思科 (CSCO) 2015 Q3 法說會逐字稿

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  • Operator

  • Welcome to Cisco Systems' third-quarter and FY15 financial results conference call.

  • At the request of Cisco Systems, today's call is being recorded.

  • If you have any objections, you may disconnect.

  • Now I would like to introduce Melissa Selcher, Vice President of Corporate Communication and.

  • Investor Relations.

  • Ma'am, you may begin.

  • - VP of Corporate Communication and IR

  • Thanks, Kim.

  • Good afternoon everyone, and welcome to our 101st quarterly conference call.

  • This is Melissa Selcher, and I'm joined by John Chambers, our Chairman and Chief Executive Officer; Kelly Kramer, Executive Vice President and Chief Financial Officer; Rob Lloyd, President of Development and Sales; Gary Moore, President and Chief Operating Officer; and our future CEO, Chuck Robbins.

  • I would like to remind you that we have corresponding webcast with slides, including supplemental information, that will be available on our website in the Investor Relations section following the call.

  • Income statements for GAAP/non-GAAP reconciliation information, balance sheet, cash flow statements, and other financial information can also be found on the Investor Relations website.

  • Click on the financial reporting section of the website to access these documents.

  • Throughout this call we'll be referencing both GAAP and non-GAAP financial results.

  • The matters we'll be discussing today include forward-looking statements, and as such are subject to the risks and uncertainties that we will discuss in detail in our documents filed with the SEC, specifically the most recent reports on Form 10-K and Form 10-Q, and any applicable amendments which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.

  • Unauthorized recording of this conference call is not permitted.

  • All comparisons throughout this call will be on a year-over-year basis unless stated otherwise.

  • As we have in the past, we will discuss product results in terms of revenue, and geographic and customer segment results in terms of product orders, unless specifically stated otherwise.

  • I'll now turn it over to John for his commentary on the quarter.

  • - Chairman & CEO

  • Mel, thank you very much.

  • I am pleased to report another very solid quarter for Cisco.

  • We delivered revenues of $12.1 billion, up 5%, and grew non-GAAP earnings per share to $0.54, up 6%.

  • We maintained strong non-GAAP gross margins of 62.5%, generated $3.0 billion in operating cash flow this quarter, and returned $2.1 billion to shareholders through share repurchases and dividends.

  • Last week was a great week for us, as we announced the CEO who will lead Cisco in its next chapter.

  • I am extremely excited to be joined today by Cisco's newly named CEO, Chuck Robbins.

  • Chuck, welcome very much.

  • I am confident you will come to understand why the Cisco Board of Directors and I are so convinced he is the right leader for Cisco right now.

  • As I reflect back, I'm extremely honored and proud to have led Cisco for the last 20-plus years.

  • We set out to change the way the world works, lives, learns and plays, and while many thought this was a very ambitious, if not unobtainable goal, we absolutely have achieved that goal.

  • We have delivered incredible innovation and have disrupted markets, and at times ourselves.

  • We have seen many competitors come and go.

  • We've had our setbacks, but always come back even stronger, something almost no other technology company has done.

  • We have remained incredibly focused on delivering for our shareholders.

  • We are a cash and profit machine, and have maintained our margins over time by delivering sustainable differentiation through integrated architectures based on intelligent networks.

  • What I am most proud of, however, is how well positioned we are to repeat the success of this last 20 years.

  • Across every market and every industry, we are moving from the Information Age to the Digital Age, and the pace of change is only accelerating.

  • Cisco is in a very strong leadership position.

  • Our vision and strategy are working, as every company, city and country becomes digital.

  • They are realizing Cisco is best positioned to help them as they become digital organization.

  • What our customers recognize is Cisco's unique track record and ability to anticipate transitions and deliver the innovation to help our customers adapt and accelerate in this new environment.

  • Cisco's sustainable differentiation over time, as reflected in our strong gross margins, profitability and cash generation, is the result of our ability to deliver integrated architectures and solutions with scale, speed, and security no one else can.

  • We've moved from selling boxes, cloud, mobility or any other solution to partner with customers on their outcomes.

  • 44,000 jobs in Barcelona, education and healthcare accessible to virtually every home in Israel, entirely new cloud-based revenue streams for service providers and General Motor's smart factory of the future.

  • Competitors selling low cost technology building blocks can't compete with our total cost advantage, operational efficiency, security, and speed to results that Cisco provides.

  • And when there is an issue, we have all seen the nightmare of trying to identify where and who to call translate into billions in lost business and reputational damages.

  • When companies and countries go digital, IT becomes a board-level concern and reliability, security, trust matter more than ever.

  • The Cisco brand, behind every one of our architectures, matters more now than ever.

  • We are seeing our moves from selling boxes to selling outcomes translate into strong execution in a tough global market.

  • We are seeing many areas of strength, including global enterprise with order growth of 7%, global commercial orders up 6%, and global public sector orders up 7%.

  • The US, excluding service provider, was particularly strong, with Brian Marlier's US enterprise order growth up 21%, US commercial order growth of 11%, and US public sector order growth of 10%.

  • We saw good revenue growth across almost of our technologies.

  • The volatility in service provider and emerging market, we have discussed in prior quarters continues.

  • Our service provider business remains challenged, both globally and in the US.

  • Service provider orders globally decreased 7%, and US service provider orders declined 17%.

  • Emerging market orders were flat, with the BRICs plus Mexico down 6%, while the remaining emerging markets grew 6%.

  • I believe we have organized well to capture more than our share in these markets and positioned ourselves for their inevitable upturn.

  • Like every other company, we are also managing the impact of currency fluctuations globally.

  • Kelly and I are both very pleased with the focus of the whole Company on maintaining stable gross margins in this environment.

  • We were especially pleased with how the sales teams have held gross margins in a very tough foreign exchange environment.

  • Repeating the common theme, those critics that felt new software or business models would have a major negative impact on our business and our margins were just wrong.

  • Clearly, there are more positives than headwinds, and I am very pleased with our solid execution.

  • At a time when many of our peers are seeing revenues decline, we delivered profitable growth, as we said we would and order delivered -- over-delivered almost on every metric we set.

  • Now I will move onto guidance.

  • I continue to be pleased with our execution in a tough environment, the strength of our financial model and the return we continue to drive for our shareholders.

  • For Q4 we expect to see revenue growth in the range of 1% to 3% and non-GAAP earnings per share in the range of $0.55 to $0.57.

  • Let me now provide some additional details on the business momentum we see in our geographies, customer segments and product and services business within our portfolio.

  • As a reminder, geographies are the primary way we run our business.

  • For geographies and customer segment, I will speak in terms of product orders year over year unless otherwise noted.

  • We finished the quarter with product orders up 2% and product book-to-bill greater than 1.

  • Moving first to the Americas.

  • Americas grew in total 2%.

  • I discussed upfront the US public sector growth of 10%, with the US federal growth up 24% and state and local up 1%.

  • We also discussed the very strong US enterprise growth of 21% and US commercial growth of 11%, and the US service provider was down 17%.

  • Latin America had another strong double-digit growth quarter.

  • Moving onto Europe, Middle East and Africa.

  • We saw Europe, Middle East and Africa growth of 2%.

  • Europe first turned up for us five quarters ago, and since then has averaged mid-single digit growth, including this quarter.

  • If you take out Russia, we saw solid growth across all of Europe, Middle East and Africa of 4%.

  • We were pleased to see Asia-Pacific, Japan and China return to growth, growing 1%.

  • And just to give you an idea of what sometimes the emerging markets have an impact on in terms of our business, with Asia-Pacific, China, Japan and China, minus China growing at 8%.

  • Finally, emerging countries.

  • Emerging markets in total were flat.

  • Emerging markets excluding BRICs plus Mexico grew 6%.

  • As discussed, we continue to see the BRICs plus Mexico challenged, down 6% in total, with Russia down 41%, Brazil down 10% and China down 20%.

  • We did see strong growth in Mexico, up 53% and India, up 6%.

  • We are modeling the volatility in emerging markets to continue for several more quarters.

  • Now moving onto customer segments.

  • We discussed the strong growth of total global enterprise up 7%, with total global commercial up 6% and global public sector up 7%.

  • The new models we have implemented globally in each of these segments are working.

  • In enterprise, the shift to selling outcomes not products, is resulting in larger opportunities and dramatic increases in pipeline.

  • In US enterprise, for example, the value of our pipeline of deals over $1 million increased approximately 60% year over year, with the average deal size up over 30%.

  • We are managing continued challenges in our service provider business, which declined 7%, as global service provider CapEx remained under pressure and industry consolidation continues.

  • We believe the organizational changes we have made in our global service provider organization are working, and we are very focused on growing our share of wallet.

  • At Mobile World Congress earlier this year we issued announcements with over 10 global service providers, including the launch of Cloud DP and service with Deutsche Telekom, Connected Car Service with AT&T, and a small sales solution for large enterprise deployments with Vodafone.

  • Now moving onto products and service.

  • I will discuss products and service business in terms of revenue year over year unless otherwise stated.

  • Starting with Switching.

  • We saw another solid quarter in Switching with growth of 6%.

  • The strong momentum of our application-centric infrastructure portfolio continue.

  • The Nexus 3K plus 9K grew 144%.

  • We added over 970 new Nexus 9K customers and ACI customers this quarter to reach a total of over 2,650 customers.

  • The AP Controller customers grew from over 300 last quarter to 580 this quarter.

  • 9K orders plus AC grew sequentially 27%, and we expect that sequential growth to accelerate in Q4.

  • We also saw good momentum in our campus portfolio, especially in fixed.

  • We did see some pressure in our modular switching as we managed the transition in the high end of our Switching portfolio.

  • As we've discussed, we expect this transition to continue for a few more quarters.

  • I am particularly pleased that we have kept gross margins extremely stable in Switching, even as we're driving our product transition in the Data Center.

  • Moving onto the Data Center.

  • UCS momentum continues with over $3 billion in revenue run rate, with over 43,800 UCS customers.

  • The number of repeat UCS customers grew 34% year over year.

  • The innovation UCS brought to the market, and architecture that converges networking, servers and storage has disrupted a market, and Cisco went from no where to the market share leader in X86 blades in the US, and the number two player worldwide with more than 85% of the Fortune 500 companies now investing in UCS.

  • We continue to see significant growth with our converged offerings including VCE and FlexPod, in addition to the positive initial ramp with our IBM Versastack solution.

  • We had a solid quarter in NGN routing, which grew 4%.

  • We saw a solid performance in high end routing again this quarter, up 5%, supported by strong momentum in our new product introductions, including the CRSX and NCS, which were both up over 200%.

  • This growth is a direct result of the transition we drove in our core routing over the last several years.

  • During the quarter, Verizon announced it is moving to a next-generation 100 gig Metro network in the US, and that it will test and deploy Cisco networking convergence systems, the NCS.

  • No one thought we were even in this game.

  • Our ability to win the deal was entirely driven by our new generation in term of engineering organization, our ability to deliver integrated architectures, our agility with engineering to realign resources quickly, the speed of our innovation, and our unique ability to partner with our customer to shape their future and the future of the industry.

  • Moving onto Wireless.

  • We saw solid growth of 9%.

  • Meraki continued with just very strong momentum, up 92% year over year, and it drove most of our growth this quarter in the Wireless category as they add new customers to their cloud-managed wireless platform.

  • We did see some softness in public sector wireless spending, driven primarily by e-rate funding timing.

  • Security growth rebounded to a strong 14%, with orders growing even faster.

  • We saw a number of strong trends and data points that support our strategy to drive to an integrated Security architecture across our customers' organizations.

  • Customers are realizing that dozens of security vendors in their business are not solving their challenges.

  • As everything in the world becomes digital, they want a player who can step up and be their trusted partner across the board.

  • No one is better positioned than Cisco.

  • We believe we are the only player capable of providing an integrated architecture across intelligent networks, and are confident in our strategy to be the number one security company for our customers.

  • A few examples of our momentum include, in this quarter we signed a record number of Security enterprise license agreements, Our Fire Power series which integrates our Sourcefire software, are continuing to show very strong momentum, far exceeding our initial forecasts.

  • And we saw a continued strong traction and growth in our advanced threat solutions, including advanced malware protection Everywhere and Cyber Threat Defense.

  • Moving onto Collaboration.

  • Our Collaboration momentum continues with revenue growth of 7%.

  • This quarter was a strong quarter for telepresence endpoints, with revenue up 19% and unit orders up a record 66%.

  • The team is on a mission to put Collaboration in every office and every room.

  • Our strategy is to deliver a new generation of product experiences at significantly lower prices, and it is working.

  • We also saw strong performance of our cloud-based offerings, with conferencing growth of 11%.

  • More people than ever are using WebEx, with the number of billable users growing over 28% to over 15 million users.

  • In the quarter we launched Spark for teams, which is proving to be a strong play in the very hot business messaging market.

  • SP Video declined 5%.

  • We continue to focus on improving profitability in this business as we develop next-generation end-to-end video solutions combining hardware, software, and services.

  • Services revenue grew 3% with orders growing faster than revenue.

  • We saw growth in both technical and advanced services, and our portfolio of cloud security consulting and analytics grew in double digits again this quarter.

  • Our gross margins continued to lead the industry by a significant amount and remained very stable in terms of services gross margin in the 65% range, plus or minus 1 point or 2.

  • We continue to believe our strategy to provide higher value to our customers by delivering business outcomes is working.

  • The opportunities that are ahead of us as we move into the Internet of Everything are very real.

  • We look at the increased security requirements and the demand for security consultancy services.

  • We also focus on the need to manage and capture insights for data distribution across the enterprise and network.

  • We are moving rapidly to build the capabilities across our portfolio to differentiate Cisco's leadership in the Internet of Everything.

  • Now let me provide an update on Cisco's momentum in cloud.

  • We continue to lead in the hybrid cloud market and increase our inter-cloud momentum.

  • This quarter we launched Phase 2 of our inter-cloud strategy, linking different clouds together using interoperable and app-centric software to create hybrid cloud.

  • Rob, thank you so much for your leadership here.

  • The team's doing a great job.

  • - President of Development and Sales

  • You're welcome.

  • - Chairman & CEO

  • During the quarter, we announced Cisco and Microsoft will integrate Cisco cloud innovation with Microsoft Azure to help service providers more quickly and cost efficiently launch new application.

  • We will also extend the enterprise class security and services in customer private clouds to Microsoft's Azure with Cisco cloud services router, the 1000V.

  • Within our strategy to work across hypervisors and stack, we continue our investment in open stack with the launch at our Worldwlde Partners Conference of Cisco open stack private cloud solutions aimed at on-premise cloud capabilities for application developers.

  • To summarize my comments, our customer conversations today are not about standalone products.

  • They are simply about digitization, growth, new revenue streams for them, innovation, and business outcomes.

  • We believe we are pulling away from our competition using the same formula that we've always used, integrating our industry-leading product in every category into architectures and solutions that deliver real outcome.

  • We've created this opportunity, and it is ours to execute.

  • I will now turn the call over to Kelly for her comments on the quarter and guidance for next quarter.

  • To you, Kelly.

  • - EVP & CFO

  • Thanks, John.

  • Overall, we had a very solid quarter and executed well.

  • From a top-line perspective, total revenue was $12.1 billion, increasing 5%, and we expanded our non-GAAP operating margin to 28.6%, with both non-GAAP net income and non-GAAP EPS growing 6% to $2.8 billion and $0.54 respectively.

  • Our GAAP net income was $2.4 billion and GAAP earnings per share on a fully diluted basis was $0.47.

  • Product revenue increased 6% and service revenue increased 3%, with product book-to-bill greater than 1. For Q3 our total non-GAAP gross margin and non-GAAP product gross margin came in at 62.5% and 61.8% respectively.

  • The increase in our non-GAAP product gross margin as compared to Q2 was driven by improved productivity, partially offset by product mix and pricing.

  • Non-GAAP service gross margin was 65.0%.

  • Looking at our geographic segment results in terms of total revenue, our Americas segment was up 8%, EMEA was up 2% and APJC was down 1%.

  • Total gross margin for the Americas was 62.9%, EMEA was 62.5%, while APJC was 61.2%.

  • Our non-GAAP operating expenses were up $4.1 billion -- were $4.1 billion, up 3%, or 33.9% as a percentage of revenue as compared to 34.6% in Q3 of FY14.

  • Our headcount increased by approximately 800 to 70,951, reflecting investments in key growth areas such as Security, cloud and software.

  • The non-GAAP tax provision rate of 22% for the quarter was consistent with our expectations.

  • Our GAAP net income and GAAP earnings per share included a benefit of $164 million, or approximately $0.03 per share, related to the charge we recorded in Q2 of 2014 for a supplier component matter.

  • The adjustment is a reduction of the liability reflecting lower than expected costs to remediate the impacted products with our customers.

  • This amount is excluded from our non-GAAP results.

  • From a balance sheet and cash flow perspective, total cash, cash equivalents and investments were $54.4 billion, including $2.6 billion available in the US at the end of the quarter.

  • We generated operating cash flow of $3.0 billion during the quarter.

  • Deferred revenue was $14.2 billion, up 8%.

  • Product deferred revenue grew in the double digits again this quarter at 12%, driven largely by subscription-based offerings, while services deferred revenue also grew, up 6% reflecting an increase in multiyear service arrangements.

  • We continue to build a greater mix of recurring revenue, as reflected in our deferred revenue.

  • Our DSO was 37 days as compared to 35 days in Q3 of 2014.

  • In Q3 we returned $2.1 billion to shareholders that included $1.0 billion through share repurchases and $1.1 billion through our quarterly dividend, which we increased 11% last quarter.

  • So far in FY15 we have returned approximately $6.2 billion, or 83% of free cash flow to our shareholders comprised of $3.2 billion of share repurchases and $3.0 billion of dividends.

  • Now let me provide a few comments on our guidance for the fourth quarter.

  • Let me remind you again that our comments include forward-looking statements.

  • You should review our recent SEC filings that identify important risk factors, and understand that actual results could materially differ from those contained in the forward-looking statements.

  • And actual results could be above or below guidance.

  • The guidance we are providing is on a non-GAAP basis with reconciliation to GAAP.

  • As John mentioned, we expect total revenue to be in the range of 1% to 3% growth on a year-over-year basis.

  • For the fourth quarter we anticipate non-GAAP gross margin to be in the range of 61% to 62%.

  • As we have said in the past, forecasting non-GAAP gross margin has always been challenging due to various factors such as volume, product mix, cost savings and pricing.

  • As a reminder, non-GAAP gross margin may vary quarter to quarter by 1 point in either direction of our guidance range.

  • Our non-GAAP operating margin in Q4 is expected to be in the range of 27.5% to 28.5%.

  • Our non-GAAP tax provision rate is expected to be approximately 22% in the fourth quarter.

  • Our Q4 non-GAAP earnings per share is expected to range from $0.55 to $0.57.

  • We anticipate our GAAP earnings to be lower than our non-GAAP EPS by $0.10 to $0.13 per share in Q4 2015.

  • The range includes a pretax charge of approximately $100 million as a result of the restructuring actions that we announced in the first quarter.

  • During Q3 we recognized pretax charges to our GAAP financial statements of $24 million related to that announcement, and we expect total charges not to exceed $600 million during FY15.

  • Please see the slides that accompany this webcast for more detail.

  • Other than those quantified items noted previously, there are no other significant differences between GAAP and our non-GAAP guidance.

  • This guidance assumes no additional acquisitions, asset impairments, restructuring and tax or other events which may or may not be significant.

  • We believe we are executing well in a rapidly transforming market and will continue to provide our guidance with all the appropriate caveats one quarter at a time.

  • We encourage our shareholders to have similar consideration.

  • As a reminder, Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure.

  • I'll now hand it back to John for his summary comments.

  • - Chairman & CEO

  • Kelly, thank you very much and nice job.

  • I believe Cisco is at a very positive inflection point.

  • In our 1997 annual report, when it was not obvious that the Internet would take off, we boldly declared that an Internet revolution would alter the fortune of companies, countries and people.

  • And we saw it come to life.

  • A number of years ago we started talking about the next phase of the Internet, the Internet of Everything, that will be much bigger than the last.

  • And it will require everything to become digital.

  • At the time almost no one understood what we saw.

  • Today, it's everyone's idea.

  • The conversations we are having today with our customers are so similar in many ways to those that we had 20 years ago.

  • We have always been the example and saw the transitions early.

  • And when others start noticing them, they are well under way.

  • As we help companies, cities, countries digitize, the outcomes are exciting: job creation, quality of life, efficient use of resources.

  • Our customers feel the pace of change accelerating, and they see the disruption in every industry and market.

  • They know their success depends on fast innovation, digitizing their business, entirely new IT organization structures and business organization structures.

  • Whether they are the disrupter or the incumbent, they are coming to Cisco as their strategic partner in the digital transformation.

  • As they build their businesses around mobile, cloud, social, data and analytic, they recognize that integrated architectures, with the intelligent networks at the core, will accelerate, or if they don't take advantage of it, inhibit their ability to move with the speed, scale and security required.

  • In simple terms, they know they will either disrupt or be disrupted.

  • I am spending more and more of my time with CEOs, Board of Directors and government leaders to explain the combination of technological, organizational and process transformation to meet these goals of our customers.

  • And as in the 1990s, in order to be a true partner to our customers, we have to lead by example.

  • Cisco is the reference point for how you reinvent yourself to embrace the opportunities of digitization and the speed of innovation required for the future.

  • We are three years ahead in making our own transition.

  • And with the pace of change in our market, three years makes a huge difference.

  • What does this mean for Cisco and our shareholders?

  • First, we spent the last 20 years moving everything to IP and taking advantage of convergence.

  • The intelligent network is at the center of every market transition, and no one comes close to Cisco when it comes to the network.

  • As 50 billion more devices come online, we have a strong hand to play and we are playing it.

  • Second, we are driving outcomes for our customers through architectures.

  • This is how we differentiate against white label and single-product companies.

  • And you can see this in our financial result, our margin stability, operating leverage, market share, and growth.

  • Third, in a digital world, security becomes even more important.

  • Cisco is the logical choice, as we combine a security architecture across the intelligent network.

  • Understanding the direction of the market and challenging ourselves to reinvent is how we address this opportunity and drive long-term value for our shareholders.

  • There could not be a better time to begin Cisco's next chapter.

  • And there is no one more excited than I am to have Chuck Robbins at the next CEO for Cisco.

  • I want to thank the Cisco employees who are leading our change and driving our innovation.

  • And your patience and energy is making Cisco's future possible.

  • Chuck, I know you will leverage the things that have made us great to date.

  • I also know you will make changes when needed, and drive innovation and new capabilities at a faster pace.

  • Cisco's momentum is strong and we are extremely well positioned for the opportunities created by digitization.

  • Every business and government leader is learning the benefits of becoming digital.

  • Growth, leadership, efficiency, productivity, conservation, safety, quality of life and education, these outcomes that are at the core of what Cisco has enabled for the last 20 years.

  • We wanted to use the Internet to change the way we work, live, learn and play.

  • And that's exactly what we've done in the past and what we will do even more in the future.

  • With that, Mel, we'll move to the session that I enjoy most, which is the Q&A.

  • Let me turn it over to you.

  • - VP of Corporate Communication and IR

  • Great, thanks.

  • Kim, we're ready of open for questions.

  • I'd like to remind anyone asking a question, please ask just one question.

  • Operator

  • Thank you.

  • Our first question comes from Simona Jankowski with Goldman Sachs.

  • - Chairman & CEO

  • Hey, Simona.

  • - Analyst

  • Hi John, and congratulations on all that you've accomplished in the last 20 years.

  • And I also want to wish Chuck all the best of luck going forward.

  • In terms of my question.

  • So John, you spent quite a lot of time on this call talking about a very positive inflection point.

  • And I just wanted to understand if that is something that you expect us to see externally in terms of accelerating revenue growth, or do you think that because you're also transitioning to more software in a recurring revenue model, that's going to really mask it because we're going to have that business mix?

  • In terms of timing, if it is something that you think will accelerate the business, are you looking at the next couple of quarters or more the next couple of years?

  • Just wanted to get a sense of the timing of the inflection.

  • - Chairman & CEO

  • Got you.

  • It's always fun.

  • Mel, I'm probably going to break a couple of my golden rules of 20 years with some of my comments today.

  • Chuck, you can do the same thing after 10 years in the job.

  • But answering them in sequence.

  • First of all, the opportunity is absolutely in revenue growth and profit growth.

  • And as you sell Solutions moving to outcomes, and you can do that much faster because of your architectures in the intelligent network, you get margin stability and premiums that go with it.

  • Let me use maybe just a couple quick examples of how I'd illustrate that.

  • In the US enterprise, if we would have told you that the top US enterprise accounts under Brian's team were to be able to grow at 21% year over year, you'd say I doubt that.

  • It took us a while, and we're a couple of months in the transition.

  • When you now grow at that rate, and have the number of large opportunities increase at the pace that we saw, you can see an inflection point which will absolutely translate not just to growth in US enterprise, but globally.

  • Let me give you an idea how that pipeline is expanding.

  • We you now sell business transformations, what Brian and Sandy do there together.

  • In the present time we have 1200 projects going on business transformation and outcomes.

  • That is a pipeline of $3.7 billion in opportunity over the next 18 months.

  • Now, we won't get all of that.

  • But it gives you an idea how rapidly that project has changed.

  • They sell to the business community with support of the CIO as opposed to respond [RFP].

  • In the last quarter alone you had 540 new projects in the quarter put into this pipeline, and they had a potential of $950 million.

  • What Chuck has done so well, whether it's in the enterprise business and you take it globally, Chuck, and taking that model and rebuilding our business and strategy, vision and strategy, make it together, is exactly one of the reasons he got this job.

  • The commercial marketplace in the US has grown for six quarters a row at approximately 10% to 11%.

  • No one else in the world is doing those numbers.

  • Again, Simona, it is purely business-based outcomes and selling architectures.

  • And what Chuck has done there is he's taken what Alison Gleeson did and taken it on a global basis.

  • So you see the same opportunity from that perspective.

  • In terms of our two headwind, the emerging markets is hard to call.

  • And I think it's often easy to take out a couple pieces and say, this is what our growth would have been otherwise.

  • Think about it.

  • Our problem in emerging markets is now down to three major countries.

  • It's China, Asia-Pacific without China, instead of growing at 1% would have grown at 8%.

  • Chuck, you and I are going over there every quarter, which is mainly you going and me occasionally following.

  • We'll eventually get that one turned around, assuming our governments get along.

  • Russia in Europe, 41%.

  • It took down the numbers there a fair amount.

  • But service provider, which was our biggest hit this quarter versus last quarter, instead of being down 1% was down 7%.

  • And Mel, we said last quarter it's going to take us time to get this fixed.

  • We didn't expect a positive upturn.

  • Here I'm going to make one of my rules.

  • I feel very comfortable that you'll see in the next several quarters -- Kelly's cringing, but that's all right, Kelly, you'll get used to it.

  • Chuck, this is one of my bad habits I want you to keep.

  • If you look at service provider, we'll turn that back positive.

  • The organization changes that Chuck made in the field that Pankaj turned engineering [organization], sideways to focus on outcomes, knocking down literally silos over 60 business units, that now are integrated toward outcomes together.

  • That will turn back positive and we aren't modeling it because CapEx is going to increase.

  • We do not think it will in the second half of the year.

  • We think actually our share of wallet's going to change.

  • Now let me put these pieces together.

  • When you win a Verizon deal, people didn't get what that was.

  • That was optical in an area that we've traditionally not been strong in.

  • Because we organize our sales engine different, our service engines different and our R&D engine different, we understood what the customer wanted.

  • We understood on the fly how we'd realign resources.

  • We understood how you're going to have a win rate that is much higher than ever before in markets that we haven't traditionally been as strong.

  • All those, Simona, translate into revenue growth and profit growth.

  • Am I pumped?

  • Oh, yes.

  • Could I be more excited than ever to turn it over to Chuck and watch what's going to happen?

  • I feel real good about our future.

  • A lot of growth in revenues and a lot of growth in profits.

  • - VP of Corporate Communication and IR

  • Operator, next question.

  • Operator

  • Our next question comes from Amitabh Passi with UBS Securities.

  • - Chairman & CEO

  • Hey, Amitabh.

  • - Analyst

  • Hi.

  • How are you, John?

  • Congratulations again from my end, and Chuck congrats to you as well.

  • - Future CEO

  • Thank you.

  • - Analyst

  • John, the one area I wanted to maybe get your thoughts on.

  • You've been talking about Intercloud.

  • It's a key pinnacle to your cloud strategy over the last couple of quarters.

  • Yet I think outside of some of the larger metrics you've shared in terms of the traction with Data Centers and customers, is there any help you can give us in terms of how we think about the monetization potential with Intercloud and how that's tracking for you?

  • - Chairman & CEO

  • Rob's been kind of the sponsor of this and the father.

  • Let me start with a very positive area.

  • Our service provider position is changing all for the positive.

  • They look at us in terms of mobility leadership.

  • They look at us in terms of video leadership.

  • They look at us in terms of Data Center leadership.

  • They look at us in terms of Security leadership.

  • With our NFE and SDN capabilities, we are leading in software.

  • The pieces that we're missing was how do you go into this new environment where each of these, quote, public clouds and clouds are separate and you have to be on different vendors' or different companies' ability to go into it.

  • And so what we're looking at first is an architecture.

  • And it cements our relationships in service providers.

  • And then it really comes through to how do you monetize it over time.

  • This will take time to monetize.

  • The effect we see indirectly is already huge when you talk about a Deutsche Telekom or a Telstra and our relationships with those.

  • Rob, a little bit in terms of how you measure success prior to we get into the monetization stage?

  • - President of Development and Sales

  • John, I think the metrics that we study, and we actually get together once a week.

  • One year into the announcement of Intercloud, we have three key areas that we focused on.

  • The first is the impact we're having in accelerating Cisco's success in private cloud.

  • You just mentioned the 21% growth of UCS.

  • You mentioned the increase in the number of customers from 300 to 580 with APIC.

  • We've seen success with converged infrastructure.

  • So maintaining that leadership position in private cloud, and now starting to track our success with the Cisco One Cloud Suite, which will bundle up our capabilities in UCS, UCS director, Intercloud fabric, and our prime service catalog.

  • If you look at all the metrics, we really do think on the score card of private cloud we're doing extremely well.

  • Second thing we're looking at through Intercloud is driving innovation through open source development.

  • And you mentioned in Montreal that we had announced the private cloud version of open stack, open stack private cloud for developers inside the fire wall.

  • I will be tracking very closely how well we do in that environment with open stack.

  • And clearly with 65 partners embracing open stack in the public cloud, some of them you just mentioned, we're really tracking how well we do in delivering open stack in the public cloud.

  • Th monetization model is infrastructure.

  • And we should measure how well we do in building the infrastructure that will sit in private and public cloud underneath of this open stack innovation.

  • The final thing, and this is just emerging, but you've seen some recent examples is the richness of the software catalog that Cisco brings to the Intercloud marketplace.

  • We've seen very good momentum recently with hosted Collaboration solution delivered by over 60 partners.

  • You mentioned Rowan's announcement of Spark for Teams, and that's a pure SaaS offer.

  • And something people might have missed was the Cisco Collaboration knowledge SaaS offer.

  • In the area of Collaboration you see a very rich set of offers.

  • We're looking at that marketplace, which will be a combination of Cisco and our partners' offers.

  • And we measure those going forward.

  • So those three areas, I'd say lots of work left to do.

  • But the scorecard's looking pretty good.

  • - Chairman & CEO

  • Thank you, Rob.

  • - VP of Corporate Communication and IR

  • Next question, please.

  • Operator

  • Our next question comes from Brian Modoff with Deutsche Bank.

  • - Chairman & CEO

  • Hey, Brian.

  • - Analyst

  • Hey, John.

  • Congratulations as well on your new role.

  • It's been nice working with you over the last 20 years.

  • Chuck, good luck in your new role as well.

  • - Future CEO

  • Thank you.

  • - Analyst

  • My question, John, is by FY16 you could see the web 2.0 CapEx higher than what you're seeing out of the carriers, the AT&Ts and Verizons.

  • How's Cisco positioned to sell into the web cloud customer base as trendsetters in the spending market?

  • How is Cisco preparing for the CapEx to OpEx transition you're seeing with cloud services, a shift from buying boxes to buying services?

  • Can you talk a little bit about how you're seeing that play out and what you think that growth will be for Cisco over the next few years?

  • Thanks.

  • - Chairman & CEO

  • If you look at where we are, and let's call it massively scalable data centers, the top 10, our role in that is evolving.

  • And candidly, we're starting to move much faster.

  • If you watch our ability to bring new products to market, you're going to see us have all 10 of the major players as key customers shortly.

  • Up to recently as you know, we were missing largely in one of those.

  • Secondly, as Pankaj has turned this engineering organization sideways and began to really focus on speed of small agile teams, and I could walk through a number of examples from mobility to security, but let's just talk about now how we develop our high end product.

  • We used to think about developing a high end product with maybe 3000 people, at least 3 to 5 years to do it.

  • Watch how we develop our next-generation router products for these major players.

  • And we'll do it in less than 12 months with probably 225 people.

  • You're talking and what these players would say, Cisco, you're finally getting it.

  • You're getting your speed of change with that.

  • You understand how to make the transition.

  • So I look at this as a very good opportunity for us to play in those with an increasing share of their spend.

  • And different than our peers, we will do it with software independent where appropriate, or combination of software, hardware and ASIC.

  • And I really like our momentum we're starting to get in these accounts.

  • And it ranges from the Microsofts of the world to the Googles of the world to the Facebooks to the Amazons.

  • Chuck, any thoughts on that one?

  • - Future CEO

  • Yes, John.

  • One of the key tenets that I've talked about over the last couple of weeks is our need in the future to rapidly sort of realign and adjust our portfolio based on what we're seeing with our customer base.

  • I think that the moves that Pankaj has made are really going to allow us to do that more effectively.

  • I think that will allow us to deal with, Brian, the shift that you highlighted from CapEx spend to some of the web 2.0 players.

  • And we're working that portfolio now.

  • We're working closely with many of them.

  • And I think you'll see us evolve that as necessary over the next couple of quarters.

  • I think when you think about the SP space, I think the biggest thing we've done over the last year, 1.5 years is that we really achieved architectural alignment with our SP customers, understanding where they want to go and aligning our portfolio.

  • And I think that our speed with which we've moved into the virtual managed services space and some of the wins that we announced, that John referenced in Mobile World Congress and some of the wins with Verizon and others, are indicative of our alignment with where they want to go.

  • And I think you'll see more of that from us in the future.

  • - VP of Corporate Communication and IR

  • Operator, next question.

  • Operator

  • Thank you.

  • Next question comes from James Faucette with Morgan Stanley Investments.

  • - Chairman & CEO

  • Hey, James.

  • - Analyst

  • Good afternoon.

  • Congratulations to John and Chuck from me as well.

  • Just wanted to ask quickly on Security, and it's an area that obviously saw good growth.

  • But I'm wondering how Security and security concerns may be impacting demand in some of your other product segments, firstly.

  • And secondly, also related to Security.

  • How should we think about your efforts in Security and areas where you may see some room for improvement in the product portfolio, et cetera?

  • Thank you.

  • - Chairman & CEO

  • Got you.

  • So, Security is the ideal market for us.

  • It basically is made up of hundreds of fragmented players.

  • We're the largest volume player at only 7.5% of the market.

  • And you know our you view.

  • We don't enter markets where we don't have a good change of getting to 40% market share with sustainable differentiation.

  • We believe it's going to be set up for an architectural play.

  • And it's going to require integration with intelligence throughout the cloud, throughout the data centers, the WAN down to the access, combining mobile with the Internet of Everything and digitization, et cetera.

  • We're on a journey here.

  • We love the momentum, 14% growth with orders growing faster, which I think was 20% growth.

  • And I expect us to do a lot better than that over time.

  • The pull-through on it is very interesting.

  • Because now, and this goes back to when we sell, we don't sell a product or just an architecture.

  • When you go in and you talk about digitizing your company, we talk about how all of our product architectures come together.

  • And then when we talk about Security together with IoE, digitizing your company, mobile, et cetera, you suddenly see how Security ties across all of those.

  • We're starting to get upgrades, and we're learning how to sell this better.

  • And probably again, Brian and Sandy's group have done the best job.

  • We get whole $10 million to $50 million upgrades of the whole network because of the Security implications, how it ties together.

  • It also gives us a seat at the boardroom, where on the one hand we can say you either disrupt or you die.

  • And on the other hand, your major fear of a CEO or a board is, what happens if we have a problem, how do I minimize it?

  • How do I know I've done everything possible, and don't save me a couple hundred thousand dollars on a white label box that causes me a problem.

  • Our win rate goes way up and our relevance goes way up.

  • And you will continue to see us move in terms of additional moves as we go in the future.

  • Chuck, I'm going to ask you maybe just to comment about his indirect question, which is acquisitions.

  • Don't tie down to specific industry, but your overall view of innovation.

  • How we defined it before, and your thoughts about, are we going to continue with the model that includes acquisitions in that model?

  • - Future CEO

  • John, so as I think about M&A activity going forward, I think if you look back at our strategy for innovation it has always combined a combination of internal R&D, partnerships, and acquisitions.

  • If you just look at the landscape today that we see in the consolidation of many of our peers and competitors, and John, you've been talking about brutal consolidation for a few quarters now.

  • Many of what we -- many of those that we see out there now are really around cost synergies, candidly, that are between players that perhaps aren't as strategically well positioned.

  • When we see that happen, that usually creates opportunity for Cisco.

  • And that's when we usually take advantage of those situations.

  • The others that you see out there are more driven based on real strategic alignment and strategic acceleration.

  • And those are typically done, I believe, by companies who are strategically better positioned in the marketplace, relative to what's going on, which is where I would argue we are right now.

  • When I think about it, you'll see us take advantage of the latter.

  • We'll leverage our go-to-market, our scale, our channel to accelerate time to market.

  • And what I would -- the example I would give you is Meraki.

  • We paid $1.2 billion for Meraki when it had $100 million in bookings.

  • And now we're on a $600 million bookings run rate by bringing that inside and leveraging what we're able to do.

  • And that's what you'll see from us in the future, which is really, I think, M&A that fits within our innovation strategy with a great deal of accountability.

  • - Chairman & CEO

  • Now, Mel always kicks me underneath the table.

  • Since it's my last one, we won't comment on rumors about acquisitions or not, but I wouldn't bet on the one that you heard today.

  • Sorry, Mel.

  • I know I'm going to break all kinds of rules today.

  • (Laughter) years to rebuild.

  • Operator

  • Thank you.

  • Our next question comes from Pierre Ferragu with Sanford Bernstein.

  • - Analyst

  • Hi.

  • Thank you for taking my question.

  • I'd like to discuss a bit like the transition, the CEO transition, Chuck and John.

  • Could you tell us about, John, how you see your role going forward as an executive search?

  • How are you going to keep yourself busy?

  • Are you going to have a you day-to-day role with clients?

  • And maybe if you can make a difference between maybe like a transition period, and on a more like run-rate basis on the back of that, how you're going to continue to be involved, if any?

  • - Chairman & CEO

  • Let me first say it very crisply.

  • Chuck is the CEO, period.

  • He will make the decisions.

  • I will be an advisor to him and I'll be very involved where he wants me to be.

  • The things I love most are vision and strategy.

  • I love time with customers, strategic partnerships, acquisitions, and whatever else Chuck wants me to do.

  • I will be his wingman, period, in terms of how we do this.

  • We were beginning to graph out our time.

  • I think, Chuck, both your and my calendars are full, full-time for about four months.

  • And I'm trying to, in this job, be working about half-time.

  • So Chuck, the one assignment I give on this transition is get to me to half-time sometime in the fall because the hunting season's coming up.

  • - Future CEO

  • Well, you realize your wife is paying me to keep you busy.

  • - Chairman & CEO

  • My wife got Chuck's number so she could text him when it was time for me to go on the road again.

  • It's a nice way of saying as we look forward, the transition will be very smooth.

  • I will be an advisor and a coach for Chuck.

  • We will not talk about that publicly.

  • I will do where we can add value.

  • I think a model that's similar is kind of what Intel's done with Andy and BK, where BK uses Andy very effectively with the board in key project areas.

  • And candidly, I think, Chuck, you went down to talk to BK about -- Brian, about what that roles might be.

  • It's Chuck's decision on this.

  • And Chuck, maybe your comments, and you can also share what you plan to do over the next 90 days, if you want.

  • - Future CEO

  • I think, Pierre, I would say that the one thing John's been very clear with me is exactly what he just said to you.

  • And he's been unwavering in our discussions on that.

  • What I would say is that everyone's been asking me what our priorities are, what we're going to be focused on.

  • And as I've said to everyone, we went through the process with the Board and we prepared a great deal of our thoughts around strategy and what we would do.

  • And now I want to just test that with our team.

  • I want to spend the next 90 days just talking to our leadership team, our employees, our customers, our partners, our shareholders, analysts; to really just make sure that the theories and the things that I think we should be doing are in alignment.

  • And I'm going to focus -- beyond that, we're going to focus on aligning our resources against the best priorities for the Company.

  • I really want to focus, secondly, on clarity and simplification of our messages and that's internal and external.

  • We'll take what Gary's done and built with a lot of the operational capabilities and the processes that he's built, and we'll double-down on that and continue to work.

  • And that includes across revenue opportunities, expense areas, as well as gross margins.

  • And then finally we'll double-down on our culture because I think one of the things that has made Cisco fantastic are our people.

  • So that's a big focus area for me as well.

  • Operator

  • Our next question comes from Mark Sue with RBC Capital Markets.

  • - Chairman & CEO

  • Hey, Mark.

  • - Analyst

  • Thank you, John.

  • Hi.

  • Thank you John, and welcome, Chuck.

  • Cisco is steadily growing its SaaS business and recurring revenue.

  • With this uptick in the pace of software growth as we transition from boxes to solutions, should we start thinking of and planning for a long-term lift to margins?

  • And with more software comes higher cash flow.

  • Should we start to also think about more cash ultimately coming back to shareholders?

  • - Chairman & CEO

  • So a series of questions.

  • Let me take part of them and Kelly can kick me or not.

  • You are going to see us move more and more into recurring revenue and deferred revenue.

  • The art is to do both at the same time.

  • Chuck and I both believe in the end we want to grow our revenue in the short term and long term, our profits in the short term and long term faster than revenue.

  • But we clearly are moving rapidly through that transition.

  • Probably the best example to give you on what's been successful would be the example, in terms of what we're doing in the Security space in terms of Meraki, where you begin to probably split at $2 for $1, $2 for current, $1 for later.

  • And as Chuck said, you start with $100 million base and you go all the way to the $600 million base fairly quickly.

  • The second would be Collaboration.

  • The numbers were great on Collaboration at 7% growth in the telepresence units at 66% year over year growth.

  • And the new products being developed in, I think, it was 12 months with the prototype and 18 months to market with only 200 people.

  • But what I loved about this quarter with Collaboration is their deferred revenue went up 20% to $1.1 billion on the quarter.

  • So you're beginning to build recurring revenue and deferred revenue pipeline that feels very good.

  • In terms of our capital allocation, you're going to see us remain committed to delivering our capital allocation as Kelly has outlined.

  • And we'll continue to be aggressive with a minimum of free cash flow going to our shareholders.

  • And you'll see us -- we wouldn't have started the dividend if we didn't anticipate regularly raising it.

  • You're going to see us be active in the share repurchase as well in terms of the capital allocation.

  • So no major change there, Mark.

  • - VP of Corporate Communication and IR

  • Operator, next question.

  • Operator

  • Our next question comes from Tal Liani with Bank of America Merrill Lynch.

  • - Analyst

  • Hi, guys.

  • I'm adding my own congrats to John and Chuck.

  • I wanted to ask about Switching.

  • You're into a major cycle of Switching.

  • New products that brings you into new markets, or develop new markets, et cetera, and creates a replacement cycle.

  • But still the numbers are not that impressive, at least on a sequential basis.

  • Revenues were down 6% in January and down 1.5% this quarter.

  • I know on a year over year it looks good, but that's because last year was so bad.

  • I'm trying to kind of do -- look at the sequentials to see what's the growth is looking like.

  • The question is, why don't we see higher numbers with Switching?

  • What prevents the numbers from going up?

  • And maybe you can relate here to units versus prices.

  • I'm trying to see if it's a pricing issue rather than a unit issue.

  • Thanks.

  • - Chairman & CEO

  • Tal, we've known each other for a long time, but I'm going to be very direct.

  • When you have Switching revenues up 11% last quarter, up 6% this quarter, it's off the charts.

  • And if you -- if I would have told anybody in this call two years ago that I'd be getting questions about Switching revenues only growing 6% in a quarter, you'd have said, you've got to be kidding me.

  • Because everybody was modeling 0 and they're modeling margins to go down.

  • Kelly, our margins on the switching actually were at the higher end of our range.

  • They've been remarkably consistent for the last eight quarters.

  • So all this garbage about new players coming in and software coming in and white label killing our approach was entirely wrong.

  • And the feeder system looks really good.

  • If you watch at the campus level, you have all of the drivers of low end switching, from IoE to digitization, to security, to mobility, all driving this upgrades and wireless.

  • And then at the high end, we're in the middle of a transition, which we executed remarkably well and we took the pain.

  • We announced the products early.

  • We knew there would be a transition from the 9K to the 7K.

  • The 9K growth is off the charts.

  • We are.

  • -- I want to be, cover my words, selection.

  • We are beating our competitors that you all were worried about.

  • We moved past them in less than one year of shipment.

  • We're growing sequentially 27% when our competitors are modeling to the market flat sequential growth.

  • That is market share gains at tremendous speed.

  • Now, it'll take us a couple more quarters to work through the 7K decline and get it balanced out.

  • And you'll see us move a lot of the capabilities of the 9K to 7K over the next couple of quarters.

  • And I know, Chuck, you've got that one with Pankaj and the balance.

  • So the bottom line on Switching, we're taking share.

  • We feel really good.

  • We're going to kick the other competitors.

  • And it's a very good growth market, and I will never apologize for growth in mid-single digits on Switching.

  • - VP of Corporate Communication and IR

  • Next question.

  • Operator

  • Next question comes from Brent Bracelin with Pacific Crest Securities.

  • - Analyst

  • Thank you for taking my question here.

  • John, you started out kind of breaking a cardinal rule.

  • I have a follow-up on that one.

  • Hopefully you'll be willing to share more color.

  • As you think about -- .(Laughter) (Multiple speakers) As you look at digital transformation projects, the 1200 projects, $3.7 billion pipeline certainly is an important proof point, shows you, kind of at least why you're seeing some of the strength in the enterprise and commercial side.

  • My question, and the question I get from investors a lot is, how is Cisco doing relative to expanding the footprint beyond kind of the core switching and routing business?

  • It's still 45% of your revenue today.

  • As you look at that pipeline around digital transformation, what's the attach rate on servers, software, services?

  • Can you give us some sort of color that's some sort of leading indicator to let us understand how well you're doing relative to expanding the overall footprint as you help enterprises transform their businesses?

  • - Chairman & CEO

  • It's interesting.

  • I want to think about how to answer that, or maybe have Chuck answer it on the next conference call in more detail on it.

  • Almost all of these sales are no longer about Switching and Routing.

  • They are purely outcome-based and it is GDP growth.

  • It's inclusion of minorities.

  • It's job creation.

  • It's healthcare.

  • It's education.

  • It's the citizens' experience and the businesses, it goes across to all industries.

  • What you do is you pull through everything at one time.

  • So we think about the total value of digitizing a company or a country, you suddenly see where we do these programs, those accounts grow at 10%, 15% faster than what they do during our prior model in terms of the opportunity on it.

  • And in terms of Routing and Switching, you can see the numbers.

  • I would expect there are other segments of the market, as SP and emerging come back to life, and they will.

  • I think SP we will see in a couple quarters, not because of CapEx spend but our positioning.

  • And emerging, eventually these three countries will level back out.

  • You will see the architecture sales where that segments outside Switching and Routing grow well.

  • Now to the point that Tal just asked, every time we sell these others, it pulls through Switching and Routing.

  • This is where intelligence in the network and our speed of architectures get outcomes that others do not, and that will drive the services, Gary.

  • That will drive the margins, Kelly, across the board that we get.

  • We might think about a way of defining a little bit more, but the bottom line is most of our customers that are with us on the digitization don't even think about us as Routing and Switching anymore.

  • And the fast growing areas of Collaboration, business messaging is one of the hottest areas growing, period, across the board in terms of the approach.

  • Collaboration.

  • If we can get 3% to 5% productivity in a company, and I think what we're doing around the Spark capability and the telepresence and this all came together, we can do it.

  • So it's a nice way of saying, I think you're going to see our areas outside of Switching and Routing grow rapidly.

  • The cool thing is it pulls through Switching and Routing.

  • And the best of all, architectures beats white label and pre-software.

  • - VP of Corporate Communication and IR

  • Operator, next question.

  • Operator

  • Thank you.

  • Our next question comes from Ittai Kidron with Oppenheimer and Company.

  • - Analyst

  • Hi, John.

  • Again, congrats to you.

  • Chuck, good luck to you in your new role.

  • John, I had a couple of questions.

  • First, going back to the service provider comment.

  • You've talked about it being down 7% globally.

  • Your Routing business was actually up on a year-over-year basis.

  • And yes, your service provider video was down 5%.

  • Can you give us a little bit, make up sort of the difference, what are the other product categories in which you're seeing issues or challenges on the service provider side?

  • Second, regarding the transformation point, which is very evident in your US results, which are quite impressive.

  • What is it in that pitch that doesn't resonate, or takes a long time to resonate, everywhere else?

  • Why is that not something that drives Europe up as well 10%, 15%?

  • - Chairman & CEO

  • Got you.

  • So several things.

  • First of all on the service provider video piece, the orders were down about 20% in SP Video.

  • So I don't want to mislead anybody with the 5% revenue number.

  • But the exciting part is, we're picking up our minimum in the cloud segment of this and the software in the cloud, which is clearly where we want the revenue to go.

  • The architecture play wins here.

  • Set-top boxes are tactical.

  • The cloud winning on video (technical difficulties) doing there is strategic to us.

  • Go to the US.

  • If you take out one of the large service providers, you're all of a sudden instead of talking down 17% you're talking down 6%.

  • And the cable players had the other part.

  • So we're starting to grow in many of these players globally.

  • It's just a few of them that have a major impact.

  • To the third part of the question, it takes a while.

  • When Chuck and Alison did the commercial operation here, Chuck then put Alison in charge of this on a global basis.

  • It takes literally a year to go through this transformation.

  • Some countries pick it up quicker than others.

  • Sometimes you have to give some of these countries a nudge after the fact.

  • Brian's total business transformation that he and Sandy are leading, that takes longer to roll out, more time.

  • Even with them, there was a disruption as they move rapidly through this where you saw their business actually slow for a couple of quarters before it took up.

  • And then there's the whole coordination with engineering.

  • And one of the key reasons that Chuck got this job, among others, is his ability to coordinate these resources together in division and strategy to determine the outcomes in terms of the direction.

  • It's a nice way of saying it's a multiyear journey.

  • The cool thing is, using US enterprise as an example, once they got it going the pipeline is accelerating.

  • And you'll see that around the world.

  • That's why we feel comfortable with the long-term gross, Simona, not just looking out a year or two.

  • But we will get more than our fair share.

  • Now let me put this in proper perspective.

  • If you watch where we are, all of our major IT players, almost without exception, are going down year over year.

  • I mean, it's a disaster in the market.

  • We will, if we hit our midpoint of the numbers we just gave you, we will be at a record earnings per share and a record quarter in terms of revenue.

  • So we're taking share of spend and position in the market extremely well as we go forward.

  • So I feel very good about where we're positioned.

  • Mel, and you're nicely saying that's going to be my last question?

  • All right.

  • Let me move to close a [little bit]

  • It's been an honor.

  • First, I want to thank all of you around this table.

  • This leadership team is amazing, and our virtual table, the operating committee and leaders, it really has been an honor.

  • It has been fun.

  • It's been challenging.

  • And I'm just very humbled by having this chance for 20 years.

  • Chuck, you're going to love this job.

  • When I look about where we are today, what excites me the most is what we've done on a culture and how we built an engine of innovation.

  • If you watch the innovation we're talking about in many of these areas, what used to take thousands of people, Pankaj does with 20.

  • We do the new mobility capability with data combining Wi-Fi with 3G and 4G in a way with 18 people in 8 months.

  • You make moves in security the same way.

  • You bring Spark to life with business messaging with 200 people.

  • We can now rival the best start-ups there are in the world, and out-execute them because they can build off of that capability.

  • What gets me very comfortable about our future, I said nicely our competitors come and go.

  • Chuck, I'm thinking about playing golf lately.

  • The exciting part about where we are is you and I are on the 18th hole and we're already ahead by 5 strokes in team play.

  • And all of our competitors have hit their golf balls off into the woods and are looking for it.

  • We're going to finish off this game.

  • By the time we're through, they're still going to be looking for their golf balls.

  • If you really look at the market and you think innovation [is breaking the] company in half.

  • Having to roll the dice of combining two companies that are really five companies into one, and you begin to think about having to cut expenses dramatically and then double-down that you can move to a software play only.

  • When we said this year that -- at the sales meeting, and people forget that's just eight months ago, that if you look at key competitors like HP and Alcatel-Lucent and Arista and VMware and Avaya, and we named several more.

  • We said half of those won't exist in a meaningful way as competitors to us in a year.

  • And everybody kind of said, yes, right.

  • Look where we are already in eight months.

  • It's a nice way of saying we're going to become the number one IT company.

  • It's been a tremendous honor to lead this organization.

  • It's one that will do better after me than during my time.

  • And that's the way of saying, like your kids, this team has built a tremendous strength.

  • They're going to do even better in the future.

  • So it's really been fun for me.

  • It's also going to be fun being your wingman, Chuck.

  • I'll have to spend my time where you want me to spend it.

  • And enjoy this moment.

  • And as much like when I ran today, Mel, you judge.

  • You said, go out and run a lot this morning, and I did.

  • And I was determined to set my new course record when I ran.

  • I got stopped in the first half-mile.

  • I've never seen this before in my life.

  • The biggest buck I've ever seen, it was probably a 12-point, maybe 14-point was right in my path, 10 feet from me.

  • And I looked it right in the eyes.

  • And at first I was annoyed because I was trying to set my timing, and then I realized you want to enjoy the moment, and how special that was.

  • But I lost.

  • I missed my timing, Mel.

  • I didn't make it by 10 seconds.

  • It's a nice way of saying that we're a competitive organization, one that is far from perfect.

  • And I've been a far from perfect leader.

  • But one that I'm very honored to have led.

  • It's really nice, like a family, that I want this to do even better as I move onto the next stage of my career, which is more one of a coach.

  • So Chuck, enjoy the moment.

  • You're going to be a fantastic new CEO, and you're going to do great things here at Cisco.

  • This team is literally unbeatable.

  • - VP of Corporate Communication and IR

  • To close the call, Cisco's next quarterly call, which will reflect our FY15 fourth quarter and annual results, will be on Wednesday, August 12, 2015, at 1:30 PM Pacific, 4:30 PM Eastern.

  • Again, I'd like to remind you that in light of Regulation FD, Cisco plans to retain its long-standing policy to not comment on its financial guidance during the quarter, unless it's done through an explicit public disclosure.

  • Please call the Investor Relations department with any follow-up questions from this call.

  • Thank you for your participation and continued support.

  • This concludes our call.

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