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

Good morning, good afternoon, good evening, wherever you're joining us from today. My name is Emily Hunt, Investor Relations Director of Cisco. I'm delighted to be joined today by Gary Steele, President of Go-to-market. Gary leads a unified organization across Cisco's sales partner and global marketing teams to accelerate outcomes for our customers in addition to leading Splunk at Cisco. As I'm sure you all know, Gary served as CEO of Splunk for 2 years prior to joining forces with Cisco. And prior to that, he was the founding CEO of Proofpoint. Before we start, please note that we may be making forward-looking statements. Actual events or results may differ materially from those statements and are subject to the risks and uncertainties outlined in our filings, including our most recent Forms 10-K and 10-Q, which you can find on the Cisco Investor Relations website. Before I hand it over to Matt, just want to say that if you have some questions [Operator Instructions] So with that out of the way, I'd now like to turn it over to Matt Hedberg. Thanks.

Sure. Thanks, Emily. Thanks, everybody, for joining us. I know it's a busy time of the year, and the markets are certainly all over the place. So we really, really enjoy these opportunities sort of ground everybody in some fundamentals and what key tech industry leaders are thinking. And so for those who don't know me, Matt Hedberg, I cover software here, I've been here for 18 years and I've probably known Gary for just about all those 18 years, I go back a long, long, long, long on time.

Long time.

And so it's fun to -- yes, it's -- one of the fun aspects of my job staying in contact with folks in different roles over the years. And so yes, today, we're thrilled to spend some time with Gary. And as Emily mentioned, we can make this interactive. I've got a laundry list of questions, feel free to use the chat function within Webex or you can e-mail them to me directly at [email protected]. And I'd be happy to insert them in some flow. We've got up to an hour, so we'll try to make this efficient with your time. But again, in the spirit of keeping this interactive, feel free to send some questions and we'll insert them where they seem right.

Awesome. So Gary, you've been with Cisco, I believe, for about 6 months now post the closing of the Splunk transaction and in a new role, you're now -- you're promoted to President Go-to-market in addition to the President of Splunk, I think it was about 4 months ago. Maybe can you start with some of your initial reflections on being part of Cisco? And also why did you take the Go-to-market job? It's a really, really interesting job from your background. I'm just really curious on the rationale. I can imagine you would have lots of other opportunities out there.

Yes, a couple of things. So one, it's been great being part of Cisco. I think the fundamental thesis that we had going into the acquisition really is bearing itself out. And when Cisco was looking at Splunk, I think they saw this opportunity to have it be an important growth driver for their overall business. And if you look today across the broad product line of Cisco, Splunk plays a very important role, helping drive digital resilience broadly across the product line in combination with all the other Cisco capabilities. So the thesis has played out really well and we can talk a little bit more about this, but the early integration efforts have gone extremely well, and we're seeing some good early results from that, which we're excited about. And so what feels great, frankly, is if the thesis actually works out when you get to the other side, and I own integration. So being on the other side of that and making sure that as we bring Splunk, we are doing the right things and delivering the right value along the way has been an important part of this. When Chuck asked me to take on the go-to-market role, I was super excited. I felt like a couple of things. One, there had been such a shift in focus into software at Cisco and running something and playing this role at scale was super interesting to me. It's really rare to get those opportunities where you can focus on scale. And so that was exciting to me. And I feel like I can bring a unique perspective into the role that I think is helpful to Cisco, and I feel like you can learn a lot at the same time. It's really a great balance. It's been a ton of fun and a ton of interesting challenges.

That's great. Yes. I think we're going to be talking about some of those. I guess given your background has been very, very software-focused. Why do you think that works at Cisco right now, which is -- I've talked to a number of folks inside of Cisco, you're really trying to change the perception, I think, of Cisco, and it's not just words. It feels like it's action that Cisco is much more of a software company these days. I guess, tell us about your background, why you think that's an important point in not only your career but the kind of the -- where Cisco is going?

Yes. No, I think it's -- if you look at the work that has been done over the course of the last 5-plus years at Cisco to build this broad recurring software revenue base, that's been a big focus of the company. And with my historical experience of having run recurring software revenue businesses, Splunk and prior to that Proofpoint, I've seen the maturity of that industry and how that's changed. And I also bring a unique perspective from a cyber point of view. I've lived in the cyber world for a really long time. And so I see and have watched the investments that Cisco has been making and now bringing Splunk into the fold, I think that we have a very unique position and a ton of opportunity out there. And so I think all of that just made a ton of sense for me, and I think my skills are unique and are helpful to Cisco.

So that's super helpful. And now I am sure we can get a lot more of the details there. You've been in this new role for about 4 months, if I'm not mistaken. Can you talk about some of your top priorities? And are there any changes you've already implemented that investors should be aware of?

Yes, I think the focus for me is thinking about how we bring to market the breadth of our portfolio and deliver value to our customers in a way that's consistent and repeatable, and we think about leveraging this broad portfolio in a way that's super constructive. And so right out of the gate, one of the things that we launched at our user conference, Cisco Live in June, and we just came out of our sales kickoff, which happened in Las Vegas a week ago is really unifying our story under a One Cisco message, bringing together basically, the power of our broad portfolio, helping our customers better understand the value that we bring across our product lines and why all these things naturally fit together. I think that clarity and that simplification of story, I think, is something that has been really well received. And I think, broadly speaking, telling the right compelling story that brings things like security together with networking to differentiate us, not only is it networking vendor but also differentiating us as a security vendor. I think those things are also very critical. And so right out of the gate, really like how do we simplify the story. I've been focused on ensuring that our resources are aligned to the biggest growth opportunities that we have across the globe. It's engaging with the channel to make sure that the channel understands all this and the channel can play a critical role as we continue to drive growth in our business across this broad product line. And so that's really -- my focus has been kind of a back-to-basics approach, making sure that we're got the right resources aligned to deliver the right growth opportunities.

Really, as a sidebar, doing quite a bit of channel work, it does certainly feel like Cisco is showing up in the cyber conversations more than it has for many, many years. So it feels like -- I saw you guys this summer as part of our July bus tour that was kind of a consistency theme then. So I think you're focused on channel, feels like it's paying some dividends early on, but we'll get into that in a bit more when we talk about cyber. I guess -- maybe before we get into some specific questions, you guys have obviously a massive global reach, a very unique perspective on IT buying trends. Can you -- and obviously, that's like one of the #1 questions that we get from investors is what's going on with the macro, what's going on with IT buying perspectives? What have you guys been seeing from an overall IT demand perspective now as it relates to Cisco?

Yes. If you look back at what we reported in our Q4 earnings call, we talked about the fact that deals are being highly scrutinized. I think there's a lot of oversight today that in the past may have not existed, but I think buyers are being very thoughtful about what they're spending dollars on and they're scrutinizing the purchases they're making. We are seeing and we noted this in our earnings call, that customers are upgrading their networks for AI. They're thinking about what does the future look like and what work do they need to be doing now to make sure that they can take advantage of that. And so we noticed some larger deals that were the result of people upgrading their networks to get ready for what is this next generation of AI infrastructure look like.

Got it. Yes. So yes, it feels like there's some very company-specific things that play at Cisco. But yes, I think the consistency around the deals taking longer, additional signatures, that's a very, very consistent theme that we're hearing from. Overall, from my perspective, things seem stable. I don't know if they're getting any better or any worse, but I think your results at least pointed to some stability out there. Let's double click on the Splunk transaction. Can you start by some of the highest level integration goals that you guys as an executive team are focused on to ensuring success there?

Yes. So from an integration standpoint, one of the most important things for us to deliver to our customers is continuing on our innovation road map. When I joined Splunk roughly 2 years ago, one of my observations have been Splunk had slowed down from an innovation perspective, and we really turned that around through a change in lead -- in product leadership, a change of thinking in the way we approach the market, and we really doubled down from a cyber point of view to ensure that we are winning our fair share in the cyber world. And as we head into Cisco, one of the things that's really important is we don't lose any of that momentum. The way this deal was funded, which is great is that we have maintained our existing road map. We're not changing anything now that we're part of Cisco, but funded on top of that is a level of investment to support integration activities. And so right out of the gate, we introduced a few critical integration capabilities. One was the integration between Cisco's XDR solution, which is relatively new to market. It was introduced in the -- basically a year ago, the fall of last year, bringing that together with Splunk's Enterprise Security solution. So if you think about the market today, there's been sort of this bifurcation between you either go down an XDR path or you go down to SIEM path. In our view of the next-generation security operations centers, these things converge. And so you get the richness of detections that happened in XDR, but the strong, investigative environment that you have with SIEM. And we think that's a very powerful combination that's been really well received in the marketplace, and we think it is a strong differentiator for a long period of time. We then have also announced integration with the Cisco Talos, threat intel. So enriching the Splunk environment with Threat Intel coming from Talos, Talos has been part of Cisco for a reasonable amount of time. And so ensuring that Splunk customers get the benefit of all of that threat intel within the Splunk environment. Those were two things that we introduced early on, and we've just made really good progress on new capabilities coming in and delivering value around. So another thing that we introduced at RSA was what we call Splunk Asset and Risk Intelligence. I think you can almost think of it as CMDB within Splunk, but its self-discovery of assets through logs that allow us to understand what are the assets across the environment where the vulnerability is associated with those. And so that you have a very actionable environment within your SIEM. That's been super well received as well. So these are all capabilities that we're continuing to move forward. We think that they have tremendous value to our customers. And I've been describing our innovation road map as a strong ground game, basically moving the ball down the field 4 yards at a time, we need to continue to convince our customers that we haven't slowed down from an innovation standpoint and that we're delivering real value. So there's a whole theme around innovation and all the work we can do across the broader Cisco. The other areas of focus for us is in the observability market, bringing in the richness of everything that lives across Cisco because today, one of the cool things that I'm super excited about is, we have more visibility than any other vendor on the planet because we can see across the customer's network, across unknown networks, across various application environments, whether it's traditional application, cloud-based application, all the way to what the end-user experience is and be able to help diagnose what's going on across that broad environment and give people actionable results. So I feel like -- and we're bringing that together as well. So there's been a lot of really good technical innovation that's happened right out of the gate because we did good planning in advance. And at the same time, from a go-to-market perspective, we've focused on a set of targeted accounts that are very loyal to Cisco that don't have Splunk, and we're focused on engaging those accounts what the opportunity to bring Splunk in. And then broadly, if you look at Splunk's historical business, roughly 2/3 of our business was in the Americas, 1/3 was in international markets. And we have so much opportunity in some of these international segments where we have just, frankly, been underserved. So places like the Middle East, Latin America, Japan, India, I think as a simple example, I think Splunk had, maybe 3 or 4 people in India, and Cisco has thousands of people. So we can just frankly have a very different impact in the market by leveraging not only the Cisco sellers, but the broad channel community that exists within Cisco. And so getting that engagement working has been a high priority for us as well. And so we're driving initiatives across product, across go-to-market, and we're thinking about short-term deliveries to build the confidence of our customers, while we're also working on really interesting longer-term innovation aspects as well.

That's great. We're going to just look on a number of those things. But I think when I step back and look at Cisco from more of a software lens, I think you guys are roughly $50 billion in revenue. And I think about 1/3 of that right now is software. When I listened to Chuck on the 4Q call talk about bringing together networking, security and collaboration, really as one organization from a technical perspective, I think being led by Jeetu Patel. It really does feel like Cisco from a top-down perspective is focused on integration and software. So I guess from your perspective, can you talk about the significance of this unification because I hear customers all the time talk about consolidation. And it's one thing to talk about it, it's another thing to deliver it. And so from your perspective, whether it's Splunk lens or your go-to-market lens, what needs to change to deliver on this vision that seemingly feels like it's going down the path of the product side. But then from a go-to-market, how do you implement the product side?

Yes. So it's a great question. I think the one thing I'm super enthusiastic about is the organizational change that Chuck announced as part of our earnings call, where as you described, we basically have now one product leader, Jeetu Patel, who is our Chief Product Officer. Our product engineering capabilities work within Jeetu's realm. Splunk hasn't moved over yet, but it will, at the right time, and we're being thoughtful about that. But being able to have a single leader that can make the product trade-offs and drive the right level of integration across the organization has been -- is super important. So I think it positions us very, very well to be able to take advantage of markets where there's convergence. So there's so much convergence today between networking and security. There's so much more we can do as a single product led org. I think we're going to see tremendous progress there. And then really driving the points of integration across our broad portfolio that deliver real value to customers that's what puts us in a position to go after. And as you described, Matt, I think aspirationally, customers want less vendors. They want platforms that deliver value across multiple product capabilities and they want less point products. And our ability as Cisco that can bring broad platform of capabilities together, I think, is super important from a market standpoint and an opportunity standpoint, and it makes it that much easier to go to market because we're selling platform versus a whole bunch of point products. And that's really -- that's been the focus. There's been a lot of really good introductions of product capabilities over the course of the last year. A good example of that is HyperShield, which was introduced in the spring of this year, next-generation network security solution, runs at a DPU, can run on a switch and can see the traffic that enables us to look for lateral movement, which is obviously a big part of the game in security. And so there's some very different, really good approaches that bring together the networking capabilities with security capabilities. And then you get all of the digital resilience capabilities from Splunk plus the broader Cisco product line. So there's -- I think there's a lot to be said for bringing these capabilities under a single leader and then thinking about them from a go-to-market standpoint is broader platform.

Excellent. That is -- yes, and it feels like you've been -- I think you said the word channel a number of times, and it really does feel like it's a joint effort between Cisco -- direct Cisco channel partners and getting that education out there. It feels like that's going to be a key focus for the company over the coming years. I want to talk a little bit -- I want to -- I was going to ask a follow-up question to the software mix shift. But maybe before I get there -- and by the way, I'm getting some questions e-mailed to me. Thank you for those. I will -- there are some specific product-related questions, so I'll insert them when we talk about the specific product. But if you look back, I guess, on Splunk's Q4 performance and kind of, call it, fiscal '24 performance from a revenue perspective, ARR perspective, any consideration that we should take into account given kind of the integration efforts into Cisco?

No. What we've seen is our last independent results were the end of Splunk's fiscal '24. And we saw the mid-teens growth with great cash flow generation. All that momentum moved right into Cisco. And as the numbers have been reported, the numbers are a little bit different because Cisco's closing periods are different. So as an example, at the end of Q4, Cisco's end of quarter closes 4 days before Splunk's end of quarter. And so the numbers don't totally align. Over time, that all goes away. It will be no big deal. But you can't always draw the exact comparison to prior periods, just simply because the periods are a little bit different. That will all work out in the wash over time. But the businesses has maintained its momentum. We've seen acceleration. We've seen some very nice deals that were done cooperatively that the Cisco team brought Splunk team into. And so we feel really good about the lift that we're seeing, even though it's really early, we're starting to see lift from the broad reach that Cisco has and the momentum that we can bring broadly to the Cisco team.

Got it. Okay. And then from -- I guess, from a consolidated view perspective, I think total ARR, I think it grew about 22%, I think, 42% product ARR growth. Obviously, that's including Splunk. I think if you eliminate that, I think total ARR grew about 4% and product ARR grew 9% ex Splunk. Can you talk about -- for those of us that are newer to Cisco and focus more on kind of the software piece, can you talk about what's causing the slower growth in ARR's core business? And then for a lot of this conversation, you're talking about the faster-growing piece. But just for somebody looking at Cisco holistically, talk a little bit about the slower-growing networking piece. And then we're obviously going to double click quite a bit on some of the faster-growing software piece.

Yes. So the slower-growing piece, we just -- we have seen some digestion on the networking side, where customers bought a lot because of the supply chain issues in the past, and they're still digesting that. And because software components live as part of that networking piece that really represents why it was somewhat slow. And the remainder of the portfolio is, actually, doing quite well, and we had some great results on the security side as an example, and that's where you're seeing faster growth. But the slowness has really simply been because we had digestion issues as customers consumed and then we can gear that -- had software audit that they bought early and waited to deploy.

I see. Okay. Okay. And then maybe as a dovetail, I think I mentioned a little bit earlier, I think about [indiscernible] of your total consolidated revenue at Cisco is software. And obviously, it's a faster growing piece. I mean, without kind of giving guidance on where that could hit longer term. How should we think about that mix shift? And maybe how does that mix shift impact kind of total growth and total profitability of the company?

Yes. I think there's sort of 2 components here. I think what you'll see is, you'll always see a blend because what we're really delivering is the value of this broad portfolio that includes both networking and security combined. And so you'll see software components that get leveraged as we continue to grow our infrastructure business, the software components that are playing an important differentiation and an important component of our overall -- of our overall stack. Obviously, software contributes in a positive way from a gross margin standpoint. You see that with the contribution of Splunk. And you'll continue as the software portfolio grows, you're going to continue to see benefit from that. And holistically, though, we are a broad portfolio that includes world-class infrastructure driven by the broad -- driven by the benefits of the broad software portfolio. So as we think about going forward, for example, the work that we're doing on the AI side, it's really we're selling what is known as hyper fabric. We introduced that at Cisco Live. That's coupled with Hyper Shield, which is our AI defense solution that helps customers protect those AI environments, but it's all integrated directly into the network fabric. And so you get this nice blend of infrastructure growth plus the software growth that's tied to it.

Got it. Got it. Okay. That's helpful. Let's dig into a little bit more of Splunk and kind of the integration here. I think -- at the time of the Splunk acquisition, if I recall, correctly -- correct me if I'm wrong, but I think you guys noted that there maybe about 5,000 existing Cisco customers with no Splunk presence that you guys thought would be a good fit for Splunk. Is that the right number? And can you talk about how you're driving that converse -- because candidly, there's a lot of investors out there that also feel that Cisco Splunk could be a share donor. But talk a little bit about the target-rich customers? And how are you going to drive conversion?

Yes. So the 5,000 accounts that were noted before or 5,000 accounts were identified, there's actually more than that, but that's the -- that was the target list that we set. And again, these were customers that were loyal to Cisco and had a broad set of product capabilities from Cisco, but had spent no money with Splunk. When we announced the closure of the deal, we also announced a focused program in our go-to-market efforts where we're effectively spiffing the Cisco team to support helping Splunk sellers get into those accounts and penetrate those accounts. And as we got to the end of our Q4, even though we're really only 90 days into the deal, we actually had seen some number of those accounts closed. And even beyond that, we saw some very big deals happened that where Splunk was an integral part of the deal. So we noted, for example, there was a 9-figure deal that included Splunk that happened in the Q4 time frame right out of the gate. And so this is -- that was not all Splunk, right? That was across the broad Cisco product line, but Splunk was a very important and critical component. So the 5,000 customers is really this focused effort to go drive the broader connection and working as well with a white glove process to bring Cisco partners in to -- that maybe had not sold Splunk but were loyal to Cisco. And so engaging those partners to ensure that we then begin to accelerate our opportunity broadly within the Cisco ecosystem. And if you combine the number of sellers that Cisco has, with the number of partners that Cisco has, I mean, our reach just grows to a whole different level. And that's the thing that I think we're -- we continue to be very excited about. And we're seeing the early makings of that benefit because we're getting reach to places we just didn't have reached before.

Got it. Got it. That makes a lot of sense. I guess in terms of -- on that large customer that you noted on the 4Q call, what do you -- so what does that typically mean from a customer perspective? Is there a list of competitors that are being displaced in that instance? And the follow-up question is around pricing. There's been a lot of -- as you know, better than I should carry, there's been a lot of questions on Splunk pricing over the years. I know you guys made a lot of changes as a stand-alone entity pre-acquisition. But talk about sort of like how pricing plays into that consolidation effort. And then are you seeing any sort of themes from a consolidation perspective?

Yes. So I think a couple of things. I think, one, on the specific large deal, this was a bigger, broader commitment to Splunk displacing as an existing set of tools that they had. So Splunk was installed, but this is a very big deal that [indiscernible] the breadth for which we are being used. So there was competitors that were displaced as part of that. And I think -- and then within that broad bracket of that large deal, I think there's -- we're putting Splunk within the Cisco-buying programs, of which that deal was part of one of the Cisco buying programs. And so that gives the customer more leverage and more consistent discount structure across all the components of Cisco. So that's a very big positive. And going back to your pricing question about, which I think is a really important one, we've been on a journey, and I think we've made tremendous progress on our journey. So just to do a little bit of history for those of you that aren't totally familiar, if you go back in time 10 years ago, Splunk had an ingest-based pricing model, meaning you paid a toll to Splunk when you brought data into Splunk. Fast forward, roughly prior to me joining, but probably 5 years now when the bulk of our business moved to the cloud, we introduced what's known as workload-based pricing. Workload-based pricing allows you to basically tie the value that you're getting. So what are you doing within Splunk and the outcome you're getting. And so people pay for the workload that they have, but there's no penalty for bringing data in. And a very good example of that is you think about access logs, super common in security, did Matt log on to Salesforce at this time or not. And you don't need that data all the time to do analytics on, you only need that data if you have some event you need to do an investigation around. So you can bring all those access logs into Splunk at no cost, it costs you nothing. And only if you're doing data analytics around that, do you pay Splunk a toll. So I think the workload-based pricing became something that was a very important change in the way we thought about how people had to pay for Splunk. And it's been very important in changing people's perceptions of Splunk's expensive. At the same time, one of the things that we've been doing a lot of work on is, as people's digital footprints have grown, data volumes have just continued to increase, and so we've introduced a whole set of capabilities to help customers really think about, one, how much data do they want to manage. And then two, where do they want that data to live? And so from a -- how do you -- how much data do you want to manage, like we encourage customers to preprocess data before it goes to Splunk. So a good example of that is firewall logs. They're super voluminous, you don't need all that data to get the right threat telemetry. And so you can shrink down the size of those logs, using capabilities that we provide. And these are capabilities we provided no cost. We had previously forced customers go to third parties like a Cribl or something like that, where you don't need to go spend money on licensing for something that you can get from Splunk. And then secondly, we have built a strategy on Federation, meaning you can decide to store your data outside of Splunk and still get the benefit of Splunk. And what that means is you can, for example, store logs in Amazon Security Lake and still through a single Splunk search bar, get access to that data and not have to necessarily bring it into Splunk and have it live in Splunk. And so this idea that while data volumes continue to grow, we want to help you shrink the amount of data that you need to retain, and then we want to help you thoughtfully decide where you want that data to live and what's the most cost-effective location for that data and then give you the power of Splunk no matter where that data lives, and we call that our Federation strategy. The other thing that we do that I think is really important in it, again, it's -- it factors into pricing and how you think about cost is we allow you to use Splunk across a multi-cloud hybrid world. And we have so many customers today that have some on-premise footprint. They want some Splunk there. They have it in the cloud. And then with data privacy rules, oftentimes, you're forced to have separate environments for separate countries and being able to see across that entire environment with Splunk and not have to backhaul all this data to a central location has been really, really important and instrumental in helping customers, again, think about how do you manage all this cost out. That was a long answer to your question, Matt, sorry about that.

Yes, it's a helpful history lesson because I agree there's still a lot of confusion out there that I still get. I guess on a go-forward basis, how do you think about leveraging the broader Cisco portfolio to maybe drive even more rapid consolidation, like are there some additional discounting? Is there even some additional pricing, promotions that you think could leverage the broader platform to give customers even a more consolidated view?

Yes. I think at a real simple level, just being part of all the Cisco-buying programs that exist. And so we have buying programs that exist for our customers that allow them to buy across our portfolio, have common discount rates and discount capabilities that in a standalone world, we would have had available within Splunk. And so at a very simple level, our largest customers will benefit from having Splunk within all of the Cisco-buying programs.

Got it. That makes sense. And then there's -- as you probably know more than I do, there's a lot of competitors that are targeting Splunk for competitive displacements post the Cisco acquisition. I guess from your perspective, why won't that happen?

Yes. I think it's really simple. I think for us, and as I mentioned earlier in this our pace of innovation is pretty incredible. And I think the value that we can bring today is more than the value we could bring when we were stand-alone. And the thing that has -- I think the thing that as people do not fully understand or appreciate about Splunk is the level of innovation that we've delivered over the course of the last 2 years is pretty amazing. And so the Splunk 3 years ago is not the Splunk of today. And so I'm confident that we will continue to deliver on this path of innovation, and we will deliver value from the fact that we're part of Cisco and this broader opportunity to bring capabilities that live within Cisco, simple things like Threat Intel, which you're just going to get for free, it's just going to show up in the product. And so there's a whole set of values that we will deliver that I don't think our competitors can come close to. And today, when I look at the industry dynamic from a security lens, I would say, bringing together XDR and SIEM is something that no one's figured out. I think we were going to be the first vendor that can really deliver something comprehensive that gives you rich detections plus this broad investigative environment that works across a multi-cloud hybrid world, which is hard, super hard and that we can solve the customers' issues around how do you manage all this data. And it's amazing the number of customers that will say, "Oh, we're going to go try something then they try it and they can't -- they literally can't get the capabilities to work to do what Splunk does. If you look at it from an observability perspective, one of the things that we did right out of the gate was we moved AppD into Splunk. So I don't know if this is well known, but we took the AppD developers that were living within Cisco. And on day one of announcement of the Splunk acquisition, we brought all those developers into Splunk. And then subsequent to that, we brought all the AppD sellers that was a separate specialist team, and we've now converged them with Splunk. And so we've been on a path of integration of bringing the benefits of APM under AppD, bringing that and integrating that with the core of Splunk, so you can move back and forth between AppD and Splunk and get the benefits of both worlds and then bringing the value of Splunk's durability cloud into that picture. And so you have a single offering that spans whatever application architecture you have, whether it's traditional or cloud-based app and then all the richness that you get from Splunk core. And so all of that over the course of the last 4 months, we've rationalized all that. And we made a whole bunch of progress really, really quickly. And again, with that combined then with our ThousandEyes offering, which allows you to see across your network as well as unknown networks, we have visibility that no one else has. And so I think there's just tremendous value that our customers get because we're together. And it's clear to me that lots of people think it's easy to go take us out? Not. This is not. And I think we're moving fast from an integration standpoint and delivering real value. And one of the things, I would say, is we've been really focused. We've not allowed our team to be distracted at all. And so I think that has also played a really important role.

That's great. That's great. I want to spend a little bit of time on security, in particular. I believe in Q4, security revenue grew, I think, about 6% ex Splunk. And On the call, I think the team talked about a number of competitive wins, continued kind of growth in SASE and then double-digit growth in networking security. Can you talk a little bit more specifically about what drove those results? And what are your expectations for security performance in fiscal '25?

Yes. So I'm super enthusiastic about the innovation and progress that we've seen within the broad Cisco product line. And much of this is because of investment in innovation that was relatively new. And so I referenced earlier the Cisco XDR solution that was introduced roughly a year ago, there's been tremendous momentum there. In the SASE world, there's been tremendous momentum and great customer adoption in the SASE world. And I think the strength of Cisco's networking, but plus the strength of what the security team has built, I think puts us in a really unique position to continue to take share and do really well in the market. And then you bring all that together with these new capabilities, like Hypershield that I referenced, Hypershield started shipping at the end of August. Again, that's a whole -- there's like nobody in the market that has anything competitive to this and allows us to really lead from a perspective of helping detect lateral movement across the network. It gives you AI-based network segmentation, allows you to do controlled updates. There's a lot of really cool features in that solution. And so there's a -- because of the investments that have been made, we feel very good about the opportunity to continue to grow, security at a nice pace, and I think as we rationalize Splunk into Cisco, I think we'll continue to see other areas of growth, but I feel really good about it. And there's been a lot of progress made.

You mentioned Hypershield a few times, and I know that's part of sort of Cisco's broader security cloud initiative and something Jeetu talks about quite a bit. Can you talk about what Cisco can bring to bear when it comes to security consolidation, especially when we're talking about Palo Alto, Zscaler and CrowdStrike when it's not just a battle at the network, but it's increasingly at that cloud layer that feels like a real battleground today. Can you talk about how HyperShield positions the company and like if we were to fast forward a couple of years from now, what's going to be the market perception on Cisco? Because I think a lot of people think Palo and some of the independent vendors are better positioned. But why will Cisco gain share over the next several years? And is Hypershield kind of a big part of kind of the broader Cisco cloud strategy?

Yes. I think Hypershield will play a critical role because it's a capability that has been desperately needed in network security. It differentiates us from the other sort of traditional network security vendors that are just operating a firewall. I think the combination that we deliver with Hypershield plus our firewall, I think, is something that customers are incredibly excited about. Like the early feedback from the preview customers was phenomenally good. They hadn't seen anything in the market like this. Everyone has been thinking about is there some way to get automatic segmentation, which has been an industry hard problem. So I think there's real differentiation there. And I think the opportunity for Cisco broadly is how do you bring world-class networking together with security to detect lateral movement because if that's what you can do, that's going to stop the kinds of issues that we've seen in the market. And there's a tremendous opportunity to get all that right. And so from the detection work that we're doing at the XDR level, the work that we're doing at the network level with Hypershield and the work broadly we're doing with SASE, I think we're really well positioned, underpinning all of that with Splunk. I think it puts us in a very unique position. And so I think you'll see networking -- excuse me, you'll see security continue to grow as a part of the overall Cisco product line, and it's a big area of focus on top to bottom in the company.

Thanks for that Gary. One of the questions we got from an investor was -- and I now read it kind of similar to how it was written, but the Cisco see the increased infrastructure modernization is a leading indicator for a firewall cycle? Or what cycle do you see in the business that could promote a broader refresh cycle later this year or into next year?

Yes, it's a good question. The one thing we noted in our Q4 earnings results was the fact that customers -- we had some -- a reasonable number of very large infrastructure upgrades, preparing for AI workloads. And that was really, again, broadly from core network to firewall, all of that, rethinking what does it need to look like -- what does the environment need to look like to support AI workloads. And so I think there will continue to be catalysts there where customers rethink the environments they have, where those AI workloads going to run? Are they running into the cloud? Are they running on-prem or some combination? And what does the infrastructure need to look like to support it? So that's the one thing that we do see, and we noted that in our Q4 results and led to some very large deals for Cisco.

That's excellent. Yes. The other topical conversation [indiscernible] was the CrowdStrike outage. And I'm wondering, a lot of us, on the analysts' side, have been asking a variety of type of vendors, does it change customers' view of consolidation, too much concentration risk? And a lot of vendors have been saying, no, they don't think that, and you can imagine probably that's what they'd be saying. But I guess, I'm curious, like from your perspective, do you think that drives more consolidation, less consolidation? Any sort of like concentration risks that you're hearing from customers?

I think the one thing that I hear is just the concern of our resilience, right? Because what the CrowdStrike event pointed out is that all of these things are digitally interconnected and when something goes sideways, it affects everybody. And so I think customers are thinking a lot more about digital resilience broadly and what do they need to do and invest to ensure that no matter what happens, they can continue to operate as a business. And so I don't think it changes customers' perceptions on am I buying too much from one vendor or not. I think -- but I do think that they're stepping back and looking at the importance of resilience, like how do they stay up and running at all times. And I frankly think that pushes more opportunity on the durability side of our business.

Well, that will be a good dovetail into our next set of questions. But I guess, from your lens and talking to customers, I think a lot of the feedback on future product initiatives or M&A comes from what customers are asking you? Are there anything in your time in this elevated role that you're hearing like, Gee, I'd love to have Cisco help me out from a cyber perspective more in this area that maybe -- could be some additional investments for you guys?

No, I think -- and you've heard this for a long time, Matt, I think, customers generally want to have less vendors that they can deal with if they can and they looked at vendors like Cisco to help them on a consolidation journey. They want -- because the issue, frankly, is it's just a lot for organizations to manage and the more -- and people -- because they have deep investments in Cisco, they'd love to see more capability from Cisco, I think.

Got it. Got it. So more consolidation. You sort of led me to the observability piece of the discussion. I think ex Splunk, I think observability grew a little faster than Cyber, I think it grew about 12%.

Right, 12%.

I guess, yes, from your perspective, and I want to double click on AppD in a second here. But what drove those results? And how do you see observability spending playing out in 2025?

Yes. I think, resilience continues to be a tough topic. It's a [indiscernible] room topic now. It's not a low-level IT developer, SRE only kind of conversation. It's all the way at the highest levels of the company. And one of the things that we continue to see is larger organizations that have, I'm going to call it, monitoring sprawl. Every app environment grew up, they bought a different monitoring tool and there's just a sea of it. And there's no sort of consolidated single way to see across the broader digital footprint. And so one of the broad themes that we see is like how do organizations step back and have a strategy for driving resilience. And it's not by having 1 million different monitoring tools that is not the answer. And as I indicated earlier, I think one of the great things for Cisco is that we can support wherever a customer is on their journey relative to cloud, whether they still have on-premise data centers with traditional-style apps or whether they've moved to the cloud, they have modern microservices-based apps, whether they want to understand what's going on across their broader digital footprint from a network perspective, no one on the planet has more insight and data than Cisco. And so I feel like we're really well positioned as we work through this journey where customers really are trying to figure out what will ultimately drive resilience for them? And how do they bring together a strategy around understanding what's up and running and why is it up and running. And we continue to also see benefit in convergence of being strong in security and observability because these are close cousins of one another. And when something goes bump in the night and everyone is on a bridge trying to figure out what happened, you had to figure out, was it a cyber event that created the problem? Was it some application failure? Was it some network issue? What was the problem? And I think -- the thing that's exciting for me is that Cisco is really well positioned to help customers answer that question and really drive resilience across the broad digital environment.

That's great. I guess -- you mentioned AppD earlier that it's been integrated into Splunk like on day 1, I think a lot of new AppD years ago. Can you give us a little bit of update on the AppD portfolio and why it makes a lot of sense inside of Splunk?

Yes. I think at a very simple level, AppD is best-in-class APM for traditional applications. And the thing that we did as we came into Cisco is, Cisco had built some number of observability capabilities for the cloud, and we basically rationalized all this and converged on Splunk capability. So leveraging the historical APM capabilities of AppD to support traditional applications, but then integrating that with the core of Splunk and then bringing forward the observability capabilities that with Splunk's observability Cloud. And so putting all that together has been the integration work that we've been working on. And they're really natural complements to one and another now. And so any conflict that we had in the portfolio, we basically rationalized as we came into the company.

That's great. Are there -- so when you look at kind of then the broader observability suite, bringing together Splunk and AppD, are there holes in the portfolio today? Maybe it's on cloud monitoring, maybe it's on broader infrastructure. But just -- because obviously, Splunk was rich in heritage and SIEM and logging and obviously, AppD brings APM capabilities. But are there any holes that you see in talking to customers that Splunk could continue to solve for people?

Yes. I think, I don't feel like we have any big holes. And interestingly, and I think it was the last 30 days, Splunk/Cisco was named a leader in the APM Magic Quadrant from Gartner. And so I think it shows the investments that we've had have really paid off in terms of recognized market leadership. The thing that I'm now excited about is being able to leverage the broader network insights directly into our product. So Cisco historically had a product called ThousandEyes, which gave you all that network visibility. We're in the process of bringing that data into Splunk. So you can not only see across your application environments but you can also see across the network. And so we think that's super beneficial and that engineering work is ongoing, but we're very confident that, that's a capability that is just a natural extension from where we've been. And again, it's not something that the competitors would traditionally have had.

Well, similar to a question on the cyber side, when there are some of the larger cyber vendors feel like there's a share shift to be had from their perspective when you talk to some of the stand-alone observability players. They do feel like Splunk/Cisco is an interesting competitive replacement opportunity. How are you winning deals against a Datadog or Dynatrace or an Elastic when they claim that they're having some success as well?

Well, one, I think the market is big and the market is growing fast. And so I think we're extremely well positioned as you look at the strength of our securities. So I think that we can go see CISOs and I like the traditional security vendors, sorry, brought that up -- I think relative to the traditional observability vendors that have very little to limited presence with CISOs, I think we have a strong position and anchor in the security community. And then being able to bridge these 2 environments, I think, has also been incredibly important. And then the broad breadth of capability that we bring to bear, like -- what I see is that people try to take specific use cases away like they don't win the state, they might win some small thing. And at the end of the day, the customers are going to come back and bring it back together. So -- if I look at our -- at the very simple level, we don't publish our renewal rates, but I can say our renewal rates have stayed steady, not changed at all, which would indicate that competitors are making no progress in terms of taking Splunk out.

This is super helpful.

Yes. And the other thing that we've seen is our fair share of competitive displacements have all been big name competitors because we can deliver capabilities that those folks can't. And we continue to see momentum competitively on the security side where QRadar sort of a jump ball these days and lots of those QRadar customers are coming to Splunk.

Interesting. Yes, it feels like others have been talking about that as well. We started this call off and it was gloomy here, now the sun's out, so I've been fighting the sun all day with my shades, so you could tell that we're covering a lot of good ground here. I guess, Gary, it wouldn't be a call without talking about AI and I guess, more specifically, GenAI. What are Cisco's software's plans for AI and maybe just generative AI? And how do you guys think about monetizing it? Because I think it's one thing to talk about, it's another thing to actually get customers to pay for. But when you think about the broader suite that's sort of under your go-to-market perspective, how do you think about GenAI?

Yes. So you'll see AI from Cisco at multiple levels. So one is at a very straightforward level, you'll have unified AI assistance across all the products. And so Splunk had just brought to market AI assistance across both our observability capabilities as well as security and that will be unified with the AI assistance that live on the networking side as well as on the collaboration side as well as in security. So you basically have one AI system from Cisco broadly across all the products. At the same time, we're building AI into the way that products work. And so you'll see that at Splunk, you'll see that across Cisco. And so monetization of AI is not at the assistance level but will come from the product capabilities that represent features that customers will pay for. And then underpinning new product capabilities like Hypershield, you got AI built in that helps us do this automatic segmentation. Those are capabilities that leverage AI, not GenAI, but leverage AI to be able to create the value for the end customer. So you're going to see AI show up in a whole variety of ways, GenAI, specifically from an assistant point of view, and you're going to see that across the broad set of product lines that Cisco has. And then at the end of the day, we're obviously building infrastructure to support the AI build-out with things like HyperFabric which basically is a full end-to-end AI stack that is fully managed. And so it's infrastructure that customers can leverage to drive both inference and training workloads.

Go it. Well, maybe to wrap up -- this has been super helpful, Gary. I appreciate your time. It feels like, in some regards it is a new Cisco. There's obviously new assets, new leadership, taking new strategic focus, new go-to-market initiatives. There's also a lot of investors that are naysayers and maybe some traditional networking investors and maybe some software investors that are a bit more skeptical. What do you say to the folks that are maybe skeptical of Cisco and if this is a new Cisco and anything has changed? And like, I guess part of that answer is looking forward, if we're sitting here in a year or 2 or 3, what's going to be the most critical aspect to driving share outperformance over the next several years?

Yes. I think this is all about continuing to deliver great outcomes from a software point of view that deliver growth numbers that matter to investors. And I think that the way to monitor the progress is continue to pay attention to the growth numbers that you see coming from Cisco as it relates to a software portfolio and how that ultimately benefits the top line because we will be a major player in these AI initiatives as customers upgrade their infrastructure software is going to play a critical role in that. So it will play out in our numbers, in our growth numbers.

Excellent. Well, we're just about up on time here. Appreciate everything, Gary and Sami for setting up this call and everybody else from the Cisco IR team. [indiscernible] there's just some questions, feel free to reach out to me or you can get hold of Sami and the broader team at Cisco for further questions. But Gary, from all of us at RBC, best of luck, and thank you again for all your time.

Thank you. It's great seeing you, Matt. I appreciate your time.

Thank you. Bye now.

Bye-bye.