Cisco Systems, Inc. (NASDAQ:CSCO) reported its fourth-quarter financial results after Wednesday’s closing bell.
Below are the transcripts from the Q4 earnings call.
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OPERATOR:
Welcome to Cisco’s fourth quarter and fiscal year 2025 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 Samy Badri, Head of Investor Relations. Sir, you may begin.
Samy Badri (Head of Investor Relations)
Good afternoon everyone. This is Samy Badri, Cisco’s Head of Investor Relations and I’m joined by Chuck Robbins, our Chair and CEO, and Mark Patterson, our CFO. Cisco’s earnings press release and supplemental information including GAAP to non GAAP reconciliations are available on our investor relations website. Following this call, we will also make the recorded webcast and slides available on the website. Throughout today’s call, we’ll be referencing both GAAP and non GAAP financial results. We will discuss product results in terms. Of revenue and geographic and customer results in terms of product orders. Unless stated otherwise, all comparisons will be made on a year over year basis. Please note that our discussion today will include forward looking statements including our guidance for the first quarter and fiscal year 2026. These statements are subject to risks and uncertainties detailed in our SEC filings, particularly our most recent 10K and 10Q reports which identify important risk factors that could cause actual results to differ materially from those contained in our 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. Now I’ll turn it over to Chuck.
Chuck Robbins (Chair and CEO)
Thanks Sami, and thank you all for joining us today. We had a strong close to fiscal 25, delivering revenue and gross margin at the high end of our guidance ranges for the fourth quarter. Continued operating leverage across our business produced strong profitability with earnings per share above the high end of our guidance. In addition, we generated solid growth in annualized recurring revenue, remaining performance obligations and subscription revenue which provides a strong foundation for our future performance. The profitable growth of our business continues to produce strong cash flows, supporting our commitment to deliver consistent capital returns. In Q4, we returned $2.9 billion in capital to our shareholders through share repurchases and dividends, bringing the total return in fiscal 25 to $12.4 billion in value or 94% of free cash flow, surpassing the 12.1 billion Cisco return to shareholders in fiscal 24. Overall, our FY25 performance has established a solid foundation as we turn our focus to delivering Cisco’s strongest year yet in fiscal year 26. As indicated in our guidance. As we move into the next phase of AI with agents autonomously conducting tasks alongside humans. The capacity requirements of the network will be compounded to accommodate both unprecedented levels of network traffic and an increasing threat landscape. According to our survey of IT networking leaders, 97% of businesses believe they need to upgrade their networks to successfully deploy AI. Having refreshed almost our entire product portfolio with industry leading networking Systems powered by SiliconOne AI, native security solutions and software operating systems, Cisco is well positioned to provide the critical infrastructure needed for the AI era. Now let me comment on the demand we saw in Q4, starting with record AI infrastructure orders received from web scale customers. These orders exceeded 800 million in the quarter, bringing the total for fiscal year 25 to over 2 billion, more than double our original $1 billion target stated in Q4 of fiscal year 24. This demonstrates the undeniable capability and relevance of our technology for multiple back end use cases with some of the most technologically advanced customers. Overall, total product orders in Q4 grew 7% year over year with solid growth across all geographies. Despite a complex environment demonstrating the valuable outcomes we continue to deliver for customers worldwide. Enterprise Product orders were up 5% year over year in Q4 as typical for the fourth quarter, we closed several very large deals with major enterprises across different industries who are compounding the value of their investments by leveraging the full breadth of our technology platforms. We have a slide in our earnings presentation that highlights both the breadth of Cisco’s reach through eight figure or larger deals and the versatility of solutions tailored to our customers needs. Public sector orders were down 6% year over year in Q4 compared with a very strong fourth quarter in FY24 when orders grew double digits year over year. That said, overall public sector demand grew sequentially in line with normal seasonality. Product orders from service provider and cloud customers continue to be very strong, up 49% year over year driven by triple digit order growth in web scale for the fourth consecutive quarter with four out of the top six web scale customers each growing orders in the triple digits. In fact, two web scale customers each placed total orders of over $1 billion for networking, security, collaboration and observability in FY25. Demand from telco and cable customers was also strong in Q4 with orders growing more than 20% year over year. Now some color on demand for our core networking and security solutions. Networking product orders grew double digits in Q4, marking the fourth consecutive quarter of double digit growth driven by web scale infrastructure switching, enterprise routing, industrial IoT and servers. There is strong interest from customers in the new family of Cisco Cat 9K smart switches along with a completely refreshed lineup of highly secure routers, wireless access points and industrial IoT devices which are purpose built for the AI ready campus and branch. Our new smart switches are powered by SiliconOne and deliver enhanced performance, quantum secure networking and radically simplified cloud, native and AI driven operations all supporting the new realities as AI changes how we work and collaborate. The introduction of our new switches marks the beginning of a major multi year refresh cycle opportunity for Cisco’s large installed campus switching base. Orders for our Industrial IoT portfolio comprised of ruggedized Catalyst products grew double digits for the fifth consecutive quarter and we see solid demand signals continuing into FY26 as countries around the world are committing to US domestic investments as part of their trade agreements. As more strategic infrastructure and manufacturing is brought onshore to the United States, Cisco is well positioned to help connect and protect these capital intensive investments at Scale As I mentioned earlier, the AI infrastructure orders we received from web scale customers were once again exceptionally strong, exceeding 800 million in the quarter. As expected, the product mix of these orders was more than 2/3 in systems with the remainder in optics in the enterprise specifically, while still early AI orders are ramping and we have a growing pipeline in the hundreds of millions as these customers look to Cisco to provide simple, scalable and secure solutions for the AI era. Our expanding partnership with Nvidia also positions us to deliver on these new demands with completed integrations of Cisco Nexus switches with Nvidia’s Spectrum X architecture offering low latency high speed networking for AI clusters. Additionally, the Cisco Secure AI Factory with Nvidia provides a trusted blueprint for building secure AI ready data centers for enterprises, sovereign cloud providers and newly emerging NEO cloud providers. We also see the opportunity with NEO cloud providers ramping with several Large deals in Q4 not included in the previously mentioned AI infrastructure orders. Our newly forged Middle east strategic partnerships including Humane G42 and Stargate UAE are all progressing as planned and we expect the sovereign AI opportunity to build momentum in the second half of fiscal year 26. We believe Cisco will be a core system provider for these significant AI training and inference cluster build outs and integral to their development and eventual hyperscaling. As we look holistically at the AI opportunity for Cisco, we frame it into three distinct but connected pillars. First, AI Training infrastructure for web scale customers Combinations of our Cisco 8K, silicon one optics and optical systems are being deployed by the largest web scalers and we expect demand for these technologies from NEO cloud providers and sovereign customers to increase in fiscal year 26. Second, AI inference and enterprise Clouds Our accelerated innovation in hardware and software coupled with our Nvidia partnership is designed to simplify, accelerate and de risk AI infrastructure deployments for the enterprise and third, AI Network connectivity Customers are leveraging Cisco platforms to help modernize, secure and automate their network operations to prepare for pervasive deployment of AI agents and applications. As we move towards agentic AI and the demand for inferencing expands to the enterprise and end user networking environments, traffic on the network will reach unprecedented levels. Network traffic will not only increase beyond the peaks of current chatbot interaction, but will remain consistently high with agents in constant interaction. We have a slide illustrating this new traffic model in our earnings presentation available on our website. As agents gain autonomous decision making and action capabilities, security will be even more critical to ensure they operate reliably and safely. As a trusted partner for enterprises, hyperscalers, NEO cloud and sovereign cloud providers alike, Cisco has the opportunity to lead this generational transition in networking and security and provide the critical infrastructure needed for the AI era. Now shifting to security, we recorded mid single digit growth in orders in Q4. Splunk and Cisco synergies delivered a 14% year over year increase in new logos for Splunk in Q4, demonstrating the benefit of our cross selling motions and joint innovation. Our new and refreshed products including Secure Access, XDR, HyperShield and AI Defense also continue to ramp and added 750 new customers collectively and in the quarter. The vast majority of our new hypershield enterprise customers are bundling with our N9300 smart switch which enables them to embed security directly into the fabric of the network. We believe that agentic AI can only be secured by fusing security deep into the network and that only Cisco can deliver this capability. Now I’d like to comment on our accelerating innovation pipeline at Cisco Live Us. In June we delivered our largest innovation payload to date, announcing over 20 new customer centric offerings across our portfolio to help our customers build AI ready data centers and future proof their workplaces with a foundational layer of digital resilience. You can see the full list of product launches in our slide deck, but I’d like to highlight our agentic ops which are already resonating with customers. Cisco AI Canvas is a revolutionary generative user interface for real time collaboration between network and security teams optimized for both human and agent interaction. Powered by Cisco’s Advanced Deep Network model, LLM AI Canvas unifies real time telemetry across various platforms to radically simplify IT operations and accelerate troubleshooting all of our new innovations introduced in FY25, spanning core networking products based on Cisco, Silicon One, advanced security technologies and unified management tools are designed on a foundation of AI, further enhancing Cisco’s platform advantage where every technology doesn’t just add value by itself, but compounds the value of our customers existing investments we continue to use Genai and Agentix systems across our customer experience organization with things like services as code and AI agents for end product support, renewals and adoption. Today over 2/3 of support cases are touched by AI and automation, which increases the proportion of complex cases we can solve within one day. We’re also seeing increased usage of Cisco’s own proprietary AI application internally, with more advanced use cases emerging across engineering, sales, operations and our people, policy and purpose organization resulting in meaningful productivity gains for our teams. To summarize, we are seeing clear demand for our technology across customer markets in addition to expanded opportunities. As we move towards agentic AI, we are innovating faster than ever before, making AI foundational in our designs, fusing security deep into our networking products and providing operational simplicity for our customers. And our strong performance is fueling our capital allocation model, returning significant value to our shareholders while positioning our business for success in fiscal 26. Before I close, I’d like to once again thank Scott Herron for his leadership and partnership over the last five years. Scott has been instrumental in driving our transition to more software and recurring revenue, which has driven greater predictability for our business and increased shareholder value. We wish you all the best in your retirement. I’d also like to take a moment to thank our teams for their hard work to close out the year, for executing with urgency as one Cisco, and most importantly for their unfailing focus on delivering valuable outcomes for our customers. Now I’ll turn it over to Mark for more detail on the quarter and our outlook.
Mark Patterson (Chief Financial Officer)
Thanks Chuck. We delivered a strong quarter with revenue and non GAAP gross margin and operating margin at the high end of our guidance range and earnings per share above the high end of our guidance coupled with solid operating cash flow for the quarter, Total revenue was $14.7 billion up 8% year over year. Non GAAP net income was 4 billion up 12% and non GAAP earnings per share was $0.99 up 14%, demonstrating good operating leverage with EPS growth outpacing revenue growth. Before we dive into the details, it’s worth reiterating as a reminder that we had a full 13 week contribution from Splunk in Q4FY24 last year, so Our reported year over year growth rates are fully comparable this quarter. Looking at our Q4 revenue in more detail, total product revenue was 10.9 billion, up 10%. Services revenue was 3.8 billion flat year over year. Networking was up 12% with growth across most of the portfolio led by double digit growth in Internet infrastructure and enterprise routing as well as solid growth in switching partially offset by a decline in servers. Security was up 9%, primarily driven by growth in our offerings from Splunk and SASE. Collaboration was up 2%, driven by solid growth in devices. Observability was up 4%, led by strong growth in Splunk and Thousand Eyes. Looking at our recurring metrics, Total RPO was 43.5 billion, up 6%. Product RPO grew 8% and total short term RPO was 21.7 billion, up 4%. Total ARR ended the quarter at 31.1 billion, an increase of 5% with product ARR growth of 8%. Total subscription revenue increased 3% to $7.9 billion and represents 54% of Cisco’s total revenue. Total software revenue was up 5% at $5.6 billion with software subscription revenue also up 5%. Q4 product orders were up 7% year over year. Looking at our product orders across geographic segments, The Americas was up 5%, EMEA was up 10% and APJC was up 7%. In our customer markets, service provider and cloud was up 49%, enterprise was up 5% and public sector was down 6%. Total non GAAP gross margin came in at 68.4%, up 50 basis points year over year. Coming in at the high end of our guidance range. Non GAAP product gross margin was 67.5%, up 50 basis points, driven by productivity improvements. Non GAAP services gross margin was 70.8%, also up 50 basis points. Our total gross margin included a small impact from tariffs which was slightly favorable compared to our estimate that was included in our guidance. We continue our focus on profitability and financial discipline with non GAAP operating margin at 34.3%. At the high end of our guidance range, our non GAAP tax rate was 18.1% for the quarter. Shifting to the balance sheet, we ended Q4 with total cash cash equivalents and investments of 16.1 billion. Operating cash flow was 4.2 billion, up 14%, primarily driven by our revenue and earnings growth from a capital allocation perspective. We returned $2.9 billion to shareholders during the quarter, comprised of 1.6 billion for our quarterly cash dividend and 1.3 billion of our share repurchases with 14.2 billion now remaining under our share repurchase program. Turning to the full fiscal year, revenue was $56.7 billion, up 5% total. Non GAAP gross margin was 68.7%, up 120 basis points. On the bottom line, non GAAP net income was 15.2 billion flat year over year. Non GAAP earnings per share was $3.81 which was up 2%. Operating cash flow was 14.2 billion, up 30% compared to FY24. Cash flow growth from the full year was positively impacted by some large tax payments in early FY24 that did not repeat. In FY25 we returned 12.4 billion in value to our shareholders through cash dividends and share repurchases. This was comprised of 6.4 billion in quarterly cash dividends and 6 billion of share repurchases. We increased our dividend for the 14th consecutive year in FY25, reinforcing our confidence in the strength and stability of our ongoing cash flows. To summarize, we had a solid fiscal quarter and year with top and bottom line performance beating and exceeding our expectations driven by strong order growth and margins. For the full fiscal 2025 we delivered record non GAAP operating income and margin, demonstrating our ability to provide operating leverage while driving strong top line growth. We remain focused on making strategic investments in innovation to capitalize on the significant growth opportunities …