Chuck Robbins: Okay. Thanks, Tal. So I think over the last few quarters, I’ve been pretty consistent that we thought the second half of this fiscal year, we would start to see an acceleration of security. And I can give you some highlights where we are seeing some of that – some green shoots early. Some of the new innovation like XDR and Secure Access, Multicloud Defense suites are – we’re seeing good pipeline build with those technologies. XDR, we now have – we announced that in April last year, we shipped in August. And we have 230 customers, 230-plus customers on the platform today. And the important thing to remember is that it’s a big platform play. And we actually typically see that as a 6 to 9-month sales cycle. So to have 230 customers already, I think, is a statement on the value that our customers are seeing.
That’s going to be a real important integration point with Splunk, by the way. So that we see, we see – we feel good about the pipeline. From a demand perspective, just to give you some insight, the Americas, the demand was almost double digits this past quarter, which is the highest we’ve seen in a while. So I think we’re seeing a lot of good indicators. And if you just watch over the next 6 to 9 months, you’re going to see more and more innovation that comes out. And I think you’ll begin to believe and see the results around that same time frame.
Sami Badri: Thank you, Tal. And we’ll get to your other question at some point after the call. Michelle, can we move to the next speaker.
Operator: Thank you. Samik Chatterjee with JPMorgan. You may go ahead, sir.
Samik Chatterjee: Hi. Thanks for taking my question. Chuck, I’m going to – for my first question, I ask you to go back to sort of the drivers of demand that you’re seeing here. We walked away from the call last time, sensing a sense of optimism about a sharp rebound when you see the inventory digestion complete. But I guess what I’m hearing from you today is even as that inventory digestion ends in fiscal ’24, you’re seeing a bit more of a macro impact on your customer demand? And are your expectations still sort of intact in terms of thinking about a more sharp rebound as you go into fiscal ’25, if you can share what you’re seeing from customers there. And for my follow-up, the Nvidia partnership, how should we think about the impact of that on your AI order [ph] target of $1 billion ? Or is it really most of that partnership that realizes beyond that sort of target window, target time frame? Thank you.
Chuck Robbins: Thanks. I would say on the thing that’s changed from last quarter is that we do just see a little more caution with our customers. I don’t want to over-rotate and say that it’s a massive shift, but we definitely saw more caution. We talked with our sales leaders ahead of the call, and they indicated – we asked them point blank, was there more caution or the same caution from the prior quarter, and we heard more, a little bit more. And then we saw the push out of the forecast. So that just tells us that there is a little bit more in the system. So therefore, I think we need a couple of quarters to see it play out before we can declare what’s going to happen in fiscal ’25. On the Nvidia discussion, a couple of comments.
We talked about the $1 billion of orders, which I know someone is going to ask me about at some point. And what I would say is that in the last 90 days, our pipeline of AI opportunities continue to grow. The pipeline is now almost three times that particular number that we gave last time, which were more orders that we see in ’25. The total pipeline is now about three times that, roughly three times that. And I would say that virtually none of that is anything associated with the Nvidia partnership yet. It’s all independent of that.
Sami Badri: Thank you, Samik. Michelle, next question.
Operator: Thank you. Ben Reitzes with Melius Research. You may go ahead.
Ben Reitzes: Hey, thanks for the question, guys. Hey, Chuck. Hey, Scott. I wanted to ask about the HP, Juniper deal. Are you seeing any uncertainty in the market near term? And how do you think that helps you long term? And if you – Chuck, if you don’t mind, just with regard to that last AI comment, your – one of your competitors, obviously, is expecting quite a big pickup next year, next calendar year. Do you feel like that AI $3 billion in pipeline or so kicks in next year, next calendar year? Or what’s your timing on that? Thanks so much.
Chuck Robbins: Thanks, Ben. So I would say on the HP, Juniper deal, the one area where they have meaningful overlap is in wireless. And I don’t know if there’s any connection to the fact that we had a 50% increase in $1 million-plus wireless deal sequentially. So it’s hard to say. But I mean there is a lot of noise in the system or in the industry about what they do there, but I can’t say specifically that any customers have talked to me about it, to be honest. So I think we’re – I think it’s a little early for them to – for the customers to be expressing that concern. They may be asking them directly, but they’re not talking to us. On the timing, yes, I think we said fiscal ’25, which starts in August of this year. And I think you probably should assume most of that is probably in the second half, I would guess, but we’ll see how things play out.
I think customers are going to move as fast as they possibly can, but we’re still in the early strategy and planning stages right now on most of it. The pipeline stuff are well-defined use cases that are already in place with certain customers, and we’re actually just working through the opportunities.
Scott Herren: Yeah. But, Ben, our expectation is the majority of that $1 billion in orders will turn into revenue in our fiscal ’25, just to be clear.
Sami Badri: Thank you, Ben. Michelle, next question.
Operator: Thank you. Matt Niknam with Deutsche Bank. You may go ahead, sir.
Matt Niknam: Hey, thanks so much. And I’ll keep it to one and one follow-up. So main question, just around inventory digestion. Is that dynamic primarily affecting enterprise and commercial customers? And can you talk a little bit about the visibility you’ve got towards this actually resolving itself by fiscal year-end? And then a follow-up just on gross margins. You were fairly stable sequentially, and I think the guide implies more of the same. So I’m just wondering, are we now largely past a lot of the supply chain dynamics or headwinds? Or has anything changed on the supply chain front? Thanks.
Chuck Robbins: Yes. So I’ll take the first, and then Scott can take the second. On the inventory digestion issue, I think it’s – I would say it’s largely an Enterprise and a Service Provider issue and particularly the cloud providers, we think they’ve got probably in excess of 20-plus weeks of inventory that they’re working through right now as they built up when the lead times were so long. We have a lot of our Enterprise products that are tethered to the cloud for management perspectives. And so we see the lag between when we ship it to the customer and when they connected. I gave the Meraki example in my prepared remarks. And so we do have visibility, and we can actually see on some aspects of the portfolio, how the time frame between shipments and connectivity is shrinking, and it’s not shrinking as fast as we thought it would, which leads us to believe this is going to extend through the end of ’24, so that’s where we are. Scott, gross margins?
Scott Herren: Yes. What you saw in the quarter is, of course, gross margins continue to show a year-on-year improving trend, roughly flat, as you said, sequentially. There’s a couple of dynamics. But to your question on where does this settle in? I think it settles in the range we’re in right now in the 66% to 67% range through the end of the year. There’s both the things that are happening from a freight and delivery standpoint, freight costs with what’s happening in the Red Sea have gone up slightly, and we continue to see a little bit of component pressure, although in the commodity sections, we’re seeing some benefit there. The scale of the services ramp up as you – obviously, services revenue trails the product revenue.
We had those three really strong quarters of product revenue growth. We’re seeing the tail of that now in our services revenue growth. And since a lot of the cost underneath our services are fixed, you get better leverage when that happens. So I think when you add all those together, we should settle in, in the 66% to 67% range. And the majority of, if not all of the supply chain constraints that we felt are behind us at this point.
Sami Badri: Thank you, Matt. Michelle, next question.
Operator: Thank you. Michael Ng with Goldman Sachs. You may go ahead, sir.
Michael Ng: Hey, good afternoon. Thanks for the question, Chuck and Scott. I just have two. First, just on the revenue guidance, I think based on the midpoint of it, the implied fiscal 4Q revenue guidance only implies about plus 1% quarter-on-quarter. Given that we’re back to a normal backlog, what’s preventing that from going back to a more normal level of seasonality? And then as a follow-up to Amit’s question earlier on the Nvidia AI deal. I just wanted to clarify. I understand that it’s Ethernet, but will it be both Nvidia’s, Spectrum-X, as well as Cisco’s Ethernet? And how will that be sold together, if that’s the correct assumption? Thank you.
Scott Herren: Michael, on the midpoint of the revenue guide, the math would lead you to what you just said. I think no one ever wants to have to reset guidance, much less have to do it twice. As Chuck just said, as we look at all the various factors coming in from the field, we see caution. And I think you should expect that there’s caution in our guide at this point.
Chuck Robbins: On the Nvidia front, I think, look, one of the key benefits that they see is leveraging our enterprise go to market, and our global ecosystem and partner community. And therefore, when these solutions are flowing through our channels and our sales teams and our partners, it will be Cisco Ethernet.
Sami Badri: Thank you, Michael. Michelle, next question.
Operator: Thank you. George Notter with Jefferies. You may go ahead, sir.
George Notter: Hi, guys. Thanks very much. I guess I’m just curious about – are there any mechanisms or activities you guys are using to help accelerate the clearance of inventory from the channel? Any price discounting, any rebating stock rotation, how are you taking an active approach here? Thanks.
Chuck Robbins: I’ll comment – I’ll make one quick comment. I think I said this in my prepared remarks as well. We’ve deployed a lot of transaction services for some of our larger customers just to help them do that. And I know that our sales teams were talking this week, Scott, maybe you remember or you have some more detail on looking at some partner incentives to help?
Scott Herren: Yes. We absolutely are working with the field on that. In a lot of cases, it boils down to a lack of the skilled resources required at both – sometimes at our partner level, sometimes at the customer level to get that done. There’s only so much you can do to accelerate it. We have put in place incentives to make that accelerate. To your other point on cancellations or stock rotation, we’re seeing those continuing to be well below where they were pre-pandemic. So we’re not seeing any of that – any pressure on that front.
Sami Badri: Thank you, George. Michelle, next question.
Operator: Thank you. Woo Jin Ho with Bloomberg Intelligence. You may go ahead.
Woo Jin Ho: Great. Thank you for taking my question. Given that most of the weakness is going to be on the networking side, could you just talk a little bit more about the future software subscription renewal rates. You did a good job this quarter with software subscriptions going up 5%, but given that networking is poised to be down, curious where that’s heading going forward.
Chuck Robbins: Yes. I think – thanks for the question, Woo Jin. I think the way to think about it is, we put a – as you can imagine, when you built up the level of annualized recurring revenue that we have, we’ve put a huge amount of focus on both customer success and driving adoption and then turning that adoption into renewals. We’ve invested fairly heavily in that space over the last couple of years, and we’re seeing renewal rates respond accordingly. When you look at where we’re more software-heavy outside of networking, but in both security and collab, as you saw, we reported growth – revenue growth in both of those categories. Observability is almost exclusively software, and we posted 16% revenue growth in observability. So we are seeing that actually trend in the right direction.
