Cisco Systems, Inc.

Welcome to Cisco's second quarter fiscal year 2022 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.

Welcome everyone to Cisco's second quarter fiscal 2022 quarterly earnings conference call. This is Marilyn Mora, Head of Investor Relations, and I'm joined by Chuck Robbins, our Chair and CEO, and Scott Herron, 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. Income statements, full gap to non-gap 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 made 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 third quarter and full year of fiscal 2022. 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 reports on Forms 10-K and 10-Q, which identify 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. I will now turn it over to Chuck.

Thanks, Marilyn. I hope you all are remaining safe and healthy. After the solid results we delivered last year, 2022 is proving to be an even stronger year fueled by exceptional demand for our solutions and the continued success of our transformation. In Q2, I'm thrilled to say that we delivered another great quarter with double-digit ARR growth and robust product orders, which fueled an all-time high backlog and a strong pipeline. These results underscore the increasing relevance and criticality of Cisco's innovation in the era of digital transformation and cloud and reinforces my confidence in our ability to deliver growth. We are focused on staying ahead of our customers' most pressing needs as they navigate a dynamic world. Our customers are moving faster than ever, driven by the move to hybrid work and hybrid cloud. This requires modernized infrastructure, new security architectures, and accelerated digital transformation. The breadth of our innovative solutions and services at a global scale, combined with our increasing ability to deliver more flexible consumption offerings, is driving even deeper partnerships with our customers across our entire portfolio. Now I'd like to spend a few minutes covering our results in more detail in what we are seeing in the market. we delivered solid top line growth combined with margins and earnings that exceeded the high ends of our guidance despite operating in a supply constrained and inflationary environment. The robust demand we saw in Q1 continued into Q2 with product order growth of 33%. Our third consecutive quarter of order growth of 30% or higher with momentum once again across all geographic regions and customer markets. For example, in our enterprise business, we delivered 37% order growth the highest in over 12 years, as large customers prioritize investments to modernize their networks and enable new digital capabilities and resiliency. As more and more becomes digitized, we expect our momentum to continue. We believe the need for highly secure seamless connectivity, hybrid cloud, and hybrid work solutions, along with edge computing, will drive growth for Cisco. The opportunity ahead of us is clear. as demonstrated by our growing pipeline and record backlog, which more than doubled from a year ago and will convert into revenue in the coming quarters. In our web scale business, we delivered another incredible quarter. Our order growth was up more than 70% year-over-year, which is over 100% growth on a trailing four-quarter basis. We continue to see exceptional performance driven by the rapid pace of adoption of our 400 gig solutions and our routed optical networking portfolio, which grew over 50% fueled by the Cisco 8000 product line, Acacia, and Silicon One. We're also seeing tremendous traction with ZR Optics as part of the routed optical network strategy. Our optical systems and Acacia businesses both saw significant double digit growth driven by our web skill customers. The innovations we've invested in over the last several years have positioned us well as the largest players in this space adopt next-generation technologies. Our customers are making strategic decisions on their future roadmap and recognize Cisco's unparalleled portfolio is critical to their strategies. We believe they are still in the early phases of their next-generation platform buying decisions and expect our momentum to continue. From a product revenue perspective, we delivered another strong and balanced quarter with 9% growth with broad-based demand across the majority of our product portfolio. This was led by increased customer spending to modernize their networks, securely connect their hybrid workforce, and build out their 5G networks, all with a strong uptake of our subscription offerings. We continue to prioritize investments that will drive our long-term performance and capitalize on the megatrends in large growing markets including cloud, full-stack observability, 5G, 400 gig, Wi-Fi 6, and security. Our expertise in these areas, along with a deep integration of hardware, software, and silicon across our portfolio, differentiates us and sets us up to win. Our team continues to innovate at a speed and scale like never before. To help our customers build and deliver the best hybrid work experience, we recently introduced new breakthrough networking innovations, including Catalyst 9000X switches built on Silicon 1, the industry's first high-end Wi-Fi 6E access points, and an as-a-service private 5G offering for the enterprise, enabling communications service providers to deliver cloud-based services to their customers. We are committed to also lead in a more sustainable way. An example of this is our Silicon 1 Catalyst 9000X switches I just mentioned, which are approximately 40% more power efficient compared to prior versions. Building technologies in this way is key towards our goal to reduce our Scope 3 emissions to net zero by 2040. I'm also proud of the progress of our business transformation to more software and subscription-based recurring revenue as we transition more of our business to the cloud. Annualized recurring revenue, or ARR, of $21.9 billion was up 11%, with product ARR increasing by 20%. Product remaining performance obligations, or RPO, which is largely software revenue that is committed but not yet recognized, was up 16%. We remain one of the largest software companies in the world. In Q2, our software revenue grew by 6% to 3.8 billion. Total subscription revenue accelerated to 5.5 billion, up 7% year over year. It's important to note that both of these metrics continue to be negatively impacted by subscription software and service that is attached to hardware where the shipments are delayed due to the component situation. The strength in our software, RPO, and ARR clearly demonstrate the value we are creating through our transformation and provides us a greater degree of visibility and predictability into our future growth. From a macro perspective, the component shortage continues to remain challenging. Our incredibly strong demand continues to outpace supply, expanding our backlog of products, software, and services. Our supply chain team continues to take aggressive action through strong inventory positions, deepening supplier relationships, qualifying alternative components, and increased use of expedited freight. There are still significant constraints with semiconductors preventing us from completing manufacturing of some of our products, and that remains a headwind to revenue growth despite very strong demand. In addition, the constrained environment continues to drive up supply chain costs, which we have successfully passed through to help offset these increases. In summary, we continue to work through the impact of the pandemic and component shortages, and we've never felt better about the company, our position, and our outlook for growth. Our Q2 results reflect healthy momentum, a clear vision, and outstanding execution by our teams. Our innovation engine and pipeline have never been stronger, and we are rapidly transforming our business by accelerating our transition to more software and subscription offerings. I am so proud of our teams and what they've accomplished during these very dynamic times. We are bringing industry-leading innovation to market and further enhancing our differentiated position across the portfolio by delivering flexible consumption models for our customers. I remain confident and optimistic about our future. Cisco is at the epicenter of massive shifts toward hybrid cloud, hybrid work, and digital transformation, which we believe creates momentum for our business and positions us well to capture the significant opportunities ahead. I'll now turn it over to Scott. Thanks, Chuck.