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

Great. We're going to go ahead and get started. So welcome to the Cisco keynote fireside chat at the Goldman Sachs Communacopia and Technology Conference. I have the privilege of introducing Scott Herren, EVP and CFO of Cisco. Scott joined Cisco in 2020 from Autodesk where he served as CFO for 6 years. My name is Mike Ng, and I cover Cisco and CommTech here at Goldman. We have about 35 minutes for today's presentation, inclusive of Q&A. So first, Scott, thank you so much for making the time out to participate in our conference. We really appreciate it.

Mike, thanks for having us. This is one of the premier conferences every year, and it's nice to get a chance to get back to San Francisco.

That's very kind of you to say.

So Cisco is the world's leading networking technology company with a portfolio of products and services that includes switching, routing, wireless, compute, collaboration, security software. Can you talk a little bit about some of the major trends that you're seeing that are shaping networking technology demand today? How does that inform how you think about the guidance for fiscal '24 and how is Cisco positioned to address them?

Yes. I'd say, first of all, we're coming off of a record quarter in Q4 and a very strong year, a year that -- double-digit revenue growth at our scale, which is something we haven't seen in well over a decade. So a good strong year. Actually closed Q4 with some encouraging momentum. I don't want to call it a trend yet, but we saw some pretty encouraging stats, and I know you're familiar with that in terms of sequential growth. So normal Q3 to Q4 growth for us, sequential growth in bookings, is somewhere in the 20% to 25% range. Q4 is always big. That's where we get a lot of our what we call WPAs and EAs. Whole portfolio agreements or enterprise agreements get done in Q4. So we always see some acceleration, but the quarter we just closed was north of 30% sequential growth. And month 1 was right in line with what our forecast had been coming when the quarter began. Month 2 was right in line. And month 3, the last month of the year, actually was well ahead of our -- more than $100 million ahead of what our expectations were. So again, it's -- I don't want to get -- I don't want to over-rotate on that but it was encouraging. It was an encouraging sign to see. And when you started to peel that back by customer market, we saw really strong sequential growth in enterprise. So we talk about 4 customer markets. Most people do 3 in our world. We have enterprise and commercial separated, commercial being the smaller end of enterprise, and then public sector and service provider. But both enterprise and commercial were very strong. And commercial, where we have the smallest customers, tends to be a bit of a leading indicator, right? And what we saw there is really good sequential growth within commercial, which tends to lead the rest of enterprise, which then tends to lead service provider. Service provider was a little bit tough. I think it's been tough for everyone through the second half of the year, but we expect to see that actually turn around in the second half of the year. So that's what we saw. That's how Q4 looked. That's how the overall year looked in terms of demand. And if you start to go, well, what's driving that? There's a handful of things that are driving that. Obviously, hybrid work continued. Companies are realizing hybrid work is here to stay. They're evaluating -- like we've done their real estate portfolio, probably looking to trim down square footage but also to reconfigure what's there. And they reconfigure it for a much more of a collaborative space. You don't need to go to the office to just set your laptop down and work all day, right? You can do that from home. So the reason for the office is different. Hybrid work requires networking, security and collaboration, which are 3 of our biggest portfolios. So that's been a driver for us. Obviously, AI, the 2 letters that absorb all the oxygen in any room whenever you say them, AI has been a driver for us. And we gave a stat in the fourth -- during our fourth quarter earnings call, that we have sold, to date, about $500 million worth of gear into AI use cases, into AI fabrics, in the hyperscalers, which I think is a number that surprised a lot of people. I know we're going to come back and talk about that. That is a significant opportunity for us as we look ahead. And then security continues to be a focal point, right? With everything that's happening in the world today, with the geopolitical tension that's out there, security becomes more and more of a mandate. And I want to make sure we get a chance to talk while we're up here today to talk about where we're going in security.

That's great. And I definitely want to hit on AI and security, and we will shortly. But just to keep things a little bit higher level for the time being, could you talk a little bit about how Cisco has changed from 5 years ago to today? Obviously, there's a business model transformation that's undergoing as more software features are available across Cisco's networking platform. So could you talk about this software business transformation and the financial and business implications of Cisco's investment in network as-a-service offerings?

Yes. We've made a pretty significant transformation, Mike, as you know, to 40-plus percent in Q4. We were at 43% of our total reported revenue comes from subscription models, comes from a recurring revenue base. That's quite a bit different than what I'll call our peers in the industry. And I think that has given us -- and so if you take that and look ahead, because we built up that level of recurring revenue, $24 billion of ARR, products growing double digits, product ARR growing double digits, almost $35 billion of RPO that we've built up over time, which has a couple of interesting effects. It's a little bit of a headwind on reported revenues. That puts us at a bit of a disadvantage, frankly, on some of the market share calculations that are being done. Our peers sell it all upfront. We sell the hardware upfront, but the software gets recognized over time. And so there's a little bit of an apples and oranges compare when you look at some of the share calculations, although share bounced back really strongly as we began to be able to clear our backlog. But it also gives us great visibility as we look ahead into fiscal '24. So our fiscal year fiscal '23 ended at the end of August -- or sorry, the end of July. Our new fiscal year, we're in right now, so we're in fiscal '24. And we guided to modest growth, which was exactly what we expected. The midpoint of the range is 1% growth next year, but that's 1% on top of 11% revenue growth the year before. And I don't -- if we -- had we not made the transformation that we've made, it would be very difficult to show that kind of growth on the back of an 11% growth year the prior year. But if you do the math, of the almost $35 billion of RPO that we've built up, just short of $18 billion is current, meaning it turns into revenue in the next 12 months. We still have an extended backlog. It's still roughly double what's normal, and we expect to clear that out in the first half of the year, with the majority of the clearing actually in Q1, in the quarter that we're in right now, but you add that in. And then you look at the ARR, the $24 billion of ARR, that -- it's annualized. So all of that gets a chance to be renewed. Now in fairness, some of those renewals are already -- some of that revenue is captured in our RPO. But when you add the remainder that's not there, roughly 40% of the revenue we need to deliver to get to the midpoint of that guidance range is in hand in one of those 3 categories. So the power of the transformation we've made is the predictability and the visibility it gives us and the opportunity to put growth on top of what was a super strong almost historic growth year for us, certainly the highest in more than a decade last year.

Great. So let's pivot to some of the topics of AI and cloud and security. To your point, I think there's been a little bit of surprise on how successful Cisco has been doing in web scale as of recently. So I think the investments in Silicon One, the Cisco 8000 platform, coupled with the evolving business model and being able to sell in a disaggregated fashion in some respects, has really helped to improve Cisco's positioning among web scale. But what are you seeing among web scale in AI? What are you seeing in terms of deployment of Cisco hardware in AI clusters? And how big of an opportunity it is for Cisco and what do you need to do to win in it?

Yes. Let me start by picking up on something you said. It's that we need to take credit for -- we've gained a lot of share in selling into the hyperscalers over the last several years. We've gained that share because we started off pretty poorly though, right? So if I'm fair, it's because -- and if you go back to when those compute -- the Amazons and Microsofts were first building out these big compute fabrics, we wanted to sell them systems, they wanted us to build bespoke product for them. And we're like, no, no, no. No one knows more about networking than -- they said, buy what we have, and that didn't work so well. And so the company then embarked on what you just talked about, building out our Silicon One strategy, which is, by the way, not only geared for greater throughput, but geared for very low power consumption, which becomes more and more important in these big-scale hyperscale environments. But we also made a -- I like your word, the way I've described it is we made the decision to meet them where they are. You talked about it being disaggregated. Instead of saying we're going to sell you systems, we said, if you just [ want about ] the chipset promise, the Silicon One chipset, we'll sell you that, if you want to do your own manufacturing. If you want to buy white boxes and put your own software on it, network operating system, we'll sell you that. Or if you want to buy complete systems, we'll sell you that. Between the combination of the innovation that's built into Silicon One and our disaggregation, I like your term, of selling to them exactly as they want to buy from us, we've seen significant share gain in the compute infrastructure. Scroll forward to now, the early days, I won't say the advent, but the early days of them building out AI models, AI fabric inside their compute infrastructure. We're there when the starting gun sounds this time, right? We've already got there. We'll meet you where you are. We've made huge strides. We've already released some AI-focused versions of the Silicon One chipset that we're selling to them. And that's what's led to the $500 million, to date, of bookings that we've sold specifically into AI infrastructure in that space. So I think we're really well positioned to win as that AI infrastructure gets built out, not only in the hyperscalers but also in enterprises. There's an enterprise opportunity here as well because of the privacy concerns and the confidentiality of the data concerns of using the big public infrastructure. So I really like the position that we're in as that accelerates.

That's great. And then on the 400G upgrade cycle, where are we today? How does this upgrade cycle look similar or different versus 100G for the industry and also for Cisco? And to your point, Cisco is positioned better this time around. Maybe, you can just unpack that a little bit more.

Yes, 400 gig has gone very nicely for us. And I think there's a little bit of confusion in one of your peers. He was looking at some of the published numbers for 400 gig and said our market share is quite low. Most of the -- a lot of the 400 gig that we sell actually gets reported as part of our SP routing space. So it's not captured as stand-alone 400 gig. It's sold inside a router that's going to our service provider customers. So we capture it there. We're growing nicely in 400 gig. But when you think about the build-out of the AI fabrics that are going to be built out, I think they're going to quickly move past 400 gig to 800 gig, we're seeing that already, and then to 1.6. And I think the other kind of variable that's in play there is as the AI infrastructures get built out, the move from single vendor lock-in at the top of the rack to industry standard Ethernet and, of course, the Ultra Ethernet Consortium that's out there building out a much higher speed, but an open-source architecture, so that you're not -- whether you're a hyperscaler or an enterprise, you're not locked into a single vendor for that top-of-rack networking. I think that -- we certainly see that shifting significantly to Ethernet over time. And I think most of the industry analysts see the same thing. That's going to play in our favor.

Great. And then on web scale, could you just talk a little bit about how the order patterns among companies in web scale have changed over the last year? What does normal look like for ordering patterns? And within that, are you seeing any divergence among the top 5 hyperscalers versus Tier 2 cloud providers in terms of orders or project pushouts or anything like that?

Yes. I think to give you a good sense of that, you need to zoom out a little bit. I'd say the hyperscalers have, by far, the longest-term vision of what their demands are, right? In other words, when they -- they're not just out there buying networking gear, they're building capabilities. They're building facilities. They're getting electricity into there. They're buying racks. They're obviously buying processing units to go inside there, and then the networking is a part of that. So they have the longest visibility, the greatest long-term visibility of any of our customer sets. When the supply chain issues set in, they leverage that visibility, right? And they ordered as much as they could to make sure they could get what they needed over time. And now as those supply chain issues have begun to abate, they're not completely behind us yet, but as they've begun to abate, we've shipped a lot into that space, and they're now absorbing it, right? So I think what we've seen is a lot of very rapid order growth during the supply chain issues. As we're shipping that out, we're now seeing the absorption cycle start. I think what we expect to see in the second half of our fiscal year, so think of that as the first half of calendar '24, is them to start to return and actually start to buy now -- to be through their absorption phase and to start to ramp up the buying in that space.

Great. Shifting gears to security. I thought you guys did a great job at Cisco Live, talking about the new security strategy. I was just wondering if you could share some of that with us today around the strategy and growth drivers in security.

Yes. It's something that I'm the most proud of. I would say, over the last 12 months, we've put a huge amount of focus on that. We've invested both organically and inorganically in that space. You've seen the Armorblox acquisition that we did, Lightspin acquisition that we did. So we've put a lot of wood behind that arrow in investing in security. But at the same time, we've also kind of revamped the leadership team in security and brought in some real industry experts in Tom Gillis and Raj and others that I know you've seen also, Mike, and that we're on stage talking about our security strategy at Cisco Live. In a nutshell, our security strategy has migrated from we're going to be -- we're going to sell piece parts against other smaller piece part providers that, that's all they sell. They sell one thing, and it's one thing of our portfolio of literally more than 20 security products. That's where we were. Where we're headed is to say -- and what we hear from our customers repeatedly is, I need to consolidate, right? It's like they're buying from RadioShack all the component parts instead of, let me buy something that actually solves my problem that meets my need. And so what we've moved over to is a security strategy that is based on use cases. We have an XDR product line that we launched at Cisco Live. That product became orderable August 1, beginning of this fiscal year for us. And we've already got a 7-figure order in-house. We talked about that on the earnings call. So we're seeing great traction there. We have a cloud protection focused set of products that we're selling and then one around hybrid work. So I see the security strategy that we're headed down playing to our advantage instead of playing to the advantage of our peers and competitors in the networking space. And it's a space that we've invested pretty heavily in, and the early returns are pretty promising on that front.

That's great to hear. I want to revisit something you mentioned at the start of our discussion, which was Cisco's outlook for 1% growth in fiscal '24, albeit off very tough comps, as you mentioned. What are the trends that you're seeing in the fiscal year to date that give you confidence in this continued growth? And what are some of the things that you're watching for that might drive outsized expectations -- or sorry, outsized results relative to those expectations or create some risks there?

Yes. I think, again, what -- I'm going to start by going back to what we already said. Like we have -- because we've moved to so much recurring revenue and we've built up the RPO base that we have and $24 billion of annualized recurring revenue, we have really good visibility to right at 40%, if not more, of the number we need to deliver at the midpoint. So that's kind of step one. If you step back and say then, what's driving that demand? What's happening in that demand? We've talked about AI. AI, obviously, is driving some sales. We see that beginning to accelerate in the second half of the year, again, the AI infrastructure build-out. Security has never been a higher focus than it is today. And I think the strategy that we've put in place and again, some of the early returns we've seen in that space, give us a lot of optimism about where we're headed on the security front. Our collaboration business has turned around from being a pretty significant headwind to growth for us. Two, we saw growth in collaboration in the fourth quarter, and we see it stabilizing out through time with some growth opportunities in the second half of the year. And then overall, networking. And it's driven by some of the things we've talked about, the renovation of campuses. I don't know about what Goldman has done in this space. What we hear from a lot of our customers is right-size the amount of real estate. There's so much underutilized real estate, commercial real estate in the world. But then once you do, make what's there usable in a much more collaborative way. And so those underlying trends just continue to drive and -- whether you hear it from customers or from your own CIO or you think through the kind of the overall macro trends that you see in some of the industry analysts around IDC and others that talk about the growth of IT spend, and then within that, where do they see the highest growth and repeatedly, networking comes up at the top of that stack. So that kind of confluence of things that I think drive the confidence and then potentially drive a little bit of upside for us in the year. The macro is a wild card. The macro could be a headwind or a tailwind. It's -- I think that's a little bit to be seen over the next 6 to 12 months. Certainly feels like we're headed toward a soft landing. That recession that was always 6 months away, 18 months ago, it was a recession coming in 6 months. And then 12 months ago, it was no, it's going to be 6 months from now. 6 months ago, it was going to be -- it does look like we're probably going to avoid the worst of that and achieve what feels like a soft landing.

It certainly is our house view. I wanted to touch a little bit on backlog. You ended fiscal '22 with a backlog in excess of $15 billion. I think it was double normal levels exiting fiscal '23 with expectations to normalize by the end of the first half, with the majority coming in the first quarter. Maybe you could just talk about the factors that have led to that sharp reduction in backlog from $15 billion? And any implications on orders and how we should think about how software impacts backlog?

Yes, that's a great question, Mike. So what -- you got to step back and say, what led to the buildup of backlog to begin with? And it was obviously the supply chain shortages that everyone in the industry -- in almost every industry. I was trying to furnish a house, it's like a year to get a refrigerator, right? It's like the supply chain problems kind of went across the board in that front. And as that hit, we were all -- everyone in the industry was driving as hard as they could to get their hands on supply. Supply was allocated in a lot of cases. And what that meant to us is we had to give extended lead times, right? If you order it today, because of the supply constraints, it's going to take us longer than normal to get that snapped together and sent off to you. And what it meant for customers is, well, shoot, if I can't get it, if I now have to respond to a -- I'll just make it up, a 30-week lead time or a 35-week lead time, I've got to place a lot of orders upfront. And so what we saw, as that happened and as those lead times extended and the supply constraints were still in place, you remember, we had 3 consecutive quarters of more than 30% bookings growth, 3 consecutive quarters of that. And then it flipped around, right? We did a ton of work. And I give a lot of credit to both our supply chain team and our product teams. We identified kind of one by one. What are the problem components? Are there alternatives that we can put in? Do we redesign the product to design around that? We redesigned well over 100 of already shipping products to work our way through that. Our supply chain team put in advanced purchase agreements. You see those in our filings. And that's enabled us to do 2 things: to work around problem components but also to -- with the advanced purchase agreements, to actually get our hands on constrained components. So that's what built it up was the extension of lead times. What has allowed us to begin to ship that is the great work by our teams to get our hands on supply. And that's also -- obviously, as we get our hands on supply, that's why you saw the outsized growth in Q3 and Q4 as we're able to get that out the door. And by the way, there's a lot of software that got trapped in that backlog as well. And so you saw the software growth, very strong software growth in the fourth quarter, 17% overall and 20% software growth on subscription model. So that's kind of what got us to today. I think as that's happening, first, bookings built up very strongly. And then as the supply constraint were lifted and we're able to ship product, that we were able to get that out the door, lead times compressed. As lead time compresses -- yesterday, it was a 30-week lead time and today it's 10, you don't need to place another order for 20 weeks, right? So lead times are normalizing pretty much across the board. Certainly, we'll be normalized by the end of the first half for all of our product lines. The second thing we heard is, hey, I've got product on order that I've had on order with you for X number of months. I need to get that gear and get that project installed and implemented before I can start the next project. So both of those, both the reduction in lead times and the fact that we're now shipping out a lot of the backlog, those have been headwinds to bookings growth. We see those clearing up by the end of the first half, right? And so that's the -- as you think about what drove both the buildup of backlog and the work-off of backlog and the implications it's had on bookings, that's kind of the dynamic that's behind the scene. And we think most of that clears up by the midyear for us.

Great. And just as a follow-up to that, I just want to make sure I understand the trajectory in the first half. The comment around most of the normalization happening in the first quarter seems to imply that orders might be down worse than the, I guess, 14% in fiscal fourth quarter '23 and potentially worse than the down 23% in fiscal third quarter. Is that generally the right way to think about it?

So we don't guide bookings, as you know. But let me just talk about the trend that I think you're getting at. By the way, seasonality would always show a reduction in orders from Q4 to Q1, right? And we're in our Q1 right now, so you have to take that into account. But I think what we see -- what we saw that was encouraging to us in the fourth quarter is not only did we see really strong sequential Q3 to Q4 growth, stronger than we would historically see. But within the quarter, we saw really strong -- month 1 was good, month 2 was good, month 3 was even stronger than normal. At a time when -- by the way, a lot of our sales force was not in accelerators. And yet, we still saw that outsized. Sometimes, when you get to the last month of a fiscal year and a lot of your sales guys are in accelerators, that sale that might have otherwise happened in the future gets pulled in because it's worth more to them at that point. We had less than half of our sales team on accelerators, and we still saw that kind of growth. So it's encouraging. And I think that's the trend to look at is look at what you'd expect from normal sequential, and you saw the dip that we had during the year in fiscal '23. But you saw the way that was coming back in the second half of fiscal '23. That's -- as we work through the rest of the backlog, so that's not a headwind, and as we normalize the rest of our lead times, so that's not a headwind, I expect to see those order patterns normalized in the second half of the year.

Okay. Great. That's helpful. I'd like to touch a little bit more around customer verticals and then geographic segments. Starting with enterprise and commercial. Could you talk a little bit about how macro may be impacting demand there? You talked a little bit about some of the diverging trends among some of the smaller customers versus larger customers. And obviously, the sequential trend in year-over-year orders for that segment or both those segments rather have improved very strongly. So maybe you could just unpack that a little bit more for us and maybe discuss any geographic trends that might be notable within those customers there.

So by geo, we had good -- again, a nice trend in orders in both the Americas and in Europe, a little bit tougher in APJ. What we typically see is when the markets turn up or the markets turn down, you see it first in the Americas soon followed by what's happening in EMEA and then APJ trails. And so that's exactly what we're seeing as the recovery happens. So I'm not seeing anything out of normal pattern from a geo perspective. Obviously, within that, there's hotspots and not, but nothing out of pattern there. If you look at our customer markets, we talked about enterprise and commercial and what we're seeing there and that -- what typically is a leading indicator of a return in demand is that small customer size. And so -- and that's what we capture in commercial. And so seeing that have such a nice sequential growth and a nice trend in terms of ordering through time is encouraging. We're seeing still reasonably good growth in public sector. Obviously, U.S. public sector has a fiscal year-end that's happening as we speak. That's a tailwind. We had good growth in public sector, pretty good -- really good sequential growth in public sector in Q4. So that's fine. SP continues to be challenged. And if you think of what gets categorized there, there's kind of a couple of different trends. There's cable and telco, which has one set of dynamics going on, and then there's the hyperscalers. All of that rolls into SP, which has a -- we've talked about the dynamics within hyperscaler.

Great. Switching gears a little bit, let's talk about gross margins. You guys guided to gross margins for the upcoming fiscal year to be 65% to 66%. Maybe you could talk a little bit about some of the key factors impacting margins from here, pricing, software mix, commodity and component cost inflation?

Yes, we've seen a really nice trend in product gross margins. As you saw, quarter-to-quarter, every quarter got stronger throughout fiscal '23, ending the year, as you said, in that 65% to 66% range. That's what we've guided for fiscal '24, and that's where I think it settles in. And so let's talk about some of the dynamics underneath that. We put in place -- as the component costs went up the way they did and as the freight and logistics costs went up the way they did, we put in place price actions. We took a couple of price actions, and we've seen that show up now. So the way that works is you take a price action, the higher price goes into an order, that order goes into backlog, right? So you don't really see the benefit of those price actions until you can clear the backlog. But we're to the point where we've kind of lapped those price actions. So while it's been a nice tailwind throughout fiscal '23, I don't see it being a significant tailwind for us, just absolute price as we look at fiscal '24. With product mix, any given quarter, you could see the gross margins bounce around a little bit with product mix. Obviously, lower margins to the hyperscalers, better margins in other parts of our business. So product mix is something that could bounce around a little bit. I think it still settles in into this level. We've had benefit from memory pricing, as everyone has, throughout the year. But I think that tailwind is pretty well behind us at this point. The team has done a nice job managing our way through that. Freight and logistics costs have continued to come down. And for a couple of reasons, one is the cost of air freight has come down per kilo, right, as more commercial airlines -- I don't know if you've flown, right? Well, you must have flown out here, Mike.

I did, yes.

Okay. The plane was packed, right?

It was.

So there's a lot more commercial lift coming online, a lot of what gets shipped. Air is belly space in those commercial planes. So as more commercial lift has come on, that's driven the cost per kilo down. But also as supply is recovered, we're able to ship more non-air. We're able to ship more ground and more ocean than we could before. And so that mix obviously has benefited us. I think most of those trends will continue through fiscal '24, but I still see us settling into this 65% to 66% gross margin range for the year.

Great. That's helpful. I do want to leave time for audience questions. Maybe I'll sneak one more in, just as people raise their hands and we'll get mics to them. But could you talk a little bit about how you're thinking about OpEx growth in fiscal '24? Any key things to consider there?

I think the key element on OpEx growth, obviously, the reset of -- if you look at the OpEx growth that we had toward the end of last year, you had 2 things going on. You had the reset of the -- our variable comp plans. We pay a bonus, that bonus in large part scales based on P&L-type metrics. The P&L metrics were much stronger in fiscal '23 than they had been in fiscal '22. So where that was running below par in fiscal '22, it's running above par in fiscal '23. That was one of the drivers of growth. We also had a bigger merit increase, as I think everyone did cycle. That drove a little bit of growth. And if you remember, we announced what I call a rebalancing, a restructuring in our fiscal Q1 of fiscal '23. And with the intent of keeping our spending at a certain level, but being able to pivot resources away from some areas and on to more strategic areas like security, as we've talked about. But we said at the time, this isn't motivated by cost savings, and we expected to end the year with head count equal to or higher than we opened the year with. And that's what happened. We did end at that point. So those are the dynamics if you look backward. If you look at the growth from fiscal '21 to the end of fiscal '23, the comp in annual growth rate was in the mid-single digits. And I think that's what our expectation is looking forward.

Great. Any questions from the audience? Scott, could you talk a little bit about capital allocation priorities? Cisco is committed to returning at a minimum 50% of free cash flow annually to shareholders. Maybe you could expand a little bit on the capital return strategy and other capital allocation priorities.

Sure. As you know, we've done a lot more than 50%. That's the commitment that we had in place. But there's really been no change in our cap allocation strategy from a strategic standpoint. It's support the growth of the business organically and inorganically. It's to obviously support the dividend. The dividend is super important. It's to offset dilution and then excess cash return to shareholders. That's remained the same. If you just do the math, our dividend at this point consumes, call it, $6.5 billion, right at $6.5 billion of free cash flow that it takes to pay the dividend. We have been on a path of spending about $1.25 billion per quarter in share buybacks and keeping that consistent. We used to be somewhat spiky on that front. We've kept that consistent and that's one of the things we talked about on the call is we hear from investors -- a couple of things that we hear from investors. One is, I want you to show operating leverage. I want you to show the bottom line grow faster than the top line. We've done that. We've been doing that historically. We didn't commit to it in advance so it's like, okay, we're already doing this. Let's make that commitment. You heard us talk about that on the call. The second is elevate the level of buybacks and keep it more consistent. We've done that, and you saw us talk about that on the call. And the third, and this is one we're still working on, is can you simplify the way you report. And so that's one we're still working on at this point. But that's what's behind the cap allocation and some of the commitments that you heard us make on the call and some other things, that it's just direct response to people like the people in the room and on the call today.

Great. I know you guys have a tremendous amount of momentum in a lot of areas of your business, and we talked a lot about them: web scale, security, the software business transformation, to name a few. But in closing, would you just talk about your vision for Cisco over the next 3 years? And what do you see as the key initiatives and strategies to achieve that vision?

Yes. Obviously, innovation is at the core of that. So what we've been building and what you'll see us continue to build is a more recurring revenue-based model, which gives you great predictability and great visibility through time. And it's a base of cash flow that can support the company going ahead. We'll continue to do that. Innovation is critical to us. We're investing pretty heavily organically and inorganically. We've closed a handful of mostly small acquisitions already this year, but focused on driving that level of innovation. That's critical to us and to our customers. And then building out to -- building to some of the trends that we see today, most notably AI and the opportunity that we have in AI, both to build more AI into our products to make them better and to sell into the AI fabric build-out that's happening in the hyperscalers and in our enterprise customers. So there's a -- I think we're really well positioned on that front, and there's a handful of things that we're doing to really continue to accelerate in that space.

Great. That's a great way to cap off this session. It's been such a privilege to be able to share the stage with you, Scott. Thank you so much for your time and participating in the conference.

Thank you, Mike. Thanks for having us.