Cisco Systems, Inc.

Welcome to Cisco's Third 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 Third Quarter Fiscal Year 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 done on a year-over-year basis. Please note, included in the materials that accompany this call is a slide which summarizes the impacts from the war in Ukraine and in the extra week in Q3 fiscal 2021. The matters we will be discussing today include forward-looking statements, including the guidance we will be providing for the fourth 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 accompanies this call for further details. Fiscal 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, and good afternoon, everyone. When we spoke with you back in February, we entered Q3 in the second half of our fiscal year with optimism, despite the supply and component challenges and other headwinds impacting us and many of our peers. Many of those factors that fuel that optimism remain unchanged today. We continue to see strong demand resulting in record backlog. Our business transformation is progressing well, and our differentiated innovation across our portfolio is helping our customers embrace and adopt the multiple technology transitions happening. However, there were two unanticipated events since our last earnings call, which impacted our Q3 revenue performance. The first is the war in Ukraine. This resulted in us ceasing operations in Russia and Belarus and had a corresponding revenue impact, which Scott will discuss. The second relates to COVID-related lockdowns in China, which began in late March. These lockdowns resulted in an even more severe shortage of certain critical components. This, in turn, prevented us from shipping products to customers at the levels we originally anticipated heading into Q3. Our Q4 guidance incorporates a wider than usual range, taking into account the revenue impact of the war in Ukraine and the continuing uncertainty related to the China COVID lockdowns. Given this uncertainty, we are being practical about the current environment and erring on the side of caution in terms of our outlook, taking it one quarter at a time. We believe that our revenue performance in the upcoming quarters is less dependent on demand and more dependent on the supply availability in this increasingly complex environment. While certain aspects of the current situation are largely out of our control, our teams have been working on several mitigation actions to help alleviate many of the component issues that we've been facing. We believe that we will begin to see the benefits of these actions in the first half of next fiscal year. Now let me talk more specifically about our third quarter performance. As I just mentioned, many of the positives we've discussed over the past few quarters remain, resulting in continued solid demand for our solutions. Total product orders grew 8% year over year, leading to yet another record backlog of well over $15 billion, up 10% sequentially and up 130% year over year. This momentum reaffirms the critical role we play in our customers' futures. Our business transformation also progressed nicely. In Q3, we saw ARR growth of 11%, ending the quarter at over $22 billion, and product ARR growth of 18%. We also exited quarter with over $30 billion in remaining performance obligations or RPO. We also delivered non-GAAP EPS at the high end of our guidance range. This was driven by effective pricing actions and spending discipline, all of which allowed us to offset lower volumes and deliver both gross and operating margins above the high end of our guidance range and deliver on our bottom line profitability target for the quarter. I want to reiterate what I said earlier. The fundamental drivers across our business are strong. While we are facing some short-term challenges, it does not change our long-term outlook, our alignment to our customers' most critical challenges, or our belief in the tremendous opportunities in front of us. Last week, we hosted our global customer advisory board meeting where we met with close to 100 customers, and they consistently shared that technology is at the heart of their strategy and has become even more important to everything they do. It's driving not just their strategies, but also their overall business transformation. The technology they're adopting from Cisco is driving their business agility, allowing them to move with greater speed, and empowering them to deliver differentiated experiences for their customers. Now I'd like to touch on some highlights from the quarter. We continue to see strong demand in several areas of our business. Our web scale business remains strong as we continue to help these customers build their capabilities to connect and serve their customers and end users at scale from the data center to the edge. This is leading to continued strength in orders, which grew over 50%, and on a trailing four-quarter basis, we had over 100% growth. This marks our ninth consecutive quarter of solid demand as we are winning new franchises, expanding our design wins, and taking share in web scale. I remain incredibly proud of the progress we've made and the momentum we have in this space. We are also extremely pleased with the traction of our 400-gig solutions, including the Cisco 8000. which is the fastest-growing SP routing platform in Cisco's history. In addition, our Silicon One portfolio, ZR and ZR Plus optics, and our Acacia portfolio of optical networking products also continue to perform well. From a product revenue perspective, our performance was led by solid demand across a majority of our portfolio, including switching, SP routing, wireless, security, and SD-WAN. Our performance in these areas reflect the ongoing investments that our customers are making to rapidly digitize their organizations to deliver differentiated experiences. Looking forward, the shift to hybrid cloud, 5G, 400 gig, IoT, hybrid work, and the explosion of applications are driving the increased need for next generation networking, connectivity, security, and observability solutions. Cisco is well-positioned to deliver for our customers with our end-to-end platforms and solutions. I'm also very proud of our pace of innovation. During the quarter, Cisco announced new innovations across our networking and cloud portfolios, along with technologies to enhance experiences in hybrid work environments. We also introduced our new predictive networks to help organizations learn, predict, and avoid network disruptions. We have even more innovation, which we'll announce at RSA and our own Cisco Live event in June. In addition to our deep passion for innovation, all of us at Cisco believe we have a unique opportunity to help make the world a better place through both the technology we build and the purpose we rally around to power an inclusive future for all. I believe this intersection of technology and purpose is why we were named the number one best company to work for in the US by Fortune and Great Place to Work for the second year in a row. In summary, while the quarter clearly did not play out as expected, Demand remains solid and the fundamentals of our business are strong. We remain focused on executing against the strategy we laid out at our investor day. We will also continue to be resolute in our focus to transform our business for more predictability and agility while bringing to market a robust pipeline of innovation. We remain confident in our long-term growth and the opportunities that we have in front of us. I want to thank our teams around the world for all that they do, executing with dedication, focus and excellence in an incredibly dynamic environment. They continue to focus on our customers with unparalleled innovation, resiliency, and determination. And with that, I'll now turn the call over to Scott.