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

Hello, everybody, and welcome this afternoon. Sami Badri here, serving as Cisco's Head of Investor Relations, and with me are Chuck Robbins, who is our Chair and CEO, along with Mark Patterson, our CFO. On our Investor Relations website, you can find Cisco's earnings press release as well as supplemental information, which includes reconciliations between GAAP and non-GAAP figures. Later, once this call concludes, the recorded webcast and the slides will be posted to that same website as well. During today's discussion, we'll refer to financial results on both a GAAP and a non-GAAP basis; unless we say otherwise, product results will be discussed in terms of revenue, while geographic and customer results will be discussed in terms of product orders. Every comparison we make will be on a year-over-year basis. Please be aware that forward-looking statements, among them our guidance for the first quarter and for fiscal year 2026, will be part of what we discuss today. Risks and uncertainties apply to these statements, and they are described in detail within our SEC filings, in particular our most recent 10-K and 10-Q reports, which lay out significant risk factors that might lead actual results to differ materially from what our forward-looking statements contain. Regarding guidance, further details can be found in the slides and press release accompanying this call, so please review those as well. Unless Cisco makes an explicit public disclosure, the company will not comment on its financial guidance during the quarter. I'll now hand things over to Chuck.

Appreciate it, Sami, and thanks to everyone for being on the call with us today. Fiscal '25 wrapped up on a strong note, with revenue and gross margin landing at the upper end of the guidance ranges we'd given for the fourth quarter. Operating leverage continued across the business, driving robust profitability, and earnings per share came in above the top of our guidance. On top of that, we posted healthy gains in annualized recurring revenue, remaining performance obligations, and subscription revenue, which gives us a solid base for what's ahead. Profitable growth in the business keeps generating robust cash flows, which underpins our pledge to return capital consistently. During Q4, we handed back $2.9 billion to shareholders via buybacks and dividends, which brought the fiscal '25 total to $12.4 billion in value, equal to 94% of free cash flow and above the $12.1 billion that Cisco gave back to shareholders in fiscal '24. All in all, how we performed in FY '25 has laid a solid foundation as we shift attention to making fiscal year '26 Cisco's strongest year yet, consistent with what our guidance indicates. As we enter the next stage of AI, where agents carry out tasks autonomously side by side with people, network capacity demands will multiply to handle both extraordinary volumes of network traffic and a growing threat landscape. Our survey of IT networking leaders found that 97% of businesses think their networks need upgrading to deploy AI successfully. With nearly the whole product portfolio refreshed — industry-leading networking systems built on Silicon One, AI native security solutions, and software operating systems — Cisco is positioned well to supply the critical infrastructure the AI era requires. Let me now turn to the demand we saw in Q4, beginning with record AI infrastructure orders from webscale customers. Those orders topped $800 million during the quarter, lifting the fiscal year '25 total past $2 billion, which is more than double the original $1 billion target we stated in Q4 of fiscal year '24. That shows just how undeniably capable and relevant our technology is across multiple back-end use cases with some of the most technologically advanced customers. Broadly speaking, total product orders in Q4 rose 7% year-over-year, with solid growth in every geography despite a complex environment, which shows the valuable outcomes we keep delivering for customers around the world. Enterprise product orders climbed 5% year-over-year in Q4. As is typical in the fourth quarter, we closed several very large deals with major enterprises spanning different industries that are compounding the value of their investments by drawing on the full breadth of our technology platforms; a slide in our earnings presentation highlights both the breadth of Cisco's reach through 8-figure or larger deals and the versatility of solutions tailored to our customers' needs. Public sector orders declined 6% year-over-year in Q4, compared with a very strong fourth quarter in FY '24 when orders grew double digits year-over-year. Even so, overall public sector demand rose sequentially, in line with normal seasonality. Service provider and cloud customers keep placing a lot of orders — those were up 49% from a year earlier. The driver was triple-digit order growth in webscale, which happened for a fourth quarter in a row, and 4 of the top 6 webscale customers each saw orders rise by triple digits. In fact, 2 webscale customers each booked total orders above $1 billion across networking, security, collaboration and observability in FY '25. Telco and cable customers also showed strong demand in Q4, with orders climbing over 20% compared with a year ago. Now a bit of context on what's driving demand for our core networking and security solutions. Networking product orders rose double digits in Q4 — that's the fourth quarter in a row of double-digit growth — fueled by webscale infrastructure, switching, enterprise routing, industrial IoT and servers. Customers are showing real interest in the new Cisco Cat9k smart switch family, plus a fully refreshed set of highly secure routers, wireless access points and industrial IoT devices, all purpose-built for the AI-ready campus and branch. Silicon One powers our new smart switches, which deliver better performance, quantum secure networking and dramatically simplified cloud-native and AI-driven operations, all of which support the new realities as AI reshapes how we work and collaborate. With these new switches arriving, a major multiyear refresh cycle opportunity is opening up across Cisco's large installed campus switching base. Our industrial IoT portfolio, made up of ruggedized catalyst products, saw orders increase double digits for a fifth quarter in a row, and we expect solid demand signals to carry into FY '26, since countries worldwide are committing to U.S. domestic investments under their trade agreements. As more strategic infrastructure and manufacturing moves onshore to the United States, Cisco is well positioned to help connect and protect these capital-intensive investments at scale. As I said earlier, the AI infrastructure orders we booked from webscale customers were again exceptionally strong, surpassing $800 million in the quarter. As expected, more than 2/3 of the product mix of those orders was in Systems, with the rest in Optics. In the enterprise specifically, while it's still early, AI orders are ramping, and our pipeline is growing into the hundreds of millions as these customers look to Cisco for simple, scalable and secure solutions for the AI era. Our expanding partnership with NVIDIA also puts us in position to meet these new demands, with integrations of Cisco Nexus switches with NVIDIA's Spectrum-X architecture now complete, offering low latency, high-speed networking for AI clusters. Beyond that, the Cisco Secure AI factory with NVIDIA offers a trusted blueprint for building secure AI-ready data centers for enterprises, sovereign cloud providers and newly emerging Neocloud providers; we also see opportunity with Neocloud providers ramping, with several large deals in Q4 that aren't included in the AI infrastructure orders I mentioned before. The strategic partnerships we recently established in the Middle East — HUMAIN, G42, and Stargate UAE among them — are each advancing on schedule. We anticipate that sovereign AI possibilities will gather steam during the back half of fiscal '26. Our view is that Cisco will serve as a central systems supplier for these major AI training and inference cluster builds, and will be essential to how they are developed and ultimately hyperscaled. When we examine the AI chance before Cisco in its entirety, we break it into three separate yet interrelated pillars. The first is AI training infrastructure for webscale clients. The largest web scalers are putting combinations of our Cisco 8K, Silicon One, optics and optical systems into service, and we anticipate that demand for these technologies from Neocloud providers as well as sovereign customers will rise in fiscal year '26. The second is AI inference and enterprise clouds. Through faster innovation in both hardware and software, together with our NVIDIA partnership, we aim to make AI infrastructure deployments for the enterprise simpler, quicker and less risky. The third is AI network connectivity. To get ready for widespread rollout of AI agents and applications, customers are using Cisco platforms to help modernize, secure and automate how their networks operate. As we advance toward Agentic AI and inferencing demand spreads into enterprise and end-user networking environments, network traffic will hit levels never seen before. Not only will network traffic rise past the peaks seen in today's chatbot interactions, it will also stay persistently elevated as agents interact continuously.

Our earnings presentation includes a slide, available on our site, that illustrates this updated traffic model. When agents can independently make choices and carry out tasks, security grows even more critical to ensure they operate reliably and safely. As a dependable partner for enterprises, hyperscalers, Neocloud, and sovereign cloud providers such as Cisco, we have the opportunity to drive this generational transformation in networking and security and to deliver the essential infrastructure needed for the AI era. Moving on to security now. During Q4, we recorded order growth in the mid-single-digit range. With Splunk now part of Cisco, the combined operation saw new logos for Splunk climb 14% compared with a year earlier in Q4 — evidence that our joint selling efforts and shared development work are paying off. Products we've launched or updated — Secure Access, XDR, Hypershield, and AI Defense among them — continue gaining traction, drawing 750 new customers in the quarter. When enterprises adopt Hypershield, most pair it with our N9,300 smart switch, which lets them weave security directly into the network fabric. We believe securing Agentic AI is only possible when protection is built deeply into the network itself, and that Cisco alone is positioned to make that happen. Let me now turn to our innovation pipeline, which is speeding up. At Cisco Live U.S. Back in June, we rolled out the biggest set of innovations we've ever brought to market, unveiling more than 20 offerings built around customer needs spanning the whole portfolio, all aimed at helping them stand up AI-ready data centers and safeguard their workplaces against future challenges through a foundational layer of digital resilience. You can find the full roster of launches in our slide deck, though I do want to highlight our AgenticOps, which customers are already responding to positively. Cisco AI Canvas represents a groundbreaking generative user interface that lets network and security teams collaborate in real time, and it's tuned for interactions involving both people and agents. Driven by Cisco's sophisticated deep network model LLM, AI Canvas brings together real-time telemetry from a range of platforms, dramatically streamlining IT operations and speeding up troubleshooting. Every innovation we rolled out during FY '25 — from core networking offerings built on Cisco Silicon One to sophisticated security solutions and consolidated management platforms — was created with AI as its bedrock, which strengthens Cisco's platform edge. That means each individual technology isn't merely valuable on its own; it multiplies what customers already get from their prior investments. Within our customer experience group, we keep applying GenAI and Agentic systems to areas such as services as code and AI agents handling in-product support, renewals and adoption. As of today, AI and automation play a role in more than 2/3 of support cases, boosting the share of complicated cases that we're able to resolve in a single day. Additionally, adoption of Cisco's in-house AI tool is growing among our employees, and we're witnessing more sophisticated applications take shape in areas like engineering, sales, operations, and the people policy and purpose group, which is driving notable efficiency improvements for our teams. In short, demand for what we build is evident across the markets we serve, and we see even greater opportunity ahead as we advance toward Agentic AI. The speed at which we innovate has reached an all-time high — AI sits at the core of our design work, security is deeply integrated throughout our networking portfolio, and we're giving customers easier ways to operate. That strong results also fuel our approach to capital allocation, returning substantial value to shareholders while positioning the company to succeed in fiscal '26. One last thing before I finish: I want to express my gratitude again to Scott Herren for the leadership and partnership he has shown across the last 5 years. His efforts were pivotal in moving us toward greater software and recurring revenue, which brought more predictability to our business and lifted shareholder value. Enjoy your retirement — we send you every good wish. Let me also pause to recognize our teams for the effort they put in to finish the year, acting with urgency as One Cisco, and above all for the steady dedication they show toward producing valuable results for our customers. With that, I'll hand things to Mark, who will walk through the quarter in more depth along with our outlook.

Appreciate that, Chuck. It was a strong quarter for us, with revenue along with non-GAAP gross margin and operating margin landing at the top end of what we had guided, and earnings per share coming in above the top end of our guidance, plus healthy operating cash flow; for the quarter, total revenue reached $14.7 billion, an increase of 8% year-over-year. Non-GAAP net income came to $4 billion, rising 12%, while non-GAAP earnings per share were $0.99, climbing 14%, which shows solid operating leverage as EPS growth exceeded revenue growth. Before getting into the specifics, it bears repeating as a reminder that Splunk contributed a full 13 weeks in Q4 FY '24 a year ago; as a result, the year-over-year growth rates we report are entirely comparable this quarter. Let's examine our Q4 revenue more closely. Total product revenue came in at $10.9 billion, rising 10%. Services revenue was $3.8 billion, unchanged year-over-year. Networking rose 12%, with gains across the bulk of the portfolio, paced by double-digit increases in Internet infrastructure and enterprise routing, plus healthy growth in switching, partly offset by a decrease in servers. Security rose 9%, mainly fueled by expansion in our Splunk and SASE offerings. Collaboration rose 2%, helped by healthy device growth. Observability came in 4% higher, driven by strong performance from Splunk and ThousandEyes. Moving on to our recurring figures: total RPO reached $43.5 billion, up 6%, and Product RPO climbed 8%, while short-term RPO totaled $21.7 billion, up 4%. We closed the quarter with total ARR of $31.1 billion, an increase of 5%, as product ARR grew 8%. Subscription revenue overall was up 3%, hitting $7.9 billion, which represents 54% of Cisco's total revenue. Software revenue overall climbed 5% to $5.6 billion, and software subscription revenue also grew 5%. Product orders in Q4 were up 7% compared with a year ago. Now let's look at product orders broken out by geographic segment: the Americas gained 5%, EMEA gained 10%, and APJC gained 7%. Looking at our customer segments, service provider and cloud grew 49%. Enterprise was up 5%, while public sector declined 6%. On a non-GAAP basis, total gross margin came in at 68.4%, an increase of 50 basis points compared with a year ago, which put us at the high end of the range we had guided. Non-GAAP product gross margin landed at 67.5%, up 50 basis points, driven in part by gains in productivity. Non-GAAP services gross margin was 70.8%, which also represents a 50 basis point improvement. Tariffs had a small effect on our overall gross margin, and that effect was slightly less than what we had assumed when setting guidance. Profitability and financial discipline continue to be priorities for us, and non-GAAP operating margin was 34.3%, at the top of our guided range. For the quarter, our non-GAAP tax rate stood at 18.1%. Now let's look at our balance sheet. Cash, cash equivalents, and investments totaled $16.1 billion when we ended Q4. Operating cash flow reached $4.2 billion, a 14% gain, driven primarily by growth in revenue and earnings. On the capital allocation side, we returned $2.9 billion to shareholders during the quarter. That figure consists of $1.6 billion paid out as quarterly cash dividends and $1.3 billion spent on share repurchases, leaving $14.2 billion remaining available under our repurchase program. Switching to the full fiscal year, revenue came in at $56.7 billion, marking a 5% increase. Non-GAAP gross margin for the year was 68.7%, which represents a 120 basis point improvement. Down at the bottom line, non-GAAP net income reached $15.2 billion, unchanged from the prior year. Non-GAAP earnings per share came in at $3.81, a rise of 2%. Operating cash flow totaled $14.2 billion, which is 30% higher than FY '24. The cash flow improvement across the full year got a boost from some sizable tax payments made early in FY '24 that didn't happen again in FY '25; we handed back $12.4 billion in value to our shareholders via cash dividends and share repurchases. That figure consisted of $6.4 billion in quarterly cash dividends and $6 billion in share repurchases. During fiscal 2025, our dividend went up for a 14th consecutive year, a move that highlights the confidence we hold in the durability and steadiness of the cash flows we continue to generate. Looking at the whole picture, we delivered a strong quarter and a strong year, with revenue and earnings results that came in above what we had anticipated, driven by healthy growth in orders along with solid margins; for all of fiscal 2025, non-GAAP operating income and margin reached record levels, demonstrating our ability to generate operating leverage even as we grow revenue at a robust pace. Our attention remains on making strategic investments in innovation, which positions us to capture the meaningful growth opportunities that lie ahead. Underpinning all of this will be our ongoing discipline around managing spending. That mix — a really potent one — is what continues to drive robust cash generation and underpins our ability to give back a lot of value to shareholders. Now on to guidance. Tariffs have become somewhat clearer, but conditions remain complicated. For Q1 and our fiscal 2026 outlook, we've assumed the tariffs and exemptions in effect today remain unchanged through the close of fiscal 2026, and those are: China at 30%, with an exemption covering semiconductors and certain electronic components providing partial relief. Mexico at 25%, and Canada at 35%, applied to components and products that fail to meet the existing USMCA exemptions. A number of nations reverted to reciprocal tariff schedules tailored to each country. An exemption covering chips and specific electronic parts mostly cancels that out. On top of that, copper, steel, and aluminum duties, plus counter-tariffs, contributed a minor effect. Where it makes sense, we'll keep drawing on our top-tier supply chain group to reduce tariff consequences. Because of the adaptability and nimbleness we've embedded across our operations in recent years, the breadth and volume of our supply network provides distinctive benefits as we serve customers around the globe. Going forward, expect us to stay committed to resilient expansion paired with fiscal restraint, generating operating leverage and maintaining capital returns. Looking ahead to our first fiscal quarter, here's what we're projecting: top-line results should fall somewhere between $14.65 billion and $14.85 billion. On a non-GAAP basis, we anticipate gross margin landing in the 67.5% to 68.5% band. Operating margin on that same non-GAAP basis is expected to come in somewhere between 33% and 34%. As for non-GAAP earnings per share, we're looking at a range of $0.97 to $0.99, with an assumed non-GAAP effective tax rate of about 19%. Now shifting to fiscal year '26, our guidance is as follows: revenue in the range of $59 billion to $60 billion, and non-GAAP earnings per share between $4 and $4.06. Sami, why don't we go ahead and open the line for questions.

Thanks, Mark. Prior to opening things up for questions from the analysts, please keep in mind that each person should limit themselves to one question plus just one follow-up. Michelle, would you bring in the first analyst waiting in line?

My initial question, I suppose, is this: when we examine your outlook, considering what you've said regarding the AI opportunity and how sovereign is beginning to contribute during the latter portion of this fiscal year, if we simply take the midpoint, it appears to presume some slowing in growth from roughly 6.5%, 7%. For the fiscal first quarter, our guidance was approximately 4.5%, heading into the remaining 3 quarters. I'm wondering whether this indicates caution on your part. Are you incorporating any shift in the demand landscape? I'm simply trying to understand how we might connect that slowdown across the rest of this fiscal year's quarters.

Aaron, I appreciate it. Let me begin by saying the AI opportunity is plainly something where our execution has left us pleased — and looking ahead — the factor you're describing is tied purely to year-over-year comparisons later in the year. It isn't — it hasn't — it's not intended to indicate any demand shift or anything along those lines that we believe. Among the questions I anticipate is whether the campus refresh starts to take hold. And ought that to serve as a significant revenue driver in the next fiscal year? If you consider the campus, the Cat9k is in year 8 of this transition. So it's — and many customers will need considerable time to assess that and examine those products prior to starting deployment; so we believe that will take hold next year as well; and we're pleased with our progress on AI. But the annual progression, I believe, is truly tied to comps. Mark, is there anything you'd like to add?

That's accurate, Chuck, I'd agree. You also need to keep in mind that looking at last year, apart from Q4, that marked the initial quarter where a true like-for-like comparison existed, since Splunk was included in the year-earlier period. Consequently, certain growth rates recorded ahead of Q4 were clearly elevated beyond what they would have been under other circumstances.

Thank you, Aaron. Michelle, we can move to the next analyst.

Thanks. I might have two things. First, regarding security and the business overall — you've now hit the one-year mark with Splunk, as you both just noted — how do you view the growth prospects there, given that you have some newer offerings and some legacy ones phasing in? Then second, it would be helpful to hear about the new CFO's priorities to set a baseline.

Sure. Let me take security, and Mark, you can certainly address the CFO priorities. Meta, I appreciate those questions. Coming out of the most recent quarter, my outlook on security is more positive, and here's the reason. During the prior quarter, I shared with everyone that we essentially have two groups of offerings; one group is fresh and updated — that includes SASE, XDR, Hypershield, AI Defense, plus our updated firewall lineup; the other group consists of legacy items that aren't major investment focuses for us at present and sit in the extended portion of their life cycle. Looking at those fresh and updated offerings, again, counting our updated firewalls, we recorded order growth above 20% for the quarter. So adoption remains broad. Yet the figure that might give you greater assurance is this: excluding U.S. Federal, which obviously faced a difficult year, security order growth across the rest of the world rose by double digits in Q4. So we are truly — we're observing this acceleration, and I mentioned — I believe I noted on the previous call that it's unfolding more gradually than I expected. Much of that stems from these items being ratable; even so, I'm pleased with our position. We now have 80 new Hypershield clients, mostly tied to this new smart switch, so that approach is delivering results. Also, we added more than 480 new SSE clients during the quarter. So that's — our Secure Services Edge is gaining real momentum. And what I'd add is that given how we expect this to develop, I foresee the growth rate steadily rising as we move through this fiscal year. That covers security. Mark, would you like to handle the second question?

Okay, and thank you, Meta, for that question. To begin, I simply want to express appreciation to Scott — he has definitely been a solid collaborator across a number of years, and specifically for the effort he has put in alongside Cisco, which I believe helped us move toward software and subscription models. At this point I have spent 25 years at this company, serving in many different positions and capacities. As I look forward, there is a substantial opening in front of us, whether that involves AI infrastructure, the webscale arena, or the enterprise AI chance that is still nascent yet expanding. Clearly, Neoclouds and the sovereign AI construction effort are taking place. Beyond that, consider cybersecurity and the way we have strengthened our position through Splunk, plus the campus refresh that lies ahead of us, which is going to span multiple years. My view is that we have an excellent opening. What I truly want to accomplish is ensuring we are properly funded to succeed. We are examining those possibilities to determine what is required for us to win. Additionally, regarding what people should anticipate from me, you should count on me concentrating on durable profitable growth, clearly on financial discipline and transparency, and really on delivering value back to shareholders.

Meta, there's one additional item on the security side I should have brought up. One more favorable development this quarter: with respect to Splunk, we now have 2 quarters in a row. As you may remember, a key opportunity we identified was landing new accounts by selling Splunk into organizations that hadn't previously used it. During Q3 and Q4, we signed more than 300 new logos — first-time Splunk buyers. So that approach appears to be paying off. The teams are executing very well on this, which gives me another reason to feel confident about the security strategy for this year.

Meta, thank you for the question. Michelle, we can move to the next analyst.

Starting off, I'd like to raise this concept of orders being pulled forward. I understand why customers might keep their reasoning to themselves when they decide to place certain orders. Still, it worries me that the federal vertical in particular, facing possible budget reductions, along with enterprises anxious about what tariffs could mean, might have sped up some purchases and in doing so taken them out of subsequent quarters. Then for my second question, could you share your view on how the AI business will be made up over the longer horizon? Right now we have that 2/3, 1/3 division between systems and optics, and I'd like to know how you see that shifting. Or do you consider this a steady state we should expect?

Thanks, Simon. I'll offer a few thoughts on the pull forward, and then Mark can provide some data points showing why we feel quite confident it hasn't occurred at scale. We've examined — there are numerous metrics we track in this business; and I'm in constant contact with customers. Our field teams are in constant contact as well; and across the last 6 months, not once has a single customer told me, "I'm going to place this order right now ahead of price increases." That's not to say we're raising prices, we haven't made any announcement of that kind. I'm simply pointing out that's the theory you're raising. So I'm not claiming it hasn't occurred somewhere, but had it been widespread, I believe I would have heard about it. Mark?

Yeah, I'll throw in a handful of additional figures. For sure, we spoke with a lot of channel partners, and we also examine how our orders normally flow across month 1, 2, 3, and so on — everything there checks out. On quite a few of our products, we actually ship software that only gets turned on after delivery. So one metric we track is the gap between shipping and activation, checking whether it has widened — it hadn't. We also review the delivery dates customers ask for. If those keep getting pushed back, that could signal they don't truly need the hardware yet and simply wanted to lock in an order early — no problem showed up there either. And then, naturally, we examined whether pipeline deals had been pulled forward, and there was nothing out of the ordinary. So we feel quite sure that no signs of pull forwards have appeared.

And Simon, regarding what you asked next — the makeup of the AI business, particularly within cloud providers' back-end networks as they stand now — nothing I'm seeing points to a dramatic change there, judging by what they've told us in our discussions. I don't — nothing has come to my attention that would make me think that kind of shift is altering in any significant way.

Thank you, Simon. Michelle, we can move to the next analyst.

Thanks, that's helpful. Chuck, I'd like to dig a bit deeper into what's happening with the networking cycle. There was a period when customers were working through a digestion phase, and following that, you started to observe a recovery in the networking cycle. At this point, we've seen two quarters in a row of solid growth there. As you think about the coming year, or fiscal '26, how sustainable does that growth look — and if we take out the new upgrades related to Cat9k, where do customers currently stand regarding their plans to upgrade legacy infrastructure? And really, what I'm driving at is that at the Investor Day, you mentioned 2% to 5% as the range for networking over the medium term. So where do you expect to land on that in fiscal '26?

Thanks, Samik. I think if you take a step back, two things are happening. You've got the AI revolution on one side, and then you've got the refresh opportunity on the other. And regarding that AI revolution, here's what we're seeing — and we saw this play out with the various transitions across the past ten years or so — typically these things emerge initially among the cloud providers, where the AI activity is unmistakably happening, and after that they spread into the enterprise. In this instance, we see movement on the back end, and we're confident the shift from back end toward front end will occur once enterprises start consuming more of these services. Beyond that, as we all know, enterprises are going to stand up inferencing on-prem as well. Additionally, the telecommunications sector is beginning to show improvement—customers there have informed us they're expanding network capacity and upgrading their infrastructure in anticipation of AI. Consequently, we believe AI will fuel network modernization throughout each of those segments. On top of that, there's the campus refresh, an area where we've barely gotten underway. Keeping in mind what I mentioned before, a routing upgrade is also in play. Our data center networking unit offers plenty of fresh technology—incidentally, enterprise orders there climbed by a mid-teens percentage during the last fiscal year. Then there's WiFi 7, which posted triple-digit growth compared with a year ago. So adoption is looking solid, and we've also introduced new campus offerings. However, when it comes to the fresh campus switching offerings, keep in mind we're already eight years into the Cat9k cycle. And frankly, when you consider the pre-Cat9k gear still sitting in our customers' environments, you're talking about an installed base worth tens of billions of dollars that remains available for us to pursue. So all of these factors together give us strong conviction that we can hold to the range we laid out on core networking at Analyst Day.

Thank you, Samik. Michelle, we can move to the next analyst.

I also have just a couple. First, regarding AI, could you discuss those AI orders exceeding $2 billion this year? Did they turn into revenue during the year? And how should we expect them to convert into revenue for next — then second, only about networking. Could you say a bit regarding the quarter's orders broken out by subsegment, campus and data center switching, wireless, routing, and any notable inflections you'd highlight across those product categories?

Absolutely, Michael. Let me offer some comments first on the — I want to provide clarity regarding the webscale business and how it appeared, and then Mark can address the revenue in FY '25 tied to their AI infrastructure orders. So I simply want to ensure everyone grasps our webscale business. To begin, we sell technology into the back end. We sell technology into the front end or the traditional cloud networks, and we sell our enterprise portfolio to these customers too. And if you examine our whole portfolio, these customers in aggregate grew triple digits 4 quarters in a row from an orders perspective. We had four of them that grew triple digit in Q4 by themselves. And as I stated in my prepared remarks, we had two of these customers across the portfolio that placed orders in excess of $1 billion each in fiscal year '25. So if you recall 5 years ago, we were discussing our strategy in the space, this definitely wasn't the case; so we feel good about the progress we made. And then I think you grasped on the AI infrastructure, we had greater than $800 million in orders during the quarter and we have greater than $2 billion on the year, more than double our original target. Mark, do you want to discuss a little bit about the revenue?

Okay, absolutely. As for the sales and units tied to those AI deals, they basically moved forward and scaled up just as we had anticipated throughout fiscal year 2025. So across the entire year, we booked roughly $1 billion in revenue from them.

During fiscal year '25, we took orders from webscale customers for AI back-end work, and from those we recognized revenue of approximately $1 billion.

Thank you, Michael. Michelle, we can move to the next analyst.

I've got a pair of questions too. Chuck, staying with the AI topic since you mentioned it briefly, could you speak to how enterprises are adopting AI and how you expect that enterprise opportunity to develop, particularly given that Silicon One appears to be the sole partner silicon that NVIDIA backs at this point? So could you describe the size you expect for this enterprise opportunity? And when do revenues or orders begin coming in from it? Then for my follow-up, picking up on what Chuck just answered, what amount of revenue contribution tied to AI are you including for fiscal '26, considering the $2 billion order received this year?

Yes, Amit, that's a good question. On the enterprise front, we did see orders, and those orders relate to networking as well as AI GPUs. As we mentioned in our earlier remarks, they split roughly 50/50. We saw a few hundred million dollars flow through, and currently we have hundreds of millions sitting in the pipeline for enterprise. I'd say plenty of pilots are underway. Plenty of activity is happening with customers who are trying out various applications in retail settings, and so on; therefore we expect it to begin ramping. After that, we expect AI applications to ramp as well. During the back half of the year, we expect Agentic proof-of-concepts to grow more, shall I say, widespread, and obviously that will demand network connectivity, network capacity, low latency and frankly, you're going to — we're going to need to embed security within the fabric of the network because — as we discussed before, these Agentic workflows will be communicating constantly, whether you're considering general agents or considering robotics, you're going to — the significance of low latency connectivity will be enormous and security will be enormous. And the sole method to accomplish both is to merge security into the network's core. So that's our strategy; that's the reason we're working so hard on what we're working on. On the NVIDIA side, I'd say much of the development is underway. I would simply say we — I don't think we've witnessed the meaningful benefit from that partnership so far, and we've had some solid development finished. We have many milestones scheduled to be completed over the coming months. And we believe that once the enterprise truly starts to ramp up that partnership along with our portfolio, we believe we'll be well positioned to assist them; regarding the revenue contribution for fiscal year '26 related to AI, I would simply say we don't actually guide by specific parts of the technology. Still, since we posted $1 billion in FY '25, you can likely work out for yourselves what you figure we'll deliver in '26, as we hold the backlog along with the fresh orders we book throughout the year.

Thank you, Amit. Michelle, can we move to the next analyst.

There are two things I want to ask, and I'll put them both out there at once. Service revenues represent roughly 25% of revenues and came in flat for this quarter. When you trace how things have moved across the past 5 quarters, growth has slowed from 6.5% to 5.5% to 2.5%, and now sits at 0. What's happening with the trends in service revenues? And what ought we to anticipate looking ahead? That's my first question. My second one concerns networking growth, which is being fueled by cloud spending — by cloud investment spending. How much danger is there that this year turns out to be an extraordinary year for spending and that trends decelerate next year purely because Oracle won't grow another 150% and Meta won't grow another 70%, 80%, and so on; so in your view, how sustainable are these growth rates? .

Tal, this is Mark; thanks for asking. I believe I'll handle the service question and then hand it to Chuck for your second one; so regarding services, if you look back 12 months and even somewhat further back, there was a great deal of professional services work we performed, genuinely assisting our customers and our partners, honestly, collaborating closely to deploy a lot of that equipment we had delivered. As you'll recall, all of that surplus backlog that we essentially pushed out to our customers, so to speak, we were aiding in that process. So for a period that produced solid growth in our services business. As you're aware, what we typically observe is that services tends to lag or in some sense trail what's taking place in product, for example. So given that we recorded networking growth of 12% this quarter, my expectation is that you'll begin to see services strengthen since services revenue is ratable; so we anticipate that this will get better as we move into FY '26.