solutions to enable their users to simply and securely access cloud workloads and SaaS applications. Moving to our collaboration portfolio. Business continuity and resiliency remain top of mind for our customers. Organizations are focused on creating flexible work environments to drive productivity while ensuring their employees remain safe. The future of work will be a hybrid model, with employees both in the office and at home, and we are leading in this area. Our collaboration portfolio is empowering organizations and teams to be more productive and secure as they adapt to new business, healthcare, and learning models. We are providing seamless collaboration with anyone, anywhere, while enabling consistent experiences for hybrid workplaces and continuing our leadership and security. Cisco WebEx saw significant increased usage and solid adoption as customers look to us for a flexible work solution that also enables privacy and security. Whether at home or in the office, our customers need a solution that brings together meetings, calling, file sharing, and messaging with a simple and highly secure user experience. Last month alone, WebEx had nearly 600 million participants, almost double the number we had in March. We recently launched new return to office solutions that provide actionable workplace analytics with WebEx Room Navigator and integrated collaboration device sensors that help ensure a safe working environment. We are also accelerating our innovation with new offerings such as WebEx Legislate to keep critical functions of global governments running along with capabilities like breakout rooms, virtual huddle spaces, and noise cancellation. We are reimagining every aspect of the collaboration experience with built-in AI technology, security, and integrated workflow applications to create a more intelligent work environment and to improve productivity. Lastly, AppDynamics. Our customers are moving to highly distributed cloud-native applications which require greater observability and insights. By combining AppDynamics and ThousandEyes, our cloud-based networking monitoring platform, we are delivering full-stack observability to help our customers better manage their applications and improve their digital experiences through end-to-end visibility, deep insights, and automated action. Now I want to share more on our CFO transition. On our last call, I shared that our CFO, Kelly Kramer, had decided to retire from Cisco. Today, I'm excited that Scott Herron will be joining Cisco as our new Executive Vice President and Chief Financial Officer beginning December 18th. Most recently, Scott served as a CFO for Autodesk. He brings an incredible background in software and helped lead Autodesk's successful business model transformation from perpetual licenses to SaaS and subscription software. As we continue our strong progress on our business model shift and sell more of our solutions as a service, Scott's depth of expertise in this area will help us accelerate our transition. He also has strong experience operating in complex global business environments at scale and a track record of profitable business growth, focused team building, and prudent financial controls. I have no doubt that he will contribute to and foster the culture we are all so proud of here at Cisco. I want to thank Kelly once again for being such a great partner and for the role she has played in our transition. We will certainly miss her, but we're very excited to have Scott in this role and as part of our team. In summary, We're encouraged by the start to the year. I'm proud of our progress, both in our own transformation and in how we are empowering customers to accelerate their own digital strategies. We have a clear vision and strategy, and I feel very good about our portfolio and the innovation we are driving. Our customers want partners they can trust, as well as choice and flexibility in how they purchase, consume, and implement technology based on their own individual needs. These anchors of trust, innovation, and choice are core to who we are at Cisco. As we focus on growing our business, we remain guided by our purpose to power an inclusive future for all. We know that pervasive access to technology and connectivity directly impacts economic growth and enables key core human needs like healthcare and education. We know that technology can help solve some of the world's biggest challenges, and we are more committed than ever to building an inclusive future in which everyone can thrive. I'll now turn it over to Kelly.

Thanks, Chuck. I also want to congratulate Scott on his new role. I've had the chance to spend some time with him, and I'm super excited. I think this is a very positive news for Cisco, and he will be a great addition to the team. Also, thanks to you, Chuck. It's been a great time working with you over the years. Now let me provide a summary of our financial results for the quarter, followed by guidance for Q2. Our overall Q1 results reflect good execution with strong margins in a challenging environment. Total revenue was $11.9 billion, down 9% year-over-year. Our non-GAAP operating margin rate was 32.7% down 0.9 points. Non-GAAP net income was 3.2 billion down 11% and non-GAAP EPS was 76 cents down 10%. Let me provide more detail on our Q1 revenue. Total product revenue was down 13% to 8.6 billion. Infrastructure platforms was down 16%. As a reminder, this is the product area most impacted by the COVID environment. We saw declines across switching, routing, data center, and wireless, driven primarily by the weakness we saw in the enterprise and commercial markets. We continued to see growth of the CAT 9K and the ramp of our Wi-Fi 6 products. Data center revenue declined, driven by servers. Applications was down 8%. We did continue to see strong growth in WebEx with the importance of remote working. This was offset by declines in unified communications and telepresence endpoints. Security was up 6%. Our cloud security portfolio performed well with strong double-digit growth and continued momentum with our Duo and Umbrella offerings. Service revenue was up 2% driven by growth in our maintenance business as well as support services. We continued to transform our business, delivering more software offerings and driving more subscriptions. Software subscriptions were 78% of total software revenue, up 7 points year-on-year. Remaining performance obligations or RPO at the end of Q1 were $27.5 billion, up 10%. RPO for product was up 15% and service was up 8%. The continued growth in RPO demonstrates the strength of our portfolio in software and services. In terms of orders in Q1, total product orders were down 5%. Looking at our geographies, the Americas was down 5%, EMEA was down 1%, and APJC was down 14%. Total emerging markets were down 15%, with the BRICS plus Mexico down 19%. In our customer segments, public sector was up 5%. Enterprise was down 15%, commercial was down 8%, and service provider was down 5%. From a non-GAAP profitability perspective, Total Q1 gross margin was 65.8%, down 0.1 points. Product gross margin was 65.3%, down 0.8 points, and service gross margin was 67.1%, up 1.7 points year-over-year. In terms of the bottom line from a GAAP perspective, Q1 net income was $2.2 billion and EPS was 51 cents. GAAP results include restructuring charges of $602 million related to the plan we announced in Q1. We ended Q1 with total cash, cash equivalents, and investments of $30 billion. Operating cash flow was $4.1 billion, up 14%. From a capital allocation perspective, we returned $2.3 billion to shareholders during the quarter that was comprised of $0.8 billion of share repurchases and $1.5 billion for our quarterly dividend. Let me reiterate our guidance for the second quarter of fiscal 21. This guidance is subject to the disclaimer regarding forward-looking information that Marilyn referred to earlier. We expect revenue to be in the range of flat to minus 2% year over year. We anticipate the non-GAAP gross margin rate to be in the range of 64 to 65%. The non-GAAP operating margin rate is expected to be in the range of 32 to 33%, and the non-GAAP tax provision rate is expected to be 19%. Non-GAAP earnings per share is expected to range from 74 to 76 cents. I'll now turn it back to Marilyn so we can move into the Q&A.