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

Good morning, and thanks for joining us for Cisco's quarterly earnings call covering the first quarter of fiscal 2022. I'm Marilyn Mora, and I lead Investor Relations. With me today are our Chair and CEO, Chuck Robbins, and our CFO, Scott Herren. You should have had a chance to look at the earnings press release by this point. Later in the day, once this call wraps up, a webcast with slides — including supplemental information — will be posted in the Investor Relations section of our website. You can also locate income statements, complete GAAP to non-GAAP reconciliation details, balance sheets, cash flow statements, and additional financial information in the Financial Information section of that same Investor Relations website. One thing to keep in mind: starting in Q1, we report revenue across these categories: secure agile networks, hybrid work, end-to-end security, Internet for the future, optimized application experiences, other products, and services. During our Investor Day, and in the press release we issued on October 20th, we explained that this shift gives our product categories better alignment with our strategic priorities. Only the way we report revenue by product category is affected — our reportable segments stay organized around geographies, which are the Americas, EMEA, and APJC. On our website, we've posted quarterly reclassified revenue figures covering the last 3 fiscal years. To find those documents, just click the Financial Information section of the website. During today's call, we'll refer to both GAAP and non-GAAP financial results, 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 will be year-over-year. What we discuss today includes forward-looking statements, among them the guidance we're giving for the second quarter and the full year of fiscal 2022. Those statements carry risks and uncertainties, COVID-19 included, which we cover in detail in our filings with the SEC. The most recent report on Form 10-K in particular lays out important risk factors that could cause actual results to differ materially from what the forward-looking statements contain. Regarding guidance, please also review the slides and press release accompanying this call for more information. Unless it happens through explicit public disclosure, Cisco won't comment on its financial guidance during the quarter. I'll hand things over now to Chuck.

Thanks, Marilyn. Good afternoon to all of you. We're glad to have you with us today. To begin, I want to express appreciation to everyone who attended our Investor Day back in September. There, we demonstrated the solid base we have established to help produce profitable growth over the long term; our aim is to optimize value creation by concentrating on a greater mix of software and subscription revenue. That provides both us and you with improved visibility and predictability regarding our future expansion. We also drew attention to our distinctive collection of leading franchises in their markets, which are ideally situated to fuel growth in highly appealing established and emerging markets. Finally, we presented how deep our leadership bench is and laid out the following stage of our approach. As we entered fiscal year '22, we got off to an excellent start with order growth of 33%, which is robust, along with sustained strong demand throughout our portfolio. Our teams are performing effectively, our ARR increased at a double-digit rate, and our momentum keeps building, propelled by digital transformation and cloud. Despite the persistent supply-constrained conditions, we remain firmly on course to meet our long-term financial objectives by putting money into growth while also producing breakthrough innovation. The last 18 to 24 months have certainly sped up the digital revolution that all of us are witnessing, as technology permanently reshapes virtually every part of our existence. The technology we create is fueling the contemporary secure infrastructure that forms the core of this revolution, and Cisco is ideally positioned to seize the opportunities that lie ahead. Our customers want digital and cloud-enabled solutions that let them operate with more speed, agility, and efficiency; we are already observing the beneficial effects of our investments aimed at speeding up innovation in high-growth sectors, such as hybrid cloud, web scale, cloud security, 5G, Wi-Fi 6, 400-gig, and full-stack observability. A major trend facing us is making it possible for employees to work from any location. This extends far beyond meetings. It concerns comprehensive capabilities needed to support a highly dispersed workforce, which demands new infrastructure architectures, observability, and security. Numerous companies are currently working out their hybrid work approach, which will rest on the technology we develop across our networking, security, and collaboration portfolios. We are also paving the way with fresh innovation, such as our recently broadened WebEx portfolio, designed specifically for inclusive experiences spanning hybrid work, workspaces, and events. Now I want to talk about our Q1 results. Continuing the momentum from the prior quarter, I'm pleased to report that we had another solid quarter that matched our expectations even with supply constraints, which I'll get into shortly. We achieved balanced revenue and non-GAAP EPS growth along with healthy margins, thanks to an ongoing economic rebound, strong execution, and outstanding demand for our products. We also produced a quarter of strong double-digit growth in ARR and RPO, which shows our transformation keeps succeeding. We have kept operating effectively in a highly dynamic environment, remaining agile so we can steer through changing conditions tied to the Delta variant and worldwide component shortages. Turning to how our customer market segments performed. In Q1, we recorded our third straight quarter of order momentum that is speeding up, with strength spread widely throughout the business. Product orders rose by at least 30% in every geographic region and in 3 of our 4 customer markets. Once more, we saw the most powerful demand in more than 10 years as customers raised their spending on digital transformation; within our enterprise and commercial businesses, order growth accelerated for a fourth quarter in a row. Public sector growth was also solid. Our service provider segment posted its largest order growth in more than 5 years, at 66%, as those customers tackle their expanding bandwidth needs. In web scale, our strong momentum carries on. Once again we set a record, with orders up more than 200%. On a trailing four quarter basis, that equals 120% growth. We're quite happy with the early traction of our 400-gig Solutions, Cisco 8000 platform, Silicon One portfolio, and the fast growth of our Acacia portfolio of optical networking products; clearly our footprint is expanding, since our cloud growth rate outpaces that of our peers. We keep investing in web scale innovations that offer differentiated customer value. Launched this quarter is the newest addition to the Silicon One family, the 19.2 terabit P100 routing device. It is the 11th chip in the Silicon One family; separately, Acacia reached a major milestone by revealing the industry's first pluggable module, able to deliver 1.2 terabit capacity on a single wavelength. Our product revenue climbed by almost $1 billion versus a year earlier, which shows the competitive advantages of our scale and reach, along with our continuing momentum. Demand was broad-based across most of our product portfolio; beyond that, our business model transition keeps showing steady progress. Because we focus on subscriptions, we can bring innovation to customers more quickly, while offering greater predictability and visibility, which produces a more durable growth business over the long term; software revenue came to $3.7 billion, with 80% sold as a subscription. Subscription revenue rose by 4% to almost $5.5 billion, while ARR grew by 10% year-over-year to $21.6 billion. Product ARR grew strongly at 21% and product RPO rose 18%, which reflects how quickly we are transforming into a software-led business model. Although our revenue growth was solid, it took a hit from the supply constraints affecting our technology peers and nearly every other industry. Our product orders were extremely strong and balanced across our markets. Yet what we can build and ship to customers is limited; we have a world-class supply-chain team that manages to deliver an incredibly high volume of products given our scale and reach. They keep executing well in this highly fluid and complex environment. We've taken a number of actions to lessen the supply constraints and get products out to our customers, such as collaborating tightly with our main suppliers and contract manufacturers, incurring much larger logistics expenses to move components to the places they're needed most, reworking designs so we can bring in alternate suppliers wherever feasible, and continually refining our build and delivery schedules. The scope and scale of these efforts go well beyond what most companies in our sector are doing. Naturally, every one of these measures, though required to get the most production and delivery to customers, increases our cost structure. Along with the higher costs we're encountering from a lot of our suppliers, these things are squeezing our gross margins. Although we've deliberately increased prices to counter this effect, the gains don't arrive right away and will show up across the quarters ahead. We stay focused on our customers, making sure we get them the products they require as fast as we can; at this point, I'd like to discuss the progress on our ESG initiatives. Back in September, we made a commitment to reach net 0 greenhouse gas emissions for Scope 1 and 2 by 2025, and net 0 across all emissions, Scope 3 included, by 2040. Our plan for achieving this centers on 4 areas: creating more efficient products, speeding up renewable energy adoption, supporting hybrid work, and putting money into innovative carbon removal solutions. We feel a profound responsibility to leverage our leadership role in the industry, along with our innovation, to improve the world, and we're eager to keep doing our part. To wrap up, I'm extremely happy with how our fiscal year has begun. Our teams are carrying out our strategy even as they steer through a difficult operating climate, and our Q1 results show that. Demand is still robust, and thanks to the momentum behind our business transformation, we've laid the groundwork for yet another year of faster growth in fiscal 2022. What we've achieved demonstrates the strength of our distinctive innovation, the power of our end markets, and our team's dedication to excellence. As customers speed up their digital transformation and their embrace of hybrid cloud and hybrid work strategies, we think our position is unmatched when it comes to seizing the opportunities in front of us. We'll keep making strategic investments throughout our portfolio to fuel growth and innovation, reinforce our competitive edge, and set Cisco up for success. And my confidence in what lies ahead remains strong. I'll hand things over now to Scott.

Thanks, Chuck. We kicked off this fiscal year with a robust first quarter. Our execution was solid, delivering yet another period of product order growth exceeding 30%, powered by broad-based momentum throughout our portfolio and showing that demand for what we sell and the services attached to it remains vigorous; revenue, net income, and earnings per share all came in strong as well. Total revenue climbed to $12.9 billion, an 8% rise compared with a year earlier, landing right within the guidance range we had given for the quarter. Demand was healthy across quite a few product categories and in every region. Our teams keep performing well despite how quickly conditions shift, though persistent shortages of components are holding back how fast we can turn record-level demand into sales. Non-GAAP operating margin reached 33.3%, an improvement of 60 basis points. Non-GAAP net income came to $3.5 billion, and non-GAAP earnings per share hit $0.82, each rising 8% versus the prior-year period, and non-GAAP EPS finished above the top end of the range we had guided to. Let's dig into first-quarter revenue more closely. Product revenue totaled $9.5 billion, a gain of 11%. Services brought in $3.4 billion, 1% higher. Secure agile networks delivered excellent results, with revenue climbing 10%. Switching posted solid growth, fueled by a double-digit rise in campus switching, with our Catalyst 9000 and Meraki switching products leading the way. Enterprise routing achieved high single-digit growth, powered by Edge and SD-WAN. Wireless jumped by a very strong double-digit amount, thanks to our Wi-Fi 6 products and Meraki wireless offerings. Data center switching grew, while compute revenue dipped somewhat. Hybrid work fell 7% overall, reflecting lower revenue from our perpetual calling, meetings, and Contact Center offerings. Those declines were partly balanced out by communication platform-as-a-service ramping up and gains in our collaboration devices. Inside hybrid work, our SaaS revenue keeps expanding at a high single-digit pace, led by Cloud Calling and Contact Center. End-to-End Security rose 4%, lifted by growth in our cloud-based solutions, while perpetual and hardware offerings declined and offset some of that. Our Zero Trust portfolio turned in a good performance with double-digit growth, as momentum continued for our Duo offerings; Unified Threat Management also grew nicely. Once again, our subscription portfolio did well, up 15%, powered by our Cloud Security and Zero Trust platforms. Internet for the Future surged 46%, largely on the strength of our webscale customers. The portfolio showed broad-based gains, with Cloud growing, Core growing on the strength of both Cisco 8000 and NCS 5500, and Edge growing on the ASR 9000. Our acquisition of Acacia also contributed benefits. Optimized application experiences rose 18%, driven by ThousandEyes, which grew triple-digits, and Intersight, which grew in the strong double-digits. AppDynamics saw double-digit SaaS revenue growth as more of its revenue came from its cloud-delivered platform. The transformation metrics we discussed at Investor Day came in solid, as we keep moving the business toward greater software and subscriptions. On the software side, we brought in $3.7 billion, which is a 1% gain, and the product piece of that rose 3%. Subscription-based offerings accounted for 80% of software revenue, a figure that climbed 2 percentage points compared with a year earlier. When we look at subscription revenue overall, it reached $5.5 billion, up 4%, while the product component of that grew 7%. That total subscription figure made up 43% of Cisco's overall revenue. Our ARR, meaning annualized recurring revenue, came to $21.6 billion, marking a 10% rise, and product ARR growth was especially strong at 21%. Turning to remaining performance obligations, or RPO, that stood at $30.1 billion, which is 10% higher. Product RPO went up 18%, and short-term RPO rose 9%, reaching $15.9 billion. So as you can see, we're still making considerable headway in shifting toward more software and subscriptions. Order momentum remained remarkably robust in Q1, with total product orders climbing 33%, as Chuck noted earlier, and that strength showed up throughout the business. Now let's look at our geographic segments. The Americas rose 31%, EMEA rose 36%, and APJC rose 39%. Emerging markets as a whole were up 37%, and the BRICS plus Mexico group was up 47%. Within our customer markets, service provider rose 66%, commercial rose 46%, Enterprise rose 30%, and public sector rose 10%. So as you can see, the strength was broad-based across the business. On a non-GAAP basis, total gross margins landed at 64.5%, a decline of 130 basis points versus a year ago. Product gross margin came in at 63.8%, down 150 basis points. Service gross margin was 66.5%, down 60 basis points. The drop in product gross margin stemmed mainly from elevated costs tied to freight, expedite, and pricier components resulting from the supply constraints. The pricing effect was fairly modest and in line with what we saw in earlier quarters, and it was partly offset by favorable product mix. We're still navigating the supply constraints that the whole industry—both us and our peers—is facing because of component shortages, and those shortages have led to longer lead times and steeper costs for many of these components. We're working hand in hand with our key suppliers, drawing on our volume purchasing and extended supply commitments, as we tackle the supply challenges and cost impacts that we anticipate will persist into the second half of fiscal 2022. Our supply chain team keeps delivering well in this highly complicated environment. We think we're taking the right strategic steps with our suppliers and contract manufacturers to make sure we can satisfy customer demand, even with the possible risks that come from boosting our inventory and purchase commitments. If we examine how acquisitions affected our Q1 results, they contributed roughly 250 basis points of positive impact on revenue and had no material effect on our non-GAAP EPS, which matches what we expected. Operating cash flow during the quarter was $3.4 billion, a 16% decline year-over-year, caused by larger supplier-related payments along with the timing of other payments and collections. We closed Q1 with total cash, cash equivalents, and investments of $23.3 billion, roughly $1.2 billion lower sequentially, largely because of $2 billion in scheduled repayments on our long-term debt. When it comes to how we allocate capital, we gave back $1.8 billion to shareholders in the quarter. That figure broke down into $1.6 billion for the quarterly cash dividend and $256 million used for share repurchases. Our innovation pipeline keeps receiving investment, both organically and inorganically. In Q1, we completed the EPSAGON acquisition and also stated our plan to purchase Reflex. Such moves fit our approach of pairing in-house innovation and R&D with selective M&A, which lets us further reinforce and set apart our market position in the growth areas that matter most to us. To sum up, Q1 was strong despite a complicated environment with supply constraints. Solid execution produced robust top-line revenue and earnings per share, reflecting balanced, profitable growth; our business model shift keeps advancing nicely, and we keep funding innovation so we can seize our considerable growth opportunities. Progress is evident as we push the ongoing transition toward greater software and subscription revenue, generating growth and building shareholder value. Let me now give our financial guidance for Q2, which follows. Year-on-year revenue growth should land between 4.5% and 6.5%. Non-GAAP gross margin should come in between 63.5% and 64.5%, which mirrors the ongoing rise in supply chain costs we face while safeguarding shipments to our customers. Non-GAAP operating margin should fall between 32.5% and 33.5%. And non-GAAP earnings per-share should be between $0.80 and $0.82. Our full-year fiscal '22 guidance remains unchanged. Year-on-year revenue growth should be between 5% and 7%, and non-GAAP earnings per share should come in between $3.38 and $3.45, which is also up five to 7% year-over-year. For both Q2 and the full year, our guidance assumes a non-GAAP effective tax rate of 19%. I'll hand things back to Marilyn now so we can begin the Q&A.

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

Thank you. Sami Badri from Credit Suisse. You may go ahead.

Hello, and I appreciate the question very much. My first one concerns the pricing hikes you mentioned baking into your price sheets. Would you say that all of the product orders booked in the quarter carried those higher prices you introduced, or did certain existing agreements remain in force that kept older price sheets intact for a few of your major clients? Could you perhaps give us a sense of the mix and maybe a clear-cut response on that front? And then my second question: it appears public sector is up 10% compared with a year ago. I believe a number of your competitors have described quite powerful end-market public sector momentum, with some of that originating from the U.S. federal government. Could you bring us up to date on what is happening in that area? Were there items that failed to cross the finish line, or any delays, or any notable things you are observing that are running into pushback when it comes to putting more public sector or federal government activity to work?

Certainly. I will begin, Sammy, with the matter of the price increase, and then — and I will hand public sector over to Chuck. The price increase we implemented truly only took effect on the 1st of September. The majority of what we shipped across the quarter either originated from RPO, meaning earlier sales that sit on the balance sheet and subsequently accrue into our revenue; and we have discussed holding $15.9 billion of current RPO as of now. So obviously, none of that would have carried the price increase within it. And plenty of the hardware shipments were delivered out of backlog across the quarter; and once again, none of those would have included that price increase. I think even as we look forward, Sami, you need to keep in mind that the price increase will have a larger impact toward the back half of the year than it will certainly have in Q2. Consider it as more of a late Q3, Q4 by the time those price increases convert into orders, those orders move through the backlog, get manufactured, and are then delivered to customers.

Sami, appreciate that question. Regarding how things stand in the public sector, looking at how our public sector results have come in worldwide across the past 2 years, they've been quite steady. I believe that business has grown by 2x since 2017, roughly — that may refer to the federal portion, our U.S. public sector — but what we observed was considerable momentum in E-Rate. There was momentum in state, local, and education. We saw momentum on a

On the civilian side, things went well, and a handful of agreements with the DoD moved into Q2 when viewed from an ordering standpoint, yet it remains quite robust and the teams are performing really well in that area. That business is simply excellent for us.

Thanks a lot.

Thank you, Sami. Let's take the next question, please.

Appreciate it. Hi, everyone. Chuck, I'd like to zero in on the security segment during fiscal '19 — you posted 18% growth, which slid to 12% in '20, then fell to 7% to '21, and now you're entering the year at 4%. Meanwhile, big rivals of yours such as Palo Alto and the Fortinet, and Check Point too for that matter, are posting faster growth, with improving rates and year-over-year figures in the tens, twenties, and even thirties. So perhaps you could break this down for me a bit. I realize you've felt good about your security business, but growth-wise it appears to be moving the wrong way compared with what peers are delivering. Maybe you could dig a little deeper into the shifts happening inside that portfolio. When will it reverse course, and maybe Scott can weigh in on what portion of that portfolio is perpetual versus subscription? Thank you.

Ittai, that's an excellent question. So to begin, I'll say there's room for us to improve in security, and the teams are putting in hard work on it. A great deal of innovative effort is underway. And then you identified the main problem Scott mentioned during his opening remarks — the on-prem, sort of perpetual, piece is shrinking while the subscription-based businesses achieved double-digit growth. Zero Trust and Unified Threat Management delivered solid growth; and on the whole, the subscription portfolio rose 15%. So it's truly about balancing that, and there's a small effect there, Ittai, from supply chain on our hardware-based network firewall business. So I'd say it's a mix of things: we have work to do, which the teams are tackling. Plus the transition and a bit of supply chain. But across the next 2 to 3 years, we'd anticipate that business continuing to improve, and the teams are dedicated to making that happen.

And Ittai, regarding what you asked in the latter portion, we haven't provided a separate figure on that, but as we mentioned during Investor Day in September, the areas where all of our markets are expanding — security and hybrid work among them — lean more toward subscription. That's the area we've directed our efforts; that's where a great deal of our innovation is concentrated; and per Chuck's comments, security's subscription component expanded 15% in the quarter; so I believe once that represents an increasingly significant share of our security product portfolio overall, that's when you'll start to observe greater acceleration in growth rates.

Perhaps Scott could give a different response — is there some way you can help us understand what stage we're at in the shift from perpetual to subscription? Will that weigh on results for quite a while, or do you believe we're near the end of it?

Yeah. Once more, Ittai (ph), I'd prefer not to attempt offering direction at that degree of detail, stretching that far into the future. I do believe the segments we've concentrated on, and the segments we're putting money into, are the ones with high growth. That's the reason you're seeing growth in the double digits. That blend is going to keep shifting. Clearly it was positive in Q1, and it was positive in Q4, the quarter before; it will keep shifting. And once more, as that portion grows into a larger share of the total portfolio, that's when you'll see it turn into faster growth.

Thanks.

OK, I appreciate you taking the time. We'll take the next question now.

Thanks. Perhaps, if I could ask something somewhat connected — regarding the software segment, a bit of detail on the growth rate. Maybe you could speak a little more broadly about software solutions and how we might begin to see growth pick up there, I suppose as we move further through this transition. And second, more specifically, Chuck, maybe you could say a little about Cat 9K renewals. I believe we're starting to reach a point where we'll see more of those. Any early signs there, and what do you expect retention rates to be, and do you think there are any software up sell opportunities as the majority of the early customer base begins renewing? Thank you.

Do you want to handle the first one and I'll handle the second.

Absolutely, that makes sense. Regarding the growth in software revenue, like you mentioned, it did experience a bit of a slowdown in the quarter, and really, that's the same impact we referred to in our opening remarks. We went through that shift from primarily selling perpetual licenses to focusing more on subscriptions, and that's something we've dedicated significant time and effort to. So, it's that underlying mix that's influencing it, where you'll notice the revenue not yet recognized, but the proof of that successful transition lies in two metrics we shared earlier in the opening commentary. Product RPO—products remaining performance obligations—rose 18%, and product ARR climbed 21%. So, many of the software deals we closed during the quarter are actually now captured in RPO and will be recognized down the line. That's essentially creating a broader drag on the reported revenue growth rate.

To build on what was just said, our perpetual software is, predictably, down compared to a year ago. So that piece — and then the ratable portion, which is recognized across 3, 4, 5 years, is what we're moving it toward; regarding the renewals on the Cat 9K, I'd say it remains too soon to know for sure, though I can share that it matches what we anticipated and what we saw in the last two quarters — these are small numbers, to be clear. We are very early in this, and the teams have been

Making it better. I want to say that we've introduced some creative value here, such as the ThousandEyes functionality that has now been integrated into it. So the teams are actively engaged on this. We hold a fair level of confidence. When you examine net retention rates, they're plainly extraordinarily positive. However, my sense is that it won't be until the second half and into fiscal '23 that we truly observe sufficient volume to feel certain we've brought the figures to where they ought to be.

Thanks for taking the question.

Meta Marshall with Morgan Stanley, go ahead.

Thanks a lot. Chuck, I'd like to ask about the discussions you're having with customers, and as your company, along with much of the sector, attempts to hand along pricing adjustments, how is that affecting demand? Perhaps especially among service providers, since they have somewhat limited budget wiggle room. Then maybe for my second one: right now you're putting substantial effort into reworking products or locating different vendors. How ought we to view the schedule for when some of these measures wrap up and you're close to working through some of that backlog? Thank you.

Let me take your first one. It differs depending on the customer, I'd say. The vast majority of customers get it; they're extremely annoyed about lead times. In cases where we must address particular customer problems involving budgets and so forth, our teams work through those directly with those customers, yet broadly speaking, I believe they grasp it, and a lot of our customers are doing the identical thing toward their own customers. So what we're seeing is an inflationary wave affecting the whole economy. Before I turn things over to Scott, one quick remark on your second point: during the first half of last quarter, we did observe a bit of worsening in the availability of components in our supply chain. After that, in the second half, it leveled off, which was a positive. Looking ahead, we anticipate modest gains in Q3 and Q4. We're not counting on much — during Q2 we expected things to stay steady, and after that we believe the last two quarters of our fiscal year will bring a bit of improvement. That's what we currently think, given what we know right now. Scott, would you like to address the second part a bit?

Sure. And —

When we begin —

Yeah, I'd say that's the big question worth $64,000. The tricky part about giving an answer is that it isn't a single commodity facing constraints — you've got to balance things out across every economy, and all of them are constrained. Then on top of that, you have to factor in the tangled logistics situation we're dealing with right now, really in every lane, whether that's ocean, air, or trucking. It's the combination of those two layers that makes this question so hard to answer. Like Chuck mentioned, we did observe stabilization, and some of those signs showed up during the quarter. From certain suppliers, we gained better visibility into components — when they'd arrive and in what amounts. We also saw fewer de-commits arrive during the quarter, which is another indicator of stabilization. And memory costs are actually starting — only just starting — but starting to come down somewhat, which means that market is moving closer to balance too. So as we look forward and consider Q2 guidance and what it implies for the full year, we're seeing signs of stabilization. Clearly, our position on RPO is very strong; that will flow into the revenue stream during the second half of the year, and the backlog we have gives us excellent visibility into precisely what we need to build, so we can be far more targeted about what we need to go chase down to achieve that — so we feel confident about where we stand, both on the Q2 guide and the full-year guide, based on what we see today.

On the downside, there have clearly been difficulties when it comes to getting products out the door to buyers. On the upside, the orders waiting to be filled have reached a record peak for us; at no point before has that figure been this large.

Great. Thank you.

Next question, please.

Thanks for fielding this. I'd like to find out whether you can put a number on it, or at least make an educated guess — of that 33% increase in orders, how much could be attributed to pull-in, meaning buyers submitting orders before your prices go up. If you have any method to strip that out or normalize for it, and how do you see order trends shaping up going forward? Is that something you project, and am I right in assuming that eventually revenue growth and order growth ought to move closer together?

I sure wish I were able to do that, since I'd love that answer for myself. Here's what I can say. We're quite certain — label it pull-ahead, label it purchasing in light of how long our lead times are, but we're quite certain that buyers are placing orders farther into the future than is typical for them. The big carriers, the cloud providers, the ones where we saw 200% growth. Those are accounts we do extensive forecasting and planning alongside; therefore, we're aware that they place orders 2, 3, 4 quarters ahead to guarantee they've got the product in the pipeline and the correct delivery sequence; thus we have that visibility, yet when you consider a category such as commercial, which was up 46%, you generally don't observe much of that. A small amount shows up — certain commercial customers are planning ahead. Still, a lot of them order at the moment they perceive the need, so answering that is genuinely tough. Regarding your second point, the sole response I can give is that it's really tied into the first response as well — something we're monitoring very carefully is cancellations, and there's been no shift at all in our historical cancellation rates. As a matter of fact, it's lower. We track pipeline growth, and I can say our pipeline growth is likely the strongest it has ever been, extending past the quarter we just closed. So we're seeing ongoing demand, and from that angle, here's how we look at it: for our very large customers, the biggest enterprises, cloud players, large carriers, we know we've got visibility, and some ordering ahead does happen among other customers, though I'd say the great majority beneath that group likely aren't doing so.

Would it be reasonable to think that the uptick in order growth compared with the previous quarter caught you off guard too? Did that come as a surprise to you as well?

Well, yes; and when you examine the comparison against 1 year earlier, that comparison was in fact harder, so momentum really picked up, if you look at it that way. But our teams have — we discussed 6 years ago that we would do the work to try to get back into these franchises in the cloud players, and that has been a big — that is a big, big success for us at this moment and that is certainly helpful. And then we have all these other trends happening at this moment. You have 5G build-out, you have Wi-Fi 6, you have every enterprise customer realizing that they will not get caught with the next crisis not having their technology modernized. Our switching growth is at a rate that — 2 years ago if I had told you we would be doing that or if you had told me we would be doing that, we would both have been crazy; so, it is — so I think your point of at some point in the future, you would expect order rate and revenue, would they have to get in line? I think over a time period, yes; not necessarily in 1 quarter versus the other because of the transition in the business model. Because if you look at the RPO that we are pulling off the Balance Sheet every quarter, I go back and look at what that would have been 6 years ago; it would not have been anywhere remotely close to what we are, so we would have been in a much more dire situation relative to supply chain and revenue right now if we had not been making the transition that we have been making.

Right. That $15.9 billion figure — just current RPO — which will flow into revenue over the next 12 months, obviously hands us a decent level of visibility there, Simon. Another point I'd make, tying to what you said, that I believe matters when it comes to how strong order flow was during the quarter: linearity also looked good; it wasn't as if the quarter opened strong and then weakened as time passed. Across the whole quarter, linearity held up well, so we head into the present quarter carrying some rather solid momentum on that dimension. In fact, it went the other way — it got stronger.

Yeah.

I really appreciate you sharing that perspective. Thank you.

Thank you, Simon.

Appreciate it, Simon. Moving on to the next one.

Thank you. A few things on that earlier question, and then second, Scott, if you've already addressed this, I sincerely apologize — I don't believe I caught the answer. But regarding putting a figure on how much revenue there would have been, and what margins would have been purchased due to the supply chain constraints, did you provide that figure? If you didn't, could you share it with us — those figures?

Honestly, we're unable to provide that figure, since calculating it isn't possible; however, when you consider product growth of 31 in the prior quarter, product growth of 33 in this quarter, the RPO, they'll come off the balance sheet < > significantly greater. It's — this backlog is the biggest one we've ever had in the Company's history. So, it's difficult to state. But Scott, anything else you'd like to add?

Paul, the thing holding us back at the moment is clearly parts availability, given two consecutive quarters where product orders rose 31% — that was Q4, which we've wrapped up — and then 33% during the quarter we've just finished, Q1. Plainly, the factor working against us achieving quicker revenue expansion is nothing other than component supply; that backlog is going to convert into revenue; it's simply a matter of that conversion happening gradually; so putting a number on it is — it's going to appear within the revenue line.

Here's how I'd put it: in the near term, this doesn't feel particularly good, but what I believe we're witnessing is that customers are making choices at this very moment, and across every segment they're picking our technology. The innovation our teams have created is what they're selecting. That, in my view, points to good things ahead, and for us it's a strong signal about what's coming. And really, the truth is that given the RPO and the backlog on our books, that product is going to go out the door. So yes, there will be some near-term bumps, but things will make up that ground.

And Chuck, it occurs to me that there are a couple of distinct factors here that are holding back revenue and margins — at least on the revenue side — namely a move toward software and RPO, plus the supply constraint — supply chain constraints — which makes it hard to figure out what demand really looks like in terms of putting a number on it. But I suppose that isn't a particularly illuminating observation. May I ask, you brought up a very strong backlog, so could you share what the backlog growth was, and also what book-to-bill was in the fall?

I'm not certain book-to-bill still matters. It mattered years back when we were a hardware Company, and everything was roughly net 30; we haven't examined that in ages. I'm certain it's sitting on some spreadsheet from years ago, but I'd say the backlog is — Scott, how would you like to describe it? I'll hand that over to you.

Paul, I won't give you the exact figure, but consider how much the revenue growth rate has changed — comparing what happened in Q4 versus Q1, those two most recent quarters, gives you an idea of how much has accumulated in that backlog.

We can see clearly what we need to manufacture and deliver, and that is the reason you're seeing the actions we're taking when it comes to increasing inventory and entering some of those longer-term buying commitments that appear in our filings; we're genuinely making every effort and doing all we can to back our customers and move that product out the door as fast as we can; however, you can gauge the growing backlog simply by examining the gap between what has been coming in through bookings and what we can actually get out the door as revenue.