思科 (CSCO) 2015 Q4 法說會逐字稿

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

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

(Operator Instructions)

Now I would like to introduce Melissa Selcher, Vice President of Corporate Communications and Investor Relations.

Ma'am, you may begin.

Thanks, Kim.

Welcome, everyone, to Cisco's fourth-quarter FY15 quarterly conference call.

This is Melissa Selcher and I'm joined by Chuck Robbins, our CEO, and Kelly Kramer, our CFO.

By now you should have seen our earnings release with expanded financial information.

A corresponding webcast with slides, including supplemental information, will be available on our website in the Investor Relations section following the call.

Income statements, full GAAP to non-GAAP reconciliation information, balance sheet, cash flow statements and other financial information can also be found on the financial information section of our Investor Relations website.

Throughout this conference call we'll be referencing both GAAP and non-GAAP financial results, and we'll discuss product results in terms of revenue, and geographic and customer results in terms of product orders, unless stated otherwise.

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

The matters we'll be discussing today include forward-looking statements including the guidance we will be providing for the first quarter.

They're subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on Form 10-K and Form 10-Q and in any applicable amendments which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.

With respect to guidance, please also see the slides and press release that accompany this call for further details.

As a reminder, Cisco will not comment on its financial guidance during this quarter unless it's done through explicit public disclosure.

I'll now turn the call over to Chuck.

Thanks, Mel.

It's an honor today to lead this call as the CEO of Cisco.

While this is only my third week officially in the CEO role we've really hit the ground running since my appointment was announced on May 4. I believe that I'm stepping into this role at an incredible time for the Company.

John's vision and leadership have set Cisco up for the future that I believe will be even better than our past.

John is an industry icon, a global community leader, a friend, and as Executive Chairman I'm excited that our customers, partners, employees and shareholders will continue to benefit from his contribution to key priority areas, and I look forward to his partnership going forward.

Over the last 90 days we've seen an infectious energy emerge at Cisco.

And we've made strong moves around the four focus areas that I laid out -- accelerating what's working and changing what's not, simplifying our business, driving operational rigor, and investing in our talent and our culture.

We will continue to move quickly, and going forward it is my intention to be transparent on what we are doing and, more importantly, why we are doing it.

As we closed out our fiscal year we delivered record revenues and record non-GAAP EPS for both Q4 and FY15.

We're growing our business and earnings while driving the evolution of our portfolio and how we bring increasing value to our customers.

We demonstrated our continued commitment to driving shareholder value, and in an FY15 returned $8.3 billion to shareholders through share buybacks and dividends, which represented 73% of our free cash flow.

Cisco is in a very strong position.

Our results reflect the work we've done over the last several years transforming Cisco in today's rapidly changing market.

When I think about our strategy I look at the huge market opportunities that exist as businesses and governments use technology to drive their growth and operational efficiency.

This is why our customers are moving to digital and it is their number one priority.

In the digital world data is the most strategic asset and is increasingly distributed across every organization and ecosystem -- on premise, at the edge, and in the cloud.

The network plays an increasingly important role, enabling our customers to aggregate, automate and draw insights from this highly distributed data with security and speed.

This is driving them to adopt entirely new IT architectures and organizational structures.

We understand how technology can deliver the outcomes our customers want to achieve, and it is how we will continue to drive our differentiated strategy and prioritization in our business.

This is something our customers and our partners appreciate.

And starting today and over the coming months it is my goal to simplify and bridge for you how Cisco's unique position in this significant market translates into growth and profits for our shareholders, both today and over the long term.

With that, I'm going to turn the call over to Kelly to run through our execution on our financial strategy.

Thanks, Chuck.

I am pleased with our execution on our financial strategy of delivering profitable growth, managing our portfolio and strategic investments and delivering shareholder value.

Starting with profitable growth, we saw good top-line growth in Q4, with a record $12.8 billion in revenue, up 4%, bringing our full-year FY15 revenue to $49.2 billion, also growing 4%.

Successful portfolio refreshes across almost product every product area and effective resource relocations to growth areas fueled revenue growth in Q4 in every product area except for SP Video.

Specifically in Q4 the continued traction of the new core platforms and high-end routing drove routing revenue growth of 3%.

Switching grew 2% with very strong 200%-plus growth of ACR, both the 9K and APIC, and strong performance in the catalyst business.

And the refresh of the entire collaboration product line accelerated our collaboration growth to 14%.

Data center grew 14% with continued market leadership of UCS.

Wireless grew 7% driven by continued Meraki momentum.

And security grew 4%.

In security this quarter we saw the acceleration and the shift from hardware to software.

Our customers are rapidly adopting our subscription-based and software offerings which is helping us build a greater mix of recurring revenue.

This transition is accelerating and will remain a focus for us going forward.

Security and collaboration both had deferred revenue growth of over 20% at the end of the quarter.

And we saw total deferred product revenue growth double digits again this quarter, up 21%.

Product orders in Q4 grew 4% year over year, with a book-to-bill comfortably above 1.

Looking at the geographies, which is the primary way we run our business, the Americas grew 7%, EMEA declined 1% and APJC declined by 1%.

Total emerging markets declined 2% with the BRICs plus Mexico down 7%.

Looking at customer segments, we were pleased to see a return to positive growth of 2% in service provider.

Commercial grew 11%, enterprise globally declined 1%, and public sector grew 4%.

From a profitability perspective in Q4 we delivered non-GAAP EPS of $0.59, up 7%.

GAAP EPS was $0.45.

For the full year we grew non-GAAP EPS 7% to $2.21 with GAAP EPS of $1.75.

Q4 non-GAAP net income was a record $3 billion, up 6%.

GAAP net income was $2.3 billion.

The focus the teams have placed on gross margin stability through technology innovation, sustainable differentiation and cost savings continues to pay off in Q4, resulting in a non-GAAP gross margin of 62.1%, with non-GAAP product gross margin of 61% and non-GAAP service gross margin of 65.9%.

Strong operational rigor resulted in non-GAAP operating expenses in Q4 at 32.8% of revenue and a non-GAAP operating margin that expanded to 29.3%.

As I stated at Cisco Live, we're making the right bets and driving discipline in where we invest, helping to ensure we get the best return on our investments.

We believe continued operational discipline, combined with portfolio optimization, can drive our operating margins even higher from where we are now over the long term.

Moving on to the second pillar of our financial strategy, which is the work we're doing to manage our portfolio and strategic investments to fuel our key long-term growth areas such as cloud, data center, software and security, in Q4 we announced an agreement to sell the client premises equipment portion of our SP Video connected devices unit to French-based Technicolor for approximately $600 million in cash and stock, subject to certain adjustments.

We will continue to refocus our investments in service provider video towards cloud and software-based services.

We expect the transaction to close at the end of Q2 FY16, and expect to see an approximate 1 point benefit to our non-GAAP gross margin rate and negligible net income impact after close.

We also announced our intent to acquire the cloud-based security company OpenDNS.

The OpenDNS acquisition aligns with our strategy to deliver more cloud-based subscription services and drive the value of analytics in our security offerings.

In Q4, we also closed two acquisitions to further complement our software collaboration and cloud offerings.

These moves are consistent with our strategy of increasing the allocation of our innovation and R&D efforts to our growth areas.

Services revenues grew 4% in Q4.

Double-digit growth in our advanced services portfolio of cloud, security, consulting and analytics reflects our strategy of selling customer outcomes.

Further extending our renewal capabilities, which is highly profitable for us, last week we completed the acquisition of MaintenanceNet, a cloud-based software platform that uses data analytics and automation to manage renewals of recurring customer contracts.

Moving on to our third pillar, delivering shareholder value, in Q4 we increased operating cash flow 15% to a record $4.1 billion.

Total cash, cash equivalents and investments at the end of Q4 were $60.4 billion, with $7 billion available in the US.

And in Q4 we returned $2.1 billion to shareholders, including $1 billion through share repurchases and $1.1 billion through our quarterly dividend.

For the full year, we generated strong operating cash flows of $12.6 billion and free cash flow of $11.3 billion.

We returned $8.3 billion to our shareholders through share buybacks and dividends, which represented 73% of our free cash flow.

We are firmly committed to continuing our capital allocation strategy of returning a minimum of 50% of our free cash flow to shareholders annually.

We are also committed to looking at the right acquisitions at the right price to drive our growth strategy.

To summarize in Q4 and for the full-year 2015, we executed well against our business and financial strategy, and saw that execution reflected in our profitable growth, cash generation and operating leverage.

We have also demonstrated our firm commitment to delivering shareholder value.

Let me now go through the guidance for the first quarter FY16 which includes the type of forward-looking information that Mel referred to earlier.

In terms of total revenue we expect it to be in the range of 2% to 4% growth year over year.

We anticipate non-GAAP gross margin rate to be in the range of 61% to 62%.

The non-GAAP operating margin rate is expected to be in the range of 28% to 29%.

And the non-GAAP tax provision rate is expected to be 23%, up 1% from the prior fiscal year.

This represents approximately $0.01 of impact to EPS.

If the US R&D tax credit is reinstated we would reflect that benefit in our effective tax rate.

Non-GAAP earnings per share is expected to be in the range of $0.55 to $0.57.

We anticipate our GAAP EPS to be lower than the non-GAAP EPS by $0.11 to $0.15.

Further details related to this range are included in the slides and press release that accompany this call.

I'll now turn it back to Chuck to summarize the call.

Thank you, Kelly.

So, let me quickly summarize.

I believe our strategy and execution have enabled our performance to be quite differentiated from our peers.

We delivered record revenue and non-GAAP EPS, and drove positive growth in new orders while increasing our deferred revenue on the product side by 21%.

We are delivering these strong results all as we transition our business.

Let me give you some clear examples.

First, as we look at our collaboration business, two years ago we said we would overhaul our portfolio and shift it towards more recurring revenue.

We delivered revenue growth of 14% and saw deferred revenue growth over 20% on the strength of our subscription and SaaS businesses.

As we look at security, in a highly distributed digital world security is the top concern for our customers.

We are pushing threat-centric security everywhere across the extended network, driving our firepower security services across hundreds of thousands of ASA firewall platforms and ISR routers.

In Q4 we added customers more than 15 times faster than Sourcefire at the time of the acquisition.

We're quickly building a substantial software subscription business in our security portfolio, and you see that in the 26% growth of deferred revenue in Q4 for security.

Assuming we continue to execute I'm confident we'll see high double-digit growth in the back half of this year.

In switching, we are driving the transition to the Nexus 3K, 9K and ACI.

And in the quarter we grew revenue across those product families to $438 million, growing more than 100% year over year and more than 50% sequentially.

We added 1,400 new 9K customers, bringing us to over 4,100 total.

And 26 of our 28 largest enterprise customers are now 9K customers, with 30% of them new in Q4.

In high-end routing we continue to drive the transition in the core and saw both of our new platforms grow in triple digits.

We've solidified our lead in this market.

And with Meraki, customers are rapidly adopting this new cloud-based consumption model.

Three years ago we bought Meraki for $1.2 billion with $100 million of annual orders.

We closed this year with almost a $1 billion order run rate, scaling the business through our global commercial channels.

These are just a few examples of what we're capable of when we focus, and this is what I intend to accelerate.

We've only begun to scratch the surface on how we can take advantage of our scale and relevance in this digital transition, and how we deliver our technology to our customers.

The strategic role Cisco is playing is at the center of digital transition, today and in the future.

And it's why I strongly believe Cisco's best years are ahead of us.

Mel, let's open it up for questions.

Thanks.

Kim, let's open for questions.

I'd like to remind analyst to please ask just one question.

Thank you.

(Operator Instructions)

James Faucette, Morgan Stanley.

I just wanted to ask a question related to security.

That was an area in an otherwise strong quarter that was a little bit below at least where we had modeled.

Just wondering if you could give a little view on maybe what transpired and how you think about security and what needs to happen there to drive that growth.

And as part of that, are you comfortable with your current portfolio in security or should we expect you to look to make additions there to make it increase even further the competitiveness?

Thank you.

James, thanks for the question.

Number one, I am very bullish about where we are with our security portfolio.

I think the team has done a tremendous job.

They've actually driven the transition that we have begun from hardware to software and subscription business.

As we stated the deferred revenue was up over 20% -- I think 26% in the quarter.

Software is now 47% of our security portfolio.

On the FirePOWER, which is where we have our malware capabilities, we added almost 3,000 new customers, which, before the quarter I think we had 3,000 customers, so we doubled the number during the quarter.

And what we plan to do now is take that across all of our 275,000 ASA firewall customers.

I do feel comfortable that in the next couple of quarters we'll get the revenue back in the high double digits.

So, I think it's a transition that we're pushing.

I think the team's doing a great job of accelerating that transition.

I think it will be good for us in the long run.

As it relates to our portfolio, when we think about this we clearly are going to have to continue to expand our offerings for the customers.

And we'll do that through a combination of internal R&D, acquisitions where needed, partnerships where they make sense, co-innovation where it makes sense.

So, we'll be looking at all alternatives.

Simona Jankowski, Goldman Sachs.

I just wanted to ask a question on the backlog.

It was down year over year even though book-to-bill was strong, as was deferred.

I was just curious if you can help us reconcile that.

And related to that, enterprise I think you said was down 1% year over year, even though you had very strong bookings there last quarter.

So, just wanted to understand the dynamics there, as well.

I'll take the backlog one here.

Looking at our backlog, it was down marginally from a year ago.

And, as you know, that's at a point in time.

I think the big difference when you compare that to the great strength you're seeing in our product deferred revenue being up is, as soon as we invoice it out of our invoice, whatever it is, the hardware or the software, we remove it from backlog.

And then, obviously, as we get our cash for things or we defer it for deals, it goes into the deferred.

So, there's a bit of a disconnect between the two of when it's actually invoiced out.

But from a backlog weeks it's right in the same line of what we'd expect at the end of the year.

Simona on the enterprise portion of the question, the number that we put out there was a bookings number, order number, new orders.

And, candidly, I'm not concerned.

We see the enterprise business, because of the finite number of customers that exist in that segment, we see those varying quarter by quarter.

The commercial and public sector, we sell the same solutions, and I think that if you look at the performance there we're very optimistic.

So, I'm not concerned at all about the enterprise business.

Amitabh Passi, UBS.

Chuck, welcome on your first call.

I wanted to piggyback on the last question.

I had a similar question on switching.

Last quarter I think there was some concern about switching sales having peaked two quarters ago.

I think you saw a sequential uptick in switching.

How should we be thinking about the cadence in your overall switching business?

Is this a business that you feel comfortable growing in this 1%, 2%, 3%, lower single-digit percent range?

Amitabh, thanks for the question.

I'm pleased with where we are.

If you look at our performance in the campus and in the access piece of our business, we had solid performance.

We continue to see strength based on, frankly, customers connecting everything -- IOE, collaboration.

As we continue to drive our collaboration portfolio all of those video end units require switching ports.

Security is driving an element of that as is the transition we see wireless.

In the data center we're continuing to work through the transition that we have talked about.

I think that you can tell from the numbers that we put up on the 3K, 9K -- revenue at $438 million, up 53% sequentially -- we feel really good about where we are.

We are accelerating there and I think that we are very optimistic and pleased with where we are on our switching business.

Brian Modoff, Deutsche Bank.

If you could add up your services revenue including Meraki, including some of the enterprise products, what's the revenue base on that?

What's the overall growth rate and trend in that business?

Thanks.

Just to make sure, Brian, what pieces are you trying to quantify in there?

Meraki, your recurring revenue stream -- your services plus your recurring revenue streams.

And what's the growth rate and what's the trend in that?

Thanks.

Great question.

if I go to the actual balance, if I start with the deferred balance and then I'll get to the actual revenue piece of that, like I've talked about before, on the product side we've been increasing the amount of our deferred revenue that is recurring.

So, that amount year over year of my total product deferred revenue is now over 46%, up from 40% a year ago.

So, we continue to increase that.

Obviously there's different ranges of the term on that, but, on average, for product it's slightly north of $500 million-plus quarter on quarter that we're bleeding down, amortizing every quarter on the product side.

On the services side, it is obviously a much more accurate run rate.

I'll pull it up here as we go through, just give me a couple seconds here and let me pull it up for you.

Or, actually, let me follow up with you on the call back on that because I have to dig it up a little bit.

Okay, Brian?

Tal Liani, Bank of America Securities Merrill Lynch.

I want to go back to the question on switching because I'm trying to understand.

This is a major upgrade and still we don't see the numbers picking up materially.

The sequential growth we're seeing is below what we've seen the last two years.

And I'm wondering, can you go over what's offsetting the gross in 3K and 9K?

Why are the numbers not showing much greater increase given the magnitude of the cycle?

Thanks.

This is Chuck.

It's a great question.

As we look at our data center switching, again, we're very pleased with the campus and the access switching.

We've got a refresh that's being driven there and that's moving along well.

We are very happy with the transition going on in the data center switching space, as we look at customers that are migrating to 10, 40, 100 gig, which is really represented by the data that I gave you earlier.

And it's just being offset by the transition from the 7K to these new platforms.

And we think in the next few quarters we'll see that inflection point.

Pierre Ferragu, Bernstein.

On the service provider side, you're now getting back to some good revenue momentum.

I was wondering, how much of that comes from a change in the landscape in how operators are looking at spending, and how much is much more related to your own dynamics and your own product cycle.

And then when we look at the second half of the year, of the calendar year, could you give us a sense of how you see the market evolving, especially your largest clients in the US?

Thank you.

On the service provider business, clearly we are pleased that we got back to growth this quarter.

Our teams have done a great job.

We're proud of what they've done.

We made some changes over the last 18 months internally in engineering and services and in sales to better position us, and I think that had a lot to do with it.

I also think that we have really gotten to a point of what I'd say architectural vision alignment with most of our customers.

We saw balance throughout the quarter in SP.

We saw good performance from data center collaboration, high end routing, even SP mobility.

So, while we're pleased with the 2% we're still cautiously optimistic about where we go.

I think that in the second half of the year right now, relative to when you think about at SP CapEx, there's a lot of movement right now around the expectations for that in the second half.

Candidly, we have not modeled any significant increase in the second half of CapEx spend from SP, and if it does occur then we'll certainly benefit from that.

So, again, we're cautiously optimistic in this space.

Mark Sue, RBC Capital Markets.

Maybe a question on how we should think about Cisco's long-term growth on an adjusted basis considering Cisco has and will continue to make acquisitions.

And increasingly you're taking a fresh look at divesting businesses.

So, can we return to your 3% to 6% long-term growth rate post the SFA divestiture?

And concurrently, how should we start modeling the revenue impact as we transition to subscription and as Cisco moves faster to software?

Obviously when I did Cisco Live we had assumed the SP Video set-top business was still in our portfolio.

I think, though, to offset that, as you know, we are very acquisitive and we will continue to be very acquisitive going forward as we continue to build out our portfolio, especially in areas like software and security.

In terms of your second part of your question, we will clearly breakout -- we expect to close the deal officially in the December-January time frame.

And when we give guidance for Q3 we'll make sure it's very transparent so you can adjust your models for what is coming out based on what we were modeling before.

Simon Leopold, Raymond James.

I wanted to come back to the routing segment.

The results this quarter certainly were a bit better than what we were modeling.

But when we compare your results to some of your closest competitors, it does appear that at least in their June ending quarters they grew a bit faster.

So, maybe you could help us understand what might be going on in the routing market overall as well as your competitive position and market share.

Thank you.

As we think about the SPs right now, I mentioned earlier that we had great success in our high-end platforms that we talked about last year as we began the transition, both of them growing over 100%.

As we look at the marketplace today, we did really well in the core.

We need to probably improve our performance in our edge routing platforms as we look ahead.

But I do think that as we look at where the service providers are going, what they want to do with virtual managed services, how we're aligned now around the deployment of NFV, and how we move forward with that, we think that we're well-positioned with routing as we look ahead.

Jess Lubert, Wells Fargo.

I was hoping you could share with us how much your business is now coming from the Web 2.0 vertical, the trends you're seeing there, how material the opportunity with these customers may be for your prospects in FY16.

And then the service business saw nice improvement so any insight as to what drove the improvement there and if there's any reason to believe service growth could accelerate as customers move forward with more complex network architectures.

Thanks.

On the MSDC and web players, what I will tell you is that we've spent a great deal of time over the last couple years really understanding what the requirements are, where they're headed, and how we can provide the technology that they need.

And I'll tell you, this quarter the top 10 web scale players, our order growth exceeded 20%.

So, we're very pleased with where we're going.

We actually embarked on some co-development with one of the cloud titans in the last 12 months.

And we delivered last quarter a new high-end platform to them as a result of that co-development.

So we're pleased with our progress there.

We continue to work with them around their unique needs.

And we think with our ability to build out scalable solutions, with consideration to their unique needs, I think that we are reasonably well positioned.

On the services side we had good performance this quarter at 4%.

I think as we look at our customers and they continue to move to the Internet of Everything and connecting devices, they're going to continue to need more and more services.

So, we're pleased with where we are and we feel good about our position in the services business going forward.

George Notter, Jefferies.

Somewhat impressed with the growth rates you guys are putting up in the commercial segment on year-on-year product orders.

You've had a string of fairly attractive year-on-year growth rates.

But can you talk about what's going on there?

Obviously Meraki is a part of the story.

I know you guys are trying to push that cloud management system onto other products in the portfolio.

Can you just talk generally about the initiatives you have going on in commercial and how you keep driving that growth going forward?

Thanks.

Thanks, George, we always appreciate that question.

This is why, when we look at our enterprise segment this quarter, it doesn't concern me.

When you look at our commercial business, our selling motions, our solutions and everything we do are the same.

There's just a much broader base of customers to balance it across.

We grew the global business in commercial 11%.

Just a couple other data points for you.

Our US commercial business this past quarter grew 19%.

And that's 23 consecutive quarters of positive growth, and 16 of those have been double digit.

So, we've had very consistent performance.

And I think the key is that we have really shifted both our solutions and our technology, as well as our selling motion and our services capability, to be much more tightly aligned with how the technology is aligned to our customers' business issues.

And I think we're doing that very well in the enterprise and I think the teams have done a really good job of that in commercial.

And those commercial customers, those mid-range customers, we see it time and time again -- they tend to be the early adopters of our new technology because they view it as a way to accelerate their business, to drive their competitiveness, and they just always seem to adopt early.

Meraki has clearly been a big success for us, as I said earlier, relative to exiting Q4, almost on a $1 billion run rate from an order perspective.

And we continue to see it being a very relevant portion of particularly the lower end of our commercial market, our K-12 market, in not only wireless but also we're seeing an expansion into managed cloud switching as well as security.

So, we're very pleased with where that is going and we would expect to continue to add more and more functionality to that platform.

Paul Silverstein, Cowan.

Very straightforward, if you could talk about pricing across regions in general.

And Kelly, can you remind us what cloud titans are as a percentage of revenue?

The cloud?

-- We don't actually share that with you.

But if I get back to your pricing question I'd say what you're going to see this quarter is very similar to what you've seen all year.

Our pricing has remained in a tight range.

You're going to see that our impact on year-over-year points is basically the same of where it was last quarter.

So, we're not seeing any incremental discounting going on.

And again that's looking across the board.

I think our teams have been executing very well, especially outside the US where they're facing the FX headwinds, where they're being very disciplined in managing through the currency effect.

Tim Long, BMO Capital Markets.

I just want to talk a little bit about the emerging markets.

It sounds like the US performance has been outstanding, just some of the countries were highlighted as a problem.

Could you give us a little view on how long do you think before we can start to see a more broad-based recovery in the emerging Markets?

And what pieces of your business do you think are most likely to drive that?

Thank you.

If you look at the emerging markets I would tell you that the story in Q4 was quite similar to the story in Q3.

If we go through the five BRICM countries, Brazil actually was made negative 45, Russia was negative 38, China was negative 3 which actually was the best performance we've had in eight quarters.

And we had some bright spots.

India was plus 5, Mexico was plus 26.

And Mexico had just a tremendous year in general.

All the emerging countries outside of those five actually grew 3%.

So, overall it was negative 2%, as we stated.

So it's very much the same as it was last quarter.

I think that they are largely and macro and geopolitical issues.

We have adjusted our cost structure, where needed, and we've invested in areas where we've seen growth, as you would expect.

And we believe that as the macro and the geopolitical issues resolve themselves, we think we'll be a big beneficiary of that.

The other comment I'll just make on emerging is if you just look at the EMEA numbers and you remove Russia, EMEA was actually positive.

It was up plus 1 without Russia.

So, overall the emerging continued to be a little bit of a strain.

Jayson Noland, Robert W. Baird and Company.

A follow-up to Europe -- how much of that is macro and how much of that is US dollar strength?

And then, Chuck, if you can comment on any headcount reductions to start the fiscal year.

Cisco's made some cuts the last couple years.

Yes.

As we look at Europe, I think that, again, there was an emerging markets element associated with it the way we measure EMEA.

And also I think we stated on the last call that we believe that the currency issue may have as much as 1 to 3 points even though we sell primarily in US dollars in most countries.

I will say that I believe our teams have proven over the last several quarters in Europe that they out-execute our peers and our competitors.

And if there are macro issues we'll deal with them but based on the things that we can control I think our teams are doing a very good job.

I'd like to thank everybody for joining the call today.

I want to just quickly summarize.

I do believe that we are in a very strong position.

I think that was reflected in our results.

I think they were differentiated from what you've seen from many of our peers.

Again, record revenue and record earnings per share, as well as the 21% growth in deferred product revenue as we continue to transition our business to a more predictable, while growing revenue and earnings at the same time.

I really believe that the transition that our customers are going through and the move to digital and the Internet of Everything will only be successful with the network at the center of that transition.

And I really do believe that the best years for Cisco are ahead.

So, thank you very much for joining the call.

Mel?

Great, thanks, Chuck.

Cisco's next quarterly call, which will reflect our FY16 first-quarter results, will be on Thursday, November 12, 2015, a day later than normal because of Veterans Day, at 1:30 PM Pacific time, 4:30 PM Eastern time.

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

Thank you for joining our call.

Thank you for joining today's conference call.

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