Cisco Systems, Inc. (CSCO) Earnings Call Transcript & Summary

Thank you, Michelle, and good morning to everyone joining us for Cisco's quarterly earnings conference call covering the fourth quarter of fiscal 2021. This is Marilyn Mora speaking, and I lead Investor Relations. Joining me today are Chuck Robbins, who serves as our Chair and Chief Executive Officer, along with Scott Herren, our Chief Financial Officer. You should have received our earnings press release by now. Once this call concludes, a webcast that goes along with it, featuring slides and supplemental materials, will be posted on our site within the Investor Relations area. You can also locate income statements, complete GAAP to non-GAAP reconciliation details, balance sheets, cash flow statements, and additional financial data in the financial information portion of our Investor Relations website. During today's call, we will refer to financial results on both a GAAP and non-GAAP basis, and unless otherwise noted, we'll talk about product results in terms of revenue, while geographic and customer results will be discussed in terms of product orders. Every comparison we make on this call is on a year-over-year basis. Today's discussion includes forward-looking statements, such as the guidance we'll offer for the first quarter and the entire fiscal 2022 year. Those statements carry risks and uncertainties, COVID-19 among them, which are described in detail in the documents we file with the SEC, particularly our latest reports on Forms 10-K and 10-Q. Those filings highlight significant risk factors that may lead actual results to differ materially from what the forward-looking statements anticipate. Regarding guidance, we encourage you to review the slides and press releases accompanying this call for additional information. Cisco will not address its financial guidance at any point during the quarter unless it does so via an explicit public disclosure. With that said, I'll hand things over to Chuck.

Thank you, Marilyn. Good afternoon, everyone, and I hope each of you remains healthy and safe. At Cisco, our team closed out fiscal 2021 with an exceptionally strong finish. Q4 results were outstanding, and revenue for the fiscal year showed strength spanning our portfolio, our customer segments, and our geographies. Product order growth reached its highest level in more than a decade, and customers keep responding favorably to the stepped-up investments we've made in software and subscriptions. That powerful momentum confirms where we stand: the global leader in the technology behind the internet and the digital enterprise. Reflecting on what we accomplished during the last year, three items stand out. First, the remarkable way our teams executed. These results came from the extraordinary work of our leadership team, our partners, and above all, our people everywhere, who moved with amazing speed and operated at a scale never seen before to produce this growth. Second, the transformation and strategic bets we've made are delivering returns. The advantages of moving toward software and subscriptions are unmistakable, and they help Cisco as well as our customers operate with more speed and agility. Third, the strength of our portfolio. The pioneering innovation we're funding right now will form the bedrock of our customers' futures. Those three elements put us in an exceptionally good spot for growth as we begin the next fiscal year, which this quarter's results demonstrate. Our confidence has never been higher that we're well positioned to help customers succeed. Looking ahead, we're single-mindedly focused on giving our customers the technologies required to navigate highly dynamic environments successfully and at an extremely fast pace. With COVID variants emerging and vaccine rollout proceeding unevenly across the world, organizations have to be resilient and adaptable, since we've all witnessed how rapidly conditions around us can shift. Though that may affect some near-term plans, such as many people returning to the office, one fact is unmistakable: demand for Cisco's technology is enormous. Regardless of how or when the global recovery unfolds, we're carrying out our vision of rebuilding a better world — one that is digital, sustainable, inclusive, and highly secure. In my view, we've reached a pivotal point in this Company's history, with a huge opportunity to reshape what the traditional office has been and to define hybrid work's future. As our customers seek to build safer hybrid workplaces along with collaborative, engaging experiences for their own customers and employees, we believe their reliance on Cisco technologies keeps growing to support their transformation and resiliency. Enterprises increasingly want digital and cloud-enabled services, which fuels demand for our solutions and opens new, expansive market opportunities for Cisco. We hold a unique leadership position to build and deliver the innovative cloud-to-edge infrastructure platforms our customers require. Thanks to how deep and wide our offerings span hardware, software, silicon, and optics, we're assisting businesses in tackling their most significant problems. Be it embracing contemporary application frameworks, transitioning toward hybrid work and hybrid cloud, protecting their organization, or achieving their ESG targets, Cisco is enabling our clients to prosper in a hybrid environment; these sector trends contributed to our solid fourth-quarter results. The traction we experienced in Q3 picked up speed throughout Q4 as we posted impressive revenue expansion, higher profits, robust margins, and operating cash flow that set a record. We additionally achieved significant double-digit increases in product deferred revenue, which demonstrates how well our shift toward promoting subscriptions and recurring income streams is working, giving us greater clarity on upcoming results; we're observing IT budgets expand as businesses start executing their essential long-term initiatives and confidence in the economy rises. That said, we acknowledge that ambiguity persists regarding COVID-19, and we're carefully tracking the delta variant along with how it affects what customers spend. At this moment, we aren't observing any further consequences on our operations, other than the parts scarcity we've encountered during the last few months. Turning to how our customer segments performed. As I noted, we achieved the largest product order increase in more than 10 years, at 31%, fueled by momentum throughout every one of our end markets. This remarkable result also exceeds our pre-COVID Q4 figures from Fiscal year 2019 by more than 17%. We experienced double-digit expansion in each of our customer segments; this momentum stems from greater customer spending on major network improvements aimed at modernizing and protecting their infrastructure to enable the new approach to working. To be specific, within our enterprise business, we enjoyed our finest quarter ever for product orders in more than a decade and recorded exceptionally robust order growth of 25%; we likewise achieved our third straight quarter of acceleration in our commercial Service Provider and public sector operations, with every one of these segments displaying growth beyond 20%. In our web-scale operation, we witnessed rising momentum that produced record results, with order growth exceeding 160%. And measured across the trailing four-quarter period, orders climbed by more than 80% because of customers embracing products throughout the portfolio and initial uptake of our 400-gig Solutions, an enormous validation of the investments we've directed toward speeding up innovation and the distinctive value we're delivering to these clients from a product portfolio standpoint, we likewise posted a highly balanced result. As clients get ready for office re-openings and hybrid work, they're boosting what they invest across our networking, Cloud Security, and Unified Communications portfolios; during Q4, we recorded double-digit revenue increases in campus switching, Catalyst 9000, high-end routing, wireless, and in our Zero Trust solutions, together with momentum in our security endpoint portfolio. We likewise saw exceptionally robust uptake of our Acacia optical solutions, propelled by growing customer need for cutting-edge technology to satisfy their expanding bandwidth demands. Our shift toward a greater emphasis on software and subscriptions keeps delivering impressive results, with software revenue surpassing $4 billion during Q4 — a 7% rise from the prior quarter and a 6% gain compared with the same period a year earlier. Inside that figure, subscription revenue climbed 9% during Q4 and 15% across the entire fiscal year. To put this in context, software accounted for 31% of our business in Q4; and across the full year, once you add our services business, together they make up more than 53% of revenue, plainly underscoring how well our ongoing business transformation is working. Beyond posting solid financial performance, our innovation engine keeps picking up speed. During the past year, we rolled out an impressive array of new capabilities spanning our whole portfolio, while simultaneously intensifying our focus on more flexible consumption models, among them our core networking capabilities offered as a service, exemplified by the recent debut of Cisco Plus. Our new Cisco Plus solutions bring cross-portfolio technologies together to address our customers' most pressing needs through faster time-to-value network-as-a-service as-a-service offerings that provide hybrid cloud technologies and will eventually grow into a wider catalog of services built and delivered alongside our partner ecosystem. Cisco Plus enhances speed, agility, and scale through on-demand solutions that intelligently adjust to our customers' business requirements. Although its launch is still in the early stages, Cisco Plus fits squarely with our transformation objectives of generating more subscription-based recurring revenue through the cloud.

The confidence to pick up the pace comes from our distinctive strengths improvement plan. In areas of key growth—technology shifts such as hybrid cloud, hybrid work, 5G, Wi-Fi 6, Edge, security, and cloud-native architectures—you'll see us keep investing so we can extend our technology leadership positions. You'll also see us bring out even more strategic offers that help our customers thrive in a Cloud-first digital world. Among these is full-stack observability, which improves their digital experiences by giving visibility and insights across their whole technology stack, plus Secure Access Service Edge, or SASE, built to enable seamless secure access to applications wherever their users work. Given the momentum in our business, we have never been more confident that the areas we are putting money into are the correct ones, and we will continue to build on our competitive advantages and push growth. Before I turn things over to Scott for additional detail on the quarter and what we expect in the next Fiscal year, allow me to bring you up to date on the supply environment. Even as demand for our technology continues to climb, we are still working through the component shortage difficulties that virtually every Company is facing; our world-class supply chain team, as it always does, is doing a remarkable job steering through this complicated situation by collaborating with our global suppliers to satisfy customer demand as quickly as we can. As we look forward, we anticipate that difficulties with supply and the effects on costs will persist at minimum through the first six months of our fiscal year, and possibly extend into the latter six months. To sum up, there is tremendous demand for what we build, and our approach has never been more pertinent. That enables us to provide more value to those we serve—customers, partners, and communities—as everyone adjusts to different ways of living and working. The rebound we're seeing everywhere, along with the momentum we have, gives me a great deal of encouragement. Our strategy and the investments we're making are things I believe in firmly. The innovation coming out of our portfolio excites me, and I take enormous pride in everything our teams and partners have accomplished. I'm eager to take what we've learned here and expand on it, giving everyone a fuller, more in-depth picture of where we're headed over the coming years and what will power our growth, when we hold our Investor Day online on September 15th — please come be part of it. Once more, I appreciate the time you've given us. With that, I'll hand things off to Scott, who can walk you through more specifics.

Thank you, Chuck. The fourth quarter gave us a solid finish to the fiscal year, with considerable momentum throughout our operations. Customer demand proved healthy, which marked the third straight quarter of rising product order growth, alongside dependable performance from our teams. I'll walk through the quarter's financial results, then review the entire fiscal year, and finish with our guidance. Q4 proved extremely strong amid a highly fluid environment. Our execution was outstanding, delivering product order growth above 30% compared with a year ago, plus order growth exceeding 17% against the product bookings we recorded in Q4 of fiscal 19, before COVID, fueled by broad-based strength in our portfolio. As a matter of fact, that was the fastest product order growth rate we've posted in more than 10 years. We likewise posted strong outcomes for revenue, net income, earnings per share, and, as Chuck mentioned earlier, operating cash flows that set a record. Total revenue climbed to 13.1 billion, a rise of 8% versus a year earlier, landing at the upper end of the guidance range we gave for the quarter. We experienced strength in numerous product areas and in every geography. Our business keeps healing nicely and accumulating momentum, with revenue rising 3% sequentially. Our non-GAAP operating margin reached 33.5%, an increase of 50 basis points. Non-GAAP net income came to 3.6 billion, while non-GAAP earnings per share hit $0.84. Each rose 5% compared with a year ago and surpassed the upper end of our guidance range; now let me offer additional detail regarding our Q4 revenue. Total product revenue reached 9.7 billion, an increase of 10%. Service revenue came in at 3.4 billion, up 3%. Infrastructure platforms delivered very strong results, with revenues rising 13%. Every business posted double-digit growth except the Data Center. Switching achieved strong growth, powered by a double-digit rise in Campus Switching, led by our Catalyst 9K and Meraki Switching offerings. We also achieved solid growth in our Data Center Switching portfolio, thanks to the Nexus 9000 products. Routing expanded, driven by the Service Provider and Enterprise markets alike, as we witnessed strong adoption throughout our portfolio, including robust uptake of our Cisco 8000 platform. Wireless grew strongly, powered by the ongoing ramp of our WIFI 6 products and our Meraki wireless offerings. Data Center revenue fell, driven mainly by servers, as we encountered ongoing market contraction. Applications declined 1%, driven by a modest drop in our collaboration portfolio; nonetheless, recurring subscription revenue inside our WebEx suite climbed 9% during Q4. We also witnessed solid growth in IoT software, AppDynamics, Cloud Contact Center, and our Cloud Calling platforms. Security rose 1%. Our Cloud security and Zero Trust portfolios did well, growing beyond 20%, as we maintained momentum in our Duo and Umbrella offerings. Our Security recurring subscription revenue rose 13% in Q4 and 18% across the full fiscal year. In both applications and security, we're witnessing strong revenue growth in the strategic areas where we and our customers are putting our investments. Our business transformation is ongoing, as we roll out additional software products and generate momentum in subscription and recurring revenue streams. Software revenue reached 4 billion, which represents a 6% rise, while subscriptions accounted for 81% of overall software revenue, marking a 3-point gain compared to the same period last year. In Q4, software subscription revenue climbed 9%, and across the entire Fiscal year, it rose 15%. As we keep expanding our software subscriptions, we are achieving greater recurring revenue levels. Moreover, the robustness of our portfolio and the shift toward additional software and services are fueling expansion in remaining performance obligations, or RPO. By the close of Q4, RPO surpassed the 30 billion threshold, hitting 30.9 billion, which is a 9% increase. For the product segment, RPO rose 18%, and for service, it went up 3%. Roughly 53% of the overall RPO is short-term, which means it will be booked as revenue within the next 12 months. As I noted, we experienced remarkably robust order activity in Q4, with total product orders rising 31% and gains seen throughout the business. Turning to our regions, the Americas saw a 34% increase, EMEA rose 24%, and APJC climbed 29%. Overall emerging markets increased 25%, with the BRICs plus Mexico up 37%; within our customer categories, commercial grew 41%, service provider was up 40%, enterprise got back to growth with a 25% rise, and the public sector increased 22%. Non-GAAP total gross margins reached 65.6%, a 60 basis point improvement from the prior year. Product gross margin stood at 65%, up 180 basis points, while Services gross margin was 67.4%, a decline of 240 basis points, which matched what we anticipated given the fluctuations we observe each quarter. The boost in product gross margin stemmed from efficiency gains due to reduced freight and other expenses, partly counterbalanced by fairly slight price declines. As we talked about last quarter, we are still navigating the industry-wide supply chain limitations caused by component scarcities. We have worked closely with our main suppliers, utilizing our bulk buying power and prolonged supply agreements to tackle the supply issues and cost effects, which we anticipate will persist at least through the first half of our fiscal year, and possibly into the second half. Our top-ranked global supply chain team keeps delivering at an elite level. Regarding how acquisitions affected our Q4 results compared to last year, they contributed a positive 210 basis point impact on revenue and had no significant effect on our non-GAAP earnings per share. On the cash side, operating cash flow for the quarter hit a record 4.5 billion, up 18% from the previous year, fueled by robust cash collections. We closed Q4 with total cash, cash equivalents, and investments amounting to 24.5 billion, an increase of about $900 million from the prior quarter. When it comes to capital allocation, we gave back 2.4 billion to shareholders over the quarter. This consisted of 1.6 billion for our quarterly cash dividend and 791 million in share buybacks. We remain committed to investing both organically and inorganically in our innovation pipeline. In Q4, we completed 5 acquisitions: Kenna Security, Socio Labs, Slido, Sedona Systems, and Involvio. Those purchases align with our approach of pairing in-house innovation and R&D with focused M&A, which lets us keep bolstering and setting apart our market standing in the growth areas that matter most to us. Now for the whole fiscal year, on balance, we posted solid financial results amid a highly difficult global pandemic setting, with robust operational execution. Revenue came in at 49.8 billion, a 1% increase. Total non-GAAP gross margin reached 66.1%, a rise of 10 basis points; non-GAAP operating margin was 33.5%, a decline of 30 basis points. On the bottom line, non-GAAP net income held steady at 13.6 billion, while non-GAAP earnings per share came to $3.22. Operating cash flow generated was 15.5 billion, unchanged from fiscal '20. In terms of capital allocation, we gave back 9.1 billion in value to shareholders across the fiscal year, equal to 61% of our free cash flow. That figure consisted of 6.2 billion in quarterly cash dividends plus 2.9 billion of share repurchases. We likewise raised our dividend for a 10th straight year in fiscal 2021, underscoring our dedication to returning capital to shareholders, along with our confidence in how strong and stable our ongoing cash flows are.

Our dedication to keeping a robust balance sheet stays unwavering, since it powers both our organic and inorganic growth efforts, and it also supports our ongoing capital allocation approach of giving back at least 50% of free cash flow to shareholders each year. In short, Q4 was excellent and the fiscal year was solid, thanks to strong operational execution. The investments we're making in innovation are paying off, and we're pushing the ongoing move toward more software and subscriptions, which generates more recurring revenue, produces growth, and builds shareholder value. Now I'd like to share forward-looking guidance. We're happy to begin the added practice of offering an annual outlook alongside our usual quarterly look ahead for fiscal year 2022. The successful transformation we've been carrying out, which involves generating a larger share of revenues from subscriptions, recurring and deferred revenue, is giving us greater visibility into our future growth outlook. Keep in mind that our guidance carries the forward-looking information disclaimer Marilyn mentioned earlier. Here is our financial guidance for Q1. We expect revenue growth between 7.5% and 9.5% year-over-year; we anticipate non-GAAP gross margin between 63.5% and 64.5%, which reflects rising supply chain costs we're absorbing as we safeguard shipments to our customers. Non-GAAP operating margin should land between 31.5% and 32.5%. Non-GAAP earnings per share should come in between $0.79 and $0.81. Here is our financial guidance for the full-year fiscal '22; we expect revenue growth between 5% and 7% year-on-year. Non-GAAP earnings per share should come in between $3.38 and $3.45, also up 5% to 7% year-over-year. For both our Q1 and full-year outlook, we are assuming a non-GAAP effective tax rate of 19%. Looking forward, we're thrilled to host a Cisco virtual Investor Day on Wednesday, September 15th, 2021, which we will webcast live, and we hope you can join us. I'll now hand it back to Marilyn so we can begin the Q&A.

Thanks, Scott. Michelle, let's go ahead and queue up the Q&A line.

Hello, and thank you for letting me ask. Chuck, Scott — I'd like to hear what you think regarding when a full-year outlook gets issued. My assumption is that other businesses, given everything uncertain with the supply chain, would have told us, "Right now probably isn't the moment for a full-year outlook." So I truly do appreciate that you're providing one; what I'd like to grasp is what gives you that stronger line of sight? The transformation came up in your remarks, yet in what way do incoming orders contribute to that clarity, and what exactly are you factoring in regarding the supply chain within that full-year outlook? On the whole, how much are you accounting for when it comes to supply-chain headwinds inside that full-year outlook? Thanks.

Yes, an excellent query, Samik. I appreciate it; this genuinely ranks among the advantages that come from the transformation underway. As our mix shifts further toward software, services, and a base of recurring revenue, our line of sight improves. Among the figures we referenced a moment ago is remaining performance obligations totaling 30.9 billion, and 53% of that amount will convert into revenue across the coming 12 months. Beyond that, we have a solid grasp of which additional renewals lie ahead and what our rate of renewal looks like as we proceed through this. Consequently, we possess a fairly strong understanding of a substantial portion of our revenue and the manner in which it will expand; we likewise maintain a solid view of the pipeline and its forward appearance, and regarding that pipeline, one point worth noting is this — for Q1, the growth we've observed in the pipeline compared with a year earlier is stronger than anything we've witnessed over the last several years. So pipeline growth looks solid for us too. Once you total all of that together, it becomes the source of our confidence to issue a full-year outlook. Regarding your question on the supply chain and what assumption applies there, here's how to frame it: that assumption represents the gap separating the top end of the outlook from the bottom end. Through the first half of the year, we anticipate the supply chain will affect us. Then, at the bottom end of the outlook, we believe supply-chain effects persist across the majority of the second half too, with a bit of resolution arriving at the close. At the top end of the outlook, we believe we've started resolving those supply-chain problems, and supply and demand return to a more balanced state sooner within the second half. That is the reason we issued the full-year outlook. Certainly, I'd say we hold that confidence given the visibility available to us, and what gets baked into it rests on some of that uncertainty; the supply chain remains a factor out there.

I appreciate that.

Thank you, Samik. Let's move on to the following question, if we may.

Great, thank you. To build on that, how should we consider the roughly 150 basis point quarter-over-quarter drop in gross margin that's reflected in the guidance, and what portion of that comes from added supply chain pressure, and would you anticipate that easing through either pricing adjustments or supply chain gains to improve it as the year goes on? Thanks.

Yeah, thanks for that, Meta. If you look at Q4 gross margin, it clearly landed above both our expectation and our guidance, and a really strong product mix was part of that, with some of it coming from a solid quarter for software, as you heard earlier on the call. Going forward, we've taken a number of actions to make sure we can keep supply available and get products to our customers. They're going through their own transformations, they're all doing what they need to do to adjust to a world that isn't just a hybrid work world but one where, with the delta variant spreading, there's added complexity. It's not a case of, "Hey, at some point the world's going to go back to normal." It's, "I need to keep this flexibility going forward." We're working to support that, and at the same time, there are imbalances between supply and demand and some of the critical components involving semiconductors and memory and some of the same things you're hearing from other peers of ours. That results in higher component costs when we purchase from those suppliers. We're also working to secure even more supply by going to brokers to obtain additional supply beyond what we can get directly from our suppliers; and in certain cases, qualifying second sources where we have no choice. Each of those, of course, adds costs and it takes time for those costs — We've been in that process through Q4, and we'll be in it through Q1. It takes time for those costs to move through our standard costing system and appear in the cost of goods sold. There's also a bit of an unfavorable product mix headwind in Q1 since we have a good sense of the products that don't carry those same impacts that we'll be able to ship, that are sitting in backlog, so that's what's behind that sequential change. As you know, we did implement a price increase; very selective, very targeted, only on the products where we were seeing the higher component costs. That took effect August 7th, but we always honor quotes that are out there for 30 days, beyond that price because it goes — maybe those quotes were produced before the price increase was put in. Alright, so if you look 30 days past August 7th, that's when the initial orders at those increased prices start arriving, and then there's a lag before those orders actually land, get manufactured, and go back out to buyers, and before we see that show up in revenue. I'd view those price hikes as something where we'll get more of the upside during Q2 and Q3 compared to what shows up in Q1.

Great. Thanks.

Thank you. Next question, please?

I value Scott addressing those prior two inquiries. When I examine your full-year outlook, the revenue figure is impressive — nearly $1 billion higher than what consensus expected. On EPS, it's closer to expectations, coming in a touch soft though not by much. The gap, clearly, comes down to gross margin and/or OpEx. I realize COVID has pushed up your cost base, same as it has for everyone else in the industry. Could you offer any detailed perspective on how the revenue beat you anticipate maps against the relatively smaller EPS projection for the year, specifically regarding gross margin as opposed to OpEx?

Sure. Paul, gross margin is truly what's driving this; and there remains — uncertainty persists regarding when supply and demand will realign across a number of those components. That explains the 5% to 7% range we provided, and it flows through down to the bottom line too. The sole additional point I'd make there, I'd rather not break it apart into each individual factor, at least for now, but uncertainty remains, and with that uncertainty, plus this being our inaugural annual guide, caution is warranted. We're aiming to be cautious with the guidance we've issued as well.

Paul, on the operating expense question: is your intention to increase OpEx at a slower pace than revenue? You're anticipating fairly robust revenue expansion in the coming year. Would you hold OpEx growth beneath revenue growth in order to generate some leverage?

Yeah, I'll take that first, and Chuck, feel free to jump in. As you can see in the guidance we've provided, 5% to 7% growth on the top line and 5% to 7% growth on the bottom line, what we're targeting is balanced, profitable growth, and that's how you ought to think about us operating this business moving forward — balanced profitable growth. Delivering 5% to 7% on both the top and bottom line is quite a solid result, especially compared with where we've stood over the past few years. So again, I don't want to go into — Paul, I understand what you're getting at. I really don't want to break apart the components of that, but the central idea is balanced profitable growth.

Paul, go right ahead — the floor's yours.

May I pose something?

Sure thing, Paul. Fire away.

Paul, one final item on that. From a gross margin standpoint, is there anything that would prevent your cost structure — thinking ahead to 21st Century and moving past COVID — from returning to where it stood, or even improving? I understand other variables are mixed in that push things either direction from one quarter to the next, but speaking broadly, ought we to anticipate that the gross margin structure comes back to what it was before COVID?

Paul, that’s what we expect. As time goes on — and again, I won’t forecast that for this fiscal year, simply because of certain supply chain uncertainties — we do expect it returns to that level, and longer term, as software becomes a larger share of our revenue stream, that ought to give our margins somewhat of a tailwind as well.

I appreciate it.

Thanks, Paul. Michelle, next question.

Yes. I appreciate you fielding my question, and nice work on the strong quarter. I'd like to pose the supply chain issue somewhat differently. Based on the order momentum and the pipeline build remarks you gave, those clearly look quite favorable. In what way do you evaluate how perishable that demand is? Do you detect anything suggesting customers could be placing duplicate orders, or how do you simply reason through that given the guidance you provided?

Aaron, it's Chuck. I appreciate that. Well, we figured someone would raise the topic of pull-ahead. There are a few points I'd make: clearly, we have no way to measure that in a direct manner. We've examined multiple signals — our pipeline review, orders through the channel, movement of opportunities in our salesforce, rates of order cancellation, how the future pipeline builds — and nothing indicates ordering far in excess of requirements, apart from aligning with our lead times. We also have customers who are big carriers, big telcos, Cloud players, and they hold capacity plans spanning 12, 18, to 24 months. So they take our lead times into account and will place orders accordingly given what they've got, yet we wouldn't describe it as a meaningful degree of pull ahead beyond coping with those lead times. Another point I'd mention is what Scott noted before: following the very strong order growth in Q4, we now have the strongest start from a forecast pipeline standpoint that we've seen in several years. That makes us think this is a trend we ought to witness continuing for some time.

Excellent, thanks.

OK, wonderful. Could we have the following question now?

Thanks. Could you take a closer look at things from the software perspective? The numbers look quite robust, but on the product side the applications and security segments are lagging somewhat; can you break that down for us? Also, secondly, I wanted to ask more about the cloud area, which performed so well this quarter. Chuck, is there anything further you can share about that? It seemed quite broad-based, but I would guess that, like the previous question suggested, some of your competitors also saw orders with longer lead times that were more advanced, or is there something else behind that massive cloud figure? Thank you.

Thank you, Tim. Regarding the Applications side, we figured you might be curious about that, and there are a few points to remember for both Applications and Security. Order rates were definitely above revenue rates, so that is the first thing I would mention. The recurring subscription components in each of those businesses were quite strong too. As Scott mentioned, in Security within Web — I mean, in collaboration within the applications WebEx suite, the recurring subscriptions within WebEx suite revenue rose 9% in Q4, 16% for the year. We saw healthy growth in IoT, < > Cloud Contact Center, and Cloud Calling. Also included there, if you remember, are phones and handsets, along with some on-prem software tied to collaboration; and the supply chain affected some of those. But the areas for future growth really appeared strong for us. On the security side, Cloud Security, Zero Trust exceeded 20%. The Security recurring subscription revenue increased 13% in Q4, up 18% for the year, so that was strong too. And once more, demand for our Next-Generation Firewall was very good, but certain legacy products in the supply chain caused a bit of a revenue headwind there; but again, orders outpaced revenues. We anticipate those will settle down in the coming quarters. Turning to Web scale, I must say that in getting ready for this call, I thought back on the past 5, 6 years of having this conversation; and I always said we would begin discussing web-scale once it became meaningful, and I suppose I can now say it is meaningful. We invested over multiple years in developing the Cisco 8000 with new silicon, optics, and software, and we achieved incredible growth. And order growth was 160% this quarter, compared to nearly 30% order growth in the same quarter a year earlier. And customers are truly embracing our full portfolio, including on the enterprise side, but more than half of that business went into their cloud infrastructure; we are also seeing 400G really taking off in a significant way, and I will share a couple of stats on that since someone will likely ask about it. During Q4, orders for 400G ports increased 668%, while across the entire year, orders for those ports rose 831%. More than 400 customers have now deployed, and altogether we've booked orders for nearly 180,000 ports. So things are genuinely progressing, and I believe those items are what — we secured multiple franchises among cloud Web scale players, we keep conducting proof of concepts, and with others we're currently in validation and certification stages. So we've consistently stated that with these players we missed the initial transition, and that we aimed to be ready for this upcoming architectural shift, and I believe our teams have performed excellently in placing us well.

Alright, I really appreciate the color there.

Thank you, Tim. Let's take the next question.

Thanks, that's a good question. There are quite a few angles to cover there, Chuck. Truly a lot of angles. So, two things I wanted to ask. First, about the order growth — I'm wondering how linear that was. The last time we discussed this was way back in 2010, when you were in the process of exiting the GSD, but it does seem like those orders might pick up speed going forward. Is that something you see as a real possibility, and how likely would an acceleration be relative to that 31% growth rate? Then I'd like to revisit what you said about pricing. How long do you think these prices can hold? Once component costs — those underlying costs — come down, what do you intend to do? Would you quickly lower these prices again, or do you think they'll stick around for a bit longer? I'm just wondering what your pricing strategy looks like as those underlying costs shift. Thanks.

I'll kick things off, and then I'll have Scott weigh in on the pricing matter too. You raised a few things there, Rod. On the linearity point, just to describe how the quarter went — it began strong and finished strong; from the first day through the last, so it wasn't a case where we saw 5% growth up until the final month and then a sudden spike. Things stayed fairly steady across the whole quarter. You brought up the potential for acceleration. I definitely wouldn't treat 31% order growth as the new baseline, but I do believe there will certainly be — it just seems as though our customers are grappling with — they're stepping forward, they're making choices about upgrading their infrastructure, along with their technology assets, to handle this new hybrid work setup. And I think what they're now realizing is that, with the Delta variant, they understand this might not be a single — this might not be just one return to the office. This is going to — they need to — they'll need to be resilient, they'll need to build in adaptability for what's ahead, since another variant could arrive six months from now; and I think that's the kind of thing customers are working through at this moment. What I'd say about pricing, before I hand it to Scott to address how durable they are, is this: one point — when we discuss gross margin for the quarter we just closed, the pricing component of gross margin actually landed at the very low end of our typical range, which tells us we're maintaining pricing discipline with our sales teams, and that's a positive indicator right now. So as these things begin to work their way through, if that pattern holds, then we'd definitely see the favorable effect we're anticipating. Scott?

Yes, I believe that's accurate. Rod, here's another perspective I'd like you to consider regarding the price hikes we disclosed on August 7th. Their primary purpose isn't really generating revenue growth — it's more about counterbalancing certain rising expenses that we're encountering. Of course, there's a delay involved, correct? Some time will pass before those new prices actually appear in our revenue stream. Nevertheless, that's the real reason behind them. So, as we always do, we'll keep evaluating whether another pricing change is necessary, whether upward or downward. We'll keep carrying out those evaluations moving forward. Just don't view them as being driven by top-line objectives; the true motivation is counterbalancing some of the elevated costs we're facing. One more point I'd like to make on this topic: we possess a pricing adjustment approach that we apply routinely across various portfolios. We simply don't discuss it during every earnings call, yet it's a capability we have and genuinely utilize quite regularly whenever circumstances justify doing so.

Okay. Great. Thank you.

Next question, please.