CISCO SYSTEMS, INC. Q2 FY2025 earnings call

• Strong Q2 results with revenue, margins, and earnings per share above guidance ranges. Positive top line supported by strong demand, with double-digit growth in annualized recurring revenue, remaining performance obligations, and subscription revenue (56% of total revenue). - AI infrastructure orders in Q2 surpassed $350 million, YTD ~$700 million, on track to exceed $1 billion in FY25. - Returned $2.8 billion to shareholders in Q2, total $6.4 billion YTD; increased dividend and authorized $15 billion share repurchases. - New product orders grew 29% (+11% organic ex-Splunk), 4th consecutive quarter of accelerating order growth. - Enterprise product orders up 27%, SP & Cloud up 75% (webscale triple-digit growth), Public Sector up 13%. - Networking orders: switching, enterprise routing, webscale infrastructure, IoT industrial networking grew double-digit; campus switching up double-digit, data center switching 4th consecutive quarter double-digit growth; AI orders from enterprises starting to grow with AI System deals and Cisco AI POD. - Security orders more than doubled, Splunk integration going well, new innovations like AI Defense launched. - Acquired Deeper Insights to expand CX AI capabilities.

Total revenue for Q2 was $14 billion, up 9% year-over-year. Total product revenue was $10.2 billion, up 11%, and service revenue was $3.8 billion, up 6%. Networking was down 3% (growth in Wireless and Switching offset by server decline). Security was up 117% (primarily driven by Splunk, ex-Splunk up 4%). Collaboration was up 1% (driven by Contact Center, CPaaS, and Collaboration Devices, partially offset by OnPrem Webex Suite decline). Observability was up 47% (ex-Splunk up 3% for the quarter). Total ARR ended the quarter at $30.1 billion, an increase of 22%, with product ARR growth of 41%. Total subscription revenue increased 23% to $7.9 billion, representing 56% of Cisco's total revenue. Total software revenue was up 33% at $5.5 billion, and total RPO was $41.3 billion, up 16%.

• Fiscal Q3 guidance: Revenue $13.9 billion to $14.1 billion; non-GAAP gross margin 67% to 68%; non-GAAP operating margin 33% to 34%; non-GAAP earnings per share $0.90 to $0.92. - Fiscal year 2025 guidance: Revenue $56 billion to $56.5 billion; non-GAAP earnings per share $3.68 to $3.74; assumed non-GAAP effective tax rate approximately 19%.

• Proposed tariffs on China, Mexico, and Canada; supply chain mitigation efforts in place but environment dynamic. - Geopolitical uncertainties, including impacts on U.S. federal government business.

Q: Simon Leopold asked about federal exposure and co-packaged optics; A: Chuck Robbins responded discussing federal business being less than 10% of total and how Cisco views co-packaged optics in strategy.

Q: Meta Marshall inquired about customer propensity to spend and campus portfolio strength; A: Chuck Robbins noted strong demand across geographies and portfolio, including public sector strength outside the U.S. and campus switching growth.

Q: Ben Reitzes asked about the 9,300 Nexus switch and enterprise AI spending; A: Chuck Robbins talked about the innovation in the switch and enterprise customers starting to spend on AI-driven infrastructure.

Q: Matthew Niknam asked about enterprise AI investment and gross margin guide; A: Chuck Robbins discussed enterprise AI being in early days but starting to see spending, and Scott Herren explained gross margin guide accounts for proposed tariffs.

Q: Samik Chatterjee asked about enterprise response to tariffs and hyperscaler AI deployment; A: Scott Herren said no evidence of demand pull-in, and Chuck Robbins noted hyperscaler deployments are on track.

Q: Tal Liani asked about Splunk trends and security observability; A: Scott Herren explained Splunk's performance and Chuck Robbins discussed security innovation and customer adoption.

Q: Amit Daryanani asked about AI orders and revenue conversion; A: Chuck Robbins said AI orders are a combination of systems, silicon, etc., and Scott Herren said revenue will ramp in H2.

Q: Jim Fish asked about Splunk customer penetration and data center wins; A: Chuck Robbins talked about Splunk integration progress and data center wins being mostly systems.

Q: David Vogt asked about competitive landscape and campus WiFi 7; A: Chuck Robbins discussed competition and campus WiFi 7 upgrade cycle.

Q: Antoine Chkaiban asked about enterprise AI use cases and data center power; A: Chuck Robbins talked about enterprise AI use cases and no major power concern in enterprise.

Q: Aaron Rakers asked about Silicon One silicon and campus WiFi 7; A: Chuck Robbins discussed Silicon One silicon's role and campus WiFi 7 upgrade plans.

Q: Karl Ackerman asked about order visibility; A: Chuck Robbins and Scott Herren said order visibility is normalizing.

Q: Adrienne Colby asked about telco customer segment and AI; A: Scott Herren and Chuck Robbins discussed telco demand driven by AI and their preparations.