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

Hello, everybody, and thanks for joining us for Cisco's Q4 earnings call for fiscal year 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 our earnings press release by now. After this call wraps up, 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 we say otherwise, we'll talk about product results in terms of revenue and geographic and customer results in terms of product orders. Every comparison we make today will be on a year-over-year basis. What we discuss today will include forward-looking statements, such as the guidance we're giving for the first quarter and the full year of fiscal 2023. Those statements carry risks and uncertainties that we describe in detail in our documents filed with the SEC—specifically 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's contained in the forward-looking statements. Regarding guidance, please also review the slides and press release accompanying this call for more details. Cisco won't comment on its financial guidance during the quarter unless it happens through an explicit public disclosure. I'll now hand things over to Chuck.

Marilyn, thank you, and I appreciate everyone being here today. It makes me extremely proud to report that we closed out our fiscal year on a high note despite an exceptionally fluid set of conditions; as a matter of fact, our results this year established multiple records. Allow me to begin by addressing those. Across the entirety of fiscal 2022, we achieved non-GAAP EPS of $3.36, which stands as a record, along with record product orders that pushed our backlog to its highest point ever, plus our second best revenue year in company history, coming in at $51.6 billion. We keep witnessing robust uptake of our software and subscriptions, which the focused investments we've been making have driven. Net income also reached a record, reflecting the operating discipline we maintained even with outside difficulties such as supply chain issues and inflation. Our continuing business transformation keeps demonstrating advancement throughout our KPIs, with annualized recurring revenue, or ARR, and remaining performance obligations, or RPO, each reaching all-time highs. These key metrics demonstrate how our revenue streams are becoming more recurring in nature. That factor, together with our record backlog, gives us improved forward visibility into our business. Although this year was unquestionably complicated, we performed admirably. I want to express gratitude to our teams for their perseverance, determination, and steadfast dedication to our customers and our partners. Our team's dedication to speeding up innovation has placed us in a uniquely strong position for fiscal 2023 and beyond; now, let me be explicit regarding our fiscal 2023 outlook; we anticipate robust results throughout our portfolio, powered by our ongoing emphasis on innovation and the relaxation of supply limitations that should generate solid top line growth and profitability. Although we expected some moderation following last year's unprecedented product order growth, demand signals remain solid. We do anticipate facing elevated costs in the near term, primarily because of greater component, freight, and logistics expenses, which our Q1 guide reflects; nevertheless, as our annual guidance will show you, we expect this margin pressure to start diminishing as the year moves forward. Over the long run, numerous multi-year growth possibilities lie ahead that give me confidence in our future. There are more technology transitions happening at the same time right now than I've witnessed in 20 years. Long-term mega trends such as hybrid cloud, hybrid work, security, IoT, 400 gig and beyond, 5G and Wi-Fi 6, along with the shift toward application observability, will probably create tailwinds for our growth; with our portfolio positioned so strongly to assist our customers, I'm quite optimistic about what lies ahead. Before we get into the quarter in detail, I'd like to offer some further context on the supply situation and how we keep building greater resiliency. Following a difficult April caused by the COVID-related shutdowns in Shanghai and the effect on semiconductor and power supplies, overall supply constraints started to loosen somewhat in the latter part of the fourth quarter and carrying on into the beginning of Q1. Although the headwinds in component supply are still with us, they've started to show tentative indications of letting up. The choices we've made and the many steps we've implemented during the last 24 months are assisting us in becoming more resilient and will help counterbalance inflationary cost pressures. Among these are bringing on additional suppliers, making use of substitute vendors, reworking hundreds of products so they rely on different components offering comparable functionality, and implementing focused price adjustments — all of which set us up well going forward. Together with the extraordinary work done by our supply chain organization and the money we've put into expanding capacity so we can support growth, these measures could generate real momentum as we enter fiscal 2023. Turning to the quarter's performance highlights, our revenue came in above the upper bound of the range we had guided to, and non-GAAP EPS landed at the top of that guidance range as well. We posted robust operating margins, produced healthy cash flow, and gave back close to $4 billion to Cisco shareholders by way of cash dividends and buybacks of shares. With product orders rising 14% for the fiscal year on an annual basis, we finished the year holding a record product backlog. On top of that, our RPO came to over $31 billion, and paired with cancellation rates that are low and still under where they stood before the pandemic, that creates the conditions for better visibility and robust revenue growth as we move into fiscal 2023. Regarding product orders in this quarter, we booked the second largest amount in absolute dollars ever recorded in the company's history. Only our Q4 fiscal 2021 result was higher, and measured sequentially, orders climbed by more than 15%, with strong gains across enterprise, commercial, and public sector. Looking at annual growth rate, we obviously are up against some extremely difficult comparisons given the record orders from Q4 of last year, when growth exceeded 30%. Given that, the year-over-year decrease didn't catch us off guard, and it doesn't worry us either. It's worth remembering that in the near term, how fast and at what rate our revenue grows depends far more on component availability than it does on product order growth for any given quarter. With RPO exceeding $31 billion — nearly $17 billion of which will be booked as revenue within the next 12 months — plus a record backlog, our top-line visibility is excellent. Because of the tireless work of everyone across our organization, the business is in better shape than it was prior to the pandemic. On the demand side, we keep seeing solid customer activity that outstrips what we're able to deliver, which is evident in the backlog growth we experienced throughout the quarter. Our business isn't insulated from macro trends, but we'll stay disciplined in how we run things while gaining from strong multiyear investment trends and the technology transitions I brought up earlier. Our innovation is assisting customers and partners in handling growing complexity, and there's a heightened sense of urgency around adopting leading-edge technologies to achieve their strategic goals. The result is that they keep turning to Cisco, counting on the distinctive, differentiated innovation we bring, to move their highest-priority business goals forward. Not long ago we ran our Cisco Live customer event, holding it in person for the first time across a three-year span, and attendance exceeded 15,000, among them thousands of our biggest customers, with many others joining remotely. What we talked about with them centered on strategic projects, ensuring supply, and the vital part Cisco can play in backing their long-range technology roadmaps. No fundamental change in how committed they are to investing in technology came through in what they told us. Whatever the quarters ahead might hold, our history shows we know how to adapt when conditions get tough. The value we offer our customers is just as powerful as it has always been; within our web scale business, momentum keeps building even as that business grows bigger, since product orders rose beyond 50% measured across a trailing four-quarter period. A substantial opening lies in front of us as these customers construct cloud networks at massive scale and lean more and more on Cisco to assist them in serving surging demand for cloud services. Because we lead in silicon, optics, software, and systems, we are positioned to prevail, given that hyperscalers prize performance and innovation that rank at the top of the industry.

We're broadening our reach, fueled by data center construction involving our Cisco 8000 routers built on Silicon One, which are the platforms growing faster than any others in Cisco's history. Along with optics provided by Acacia, we possess a solid base for 400 gig and beyond, allowing us to re-architect the internet through routed optical networking. On top of that, we just booked and delivered our initial 800 gig systems to a web scale customer of ours. Turning to IoT, we now have over 200 million connected things running on our cloud platform, with growth coming from connected car; we closed fiscal 2022 having taken product orders worth more than $1 billion, and that figure is rising at a double-digit pace. We keep advancing in our shift toward recurring revenue that leans more on software and subscriptions. ARR came in at roughly $23 billion, which was an 8% increase, while product ARR rose 13%. Subscription revenue was robust this quarter, powered by our expanding lineup of recurring offers. Although software revenue declined a bit, once supply constraints ease and we start shipping more products, we anticipate improvement in software, subscription, and services tied to hardware products sitting in our backlog. The money we've put into innovation is delivering returns, since our competitive standing is quite strong. During Q4, we rolled out multiple new cloud-delivered innovations spanning our portfolio to assist organizations in boosting productivity and resiliency; we debuted Nexus Cloud, a platform that helps our customers deploy, manage, and operate their data center networks from the cloud. We also brought out Calisti and Panoptica, two new cloud-native API-first tools designed for faster and better application development. Additionally, we unveiled AppDynamics Cloud, a next-generation edition of our observability platform built for cloud-native applications. Furthermore, we outlined our approach to assist customers in linking their whole security architecture through our new platform, Cisco Security Cloud, which will fundamentally change things for them as they seek to secure their multi-cloud environments using a single cloud-delivered security platform. That's only a single piece of our wider security innovation cycle. Building on the double-digit growth in security we recorded this quarter, we're putting investment across our security business, concentrating on cloud-based offerings, best-in-class AI-driven threat detection, and end-to-end security architectures. These innovations put us in a good position to lead in the security market. To sum up, we performed well on our strategy and transformation throughout what is still a highly dynamic period. That produced a strong finish to our fiscal year, establishing multiple records throughout our business, owing to the solid execution of our teams, our market-leading innovation, and our ongoing expansion of recurring revenue. We additionally made decisive moves to help counter inflation and strengthen resilience in our supply chain while putting money into our business to set us up well for long-term growth. The strength of our technology remains a crucial engine of economic growth and productivity. Our results and outlook show the essential part Cisco plays as a leader in delivering innovative technology solutions to customers both now and in the future. Looking ahead to fiscal 2023, our purpose-driven culture continues to steer us, and we stay firmly dedicated to creating value for customers, partners, and investors, while also keeping this an incredible workplace for our team members. At this point, I'll hand things over to Scott.

Thanks, Chuck. To start, I'll walk through how we did financially this quarter, then I'll go over the entire fiscal year, and after that I'll discuss guidance. Our Q4 performance overall shows solid execution despite an environment where supply remains constrained and, as Chuck noted, higher costs that showed up in gross margins. We're quite happy that shipment levels came in above what we had expected, and that revenue totaling $13.1 billion beat the top end of the range we had guided to, since supply improved thanks to the many steps we've taken across several quarters. Non-GAAP operating margin came in at 32.4%, a drop of 110 basis points, matching what we had guided. Non-GAAP net income reached $3.4 billion, a decline of 3%, while non-GAAP earnings per share was $0.83, landing at the upper end of our guidance range. Turning to Q4 revenue with more granularity, product revenue totaled $9.7 billion while service revenue was $3.4 billion, with each flat versus a year ago. Inside product revenue, Secure, Agile Networks fell 1%. Switching was lower in both data center and campus, due to supply constraints. We did see gains in our Catalyst 9000, Nexus 9000 and Meraki switching offerings. Enterprise routing dropped, mainly because of edge and SD-WAN, though access strength partly offset that. Wireless grew strongly, mainly from our Meraki wireless offerings. We also achieved double-digit growth in servers. Internet for the Future fell 10%, as web scale revenue strength was offset by declines in cable, edge and optical. Collaboration rose 2%, lifted by growth in collaboration devices, partly offset by lower meetings and calling offerings. End-to-end Security posted record revenue with robust growth of 20%, fueled by strength throughout the whole portfolio. Our Zero Trust portfolio keeps performing well, thanks to strong results in our Duo offering. Optimized Application Experiences grew a solid 8%, helped by double-digit growth in our SaaS-based offering, ThousandEyes. We keep advancing on our transformation metrics as we move the business toward more software and subscriptions. We delivered strong performance in ARR of $22.9 billion, up 8%, with product ARR growth of 13%, helped by several large software transactions that closed in the quarter. Total software revenue was $3.9 billion, a decrease of 2%, while software subscription revenue rose 1%. Keep in mind, we still have well over $2 billion of software orders sitting in our product backlog. 83% of the software revenue was subscription-based, which is up two percentage points versus a year ago. Total subscription revenue was $5.8 billion, an increase of 2%. Total subscription revenue made up 44% of Cisco's total revenue. RPO was $31.5 billion, up 2%. Product RPO rose 6%, service RPO fell 1%, and our total short-term RPO grew 4% to $16.9 billion. Total product orders in Q4 were the second highest in our history. Even though product orders declined 6% during the quarter, you have to remember the comparison is against 31% growth in the prior-year period, and that was the largest product orders total ever for us. Sequentially, product orders rose more than 15%, with double-digit gains across enterprise, commercial, and public sector. If we look at our geographic segments on a year-over-year basis, the Americas declined 9%, EMEA declined 4%, and APJC increased 1%. Within our customer markets, enterprise fell 15%, public sector fell 3%, service provider fell 7%, and commercial rose 1%. On a non-GAAP basis, total gross margin was 63.3%, a decline of 230 basis points year-over-year. Product gross margin came in at 61.3%, down 370 basis points, while service gross margin reached 69%, up 160 basis points. Within product gross margin, greater component and commodity costs, plus higher freight and logistics tied to supply constraints, were the main reasons margins fell short of expectations. We realized growing advantages from the pricing steps we've implemented, as well as from mix. Yet again, we experienced a substantial rise in backlog levels for both hardware and software, far above what we normally see historically. As Chuck mentioned, our ending product backlog set a record for the year. As a reminder, backlog does not form part of the $31.5 billion in remaining performance obligations. It's worth noting that adding together our backlog and RPO provides strong visibility into our fiscal 2023 top line growth. We closed Q4 with total cash equivalents and investments of $19.3 billion. Operating cash flow during the quarter totaled $3.7 billion, a decline of 18% year-over-year, largely because of advanced payments and inventory purchases made to secure future supply. On capital allocation, we gave back $4 billion to shareholders in the quarter. That consisted of $2.4 billion in share repurchases and $1.6 billion for our quarterly cash dividend. Moving to the full fiscal year results, overall, our financial results were solid in a year when we confronted significant supply constraints, rising component and related costs, and the war in Ukraine. Our financial performance stood out for strong demand, with product order growth of 14%, including two quarters of truly impressive 33% growth, although our results were clearly affected by the supply constraints. Revenue reached $51.6 billion, up 3%, while non-GAAP earnings per share rose 4% to $3.36. Regarding our software metrics, total software revenue was flat at $15.1 billion, with the product portion up 2%. Subscription-based software accounted for 81% of software revenue, an increase of two percentage points year-over-year. Total subscription revenue was $22.4 billion, up 2%. Total subscription revenue made up 43% of Cisco's total revenue. Total non-GAAP gross margin was 64.6%, down 150 basis points, and our non-GAAP operating margin was 33.6%, up 10 basis points. Looking at the bottom line, our non-GAAP net income came to $14.1 billion, which is a 3% increase. Operating cash flow reached $13.2 billion, a 14% decline from fiscal 2021, largely because of advance payments made for inventory to lock in component supply. Although those payments hurt operating cash flow for the full year, they, along with other related steps we took, contributed to easing the supply situation during Q4 and in quarters ahead. When it comes to capital allocation, we gave back roughly $14 billion to shareholders through cash dividends and stock buybacks, which amounts to 109% of free cash flow. That figure breaks down into $7.7 billion for share repurchases and $6.2 billion for quarterly cash dividends. In fiscal 2022 we also raised our dividend for the 11th year in a row, which underscores how dedicated we are to giving excess capital back to shareholders and how confident we are in the strength and stability of our ongoing cash flows. Having a strong balance sheet and solid overall financial position is plainly a competitive edge when conditions are tough. In summary, we performed well in Q4 and posted a solid fiscal year despite a highly complex environment, all while making continued progress on shifting our business model and investing strategically in innovation to take advantage of our considerable growth opportunities and expanding addressable markets. Demand for what we offer in products and services remains strong as we push innovation forward through sustained investment and a move toward more recurring revenue, which delivers growth and drives shareholder value. Now for our financial guidance in Q1, we expect revenue growth between 2%-4%. We anticipate non-GAAP gross margin between 63%-64%. Non-GAAP operating margin should fall between 31.5%-32.5%, and non-GAAP earnings per share should come in between $0.82-$0.84. Regarding fiscal 2023, here is our guidance. We expect revenue growth between 4%-6% year-over-year. Non-GAAP earnings per share guidance should land between $3.49-$3.56, which is also up 4%-6% year-on-year; for both our Q1 and full year guidance, we assume 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 list of Q&A.

Hello, and thanks. There were actually a couple of things I wanted to ask. The first one concerns fiscal year 2023: the revenue growth you're expecting is somewhat above what most on the street had modeled. Could you take us through how the segments break down, what's fueling that momentum, and which segments might underperform relative to the stronger ones? My second question: could you offer some detail on what makes up gross margin when it comes to pricing and productivity in fiscal Q4 of 2022? That would be useful.

Sure. Thanks, Sami. Looking at the guidance we provided for fiscal 2023, it's balanced growth — once again, 4%-6% growth on the top line, 4%-6% growth on the bottom line. Once you dig into it — naturally, we don't guide at that level — what we've observed, as you'd anticipate, is solid demand, as Chuck mentioned during the call, all the way through the end of the fourth quarter, though it varies somewhat across industry verticals. Retail, unsurprisingly, facing some pressure. Financial services, facing some pressure. Strength pretty much everywhere across the remaining sectors. Healthcare is also under a bit of pressure. As we move into fiscal 2023, that's the picture we're seeing vertical by vertical; we saw solid double-digit growth sequentially, once again, from Q3 to Q4, since, as you know, the year-on-year comparisons are very tough given that 31% growth we posted a year ago. Solid sequential growth, if you break it out by customer market across enterprise, public sector, and commercial. Again, we're seeing fairly balanced growth pretty much everywhere, and that's what we expect as we move into fiscal 2023. On the gross margin question, price is giving us a benefit. One point we've made, however, is that a lag exists between the price increases we've implemented and what actually appears in reported revenues. I know you're aware of this from earlier quarters, Sami. Some of that benefit showed up in Q4, and you'll see it in our filings, in our 10-Q or 10-K filing for the end of the quarter; it's roughly 1% up year-on-year of gross margin driven by price. Then, naturally, the offset comes from higher cost, both component cost and freight and logistics.

Got it. Thank you.

Next question, please.

Thanks. I’d like to ask about a couple of items quickly, with the first one being the software business. Chuck, you described performance as roughly flat, yet there’s still a significant backlog being carried. That situation has persisted for several quarters now, so perhaps you can share a bit about what you believe will push this business to advance more aggressively toward the software model. I also wanted to ask a follow-up regarding the cloud vertical, where orders have been really strong. Could you discuss a little whether the range of portfolio products being shipped into that area is expanding? I know Acacia is performing well, but if there are any other areas of notable strength, that would be great. Thank you.

Appreciate that, Tim. Let's kick things off with software. You've got it right — software is essentially flat. Two points I'd highlight there: we've clearly been making a shift away from the perpetual model, which is shrinking, and that's intentional on our part. Our aim is to shrink perpetual software while growing subscription software. Here's how I'd frame it: perpetual dropped about 14% in the quarter. Also, like Scott mentioned, we hold more than $2 billion — and the figure leaving Q4 is actually larger than it was back in Q3 — of software in backlog, tied to hardware, as you noted. Those are the two things driving that, which is exactly why we ought to focus on ARR, since it mirrors the ACV we essentially carried out of the quarter. So it serves as a signal for upcoming software revenue. We feel good about it. Once we clear out some of these supply chain issues, I believe we'll begin to see it reflect more closely what we've been planning for. On the cloud vertical, we keep landing new insertions. That business is now nearing $3 billion a year, when just two or three short years back it was essentially nothing. The teams have performed incredibly well. Clearly, across the last four quarters, it has grown 50%. On the revenue side, it leans heavily on supply chain, so I wouldn't get too caught up in revenue versus orders at this moment. I expect we'll navigate through that over the coming, let's say, four to five quarters. All in all, really happy with where things stand.

Okay. Thank you.

Thanks, Tim. Next question, please.

Yeah, hey everyone, thanks for asking. I suppose I wanted to look a bit more closely at the order growth. Clearly the numbers are really strong, but they don't quite line up with how we, you know, would have thought they'd turn out. What doesn't line up is that you're reporting an increase of more than 15% for the quarter, yet a decline of 6% compared with the prior year. Our own math came out nearer to flat, roughly minus 1%. We're just wondering if there was any restatement related to last year's July quarter. You had highlighted 31% order growth for that period, or whether anything else, you know, is affecting how these orders behave that could help us make sense of that gap, at least based on our figures. I have a follow-up.

Okay, Rod — I noticed a few people had expected a decline of 15%, so I figure that comes down to differing approaches to modeling. When we considered this, and we clearly are aware it was 31%, and then for Q1, since we're comparing against 33%, we looked for alternative angles on the business that would reflect what the demand signal actually shows. Let me walk through a handful of those points. To start, looking at product orders, like I mentioned, this was the second-best ever, surpassed only by Q4 of the prior year. It was up 15%; measured sequentially, that fits within our historical patterns. Excluding last year, which was an unusual sequential, it lines up quite well; it falls within the range we've observed over the past 10 years. On that 15%, enterprise, public sector, and commercial each posted solid double-digit sequential gains, and once more, they grew sequentially from our biggest third-quarter product bookings on record. We're also seeing the pipeline keep expanding. When we came out of Q4, pipeline growth looked quite strong, and that's a helpful signal for what lies ahead. One last point: based on how our sales teams called the quarter, early in month three they adjusted their forecast for that quarter, and they closed out better than anticipated, with momentum as we left the quarter. Linearity held up well; nothing we've observed points to a major change in the demand signal coming from our customers.

Yes, Rod, just to make sure your question is fully addressed, our method for reporting year-on-year figures hasn't shifted at all. It remains identical. Beyond what Chuck already mentioned, I'd just note one additional point: within the quarter, linearity came in quite robust. As a matter of fact, the final week of the quarter matched the size it had reached a year earlier, and the linearity from month to month aligned precisely with both last year and the expectations for the prior year; we observed strength all the way through the close of Q4.

Understood. Alright, then as a quick follow-up, may I ask you folks about inventory? I'm aware that inventory has risen fairly significantly once more. Would you expect inventory to begin declining in the coming quarter? Or I'm simply wondering roughly where things stand in that back-and-forth pattern of inventory, considering the supply shortages and similar issues.

Okay, so Rod, what we've got sitting in inventory is basically the remaining components that aren't constrained. So when the constrained ones become available, naturally we're able to complete the kits, you know, and send the product out the door to our customers. It's increasing. You know, it's risen roughly $1 billion compared to a year ago, now at $2.5 billion. Our advance payments have also gone up. Both of those create somewhat of a drag on cash flows, as you observed.

Yeah, really, what this comes down to is just making sure we have all the pieces in place, so that once those bottlenecked components free up — and we did see some of that starting to happen late in Q4 — we're able to match everything up and ship the product out to our customers.

Okay, great. Appreciate it, guys. Thank you .

Okay. Let's take the following question.

Yes, I appreciate you answering my question. I've got a couple too. So, I suppose what I want to ask first concerns gross margins, or perhaps regarding the EPS guidance of 4%-6% for fiscal 2023, how do you view gross margins given that context? And is there also a buyback assumption built into that guidance?

Nothing extra in the way of repurchases appears in these figures. Regarding how we deploy capital, that has been discussed before. Two pieces make up our repurchasing of shares: one is systematic, simply neutralizing dilution from shares granted under our equity programs, while the other is opportunistic. So what should we expect for gross margin across the year? Naturally, Amit, providing full-year guidance isn't something we do. My own view is this: over the course of the year, as the backlog gets worked through, an increasing number of orders within it will start shipping, and those orders carry the higher prices we implemented during the prior year. That, in turn, will act as a tailwind for margins as the year progresses. Between the guide for our first quarter and the level where we finish the year, I could see margins rising by as much as 50 basis points.

If I may ask a quick follow-up — there's been a good deal of worry out there that rising interest rates are going to begin hitting enterprise spending broadly. From your print and your guide, it doesn't look like you're detecting any of that. I'd really like to hear your view: what are your customers telling you now that the macro environment is shifting? And tied closely to that, as the macro backdrop changes, are you noticing any change in the way they buy, or in what they're looking to purchase from you?

Sure, that's a fair question. What I'd tell you is this: if there's a major macro shift that causes enterprise spending to move, we're not protected from that. What I'm really saying is that as we came into Q1, we simply haven't observed any change in the demand signal for materials. That's the situation. On the previous call, I think I spent a lot of time talking about how, in my view, after the pandemic, the way our customers look at technology is quite different from how it would have looked seven, eight, nine years back. If you were to ask our customers whether they'd halt spending in a crisis, I think they'd likely say, "Given everything we've been through over the last three years, when isn't there a crisis?" Broadly speaking, we aren't hearing much variation. As for your question about whether buying behavior looks different or what they're trying to purchase from us: in certain cases, customers want a somewhat quicker ROI, and that shapes how they consider which products to buy in times like these; in certain cases, customers are thinking ahead about lead times for fiscal 2023 budgets and attempting to get a clearer picture of what those budgets will look like, since the shipments and the payments would fall in the 2023 timeframe. Beyond that, nothing looks materially different to us.

Perfect. Thank you, and congrats on a nice quarter.

Thanks, Amit.

Thanks, Amit. Next question.

Okay, thank you. I have a few things I'd like to ask. First, regarding the improved availability of supply, I'm trying to understand how much of that comes from certain trailing-edge parts finally being easier to obtain, versus how much stems from the redesign work you've completed throughout this year, which seems to have opened up additional flexibility. Then, Chuck, here's my second item: given the valuation pullback we've witnessed across much of the software sector, in what ways does that shift your thinking around strategic opportunities? Thanks.

Thanks, Meta. Regarding the first point, I'd describe it as a mix of those two factors. Like we mentioned before, during the quarter we experienced higher volumes across the wider network, and honestly, that was a chance we capitalized on, which explains the stronger top line. We managed to ship additional product to our customers, something we were clearly quite pleased about; however, we had to spend more on those components, and we expect that to persist for roughly the next 60 to 90 days. After that, we believe some of those purchases will start becoming obtainable from the very suppliers who have introduced the excess inventory into the market. Meanwhile, we have — and I believe I mentioned this during our previous call — we've been working on hundreds of product redesigns. Two of our high volume products that also carry solid margins are set to start shipping in a redesigned space, kind of toward the later part of Q1 and then through the rest of the year, which we expect will be beneficial too; it's a blend of those two elements; that's what provides us with a bit of optimism that things will keep getting better throughout the year. As for the second question, Meta, about the valuations, I've encountered this one several times, and people have asked whether our M&A strategy has shifted due to the valuations, and my answer has been that our strategy remains the same, but the willingness to engage with us from certain companies that assumed they had different strategic exits may have shifted; we haven't altered our strategy; we simply believe it potentially opens up more opportunity for us with companies that previously might not have been interested because they believed a high-flying IPO was waiting for them, which they may not think is true at present. The market is clearly adopting a very different perspective on profitability as opposed to mere growth.

Perfect. Thank you.

Thanks, Chuck. Next question, please.

Hey everyone. What I'm attempting to do is separate next year's growth—likely driven by improved supply—from our backlog, which is extremely large, and also from the broader spending climate. You began addressing this when we brought up enterprise. So perhaps I should broaden my question regarding the overall environment. As you review your different segments—what you previously referred to as theaters—covering cloud, service providers, enterprise, and so on, could you walk us through what you anticipate for spending conditions and possibly the length of time required, you know, to finalize deals compared with earlier periods when you consider the coming quarters? I'm attempting to gauge whether the climate as you perceive it now is worsening, staying the same, or which specific areas are experiencing a downturn or not. My second question is simply whether you could discuss security. Security performed well once more, in fact significantly better, and there's been steady progress across the quarters—if you could address where you stand in security.

Excellent. Appreciate it, Tal. I believe Scott mentioned this—that our fiscal year 2023 revenue is far more a consequence of component supply than it is tied to demand. What I can share is that under our present models, we would finish fiscal 2023 with approximately the same backlog we had going into FY 2023. Then, looking at the various segments you mentioned, we saw small business growth globally in Q4 reaching double digits, which is an encouraging indicator that expansion there continues. Breaking it down further, you know, commercial was up 39% a year ago, so on a sequential basis it rose by double digits. Enterprise climbed, you know, into the mid-20s last year, so sequentially it's growing at a high double-digit rate. Those are positive signals for us. And the pipeline expansion we observed as we closed out the quarter simply indicates there's still plenty of opportunity out there. At this point we're modeling, you know, for things to keep going just as we currently observe them. Bearing in mind, you know, since you asked me to go region by region, I think Asia and Europe—we spoke with our team this week, and they appear to remain fairly optimistic, just as we are in the Americas. It was a pretty consistent narrative. Scott?

Yes. Tal, the sole point I would make is that when you consider the 4%-6% growth we are now projecting for fiscal 2023, it is entirely limited by supply. Although the supply conditions we experienced late in the fourth quarter that we just finished, you know, there was a bit of relief. That does not indicate it is finished; we will face supply constraints during fiscal 2023 in just a few areas. If those did not exist, our growth would be much faster; this is not about demand; demand is not what limits us, supply is what limits us in fiscal 2023.

Regarding what you said about service providers and cloud, is that the same response as for the enterprise? In other words, at this point you aren't anticipating much movement in that environment?

Correct, nothing is showing up for us. What I'd say regarding the service provider segment is that given how far ahead those lead times stretch, we began a long-range planning effort with them, which I've mentioned previously. Right now we're carrying deferred bookings that appear nowhere, close to half a billion dollars, since those fall past our usual shipment window for when they'd want delivery. From these customers we hold orders, you know, several quarters ahead, and every one is non-cancelable thanks to the contracts we've signed. That momentum feels good to us. Our view is that those clients will keep spending across every trend we've discussed. Since we just delivered our initial 800 gig system to a web scale player, we expect to keep seeing them benefit from these faster platforms.

Tal, thanks, that's great. And you also brought up security, right?

Yes, I did. I believe Scott brought that up in his remarks. Honestly, on the firewall side, we experienced solid expansion along with some movement in backlog. From a firewall standpoint, shipments were quite strong this quarter. At the same time, we saw momentum in our endpoint business. Our Zero Trust business also performed well. We're going to keep at it. For the company right now, this year, that's the top priority for investment. We are, I think, pushing forward with more innovation in that area and developing that portfolio in the strategic way we've outlined. My expectation is that we'll keep witnessing gains. That said, during this quarter, clearing out some firewall backlog gave us a lift.

Great. Thanks.