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

Hello, everyone, and thanks for joining us for Cisco's Quarterly Earnings Conference Call for the First Quarter of Fiscal Year 2023. 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, a webcast with slides — which includes supplemental information — will be posted on our website under the Investor Relations section. In keeping with what we normally do in Q1, we've applied some reclassifications to amounts from prior periods so they line up with how the current period is presented. You can also find income statements, complete GAAP to non-GAAP reconciliation details, balance sheets, cash flow statements, and other financial information in the Financial Information section of our Investor Relations website. During this 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, while geographic and customer results will be discussed in terms of product orders. Every comparison we make on this call will be on a year-over-year basis. Today's discussion includes forward-looking statements, among them the guidance we'll give for the second quarter and the full year of fiscal 2023. These are subject to the risks and uncertainties we describe in detail in the documents we file with the SEC, in particular the most recent report on Form 10-K, which lays out important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. Regarding guidance, please also refer to the slides and press release accompanying this call for more details. Cisco won't comment on its financial guidance during the quarter unless it does so through an explicit public disclosure. With that, I'll hand things over to Chuck.

Thanks, Marilyn, and I appreciate everyone being here today. Fiscal 2023 has begun well for us, with solid performance that came in above the upper bound of what we had guided for on both revenue and non-GAAP EPS. Our quarterly revenue was the biggest ever recorded by the company, reflecting great execution and the steps our team took to fix the supply problems we faced. With those results in hand, plus robust orders, good visibility, and supply pressures letting up, we're lifting our outlook for the entire year, and Scott will walk through that shortly. Even as we actively steer through a market that keeps shifting and remains complicated, our attention stays squarely on carrying out our strategy, which includes moving toward recurring revenue from software and subscriptions. Software revenue rose 5% compared with a year earlier, while software subscription revenue was up 11%. Now that supply is loosening and we can ship hardware, software subscriptions that had been stuck in backlog waiting for unshipped hardware are being freed up. Our ARR also shows this progress, coming in above $23 billion, a 7% gain, with product ARR up 12%; the quarter closed with RPO at close to $31 billion, 3% higher than a year ago, and product RPO rose 5%. More than $16 billion of that RPO will convert into revenue within the coming 12 months, and backlog stays high, near record levels; these figures give us better visibility and predictability and add to our confidence that we can perform across the present market cycle. They also highlight the distinctive position we hold, assisting customers in becoming more agile and resilient as they work through a complicated mix of challenges. As I usually do, I want to give an update on the supply chain before I get into our Q1 results. Just as you've heard from others in the sector, we're feeling good about modest gains in the availability of certain components as shortages keep loosening relative to last quarter. Redesigning a large number of our products has similarly contributed to steadier supply and greater resiliency. During the past several quarters, you've heard me describe the steps we took to deal with supply constraints; those steps are now producing results and helping our performance. We currently have better visibility into how our customer product deliveries will ramp, which gives us more confidence about our fiscal 2023 outlook; let me now turn to the quarter's performance highlights. Revenue came to $13.6 billion, a 6% increase, and non-GAAP EPS was $0.86, which is the second highest quarterly non-GAAP EPS the company has ever posted. In addition, we brought in $4 billion of operating cash flow and gave back more than $2 billion to shareholders. These numbers demonstrate that we stay dedicated to operating discipline and to our balanced priorities for allocating capital. We keep putting money into our long-term growth opportunities while also giving capital back to shareholders. When it comes to the orders we booked this quarter, one thing worth flagging is that the comparison to a year ago sits against a particularly robust stretch — 34% growth in Q1 of fiscal year '22. Geographically speaking, we picked up on a bit of growing hesitation in Europe. What's behind that is a sharp jump in energy prices along with volatility in the market, and that's prompting customers to take a hard look at what they're spending overall. That said, it opens a door for us too, since offerings such as IoT, Silicon One and power over ethernet deliver a substantial cut in power usage. To put things on a more normalized footing, the sequential gain from Q4 to Q1 came in only a touch under the typical band we've seen across the past 6 years. Another point worth making is that these were the second highest Q1 orders ever recorded in the company's history. Momentum in product revenue is strong across key areas of our business, among them Secure Agile Networks, Security and Optimized Application Experiences. Beyond that, a number of products turned in record results, among them the Catalyst 9000 family, Cisco 8000, Wireless, Meraki, ThousandEyes and Duo. Networking matters more and more to every organization, propelled by digital transformation, hybrid cloud, AI and ML workloads; that's what's fueling appetite for what we offer. As we've talked about before, there are favorable forces at work for our business too, including hybrid work, 400 gig and beyond, 5G, WiFi 6, security and full stack observability. Our view is that these wider technology shifts will mean every customer has to rebuild their network infrastructure, and that in turn will power long-term growth throughout our portfolio. When I talk with customers, what they tell me is that although they're keeping a close eye on the economy, their attention stays on making the right bets across their business to boost agility and spark more innovation and productivity. Over in our web-scale business, demand is still firm, fueled by their expanding investments with Cisco to construct AI fabric and cloud networks that scale massively. Yet again, momentum was strong for our Cisco 8000 routers built on Silicon One. Demand for our 400 gig products is vigorous, and we now count close to 1,200 customers; measured on a trailing 12-month basis, web-scale orders grew by double digits or better for the eighth quarter in a row. Capacity and demand for networks keep climbing, pushed by 5G, IoT, pervasive video and the other technology trends I brought up earlier. Because we're committed to powering next-generation networks while also advancing sustainability, we rolled out new 800 gig switching platforms built on our Silicon One G100 chip, aimed at helping satisfy customer demand for greater programmability, bandwidth and energy efficiency. Now let me turn to innovation, since I couldn't be prouder of the way our teams have joined forces to bring market-leading solutions to our customers. Security and hybrid work matter more now than they ever have. We keep expanding what we can do so customers can work more safely from anywhere while cutting cost and complexity. On the security front, we rolled out new data loss prevention, firewall and Zero Trust capabilities throughout our portfolio. Additionally, through teamwork, we unveiled over 40 fresh products aimed at supporting hybrid work and creating outstanding customer experiences. We remain dedicated to offering our clientele additional options. One illustration of that would be working alongside Microsoft to integrate Microsoft Teams into Cisco meeting room devices. Through this effort, we're enhancing interoperability and showing our willingness to address what our customers require while offering more adaptability. In summary, we turned in yet another robust quarter with growth in revenue and non-GAAP earnings. Strong order levels, better visibility, and a supply situation that is easing give us improved clarity and predictability, and that supports the assurance we hold regarding our business as well as our raised guidance for the year. What we achieved this quarter demonstrates our innovation and execution in assisting customers through these complicated times. On top of that, it underscores Cisco's strength, durability and discipline in the way we run the business while continuing to invest so we can seize the multiyear growth opportunities that lie ahead. Our portfolio is in excellent condition, and our business model is resilient, with 43% of our revenue now recurring, which matters greatly as we steer through the present macro environment. The dedication and hard work put in by our leadership team and employees across the past few years to transform our business model shows up in the results we posted this quarter. Along with the strength of our balance sheet and our standing in the market, we possess a superb foundation for producing long-term results. At this point I'll hand things over to Scott.

Thanks, Chuck. We kicked off this fiscal year with a robust first quarter, which shows how well we're executing and how tightly we're managing the business. Our total revenue hit a record $13.6 billion, coming in above the top end of the guidance range we'd given, and that was fueled by product shipment volumes that beat what we expected along with ongoing gains in component supply. On a non-GAAP basis, operating margin landed at 31.8%, a decline of 150 basis points, which matched our guidance range and stemmed mainly from pricier components plus logistics expenses tied to supply constraints. Non-GAAP net income came to $3.5 billion, a rise of 2%, while non-GAAP EPS reached $0.86, an increase of 5%, both surpassing the upper end of our guidance range. Now let's dig into Q1 revenue a bit more. Product revenue totaled $10.2 billion, climbing 8%, and service revenue held steady at $3.4 billion. Inside product revenue, Secure Agile Networks turned in a solid performance, rising 12%. Switching revenue expanded, with campus switching notching double-digit growth, powered by gains in our Catalyst 9000 and Meraki offerings. Data center switching slipped slightly, yet our Nexus 9000 offering delivered healthy growth. Enterprise routing fell, largely because of the shift to our Catalyst 8000 series routers as well as supply that remained constrained. Wireless posted very robust double-digit growth, mainly on the strength of our WiFi 6 products and Meraki wireless offering. Internet for the Future dropped 5%, dragged down by decreases in Cable, Optical and Edge. We did see expansion in our Cisco 8000 offering and strong double-digit growth in web scale. Collaboration slid 2%, pulled lower by a decrease in meetings, though growth in calling partly made up for it. End-to-end security rose 9%, lifted by unified threat management and Zero Trust offerings. Our Zero Trust portfolio keeps delivering, helped by strong results from our Duo offering. Optimized application experiences gained 7%, fueled by double-digit growth in our SaaS-based offering, ThousandEyes. We're still making headway on our transformation metrics as we move the business toward more software and subscriptions; our ARR came in strong at $23.2 billion, rising 7%, with product ARR growth of 12%. Total software revenue was $3.9 billion, up 5%, and software subscription revenue climbed 11%. Subscription-based software made up 85% of software revenue, an increase of 5 percentage points versus a year ago. We still carry more than $2 billion in software orders within our product backlog. Total subscription revenue reached $5.9 billion, an increase of 6%. That subscription revenue accounted for 43% of Cisco's total revenue. And RPO rose — it was $30.9 billion, up 3%. Product RPO went up 5%, and service RPO went up 1%. Total short-term RPO climbed to $16.4 billion. As for Q1 orders, they were the second highest for a first quarter in our history. Even though product orders fell 14% during the quarter, it's worth remembering that they're being measured against 34% growth from a year earlier. Cancellation rates remain low, still under prepandemic levels. Turning to our geographic segments compared with a year ago: the Americas was down 10%. EMEA declined 23%, while APJC fell 10%. Looking at our customer markets, service provider dropped 23%, commercial slipped 14%, Enterprise declined 13%, and public sector was off 7%. Our total non-GAAP gross margin landed inside the guidance range we gave, at 63%, which is a 150 basis point decline compared to a year ago. Product gross margin reached 61%, a drop of 280 basis points, while service gross margin hit 68.8%, an increase of 230 basis points. Within product gross margin, the decline came mainly from component costs plus elevated freight and logistics expenses tied to supply constraints. Strong favorable pricing helped partially counter this, stemming from moves we made during the previous year, along with some gain from product mix. For both hardware and software, backlog remains far above where it has historically been. While managing a complicated supply situation, we managed to ship more this quarter, producing roughly a 10% sequential reduction in total backlog, which still stands at the second highest level on record. As a quick note, backlog does not form part of our $30.9 billion in remaining performance obligations. Together, our substantial backlog and RPO kept giving us strong visibility into our top line. Moving over to the balance sheet: we closed Q1 with $19.8 billion in total cash, cash equivalents and investments. Operating cash flow during the quarter totaled $4 billion, which is 16% higher than a year ago. On capital allocation, we gave back $2.1 billion to shareholders in the quarter, made up of $1.6 billion in quarterly cash dividends and roughly $500 million in share repurchases. This all aligns with our long-term goal of returning at least 50% of free cash flow to shareholders each year. We finished the quarter with $14.7 billion available under stock repurchase authorization. In summary, Q1 saw us execute effectively amid a very complex environment, achieving top line growth and non-GAAP profitability that beat expectations. We're continuing to advance our business model shift toward more recurring revenue, while investing strategically in innovation to seize our considerable growth opportunities. In line with that aim, we disclosed certain restructuring actions aimed at prioritizing investments in our highest growth opportunities and resizing our real estate footprint, which should help maximize long-term shareholder value. Now to our financial guidance for Q2: we expect revenue growth between 4.5% and 6.5%; non-GAAP gross margins should land between 63% and 64%. Non-GAAP operating margin is projected between 31.5% and 32.5%. Non-GAAP earnings per share should come in between $0.84 and $0.86. For fiscal year '23, our guidance is that we're lifting our revenue growth expectation to between 4.5% and 6.5% year-on-year. That's an increase from the earlier range of 4% to 6% growth. Non-GAAP earnings per share guidance should fall between $3.51 and $3.58, which is also up 4.5% to 6.5% year-on-year. For both the second quarter and the entire year outlook, we are taking a 19% non-GAAP effective tax rate as our assumption. What our Q2 forecast captures is the greater visibility that comes from the substantial backlog we hold and the RPO accumulated through the transformation of our business model, along with supply constraints letting up. With respect to the whole year outlook, it carries forward the better-than-expected Q1 result while taking a cautious stance on the rest of the year. At this point I'll hand things back to Marilyn so we can begin the Q&A.

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

Nice work on the quarter. Chuck, I was hoping you might expand a bit further on the remarks you made regarding Europe, and also on what you're observing when it comes to activity levels or the approval thresholds required inside the U.S. — that would really help.

Appreciate it, Meta. Sure — Europe, as you'd expect, is getting hit by energy expenses. And I believe that's simply pushing businesses to examine their P&L the way anyone would, and to reconsider where their money goes. And things there still seem somewhat less chilly, if you will. We spoke with a few of our team members this week, which is an encouraging signal. But another point I raised, and I consider it a significant one, is that clients are attempting to tackle this energy expense challenge extremely forcefully; and we possess multiple technology areas capable of assisting them with that, among them our Silicon One technology, which runs their networks while drawing far less power. There's IoT, where we're able to link up these energy systems and boost their efficiency, plus Power-Over-Ethernet, which essentially shrinks the power footprint our customers require. So some opportunity does emerge from this too. If I shift to Asia briefly, you've got — Asia proved fairly resilient, actually. They're definitely conscious of the economic conditions unfolding, yet we had 5 regions last quarter that came in positive following large gains 12 months earlier, among them India, which expanded substantially after substantial growth the year before. So that was an encouraging signal. So Asia feels fairly resilient at the moment. Then for the Americas, I'd describe it as somewhat mixed. Some customers are charging ahead while others are adopting a more cautious view. We believe that by December, we'll gain clearer insight into the 2023 budgets, which will help; and regarding your question about additional signatures, we have observed — our customers have put in place stronger signature requirements. Still, on the whole, the deals we have in motion are getting signed. They're simply requiring somewhat more time than we'd anticipate.

Fantastic quarter, and I can see those figures climbing, but what I want to know is how much comes from working through backlog versus how much comes from the broader environment? In other words, I'm looking at your product growth — product orders; that's a 14% decline. In the previous quarter, it was a 6% decline. So the real question is what's happening with the environment itself? Are bookings and backlog showing that conditions are getting softer, and what we're witnessing is a pickup driven by supply constraints letting up? Or are conditions actually stable? And perhaps you could point to a few of your major product categories so we can see what the trends look like.

Yes. Thanks, Tal. This is something we anticipated being asked, so I'll provide a bit more granularity than I'd typically offer. To start, for the 2 quarters we just closed along with the upcoming quarter, we're up against enormous year-over-year comps from the previous year. So like we said before, we believe sequential growth is the better metric to focus on. And as I mentioned, we came in a touch under our historical quarter-to-quarter range, about 1%. So that wasn't meaningful, not entirely outside the norm, definitely somewhat softer than what we'd typically anticipate but not meaningful. Enterprise and commercial worldwide both landed inside the typical sequential range. Public sector fell a bit outside that range, and service provider is simply uneven; so reading sequential performance for service provider isn't truly meaningful. So demand didn't — it certainly didn't collapse dramatically by any means; actually, U.S. enterprise, following a upper 20s increase the year before, they posted low single-digit positive growth once more. So that was an encouraging indicator. Our order linearity during the quarter was on track. And keep in mind, it was our second biggest Q1 for orders ever. So only — the sole quarter that exceeded it was the one a year earlier; so that's encouraging. Now what you're getting at, and I believe everyone is getting at, is whether this year is being powered by backlog? And then once we move past that, everything collapses. So let me share a few data points on that. Even if our orders decline 10% this year, which isn't what we're forecasting, we will still — we currently project that we'll close the fiscal year with 2 to 3x our typical year-end backlog. That typical backlog generally runs $4 billion to $5 billion. So I'm giving you real figures here; and when you combine that with 43% of our revenue now derived from recurring, which shows up in our RPO, that's what gives us strong confidence and strong visibility in the near term; so hopefully, that addresses your question as I respond, Tal.

Chuck, as a quick clarification — you mentioned that quarter-over-quarter drop. It came in slightly below what we'd normally see for the season. Yet your backlog figure fell roughly 10% versus the prior quarter, from what I can tell. Could you reconcile those two data points for us? Because the way it sounds — if I take the 13.1% you posted in last year's fourth quarter, you'd land somewhat under that.

David, I believe the connection to you may have dropped.

Can you guys hear me?

Now we can.

Could you assist in reconciling the backlog with the sequential remarks? When I examine your quarter-over-quarter backlog comments, it was a bit under seasonal, yet it appears you reduced backlog by roughly 10%. Consequently, it looks like there's approximately $600 million or $700 million in revenue for us to try to pin down. So if you could just go through that, it would be useful.

Certainly. Yes. Backlog declined roughly 10%, which left us with an ending backlog at the close of Q1 that ranked as the second highest ever in our company's history and exceeded what we had observed at the close of Q3. Thus, we experienced a spike upward of slightly more than 10% during Q4 and then returned lower in Q1. What Chuck was referring to regarding the sequentials is truly about total product bookings that arrived compared with our current backlog position. So orders flow in, enter the backlog, and that backlog subsequently turns into revenue. You should view it as less about whether a backlog change translates into revenue growth and more about whether a backlog change translates into build.

And remember, bookings contribute to both backlog and RPO.

Understood. Perhaps one last point regarding profitability. Once software moves out of backlog, my assumption is that this would have provided a boost to gross margins during the quarter. Could you roughly quantify what that impact might have been for the period, considering there are clearly some supply chain and logistics pressures affecting margin?

Yes, your description is accurate. Over the longer term, as the software portion keeps expanding and we can deliver that from backlog, it will serve as a margin tailwind. Currently, much of what we are delivering from backlog remains older product. Incidentally, we achieved solid improvement with our aged backlog in the quarter, but many of the orders we are still fulfilling were placed before the price increases. So two things are occurring simultaneously. You have elevated costs, and the revenue corresponds to sales made prior to the price increases — which clearly creates a margin headwind. Simultaneously, we are seeing additional software go out, which acts as a tailwind. The net effect remains a fairly considerable headwind. Product gross margin was 61% for the quarter, consistent with what we observed in Q4. The positive development is that we made strong headway in clearing out a substantial portion of that aged backlog. Some remains to be cleared in Q2. Therefore, I anticipate that by year-end, margins will grow beyond their current level, with product margins increasing 50 to 75 basis points.

Good numbers. Chuck, let me revisit what you said when Tal asked his question. It's obvious that since orders have fallen and you can now deliver much more effectively, the backlog is only going to keep shrinking over the coming quarters. So please help us understand where the line is between a decline that would worry you and one you'd view as a typical rate as things return to their usual historical levels. Where exactly would you draw that line — the point at which you'd say that beyond this, we likely have a problem, but if it lands around X, then it's completely normal and reasonable for that to play out across the next 12, 18 months?

Yes, Ittai. We've actually run models on a range of booking scenarios for the year, and for it to become a concern, things would need to be considerably worse than what I described to you. Scott, anything else you'd like to add?

No. What I believe you're really asking is this: when will things return to a more typical seasonal rhythm, correct? Clearly, seasonality disappeared, first as we entered the pandemic and then as we exited it, with 3 straight quarters of growth above 30%; now we're starting to notice indications that normal seasonality is coming back. Seeing it will be somewhat tricky, however, since as supply constraints ease, we'll be in a position to shorten lead times. For a handful of product lines, we've already accomplished that. And as we do so, naturally, that is going to affect bookings in the current period itself. So over the next few quarters, as lead times normalize, it's going to be somewhat hard for you to identify those trends.

Let me ask a couple of things quickly, if that's alright. Chuck, regarding the cloud vertical, would you mind expanding a bit — you're still referring to double-digit orders in that area, so could you break down the slowdown, perhaps separating simple stabilization of ordering across additional quarters from what might lie ahead — plenty of discussion has circulated about cloud providers steadying their spending in the coming year, so if you could distinguish between those 2 factors; and regarding software, I'm just wondering whether you can bring us up to date. A good deal of hardware seems to have been converted, and that provided a boost. Could you discuss the 9K renewals a bit, and perhaps some of the other standalone software products you believe might likewise support that growth figure over the coming few quarters?

Yes. Both are solid questions, Tim. Regarding the cloud vertical, I believe you're identifying the correct issue, which is that stabilization of those orders will likely take place across the coming few quarters. In truth, it wouldn't shock me if our trailing fourth quarter rates, over the next couple of quarters, possibly even turn negative, given how much ordering ahead of time we've witnessed. Yet overall, we keep seeing genuinely robust demand from them; we've engaged in substantial long-range planning alongside them. A certain quantity of orders we hold isn't even in book — they won't appear in bookings at all as of now, since they fall beyond the window for our bookings lead time. That's a good sign. So we keep seeing achievement in that area. We keep securing franchises, and we're confident about our position there. Regarding software, here's what I'd say: the 9K renewals are getting better. At present they remain immaterial. I believe we'll witness that happen next year. What we did make known is the — during this past year, that is — we intend to run the entire Catalyst portfolio through the Meraki dashboard, the Meraki platform, and that's going to be provided to our customers holding the DNA license along with the premium license. Thus we believe that, by itself, we've already introduced the monitoring feature there plus the management. We believe we'll also incorporate — we'll also boost our renewals past that point. Still, as we mentioned, we enjoyed a record quarter for Cat 9K. So we're quite pleased with its performance. Scott?

Yeah, and one more thing I'd tack onto that, Tim — when you're evaluating how the software side is performing, keep in mind that the subscription portion, that slice within overall software, was up 11%. It now makes up 85% of the whole. Since the whole is only up 5%, perpetual kept shrinking within software licensing — or software revenue, rather. It's at 15% of the total now. So my sense is we're reaching a stage where subscriptions have become much bigger than what perpetual represents, and that drag from perpetual is going to hit us less down the road.

Thanks for letting me ask. Scott, I realize this may be something you either can’t answer or would rather not address, but I wanted to return to the margin topic with two linked questions. First, just to make sure I understand, when you mention the 50 to 75 basis point gain in product margin, I’m assuming that is measured from what we saw this quarter — is that the baseline you’re using?

That’s correct — 50 to 75 from this quarter, and that should be the case once we reach Q4.

All right. Turning to my follow-up, over a longer horizon — and I realize there are many variables in play, and forecasting is difficult in this kind of climate — but further out, is it possible to return to, or perhaps surpass, growth of almost 67% alongside a 34% operating margin, like you had in early '21? Those figures — your gross margin stood at a 15-year peak. As for your operating margin, I believe you'd have to look all the way back to '97 to find the last occasion you posted a number like that. Clearly, you're a long way from those levels, just as everyone else is compared with what they were achieving 1.5 years ago, before the pandemic. So where do you believe you can ultimately return to over the long term? And on a related note, what are your expectations and your plans when it comes to OpEx growth? My assumption is you'd like to generate some level of leverage in definitive gross margin. Is there anything you can share? OpEx growth for this quarter, I believe, came in at 4% or 5%. To me, that seems somewhat elevated. But do you have any thoughts about how you're thinking going forward?

Sure. I'll address the gross margin portion first. As you're aware, Paul, there are several variables at work within gross margins. The first is the backlog, portions of which remain at levels set before the price increases. We'll ship that out gradually as we move through that portion of the backlog. Naturally, that will serve as a tailwind. The growing share of software embedded in our revenues will act as a tailwind too. Will it return to 65%? I think — achieving that would require us to see either additional cost reductions on the input side involving freight and logistics, which we are starting to observe. Although those costs are higher year-on-year, on a sequential basis we're starting to notice some indications of softening in freight and logistic costs as well, though we'll need to confirm that; and we'd also need to see either a further decrease in component cost or a price increase; so I think — without providing a specific number, I think there are several variables in there. Looking ahead, there are more tailwinds than headwinds on that front. Regarding the OpEx side, part of what you're seeing this quarter, naturally, stems from the normalization of our bonus plans — last year, the bonus plan clearly didn't pay out very well, and as we move into this year and that normalizes, that accounts for part of the OpEx growth. We also had an annual merit increase cycle that was slightly larger than usual; that's contributing to some of the OpEx growth too. I think our longer-term focus is — and you've heard me mention this — balanced profitable growth, correct? If you look at our guidance for the year, 4.5% to 6.5% growth on the top line, 4.5% to 6.5% on the bottom line. Over the long term, we've discussed 5% to 7% top line, 5% to 7% bottom line. That, in my view, is genuinely the lens through which this ought to be considered.

I'd like to inquire about how foreign exchange has affected things. Clearly, the U.S. dollar is sitting at 20-year highs. Perhaps you could explain how you're approaching that discussion with international customers. Is demand weakening at all? What does it look like?

Sure, George, I'll begin with the figures on that. And I'm certain you're aware of this; roughly 90% of our revenue is sold with USD as the denomination. So the dollar's strength doesn't create much of a translation effect for us. It isn't minor, but the advantage we receive on the OpEx line cancels it out; so from a translation perspective, FX truly hasn't made a material difference for us. When we consider the — now you're selling in USD while the exchange rate to the dollar is elevated, without a doubt that's creating some impact. Definitely, one factor behind what Chuck mentioned earlier regarding what we're observing in Europe: not only are they contending with high inflation in their own markets, but that higher cost in local currency to transact has been something of a headwind. Yet we've managed this before. Throughout the company's entire history, we've sold in USD. We don't expect it to be something that leaves a lasting impact on us.

So, to start off, I was wondering if you might speak to what's going on with the service provider segment. From what I recall, you mentioned a 23% decline in orders. Compared with the rest of the portfolio, that looks somewhat sharper. It would be useful to hear what's driving that, whether we're talking about traditional service providers or web scale players.

I wasn't able to make out what you asked.