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

Good day, everyone, and welcome to Cisco's quarterly earnings conference call for the second 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 review our earnings press release by this point. After this call concludes, a webcast with slides—along with 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 our Investor Relations site. During today's call, we'll refer to both GAAP and non-GAAP financial results, and unless otherwise noted, we'll cover product results by 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. Today's discussion includes forward-looking statements, among them the guidance we're giving for the third quarter and the full year of fiscal 2022. These statements carry risks and uncertainties, COVID-19 included, that are described in detail in the documents we file with the SEC, particularly our most recent reports on Forms 10-K and 10-Q, which lay out important risk factors that could cause actual results to differ materially from what those forward-looking statements contain. Regarding guidance, please also review the slides and press release accompanying this call for more details. Unless Cisco makes an explicit public disclosure, we won't comment on our financial guidance during the quarter. I'll now hand things over to Chuck.

Appreciate that, Marilyn. I trust everyone is staying safe and well. Following the strong performance we posted a year ago, 2022 is shaping up to be an even better year, powered by remarkable demand for what we offer and the ongoing wins from our transformation; during Q2, I'm delighted to report that we turned in yet another excellent quarter, with ARR climbing by double digits and healthy product orders, which produced a record-high backlog and a solid pipeline. What these outcomes show is that Cisco's innovation keeps growing more relevant and more essential amid digital transformation and cloud, and they strengthen my belief in our capacity to generate growth; our attention is fixed on remaining ahead of what our customers need most urgently as they steer through a fast-changing world. Our customers are acting more quickly than at any point before, pushed by the shift toward hybrid work and hybrid cloud. That demands updated infrastructure, fresh security architectures and faster digital transformation. The scope of what we offer in innovative solutions and services worldwide, paired with our growing skill at providing more adaptable consumption options, is creating even stronger partnerships with our customers throughout the whole portfolio. At this point I'd like to take a few minutes to go through our results in greater depth and describe what the market is showing us. We achieved healthy top line growth alongside margins and earnings that came in above the upper ends of our guidance, even while dealing with a supply-constrained and inflationary backdrop. Strong demand from Q1 carried over into Q2, as product orders rose 33%, marking our third straight quarter with order growth at 30% or above, with strength again spanning every geographic region and customer market. To illustrate, within our enterprise business, orders climbed 37%, the best in more than 12 years, as big customers put priority on investments to update their networks and unlock new digital capabilities and resiliency. As ever more things become digitized, we anticipate that our momentum will keep going. We think the demand for highly secure, seamless connectivity, hybrid cloud and hybrid work solutions, together with edge computing, will propel growth for Cisco. The chance in front of us is obvious, as our expanding pipeline and record backlog make clear, with the latter having more than doubled versus a year earlier and set to turn into revenue over the quarters ahead; in our web scale business, we posted another amazing quarter. Demand rose more than 70% compared with the same period a year earlier, and measured across the last four quarters the gain comes to over 100%. Results continued to be very strong, and the main force behind that was how quickly customers are picking up our 400-gig offerings along with the routed optical networking portfolio, which itself expanded by more than 50%, with the Cisco 8000 lineup, Acacia and Silicon One doing the heavy lifting. On top of that, ZR optics are drawing a great deal of interest as part of the routed optical network approach. Meaningful double-digit expansion showed up in both the Optical Systems unit and the Acacia unit, and our web scale clients drove that. Because of the investments we have made over the last few years, we now sit in a strong position while the largest companies in this market move toward next-generation technologies. Our clients are making strategic choices regarding their future road map and see Cisco's unmatched portfolio as essential to their plans. We think they remain in the early stages of deciding on their next-generation platform purchases and anticipate that our momentum will keep going. Looking at product revenue, we turned in another robust and well-balanced quarter, growing 9%, with demand spread broadly across most of our product portfolio. Higher customer outlays for network modernization, secure connections for hybrid workers and 5G buildouts fueled this, with our subscription products seeing robust uptake as well; investments that will power our long-term results remain our priority, enabling us to capitalize on mega-trends across big, expanding markets such as cloud, full stack observability, 5G, 400-gig, WiFi 6 and security. What distinguishes us and puts us in position to succeed is our know-how in these domains, combined with tight integration of hardware, software and silicon across our offerings. Never before has our team innovated at such pace and magnitude. To support our clients in creating and providing the finest possible hybrid work experience, we recently introduced several groundbreaking networking products. These include Catalyst 9000X switches that run on Silicon One, the first high-end WiFi 6E access points in the industry, and a private 5G as-a-service option for enterprises. This allows communication service providers to offer cloud-based services to their own customers. We're also dedicated to leading with greater sustainability. For instance, the Silicon One Catalyst 9000X switches I just referenced are about 40% more power efficient than earlier models. Developing technology this way is essential for reaching our target of cutting Scope 3 emissions to net 0 by 2040. I'm equally pleased with how far we've come in reshaping the company toward software and subscription recurring revenue, moving more of what we do into the cloud. Our ARR reached $21.9 billion, a gain of 11%, and product ARR climbed 20%. Product RPO — mostly committed software revenue not yet recognized — rose 16%. We're still among the biggest software firms globally. Software revenue in Q2 increased 6%, hitting $3.8 billion. Subscription revenue overall reached $5.5 billion, accelerating 7% compared with a year earlier. You should keep in mind that the component situation is holding back hardware shipments, and that's dragging down both of those metrics because subscription, software and service ride along with that hardware. What our software, RPO and ARR are delivering makes it obvious how much value our transformation is generating, and it gives us better visibility and predictability when it comes to future growth. Looking at the broader environment, the component shortage is still a tough problem. Demand is unbelievably strong and keeps exceeding what we can supply, so our backlog of products, software and services keeps getting bigger. Our supply chain team is responding aggressively — building strong inventory positions, strengthening ties with suppliers, getting alternative components qualified and leaning more on expedited freight. We're still facing major semiconductor bottlenecks, and because of that we can't finish building certain products. Even with demand running very high, that's holding back our revenue growth. On top of that, this tight supply situation keeps pushing our supply chain expenses higher, and we've managed to pass those costs along in order to counterbalance them. To sum up, we're still dealing with the fallout from the pandemic and the parts shortage, yet our confidence in this company, in where we stand, and in our growth prospects has never been higher. The results for Q2 show solid momentum, a sharp sense of direction, and superb work from our teams. The strongest innovation engine and pipeline we have ever had are now in place, and we are rapidly transforming the company by accelerating our shift into software and subscription models. Through these extremely volatile times, our teams have accomplished so much, and no one could feel more pride than I do. By offering flexible ways for customers to consume what we sell, we are bringing best-in-class innovation to market and reinforcing the distinctive position we hold across the portfolio. What lies ahead leaves me as confident and optimistic as ever. Enormous moves toward hybrid cloud, hybrid work, and digital transformation are happening, and Cisco is positioned at their very core; we believe that drives momentum for our business and places us well to capture the major opportunities ahead. Now I'll hand things over to Scott.

Appreciate that, Chuck. The second quarter came in strong throughout the company; we carried out our plans effectively, posting a third straight quarter where product orders rose by over 30%, fueled by momentum across our portfolio, which includes ongoing healthy appetite for what we sell and provide, combined with careful cost control and management of our supply chain. Revenue on a total basis climbed $760 million, reaching $12.7 billion, which is 6% higher than the same period a year ago and right within the guidance range we gave for the quarter. We experienced positive results in quite a few product categories and in every region where we operate. Our operations held up nicely amid this extremely volatile setting where supply remains tight, something that, as Chuck noted, keeps getting in the way of turning the considerable demand on our books into sales. Profitability overall during Q2 was robust, posting a non-GAAP operating margin of 34.3%, non-GAAP net income of $3.5 billion and non-GAAP earnings per share of $0.84, and that non-GAAP EPS figure landed above the top of the range we had guided. Let's dig into Q2 revenue with more granularity. Product revenue on a total basis came to $9.4 billion, rising 9%. Service revenue reached $3.4 billion, falling 1%, which resulted from holdups in hardware support contracts tied to the limited supply. Inside product revenue, Secure, Agile Networks turned in a good performance, with revenue climbing 7%. Switching posted steady expansion, fueled by a double-digit rise in data center switching, which our Nexus 9000 products drove. Campus switching delivered steady growth, led by the Catalyst 9000 alongside Meraki switching products we offer. Wireless saw a very robust double-digit gain, powered by WiFi 6 products as well as our Meraki wireless lineup. Compute revenue also rose by double digits, with servers driving that. Enterprise routing fell, mostly because of access, partly balanced out by momentum in SD-WAN. Hybrid work, the line where we only report our collaboration portfolio, dropped 9%, the result of lower collaboration devices and meetings offerings, partly countered by the ongoing expansion of our Communication-Platform-as-a-Service. Starting with the next quarter, this category's name shifts from hybrid work to collaboration. Nothing about the pieces inside this category will change. End-to-end security expanded 7%, showing widespread momentum across the bulk of the portfolio. Our Zero Trust portfolio did nicely, notching double-digit growth thanks to solid results from our Duo offerings. Our subscription portfolio kept up its good performance, powered by cloud security and Zero Trust. Internet for the Future jumped 42%, largely propelled by the power of our web scale customers; we witnessed wide-ranging momentum in the portfolio, with gains in edge, fueled by double-digit growth from our ASR 9000 offerings, plus core, which was strong in Cisco 8000 and optical. We also kept seeing a solid contribution from Acacia, our optical networking offerings. Optimized application experiences rose 12%, powered by double-digit growth in both ThousandEyes and Intersight. SaaS revenue for AppDynamics expanded at a mid-single-digit pace as the move toward its cloud-delivered platform carried on. We keep advancing on our transformation metrics as we move the business further toward software and subscriptions. On the software side, we brought in $3.8 billion, which is up 6%, and the product piece of that rose 9%. Subscription-based offerings accounted for 80% of software revenue, a gain of 4 percentage points compared with a year ago. Our total subscription revenue reached $5.5 billion, up 7%, and that represented 44% of Cisco's overall revenue. Annualized recurring revenue — ARR — came to $21.9 billion, a rise of 11%, with product ARR growing a strong 20%. Remaining performance obligations, or RPO, stood at $30.5 billion, up 8%. Product RPO was up 16%, service RPO was up 3%, and short-term RPO in total climbed 8% to $16.3 billion. Keep in mind that this short-term piece converts into revenue across the coming 12 months. On the acquisition front, there was a positive impact of roughly 200 basis points year-over-year on Q2 revenue growth, and no material effect on our non-GAAP EPS, which matches what we had expected; order momentum stayed exceptionally strong for us in Q2. Product orders overall rose 33%, with strength seen throughout the business. Turning to our geographic segments: the Americas climbed 36%, while EMEA and APJC each rose 30%. Emerging markets in total were up 39%, and the BRICS plus Mexico was up 48%. Within our customer markets, service provider rose 42%, enterprise rose 37%, commercial rose 34%, and public sector rose 20%. As you can tell, strength was broad across our geographies and customer markets. On a non-GAAP basis, total gross margin landed at 65.5%, a decline of 140 basis points year-over-year; product gross margin was 64.3%, down 230 basis points; and service gross margin was 68.8%, up 90 basis points. The drop in product gross margin came mainly from continued elevated component costs tied to supply constraints, along with higher freight and logistics expenses. As we've noted over several quarters, we keep managing through the industry-wide supply constraints that both we and our peers face because of component shortages, which have led to longer lead times and higher supply costs. The situation is still difficult. We remain closely engaged with our key suppliers, using our volume purchasing and extended supply commitments as we work through the supply challenges and cost impacts, which we anticipate will persist into the second half of our fiscal 2022. As I said, the component supply constraints also slow how quickly our strong demand turns into revenue; that has produced a substantial increase and a continued buildup in our backlog levels, well past what we normally see historically. Beyond that, the ongoing supply constraints have affected not just our ability to ship hardware but also our delivery of software, including subscriptions that customers order alongside the hardware. That undelivered software sits in backlog as well until the hardware ships, which is the point when we start recognizing the revenue. Naturally, this affects our software revenue growth and other related metrics. To give you a sense of how large our backlog is, product backlog at the end of Q2 exceeded $14 billion, a jump of more than 150% year-on-year. Inside that figure, software backlog nearly doubled, reaching over $2 billion — and remember, backlog doesn't count toward the $38.5 billion we report as remaining performance obligations. Q2 closed with $21.1 billion in total cash, cash equivalents and investments. Our quarterly operating cash flow came to $2.5 billion, a 17% decline compared with a year earlier, mostly because of advance payments made to lock in future supply; those advance payments produced a negative 17% year-over-year effect on operating cash flow. On top of that, we paid roughly $100 million in taxes during the quarter, a payment that had been postponed under the CARES Act. That payment added another negative 4% year-over-year impact on our operating cash flow. Turning to capital allocation, we gave back $6.4 billion to shareholders in the quarter; that consisted of $4.8 billion in share repurchases plus $1.5 billion for the quarterly cash dividend. Because of how confident we feel about our business now and going forward, our Board approved an extra $15 billion for share repurchases, which takes the total to roughly $18 billion; we're also increasing the dividend by $0.01 to $0.38 each quarter, marking our 12th raise.

When you look at the dividend raise, the extra buyback authorization, and the greater repurchasing activity we did this quarter, together they show how dedicated we are to giving excess capital back to shareholders, and they reflect how confident we are that our cash flows will remain stable. Our innovation pipeline keeps receiving investment, both organically and inorganically. During Q2 we completed the replex acquisition, and Opsani was brought in early in Q3, which bolsters our full stack observability offerings. Such moves fit our approach of pairing internal innovation and R&D with selective M&A, letting us further reinforce and set apart our market position within our key growth areas. In short, it was another solid quarter, with strong product demand and good execution despite a complicated environment of supply constraints. Our business model shift keeps moving forward, and we are investing in innovation so we can seize our considerable growth opportunities and broadening addressable markets. Progress is visible as we push the ongoing transition toward more software and subscription revenue, which produces growth and builds shareholder value. Let me now give our financial guidance for Q3. Keep in mind that Q3 of last year had an additional week, and that lifted total revenue by roughly 3 points of growth. The overall effect on cost of sales and operating expenses came to about $150 million, which meant a $0.04 gain to earnings per share in last year's Q3; looking to the coming quarter, revenue growth should land between 3% and 5%. We expect non-GAAP gross margins between 63.5% and 64.5%, which mirrors the ongoing rise in supply chain costs we are absorbing while safeguarding shipments to our customers. Non-GAAP operating margin should come in between 32.5% and 33.5%. Non-GAAP earnings per share should fall between $0.85 and $0.87. Across the whole fiscal '22 year, we are narrowing the range as follows; revenue growth should be between 5.5% and 6.5% year-on-year. Non-GAAP earnings per share rises to $3.41 to $3.46, which is 5.9% to 7.5% higher year-on-year. For both our Q3 and full year guidance, a non-GAAP effective tax rate of 19% is what we assume. I will hand it back to Marilyn now so we can begin the Q&A.

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

Hey everyone, great to see these solid numbers. I'd like to explore the supply chain a bit more. Chuck and Scott, could you possibly address whether, from one quarter to the next, the situation has deteriorated somewhat or improved somewhat? Also, do you have any schedule in mind for when a significant betterment might occur? And building on that, Scott, once that betterment arrives, ought we to anticipate something like a stretch of, say, 2 or 3 quarters featuring really exceptional expansion while you work through this extraordinary backlog? I'm simply attempting to grasp the situation regarding how everything here gets resolved.

Yeah, Ittai, I appreciate that inquiry. Let me begin, and afterward Scott may chime in. What I'd say is that across the quarter, the supply chain neither worsened substantially nor improved substantially. It remained fairly steady. Throughout those months there were gains and losses, yet on a broad scale, that's how I'd describe it. Toward the close there was a slight Omicron impact, with individuals falling ill and being unable to appear at plants, plus certain widely reported logistics challenges; nevertheless, by and large, that's what we encountered; we lack — I can't claim we possess a solid schedule for you concerning when conditions start getting better. What we know at present is merely that we anticipate this staying with us across the latter half of our fiscal year. Scott, anything to add?

Yeah. No, I'd say you've got that right — it matches what we've been anticipating. And Ittai, regarding your question about the way this unwinds, my view is that it won't come off in a lumpy manner. My sense is that it will unwind as supply and demand move closer to balance. And I think that's just going to take place steadily across the coming few quarters; so I don't anticipate any significant bump in any particular quarter. My sense is that supply opens up — given $14 billion of backlog, there's ample demand for us to go fulfill. The real issue is when that supply opens up; and as it opens up, my sense is it will take place steadily as time goes on.

Understood. Scott, to make that final point clearer — is there any means by which you could determine what portion of this backlog consists of duplicate orders? From a customer perspective, I'm not sure what it signifies that you're carrying all of this backlog. Are customers genuinely facing lengthy waits to receive product? And what exposure do you face that some element of duplicate ordering is embedded in these numbers?

Ittai, we've remained attentive to that and have monitored it ever since we started accumulating backlog, which followed 3 straight quarters where demand rose around 30% while revenue climbed only 6% to 8%. Considerable backlog has been building up, so that's been on our radar. Clearly, customers are reacting to our lead times, and those lead times have stretched as component lead times stretched. So there's some extension in there, I'd say. Still, what we believe we're witnessing is genuine demand. It's likely a mix of demand that was held back from products that couldn't be completed while the pandemic was ongoing. It's likely the early stage of a number of those trends we've discussed and are putting investment behind. And if we consider the possibility of duplicate ordering, you'd probably not detect much of it among commercial and small customers, and that segment continues to show solid growth for us. You'd probably likewise start to notice the pipeline build decelerating, and that isn't happening either. At this stage, our pipeline remains very robust. So we're searching for indicators that could give us a clearer read. Nothing we're observing right now suggests duplicate ordering is present.

Let me lay out a line of reasoning about your higher costs and see if anything about it doesn't hold up. Eventually, logistics and freight expenses will get back to normal — or at least mostly back to where things stood 1 year or 1.5 years ago. And when it comes to the more persistent piece, semiconductor costs, if those don't come back down, the price hikes you're implementing over the coming 3 to 4 quarters, as the backlog gets worked through, ought to counterbalance those elevated costs, whether fully or to a substantial degree. Before my follow-up, does that reasoning have any flaws?

Paul, I'd say the reasoning holds up. What I'd tell you to expect matches what I shared last quarter. When I look at gross margin for the remainder of this fiscal year, my view is it remains where we are now — in the 64% to 65% range — all the way to the year's end. Past that, as you mentioned, and I'm hoping you're correct, logistics costs start moving back toward something more typical. Clearly, the price increases we've implemented — we've discussed this before. Right now we aren't getting much advantage from them, because once a price increase goes in, there are offsets during the period from when we started until it reaches the field. The field must then accept those prices and sell to customers. Those orders need to enter the backlog and then be fulfilled from the backlog before we finally receive the revenue credit for those price increases. And my sense is that we're starting — we will start — to see the benefit of those price increases near the close of this quarter and more so into Q4. But as far as my expectation for gross margins goes right now, they remain in the range we're currently in, the 64% to 65% range, through the end of the year.

Understood. Chuck, regarding the top line, during my 26 years of analyzing this sector, I have never witnessed a stronger demand backdrop spanning enterprise, carrier, and web scale. You would need to look all the way back to the late '90s. Naturally, that situation ended up being a bubble. We observe the expansion of your competitors, Arista, Juniper, Extreme, F5, and so on — what portion of current activity stems from straightforward market expansion? What portion reflects better execution by Cisco?

That is an excellent question. My response would be that it is unquestionably a mix of the two. The markets are indeed strong, just as you pointed out, since some of our rivals are also posting healthy numbers. Yet whenever you examine — whenever I examine the rates of order growth within specific parts of our business, specific technology domains, I can tell you that we are taking share. Take web scale; clearly, our execution there is outstanding since we were absent from that space only a couple of years back. And in certain technology domains such as WiFi, the order growth rates, including campus switching, the gross — on the order side, I believe that — I believe there is a great deal of truly strong execution. I believe our portfolio is in excellent condition. And bear in mind, we sit at the beginning of these multiyear shifts that strongly benefit us, be it 5G, be it 400 gig, WiFi 6, hybrid cloud, hybrid work, edge compute. I mean, all of these represent technology domains and transitions that work in our favor. So those are partly tied to the market, yet I believe our portfolio is positioned well to capture those transitions.

Alright, I have 2 tough questions for you. The second will be brief, but let me start with the first. First off, congratulations on growing product orders by more than 30%. What many of us are eager to learn is: what's the appropriate normalized growth rate? Or when will that normalized growth rate at last begin showing up in your results? Looking at that 30%, we see a thematic trend. Yet eventually, it has to decline somewhat. When do you expect that product order growth to actually normalize? That's question one. Question two is worth $20 billion. Are you acquiring Splunk? If you aren't, what internal factors led you to avoid such a deal?

Let me address both, I suppose. Regarding the first, I believe next quarter, Q3, the year-over-year comparisons certainly become more difficult, especially since we also had an additional week of orders. Then in Q4, clearly, that marked the initial quarter when we saw a 30%-plus quarter during the prior fiscal year. So those should be solid quarters for us to essentially serve as a litmus test regarding your question. Beyond that, I'm not certain I can give you a straight answer, though the math will definitely become harder over the coming couple of quarters. As for your second question, to begin with, we never discuss rumors, speculation, or stories. What I can say is that we continually assess possible opportunities. Scott and I were chatting, and we figure that for each deal we complete, we likely examine 10 to 15 companies. Our choices rest on, above all, strategic fit; next, cultural fit; and just as crucially, financial and valuation fit; and we remain disciplined at all times, and we keep concentrating on both inorganic and organic opportunities. But I'll say that you ought to expect us to stay extremely, extremely disciplined moving forward too.

I'd like to revisit gross margins from this quarter. You folks came in well above the upper bound of the range you'd guided to. Could you talk about which factors on the gross margin line turned out better than expected? Then, for my second question — this may sound like it comes out of left field — Chuck, the public sector orders genuinely caught me off guard. They were remarkably strong. Could you perhaps unpack that a bit and speak to what's happening in the public sector?

I'll handle the first one. Regarding gross margin, Rod, the story really was product mix — we had the components on hand to build and ship those products during Q2. Like I mentioned before, what we expect for gross margin this year hasn't changed. Favorable product mix in Q2 pushed us past the top of our guidance range, which I'm certain you already know. Looking ahead to Q3 gross margins, I'd call it somewhat of a headwind, though it balances out across the year. So for the full year, our gross margin expectations remain the same.

Scott, could you speak to what particular kinds of products contributed favorably in the mix? Give us a bit more detail, please.

A mix is what it always is. Both product lines and customer size affect things when you look across them. Instead of walking through each product individually, the situation is this — during the quarter, the supply on hand simply let us ship items with better margins. And once more, because of what we can see thanks to a $14 billion backlog, we have fairly strong visibility regarding what must be built, plus a solid sense of how that will look in upcoming quarters. So I'm confident we will remain in this range until the year is over.

Turning to what you asked about the public sector — good thing you raised that, since plenty of folks glance at that 20% figure, notice it sits under the other customer markets, and read it as a negative. What's actually true, though, is that over the past couple of years it has been our steadiest area. Strength showed up across the board. Take our government business — I'm pulling up some numbers as I speak — we've posted positive growth for 6 quarters running, with 3 of the last 4 delivering robust double-digit gains. Then look at education, where we've also strung together 5 straight quarters, or maybe 6. The last 5 quarters have been especially powerful. So across the public sector, it was genuinely broad-based.

Yeah, I wanted to touch on the software area. There was solid growth compared to last year during the quarter. I realize it's still somewhat constrained. But perhaps you could share a bit, Chuck, on when you expect we'll begin to see that pick up more noticeably than total revenues? Is that Cat9K? Is it other offerings shifting further toward software as things recover in certain other segments? Then my second question concerns the cloud business. You mentioned the robust orders once more. Could you offer us some insight into what's behind that? And beyond simply looking at it by product, are there competitive victories, fresh use cases, additional customers you're seeing? What's actually fueling that 70% growth versus a year ago and 100% across the last 4 quarters?

Let me grab some figures here; so Tim, regarding your first point, on the software side, I believe that's a very good question. I think Scott pointed out during his portion that product software revenue growth came in at 9%. The key thing — you need to dig deeper to grasp what's happening. Our legacy perpetual software, which we've been migrating away from toward 2 subscriptions, saw perpetual decline 12% while subscription rose 17%. So the shift is genuinely unfolding as we anticipated. That explains why you're observing some of the — since subscription revenue, clearly, gets recognized across time, and you're absorbing a 12% reduction on a onetime software component from how we previously sold it; so that dynamic simply needs to keep working itself out. You've got the renewals you brought up beginning to arrive on certain DNA items in full force during '23 followed by '24, '25 starting to build; but — plus you've got more than $2 billion in software held in backlog that isn't an RPO yet since it's tied to hardware that hasn't gone out. And we book a portion of that immediately and the remainder across time. So all those factors are currently at work. Having said all that, I think you ought to anticipate — once things return to normal, my expectation is that after we work through this supply chain and backlog situation, under ordinary circumstances, you'd likely find software growth — revenue growth expanding more rapidly. Yet at present, given how large our backlog is, that might not occur for a number of quarters.

Yeah. That software figure of $2 billion — actually, what's sitting in our backlog right now is a bit above $2 billion, and compared with only a year back, that's nearly twice as much, correct? So some portion will always remain in backlog, but it has roughly doubled. And naturally, the bulk of that software gets recognized on a ratable basis. So once we're able to move it out of backlog and get it shipped, there's still going to be a ratable ramp associated with it. Over the longer horizon, if you recall what was stated back in September, we told you the recurring revenue portions of our product business should expand at a compound annual growth rate between 15% and 17%, and that's exactly what we just delivered, all right? The product subscription component within our software business was up 17% during the quarter; so I'd say we're squarely on track there.

I'm attempting to locate a breakdown of the various franchises within web scale. Where did that go? Can you recall?

Yes, let me get it for you.

Alright, regarding the cloud segment — actually, I don't have those figures with me at the moment — what I'd say about the cloud segment is this: we keep winning, we're still landing new use cases involving our integrated systems, the Silicon One systems, and we've also landed use cases where customers are just purchasing our hardware, which means a switch running their own operating system. Some of our customers use several consumption models at once — one might purchase silicon and also purchase the hardware switch, another might purchase an integrated system plus silicon. So it's a mix of all those arrangements, and we're landing new competitive use cases, and — I don't believe — that isn't the item I was after. Alright. So it's a — apologies, I was just — Marilyn was attempting to locate it. But my plan was to share the customer count and which — the number of franchises we landed within each one, yet I don't have those available right now, and we'll work on getting that; but broadly speaking, we are certainly landing new use cases.