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

Hello, and thanks for joining us on Cisco's conference call for the second quarter of fiscal year '24. I'm Sami Badri, serving as Cisco's Head of Investor Relations, and with me today are Chuck Robbins, our Chair and CEO, along with Scott Herren, our CFO. You ought to have accessed our earnings press release by this point. After this call concludes, a webcast with slides—supplemental information included—can be found on our website within the Investor Relations section. Income statements, complete GAAP to non-GAAP reconciliation details, balance sheets, cash flow statements, and additional financial information are likewise located in the Financial Information section on our Investor Relations website. During this call, we will reference GAAP as well as non-GAAP financial results, and unless otherwise noted, we'll talk about product results in terms of revenue, plus geographic and customer results in terms of product orders. Every comparison we make today will be year-over-year. Today's discussion covers forward-looking statements, among them the guidance we're giving for the third quarter and the full year of fiscal 2024. Such statements carry risks and uncertainties described at length in our SEC filings, in particular the latest reports on Forms 10-K and 10-Q, which lay out significant risk factors that might lead actual results to diverge materially from what those forward-looking statements indicate. Regarding guidance, kindly refer to the slides and press release accompanying this call for additional details. Unless made via an explicit public disclosure, Cisco won't address its financial guidance during the quarter. I'll hand things over now to Chuck.

Thanks, Sami, and I appreciate everyone joining us today. Our Q2 results were strong, with revenue finishing at the high end of the guidance range we provided. Healthy operating leverage across the company pushed margins higher than the upper limit we'd projected, allowing us to deliver earnings per share that beat expectations. In Q2, we once again returned $2.8 billion in total value through dividends and share buybacks. We also shared today that Cisco's dividend payout rate is going up again, which underscores our ongoing dedication to giving shareholders meaningful value through consistent capital returns. Overall, our second-quarter numbers continue to advance the strategic overhaul of our business, which centers on expanding software subscription levels and annualized recurring revenue, or ARR—and this quarter both areas showed improvement. Our deal to acquire Splunk, still pending, also reinforces that transformation plan by driving stronger expansion, widening our range of software-based offerings and producing greater ARR, with an estimated $4 billion in extra ARR once the transaction is complete, and it will position us among the biggest software firms globally. Before turning to how we performed during the quarter, I'd like to open with a few remarks about the demand landscape. Starting with the broader economic picture: because uncertainty is running high, we're noticing that deals are getting more scrutiny and people are exercising more caution. Hearing that from the customers we serve is prompting us to take a more careful approach when it comes to our forecasts and what we expect. Next, as we talked about during the prior quarter and then observed in the numbers other technology suppliers posted, since the beginning of our fiscal 2024, buyers have needed time to get the larger volumes of product we sent them in recent quarters up and running, and that process is stretching out beyond what we originally anticipated. And third, demand remains soft among the telco and cable service provider clients we work with. There's been a lot of strain across this industry, and companies are changing when they roll out their deployments, and that's dragging down what we expect for our business. Because of all this, we're reworking our spending and our investments so they match what's happening right now. That said, when it comes to the product lines where we're able to track how much inventory customers are working through by way of cloud connections, things are improving at a steady pace. Still, from what customers have told us, we think it will take another 1 to 2 quarters before their inventory is fully implemented, and as I said, that's a longer stretch than we had anticipated. We keep monitoring Meraki activations, and those are picking up a bit of speed in wireless while slowing down somewhat in switching. If we take Meraki as a stand-in for the broader enterprise networking lineup we sell, we anticipate that the ongoing rollout of equipment already sent to customers will be mostly wrapped up once fiscal 2024 comes to a close. Take our wireless segment, for instance — we're pleased to see how many deals worth at least $1 million came in, with that count rising roughly 50% from Q2 to Q3. That tells us plenty of wireless buyers have worked through the inventory we delivered and are getting ready to roll out bigger installations over the next several months. We're working hand in hand with our clients too, helping them handle the increased emphasis on putting the Cisco gear they already have into service, which has driven our services revenue up compared with the same period last year. Another thing worth pointing out is that revenue not centered on hardware — think areas like security and collaboration — went up, and our observability products posted double-digit growth versus a year ago. And even with the short-term headwinds, our win rates haven't moved, and measured on a trailing 4-quarter basis, we held steady market share in three out of our four biggest markets. Let me turn now to how we did in Q2. Like I said before, results for the quarter came in roughly at or above what we had expected for Q2. Because of the confidence our customers have in us and how essential our technologies are to the outcomes they're after, I have strong conviction about the underlying strength of our portfolio and the growth chances ahead of us; through innovation, we deliver for our customers and make it possible for them to roll out next-generation applications with strong security. In that vein, we support their expansion by way of our products and services, so that as they bring on new technologies, we expand right along with them. We keep speeding up innovation in the areas where growth is highest. At Cisco Live EMEA last week, we rolled out new networking capabilities, advancing what we envision for the Cisco networking cloud. We also unveiled a number of new capabilities spanning our security, collaboration and observability portfolios, all making use of AI. On top of that, we keep seizing the multibillion-dollar opportunity in AI infrastructure; during this quarter, we revealed the next step in our partnership with Nvidia, aimed at giving enterprises simplified AI infrastructure that works both in the cloud and on-prem. That covers networking hardware as well as software for supporting advanced AI workloads. We plainly stand to gain from AI adoption, and this partnership shows even more clearly the central part we play in AI and in the broader technology ecosystem. Our joint solution will go to market through our vast global channel, backed by professional services and support from key partners dedicated to helping businesses get their GPU clusters deployed over Ethernet infrastructure. When it comes to web scale, momentum continues with three of the top four customers rolling out our hyperscale Ethernet AI fabric, using Cisco-validated designs for AI infrastructure. Though the opportunity ahead is enormous, adoption of AI workloads is still at an early point. Turning to security, we keep delivering on our product roadmap, building the industry's most comprehensive unified platform with end-to-end solutions; during this quarter, we launched Cisco Identity Intelligence, an analytics layer that draws data from identity infrastructure and runs behavior-based assessments, helping guard against identity-based attacks, which sit at the leading edge of today's cyber threats. AI is spreading further throughout the Cisco Security Cloud as well; take our new AI Assistant and Secure Access, which lets customers build security access policies through natural language prompts, cutting errors and making policy administration 70% faster. Our new security offerings, such as XDR and Secure Access, are gaining traction fast since launching this fall, and we now have more than 230 Cisco XDR customers. Looking ahead across the coming 6 months, expect additional significant announcements spanning the portfolio, driven by our faster organic innovation plus acquisitions. We've also expanded ThousandEyes, which is powered by AI, into Cisco Secure Access, building on earlier connections with AppDynamics, Webex, Catalyst and Meraki platforms. Through ThousandEyes, customers gain visibility into the digital experience of users, applications and things, thanks to billions of daily measurements of the Internet and public SaaS, along with thousands of enterprise customers delivering best-in-class digital experiences for users. Within observability, we rolled out the Cisco Digital Experience Monitoring application, which offers deep insights into how browser and mobile applications perform and enables efficient resolution of session level issues. Our ongoing generative AI advancements extend our existing platform capabilities, helping operations teams concentrate on what matters most, cutting down tool sprawl, boosting overall performance and providing highly secure digital experiences. Returning to the pending Splunk acquisition, pairing Splunk's complementary capabilities with our own, along with AI, security and observability, will produce an end-to-end data platform that strengthens our customers' digital resiliency. We couldn't be more excited about what we'll accomplish together: delivering innovation leadership that customers can trust, a strong go-to-market operation, and a truly world-class culture — all of which will help our customers achieve their technology outcomes via inventive products and solutions. On top of that, I want to briefly address timing. While the Splunk acquisition's completion remains subject to regulatory clearances and the usual other closing conditions, given how much positive movement we've seen to date on the required regulatory approvals, our expectation now is that the transaction will close in the latter part of the first quarter or the beginning of the second quarter of calendar 2024, which corresponds to our fiscal third quarter. Before I turn it over to Scott, let me quickly review three main points. To start, we've adjusted what we expect for the back half of the year. That change mirrors a macro backdrop that's cautious, customers working through sizable inventory positions, and Service Provider still soft. Next, whatever conditions we face, you can count on a disciplined approach from us. Our commitments to operating leverage, capital allocation and expense management haven't changed. Finally, day by day, our portfolio grows ever more robust. We still have tasks ahead, and the present climate is what it is, yet our confidence in the long-term strategy holds. With relentless focus, we pursue our pledge to deliver long-term value for shareholders and innovation that leads the industry for our customers. I'll hand things over to Scott now so he can walk us through additional specifics regarding the quarter and what we're projecting ahead.

Thanks, Chuck. Once again, our Q2 outcomes show we executed well, delivering robust margins and greater operating leverage. During the quarter, total revenue landed at the upper end of the range we had guided to, coming in at $12.8 billion, which represents a 6% decline compared with the same period a year ago. Non-GAAP net income came to $3.5 billion, a 3% decrease, while non-GAAP earnings per share exceeded the top of our guidance range at $0.87, down 1%. Let's dig deeper into Q2 revenue. Product revenue totaled $9.2 billion, falling 9%, and service revenue reached $3.6 billion, rising 4%. Networking, which is our biggest product category, dropped 12%. We experienced decreases in switching, wireless and routed optical networking, mainly because of softness in the Enterprise and Service Provider & Cloud markets. Security rose 3%, with our Zero Trust offering expanding at a double-digit rate. Collaboration climbed 3%, fueled by gains in collaboration devices and calling, partly offset by a drop in meetings. Observability grew 16%, powered by increases throughout the portfolio along with sustained momentum in ThousandEyes network services. As Chuck noted, ThousandEyes assists with monitoring and assuring digital experience across every location—on-premise, Internet and the cloud. We're still advancing our shift toward offerings based more on recurring revenue; we delivered robust results in our ARR of $24.7 billion, which grew 6%, with product ARR rising 9%. Total software revenue stayed flat at $4.2 billion, while software subscription revenue grew 5%. Subscription-based software accounted for 88% of our software revenue. Total subscription revenue rose 6% to $6.4 billion, and that now makes up 50% of Cisco's total revenue, which is 6 percentage points higher than a year ago. RPO stood at $35.7 billion, up 12% year-over-year. Both product and service RPO rose 12%. All told, short-term RPO was $17.9 billion, an increase of 6%. Q2 product orders fell 12%, a notable gain versus Q1 as customers keep drawing down product shipments from earlier quarters. Now let's look at our geographic segments year-over-year. The Americas fell 10%, EMEA fell 8% and APJC fell 27%; within our customer markets, Service Provider & Cloud fell 40%, Enterprise fell 6% and Public Sector fell 5%. By the close of Q2, backlog had gone back to typical levels. Total non-GAAP gross margin reached 66.7%, 280 basis points higher year-over-year and beyond the top of our guidance range. Product gross margin was 65.2%, an increase of 310 basis points. That gain came mainly from reduced freight and component costs plus a favorable product mix, partly offset by a negative pricing impact. Service gross margin was 70.5%, up 140 basis points. Non-GAAP operating margin reached 33%, 50 basis points higher and above the top of our guidance range. Solid non-GAAP gross margin combined with ongoing cost management produced that leverage. In addition, we're reallocating our investments and expenses to match the present environment, which should help us maximize long-term value for shareholders. Under the restructuring plan we announced, we anticipate affecting roughly 5% of our worldwide workforce, with estimated pretax charges of about $800 million. Turning to the balance sheet. We closed out the second quarter with cash, cash equivalents, and investments totaling $25.7 billion. As we had anticipated, operating cash flow came in at $800 million, largely because of when federal tax payments fell and the larger yearly TCJA transition tax payment. During this quarter, we gave back $2.8 billion to shareholders, which consisted of $1.6 billion in quarterly cash dividends and $1.3 billion in share repurchases. So far this year, we've delivered $5.7 billion in value back to shareholders, and we intend to keep repurchasing shares at the same quarterly pace through all of fiscal 2024. Boosting shareholder returns via stronger operating leverage, sustaining a larger yearly level of share buybacks, and increasing our dividend aligns with how we approach capital allocation. Because of how confident we feel about our business right now, we announced a dividend raise of $0.01, bringing it to $0.40 each quarter. This bump shows our dedication to giving back at least 50% of free cash flow to shareholders every year, as well as our belief in the durability of our cash flows going forward. In short, we performed well, with margins that stayed strong and better operating leverage as we assist customers in finishing record deployments and implementations. We keep advancing the shift in our business model toward more recurring revenue. We're making strategic investments in innovation so we can seize our growth opportunities, and we're dedicated to creating long-term shareholder value; when it comes to our planned purchase of Splunk, we're still working through the regulatory approvals and closing conditions. And as Chuck said, we're hopeful it will close sooner than we initially expected; we haven't factored any effect from the Splunk deal into our forward-looking guidance. Now on to our guidance. As we said earlier, we've adjusted our expectations for the back half of the year to reflect caution stemming from macro uncertainty, our customers continuing to absorb the record amounts of product shipments they got from us, and softness in our Service Provider market; for Q3, here's our guidance, we expect revenue between $12.1 billion and $12.3 billion. We expect non-GAAP gross margin between 66% and 67%. Non-GAAP operating margin should land between 33.5% and 34.5%. Non-GAAP earnings per share should come in between $0.84 and $0.86. For fiscal year '24, here's our guidance, we expect revenue between $51.5 billion and $52.5 billion. Non-GAAP earnings per share guidance should fall between $3.68 and $3.74. In both our Q3 and full year guidance, we're assuming a non-GAAP effective tax rate of 19%. Sami, let's now move into the Q&A.

Appreciate that, Scott. Ahead of opening things up for questions from the analysts, a quick reminder that each person should limit themselves to one question plus one follow-up. Operator, please bring in the first analyst waiting in the queue.

Good afternoon, and thanks. I'll get both of my questions out there right away. Chuck, the full-year revenue outlook came down roughly 500 basis points compared with where it stood 90 days ago. Could you break down the pieces there — how much stems from digestion lasting longer, how much from the macro backdrop, and how much from softness among telcos? Then, what's your thinking on how we return to organic revenue growth on a sequential basis? And for my second question, I'd like to dig into that Nvidia news you announced. Some people seem to read it as mainly a server story rather than a networking one. Could you spell out the details and explain what it means for Cisco? Thank you.

Amit, thank you very much. So obviously, with the lower guide, we talked about the feeling that there's some macro uncertainty; we talk to our teams in preparation for this, and they obviously submitted their forecast; and what we really saw was what they previously told us 90 days ago relative to the second half versus what they told us a couple of weeks ago had changed materially, which means customers are pushing things out and putting a little more scrutiny on them; so that's the difference that we've seen. If you're asking me to separate out how much each of those three contributed — the digestion problem, plus the telco side and the SP side — honestly, that's really hard to pin down. That said, my view is that we ought to have worked our way through the higher inventory levels by the time our fiscal year closes. On the SP telco and cable portion, our hope is that they'll start putting money back into investment during '25. Our earlier expectation was that they'd resume investing in the back half of this year, and that's something we no longer consider accurate. So regarding the consumption problem and the SP situation — or rather, the consumption problem — my belief is that it's a short-term matter lasting until the year is over. As for the macro situation, that's something only time will tell, and probably the same goes for the SP telco. Obviously, all of this pushed us to make an adjustment to the back half of the year. Turning to the Nvidia partnership — it's Ethernet, no question. I was present in that meeting when Jensen and I initially discussed it, and he was on board with incorporating our Ethernet tech alongside their GPUs to build out the stack. Servers will be part of it too, and multiple iterations of this will emerge down the road. That said, whenever several clusters get linked together, our Ethernet technology will be part of it.

Thank you, Amit. Michelle, we have the next analyst.

Thank you. So, you brought up Service Provider, but I'm just trying to get a feel for whether the softness is more on the data center side or the edge side, or when it comes to those five investment priorities you flagged that enterprises had a few quarters back, is any one of those areas still being given major priority, or are some being deprioritized? Then, for my second question, what's your read on how enterprises are approaching AI and where the money for AI is being pulled from? Any thoughts at all would be useful. Appreciate it.

Yeah, thank you, Meta. What I'd tell you is that cybersecurity is definitely an area where we're watching customers put money to work. Observability is another — you saw that 16% growth rate — and collaboration actually came in positive this quarter, which was encouraging. Customers are still at different stages of navigating this hybrid work setup. We had a really solid quarter in our devices and our video device businesses. We're seeing customers put money into their customer experience via things like contact center, so there's a lot of that happening. Customers are also still putting money into rearchitecting their applications, and that opens up observability opportunities along with the need to rearchitect their networks to handle the traffic flows we've discussed for a couple of years now. What I believe is the core problem at this moment is that we delivered such a large amount of networking into our core business that the difficulty lies there — customers are simply working to get all of that deployed right now. When it comes to the enterprise and their thinking around AI, what I can share is that across the last 90 days, we started to see the pipeline for enterprise AI use cases take shape. There's substantial activity happening in financial services. I'd characterize it as early in terms of what they're working through, but opportunities are starting to appear. There have also been some remarks — not enough for me to call this a huge trend — but some of our field teams have said they see customers keeping budget in reserve so they can direct it toward AI once their strategy is completely ready. That's really all I can share with you right now.

Thank you, Meta. Michelle, can we go to the next analyst.

Thanks for taking my question, guys. Perhaps I'd like to pause briefly, Chuck, and maybe Scott as well. When I look at your guidance for this year, we're essentially returning to fiscal '19 revenue levels. So I'm just attempting to work out how your longer-term model functions given that 5% to 7% guidance you presented at the investor briefing several years back as a kind of investor — as a sort of customer digest product. It seems like the core networking portfolio might be losing additional share, especially since other segments of the business have expanded. So given that we're basically back at fiscal '19 levels, I just wanted to get a feel for how you're viewing the portfolio right now. And on the profitability side, you've clearly done an incredible job, and I'd assume the cost reductions are continuing in that direction to sustain higher margins. But could there be a chance to leverage margin, and perhaps pricing, down the road to win back some of that share if a potential strategic deal in the market today creates a disruption? Thanks.

Scott Herren here. I'll kick things off, David, and then Chuck can jump in regarding share. Regarding that 5% to 7% figure, let's think about it this way: when we originally provided that number—back in 2021, as you'll recall—it was before any of the supply chain turbulence we've since experienced. After that point, naturally, supply chain issues took hold, which drove a surge in product orders and then a significant accumulation of our backlog; as we worked through that backlog, revenue spiked. Consequently, comparing one year to the next has been challenging given all those shifting dynamics. Right now, the situation is that once we got through the backlog — and we did that really fast thanks to how strong our supply chain team is — the constraint simply shifted to a later stage. So when you look at this year's revenue, I don't believe you can attempt to line it up against prior years, since there are so many variables shifting beneath the surface. The basis for the 5% to 7% figure we provided you was that it represents the combined expansion of the TAM across the markets we operate in, correct? So as things stand, we continue to view that as the longer-term direction we're moving toward. When it comes to those year-over-year growth rates, my view is that they won't settle down until the inventory currently sitting in the field gets worked through, and that inventory is among our biggest headwinds. After that happens, ordering can return to normal, and then you have to lap that period. In other words, you'd need to look four quarters ahead before you're comparing against a more normalized baseline. That's the way I'd recommend thinking about it over the longer term. As of right now, though, nothing has changed. Once the Splunk acquisition is complete, we'll refresh the longer-term model, and at that point we can offer you a clearer picture of how we'll look as a combined company.

David, regarding that loss of share, my take is that if you check the most recent reports made public following the second quarter...

Third quarter, calendar...

Calendar Q3 — across our 4 biggest markets, meaning campus switching, wireless, and SP routing, we picked up share. So I'm not sure what's behind this idea that we're losing share. On data center switching, yes, it shows up as a share loss; but let's be clear — one of our main rivals there books their web scale sales under data center switching, while we book our web scale sales under SP routing. So those become kind of apples and oranges categories. As for the rest, according to the most recent reports published, we've actually gained share on a rolling 4 quarter basis, even looking back over the last 3 years.

Thanks, David. Michelle, let's go to the next analyst.

Appreciate you taking my question. I have one that's simple and another that's a bit tougher. I'll begin with the simple one and then pose the other; it simply appears as though your order trajectory is improving somewhat. So orders declined 12% this quarter, which isn't too bad. And I realize you don't provide order guidance, but perhaps you could speak to when you think orders might return to growth, considering the comparison and the trend. For the other question, I wanted to see whether you could address how you picture the AI clusters in terms of whether the web-scale operators will pick multiple vendors within one cluster, or whether they'll assign perhaps separate data centers to separate suppliers? Or will they combine and alternate, how do you expect the split to unfold, especially in the hyperscale opportunity? And I truly mean this over a longer horizon, '25, '26, not right now when InfiniBand dominates, but once Ethernet begins capturing more share. Thank you.

Yes. Thanks, Simon. So regarding the order trajectory, I believe what — we obviously don't guide bookings. What I would tell you is that although our teams revised what they expect for the back half, that period will still come in stronger than the front half. So your interpretation of the general direction, I believe, remains valid, and I won't add anything further there. Regarding AI clusters, that strikes me as a solid question, because you're going to hear both from us and from rivals about quite a few web scale companies that rely on our technology beneath GPUs — meaning our Ethernet offerings along with our GPUs. Therefore, it's important to remember that these players almost always pursue a two-supplier approach. Their preference is invariably for a pair of suppliers, which means both of us are actively competing in that area right now. As things stand, the clusters they run are entirely uniform. Whether mixing them would eventually deliver an advantage is something I believe we can't determine yet. My own view is that unless a major shift occurs, or some technical justification emerges for combining different GPUs — something I'm not in a position to address — the network layer beneath them won't end up mixed. Quite simply, I see no upside for them in going that route.

Thanks, Simon. Michele, let's take the next question.

Hello. There are two things I'd like to ask. Security comes first. The market is fantastic. We got together 2 years back and 3 years back, when you discussed a fresh strategy and go-to-market approach, yet growth remains just 3%. What's going on with that? And what steps can you take to repair security and capitalize on this expanding market? Then perhaps I'll pose my follow-up.

All right. Appreciate it, Tal. So my view is that across the past several quarters, I've stayed fairly consistent in saying that we expected security to begin accelerating in the back half of this fiscal year; and I can share a few highlights showing where some of that is appearing — a few early green shoots. With certain newer innovations, such as XDR and Secure Access, the Multicloud Defense suites — we're observing solid pipeline growth around those technologies. On XDR, we now have — back in April of last year we made the announcement, and August was when we shipped it. Today we count 230 customers, more than 230 customers, using the platform. And what matters most to keep in mind is that this is a major platform play. And usually we find it's a sales cycle of 6 to 9 months; so having 230 customers at this point, I'd say, speaks to the value our customers are getting. Incidentally, that will serve as a genuinely important integration point alongside Splunk. So we see — we feel positive regarding the pipeline. On the demand side, just to offer a bit of insight, in the Americas demand came in at nearly double digits during the quarter just ended, which is the strongest we've witnessed in some time; so I'd say plenty of encouraging signals are showing up. And if you simply keep watching across the coming 6 to 9 months, you'll notice additional innovation arriving more and more. And my guess is you'll start to trust and observe the outcomes around that very same period.

Thanks, Tal. As for that other thing you asked, we'll address it at some point once this call is over. Michelle, let's bring in the next person to speak.

Hi, and thanks for taking my question. Chuck, for my first question, I'd like you to revisit the demand drivers you're seeing. When we finished the last call, we came away feeling optimistic about a strong rebound once inventory digestion wraps up. But what I think I'm picking up from you today is that even with that digestion finishing in fiscal '24, you're noticing somewhat more of a macro effect on demand from your customers? And do you still hold expectations of a sharper rebound as you move into fiscal '25, if you could tell us what you're observing among customers there; then for my follow-up, regarding the Nvidia partnership, how should we view its effect on your AI order target of $1 billion? Or does most of that partnership actually land after that target window, that target time frame? Thank you.

Thanks. On what has shifted since last quarter, I'd say we simply observe slightly greater caution among our customers. I don't want to over-rotate and call it a massive shift, but we certainly saw more caution; we spoke with our sales leaders before the call, and they told us — we asked them directly whether caution had increased or stayed the same versus the prior quarter, and we heard more, a little bit more. Then we saw the forecast get pushed out. That tells us there's a little bit more in the system. So I think we need a couple of quarters for it to play out before we can declare what will happen in fiscal '25. On the Nvidia discussion, a couple of comments. We talked about the $1 billion of orders, which I know someone will ask me about at some point. What I'd say is that over the last 90 days, our pipeline of AI opportunities has continued to grow. That pipeline is now almost three times that particular number we gave last time, which were more orders we see in '25. The total pipeline is now about three times that, roughly three times that. And I'd say virtually none of that is anything associated with the Nvidia partnership yet. It's all independent of that.

Thanks, Samik. Michelle, let's take the next one.

Hi there, appreciate you taking the question, everyone. Hello, Chuck. Hello, Scott. I'd like to ask regarding that HP and Juniper transaction. Is any near-term market hesitation showing up? And in what way do you figure it benefits you over the longer haul? And if you — Chuck, if it's alright, just about that most recent AI remark, clearly one of your rivals is anticipating a fairly sizable step-up in the coming year, the next calendar year. Do you view that AI pipeline of roughly $3 billion as arriving in the coming year, the next calendar year? Or how do you see the timing there? Many thanks.

Appreciate it, Ben. Regarding the HP and Juniper transaction, the single place where they overlap substantially is wireless; and whether that ties at all to the fact that our $1 million-plus wireless deals rose 50% quarter over quarter, I couldn't tell you. So it's tough to pin down. That said, there's plenty of chatter across the system, or within the industry, about their activity there, yet honestly I can't point to any specific customers who have raised it with me. So my sense is we're — my sense is it's somewhat soon for them to — for customers to be voicing that worry; perhaps they're putting the question to them straight, but nobody's bringing it to us. On timing, yes, I believe we referenced fiscal '25, which begins in August of this year. And my guess is you ought to figure the bulk of it lands in the back half, I'd imagine, though we'll watch how it unfolds. My sense is customers will proceed as quickly as they're able, yet at this point we remain in the early strategy and planning phases for the majority of it. The pipeline items are clearly defined use cases already established with particular customers, and right now we're simply working our way through those opportunities.

Right, Ben, but just so we're clear, we expect most of that $1 billion in orders to convert into revenue during our fiscal '25.

Thanks, Ben. Michelle, let's go to the next question.