Cisco Systems Inc (CSCO) — Q3 2025 Earnings Call Transcript

Good afternoon, everyone. This is Sami Badri, Cisco's Head of Investor Relations, joined by Chuck Robbins, our Chair and CEO; Scott Herren, our CFO; and Mark Patterson, our Chief Strategy Officer. 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 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 fourth quarter and fiscal year 2025. These statements are subject to risks and uncertainties detailed in our SEC filings particularly our most recent 10-K and 10-Q 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.

Thanks, Sami, and thank you all for joining us today. Q3 was another strong quarter for Cisco, with revenue, margins, and earnings per share all above the high-end of our guidance ranges. We also generated solid growth in annualized recurring revenue, remaining performance obligations, and subscription revenue, which all support our future performance. In addition, we received AI infrastructure orders from web-scale customers in excess of $600 million in Q3, bringing our year-to-date total to well over $1 billion, surpassing our original fiscal year '25 AI order target a full quarter early. The performance of our core business continues to produce strong cash flows, underpinning our commitment to deliver consistent capital returns. In Q3, we returned $3.1 billion in capital to our shareholders through share repurchases and dividends, with a total of $9.6 billion in value returned year-to-date. Our overall strong performance was a result of accelerated product innovation and solid execution by our teams driving sustained demand for our technologies. Total product orders grew 20% year-over-year or 9% on an organic basis, excluding Splunk. Despite the uncertain macro environment, this demonstrates the valuable outcomes we are delivering for customers in the era of AI. Looking at demand in more detail by customer market. I'd also like to remind you that Q3 of fiscal year '24 included six weeks of Splunk contribution. Enterprise product orders were up 22% year-over-year in Q3, driven by double-digit growth in the Americas and APJC. Public sector orders were up 8%, with growth in all geographies as governments around the world continue to trust Cisco as their end-to-end technology partner. Notably, U.S. federal orders grew double digits in Q3, after a challenging first half. During the quarter, our AI-powered cloud managed Meraki for government networking solution also achieved FedRAMP authorization from the U.S. government. Product orders from service provider and cloud customers continue to be strong, up 32% year-over-year, driven by triple-digit growth in web scale with three of the top six web scalers each growing orders in the triple digits. Now some color on demand from a product perspective. Networking product orders grew double digits driven by web-scale infrastructure, enterprise routing, switching, and our industrial IoT products. Campus switching orders grew high-single digits in Q3 against a tougher prior year compare, demonstrating the continued demand for our campus portfolio to enterprise customers. We also saw triple-digit sequential growth in orders for our WiFi 7 portfolio in Q3. Year-to-date orders for our industrial Internet of Things portfolio comprised of ruggedized catalyst products grew 35% year-over-year. As strategic infrastructure and manufacturing begins to onshore to the United States, Cisco is well-positioned to help connect and protect these capital-intensive investments at scale. Our data center switching orders were up double digits year-to-date compared with the same period last year. Cisco was recently ranked as a market leader in Gartner's Magic Quadrant for data center switching. This is a testament to our ability to address the full range of data center switching use cases and our vision to simplify operations while enhancing security, which is essential for critical application deployments. As I mentioned earlier, the AI infrastructure orders we have received from web-scale customers were exceptionally strong in the quarter, exceeding $600 million and bringing our year-to-date total to well over our $1 billion target for fiscal year '25. As expected, the product mix of these orders was more than two-thirds in systems with the remainder in optics, demonstrating the growing importance of our technology to web-scale customers for their AI training use cases. AI orders from enterprise customers continue to show momentum as this large nascent market opportunity starts to unlock. Enterprises are seeking simple, seamless, scalable, and secure solutions for their AI deployments which we are ready to deliver through our expanding partnership with NVIDIA. During the quarter, we announced our intent to create a cross-portfolio unified architecture, where NVIDIA will enable Cisco Silicon One to become the only third-party silicon that is included as part of the NVIDIA Spectrum-X Ethernet networking reference architecture. Cisco will also build interoperable systems combining NVIDIA Spectrum silicon with Cisco operating system software allowing customers to simultaneously standardize Cisco Networking and NVIDIA technology in the data center, across front and back-end networks. We also announced a Cisco secure AI factory with NVIDIA, which will embed security end-to-end. From the application to the workload to the infrastructure, using solutions like Cisco AI Defense and hybrid mesh firewall, enabling enterprise customers to build and secure data centers to develop and run AI workloads. Yesterday, we announced a new multiphase investment program in the Kingdom of Saudi Arabia. Saudi Arabia announced a new AI company, HUMAIN, and we will be a strategic technology partner contributing to their AI infrastructure build-outs. This partnership aligns with Saudi Vision 2030, contributing to the Kingdom's transformation into a diversified digital economy and enhancing its global and regional competitiveness in the AI era. In addition, we have joined the AI infrastructure partnership alongside BlackRock Global Infrastructure Partners, MGX, Microsoft, NVIDIA, XAI, and Energy Partners GE Vernova and Nextera Energy, as it seeks to invest in secure, efficient, and scalable infrastructure to support AI workloads. We also announced an expanded collaboration with G42, the UAE-based Global Technology Group to advance how secure AI infrastructure and innovation can be scaled across public and private sectors. These investments and partnerships highlight our market position as a global leader and preferred partner in AI networking solutions, as well as our commitment to collaborating across the industry to create a strong global ecosystem for AI. Additionally, we expect a sovereign AI cloud opportunity to ramp in the near term, and that Cisco will be a core system provider for these significant AI training and inference cluster build-outs. As we look at the opportunity that AI presents for Cisco, it is worth reiterating that we frame it in three distinct but connected pillars. First, AI training infrastructure for web-scale customers; combinations of our Cisco 8-K, Silicon One optics, and optical systems are being deployed by five of the six largest web scalers. Second, AI inference and enterprise clouds. Our accelerated innovation in hardware and software, coupled with our NVIDIA partnership, is designed to simplify and de-risk AI infrastructure deployment for the enterprise. And third, AI network connectivity. Customers are leveraging our technology platforms to help modernize, secure, and automate their network operations to prepare for the pervasive deployment of AI agents and applications. With genetic AI, the network is fundamentally constrained and will require ultra-fast, low-latency, energy-efficient networks, which we can deliver. Shifting to security. Orders grew in high double digits in Q3. Our security orders included a large multi-year deal with a major financial services company for Splunk's security and observability platforms, which was driven by our combined sales force. This was a win for Splunk from an industry competitor and is a strong proof-point of our go-to-market synergy. This was also the largest deal ever for Splunk. Our recently launched security products of Secure Access, XDR, and Hypershield collectively added over 370 new customers in the quarter. The majority of our new Hypershield enterprise customers are bundling it with our new N9300 Smart Switch because of our unique ability to embed security directly into the fabric of the network. Now I'd like to comment on some highlights from our accelerating innovation pipeline. Safety and security will be the defining challenge of Agentic AI, and we recently introduced several innovations designed to help security professionals harness the power of AI while keeping security at the forefront. These include Cisco XDR correlating attack telemetry across network, endpoint and cloud, using new AI-powered solutions to empower security teams to understand complex threats in seconds. Agentic AI advancements for Cisco XDR and Splunk to simplify threat detection and response. A new partnership with ServiceNow, which will integrate their security operations capabilities with Cisco AI Defense, and the launch of Foundation AI, a team of leading AI and security experts focused on developing cutting-edge technology to address the fundamental security issues of the AI era with novel open source tools, including the first reasoning model to enhance security applications. Just last week, we introduced Cisco's Quantum Network Entanglement Chip, a revolutionary prototype making real-world quantum networking applications possible in order to speed up the future of quantum computing. These applications will solve complex customer challenges and drive innovation across industries from supply chain optimization to accelerating drug discovery. In addition, we are using Gen AI and genetic systems across our customer experience organization to maximize customer value, deliver great experiences, boost productivity, and create capacity. Today, over 60% of support cases are touched by AI-driven automation, which is driving up the proportion of complex cases we can solve within one day. In addition, low severity cases have reduced as more customers are using our AI support assistant. Also, our AI renewals agent has enabled us to increase the capacity of our renewal specialists. As you can see, we are driving an enormous amount of innovation, and I look forward to showcasing even more new customer-centric solutions at Cisco Live next month. Before I turn it over to Scott, I'd also like to share some important organizational announcements. After careful consideration, Scott has made the decision to retire at the end of fiscal year '25. As many of you know, Scott joined us in 2020 during a period of great uncertainty around the world and he has been instrumental in driving our transition towards more software and recurring revenue. This has driven greater predictability for our business and increased shareholder value. I want to thank Scott for all that he has done for Cisco. I am grateful for his partnership as we've managed through many unprecedented situations together. I'm happy to share that beginning day 1 fiscal year '26, Mark Patterson, our current Chief Strategy Officer, will serve as Cisco's new Chief Financial Officer. In Mark's nearly 25 years at Cisco, he's held leadership roles in finance, strategy, and operations. He also spent over a decade in sales, working in roles that span every customer segment and geography. Most recently, he led our corporate strategy, development, and incubation organization. Mark's focus has been on connecting our longer-term strategy and investments with our immediate and urgent growth opportunities. The breadth of his experience, along with his deep knowledge of Cisco and our customers, partners, and investor community uniquely position him to help accelerate Cisco's growth in this new role. I'm also excited to announce the promotion of Jeetu Patel to President and Chief Product Officer. Under Jeetu’s leadership over the past 9 months, he has unified our product vision and strategy and vastly accelerated our innovation pipeline, focusing on delivering even greater value for our customers and our partners. We also announced the appointment of Kevin Weil, Chief Product Officer of OpenAI to Cisco's Board of Directors yesterday. These announcements further our confidence in Cisco's long-term success and durability in the era of AI. To summarize the quarter, we are seeing clear demand for our technology across our customer markets. Our innovation pipeline continues to accelerate as we weave security deep into our networking products, and our strong performance is fueling our capital allocation model, returning significant value to our shareholders. Now I'll turn it over to Scott for more detail on the quarter and our outlook.

We delivered a strong quarter with revenue and earnings per share exceeding the high end of our guidance ranges, along with solid margins and operating cash flow. Total revenue for the quarter reached $14.1 billion, reflecting an 11% year-over-year increase. Non-GAAP net income was $3.8 billion, and non-GAAP earnings per share was $0.96. Delving into our Q3 revenue, total product revenue was $10.4 billion, up 15%, while services revenue was $3.8 billion, up 3%. Networking revenue increased by 8%, driven by growth in switching and enterprise routing, although this was partially offset by a decline in server sales. Security revenue soared 54%, largely due to growth in offerings from Splunk and SASE. Collaboration revenue grew by 4%, supported by growth in Devices, the Webex Suite, and our CPaaS offerings, with observability increasing by 24%. In terms of recurring metrics, total ARR reached $30.6 billion, marking a 5% increase and featuring product ARR growth of 8%. Subscription revenue rose 15% to $7.9 billion, which constitutes 56% of Cisco's total revenue. Total software revenue was up 25% at $5.6 billion, with software subscription revenue increasing by 26%. Total RPO stood at $41.7 billion, an increase of 7%. Product RPO grew by 10% and total short-term RPO was $21.1 billion, up 5%. Q3 product orders increased by 20% year-over-year, and excluding Splunk, product orders were up 9% year-over-year. Geographically, product orders showed growth with the Americas up 27%, EMEA up 4%, and APJC up 21%. By customer markets, service provider and cloud orders were up 32%, enterprise orders increased by 22%, and public sector orders rose 8%. Our total non-GAAP gross margin was 68.6%, up 30 basis points year-over-year, surpassing the high end of our guidance range. Non-GAAP product gross margin reached 67.6%, up 70 basis points, driven by productivity improvements and Splunk, though this was partially offset by pricing. Non-GAAP services gross margin was 71.3%, down 30 basis points. The impact of tariffs on our gross margin was more favorable than estimated in last quarter’s guidance. We remained committed to profitability and financial discipline, achieving a non-GAAP operating margin of 34.5%, above the high end of our guidance range. Our non-GAAP tax rate for the quarter was 17.5%, which was better than expected due to increased tax benefits. On the balance sheet, we ended Q3 with total cash, cash equivalents, and investments amounting to $15.6 billion. Our operating cash flow rose to $4.1 billion, up 2%, primarily driven by revenue and earnings growth. From a capital allocation perspective, we returned $3.1 billion to shareholders during the quarter, including $1.6 billion in dividends and $1.5 billion in share repurchases, with $15.4 billion remaining in our share repurchase program. We are continuing to invest both organically and inorganically to enhance our innovation pipeline. During Q3, we completed the acquisition of SnapAttack, which enhances our capabilities in Splunk and assists organizations in future-proofing their security operations. In summary, we had a robust quarter with performance exceeding expectations, driven by strong order growth and margins. We are focused on strategic investments in innovation to leverage significant growth opportunities ahead, all supported by disciplined spending. This combination fuels our strong cash flow generation and our ability to provide value to shareholders. Regarding guidance, while there has been some progress with tariffs, uncertainty remains. Our guidance assumes current tariffs and exemptions will stay in place through the quarter. We expect Q4 revenue to range between $14.5 billion and $14.7 billion, with non-GAAP gross margin anticipated between 67.5% and 68.5%. Non-GAAP operating margin is expected to be between 33.5% and 34.5%, and non-GAAP earnings per share is projected to be between $0.96 and $0.98, assuming a non-GAAP effective tax rate of around 18%. For the full fiscal year 2025, we expect revenue to range from $56.5 billion to $56.7 billion, with non-GAAP earnings per share anticipated between $3.77 and $3.79.

Thank you, Scott. Before we start the Q&A portion of the call, I'd like to remind analysts to ask 1 question and a single follow-up question. Operator, can we move to the first analyst in the queue?

Great. And congrats on the quarter. Maybe the two questions for me. Just one, what are you seeing in terms of customer buying behavior right now, just given the uncertainty kind of with some of the tariffs that you laid out and just whether you kind of saw any pull forward potentially in April. And then just maybe as a second question, just any commentary around public sector and federal kind of around the same questions. Thank you.

Yes, thank you, Meta. I will provide some commentary, and then I'll ask Scott to share some data points regarding the pull-ahead issue. From a customer behavior perspective, we haven't observed any significant changes in purchasing patterns. There hasn't been a noticeable slowdown from our customers; they remain dedicated to the technology transition. The AI transition is crucial, and I believe they will continue to invest until it becomes absolutely necessary to halt spending. Currently, they still feel comfortable. Regarding pull forwards, there may have been a few orders from customers who wanted to advance their purchases due to concerns about tariffs. However, we've analyzed numerous data points and found no evidence of widespread pull-ahead business. I'll ask Scott to quickly share some of those data points, and then I'll address the public sector.

Thanks, Chuck. I want to emphasize that we did not create a strong incentive for customers to purchase in advance by discussing price increases. As you may recall, we previously mentioned our strategies regarding tariffs, leveraging our excellent supply chain team. Once the tariff situation becomes more stable, we have measures to address it, similar to our approach with China tariffs during the initial Trump administration. Pricing would only be considered after that. After consulting with our channel partners, who observed no advance buying or delayed purchasing behavior, as well as our sales team, we analyzed channel inventory, which surprisingly did not increase; in fact, it decreased. We closely collaborated with web scalers and tracked not only their orders but also their current stock. Interestingly, web scaler inventory on hand declined during the quarter. We also monitored Meraki activations, noting when each serial number is shipped and activated. Even with some inventory at our customers, the time between shipment and activation remained consistent with pre-pandemic levels. There were no signs of unusual behavior. We also examined sales patterns, particularly for any spikes in the third month since reciprocal tariffs were announced on April 2. If there had been significant advance purchasing, we would have noticed an uptick, but we observed the same sales pattern as in past periods. Our pipeline analysis showed no extraordinary pull-ahead or push-out activities. Lastly, we monitored whether customers were ordering now but asking for future ship dates. There might be occasional instances of that, but we found no significant patterns indicating a high volume of such requests. Overall, we do not see any notable pull-ahead or push-out trends.

So Meta, let me discuss the public sector. The Global Public Sector increased by 8%. The organic growth was 3% globally. In the U.S., we experienced notable strength in federal contracts, including double-digit order growth in U.S. Federal this quarter, despite our largest deal being delayed. That was a positive sign. However, there is ongoing stress in the civilian sector, particularly due to agency shutdowns and employees' job security concerns, which raises significant human capital issues. It's important to note that civilian contracts make up about 25% of our federal business, while 75% comprises Intelligence and Department of Defense contracts. Overall, we were satisfied with our public sector performance this quarter.

Thank you, Meta. Michelle, can we go to the next analyst?

Hi. So this year, Meta is growing CapEx by 70%, and you see very strong growth across the board. And the question is I know you're only now ramping networking, but the question is whether 2025, you think is a peak year. CapEx will likely slow down materially slow down. What happens to Cisco in an environment where cloud CapEx is slowing down? Thanks.

Hi Tal, thank you. First of all, I don't know that I would suggest that the cloud CapEx, particularly on a global basis, as you see the announcements that were made in the Middle East this week, we're seeing sovereign cloud strategies being built around the world. So I think on a global basis, I don't think that will be the case. And talking to these customers, I don't anticipate that they have a huge demand for slowing down. I think that you may see a different balance between their investments on capital to serve enterprise customers leveraging these models through inference and other things. But I don't anticipate it is going to be that 2025 is going to be a peak year. I think this has many years to run.

And Tal, just to remind you, as we continue to build out all the public cloud infrastructure for training, there is a significantly larger opportunity in enterprise AI as companies develop the capability to perform inferencing within their own data centers. Overall, the AI opportunity has several years ahead of it at this point.

Thank you Tal. Michelle, we can move to the next analyst.

Thank you, Sami, and congratulations on the quarter, Scott, on your upcoming retirement. I have two quick questions. Chuck, you mentioned a significant sovereign deployment opportunity in your prepared comments. Is that currently part of your order book, specifically the $600 million from last quarter? If not, how do you assess the size of those opportunities? Additionally, I understand that last quarter, you began shipping your G200 silicon at 51.2T. Can you provide an update on what you’re observing in the data center switching area and whether this will serve as a catalyst over the next couple of quarters? Thank you.

Yes, thank you, Aaron. I believe you're referring to the HUMAIN announcement we made yesterday or the one the Saudis made earlier this week regarding the establishment of this company. We've been collaborating with them for several months, and the straightforward answer is that there are currently no orders in the $600 million from them as they are just beginning. A team will be returning to the Middle East next week to engage with them further. It's worth mentioning that the CEO of HUMAIN is Tareq Amin. To provide some context, Tareq was the CTO at Reliance JIO when we collaborated on building that network over several years. He also served as the CEO of Rakuten during our development of the Open RAN mobile network in Japan. We have been in touch with Tareq since he moved to Saudi Arabia, and we have a long-standing friendship. We have completed large-scale projects together over the past twelve years, so we have a strong rapport. We're excited about this opportunity, but it’s not included in our sales forecasts at this time. Regarding the G200 chip, I would say it is central to any of the system orders. I mentioned that of the $600-plus million, two-thirds pertains to systems that will be based on the G200. Currently, our customers have indicated that if we could provide more capacity, they would be interested in purchasing more. So, it is performing well at the moment. Additionally, we have several other chips in various stages of development for our next-generation platforms that we are looking forward to.

Thank you, Aaron. Michelle, we can move to the next analyst.

This is Joseph Lima Cardoso on for Samik. I also wanted to follow up on the Middle East announcements. Maybe a two-parter here is just, can you elaborate on how Cisco is looking to participate here, particularly as it relates to the portfolio? And I know it's early days, but any early insights that you can share into the timing and magnitude of these opportunities for the company as kind of investors are looking to embed it potentially into the model? And then I have a follow-up. Thank you.

You want to go ahead and ask your follow-up, Joe? We'll just get them both.

Yes, yes, sure. And the follow-up is actually just more on the enterprise vertical, particularly Campus. Obviously, orders are coming in good on the enterprise vertical. But just curious if you could flesh out what you are hearing from customers on this front and the momentum that you're seeing in kind of the order backlog here, orders slash backlog here and how you're thinking about the opportunity around the recovery relative to when we last spoke 90 days ago.

Okay. So on the Middle East front, I will just tell you that Tareq made a comment to me that they're behind and they're going to catch up. So I think they're going to spend a lot of money, and I think they're going to spend it as quickly as they possibly can. It's hundreds of billions of dollars at the end of the day that they will be spending. If you go to the HUMAIN, their website and scroll down, they list their initial strategic partners. So you can see but our discussions with them have been around the networking, compute, security, and observability. So that represents a pretty good opportunity for us. I think there'll be as big as any of the major web scalers in the United States is how I would think about it. On the enterprise campus front, yes, we saw strong orders in campus switching. We saw the triple-digit sequential growth in orders for WiFi 7. We saw really strong growth in our enterprise routing portfolio this quarter. So we still see customers investing heavily in modernizing their infrastructure. The general belief and feedback that we're getting from these customers is as they get ready to roll out a genetic AI, in particular, the network is absolutely going to be key because of the real-time nature of this communication, and they all want to ensure that while they may not know exactly what those applications are going to look like right now, they absolutely know they're going to need the most modern networks they can have. And I think that's what's driving it right now.

Thank you, Joe. Michelle, we can move to the next analyst.

Hi, good afternoon. Thanks for the question and congratulations, Scott, on the upcoming retirement. I really appreciate all your time and help throughout the years. As it relates to my two questions. First, I was just wondering if you could talk a little bit more about the networking orders' strength in the quarter. How much of that was the broad recovery and things like campus, how much did the product cycle of WiFi 7 contribute? And could we expect that to continue over the next 12 months to 18 months here or so? And then second, just a housekeeping question. I was wondering if you could just share the organic revenue growth rates for the company and the segment ex-Splunk, if you have that off hand. Thank you.

I believe the strength in networking orders was widespread. As I mentioned earlier, we observed activity in the enterprise switching sector, along with growth in data center switching and significant growth in enterprise routing. We also experienced triple-digit sequential growth in WiFi 7. To your point, this tends to follow a 12-month to 18-month cycle. Once customers initiate this upgrade, it aligns with the standard upgrade cycles we have seen historically. It's important to note that there is a period when we usually introduce refreshed products, whether that pertains to the WiFi portfolio or the campus switching area. Once that process begins, it will enhance our ongoing opportunities as we move forward. Scott, would you like to discuss organic revenue next?

Yes. And Michael, thanks for the comments and for the question. First of all, I should say, Splunk is performing in-line with or actually slightly ahead of our expectations on both revenue and profitability, consistent with what we told you last quarter. The integration has gone really well. The people side of integration is pretty much complete at this point across all functions. The product integration continues to go along well. And this is the quarter that we actually lapped the acquisition during Q3. And so at this point, it's part of the run rate. I don't really plan on breaking out organic versus inorganic from this point forward. It gets harder and harder given the level of integration we've done across the board to split that out. So not really planning on giving that data point, given that it's just part of our overall run rate at this point.

Thank you, Michael. Michelle, we can move to the next analyst.

Hi, thanks so much for taking the question. And Scott, thank you again for all your help over these last couple of years. My question is on web scale. So obviously, you continue to see very impressive growth here. Maybe, Chuck, if you can talk to what's driving some of the sustained success, the pace of transition away from InfiniBand towards Ethernet and maybe some of the bigger differentiators that are helping you win incremental share across these hyperscalers? Thanks.

Thank you, Matthew. From the beginning, these customers aimed to transition away from InfiniBand. The critical factor was their confidence in the technology, and they are now very reassured about its capabilities in running training models over native Ethernet and enhanced Ethernet that we provide. We've discussed their need for silicon diversity, which was a key reason for our initial involvement. Now, we are supplying high-quality products in the timeframe they require. They expect certain products from their partners, focusing on systems that include software, silicon, and other components. The most valuable elements are the operating system and silicon. As many are adopting proprietary operating systems on these platforms, having reliable silicon is essential for long-term competitiveness in this market. We are fortunate to have acquired a great team in 2016 that has been developing Silicon One and maintains close relationships with these customers. They collaborate daily, and I believe the silicon is a key differentiator. We provide high-quality systems and services, experience, and supply chain support, all of which are important. However, without the silicon, achieving long-term success would be extremely challenging.

Thank you, Matthew. Michelle, we move to the next analyst.

Yes, thanks a lot for taking my question. I guess I have two as well. Starting off your AI orders at $1 billion, it came in, I think, a quarter ahead of what you had expected, and it looks like you're seeing some continued momentum as you go forward with sovereign and enterprise that you talked about. I'm just wondering, how should we think about the growth rates as we move forward on AI orders or AI revenues? It would be helpful to just kind of frame that out a little bit in terms of the forward growth rates. And then if I could just follow up for Scott, your July quarter guide, Scott, if I'm not mistaken, implies revenues are up 3%, 4% sequentially, but operating margins are down 50 basis points. Maybe just flesh out why the margins are coming down in July while revenues are going up and best luck in your retirement as well. Thank you.

Thanks, Amit. Regarding AI orders, it's important to remember that these are large customers and the orders are non-linear. Last quarter, we recorded around 350, while this quarter, we surpassed 600. If we can increase our capacity, they would likely order even more. I believe that as long as we execute effectively and boost our capacity, we should see continued growth in this area. It's crucial that we meet the needs of these customers because failing to do so could put us on the sidelines temporarily. The teams are working diligently, and that's my perspective. As long as we can keep increasing capacity, we will see further improvements in this business. Scott, would you like to discuss July?

Sure. Yes. And you are doing the math right, Amit, first of all, thanks for what you said. You're doing the math right on margins. The biggest difference, you can see it's actually in the gross margin line, and that falls through to the op margin line. And that's really a full quarter and I laid out the assumptions for you in the opening commentary on tariffs. It is a full quarter of the tariffs being in effect, and we reflected the full cost without mitigation, and that's the big driver that we see sequentially going from Q3 to Q4. Still feel good about putting up the midpoint of the guide at 11% EPS growth.

Thank you, Amit. Michelle, we can move to the next caller.

Thank you very much for taking the question. I'll ask both upfront. The first one is, Chuck, I think last quarter, you had sort of alluded to an upcoming campus refresh. And I would think Cisco's sort of do. What I'd like some help with is understanding the maybe historic perspective of when you've had these refreshes how to think about that? Because when I reflect on the last one, 2017, 2018, that occurred when you were shifting customers to subscription. So I feel like that's a tough metric to use to understand the potential. And then the follow-up may be a bit simpler, which is how do we think about the impact of tariffs understanding they're changing every day? But given everything we know, after July 9, what would be the effect of tariffs based on the July 9 end of the pause? Thank you.

Yes, Simon, I appreciate your point about the 2017 start of the campus refresh. It's difficult to quantify. We've also observed some positive trends in the enterprise campus business over the past year. Looking ahead to the next 12 to 24 months, what's crucial for our customers is embedding security deeply within the network. You'll see us focusing on integrating AI and security services within the network so that our customers can implement this seamlessly, which is essential for addressing AI challenges. Recently, I spoke with the CISO of a Fortune 100 company, and during our discussion about security, she emphasized the need for a clear, multi-year architecture aimed at eliminating physical firewalls from her infrastructure. She made it clear that if security isn't integrated into the data traffic, it won't be effective. Therefore, envision that we will deploy security comprehensively throughout the network infrastructure. Coupled with AI, this approach will provide compelling reasons for customers to consider these platforms.

Yes. And Simon, on your second question on the impact of tariffs after July 9, I mentioned in the opening commentary that we've built into our forecast that underpins the guide for Q4 an expectation that on July 9, those exempt, that pause ends and we go back to the reciprocal tariffs that were announced on April 2. And with the two exemptions, the U.S. MCA exemption still in place and the semiconductor and certain electronic component exemptions still in place. So we've reflected that in the guide for Q4. I think it is a little bit hard right now to predict what is going to happen on July 9 and what agreements get put in place between now and then. But just wanted to protect the downside in the guide.

Thank you, Simon. Michelle, we can move to the next analyst.

Hi, guys. Nice quarter. And Scott, congrats on your upcoming retirement here. And look, I don't want to rain on the freight here. But if I look at networking here, it returned to growth, but it was also against a very easy compare and even still down versus a couple of years ago. If AI really isn't substitutionary of existing non-AI networking real estate with some of these web scales and enterprise is growing at the rates you're calling out, why isn't this sort of growing faster than even the 8% on the comp here? And then just following up on Simon's question before, as my follow-up. Can we just get an update as to the exposure between data center versus campus within networking? And how we should think about the price per port kind of playing out here as we're 7, 8 years now down the road? Thanks, guys.

On the first one, I think the short answer is that most of this AI infrastructure has not begun to flow through revenue yet. Scott, I don't know if you want to add anything.

That's right. We mentioned from the beginning that when we set the $1 billion target for the year, it was intended as a sales target, not a revenue target. However, we anticipated that it would start converting to revenue in the second half of the year. We observed the first signs of this in Q3, and we expect to see some more in Q4.

And I think on the data center versus campus, clearly, the data center, with a higher speed, you're going to see a higher per port cost, but you are going to see much higher volumes in the campus. So I think they sort of normalize each other out over time.

Thank you, Jim. Michelle, we can move to the next analyst.

This is Andrew for David. I wanted to ask about the nature of the $600 million in AI orders. You mentioned that these orders are typically nonlinear and come from very large customers. Are you starting to see larger orders becoming a significant part of that $600 million, particularly from your most successful customers? Or are these large orders more spread out among many customers, considering you mentioned three with triple-digit growth? Additionally, could you provide an estimate of the impact of tariffs on your Q4 gross margin guidance? Thank you.

Yes, Andrew, you made a great point. You nearly answered the question yourself. We have three out of six customers that experienced triple-digit growth, so I believe the results are quite balanced. From my perspective, we are observing acceleration among all these customers, which is positive. However, there were three customers that showed exceptionally high growth. Next quarter could bring different outcomes, but overall, it remains fairly balanced.

And then on your question on the tariff impact and the guide, what I wanted to do is make sure you understood the assumptions that were built into it. So we walked through those China at 30%, Mexico and Canada, where it is not eligible for the USMCA exemption at 25%, 10% everywhere else until July 9, and then reverting back to the reciprocal tariffs and then a small impact on us for the tariffs on steel and aluminum and retaliatory. That's all built into the guide. I haven't broken out and quantified the dollar value that goes with that. I'm a little reluctant to do it because the puck keeps moving on this. What I wanted you to understand is that everything that we know today, the impact of those has been built into the guide for Q4.

Thank you, Andrew. Michelle, we can move to the next analyst.

Yeah, thank you. I have two, and I'll just ask them at the same time as well, please. So the extended partnership with NVIDIA is an endorsement of your Silicon One family and certainly underscores your opportunity as enterprises deploy AI compute. I was hoping you could quantify your AI orders for the enterprise at our incremental to the $1 billion of order target you have for cloud. And then second, when might Silicon One offer co-packaged optics solutions as you seek to broaden your data center switch offering? Thank you.

Thank you, Karl. To start, regarding the NVIDIA partnership, we've had several phases of announcements, and many of the solutions we plan to provide to enterprises are still forthcoming. Most of these will begin to roll out in about 60 days, with further offerings following afterward. It's important to clarify that we haven't seen significant gains in the enterprise from this yet. The AI orders in the enterprise space have been somewhat challenging for us to identify, but we've been working on establishing a baseline. I can share that we're definitely witnessing growth, reaching hundreds of millions of dollars so far, though not yet in the billions. The ability to accurately flag these orders relies heavily on our sales team, especially given the large number of enterprise customers we have. Regarding the Silicon One CPO, we showcased it in 2023, but at that time, there wasn’t a substantial amount of customer demand for various reasons. We have a dedicated team focused on it, and we are committed to it. The adoption will depend on customer interest, driven by a combination of power benefits and speed needs. As soon as customers express that demand, we will be ready to deliver first to market.

Thank you, Karl. Michelle, we can move to the next analyst.

Hi, it's Adrienne Colby for Atif. Thank you for taking the questions. It's been a while since you talked about your AI pipeline versus your AI orders. So I was hoping you could update us on what that part of the funnel is looking like. And secondly, I was hoping with the departure of parcel you could update us on the search there for a new head of go-to-market.

Yes, we currently do not provide details on our AI pipeline. We discussed this a long time ago, and the $1 billion target we initially shared was meant to demonstrate our commitment to this area. The results indicate that our customers are recognizing this commitment. We won't be providing continuous updates on this. Additionally, we recently appointed Oliver Tuszik as our new head of go-to-market. He previously managed our Europe, Middle East, and Africa region and led our global partner organization before that. He has a strong grasp of our go-to-market strategy, and we announced his appointment last week. Thank you.

Thank you, Adrienne. Michelle, we can move to the next analyst.

Yeah. Thanks for taking the question. I wanted to ask about your networking business and in particular, your hyperscaler customers, and in particular, the usage of a white box given that Cisco can provide that broad range of offerings from the chip to white box to the full system. Can you maybe just comment on whether you see white box eating up a big part of the spending pie? And is it AI that's driving that share shift or something else that's happening?

I would say that we haven't noticed a significant change in the balance between what customers purchase from us versus what's available in white boxes. When customers choose to go with white boxes, we can collaborate with them to integrate our technology and manage the process, ultimately delivering that product. However, the majority of purchases still lean towards complete systems. Each hyperscaler faces unique challenges that influence their decisions, and some have made choices in the past that have since evolved, leading them to pursue different solutions now. So, I don't think there's a straightforward answer applicable to all customers.

Yes. And just a quick reminder, Sebastian, we said this earlier, but of the more than $600 million in orders that we took during Q3, two-thirds of those were systems as opposed to optics and optical. So we're seeing the shift to systems that we had predicted in the Q2 call.

Thank you, Sebastian. I'm now going to hand it over back to Chuck for some closing remarks.

Yes, thank you all for joining, and I want to express my satisfaction with our progress and pride in what our teams have accomplished. I would also like to extend my gratitude to Scott, who has been an excellent partner over the past five years, assisting in the transition through some complex situations. I'm thrilled to have Mark take on this role. Mark and I have collaborated closely for 18 years, and he brings a wealth of experience from Cisco that will be invaluable.

Thank you, Chuck.

As we look ahead, we see a strong opportunity in AI and believe we are well positioned. From a technology and portfolio standpoint, we cover the entire stack with our offerings in networking, security, and Silicon, which are all crucial. We are providing secure AI solutions in the marketplace and have established partnerships and investments, including a key partnership with NVIDIA that delivers essential solutions for our customers. This week, we announced partnerships with HUMAIN and G42, among others. We also enjoy a global presence and customer trust, allowing us to effectively understand the needs of cloud, enterprise, and public sector customers. This gives us a unique perspective on discussions surrounding sovereign clouds. Our team is currently executing well and achieving great results, and I’m very proud of their efforts. I look forward to our next conversation, and Sami, I'll turn it back to you.

Thank you, Chuck. Cisco’s next quarterly call, which will reflect our fourth quarter and fiscal year 2025 results will be on Wednesday, August 13, 2025, at 1:30 p.m. Pacific Time, 4:30 p.m. Eastern Time. This concludes today’s call. If you have any further questions, please feel free to contact the Cisco Investor Relations department, and we thank you very much for joining the call today.