Cisco Systems, Inc.

Welcome to Cisco's first quarter fiscal year 2024 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 Sammy Badri, head of investor relations. Sir, you may begin.

Welcome, everyone, to Cisco's first quarter fiscal year 2024 quarterly conference call. This is Sammy Badri, Cisco's new head of investor relations, and I'm joined by Chuck Robbins, our chair and CEO, and Scott Herron, our CFO. Having followed Cisco on the sell side for 10 years, I couldn't be more excited to join the company and look forward to engaging with you all in my new role. By now, you should have seen our earnings press release. A corresponding webcast with slides, including supplemental information, will be available on our website in the investor relations section following the call. As a reminder, we have simplified how we report product and service revenue in customer markets. Starting this quarter, we are reporting revenue in the following five categories, networking, security, collaboration, observability, and services. And we are reporting customer markets in the following three categories, enterprise, public sector, and service provider and cloud. Also, 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 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 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 and full year of fiscal 2024. They are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent report on Form 10-K, 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, Sammy, and welcome to Cisco. I hope everyone is doing well, and thanks for joining us today. We delivered a solid start to fiscal 2024 with the strongest first quarter results in Cisco's history in terms of revenue and profitability. Our Q1 revenue was at the upper end of our guided range. EPS exceeded the high end of our guidance, driven by strength in gross margins and expense control. resulting in strong operating leverage. Our disciplined expense management and the tailwinds from our business model transformation resulted in our highest non-GAAP gross margin in over 17 years and record non-GAAP operating margin. We also returned $2.8 billion in Q1 via cash dividends and share repurchases, delivering on our capital return commitments to our shareholders. As we continue to transform our business towards more software and recurring revenue streams fueled by accelerated innovation, We remain committed to driving operating leverage and shareholder returns. Now turning to the demand environment. After three quarters of exceptionally strong product delivery, our customers are now focused on installing and implementing these unprecedented levels of products. The bottleneck that we previously saw in the supply chain has now shifted downstream to implementation by our customers and partners. Our order lead times and backlog have largely returned to normal levels. As deliveries rose, the channel inventory we track at our distributors also steadily declined during this time. Simply put, customers are now taking time to onboard and deploy these heightened product deliveries. While the macro challenges we have discussed still exist, we believe this implementation phase is the primary reason for the slowdown in new orders. We saw it mostly with our larger enterprise, service provider, and cloud customers, and it was most pronounced in October. Based on our analysis, we believe this phase is temporary and estimate there is an additional one to two quarters worth of shipped orders in customers' hands still waiting to be deployed. This has near-term consequences for revenue and our outlook for the next couple of quarters, which Scott will discuss shortly. However, it does not change our longer-term confidence. We expect product order growth rates to increase in the second half of the fiscal year. We also remain very confident in the foundational strength of our business and future growth opportunities given the criticality of our technologies. Overall, our win rates are stable, cancellation and return rates remain below pre-pandemic levels, and we have gained market share, all of which are testaments to the strength of our portfolio and how it aligns to our customers' most pressing needs. As we look to enhance our capabilities in higher growth areas, in the first quarter of fiscal 24, we announced our intent to acquire Splunk, The combination of Cisco and Splunk will create an end-to-end data platform to enhance our customers' digital resiliency with our complementary capabilities in AI, security, and observability. The combination of Cisco and Splunk also directly supports our strategic objectives around driving higher levels of growth, software capabilities, and ARR. Together, we will bring trusted innovation leadership, an outstanding go-to-market engine, and a world-class culture that will help our customers achieve their technology outcomes with innovative products and solutions. Now let me comment on our quarterly performance. As I previously mentioned, we delivered strong revenues in Q1, which was broad-based across our product portfolio and driven by our customers' investments in generative AI, cloud, security, and full-stack observability. As expected, we continued to gain market share with the release of the calendar Q2 results, recording another quarter of year-over-year gains in three of our largest networking markets. campus switching, wireless LAN, and SP routing. In web scale, we see continued momentum in AI with three of the top four customers deploying our hyperscale Ethernet AI fabric. We also already have line of sight to over $1 billion in orders for AI infrastructure from major cloud providers in fiscal year 25. To help advance AI, we are working with key GPU and storage partners to create solutions including Ethernet technologies, GPU-enabled infrastructure, and joint tested and validated reference architectures with a commitment to open networking for AI. Collectively, we believe there is a great opportunity for a broad set of innovations in compute, GPU, networking software, and services to support core and edge AI infrastructure. According to the 650 Group, the AI switching market is forecasted to exceed $10 billion in 2027. Our scalable fabric for AI coupled with the proven power saving capabilities of Cisco Silicon One, put us in a strong position to build out the infrastructure needed for AI clusters, and we are laser focused on winning in this space. Moving to security, we continue to execute against our product roadmap and strengthen our unified security platform. Since our Cisco XDR solution became available this summer, we have added recovery to the response process, giving security teams the ability to snapshot and restore their business critical data at the first sign of a ransomware attack. With our three new offers around XDR, Cisco secure access, and multi-cloud defense, we already have over $500 million in the pipeline across over 1,000 customers. We also launched our new Cisco security firewall solution this quarter. We are actively engaged in competitive sales with all these products and expect to see meaningful positive results in the coming quarters. In our collaboration portfolio, we recently introduced a range of truly game-changing AI capabilities spanning the entire WebEx suite, as well as new devices for reimagined workspaces at our WebEx One event. Before I turn it over to Scott, let me briefly summarize three key takeaways. First, as we consider where we're at today, the primary issue with demand is that customers are taking time to onboard and deploy heightened product deliveries. While we are not immune to the macro, we believe this is temporary as our customers and partners continue to tell us that our portfolio is stronger than ever and we have continued to see share gains in key markets. Second, we remain confident in our future with the incremental multi-billion dollar AI infrastructure opportunity, the increasing criticality of security and observability, and what we believe Cisco and Splunk can do together for our customers is truly exciting. Lastly, you can always count on us to take a disciplined approach regardless of the environment. We remain committed to operating leverage, capital allocation, and expense management. I'll now turn it over to Scott to provide more detail on the quarter and our outlook.

Thanks, Chuck. We delivered solid results in Q1, driven by the prior strategic actions we took to mitigate the supply chain constraints. For the quarter, we reported strong revenue growth and a record non-GAAP operating margins. Total revenue was $14.7 billion, up 8% year-over-year at the high end of our guidance range. Non-GAAP net income was $4.5 billion, up 28%. Non-GAAP EPS was $1.11, up 29%, exceeding the high end of our guidance range. Looking at our Q1 revenue in more detail, total product revenue was $11.1 billion, up 9%, and service revenue was $3.5 billion, up 4%. Networking. Our largest product category drove the increase with 10% growth. Within networking, the growth was driven by switching, where campus and data center were both up double digits on the strength of our Catalyst 9000 and Nexus 9000 offerings. This was partially offset by a decline in wireless. Security was up 4%, driven by our zero trust and threat intelligence detection and response offerings. Collaboration was up 3%, driven by growth in calling and contact center, partially offset by a decline in meetings. Observability was up 21%, driven by growth across the portfolio, including double-digit growth in ThousandEyes and AppDynamics. We continued to make progress in our transformation to more recurring revenue-based offerings and saw solid performance in our ARR of $24.5 billion, which increased 5%, with product ARR growth of 10%. Total software revenue was $4.4 billion, a 13% increase, with software subscription revenue also up 13%. 85% of our software revenue was subscription-based. Total subscription revenue increased 10% to $6.5 billion, which represents 44% of Cisco's total revenue, an increase of one percentage point over last year. RPO was $34.8 billion, up 12% year-over-year. Product RPO increased 14%, and service RPO increased 11%, The total short-term RPO was up 8% to $17.6 billion. Looking at our product orders by geographic segment year over year, overall product orders declined 20%, with the Americas down 19%, EMEA down 13%, and APJC down 38%. In our customer markets, service provider and cloud was down 38%, enterprise was down 26%, and public sector was up slightly at 2%. Total non-GAAP gross margin came in at 67.1 percent, up 410 basis points year-over-year and 110 basis points above the high end of our guidance range. Product gross margin was 66.5 percent, up 550 basis points. The increase was driven primarily by productivity improvements with lower freight, logistics, and component costs. Favorable mix and positive pricing also contributed to the year-over-year improvement. Services non-GAAP gross margin was 69 percent, up slightly. Our non-GAAP operating margin came in at 36.6 percent, up 480 basis points and exceeding the high end of our guidance range. This improved leverage was driven by both our strong non-GAAP gross margin and ongoing discipline cost management. Shifting to the balance sheet, we ended Q1 with total cash, cash equivalents, and investments of $23.5 billion. We had operating cash flow for the quarter of $2.4 billion down 40 percent primarily due to the $2.8 billion tax payment related to prior quarters, which was associated with the IRS tax relief due to the California floods. This quarter, we returned $2.8 billion to shareholders, comprised of $1.6 billion for our quarterly cash dividend and $1.3 billion of share repurchases. Consistent with our CAF allocation strategy, we are committed to increasing shareholder returns through greater operating leverage, maintaining a higher level of annual share repurchases, and growing our dividend. We continue to invest organically and inorganically in our innovation pipeline. During Q1, we announced our intent to acquire Splunk, which we expect to close by the end of the third quarter of calendar year 2024, subject to regulatory approvals and customary closing conditions, including approval by Splunk shareholders. In Q1, we also closed several acquisitions, all of which are highly complementary to our internal R&D, in line with our strategy to strengthen our position in cloud, security, observability, and AI with targeted strategic M&A. To summarize, we delivered a solid quarter, highlighted by top line growth and increased operating leverage that resulted in stronger than anticipated earnings per share. We continue to make progress in our business model shift to more recurring revenue. We remain focused on discipline expense management without losing sight of the strategic investments necessary to innovate and capitalize on growth opportunities. Turning to our financial guidance, as Chuck outlined, the bottleneck that we previously saw in the supply chain has now shifted downstream to implementation by our customers and partners. Most of the supply chain constraints are now behind us, and both shipment lead times and backlog have largely returned to normal levels. Q1 product orders declined 20% as our largest customers are implementing elevated levels of product shipments prior quarters as we delivered orders from our historically high backlog levels. As Chuck mentioned, we believe there are one to two quarters worth of shipped orders awaiting implementation by our customers. Our revenue guidance assumes one to two quarters of lower revenue and then a return to more typical sequential growth rates. Consequently, for Q2, we expect revenue to be in the range of $12.6 to $12.8 billion. We anticipate the non-GAAP gross margin to be in the range of 65 to 66 percent. Non-GAAP operating margin is expected to be in the range of 31.5 to 32.5 percent. And non-GAAP earnings per share is expected to range from 82 to 84 cents. For fiscal year 2024, our guidance is updated as follows. We expect revenue to be in the range of 53.8 billion to 55 billion. Non-GAAP earnings per share is expected to be in the range of $3.87 to $3.93. In both our Q2 and full-year guidance, we're assuming a non-GAAP effective tax rate of 19%. I'd like to thank our teams for their focus and execution this quarter. We remain confident in the strength of the business and our ability to capitalize on the key growth opportunities ahead. I'll now turn it back to Sammy so we can move into the Q&A.

Thanks, Scott. Michelle, let's go ahead and queue up for questions.

Thank you. Tal Liani with Bank of America. You may go ahead, sir.

Tal, are you there?

Yes, sorry, I was on mute. Now you can hear me. What is your assumption on the growth seasonality after the next quarter? Are we back in your assumptions to normal seasonality? or do you expect kind of different seasonality than previous years?

Yeah, Tal, it's a great question. You know, as I said, when we talked about one to two quarters of basically inventory, but shipped product that's at our customers that's not yet been installed, I expect the impact to be greatest in Q2 and in Q3. But when you look at order growth, we do see a return to order growth in the second half of the year. Both sequentially and year-on-year as we get there.

So in terms of revenue recognition, you expect 2Q to 3Q sequentials. That was my question. Do you expect 3Q to be weaker than previous seasonality, or do you expect it to be the same as previous seasonality?

No, from a revenue standpoint, we don't guide booking style, but from a revenue standpoint, I do see sequential increase Q2 to Q3.

Okay.

Thank you.

All right. Thank you, Tal. Michelle, next question.

Nina Marshall with Morgan Stanley Investment Research. You may go ahead.

Great. Thanks so much. Maybe just a question on if you see the investment categories kind of changing maybe pre the orders that you've seen and then when you see them come back in a couple of quarters. I guess I'm just trying to get a sense of you know, have much of the orders we've seen over the last year been catch-up investments like campus and data center, and then areas of investment will change as we come back, or is this really just inventory digestion and the investment categories and kind of investment prioritization will stay the same with customers? Thanks.

Yeah, Amita, thanks for the question. I think your latter comment is probably the closest to the truth. We don't anticipate a big difference, although... I think with the improvements that we've seen in our portfolio in security, we should see security accelerate. Obviously, we'll continue to update you on the AI opportunity that's out there. We think that's going to continue to be a driver over the next couple of years. But in general, I think it'll look more normal once we get through this.

Great. Thank you.

Thank you, Mita. Michelle, next question.

I'm at Dariani with Evercore. You may go ahead.

Thanks for taking my question. I guess, Chuck, one of the things I think folks will struggle to understand is the conviction you have that this is an implementation pause and not a macro demand-centric weakness. So I'd love to just understand whatever you can talk about and why you're so convinced this is a one to two quarter implementation pause rather than enterprise demand is just getting weaker. Anything on that front would be helpful. And then I just want to clarify this part. You folks said a billion dollars in AI orders. That's two times the number you gave last time. Is that correct? Thank you.

Yeah, Amit, thank you. So if you'll be patient with me, I'll give you a few data points and some context around why we think this is an inventory issue that's sitting with our customers. First of all, our customers and our sales organizations have been very clear with us over the last 90 days that this is the issue, particularly our large enterprise and our service providers. We talked about that with the service providers prior, but it shifted into the enterprise space in a big way. the other thing is we had our partner summit last week, and some of our largest partners, unsolicited, began their conversations with me by talking about this very issue, which candidly, I knew the customers had talked about it, and our sales teams had talked about it. I was actually surprised to hear it so consistently at that partner summit. So that's sort of the subjective view, and then we've done some analysis, and there's three things I'd point out. The first is that In certain parts of our portfolio, we actually can see the timeframe from shipment of a product until the product begins to connect to the cloud, back to the cloud, like Meraki. And what we've seen is a one to two quarter delay versus what historically you would see when these products get shipped, how long it takes for them to be activated and connect to the Meraki cloud. So that's the first piece. The second is, We had a very strong quarter in federal U S federal from an orders perspective. And so we, we looked into why big customer, like the U S government department of defense would not have the same issue. And the reality is, is that they have special clauses in their contracts that give them most favored nation status when we're actually making shipment decisions. And certainly with the Department of Defense, we prioritized them during the supply chain crisis. So they never had a big influx. They had a very steady flow of products across, which explains why their order numbers look fairly normal. The third point I'd say is that we noticed a serious uptick in Q1 in our transactional advanced services, which is loosely translated to be implementation services. where that grew almost 20% and the forecast for Q2 is almost double digits again. So it's clear that customers are asking us to come help them get this done. And I'll give you one final subjective data point and then I'll talk about the AI stuff. We had one big partner tell us that they have literally hired 200 people in the last 90 days solely focused on implementing technology for their customers. There's just so many things that we've learned over the last 90 days. Clearly, this surprised us, but I think we feel pretty good right now. I'll make a comment about why I don't think it's macro. Candidly, it might have been easier for me to say it was macro, but as we've discussed prior, the traditional service provider has been tough and it remains that way. We've talked about elongated sales cycle. They remain. We've talked about, in some cases, the need for extra signatures, which is pretty normal. that's remained but we didn't see it get materially worse in the quarter and so all of that and i'm sorry for the long answer but i wanted to be thorough all of that is really what led us to believe this that this is a consumption issue with our customers so i'm going to pause there and then i'm going to answer your ai question what what we gave last time was orders to date we had taken orders for over $500 million for infrastructure to support AI networks, AI GPUs, inside the cloud players. And I'll talk a little bit more about that in a moment. The numbers that we gave today is a forward-looking set of numbers that say in fiscal year 25, which is when we said we believed that the broad Ethernet build-out would occur underneath GPUs, we have already we have line of sight to a billion dollars plus of orders that our teams feel pretty good that we're going to get and or we've been designed in already. So that's just sort of a forward-looking set of orders that we've identified for fiscal 25. I will also just cover real quickly, we now have our Ethernet fabric deployed underneath GPUs and three of the four hyperscalers, major hyperscalers in the United States. We also are working very closely with AMD, Intel, and NVIDIA to create solutions, including Ethernet technology, GPU-enabled infrastructure, jointly tested and validated reference architectures. And I will say, even this week, yesterday, Jensen from NVIDIA and four or five of his executives came over to see us, and we spent 90 minutes together with my executive team. And we believe we have a great opportunity to actually build some integrated solutions between our technology and their technology to actually take to the enterprise. So we're beginning to see the use cases in the enterprise evolve, and we think that a partnership with NVIDIA in that case with our underlying technology and our strength of go-to-market, we think will be a winning combination. So we're working on that as well. So there's a lot going on in the AI space.

All right. Thank you, Amit. Michelle, next question.

Thank you. Simon Leopold with Raymond James. You may go ahead.

Thanks for taking the question. I want to see if maybe you'd be willing to unpack the networking segment a little bit in terms of the trend, and really what I'm trying to get at is understand sort of what's doing better, what's doing worse, in that I suspect its data center sounds to us pretty good, whereas maybe campus is a bit weaker and declining, and hopefully during this transition to new segmentation, you can give us a little bit more color within networking. Thank you.

Hey, Simon, thanks for that. I would say the bigger variance that we're seeing, I mean, right now, obviously, the demand signal is a little bit tough because of the amount of inventory that's out in the field. And we have normalized lead times at this point. We knew that would happen sometime in the first half. It's now happened. Our lead times are back to where they were pre-pandemic. And our backlog has shipped. The supply chain team has done a terrific job getting product out the door. That's what's kind of move the bottleneck from our level down to our customer's level. But when you start to unpack within networking, we're not seeing at this point a huge difference between, for example, data center or campus networking. What we are seeing is a little more field-based inventory on wireless access points. That's been slightly slower than what we've seen just because of the amount of product that's been shipped out than what we've seen in the rest of the networking.

Thank you very much. Thank you, Simon. Yep. Thanks, Simon. All right, Michelle, next question.

Ben writes us with Milius Research. You may go ahead, sir.

Hey, thanks. Good afternoon, everyone. I wanted to ask about your share repurchase cadence. You know, stock obviously could get hit here. We have been talking about $5 billion in buybacks or so for the year. I know some of that stock's at dilution. If you guys are confident in a second-half pickup – Is there any potential that you would be more aggressive in the upcoming quarter? And how are you thinking about share repo this year, given current dynamics with the Splunk deal coming? Thanks.

Yeah, Ben, as we said on the Splunk transaction, it's going to be, outside of the transactional cost, it's going to be cash flow positive from the first year forward. So the Splunk transaction is not in any way having an effect on our capital return either through the dividend or through share buybacks. We expect to continue at higher level and consistent higher level of share buybacks and to continue to show increases in our dividend. We also will obviously look at the chance to be opportunistic on the share buyback. I'm not going to commit to that at this moment, but that is something that we'll obviously take a look at.

All right, thank you, Ben. All right, Michelle, next question.

Samik Chatterjee with JP Morgan. You may go ahead.

Thank you for taking my question. I guess if I can just clarify one thing first. I think, Chuck, in your prepared remarks, you did say you saw the more pronounced impact on the orders in the month of October. I think that's what I heard you say. I'm just curious, are you implying that you did see an improvement orders in the sort of first couple of weeks of November itself and that's maybe part of your confidence and that it's a bit more temporary than a longer pause from the customers and then you did mention large partners really being the ones that are facing this sort of inventory installation problem what gives you sort of color that SMBs or smaller customers are sort of not going to face a similar issue, or are you also making that in terms of your sort of next couple of quarters of headwinds that you're thinking about on the revenue side? Thank you.

Thanks, Samik. I think my point with October was that, you know, if you go back to the end of Q4, we talked about on the last call that we had a fair amount of momentum as we exited the quarter, which is one of the reasons we didn't expect to see this. and we had our normal year-end sales, moving accounts around, moving territories around, and getting sort of the sales startup process that happens in the first, say, six weeks of the fiscal year, which we went through. So what we tend to look for is the middle of the quarter, and then into October is when we expect to see the actual quarter materialize and everything kind of come together and it just didn't and that's what that was with the comment about that it was it was primarily you know we really it was really clear to us in October that that we that this was going to be the situation relative to they're the ones who are having the consumption issue because they have the most inventory you asked how we What confidence will we have if it's not SMB? If you look at orders, we look at a sub-segmentation within enterprise now and within service provider, et cetera, and SMB was fine. And, in fact, the smaller the customer we had, the better their order performance for us in the quarter was. So it just followed the trend that the consumption issue is upmarket and the small to midsize customers didn't feel it. Good. Thank you.

All right. Thank you, Sameek. Michelle, next question.

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

Great. Thanks, guys, for taking my question. Scott, maybe this is for you. I just want to unpack maybe one of the comments that you made, and I know you don't guide to orders, but I think in your prepared remark, you said backlog is back at normal levels at the end of the quarter. So are we to assume that the guide for TQ in the rest of the year doesn't include backlog conversion into revenue, And then if that's the case, you know, to your comment about orders accelerating in the second half, I know you don't guide specifically to orders, but you did make a comment that revenue is going to be up, I think, sequentially in the third quarter, year over year, and in the fourth quarter, sequentially, and year over year. Doesn't that suggest like a pretty steep order acceleration, not just an acceleration, but significant positive order trajectory in the fourth quarter and the third quarter? I know it's easy comps, but just some more color there would be helpful. Thanks.

Yeah, yeah, David, we did say that. We are expecting sequential improvement in the second half of the year in both Q3 and in Q4. And both, and again, we don't guide this, but in both orders and revenue, as you'd expect, backlog is normalized at this point. We knew that would happen in the first half. I think the supply chain team did a great job getting those orders in the hands of our customers. We now need them to implement them, but we've got the orders in the hands of our customers. So we do see sequential increases. And as you said, As you noted, from a booking standpoint or order standpoint, the second half has easier compare points. Obviously, the reverse is true on revenue. The second half revenue will have very difficult compare points the last year.

Great. Thank you. All right. Thank you, David. Michelle, next question.

with Deutsche Bank. You may go ahead.

Hey, guys, thank you for taking the question. Maybe just to dovetail, one follow-up to the prior question. I have just another one on margins. Just on the prior one, is the expectation for a second-half improvement in a one- to two-quarter digestion, does that vary at all across the three different customer sets you outlined? And then just on the margins, so 36.6 on up-income margins this quarter, I think the guide implies a 400- to 500-basis point dip. Is that due to just the sheer revenue decline sequentially, or are there other cost items we should consider on either the gross margin or ROI margin line?

Thanks. Yeah, to your second question, it is just based on how the revenues are flowing through the second half of the year. I think gross margins, we've said, will settle in somewhere in this 65% to 66% range. I think at this point, it looks like it'll be closer to the higher end of that range for the second part of the year. So that's the way I see the year flowing out. Remind me, Matt, what was the first part of your question?

Just around the expectation for second half improvement in orders, one to two quarters worth of installation. Is that broad across the three customer sets or does it vary across service provider, enterprise, and federal?

Yeah, right. I think we expect, I certainly would expect service provider to continue to be difficult through the second half of the year. Within service provider, we've got both Telco and Cable, which has one set of market dynamics going on. I think that will continue to be a difficult space. On the other side, we have WebScale, and we do see the WebScale orders. While they've got also inventory to work their way through, we do see line of sight to them beginning to increase their orders again in the second half of the year. So SP is a bit of a mixed bag, but I think it will continue to have probably the greater impact.

Thank you. All right. Thank you, Matt. Michelle, next question.

George Nader with Jefferies. You may go ahead.

Hi. Thanks a lot, guys. Just continuing on on that last question, you know, if I look around the space, you know, companies have been dealing with excess inventories for, you know, really three quarters now. And I guess I'm just curious, you know, why is this now becoming more evident at Cisco versus, you know, a few quarters ago? And then also, you know, you mentioned that the issue is spreading more to enterprises. We don't typically think about enterprises as, you know, inventorying, you know, infrastructure. And so I guess the question for you is, you know, has something changed there or is this more, you know, distribution channel inventory? Any insight would be great. Thanks.

Yeah, thanks, George. I think that the reason it's become relevant now is because, I mean, we really unloaded our backlog in the last six months. I mean, and, and it was billions of dollars more than what we would normally ship to customers during that time period. So they, uh, I think it's just, and we, we know that, you know, the, the cloud providers, as an example, had been buying ahead and they had been doing it for sure to your point. Uh, and all along we, uh, we, we have very sequenced purchasing cycles with, with those players. So we kind of know when they're going to start placing their next orders. I think on the enterprise, we're talking about the top 200 customers, right? These are the big customers who actually, you know, if they're doing a refresh of their infrastructure, they might order 400, 500 switches, as an example, or they may be doing a branch rollout. And in some cases, to your point, it could be sitting with them or they could have a partner who's doing the staging, and the partner may be backed up with, you know, resources to try to get the staging done. So it varies, but it could be either one of those or a combination of both.

And, George, just to put some data to that, and you have this data, but I'll repeat it. Our revenue growth, obviously the quarter we're announcing now, product revenue growth was 9%. But if you go back to Q4, product revenue growth was 20%, and in Q3 it was 17%. So obviously we get revenue when we can complete a shipment and get it out the door. It gives you a sense of just how much has been pushed out, and as Chuck said, in the last two to three quarters. Thank you.

Thank you, George. And then, Michelle, we have time for one last question.

Thank you. Michael Eng with Goldman Sachs. You may go ahead.

Hey, good afternoon. Thanks for the question. I just have two questions. First, on the AI orders $1 billion, what's the feedback from the hyperscalers on your improving position with these customers relative to a few years ago? Is it selling in a more disaggregated fashion with Silicon One? Is it a desire for Silicon diversification? And then the second question, just as a follow-up on the order slowdown, Was that, you know, more concentrated in the campus with, you know, wireless LAN and wired or data center or both, just within enterprise specifically? Thank you.

Thanks, Michael. On the AI question relative to the cloud players, I think that, look, I think early on, We regained our footing there because we listened and we showed flexibility with our willingness to disaggregate if they wanted to do so. And, you know, we're in, I can't even remember, but numerous use cases across the large web scale players. And I think we added another over 10 new use cases last quarter alone where we had been designed in. And I think it's, so I think that the disaggregation and the flexibility and us listening to them and understanding what they wanted was the reason that we got back in. And now the feedback is as long as we're performing, I think they like our products. They like the power savings of Silicon One. It's a massively lower power consumption. I think they do like Silicon diversity for sure. And then as you look at the AI infrastructure, that's currently primarily being supported via InfiniBand. They just want to move to more of a standard broad-based technology like Ethernet that they can actually have multiple sources. And so we think that's what's driving that now. And now it's just about performing and executing and delivering on what we tell them we're going to do. Scott, you want to take a second?

Yeah, Michael, I think I touched on this earlier as the question came up. I think that the way to think about it is, First of all, if you're trying to generalize the trend more broadly across the industry, it may be a little difficult because we've cleared our backlog, I think, significantly faster than others have. But where we saw a differentiation was less between the data center infrastructure and campus networking and more between networking and wireless. We did see, because we've shipped an enormous amount of wireless access points out, we did see that take a little bit more of an impact. just because our customers are sitting on more inventory on hand of that that they're looking to get installed. Great. Thank you, Chuck. Thank you, Scott. Thank you.

All right. Thank you, Michael. All right. So we'll go ahead and turn it over to you, Chuck, for some closing remarks.

Yeah, thank you, Sammy, and welcome again. Listen, we're proud of the team for the performance in Q1, obviously a very solid quarter. with the exception of this demand issue that we talked about, we'll always try to be transparent with you and share with you exactly what we're seeing. We know what's going on. We're on top of it, and we do feel that it's temporary. At the same time, we're very confident in our opportunities long term. We're confident in the AI opportunity. We're very encouraged by our improving position in security, observability, and we're also very encouraged by by the opportunities that will come with the Splunk acquisition. I think many of you know that on Monday night, the waiting period for review under the Hart-Scott-Rodino Act in the U.S. expired, meaning that we've effectively passed the antitrust review period in the United States. We're excited about that. At our partner summit last week, the feedback on our portfolio right now was probably as good as it's been in a long time. And I also just want to reiterate our commitment to delivering value to you and our shareholders via operating leverage, capital allocation, and obviously managing our expenses in times when we see challenges like we have right now. So thank you for joining us today, and I'll turn it back over to Sammy.

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