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

Everyone, thanks for joining us for Cisco's quarterly earnings conference call for the second quarter of fiscal 2023. I'm Marilyn Mora, and I lead Investor Relations. With me today are Chuck Robbins, who serves as our Chair and CEO, and Scott Herren, our CFO. You should have already had a chance to look at the earnings press release we issued. After this call wraps up, a webcast with slides — supplemental information included — 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, along with additional financial information, in the Financial Information section on our Investor Relations site. During today's call, we'll be talking about results under both GAAP and non-GAAP, and unless we say otherwise, product results will be discussed in terms of revenue, while geographic and customer results will be discussed in terms of product orders. Every comparison we make today is on a year-over-year basis. What we discuss today will include forward-looking statements, among them the guidance we're giving for the third quarter and for the full fiscal year 2023. Those statements carry risks and uncertainties that are described in detail in the documents we file with the SEC — in particular, our latest reports on Forms 10-K and 10-Q — which lay out significant risk factors that might cause actual results to come in materially different from what those forward-looking statements suggest. Regarding guidance, please look at the slides and press release accompanying this call for more information. Cisco won't address its financial guidance during the quarter unless that happens through an explicit public disclosure. I'll hand things over now to Chuck.

Appreciate that, Marilyn. Hope everybody's doing well. With the fantastic results we posted in the first half, fiscal '23 is shaping up to be quite a strong year. The momentum comes from demand for our cloud-driven networking portfolio, the continued success of our business transformation efforts, and a supply picture that keeps getting better — largely because of the aggressive steps our team has taken. Before I share more specifics about the quarter, I want to pause and say how deeply proud I am of the people here at Cisco. The environment around us is still dynamic, but Cisco is in a stronger position right now than at any point since I took on the CEO role almost 8 years ago. We've overhauled and reinvented both the business and what we hold, all while staying very strict in how we manage money and operations. That's why I feel strongly that long-term success lies ahead. Let me go into more depth about the quarter now. We posted impressive results in Q2, once again coming in above the top end of the ranges we had guided to. Revenue for the quarter hit $13.6 billion — our second best ever — which represents a 7% increase, and non-GAAP EPS reached a record $0.88; on top of that, we saw healthy ARR growth, non-GAAP margins that expanded quarter over quarter, and a record figure for non-GAAP net income. As for the shift in our business model, progress remains excellent: software revenue grew 10%, and software subscription revenue climbed 15%. On top of that, 44% of everything we brought in now comes from recurring sources. We've also accumulated roughly $32 billion in remaining performance obligations, and our backlog is still solid. Although we reduced backlog 6% from the prior quarter, it was still up compared with a year earlier. Those figures, combined with the better visibility we now have, prompted us to lift the outlook for the entire year, and Scott will get into that shortly. During this quarter, we posted an all-time high for operating cash flow, which made possible both the dividend raise announced today and repurchasing more than $1 billion. Our promise to return capital to shareholders keeps being fulfilled. I'd also like to give you the latest on supplies. Even though we're still dealing with serious shortages in parts for some product lines, things got better on the whole. Our supply chain and engineering groups moved aggressively to redesign hundreds of products, and when that work combined with the improved situation, we were able to ship more product and cut customer wait times substantially. Because we shipped more, channel inventories went down too, since our partners could finally finish customer projects. As I mentioned in the prior quarter, when supply pressure lets up and wait times get shorter, we anticipate that orders will return to normal after being unusually high, as customers go back to their usual purchasing habits. That means looking at order growth from one quarter to the next tells you more than comparing it to the same period a year ago. During the second quarter, even though lead times got better, our sequential order increase stayed within our usual historical ranges for the majority of our geographies and customer markets. Having said that, I'd like to discuss what we're observing regarding customer demand. Looking at our customer markets, we saw the usual double-digit growth from one quarter to the next in both enterprise and commercial, while the public sector performed better than at any previous point in its history. Turning to our service provider business, orders fell short of recent quarter-over-quarter levels, because some customers are managing how our products are being incorporated more effectively into their production environments. We just posted another quarter where adoption of our 400-gig Cisco 8000 and Silicon One offerings grew quickly, which reflects the ongoing spending by our customers on both our innovative products and AI optimized infrastructure. That said, on the web-scale front, we did see a broad deceleration caused by product lead times returning to normal, yet 2 of our largest customers placed orders with us that were over 40% higher in the first half of fiscal ‘23. Our share in this area keeps climbing. And over the past several years, web-scale cloud infrastructure has gone from essentially zero to a multibillion dollar run-rate business for us. I could not be more pleased with the overall progress we have achieved, since we keep winning more and more use cases inside their infrastructure. We are likewise still only at the start of what we think will be an enormous growth opportunity ahead. Even as we keep watching global macroeconomic conditions closely, the overall demand environment is still steady and matches Q1, and our pipeline along with win rates stay stable. If you look at the wider landscape, digital transformation and hybrid cloud are still among the top spending areas, and that is driving growth throughout our portfolio. Many clients have told me that although their expenditures might be tapering off in some segments, tech remains indispensable since it's vital for their broader business durability, ability to stand apart from rivals, and achievement. Indeed, recent research by Gartner and IDC clearly indicates that tech budgets are growing, as they forecast IT outlays will climb by a mid to high single-digit percentage during 2023. Similarly, we see numerous clients advancing with hybrid work along with AI and ML spending as they construct the contemporary infrastructure needed to fulfill their aims. IoT has also been accelerating. During the second quarter, we achieved unprecedented revenue growth, driven by customers wanting to link up their industrial operations for better management of energy use, automation, and productivity. Additionally, cybersecurity and comprehensive observability remain key strategic focuses, and we continue to dedicate resources and develop new solutions there. When it comes to product sales, we saw robust growth in the double digits for Catalyst 9000, enterprise routing, Wireless, Meraki, DUO, and ThousandEyes, reflecting our customers' ongoing efforts to upgrade their infrastructure for swift digital transformation and improved security. We're increasing our funding for cloud-based management tools that deliver the ease of use our customers need. You'll continue to witness us integrating AI and ML into these platforms to make network administration even simpler. Take Q2, for example: we introduced a number of fresh offerings across our cloud managed networking and security portfolios, giving customers stronger visibility through AI-driven insights, secure connectivity, and simpler IT operations. At the start of this week, we showed an early version of our cloud-native full stack observability platform, which is the first network visibility product to back open telemetry. Combining ThousandEyes with AppDynamics lets us correlate data and generate insights across the user, the application, and the network in a way nothing else can match. To simplify network security and policy management, Cisco+ Secure Connect, our unified SASE solution, is now integrated into Cisco SD-WAN fabrics built on Viptela technology, as well as our current Meraki SD-WAN fabric. We also rolled out new servers that are flexible, more powerful, and more energy-efficient, which not only help bring costs down but also assist our customers in meeting sustainability objectives — a area that's becoming increasingly vital for most of them. In closing, what we accomplished this quarter makes me proud. We posted strong financial results, drove innovation throughout our portfolio, and keep making excellent strides on transforming our business; what's more, greater visibility from nearly $32 billion in RPO, a solid backlog and pipeline, and improving supply give us confidence to lift our full year outlook; we anticipate those same dynamics carrying into fiscal year ‘24, which gives us conviction in our capacity to fulfill our commitments. The modern, resilient, and secure networks we're constructing act as the backbone for our customers' technology strategy. Cisco is well-positioned to gain from multiyear investment cycles thanks to our market-leading hardware along with our innovative software and services. Together, these let our customers digitize quickly, secure their environments, and reach their sustainability goals, all while providing differentiated experiences. Now, I'll hand things over to Scott.

Thanks, Chuck. We turned in another solid quarter, beating what we expected on both the top and bottom lines. That was powered by disciplined execution, ongoing momentum from our business transformation, and better supply availability, since the steps our supply chain group has taken across the past few quarters are now paying off. Revenue came to $13.6 billion in total, a 7% increase. Non-GAAP net income hit a record $3.6 billion, and non-GAAP earnings per share also set a record at $0.88. Turning to Q2 revenue in more depth, product revenue overall reached $10.2 billion, rising 9%. Service revenue totaled $3.4 billion, climbing 2%. Inside product revenue, secure Agile Networks did really well, gaining 14%. Switching revenue rose by double digits, with campus switching showing strength thanks to our Catalyst 9000 and Meraki offerings. Data center switching slipped a bit, yet we recorded robust growth for our Nexus 9000 offerings. Enterprise routing posted double-digit growth, mainly from strength in our Catalyst 8000 Series routers, SD-WAN and IoT routing. Wireless saw very strong double-digit growth, with strength throughout the portfolio. Internet for the Future fell 1%, pulled down by optical and Edge. We did see growth for our Cisco 8000 offering along with double-digit growth in web-scale. Collaboration dropped 10%, weighed down by declines in meetings and collaboration devices, partly offset by gains in contact center. End-to-end security climbed 7%, lifted by our unified threat management and zero trust offerings. Optimized application experiences rose 11%, helped by double-digit growth in our SaaS-based offering ThousandEyes. We achieved solid progress on our transformation metrics as we move the business toward more recurring revenue-based offerings, supported by higher software and subscription levels. Strong performance showed in our ARR of $23.3 billion, which rose 6%, with product ARR growth at 11%. Software revenue overall was $4.2 billion, up 10%, while software subscription revenue increased 15%. Subscription-based software made up 84% of software revenue, which is 4 percentage points higher, year-over-year. We still hold $2 billion of software orders in our product backlog. Subscription revenue overall reached $6 billion, an increase of 9%. That subscription revenue accounted for 44% of total revenue. RPO stood at $31.8 billion, up 4%. Product RPO rose 7% and service RPO rose 2%, and total short-term RPO climbed to $16.9 billion. Although product orders overall fell 22%, that came against 34% growth in Q2 fiscal ‘22, which ranks among the biggest quarters for product orders in our history. We saw year-over-year declines across our geographies and customer markets. On a sequential basis, total product order growth matched our historical growth rates. Within our customer markets, we saw double-digit sequential growth in both enterprise and commercial, and public sector was better than we have seen historically. Order cancellation rates remain very low, still below pre-pandemic levels. Total non-GAAP gross margin landed at the high end of our guidance range, at 63.9%, down 160 basis points and up 90 basis points sequentially. On product gross margin, we posted 62.1%, which is a decline of 220 basis points compared to a year ago and a gain of 110 basis points from the previous quarter. Service gross margin reached 69.1%, an increase of 30 basis points. Within product gross margin, the drop from last year was mostly caused by elevated component costs along with other expenses. That was partly counterbalanced by favorable product mix and pricing, since the advantages of steps we took during the earlier fiscal year came through as our backlog shifted. Non-GAAP operating margin landed at 32.5%, the top end of the range we had guided, representing a fall of 180 basis points versus a year earlier and a rise of 70 basis points quarter over quarter. The decrease from last year stemmed mainly from those same higher component and other costs I referenced. For hardware as well as software products, backlog remains well above where it has historically stood. While dealing with a complicated supply situation, we managed to reduce overall backlog by 6% from the prior quarter, even though it was still up on a year-over-year basis. As a quick note, backlog does not form part of the $31.8 billion we hold in remaining performance obligations. Together, our sizable product backlog and RPO kept giving us excellent visibility into our top line. Moving to the balance sheet, we closed Q2 with $22.1 billion in total cash, cash equivalents and investments. Operating cash flow for the quarter set a record at $4.7 billion, climbing 93% from a year ago on the back of solid collections, and we postponed our Q2 federal tax payments because of IRS tax relief tied to the California floods; we anticipate paying those federal taxes before the fiscal year ends. We gave back $2.8 billion to shareholders in the quarter, split between $1.6 billion for the quarterly cash dividend and $1.3 billion for share repurchases. At quarter's end, we also had $13.4 billion left in stock repurchase authorization. Earlier today, we said we are lifting the quarterly dividend by $0.01, bringing it to $0.39 per share, marking the 13th increase in a row. That underscores our pledge to return at least 50% of free cash flow to shareholders each year, along with our confidence in the strength and steadiness of our ongoing cash flows. In summary, it was an excellent quarter, with top and bottom line results beating expectations. We keep advancing our business model shift toward more recurring revenue while investing strategically in innovation to seize our considerable growth opportunities. Now on guidance, our ranges mirror our robust pipeline and substantial visibility, supported by healthy backlog, ARR, RPO and better supply availability as we keep gaining from the steps our supply chain team has taken across the past several quarters. We anticipate those same factors carrying into fiscal 2024, providing us more visibility and confidence in our longer term goals. Looking at fiscal Q3, here's what we're guiding toward: revenue growth should land somewhere between 11% and 13%; for non-GAAP gross margin, we're anticipating a range of 63.5% to 64.5%; non-GAAP operating margin is projected to come in between 33% and 34%; and non-GAAP earnings per share should fall somewhere between $0.96 and $0.98. We're also making a notable revision to our guidance for the full year fiscal '23 when it comes to revenue and non-GAAP earnings per share, and those same factors are what's driving it. When we look at fiscal year '23, we're now expecting revenue growth in the range of 9% to 10.5% on a year-over-year basis. For non-GAAP earnings per share, the expected range is $3.73 to $3.78. Within both the Q3 and full year guidance, we're working with an assumed non-GAAP effective tax rate of 19%. At this point I'll hand things back over to Marilyn so we can get started with the Q&A.

Much appreciated, Scott. Before we open things up for questions from the audience, I’d like to hand things over to Chuck so he can share a couple of remarks.

Yeah. Prior to opening things up for questions, I want to express our sympathy for everyone affected by what happened in Turkey and Syria with that earthquake. Watching the number of lives lost rise has been truly heartbreaking, and alongside our colleagues based in that area, we're coordinating closely to provide assistance and whatever on-the-ground aid we're able to offer. We simply want them to know they're in our thoughts and that support is available.

Thanks, Chuck. Michelle, let's get started and allow people in the queue to ask their questions.

Thank you, everyone, and congratulations on a strong quarter and a solid guide. I suppose the key issue is, when you consider the outlook you've provided regarding ongoing improvements in the supply chain, how much time do you believe the process of normalizing the order backlog will require? Perhaps you could put a number on it for the quarter itself, or maybe within the guidance — looking at that guidance, what portion stems from your capacity to ship more, as opposed to genuine underlying demand? I'm simply attempting to determine how long you can sustain this at growth rates that exceed your normal level.

Sure, Ittai, I appreciate the question. And amazingly, that was exactly the question I anticipated first. So allow me to give a brief summary of what we're observing, and afterward I can provide additional specifics. First of all, let's begin with the reality that our demand is steady — that comes first. Given the sequential patterns we observed, demand held steady; and actually, if you examine our Q3 forecast, which we typically wouldn't share with you, the present Q3 forecast likewise aligns with historical sequential ranges; so that's the initial point. The second item is, as Scott mentioned, although our backlog declined 6% from the prior quarter, it increased compared to the same period last year, and we anticipate finishing the fiscal year — even under the guidance we provided today — with a backlog approximately twice the size we'd ordinarily have at year's end. Another factor to consider is that our business transformation, with 44% of revenue now recurring, genuinely provides substantial help. Plus we hold $23 billion in ARR, which we are able to renew over the coming 12 months. So if you look back 8 or 9 years, we may have needed to book orders covering 75% of revenue during any particular quarter. Today, though, 44% of our revenue originates from the balance sheet and recurring revenue. With all of that in mind, we truly think we can still deliver; we're confident about achieving positive growth in fiscal '24, clearly against fairly substantial comparables, given the guidance we released today.

All right. So when I hear "normal," and I factor in what your ranges looked like historically, prior to the pandemic, what always comes to mind is 4 to 6 as roughly the band, give or take, that you operate within. Would it be accurate to say that going forward, anything beyond that essentially means — it's consuming backlog? And even though your backlog sits at double, that could still allow you to operate above those typical ranges for no less than a couple of years, from the sound of it, barring anything out of the ordinary. Or am I getting your points wrong?

Scott, would you like to handle that?

Definitely not, Ittai. That said, the honest answer is fiscal '24 guidance just isn't something we can provide yet. The reason we brought these figures up is to show you that our line of sight is stronger today than it has ever been before — whether that's the backlog or the roughly $17 billion, nearly $17 billion in current RPO, which will convert into revenue across the coming 12 months within ARR. On top of that, the backlog we're about to fold in is around twice the size it would typically be when a year wraps up. So our confidence about the direction we're taking into fiscal '24 is solid. Still, sitting where we do on the calendar, having just closed out our second quarter, giving anything sharper than that strikes me as premature.

Okay. Appreciate. Good luck. Thanks.

Thanks.

Thanks, Ittai. Could we take the next question, please?

Thank you. Congratulations from me too on a genuinely strong quarter. So I suppose if I look at the secure agile networking segment putting up 14% growth, that stands out; and in my view the industry isn't expanding anywhere near that rate; so I'd really like to get a sense of whether you believe share gains are beginning to return to Cisco, particularly now that the supply chain is starting to get better? Is that something you see as a tailwind, and maybe one that carries on through the remainder of the year? Perhaps you could address that, and also say a bit about how campus performed inside that segment? That would be useful.

Thank you, Amit. I'll handle the share question, since I believe I've mentioned on a number of calls that market share clearly mirrors revenue, and given our backlog, as we started shipping particular products, we would end up a gainer of share, and we definitely anticipate that once these figures are absorbed and the new reports are published for Q4, you will observe that happening. To give one illustration, in the prior quarter, revenue from our wireless business climbed 57% versus the same period a year earlier. And my guess is that this will be a source of share gain. Another point worth remembering is that market share isn't an exact science. I'd say that whenever we ship products into the web scale infrastructure space, for instance, it lands in our routing reports, whereas a lot of our rivals place it under data center switching. So achieving a fully like-for-like comparison can be quite hard in certain situations, yet I do think that as we keep shipping our backlog, we will be picking up share. Would you like to say a few words about campus switching?

Yes. Sorry, I missed that part of the question.

Amit, can you repeat your question about the campus switching, the second part?

Yeah. I was simply curious — given that 14% growth you recorded in that segment, how exactly is campus doing for you? And in what way has the supply chain situation eased against that backdrop?

Right. Campus is performing nicely for us. As for the supply chain — I don't want anyone walking away thinking it simply improved on its own. Our supply chain folks and our product engineering folks have labored pretty much nonstop across the past several quarters: redesigning products, qualifying substitute components, and collaborating with our suppliers down to their subcomponent level to ensure we could unlock this capacity, so that the added supply driving some of those share gains we've mentioned comes from enormous effort by many individuals within the company. Honestly, I believe it leaves us better situated than plenty of our competitors across the industry at present when it comes to supply chain. That said — that's the lengthy response. Briefly: yes, we're performing quite strongly there. And as we keep delivering what we've just set out as our guidance for this year's second half, I expect you'll keep watching our share gains expand.

Understood — that's a big help. Let me squeeze in one more quick question about your second-half outlook, which looks quite strong. For the April quarter, though, it sounds like you're signaling a 130 basis point year-over-year decline in gross margins. Could you break down how much of that dip you'd call cyclical — supply chain, logistics, that kind of thing — versus structural? And assuming supply chain really does get back to normal, what would a normalized gross margin look like for the company? Thanks.

Sure. The midpoint of our April quarter guidance works out to roughly a 10 basis point gain versus the quarter we just reported. So gross margins are indeed moving higher, and the main driver isn't cost — we are seeing some logistics cost relief in particular, though component costs are mostly holding steady. What's really behind it is that with more backlog shipping, a growing share of what we deliver carries the price increases we implemented last year. So I'd expect gross margins could keep climbing from current levels, perhaps by as much as 50 basis points in Q4.

That's great, thanks.

Excellent, thank you. Let's take the following question now.

Thank you. Chuck and Scott, I appreciate that the two of you covered the issue of demand-trend visibility during your prepared remarks. That said — I apologize — but I'd like you to go back over this, particularly within your enterprise segment, government and U.S. federal included; I'm certain you and your team know what your rivals have reported. Chuck, I realize you just spoke to the market share question. Still, could you provide additional detail regarding how solid those demand trends are and what visibility they're producing?

Well, like I mentioned, our enterprise and commercial operation — which mirrors the way the majority of our peers define enterprise — rose by double digits on a sequential basis, consistent with what we've seen historically. And the public sector in fact did better than that — it came in above our usual ranges across the quarter; another point worth making is that our quarter, looked at from a linearity standpoint, was pretty typical, and we're distinctive in that January fell inside our Q2. One thing people asked us was what would occur with budgets once we moved into calendar '23. And plainly — we ended up finishing more strongly than we began the quarter. So there are a handful of data points for you; and I believe that if you consider what our customers are prioritizing at present, think about a few of their leading products. They've got a full rearchitecture of their applications underway to make them cloud native and run them in public and/or private clouds. They must rearchitect their infrastructure so it can handle the shifting traffic patterns that multi-cloud introduces. They're contending with hybrid work and the question of how to transform our IT infrastructure for it. They're facing cybersecurity threats at enormous scale, and every one of them is also centered on sustainability, which is driving substantial growth in our IoT business as we connect industrial systems on behalf of our customers; so when you consider those five major trends, all of our customers have us right in the middle of them. So we're feeling good about our position. And the final point I'd make is that I was in Tokyo and Singapore last week, and at the same time, many of our — my leadership team was in Amsterdam for Cisco Live Europe, and nobody is discussing reducing technology spending at this moment. Everyone appears firmly committed to it. I think the fundamental strength of technology in relation to the strategy of every one of our organizations is simply too great right now.

All right; and Scott, returning to what you said about margins. I understand that you have to learn to crawl before you can walk, but at this point you're roughly 3 percentage points under the peak for both gross and operating, in terms of that initial recovery — do you have any thoughts on how much of those 3 percentage points? Is it visually possible to get back to 67 gross? Is getting back to 35 operating something you can do, and is it simply a matter of time, or, because of price increases when it comes to semis or other things, is that simply a bridge too far?

Yes. I mean, when you discuss the long term, a number of tailwinds are going to arrive in gross margin, so I'm not necessarily referring to our guide for fiscal '23, but over a longer horizon, several items are going to serve as a tailwind there. One is continuing to make our way through the backlog and pass along the price increases. I believe we're going to keep seeing leverage and logistics costs, both from a reduction in the freight cost per kilo and also in the mix of how we move things between what has supply airfreight and what will travel by ocean. So I think some leverage is going to show up there as well. I don't see many of our component providers outside of commodity areas like memory forming a line to lower cost to us, right? So I think it's going to be the combination of mix that will benefit us and some cost leverage in the non-component areas that will push that north.

So your view is that we can return to 67, 35?

Correct. Paul, is it a 5-year gross margin projection that you're after here, or am I reading that wrong?

Sure, over the long haul. Looking out over the long term, is it possible to return to that model?

Over the long term, there is certainly leverage available to drive it back to where it has sat historically, no doubt, and perhaps even higher.

Thanks, Scott.

Thank you.

Thank you, Paul. Could we take the following question, please?

Wonderful, thank you. My guess is that while you’re talking with clients, what they want is greater flexibility in how subscriptions work, and a piece of your move toward subscriptions has been developing the ELA framework, or the subscription framework you’ve already offered; I simply hoped to understand where you believe you stand regarding making some of your offerings more subscription-based, whether that is creating a significant effect at this moment, and then perhaps a few remarks on how you currently view the M&A landscape? Thanks.

Meta, I appreciate it. So I would describe us as likely still early in the process of shifting the legacy portfolio toward subscription arrangements. The team is putting in a lot of effort on that at this time. And we’ll simply keep bringing you updates. Yet I believe we are a number of quarters away from truly having anything to discuss concerning how large that business is, though we’re working hard to be capable of providing it. And what matters most is providing clients with flexibility. That is why — across roughly the last 7 years, we have separated hardware, software, and silicon. We virtualized software so it could operate on x86 appliances; therefore we want to offer our clients whichever forms of flexibility they might want. That covers the first part; regarding M&A, I’d say our approach, as you might anticipate, is unchanged. I believe market dynamics have shifted, and I believe that as valuations stay somewhat subdued compared with their highs for a longer time, some businesses are likely arriving at a more realistic view of how long such valuations can last and whether earlier valuations were ever sensible to begin with. So we keep monitoring what is happening; we keep examining the marketplace, yet our approach is the same.

Great. Thanks.

Thanks, Meta. Next question, please.

Appreciate you fielding this. I was hoping we might spend a moment on what you're observing regarding data center patterns. During the prepared remarks, I believe you said Campus performed well while data center came in soft. And I suppose what I'm after isn't only the switching piece, but also your UCS operation; and what do the wider trends look like? What portion of that reflects hyperscale decelerating as opposed to the larger market — just attempting to break that down somewhat? Thank you.

Sure, let me offer a few thoughts, and Scott, I'm not certain whether you'd like to add any specifics; but what I'd say is that our clients are more and more balanced in the way they consider private cloud against public cloud; and as a result we've witnessed ongoing emphasis on reinvigorating the private data center infrastructure. And I'll let Scott address — I'm unsure regarding the infrastructure side or UCS, whether you'd like to share that. But one more thing I'd highlight, Simon, as I noted in my earlier comments concerning market share, whatever we sell in the infrastructure inside web scale feeds into our routing market share figures and our routing business. So it doesn't really lift our data center switching in the manner we report it. So this is somewhat of an apples-and-oranges situation. I simply want to confirm you grasped that.

Yeah, that's a fair observation. And regarding UCS — if that's what you're really getting at, Simon — we're also seeing solid expansion there, and from what our own numbers suggest, we believe we're picking up share in that area too.

Thank you. And now, perhaps a brief additional question: I found it somewhat unexpected that the measure for software bundled with hardware sitting in backlog amounts to $2 billion, which matches what it was during the previous quarter. My assumption had been that this figure would have decreased given essentially the progress made in delivering the hard — the hardware tied to it. So perhaps my comprehension of that figure is off, or could you explain a bit why that $2 billion stayed flat despite additional shipments of the associated hardware? Thanks.

That's an excellent question, Simon. And in fact we did observe — in case you caught it, our total software revenue rose 10% during this quarter, so we're back to growth in the double digits. And a portion of that increase stems from delivering some of the backlog, encompassing both the hardware and the software that had been sitting in backlog. Thus we are experiencing the upside from getting that shipped out. Meanwhile, as Chuck mentioned previously, demand has stayed consistent. And therefore our total backlog, though it declined just roughly 6% quarter over quarter, still contains a considerable quantity of software stock, a portion of which is tied to hardware.