Cisco Systems Inc (CSCO) — Q2 2019 Earnings Call Transcript

Thanks, Michelle. Welcome, everyone, to Cisco’s second quarter fiscal 2019 quarterly earnings conference call. This is Marilyn Mora, Head of Investor Relations, and I’m joined by Chuck Robbins, our Chairman and CEO; and Kelly Kramer, our CFO. By now, you should have seen our earnings press release, and 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. 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 made on a year-over-year basis unless stated otherwise. The matters we will be discussing today include forward-looking statements including the guidance we will be providing for the third quarter of fiscal 2019. They are subject to the risks and uncertainties 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 accompany this call for further details. As a reminder, Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. As a reminder, in Q2, on October 28, we completed the sale of our SPVSS business and accordingly had no revenue or expense from that business in Q2 fiscal 2019. As such, all of the revenue, non-GAAP, and product orders information we will be discussing is normalized to exclude the SPVSS business from our historical results. We have provided historical financial information for the SPVSS business in the slides that accompany this call and on our website to help understand these impacts. As a reminder, the guidance we provided during our Q1 earnings call and today's call has been normalized in the same way. I will now turn the call over to Chuck.

Thank you, Marilyn and good afternoon, everyone. This quarter we again demonstrated that we have built a resilient growth engine that is firing on multiple cylinders. Our strategy of expanding our portfolio, while investing in our core markets is delivering unprecedented innovation for our customers and sustainable value for our shareholders. We delivered revenue growth across all geographies and businesses, strong margins, double-digit non-GAAP earnings per share growth, and continued solid cash generation. We're building the technologies that enhance our customers’ new digital capabilities and experiences like never before. With a continued expansion to the cloud, the increasing connectivity of users and devices and the need to secure their enterprises, our customers are facing the most complex and dynamic IT environment we've ever seen. Cisco's intent-based networking architecture helps them navigate this complexity by enabling them to simplify, automate, and securely transform their infrastructure. We are redefining every networking domain for our customers from the campus to the wide area network to the data center to the cloud, delivering the agility, operational efficiency, and most importantly, the security our customers require to accelerate their digital transformations. Only Cisco can build and deliver a multi-domain intent-based architecture that sits at the intersection of users, devices, applications, and data that can securely connect any user on any device on any network to any application. Simply put, the Cisco of today is at the center of our customer strategies and no longer viewed just as an enabler of those strategies. Now, let's review some of the highlights in our key strategic growth areas. Starting with infrastructure platforms. Over the last 18 months, we've been reinventing networking from the ground up to connect every domain of the extended enterprise and it's clear that the investments we've made in our core business are paying off. We are executing well, with continued growth in our infrastructure portfolio and strong customer uptake of our Catalyst 9000 family of switches and our SD-WAN offerings. We are now extending our industry-leading security and intent-based networking capabilities to new IoT edge platforms, connecting devices throughout the enterprise with unprecedented scale, unparalleled flexibility, and control. Going forward, you will see us continue to extend our intent-based networking innovations across the portfolio with subscription-based offers that will enable our customers to adopt a consistent architecture across every domain. In the data center, we're enabling digital enterprises to securely access their applications and their data everywhere from private to public cloud environments, as well as the edge. Two weeks ago, we announced a new architecture that extends a data center to wherever the data exists and across all applications running anywhere. We introduced several new innovations to extend our multi-cloud leadership with ACI Anywhere, HyperFlex Anywhere, and cloud center capabilities. We are also well positioned to take advantage of 100 gig and 400 gig upgrade cycles across enterprise data centers, service provider, and web scale networks. With global Internet traffic expected to increase threefold over the next five years, our customers are facing an exponential demand for capacity. To address their need for speed and performance, we continue to innovate to drive the industry's transition to next generation high-speed networks of 400 gig and beyond. Our acquisition of Luxtera will further augment our existing capability around silicon and optics, enabling our customers to build the fastest and most efficient networks. Now moving to our security business, we generated strong double-digit growth reflecting the increasing demand for our market leading solutions and the trust our customers place in us. The attack surface is only increasing. And our comprehensive approach of integrating security into the intent-based architecture from the network to the cloud to the endpoint has been successful, as our installed base continues to grow. With our industry-leading threat intelligence, we are redefining how security is delivered with our multi-domain architecture. For example, as a leader in both SD-WAN and security, Cisco provides the most robust SD-WAN platform integrated with cloud security. This helps to simplify and secure our customers’ deployment, operation, and management of their environments. Increasingly, we're helping to secure our customers’ distributed enterprises with remote access and cloud-based security solutions. A great example of this is Duo Security’s cloud delivered zero trust platform, which significantly expands our footprint in the Identity and Access market bringing together user, device and application visibility and trust. We are seeing strong traction with Duo and good progress in scaling their capabilities while strengthening our cloud-based subscription portfolio. Turning to applications, and collaboration, enterprise communications continue to evolve as we move to a digital cloud-based world. We are defining the future of work with next generation collaboration platforms that have flexible, intuitive, and intelligent on-premise and cloud-based solutions. This comprehensive approach to collaboration is a key reason why customers are adopting our market leading portfolio resulting in another quarter of exceptional growth. Cisco provides a full suite of collaboration solutions for calling, meeting, team collaboration and care, with flexible subscription offerings designed to easily integrate into customer workflows. With a deep integration of BroadSoft with our core capabilities, we are now the market leader for cloud-based calling and care solutions with compelling solutions for SMBs as well as enterprises globally. AppDynamics is the largest APM vendor providing real-time analytics and insights across applications, infrastructure, and the network, driving solid momentum with our customers. We have been investing in several new capabilities delivering the broadest application visibility and monitoring platform in the world. Our real-time analytics and monitoring offerings are mission critical for our customers as they face a growing complex application environment. To simplify and automate their IT operations, we recently launched AIOps, leveraging AI, machine learning, and automation to enable improved customer experiences and greater business performance. In summary, we are very pleased with our strong quarter and first half performance. Our teams are executing incredibly well, aggressively transitioning to a software model and accelerating our pace of innovation, and I'm proud of the work they're doing. Our multi-domain intent-based architecture is helping to simplify, automate, and secure the complex IT environments our customers are facing. And I believe we are well-positioned to play an even more strategic role with them as they embrace multi-cloud, edge computing, and digital transformation. The innovation our teams have been driving has now given us the strongest portfolio that we've had in a long time, and I couldn't be more confident about our future. Kelly, I'll now turn it over to you.

Thanks, Chuck. I'll start with a summary of our financial results for the quarter, followed by the guidance for Q3. Q2 was a solid quarter across the business. We executed well with strong orders, revenue, gross margin, EPS, and operating cash flow. We had continued momentum and product orders which grew 8%. Total revenue was 12.4 billion, up 7%. Our non-GAAP operating margin rate was 32.1%, non-GAAP net income was 3.3 billion, up 6%, and non-GAAP EPS was $0.73, up 16%. Let me provide some more detail on our Q2 revenue. Total product revenue was up 9% to 9.3 billion. Infrastructure platform grew 6%. Switching had another great quarter with double-digit growth in the campus driven by the continued ramp of the Cat 9000. Wireless also had double-digit growth, with strength of our Wave 2 offerings and Meraki. Routing declined due to weakness in service provider. We also saw decline in data center servers partially offset by strength in hyperconverged. Applications is up 24%, with growth across all the businesses. We saw strong growth in unified communications, telepresence, and AppDynamics. Security was up 18% with strong performance in identity and access, advanced threat, and unified threat. Service revenue was up 1% driven by software solution support. We continue to transform the business delivering more software offerings and driving more subscriptions. Software subscriptions were 65% of total software revenue, up 10 points year over year. When we look at the impact of acquisitions on our future results year over year, there was a 140 basis point positive impact on revenue. We saw strong momentum in Q2 with total product orders growing 8%. Looking at the geographies, America grew 7%, EMEA was up 11%, and APJC was up 6%. Total emerging markets was up 6% with BRICS plus Mexico up 2%. In our customer segment, enterprise was up 11%, commercial grew 7%, public sector was up 18%, and service provider was down 1%. From a non-GAAP profitability perspective, total Q2 gross margin was 64.1%. In terms of the bottom line from a GAAP perspective, Q2 net income was 2.8 billion and EPS was $0.63. We ended Q2 with total cash, cash equivalents, and investments of 40.4 billion. Q2 operating cash flow was 3.8 billion, down 7%. We paid 750 million for the first transition tax payment related to the tax cuts and jobs act. Normalized for that tax payment, operating cash flow was up 12%. From a capital allocation perspective, we returned 6.5 billion to shareholders during the quarter that was comprised of 5 billion of share repurchases and 1.5 billion for our quarterly dividend. Today, we also announced a $0.02 increase to the quarterly dividend to $0.35 per share, up 6% year over year. This represents a yield of approximately 3% based on today's closing price. We also announced a $15 billion increase to the authorization of the share repurchase program. This raises the remaining share repurchase authorization to approximately 24 billion. This dividend increase and additional share repurchase authorization reinforces our commitment to returning capital to our shareholders and our confidence in the strength and stability of our ongoing cash flows. We continue to invest organically and inorganically in our innovation pipeline. During the quarter, we announced the acquisition of Luxtera, a company focused on silicon photonics, which closed on February 6. To summarize, we had a great Q2, we executed well with strong top-line growth and profitability. We're seeing the returns on the investments we’re making in innovation and driving the shift to more software and subscriptions driving long-term growth and shareholder value. Let me reiterate our guidance for the third quarter of fiscal '19. This guidance includes the type of forward-looking information that Marilyn referred to earlier. Note again, that we have normalized our third quarter guidance to exclude the SPVSS business for Q3 of fiscal '18, which we divested on October 28 of 2018. We have provided historical financial information for the SPVSS business in the slides that accompany this call. We expect revenue growth in the range of 4% to 6% year over year. We anticipate the non-GAAP gross margin rate to be in the range of 64% to 65%. The non-GAAP operating margin rate is expected to be in the range of 31% to 32% and the non-GAAP tax provision rate is expected to be 19%. Non-GAAP earnings per share is expected to range from $0.76 to $0.78. I'll now turn it back to Marilyn, so we can move to Q&A.

Thanks, Kelly. Michelle let's go ahead and open the line for question. As a reminder, I ask that all of you limit yourself to one question only, so that we have enough time to get to all of you. I'll now turn it over to you, Michelle to start the queuing process.

Thank you very much. And congratulations on the results and the outlook. When we look at a couple of dynamics, whether it be tariffs, government shutdown, or maybe even weather for installation and shipping your product around the whole US, any thoughts around how we should think about those items, how they played out and your forecast of what's built in?

Jim, this is Chuck. I want to start by saying that we are currently experiencing a highly complex macro geopolitical environment with many factors at play. However, from the beginning to the end of the quarter, we experienced no significant changes. Demand remained steady throughout the quarter, and our teams executed very well. As we look to the future, we are considering current conditions, and so far, we've navigated the various dynamics successfully. We are quite proud of our teams' accomplishments.

Next question please.

Good afternoon, Chuck and Kelly. Congratulations, these are solid results. My question Chuck and Kelly, I would like to get your thoughts into, you know, the secular growth portfolio you have around AppDynamics, Meraki, Viptela, Duo, et cetera, are these assets starting to drive new sales opportunities, perhaps new product refresh for the core business, or are these mostly like standalone like they're growing in their respective areas? Thank you.

Thank you, Vijay, and I appreciate the kind words. When examining our various acquisitions, such as BroadSoft and its integration with our collaboration portfolio, it is clear that they enhance our overall architecture and have a positive effect on our business. For instance, as we strengthen the integration between the Meraki portfolio and the traditional Cisco offerings while aligning our automation strategies, customers can adopt a hybrid model combining both technology areas. This is beneficial for many of our clients who may prefer the core Cisco solutions in their main offices and Meraki in retail locations or smaller branches. Similarly, an acquisition like Duo fits into our broader security architecture, which our customers are clearly embracing, as evidenced by the 18% growth rate—our fastest in security in years. Thus, while the impact of each acquisition varies, most contribute to enhancing the architecture they are part of.

And just to add, I think, we're also embedding it in our products, right and you can look at like when we acquired Stealthwatch, it's now part of what we're doing at the Cat 9000 or what we announced with Umbrella being in part of other products. So, I think it's a combination of both.

Yeah, bringing together some of the traditional technologies, I mean thinking about bringing together ISR with Viptela and Umbrella to create this new secure SD-WAN offering, I mean that's a unique capability that only we have and look at taking some of the security technologies like advanced malware and moving them into the Meraki portfolio. Those are obviously key differentiators for us.

Thanks Vijay, next question please.

Hi, guys. Thanks for the question. I guess I wanted to start off with the public sector side of things and the order trajectory there improved a lot to 18%. And yet, you know, we're all sitting here expecting the US Fed to be weak. So, I wonder if you could sort of comment on the US Fed impact on the current quarter, and then why we're seeing such a big order acceleration there and then I have a follow-up.

I think it's important to understand the dynamics of the shutdown we experienced. Only about 25% of government agencies were affected. Some of our partners anticipated the shutdown and placed orders in advance, which helped mitigate the impact. I'm pleased to share that our US Federal business grew double digits despite the shutdown, highlighting our team's effectiveness and relationships. Looking at our global business, particularly in Europe, we saw 11% growth in the EMEA region. Much of that growth is linked to the public sector, which was consistent worldwide. Overall, our public sector business grew 18% globally, indicating that our technologies are resonating well in that segment.

I wanted to follow up on the enterprise order rate. It was 15% last quarter, and it's slowed to 11%. Can you comment on what you're observing there? You've mentioned before that last year was particularly strong, and I'm curious if this is just a short-term trend or if this is a trajectory we should anticipate continuing.

As I consider our enterprise portfolio, it aligns well with what our customers are seeking. They are focusing on strategies to increase revenue and are interested in how our collaboration architecture and location analytics can assist them. Additionally, they are looking for ways to reduce operating expenses, which ties into the automation we are implementing in networking, particularly with our SD-WAN solutions. These elements are central to what our enterprise customers need. We have discussed in previous calls that we are still in the early stages of the Cat 9000 initiative, and we have now introduced a wireless portfolio that integrates with that framework. The SD-WAN solutions will also be part of this architecture, and customers are just beginning to deploy this technology. We are optimistic about our position, and if we continue to execute effectively, we believe the benefits for the customer will lead to a successful future for our enterprise accounts.

Next question please.

I've got two related questions; one my customary what's your rate of price erosion in connection with that. If you could talk about gross margins drivers looking forward. And related to that, if I did the math right, you all did 4.5 billion of operating cash flow if you exclude the 800 million in connection that one-time tax item. That's a record by over $400 million or 10% of what historically is not your strongest cash flow quarter. The question is, is that a new normal? Or were there other extraordinary items in that number?

Regarding cash, there’s nothing out of the ordinary. The $750 million we paid out will be incurred over the next eight years as part of the transition tax. Apart from that, there’s nothing exceptional. In Q1, we had a notable $400 million payout related to a risk, but Q2 doesn’t feature anything similar. Answering Paul's question about price this quarter, it had a one-point impact on gross margin, and the teams managed that well. Going back to the factors influencing gross margin, as discussed in the last earnings call, the same drivers are still present. We faced significant negative pressures from DRAM and component costs in Q2. However, in our forward guidance, you'll see an increase of another half point because, as I anticipated last quarter, DRAM is expected to become a tailwind in Q3 and Q4. This explains the rise in our gross margin guidance. The influences we saw were mainly the component costs in Q2, which are expected to improve, along with a slight drag from ramping up the Cat 9000 portfolio due to the deferral impact, but overall, we're executing effectively.

Kelly, I trust you. I’ll go and shift software will have a benefit over time?

We're experiencing various factors that are mitigating many of the challenges associated with components. This trend is expected to persist, which is why you continue to observe these elements in our results. The DRAM issue has been a notable challenge for us in recent quarters, but we anticipate that we will keep benefiting from it.

Thanks, Paul. Michelle, next question.

Thanks and congrats, let me add my congrats, a fantastic execution in what seems to be a very crazy world. Maybe I have a two-part question. I guess, Chuck, trying to kind of dig into what Rod was asking before. You're running multiple product cycles and in multiple product areas, but if you have to kind of put it all together across your entire customer base, in what phase of the adoption are we embrace of the customers of this new portfolio, are we early cycle, mid-cycle, help me think about that?

Thank you, Ittai. It's important to understand that we have been focused on developing top-notch technology for our customers across various domains. We've created excellent portfolios for data center switching, campus switching, and campus wireless. In the past three years, we have established an automation framework within these domains. We developed ACI for the data center, DNA for the campus, an SD-WAN platform for the branch, and a security control center that automates our security architecture. Now, we are starting to integrate these elements. When we mention multi-domain, we are providing our customers with the capability to automate processes across all these areas. In the coming months, you can expect more announcements about extending this. We have also incorporated it into the IoT architecture, enabling applications running in the cloud or data center to deploy specific policies across all those domains. This is what excites our customers. At this stage, we are still in the early phases. Reflecting on how many years customers have invested in their existing infrastructure, we recognize that there is significant groundwork to cover as we transition into this new architecture. Overall, it is still very early in all the areas I mentioned.

That's great. As a follow-up, I didn't catch the comment about the data center switch. Could you provide some clarity on your current position there and how you see the impact of 400 evolving over time?

I think we provided a broader switching number. Our overall switching business increased by double digits, which is significant. We're pleased with that progress.

And on the 400-gig.

And regarding the 400 gig, we have a lot of work happening in our data center switching portfolio, where we're in some early field trials, as well as in our networking portfolio. We expect to see broad deployments by the middle of this year, and we are optimistic about that. There are a couple of key differentiators for us. We manufacture our own silicon, and the Luxtera acquisition will allow us to integrate optics more effectively instead of sourcing them externally. Our intent-based architecture and the capability of our silicon to perform real-time packet examinations for customers, allowing them to view packet flows dynamically, are significant advantages. Additionally, we anticipate benefits in power consumption. By the middle of this year, we will see if all of this materializes, and I believe our teams are positioned well.

Thanks Chuck, next question.

Chuck, I wanted to check in with you about the momentum in emerging countries. Last quarter, you mentioned solid momentum in places like India. Are those stronger dollars starting to reflect in their appetite for IT spending?

We gave that number, right, the emerging markets? Up 6% on orders.

And BRIC was up 2%.

So, I think 6% in light of what we've heard from others around that space. And, you know, historically, what we've seen is when interest rates in the US start rising, it creates challenges in emerging countries. And I think if you press Kelly, she’d probably tell you the currency was a slight headwind for us as well. So, I think the teams are doing well and it speaks to the relevance of what we built. We’ve had some big build outs in India. So, India slowed a little bit for us but still quite positive. I think Russia was slightly negative. Mexico was positive. It is a same story, it is a portfolio of emerging countries and right now we have more that are performing well from a volume perspective. China was roughly flat for the last quarter. But overall, again, I’m pleased given the complexities that our teams are facing both geopolitically and from a currency perspective, I think they executed really well. And I think it speaks to the teams themselves on the ground and the portfolio that our engineering organizations built.

I have two questions or one question and one follow up. The first one is just about cloud spending. We hear a lot about weakness in spending. On one hand, you're not very, very exposed, you're exposed in certain areas and other areas not. On the other hand, it's a big growth opportunity for you. Can you discuss your participation in cloud and your comments on any weakness in cloud spending and then I have a follow up on the Chinese vendors?

This quarter, having less exposure is beneficial. However, we are pleased with the progress we are making. The big transitions we mentioned, like the 100-gig and the 400-gig, present opportunities for us, and we are actively working to position ourselves favorably for these developments. I can't provide more insight than what you've already heard from those significantly involved in that sector. We are continuing our efforts and pursuing the same initiatives we've previously discussed. I would say our position has not changed substantially from what we described about 12 to 18 months ago, but we are making progress, and we have indicated that it will be a long journey to achieve our goals.

I would like to follow up on that. Could you discuss your exposure in the cloud, particularly the differences between hyperscalers and smaller cloud vendors? Are you observing similar trends with smaller companies where you have exposure compared to larger ones? I hosted a call with Huawei this morning, and they mentioned that they believe they will gain market share despite various challenges. While you don’t compete with them in China and the U.S., you do compete with Huawei and ZTE on a global scale. There have been repeated inquiries about market share gains compared to these companies. What is your perspective on this, and what experiences have you had recently regarding competition with Huawei when you engage with major carriers? How do you view your portfolio in comparison to Huawei's in light of these challenges?

It's a good question. The size of the market opportunity in China skews the global market share numbers. If you're not significantly involved in China, it's challenging to capture market share when looking at the global picture. We’ve started to analyze our performance with and without China to understand our standing. I believe our current innovation, especially the efforts from our teams in the service provider space and the developments around the 5G packet core and other next-generation platforms launching this year, positions our innovation competitively on a global scale. Our performance in the EMEA and APJC regions over the last few quarters indicates that we're not only maintaining our position but also competing effectively. Last quarter, for example, we experienced positive growth in the service provider segment in both regions. I am confident that we are competing well and achieving success right now. The share comment could reflect the size of the Chinese market, but in other parts of the world, we're performing strongly.

I’m on for John. You talked about double-digit growth in Campus, are the new Catalyst 9K products that you introduced about a quarter ago starting to contribute to revenue. I’m really just trying to get at how much more there is to go in Campus and whether it's unreasonable to think Campus could be up double digits for the full year as newer Cat 9K products start to layer on?

Well, I think, when you just look at the 9K sales versus the install base of the products that the 9K replaces, we are very early in that cycle. And we just launched a 9200. When did that start?

A quarter ago. Just started shipping this quarter.

A quarter ago. Just started shipping this quarter. So the products that we announced in the middle of 2017 clearly are flowing through revenue. The 9200 just started contributing to that. But again, if you look at where we are versus the install base that these products replace, it's very early.

And then a quick follow up on M&A, I wonder if you could comment on capital allocation, now that the core business is growing very healthy, is it time for accelerated M&A perhaps?

Well, I'll make a comment and Kelly can add on to it. I don't think that the growth of the core fundamentally changes our overarching acquisition strategy. I think that we've had an acquisition strategy that's continued to add to our portfolio and expand our portfolio. What I alluded to early on is that our strategy of not only creating adjacent expansions to our portfolio, but really driving innovation back into our core, so that we can get growth from both, given the size of our core markets, that's working. So I don't think that our overall M&A strategy changes because of the success of the core, but Kelly?

Yeah. It never has changed, right? I mean, I think our strategy has always been clear, we're going to invest in the business first. And we're always looking for M&A, no matter what the environment is, and we're going to do smart M&A, and then we're committed to our dividend growth like we have been. And then of course the share buyback, and again, I think you saw the latter two there, we just announced again another increase to the dividend, just showing the commitment we have and the faith we have in the cash flows of the business as well as just another increase of share buyback authorization. So I'd say it's independent to how the core business is doing. It’s just a critical part of our overall strategy.

Thanks Chuck, next question.

Thank you for taking my question. I'd like to revisit what you said about the emerging market, specifically regarding China. It sounds like you're pleased with your performance there, and it's impressive that sales in China have remained flat. Overall, your emerging markets are doing well, especially considering currency fluctuations. However, I want to know how your conversations with clients are going in that region. What’s your outlook? Cisco has traditionally been a bellwether and has good insight into how enterprises perceive macroeconomic developments. Based on your recent discussions with clients, what is your perspective on the macroeconomic landscape for 2019?

Thank you for the question. I've repeatedly expressed my astonishment at the resilience we've witnessed globally despite various macroeconomic challenges and geopolitical issues, including shutdowns, US-China trade tensions, Brexit, stresses in Italy, and political unrest in some emerging markets. It's truly remarkable how resilient the situation is. I want to emphasize that our enterprise customers no longer see this technology as an optional part of their strategy; it has become essential. Many strategies aimed at revenue growth cannot succeed without continued investment in technology. Initiatives focused on simplification, cost reduction, and productivity in their IT infrastructure, as well as navigating the complexities of a multi-cloud environment, require ongoing execution. Most of our customers are acutely aware that halting their investments could allow their competitors to get ahead. Over the past 90 days, I haven't noticed any significant changes in our customer discussions, except for one client highly exposed to the Chinese market. They acknowledge the geopolitical impacts but haven't linked it to any spending changes in their plans. Overall, it seems like everyone is continuing on the same trajectory as they were three to six months ago.

Hi, thank you. I just wanted to get a quick one regarding the number of ELAs you signed in the quarter and what percentage of revenues that actually reflected?

Are you talking just Cisco One, what we have provided before?

Yes, exactly. That's right.

We are now at around 31,000 to 31,500 for Cisco One. Moving forward, as we bring more of our portfolio into play, particularly with the DNA architecture, you will see more of our customers adopting this framework that includes the software. We are continuing to grow the Cisco One bundles, and as we advance through the early stages of the enterprise networking Cat 9K portfolio transition, you will notice an increasing shift towards the DNA architecture and associated software bundle.

And then are you comfortable giving a percentage of revenues, something like that that we could get a little bit of an indicator from?

No, we don't disclose that.

As a follow-on, at the last Analyst Day, Kelly, you talked about software as a percentage of total revenue I think going from 22% to 30% over three years. Can you indicate where you are in that range, if 30 is still the goal, if there's now a higher goal and then how is 606 affecting that? And specifically in this quarter did 606 give you a revenue boost?

Yeah. Yeah. So I would say to the first part of that question, we are continuing to progress along those lines. And with the new rev rec, because it's accelerating some of these things that, when you pull a snapshot for this year, it's accelerating some of it, but overall for the longer term strategies, it’s absolutely progressing like we said it would at SAC. And yes, this quarter, we were around 2% for the acceleration when you compare the 606 versus 605 accounting change difference.

Chuck, I wanted to ask you, it’s interesting to me that the focus on hybrid and hybrid cloud is starting to evolve, especially given where people thought we might end up just a couple of years ago, can you talk about how well formed you think your customers are? And I guess are they seeing or can they understand the real value that Cisco can deliver in hybrid implementations yet and how much missionary work you will still have to do?

Yeah. Thanks, James. Look, here's a situation our customers find themselves in. If you contrast where they thought they were going to be four or five years ago, they thought that they were going to move to the cloud. And we've joked about it being a euphoric neighborhood, you know, where they just move and everything is simple and somewhere along the way, they find themselves with four or five cloud providers, multiple collaboration cloud providers, 100 SaaS providers, an explosion of IoT at the edge, and so what's happening is, and by the way, still, they still have private data centers with applications that can't be migrated to the cloud. They've now gotten to a place where certain applications they're repatriating from the cloud. And the reality is that, they've now find themselves with a more complicated environment than they had five years ago when they began this journey to simplification. So that's the irony. If you think about what I just described, there's only one piece of technology that is consistent across all of those things that I just talked about and that is the network. And so what's happening is a lot of the things that have to occur to help them navigate this need to happen in the network. And so that's where this whole policy automation strategy that we have is really important because for them to be able to deal with applications running anywhere, deal with users operating anywhere, the data flows and the traffic flows are nothing that look like what led them to architect their networks the way they did a decade ago. And then couple that with security and the fact that security, you're not protecting a perimeter anymore, so it's not about a big fat honking firewall, it's about an architecture that really does have Integrated Security from the network to the cloud to the edge to email where you're building a comprehensive integrated strategy where you're seeing threats in one area and you're protecting across all those domains. So to answer your question, I think that two years ago, we had to convince customers that this is what we felt and today, I'd say most enterprise customers, they could present the whole set of slides to you before we even start talking about the challenges they face and the importance of the network going forward. Thanks for the last question. Thank you. I want to thank all of you for joining us today. I'll make a few closing comments. First of all, I think our teams have executed incredibly well in light of a very complicated macro and geopolitical environment that we find ourselves in. Our engineering teams over the last few years have delivered on innovation to a point where I will tell you that our portfolio is in the best shape it's been in years. And I think we are in a very good position with our customers based on the strategies that they're deploying going forward. And I have a high degree of confidence in our ability to execute. When you look to the future, there are two elements we have to consider, there are geopolitical macro issues and we will continue to navigate them to the best of our ability and then there's our own execution, which I think is probably near the peak of what our teams have done in quite a while. So we feel good about where we are. There's obviously a lot of variables, a lot of complexities, but we're pleased with what we accomplished last quarter. We feel good about next quarter, and we're going to continue to execute. Thanks for joining us.

Thanks, Chuck. And I'm just going to wrap up here. Cisco's next quarterly earnings conference call, which will reflect our fiscal 2019 third quarter results, will be on Wednesday, May 15, 2019 at 1:30 PM Pacific Time, 4:30 PM Eastern Time. Again, I’d like to remind the audience that in light of regulation FD, Cisco’s policy is not to comment on its financial guidance during the quarter, unless it's done through an explicit public disclosure. We now plan to close the call. If you have any further questions, feel free to contact Cisco's Investor Relations Department and we thank you very much for joining today's call.