Q3 2025 Earnings Call Transcript

Welcome to Cisco's Third Quarter Fiscal Year 2025 Financial Results Conference Call. At the request of Cisco, today's conference is being recorded. If you have any objections, you may disconnect. Now I would like to introduce Sami Badri, Head of Investor Relations. Sir, you may begin.

Good afternoon, everyone. This is Sami Badri, Cisco's Head of Investor Relations, joined by Chuck Robbins, our Chair and CEO; Scott Herren, our CFO; and Mark Patterson, our Chief Strategy Officer. Cisco's earnings press release and supplemental information, including GAAP to non-GAAP reconciliations are available on our Investor Relations website. Following this call, we will also make the recorded webcast and slides available on the website.

Throughout today's call, we'll be referencing both GAAP and non-GAAP financial results. We will discuss product results in terms of revenue and geographic customer results in terms of product orders unless stated otherwise. All comparisons will be made on a year-over-year basis. Please note that our discussion today will include forward-looking statements, including our guidance for the fourth quarter and fiscal year 2025. These statements are subject to risks and uncertainties detailed in our SEC filings particularly our most recent 10-K and 10-Q reports, which identify important risk factors that could cause actual results to differ materially from those contained in our forward-looking statements.

With respect to guidance, please also see the slides and press release that accompany this call for further details. Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. Now I'll turn it over to Chuck.

Thanks, Jamie, and thank you all for joining us today. Q3 was another strong quarter for Cisco, with revenue, margins and earnings per share all above the high-end of our guidance ranges. We also generated solid growth in annualized recurring revenue, remaining performance obligations and subscription revenue, which all support our future performance. In addition, we received AI infrastructure orders from web-scale customers in excess of $600 million in Q3, bringing our year-to-date total to well over $1 billion, surpassing our original fiscal year '25 AI order target a full quarter early.

The performance of our core business continues to produce strong cash flows, underpinning our commitment to deliver consistent capital returns. In Q3, we returned $3.1 billion in capital to our shareholders through share repurchases and dividends with a total of $9.6 billion in value returned year-to-date. Our overall strong performance was a result of accelerated product innovation and solid execution by our teams driving sustained demand for our technologies. Total product orders grew 20% year-over-year or 9% on an organic basis, excluding Splunk.

Despite the uncertain macro environment, this demonstrates the valuable outcomes we are delivering for customers in the era of AI. Looking at demand in more detail by customer market. I'd also like to remind you that Q3 of fiscal year '24 included six weeks of Splunk contribution. Enterprise product orders were up 22% year-over-year in Q3, driven by double-digit growth in the Americas and APJC.

Public sector orders were up 8% with growth in all geographies as governments around the world continue to trust Cisco as their end-to-end technology partner. Notably, U.S. federal orders grew double digits in Q3, after a challenging first half. During the quarter, our AI-powered cloud managed Meraki for government networking solution also achieved FedRAMP authorization from the U.S. government. Product orders from service provider and cloud customers continue to be strong, up 32% year-over-year, driven by triple-digit growth in web scale with three of the top six web scalers each growing orders in the triple digits.

Now some color on demand from a product perspective. Networking product orders grew double-digits driven by web-scale infrastructure, enterprise routing, switching and our industrial IoT products. Campus switching orders grew high-single digits in Q3 against a tougher prior year compare, demonstrating the continued demand for our campus portfolio to enterprise customers. We also saw triple-digit sequential growth in orders for our WiFi 7 portfolio in Q3. Year-to-date orders for our industrial Internet of Things portfolio comprised of ruggedized catalyst products grew 35% year-over-year.

As strategic infrastructure and manufacturing begins to onshore to the United States, Cisco is well-positioned to help connect and protect these capital-intensive investments at scale. Our data center switching orders were up double digits year-to-date compared with the same period last year. Cisco was recently ranked as a market leader in Gartner's Magic Quadrant for data center switching. This is a testament to our ability to address the full range of data center switching use cases and our vision to simplify operations while enhancing security, which is essential for critical application deployments.

As I mentioned earlier, the AI infrastructure orders we have received from web-scale customers were exceptionally strong in the quarter, exceeding $600 million in bringing our year-to-date total to well over our $1 billion target for fiscal year '25. As expected, the product mix of these orders was more than two-thirds in systems with the remainder in optics, demonstrating the growing importance of our technology to web-scale customers for their AI training use cases. AI orders from enterprise customers continue to show momentum as this large nascent market opportunity starts to unlock. Enterprises are seeking simple, seamless, scalable and secure solutions for their AI deployments which we are ready to deliver through our expanding partnership with NVIDIA.

During the quarter, we announced our intent to create a cross-portfolio unified architecture, where NVIDIA will enable Cisco Silicon One, to become the only third-party silicon that is included as part of the NVIDIA Spectrum-X Ethernet networking reference architecture. Cisco will also build interoperable systems combining NVIDIA Spectrum silicon with Cisco operating system software allowing customers to simultaneous standardize Cisco Networking and NVIDIA technology in the data center, across front and back-end networks. We also announced a Cisco secure AI factory with NVIDIA, which will embed security end-to-end.

From the application to the workload to the infrastructure, using solutions like Cisco AI Defense and hybrid mesh firewall, enabling enterprise customers to build and secure data centers to develop and run AI workloads. Yesterday, we announced a new multiphase investment program in the Kingdom of Saudi Arabia. Saudi Arabia announced a new AI company, HUMAIN, and we will be a strategic technology partner contributing to their AI infrastructure build-outs. This partnership aligns with Saudi Vision 2030, contributing to the Kingdom's transformation into a diversified digital economy and enhancing its global and regional competitiveness in the AI era.

In addition, we have joined the AI infrastructure partnership alongside BlackRock Global Infrastructure Partners, MGX, Microsoft, NVIDIA, XAI and Energy Partners GE Vernova and Nextera Energy, as it seeks to invest in secure, efficient and scalable infrastructure to support AI workloads. We also announced an expanded collaboration with G42, the UA based Global Technology Group to advance how secure AI infrastructure and innovation can be scaled across public and private sectors. These investments and partnerships highlight our market position as a global leader and preferred partner in AI networking solutions, as well as our commitment to collaborating across the industry to create a strong global ecosystem for AI.

Additionally, we expect a sovereign AI cloud opportunity to ramp in the near term and that Cisco will be a core system provider for these significant AI training and inference cluster build-outs. As we look at the opportunity that AI presents for Cisco, it is worth reiterating that we frame it in three distinct but connected pillars. First, AI training infrastructure for web-scale customers, combinations of our Cisco 8-K, Silicon One optics and optical systems are being deployed by 5 of the 6 largest web scalers. Second, AI inference and enterprise clouds.

Our accelerated innovation in hardware and software, coupled with our NVIDIA partnership is designed to simplify and derisk AI infrastructure deployment for the enterprise. And third, AI network connectivity. Customers are leveraging our technology platforms to help modernize, secure and automate their network operations to prepare for pervasive deployment of AI agents and applications. With a genetic AI, the network is fundamentally constrained and will require ultrafast, low-latency, energy-efficient networks, which we can deliver.

Shifting to security. Orders grew in high double digits in Q3. Our security orders included a large multiyear deal with a major financial services company for Splunk's security and observability platforms, which was driven by our combined sales force. This was a win for Splunk from an industry competitor and is a strong proof-point of our go-to-market synergy. This was also the largest deal ever for Splunk.

Our recently launched security products of Secure Access, XDR and Hypershield collectively added over 370 new customers in the quarter. The majority of our new Hypershield enterprise customers are bundling it with our new N9300 Smart Switch because of our unique ability to embed security directly into the fabric of the network. Now I'd like to comment on some highlights from our accelerating innovation pipeline. Safety and security will be the defining challenge of Agentic-AI, and we recently introduced several innovations designed to help security professionals harness the power of AI, while keeping security at the forefront.

These include Cisco XDR correlating attack telemetry across network, endpoint and cloud, using new AI-powered solutions to empower security teams to understand complex threats and seconds. Agentic AI advancements for Cisco XDR and Splunk to simplify threat detection and response. A new partnership with ServiceNow, which will integrate their security operations capabilities with Cisco AI Defense and the launch of Foundation AI, a team of leading AI and security experts focused on developing cutting-edge technology to address the fundamental security issues of the AI era with novel open source tools, including the first reasoning model to enhance security applications.

Just last week, we introduced Cisco's Quantum Network Entanglement Chip, a revolutionary prototype making real-world quantum networking applications possible in order to speed up the future of quantum computing. These applications will solve complex customer challenges and drive innovation across industries from supply chain optimization to accelerating drug discovery. In addition, we are using Gen AI and genetic systems across our customer experience organization to maximize customer value, deliver great experiences, boost productivity and create capacity. Today, over 60% of support cases are touched by AI-driven automation, which is driving up the proportion of complex cases we can solve within 1 day.

In addition, low severity cases have reduced as more customers are using our AI support assistant. Also, our AI renewals agent has enabled us to increase the capacity of our renewal specialists. As you can see, we are driving an enormous amount of innovation, and I look forward to showcasing even more new customer-centric solutions at Cisco Live next month. Before I turn it over to Scott, I'd also like to share some important organizational announcements.

After careful consideration, Scott has made the decision to retire at the end of fiscal year '25. As many of you know, Scott joined us in 2020 during a period of great uncertainty around the world and he has been instrumental in driving our transition towards more software and recurring revenue. This has driven greater predictability for our business and increase shareholder value. And I want to thank Scott for all that he has done for Cisco. I am grateful for his partnership as we've managed through many unprecedented situations together.

I'm happy to share the beginning day 1 fiscal year '26, Mark Patterson, our current Chief Strategy Officer, will serve as Cisco's new Chief Financial Officer. In Mark's nearly 25 years at Cisco, he's held leadership roles in finance, strategy and operations. He also spent over a decade in sales, working in roles that span every customer segment and geography. Most recently, leading our corporate strategy, development and incubation organization Mark's focus has been on connecting our longer-term strategy and investments with our immediate and urgent growth opportunities.

The breadth of his experience, along with his deep knowledge of Cisco and our customers, partners and investor community uniquely position him to help accelerate Cisco's growth in this new role. I'm also excited to announce the promotion of Jeetu Patel to President and Chief Product Officer. Under Jeetu’s leadership over the past 9 months, he has unified our product vision and strategy and vastly accelerated our innovation pipeline, focusing on delivering even greater value for our customers and our partners. We also announced the appointment of Kevin Weil, Chief Product Officer of OpenAI to Cisco's Board of Directors yesterday.

These announcements further our confidence in Cisco's long-term success and durability in the era of AI. To summarize the quarter, we are seeing clear demand for our technology across our customer markets. Our innovation pipeline continues to accelerate as we view security deep into our networking products, and our strong performance is fueling our capital allocation model, returning significant value to our shareholders. Now I'll turn it over to Scott for more detail on the quarter and our outlook.

Thanks, Chuck. We delivered a strong quarter with revenue and earnings per share above the high end of our guidance ranges, coupled with solid margins and operating cash flow. For the quarter, total revenue was $14.1 billion, up 11% year-over-year. Non-GAAP net income was $3.8 billion and non-GAAP earnings per share was $0.96. Looking at our Q3 revenue in more detail.

Total product revenue was $10.4 billion, up 15% and services revenue was $3.8 billion, up 3%. Networking was up 8%, with growth across most of the portfolio, led by double-digit growth in switching and enterprise routing, partially offset by a decline in servers. Security was up 54%, primarily driven by growth in our offerings from Splunk and SASE. Collaboration was up 4%, driven by growth in Devices, Webex Suite and our CPaaS offerings and observability was up 24%.

Looking at our recurring metrics. Total ARR ended the quarter at $30.6 billion, an increase of 5% with product ARR growth of 8%. Total subscription revenue increased 15% to $7.9 billion and represents 56% of Cisco's total revenue. Total software revenue was up 25% at $5.6 billion, with software subscription revenue up 26%.

Total RPO was $41.7 billion, up 7%. Product RPO grew 10% and total short-term RPO was $21.1 billion, up 5%. Q3 product orders were up 20% year-over-year, excluding Splunk, product orders were up 9% year-over-year. Looking at product orders across our geographic segments.

Americas was up 27%, EMEA was up 4%, and APJC was up 21%. In our customer markets, service provider and cloud was up 32%, Enterprise was up 22% and public sector was up 8%. Total non-GAAP gross margin came in at 68.6%, up 30 basis points year-over-year, coming in above the high-end of our guidance range. Non-GAAP product gross margin was 67.6%, up 70 basis points driven by productivity improvements and Splunk, partially offset by pricing.

Non-GAAP services gross margin was 71.3%, down 30 basis points. The impact of tariffs on our gross margin was favorable to what was estimated in the guidance we provided last quarter. We continue our focus on profitability and financial discipline with non-GAAP operating margin at 34.5%, above the high end of our guidance range. We recorded a non-GAAP tax rate of 17.5% for the quarter, which was favorable by 1.5 percentage points compared to what was assumed in our guidance, primarily due to an increase in tax benefit from the foreign-derived intangible income deduction and one-time benefits.

Shifting to the balance sheet. We ended Q3 with total cash, cash equivalents and investments of $15.6 billion. Operating cash flow was $4.1 billion, up 2%, primarily driven by revenue and earnings growth. From a capital allocation perspective, we returned $3.1 billion to shareholders during the quarter comprised of $1.6 billion for our quarterly cash dividend and $1.5 billion of share repurchases with $15.4 billion remaining under our share repurchase program.

We continue to invest organically and inorganically in our innovation pipeline. During Q3, we closed the acquisition of SnapAttack, which adds capability to Splunk and helping organizations power the security operations center of the future. To summarize, we had another solid quarter with top and bottom-line performance exceeding our expectations, driven by strong order growth and margins. We remain focused on making strategic investments in innovation across our business to best capitalize on the significant growth opportunities we see ahead, all underpinned by disciplined spend management.

It's this powerful combination that continues to fuel our strong cash flow generation as well as our ability to return significant value to our shareholders. Turning to guidance. While we've seen some progress on tariffs, there continues to be uncertainty. Our guide assumes current tariffs and exemptions remain in place through the quarter.

These include the following: China at 30%, partially offset by an exemption for semiconductors and certain electronic components. Mexico and Canada at 25% for the components and products that are not eligible for the current U.S. MCA exemptions. Other countries at a base rate of 10% until the end of the 90-day pause on July 9 and then reverting to country-specific reciprocal tariffs partly offset by an exemption for semiconductors and certain electronic components.

And finally, a small impact from tariffs on steel and aluminum and retaliatory tariffs. We'll continue to leverage our world-class supply chain team to help mitigate the impact where appropriate through the flexibility and agility we have built into our operations over the last few years. The size and scale of our supply chain provides us some unique advantages as we support our customers globally. For fiscal Q4, our guidance is we expect revenue to be in the range of $14.5 billion to $14.7 billion, we anticipate non-GAAP gross margin to be in the range of 67.5% to 68.5%.

Non-GAAP operating margin is expected to be in the range of 33.5% to 34.5%, and non-GAAP earnings per share is expected to range from $0.96 to $0.98, and we're assuming a non-GAAP effective tax rate of approximately 18%. For the full year fiscal '25, our guidance is -- we expect revenue to be in the range of $56.5 billion to $56.7 billion, and non-GAAP earnings per share is expected to range from $3.77 to $3.79. Sami, let's now move into the Q&A.

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

Thank you sir. Meta Marshall with Morgan Stanley. You may go ahead.

Great. And congrats on the quarter. Maybe the two questions for me. Just one, what are you seeing in terms of customer buying behavior right now, just given the uncertainty kind of with some of the tariffs that you laid out and just whether you kind of saw any pull forward potentially in April.

And then just maybe as a second question, just any commentary around public sector and federal kind of around the same questions. Thank you.

Yes, Meta, thank you. I'm going to -- I'll give you some commentary, and then I'm going to ask Scott to give you some data points on this pull-ahead issue. But I'd say from a customer behavior perspective, first of all, we haven't seen any meaningful change in how they're purchasing. And so we haven't seen any customers really fundamentally slowing down.

They're still committed to the technology transition. I think the AI transition is just so important that they are going to continue to spend until they just absolutely have to stop. And I think that as of right now, they are still comfortable. As it relates to pull forwards, look, I think I'm sure there was an order here or there from a customer who decided to pull something forward because they were concerned about tariffs.

But we looked at a ton of data points to see if we saw any signs of broad-based pull ahead business, and we did not. And I'm going to ask Scott real quick to share some of those data points, and then I'll answer the public sector.

Thanks, Chuck. And I should remind you, too, Meta, that we didn't motivate a lot of pull ahead by talking about price increases. If you remember, the way we talked about the impact of tariffs was we had a number of levers. We have a great world-class supply chain team.

Once the tariff scenario stabilizes, there are steps that we can take to mitigate it, as you've seen us do with the China tariffs from the first Trump administration. And only after that, would we consider pricing. So we didn't build a strong motivation. But we looked at -- after speaking to our channel partners who also didn't see any buy ahead or delay behavior by the way, and our own sales team, we looked at channel inventory, which you would think would go up.

It did not. It actually was down. We worked closely with the web scalers we understand not just what they have on order, but what they have on hand. Actually, web scaler inventory on hand went down during the quarter. we looked at Meraki activations.

We know when a serial number x leaves the factory floor and when it gets activated when we had built up some inventory at our customers, you recall that period of time between shipment and activation extended. It is stayed right where it was, which is back in-line with where it was pre pandemic. So there's no indication there. Of course, we look at linearity and in particular, to see if we saw a spike in the third month, which, if you recall, the reciprocal tariffs were announced on April 2. And so if there was some buy-ahead activity, we would have seen a heavier month.

We did not see that. We saw the exact same linearity that we had seen historically there. we look at our pipeline for pull-aheads or push-outs, nothing out of the ordinary there. And I'd say the last metric is we look at when a customer orders today, but request a future ship date. There's always a little bit of that that happens.

But we look to see was there a pattern of a lot of orders that came in with a future ship date, and there was nothing out of the ordinary either. So we really don't see any signs of any notable pull ahead or for that matter, push out.

So Meta, let me cover the public sector. So just -- I know we put this in the corresponding slides, I think, but Global Public Sector was up 8%. If you just look at the organic growth, it was up 3% globally we saw -- in the U.S. we saw strength in federal ironically. So we saw a double-digit order growth in U.S.

Federal this quarter. And candidly, that was with our biggest deal slipping out. So that was positive. I would say there still continues to be stress on the civilian side obviously, with agencies that have been shut down with employees who are worried about their jobs, there's a lot of just human capital concern on the civilian side, but it's also important to remember that, that's about 1/4 of our federal business, 75% of it is Intelligence and Department of Defense.

So overall, we were pleased with public sector during the quarter.

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

Thank you. Tal Liani with Bank of America. You may go ahead, sir.

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

Hi Tal, thank you. First of all, I don't know that I would suggest that the cloud CapEx, particularly on a global basis, as you see the announcements that were made in the Middle East this week, we're seeing sovereign cloud strategies being built around the world. So I think on a global basis, I don't think that will be the case. And talking to these customers, I don't anticipate that they have a huge demand for slowing down.

I think that you may see a different balance between their investments on capital to serve enterprise customers leveraging these models through inference and other things. But I don't anticipate it is going to be that 2025 is going to be a peak year. I think this has many years to run.

And Tal, just to remind you on the tail-end of building out all the public cloud infrastructure for training, there is a significantly larger opportunity in enterprise AI, right, as they build out the capability to do inferencing inside their own data centers. So I think there is a -- in aggregate, the AI opportunity has several years to run at this point.

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

Aaron Rakers with Wells Fargo. You may go ahead.

Yeah, thanks Sami, and congrats on the quarter and Scott on the future retirement. I guess I'll ask my kind of two quick questions in conjunction here. So I want to -- I think, Chuck, in the prepared comments, you referenced a large sovereign deployment opportunity that is coming here soon. I guess the first question on that is that is that currently in your order book, the $600 million you saw this last quarter?

And if not, how do you think about the size of those opportunities? And then a quick follow-on is I think this last quarter, you launched or you started shipping your 51.2T -- I think it's the G200 silicon. Can you just give us an update on what you're seeing in the data center switching side and if that really becomes a catalyst year as we look out over the next couple of quarters? Thank you.

Yes. Thanks, Aaron. So I think you're referencing the HUMAIN announcement that we made yesterday or the Saudis made early this week, they announced the creation of this company. We've been working with them on this for months and the short answer is there's absolutely no orders in the $600 million from them.

They are just getting started. We've got a team of people returning to the Middle East next week to spend more time with them. I think it is important to note on HUMAIN, the CEO there is an individual named Tareq Amin and just to give you some background on Tareq he was the CTO at Reliance JIO, when we built that network with them over the course of several years. And then he was the CEO of Rakuten, when we built with him the Open RAN mobile network in Japan.

And so we've been engaged with Tareq, since he actually moved into Saudi Arabia and he is a good friend, an old friend. We've been doing large-scale projects with them for a dozen years now. So he knows us. We know him well, and we're looking forward to that opportunity.

So I think that's not included in any of our forecasts from our sales teams or anything at this point. On the second point, the G200 chip, I would say it is at the heart of the any of these systems orders. So I made a comment that of the $600-plus million, two-thirds of it was systems, and those systems would be based on the G200, and I would tell you that right now, those customers are telling us that they -- if we could get more capacity out, they would buy more. So it is actually doing well right now.

And we've got a number of other chips that are in various stages of the process for the next-generation platforms that we are also looking forward to.

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

Samik Chatterjee with JPMorgan. You may go ahead.

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

And then I have a follow-up. Thank you.

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

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

Okay. So on the Middle East front, I will just tell you that Tareq made a comment to me that they're behind and they're going to catch up. So I think they're going to spend a lot of money, and I think they're going to spend it as quickly as they possibly can. It's hundreds of billions of dollars at the end of the day that they will be spending.

If you go to the HUMAIN their website and scroll down, they list their initial strategic partners. So you can see but our discussions with them have been around the networking, compute, security and observability. So that represents a pretty good opportunity for us. And I think there'll be as big as any of the major web scalers in the United States is how I would think about it.

On the enterprise campus front, yes, we saw strong orders in campus switching. We saw the triple-digit sequential growth in orders for WiFi 7. We saw really strong growth in our enterprise routing portfolio this quarter. So we still see customers investing heavily in modernizing their infrastructure. And the general belief and feedback that we're getting from these customers is as they get ready to roll out a genetic AI, in particular, the network is absolutely going to be key because of the real-time nature of this communication, and they all want to make sure that while they may not know exactly what those applications are going to look like right now.

They absolutely know they're going to need the most modern networks they can have. And I think that's what's driving it right now.

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

Thank you. Michael Ng with Goldman Sachs. You may go ahead.

Hi, good afternoon. Thanks for the question and congratulations, Scott, on the upcoming retirement. I really appreciate all your time and help throughout the years. As it relates to my two questions.

First, I was just wondering if you could talk a little bit more about the networking orders strength in the quarter. How much of that was the broad recovery and things like campus how much did the product cycle of WiFi 7 contribute? And could we expect that to continue over the next 12 months to 18 months here or so. And then second, just a housekeeping question.

I was wondering if you could just share the organic revenue growth rates for the company and the segment ex-Splunk, if you have that off hand. Thank you.

Okay. I think on the networking order strength, I think it was across the board. As I was saying earlier, I think we saw it in the enterprise switching space. We saw it in -- we saw growth in data center switching.

We saw it in -- we saw strong growth in enterprise routing. We saw that triple-digit sequential growth in WiFi 7. I do think, to your point, it's a 12-month to 18-month cycle. I think once the -- once customers begin this, I mean it's just -- it's a standard upgrade cycle that we see -- that we've seen historically. I think the way to think about it is we've talked about the fact that there's a window and there's sort of a time frame where we typically deliver refreshed products, whether it's the WiFi portfolio or the campus switching portfolio.

And so when that begins as well, then that will also enhance that ongoing opportunity, I think, as we go to -- as we look to the future. So Scott, do you want to talk a little bit of organic rev?

Yes. And Michael, thanks for the comments and for the question. First of all, I should say, Splunk is performing in-line with or actually slightly ahead of our expectations on both revenue and profitability, consistent with what we told you last quarter. The integration has gone really well.

The people side of integration is pretty much complete at this point across all functions. The product integration continues to go along well. And this is the quarter that we actually lapped the acquisition during Q3. And so at this point, it's part of the run rate. I don't really plan on breaking out organic versus inorganic from this point forward.

It gets harder and harder given the level of integration we've done across the board to split that out. So not really planning on giving that data point given that it's just part of our overall run rate at this point.

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

Matthew Niknam with Deutsche Bank. You may go ahead, sir.

Hi, thanks so much for taking the question. And Scott, thank you again for all your help over these last couple of years. My question is on web scale. So obviously, you continue to see very impressive growth here.

Maybe, Chuck, if you can talk to what's driving some of the sustained success, the pace of transition away from InfiniBand towards Ethernet and maybe some of the bigger differentiators that are helping you win incremental share across these hyperscalers? Thanks.

Yes. Thanks, Matthew. Look, I think it is been the intent of these customers from day 1 to move away from InfiniBand. And the gating factor was held soon did they feel good about the technology.

And they feel very good about the technology and how it's enabling them to run these training models over native Ethernet or some enhanced Ethernet that we are delivering. I think that we've talked over the last few years about their desire to have silicon diversity, which we think was one of the key reasons that we got in originally. And now we are delivering high-quality products in the time frame they need the -- if you look at what they're looking for in these products from their partners, there is really sort of -- you have a system that has software and has silicon and then other components.

And the real high-value pieces of this are the operating system and the silicon. And as many of them are transitioning hard into running their own proprietary operating systems on these platforms, it is imperative that you have silicon if you want to be competitive long term in this space. And so we are very fortunate that we made the acquisition in 2016. We have a great team that's been developing Silicon One. They're very close to these customers.

They work with them every day. And I think the silicon is the key differentiator that's really -- I mean, we're delivering high-quality systems and everything else that they want the services, the experience, the supply chain, all those things that matter deeply. But at the end of the day, if we didn't have the Silicon it would probably make it virtually impossible for us to be successful long term here.

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

Amit Daryanani with Evercore ISI. You may go ahead, sir.

Yes, thanks a lot for taking my question. I guess I have 2 as well. Starting off your AI orders at $1 billion. It came in, I think, a quarter ahead of what you had expected and it looks like you're seeing some continued momentum as you go forward with sovereign and enterprise that you talked about.

I'm just wondering, how should we think about the growth rates as we move forward on AI orders or AI revenues? It would be helpful to just kind of frame that out a little bit in terms of the forward growth rates. And then if I could just follow up for Scott, your July quarter guide, Scott, if I'm not mistaken, it implies revenues are up 3%, 4% sequentially, but operating margins are down 50 basis points. Maybe just flesh out why the margins are coming down in July, while revenues are going up and best luck in your retirement as well.

Thank you.

Thanks Amit. On the AI orders, how do you think about the growth? I would say just one thing to remember is that these are big customers that are -- and these orders are non-linear in nature. So we'll see how it goes.

But I mean last quarter, we did 350 or something like that. This quarter, we exceeded 600. And as I said earlier, if we could actually -- if we could increase capacity, they would take more. So I think if we're able to execute and increase capacity, we should be able to continue to see this ramp as long as we are delivering and executing, which is one thing I've said all along is we have to execute because if we miss with these customers, then we sit on the sidelines for a while. So we -- the teams are working really hard and I think that's how I think about it.

It's nonlinear orders. And as long -- if we can continue to increase the capacity, then we'll continue to see that business improve Scott, do you want to talk about July?

Sure. Yes. And you are doing the math right, Amit, first of all, thanks for what you said. You're doing the math right on margins.

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

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

Thank you. Simon Leopold with Raymond James.

Thank you very much for taking the question. I'll ask both upfront. The first one is, Chuck, I think last quarter, you had sort of alluded to an upcoming campus refresh. And I would think Cisco's sort of do.

What I'd like some help with is understanding the maybe historic perspective of when you've had these refreshes how to think about that? Because when I reflect on the last one, 2017, 2018, that occurred when you were shifting customers to subscription. So I feel like that's a tough metric to use to understand the potential. And then the follow-up may be a bit simpler, which is how do we think about the impact of tariffs understanding they're changing every day.

But given everything we know, after July 9, what would be the effect of tariffs based on the July 9 end of the pause? Thank you.

Yes, Simon, I think you -- first of all, I think your point relative to the 2017 kick-off of the campus refresh is a very valid one. So it's hard to say. We've also seen some strength over the last 12 months in the enterprise campus business. So here's what I would tell you, though, as we look to really drive this over the next 12 months, 24 months.

I think that what's most important to our customers right now is that we embed security deep into the network. And so what you're going to see is you're going to see a focus on enabling agentic AI and enabling security and security services in the network so that our customers can do this in-line, which is going to be necessary for us to solve the AI problem. I'll tell you, I had a discussion with a CISO of a Fortune 100 company a couple of weeks ago, Jeetu and I were together. And we started talking about security and she stopped us and said, listen, if you can't paint a picture for me, define an architecture for me, multiyear architecture that has me removing every physical firewall for my infrastructure that I want to talk to you because if it's not embedded in the traffic flows, it's never going to happen.

It's not going to work. And so what I would tell you on this is just envision that we're going to deploy security everywhere out through the network infrastructure. And that plus AI, I think, will give customers reasons to really look at these platforms.

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

But just wanted to protect the downside in the guide.

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

James Fish with Piper Sandler. You may go ahead, sir.

Hi, guys. Nice quarter. And Scott, congrats on your upcoming retirement here. And look, I don't want to rain on the freight here.

But if I look at networking here, it returned to growth, but it was also against a very easy compare and even still down versus a couple of years ago. If AI really isn't substitutionary of existing non-AI networking real estate with some of these web scales and enterprise is growing the rates are calling out, why isn't this sort of growing faster than even the 8% on the comp here? And then just following up on Simon's question before, as my follow-up. Can we just an update as to the exposure between data center versus campus within networking?

And how we should think about the price per port kind of playing out here as we're 7, 8 years now down the road? Thanks guys.

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

That's right. We said all along that we thought the -- when we put the $1 billion target out for the year, that was a sales target, not a revenue target, but we said we thought that would begin to convert to revenue in the second half of the year. And we saw that again, the first piece of that in Q3, and we expect to see a bit of it again in Q4.

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

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

Thank you. David Vogt with UBS.

This is Andrew for David. I wanted to ask a question about the texture of those $600 million of AI orders. You mentioned that they tend to be nonlinear and they're very large customers. I'm wondering if you're starting to see bigger orders is a large component of that $600 million and with the customers where you're having the most success?

Or are you really seeing sort of a diffuse kind of large growing orders across a number of customers that you mentioned you had three going triple-digits. And the follow-up question I wanted to ask is just -- I'm not sure if I missed it, but could you give an estimate of roughly what you think the impact of tariffs are in your guidance for Q4 for gross margin? Thanks.

Yes, Andrew, I think you nailed it. You almost answered the question for us. I mean we have 3 of the 6 that grew triple digits. So I think it's fairly balanced.

I would tell you that we -- when I would look at these customers, we're seeing acceleration across all of them. So it's all positive, but there are -- in this case, we had 3 that were just super high growers next quarter, maybe a different there. So we'll see, but it's pretty balanced.

And then on your question on the tariff impact and the guide, what I wanted to do is make sure you understood the assumptions that were built into it. So we walked through those China at 30%, Mexico and Canada, where it is not eligible for the USMCA exemption at 25%, 10% everywhere else until July 9 and then reverting back to the reciprocal tariffs and then a small impact on us for the tariffs on steel and alumina and retaliatory. That's all built into the guide. I haven't broken out and quantified the dollar value that goes with that.

And I'm a little reluctant to it because the puck keeps moving on this. What I wanted you to understand is that everything that we know today, the impact of those has been built into the guide for Q4.

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

Karl Ackerman with BNP Paribas. You may go ahead sir.

Yeah, thank you. I have two, and I'll just ask them at the same time as well, please. So the extended partnership with NVIDIA is an endorsement of your Silicon One family and certainly underscores your opportunity as enterprises deploy AI compute. I was hoping you could quantify your AI orders for enterprise at our incremental to the $1 billion of order target you have for cloud.

And then second, when might Silicon One offer co-packaged optics solutions as you seek to broaden your data center switch offering. Thank you.

Yes. Thanks, Karl. I would say -- first of all, I'd say the NVIDIA partnership, we've had a couple of phases of the announcements and a lot of the solutions that we're going to deliver to the enterprise are still to be delivered. So most of them start rolling out like 60 days from now, and then they'll just -- they'll be flowing after that.

So first thing I want to just clarify is we haven't seen a lot of upside yet in the enterprise from that. I would say the enterprise AI orders is a little more difficult for us to flag these, but we have been trying to do so, so that we have a baseline. And what I will tell you is that we're definitely seeing acceleration. It is in the hundreds of millions of dollars, not in the billions yet that we're seeing.

But again, there is a lot of dependence on the sales force flagging these things properly when you get into that scale with the number of enterprise customers that we have. On the Silicon One CPO question, I think it's important to remember that we've demonstrated CPO in 2023. And at the time, there wasn't a significant amount of customer demand for it for lots of reasons. But we have a team of people that are working on it. We will embrace it.

I think that it's going to be driven by customer desire, and I think that's going to be driven by a combination of power benefit as well as speed requirements. And as soon as customers are asking for it, we'll be first in market ready to deliver it.

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

Thank you. Atif Malik with Citi. You may go ahead.

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

Yes. So we -- correct me if I'm wrong, Scott, but we don't give out pipeline for AI at this point. So we did that a long time ago. And again, it was the $1 billion target in the pipeline stuff was really to give you all more confidence that we were serious in this space.

And I think the results have now said that these customers are taking us seriously. So we won't be doing all that on an ongoing basis. And then, yes, we named a new head of go-to-market, Oliver Tuszik, who was most recently running our Europe, Middle East, Africa region and before that was running our global partner organization before he came to Cisco, he was a CEO of Global Partner. So he has a really deep understanding of our go-to-market model and we announced him a week ago.

Thank you.

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

Thank you. Sebastien Naji with William Blair. You may go ahead.

Yeah. Thanks for taking the question. I wanted to ask about your networking business and in particular, your hyperscaler customers, and in particular, the usage of a white box given that Cisco can provide that broad range of offerings from the chip to white box to the full system. Can you maybe just comment on whether you see white box eating up a big part of the spending pie.

And is it AI that's driving that share shift or something else that's happening?

Well, what I would say is that I don't think we've seen a meaningful shift between what they buy from us versus when they buy white boxes -- to your point, when they want to buy white boxes, we can work with them to actually integrate our silicon and actually manage the process for them and help deliver that product. But we see the predominance is still buying systems. And I think it's just up to -- every hyperscaler has a different set of kind of issues that lead them to the answer. And in some cases, some of them have had an answer two years ago that now has changed, and they're doing it a different way.

So I'm not sure there's a real clean answer across the customer base.

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

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

Yes. Let me just thank all of you again for joining and reiterate that how pleased I am with our progress and how proud I am of what our teams have done. I'd also like to once again thank Scott. He's been a great partner for me for the last 5 years. helping drive the transition.

And as I said earlier, dealing with some pretty complex situations over the years. I'm excited to have Mark step into the role. Mark and I have worked closely together for 18 years. So we -- he has a great set of experiences here at Cisco and will bring a lot into the role.

Thank you Chuck.

As we look ahead, I think the AI opportunity for us, we believe, is a strong one. We think we're well positioned. We believe that because we -- from a technology and a portfolio perspective, we play across the full stack. We have networking, we have security.

We have Silicon, which I think are all very important. We have secure AI solutions that we're delivering in the marketplace. We also have the partnerships and the investments. We have the NVIDIA partnership, which is delivering critical solutions for our customers.

This week, we announced the HUMAIN partnership the AIP investments, the G42 partnership, and there are more to come. And I think the other thing we have is we have global presence, we have customer trust. We have the ability to understand both the cloud customers as well as the enterprise customers and the public sector customers. So when it gets -- when these sovereign clouds are being discussed, we have a unique perspective across all of those segments.

We understand what they need in long-term partnerships. We have a great team that are delivering right now, strong execution and great results. I’m really proud of what they’ve done. So I look forward to talking to you soon.

And Sami, I’ll hand it back to you.

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

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