Cisco : Q1FY22 Prepared Remarks (opens in new window)

These prepared remarks should be viewed solely in conjunction with the related quarter's conference call webcast and press release, which can be found here.The webcast includes the prepared remarks as well as a question and

answer session.

Please click herefor complete GAAP reconciliation information between our GAAP financial results and our non- GAAP financial results.

Cisco Systems, Incorporated [CSCO]

Q1FY22 Earnings Results Conference Call

Wednesday, November 17, 2021

Introduction

Welcome, everyone, to Cisco's First 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 Herren, 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 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.

As a reminder, effective in Q1, we began reporting our revenue in the following categories: Secure Agile Networks, Hybrid Work, End-to-End Security, Internet for the Future, Optimized Application Experiences, Other Products and Services. As discussed during our Investor Day and in our October 20th press release, this change better aligns our product categories with our strategic priorities. This change only impacts how we report revenue by product category, as our reportable segments will continue to be based on geographies, which consist of the Americas, EMEA and APJC. We included quarterly reclassified revenue amounts for the last three fiscal years on our website. Click on the Financial Information section of the website to access these documents.

Throughout this conference call, we will be referencing both GAAP and non -GAAP financial results, and will 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.

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 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 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.

Opening Remarks

Thanks, Marilyn, and good afternoon, everyone. We look forward to spending time with you today.

First, I would like to thank those of you who joined us for our Investor Day in September, where we showcased the strong foundation we've built for helping to generate long-term profitable growth. We're striving to maximize value creation through our focus on higher concentrations of software and subscription-based revenue streams. This gives us and you greater visibility and predictability into our future growth. We also highlighted our unique portfolio of market-leading franchises, which are well positioned to drive growth in highly attractive existing and expansion markets. Lastly, we showcased the depth of our leadership team and outlined the next phase of our strategy.

Moving into fiscal year '22, we are off to a great start with robust order growth of 33% and continued strong demand across our portfolio. Our teams are executing well, our ARR grew double digits and our momentum is accelerating, driven by digital transformation and clo ud.

Even with the ongoing supply constrained environment, we are solidly on track to deliver against our long-term financial targets by investing for growth while delivering breakthrough innovation.

The past 18 to 24 months have no doubt accelerated the digital revolution we are all experiencing, as technology is permanently changing nearly every aspect of our lives. The technology we build is powering the modern secure infrastructure that sits at the heart of this revolution, and Cisco is well positioned to capture the opportunities ahead.

Our customers want digital and cloud-enabled solutions that allow them to move with greater speed, agility and efficiency. We're already seeing the positive impact of our investments to drive accelerated innovation across high-growth areas, including hybrid cloud, Webscale, cloud security, 5G, WiFi6, 400G and Full-Stack Observability.

1. key trend in front of us is enabling employees to work from anywhere, and this is much broader than meetings. It's about the holistic capabilities to support a highly distributed workforce that require new infrastructure architectures, observability and security. Many companies are in the process of defining their hybrid work strategy, which will be based on the technology we build across our networking, security and collaboration portfolios. We are also leading the way with new innovation, including our recently expanded Webex portfolio, purpose-built for inclusive experiences across hybrid work, workspaces and events.

Now I'd like to discuss our Q1 performance. Building on the momentum from last quarter, I'm proud to say we achieved another strong quarter inline with our expectations despite supply constraints, which I will discuss shortly.

We delivered balanced revenue and non-GAAP EPS growth with healthy margins driven by a continued economic recovery, strong execution and exceptional demand for our products. We also generated a strong quarter of double-digit growth in ARR and RPO, reflecting the ongoing success of our transformation.

We have continued to operate successfully in a very dynamic environment, staying nimble in order to navigate the evolving conditions related to the Delta variant and global component shortages.

Now let me discuss the performance of our customer market segments. Q1 marks the third consecutive quarter of accelerating order momentum with broad-based strength across our business. Every geographic region and three of the four customer markets grew product orders at 30% or higher. We again experienced the strongest demand in over a decade as our customers increased their investments in digital transformation.

In our Enterprise and Commercial businesses, we achieved our fourth consecutive quarter of accelerating order growth. We also saw solid growth in Public Sector. Our Service Provider segment delivered its highest level of order growth in over five years, with 66% growth, as these customers address their growing bandwidth requirements.

In our webscale business, our robust momentum continues. Our performance was once again a record, with order growth of over 200%. That's 120% growth on a trailing four-quarter basis. We are very pleased with the early traction of our 400G solutions, Cisco 8000 platform, Silicon One portfolio and rapid growth in our Acacia portfolio of optical networking products. It's clear we are expanding our footprint as our cloud growth rate is outpacing our peers. We continue to invest in webscale innovations, with differentiated customer value. Launching this quarter, the latest member of the Silicon One family, the 19.2-terabit P100 routing device, the 11th chip in the Silicon One family. In addition, Acacia marked a major milestone by unveiling the industry's first pluggable module capable of delivering 1.2-terabit capacity on a single wavelength.

Our product revenue was up nearly $1 billion year-over-year, demonstrating the competitive advantages of our scale and reach, as well as our ongoing momentum. We saw broad -based demand across the majority of our product portfolio.

In addition, we continue to see steady progress in our business model transition. Our focus on subscriptions allows us to deliver innovation faster to our customers while providing more predictability and visibility, leading to a more durable growth business over the long term.

We delivered software revenue of $3.7 billion, with 80% sold as a subscription. Subscription revenue increased by 4% to nearly $5.5 billion, while ARR increased by 10% year-over-year to $21.6 billion. We saw strong product ARR growth of 21% and product RPO grew 18%, reflecting our rapid transformation to a software-led business model.

While our revenue growth was solid, it was impacted by the supply constraints, which are affecting our technology peers and nearly every other industry . Our product orders were extremely strong and balanced across our markets, but we are constrained in what we can build and ship to our customers.

We have a world-class supply chain team that works to deliver an incredibly high volume of products given our scale and reach. They continue to execute well in this highly fluid and complex environment. We have been taking multiple steps to mitigate the supply shortages and deliver products to our customers, including working closely with our key suppliers and contract manufacturers, paying significantly higher logistics costs to get the components where they're most needed, working on modifying our designs to utilize alternative suppliers where possible, and constantly optimizing our build and delivery plans.

We are doing this at a breadth and scale that is significantly greater than most in our industry. Of course, all these steps, while necessary to maximize our production and delivery to customers, add to our cost structure. When combined with cost increases we are seeing from many of our suppliers, these factors are putting pressure on our gross margins. While we've thoughtfully raised prices to offset this impact, the benefits are not immediate and will be recognized over the coming quarters. Our focus remains on our customers to ensure we provide them with the products they need as quickly as possible.

Now I'd like to share the progress we're making on our ESG initiatives. In September, we committed to being net zero greenhouse gas emissions for Scope 1 and 2 by 2025 and net zero for all emissions, including Scope 3, by 2040. We believe we will do this by focusing on four areas: building more efficient products, accelerating the use of renewable energy, embracing hybrid work and investing in innovative carbon removal solutions. We believe we have a deep responsibility to use our industry leadership position and our innovation to make the world a better place and look forward to continuing to do our part.

In summary, I am very pleased with the start to our fiscal year. Our teams are executing on our strategy while navigating a challenging operating environment, and this is reflected in our Q1 results. Demand remains strong, and with the momentum in our business transformation, we have set the stage for another year of accelerated growth in fiscal 2022.

Our performance is a testament to the power of our differentiated innovation, the strength of our end markets and our team's commitment to excellence.

As our customers accelerate their digital transformation and their adoption of hybrid cloud and hybrid work strategies, we believe we are uniquely positioned to capture the opportunities ahead. We will continue to strategically invest across our portfolio to drive growth and innovation, strengthen our competitive advantage and position Cisco for success, and I continue to have great confidence in our future.

I'll now turn it over to Scott.

Financial Overview

Thanks, Chuck. We started the fiscal year with a strong Q1 performance. We executed well, resulting in another quarter of more than 30% product order growth, driven by strength across our portfolio and demonstrating continued, robust demand for our products and services. We also had strong results across revenue, net income and earnings per share.

Total revenue increased to $12.9 billion, up 8% year-over-year, coming in line with our guidance range for the quarter. We saw strength in a number of product areas and across all geographies. Our business continues to execute well in this highly dynamic environment, but ongoing component supply constraints are impacting our ability to convert historically high demand into revenue as quickly as we'd like.

Non-GAAP operating margin was 33.3%, up 60 basis points. Non -GAAP net income was $3.5 billion and non-GAAP earnings per share was $0.82, both up 8% year-over-year, with non- GAAP EPS coming in above the high end of our guidance range.

Looking at our Q1 revenue in more detail:

Total product revenue was $9.5 billion, up 11%.

Service revenue was $3.4 billion, up 1%.

Secure Agile Networks performed very well with revenues up 10%. Switching had strong growth, driven by a double-digit increase in Campus Switching, led by our Catalyst 9000, and Meraki switching offers. The Enterprise routing portfolio had high-single-digit growth driven by Edge and SD-WAN. Wireless had very strong double-digit increase, driven by our WiFi6 products and Meraki wireless offerings. We had growth in data center switching, and compute revenue declined slightly.

Hybrid Work was down 7% overall, driven by revenue decreases in our perpetual calling, meetings and contact center offerings. These were partially offset by the ramp of Communication-Platform-as-a-Service and growth in our Collaboration Devices. Within Hybrid Work, our SaaS revenue continues to show growth of high single digits, driven by cloud calling and contact center.

End-to-End Security was up 4%, driven by growth in our cloud-based solutions, also offset by declines in our perpetual and hardware offerings. Our Zero Trust portfolio performed well, with double-digit growth, as we had continued momentum in our Duo offerings. We also saw good growth in Unified Threat management. Here again, our subscription portfolio performed well, growing 15%, driven by our cloud security and Zero Trust platforms.

Internet for the Future was up 46%, driven in large part by the strength of our Webscale customers. We saw broad strength in the portfolio with growth in cloud, growth in core with strength in both Cisco 8000 and NCS 5500, and growth in Edge with the ASR 9000. We also saw benefits from our acquisition of Acacia.