Cisco at Wells Fargo's TMT Summit: AI and Growth Prospects

On Tuesday, 18 November 2025, Cisco Systems Inc (NASDAQ:CSCO) participated in Wells Fargo's 9th Annual TMT Summit. The discussion highlighted Cisco's strategic focus on AI networking, cybersecurity, and infrastructure growth. While the company reported strong Q1 earnings, challenges such as component supply dynamics and memory costs were also addressed.

Key Takeaways

• Cisco aims for over $4 billion in AI-related orders and over $3 billion in revenue for the fiscal year.
• The acquisition of Splunk is expected to enhance long-term growth in the cybersecurity sector.
• Cisco's government exposure remains robust, with growth in U.S. Federal business and public sector orders outside the U.S.
• A multi-year campus upgrade cycle presents significant opportunities due to aging equipment and security needs.
• The company is committed to returning capital to shareholders, targeting $1 billion per quarter in buybacks.

Financial Results

• Overall Performance:

- Strong Q1 earnings with growth across geographies, customer markets, and technologies.

• AI Infrastructure:

- $1.3 billion in new orders in Q1 from top hyperscalers.

- Targeting over $4 billion in orders and more than $3 billion in revenue for the fiscal year.

• Security Business:

- Revenue declined by 2% in the quarter due to a shift to cloud-based offerings.

- Splunk's product RPO and product ARR are growing at double-digit rates.

• Government Exposure:

- Mid to upper single-digit growth in U.S. Federal business in Q1.

- Double-digit growth in public sector orders outside the U.S.

• Capital Return:

- Approximately $2 billion worth of stock bought back in the past quarter at an average price of $68.

Operational Updates

• AI Infrastructure:

- Strong performance across web scalers with four design wins in the quarter.

- Five wins at six of the top web scalers for AI infrastructure and systems.

• Campus Upgrade Cycle:

- Driven by the need to replace aging equipment, enhance security, and support AI applications.

- Major customer event in June announced a comprehensive refresh to campus switches.

• Security Business:

- Splunk secured 250 new logos in the quarter, aiming for over 1,000 for the year.

Future Outlook

• AI Networking and Infrastructure:

- Anticipated increase in orders from neo cloud and enterprise AI in the second half of the year.

- Significant build-outs expected in FY2027.

• Security Business:

- Double-digit growth expected in FY2027.

• Campus Upgrade Cycle:

- A multi-year, multi-billion dollar opportunity.

Q&A Highlights

• Security:

- Transition to cloud offerings impacts revenue timing but is beneficial long-term.

• Supply Chain:

- Memory price increases and DRAM strains considered in guidance.

- Silicon One mitigates silicon-related impacts.

• Government:

- Focused on defense and intelligence spending, less affected by budget cuts.

For more details, refer to the full transcript below.

Full transcript - Wells Fargo's 9th Annual TMT Summit:

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Perfect. So why don't we go ahead and get started? I'm Aaron Rakers. I'm the IT hardware and semiconductor analyst for Wells Fargo. Extremely excited to have Mark Paterson here, the CFO of Cisco, company fresh off of results last week. Very good solid print. So first of all, Mark, thanks for joining us. It's.

Mark Paterson, CFO, Cisco: Thanks, Aaron.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: It's really great.

Mark Paterson, CFO, Cisco: Good to be here with you and meet you in person.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yeah, definitely. Better than the Zoom video. I think last week I was in an airplane trying to do my callback with you guys, so.

Mark Paterson, CFO, Cisco: Webex video.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yeah.

Mark Paterson, CFO, Cisco: Whatever.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Webex. I'm sorry. Webex. but, you know, Mark, again, appreciate it.

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Maybe we'll start by just, you know, to level set. When we, you know, Cisco's a big company. That's clear. Broad-based portfolio, but how do you think about the biggest kinda growth drivers for Cisco as we look out over the next 12, 24 months? And maybe we'll just double-click from there on some of those key themes that we're talking about.

Mark Paterson, CFO, Cisco: Yeah. First off, I would just start with, you know, our recent quarter that we announced.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: Earnings. Really strong earnings. If you look at our order growth, if you look at it across geographies, across customer markets, if you look at technologies, everything grew. Really good balance, really good strength. Very broad-based. I would say, you know, you and I were chatting a little bit ago, and I just started my 26th year with Cisco. I would say that right now we've probably got more opportunity ahead of us than I can remember in a long, long time, if not ever, to be honest. I think the big things for us right now are AI networking.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: AI infrastructure, from starting up at hyperscale, going down into the neo clouds, including Sovereign, and then into the enterprise AI opportunity as well. This big campus refresh opportunity that we spent some time talking about with our earnings call and callbacks, etc., is really starting to happen for us now. Cybersecurity, you know, if you go back, it was just about, I guess it's been 20 months ago now that we closed the acquisition of Splunk. I think we've really filled out that portfolio and see that as a big growth driver for us moving into the future.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep. That's great. I'll start right where you started.

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: You know, AI. Let's talk about, you know, maybe again, remind us of what you guys have done. $1.5 billion. I think we talked about $3 billion, you know, last week on the call. Very strong order growth, if my memory's right, $1.3 billion.

Mark Paterson, CFO, Cisco: Yep.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: But, you know, walk us through some of those numbers. And I think what I'm most interested in is to maybe appreciate how that's evolved.

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Right? How it's deepened, how it's maybe broadened, and, you know, maybe touch on that from a perspective of the web scalers, right? But also what we're starting to see in maybe enterprise and sovereign, as well as far as opportunities for Cisco.

Mark Paterson, CFO, Cisco: Yeah, sure. I think how it's evolved is really key because if you go back, you know, 18 months ago, I think that folks really were not, they were not sure what's Cisco's role in AI. As you go back to the beginning of our last fiscal year, we put a target out there of $1 billion that we said we'd take in orders. I think the reason why we really did that was twofold. One is to really just show the criticality of the technology that we sell to the hyperscalers and building of the training models, etc. The second was also just to show the magnitude and the size of the opportunity. Fast forward to the end of last fiscal year, we did just over double that target.

Really good strength as we exited FY25. I think this quarter may be an inflection point for us, though. We had a really strong start to this fiscal year. $1.3 billion, as you said, in terms of new orders that we received from just the top hyperscalers. This does not include sovereign or the neo cloud opportunities. $1.3 billion we said we would do by the end of the year. We gave two targets. We said order-wise, we would anticipate to do at least double what we did a year ago. Think $4 billion plus anyway. Then we gave a revenue target too because there were also a lot of questions.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Mm-hmm.

Mark Paterson, CFO, Cisco: Last year about, "Okay, it's great you got these orders, but, you know, are they cancelable? When's it gonna turn into revenue?" You know, how and, we recognized $1 billion in revenue last fiscal. This year we said we'd do over $3 billion. You know, I think, again, a lot of momentum. As you dig underneath that, we can certainly talk more about kinda where some of the strength is.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: We're really seeing, you know, good strength across each one of the web scalers, at this point as well.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: And I always, you know, the question always comes up. I mean, you guys, first to just make sure the definitions everybody understands. It's backend, just web scalers is that number, right? To your point, it doesn't include enterprise, doesn't include sovereign, but it also doesn't include any front-end opportunities that you might see.

Mark Paterson, CFO, Cisco: Yeah. What the big differentiator is, each one of the hyperscalers that has marked it as an AI use case specifically for us, it starts to get a little bit blurry between back and front.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yeah.

Mark Paterson, CFO, Cisco: Is it connecting the back to the front, etc.? We really just follow exactly what our customers are telling us.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: The other vector within that is, you know, optics, systems.

Mark Paterson, CFO, Cisco: That's right.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Within systems, silicon only relative to full-on systems. Can you help maybe us appreciate those mixed dynamics?

Mark Paterson, CFO, Cisco: Yeah. We started with a lot higher concentration of optics versus the systems. We kinda finished the year, our last fiscal year, at a higher concentration of systems.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: Versus optics. You know, I think you're gonna see that ebb and flow a little bit. The first quarter that we did the $1.3 billion of new orders, it's basically half and half between the two. We've got a very compelling, you know, optics portfolio as well as all of the systems that we're selling them are Silicon One-based.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: I think the big thing too that is really an important data point on sort of where we are with the web scalers is what you do is, you know, you work with them to get designed in and into some use case, if you will, whether it's top of rack, leaf, spine, etc. We said at our investor day we had like 10 design wins in total about a year and a half ago. We continue to have a lot of success with the web scalers. The number's growing overall.

If you dig into that $1.3 billion of new orders that we got in Q1, you'll see that there were actually four different web scalers that showed more than 100% growth when you look at those Q1 orders versus a year ago. The fact is also we had four different design wins in the quarter, which will pay off in the coming quarters and years. Those four were across four different web scalers. It is not surprising. I think that as you get in, you start to have success, you get more roles, you get more opportunities.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: We're seeing that across the broader portfolio as well. It's not just the AI infrastructure piece. If you just look at in totality what we're selling the web scalers.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: We had two web scalers that purchased over $1 billion apiece last year. And that's the whole portfolio, if you will.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: Cloud space as well as infrastructure.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: And then, I think in the past you've talked about you, you've had five wins at six of the top, the six top web scalers, right? You just mentioned four new wins.

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: At four. But overall, that's correct, right? It's five out of the top six.

Mark Paterson, CFO, Cisco: Yeah. We do, but just to point out.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yeah.

Mark Paterson, CFO, Cisco: We do business with all six in terms of the.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: The total portfolio, but we've talked about five in terms of the, the AI infrastructure and systems space.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: And how would you characterize in the switching piece of this, appreciating it ebbs and flows? Acacia comes in, optics are strong, and vice versa. But the depth of your engagement in the networks, meaning I think in the past when I've spoken with Sami and stuff, it's been more maybe top of rack. Has that gone deeper? Any color on that?

Mark Paterson, CFO, Cisco: Yeah, you know, we haven't given the specifics of all the roles, but I would say it continues to evolve and the relationships are continuing to improve. More roles are coming online. We've got products that will address both the scale-out and scale-across technologies now. You've seen some announcements here released recently on our P200-based.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: systems that'll be available in the spring. The optics portfolio, obviously, the long-range coherent, pluggables that we have. I'd say, you know, a lot of momentum and the sort of the role that we're playing is growing in importance and scale.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep. Maybe I'll transi—well, before I go there, you mentioned scale-out, scale-across. What is Cisco's role in scale-up? What is their view on that?

Mark Paterson, CFO, Cisco: We, if you notice in our investor slides that Sammy.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yeah.

Mark Paterson, CFO, Cisco: So, nicely put together for us, you'll see kind of a roadmap, if you will, of Silicon One. And there's five product families now, actually, across the scale-out as well as scale-across. And then there's three different enterprise/service provider product families that we're rolling out across our entire portfolio. But scale-up, we basically just said, "Look, you know, we're gonna be a part of that." We've not said a lot publicly yet, so I'd just say stay tuned on that front.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yeah. And part of that is standardization, the ecosystem, you know, evolving if it's ESON or some of the other things. Okay.

Mark Paterson, CFO, Cisco: Yep.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Shifting, keeping with AI, but maybe shifting to, you know, the other piece, the enterprise and sovereign piece. Cisco's been involved again in your, in your orders, right? It doesn't include, you know, Humane, G42.

Mark Paterson, CFO, Cisco: Yep.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: What are you seeing in Sovereign? And then after that, I'll ask you the same question on enterprise.

Mark Paterson, CFO, Cisco: We just talked through a lot of stats around hyperscale. And we've got, you know, material numbers that we're talking about there. We wanted to kinda bucket that, if you will.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: On its own. The other area that is much more nascent but growing, as you mentioned, is kinda neo cloud, including Sovereign and as well as the enterprise AI piece of it. We gave two data points, and just for now, kinda collecting all three of those in sort of one bucket, if you will. Pipeline is over $2 billion now, so really ramping there. The orders are starting to ramp as well. Couple hundred million dollars in orders that we've taken collectively across that space. What we said is, Humane and G42 and some of these Sovereign builds, in fact, we just had an announcement out today with our investment in Humane and the build-out that's gonna begin there.

What we said was, "Look, it's not really material to our guide this year." You'll see some ordering really start in the second half of this year, but I think the more material, build-outs, if you will, will be in FY2027.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Okay. One of the things that I thought, you know, is interesting and very unique to the Cisco story around AI is the relationship with NVIDIA.

Mark Paterson, CFO, Cisco: Mm-hmm.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: That's deepening, I think, and you're gonna correct me if I'm wrong, it has a lot to do with the enterprise adoption, this idea of bringing agentic AI into enterprises, the network piece of the equation. You know, today's has been complex. So you.

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Can we talk about the NVIDIA relationship, how that differentiates Cisco? When do you maybe see that becoming an incremental driver to the story?

Mark Paterson, CFO, Cisco: Yeah. I think that the partnership with NVIDIA is all about trying to make it as simple as possible for enterprises to deploy AI and to really accelerate that opportunity. You have seen two products from us. There is a switch that we built based on Silicon One that is part of the reference architecture of Spectrum-X. That is now available. There is also another switch that we just announced this past quarter that is going to be Spectrum-X silicon and have our software, and we will build the system. That will be available kind of in the spring. I think, well received by customers, working very well with NVIDIA, probably start to see things ramp kind of in the back half of this year. I think fiscal year 2027 would be a much larger opportunity for us.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Okay. Maybe shifting over to another big topic as you brought up at the beginning of the conversation, the campus upgrade opportunity, right?

Mark Paterson, CFO, Cisco: Mm-hmm.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: I mean, we talked on the callback last week about, you know, end of life, end of support, you know, the opportunity that you see. I think the company's been very, you know, pragmatic in like, "This is, this is a, this isn't an inflection. It's gonna be a multi-year kind of, you know, upgrade cycle." Can you dive a little bit deeper into that? What's driving the campus upgrade cycle? How big is that opportunity? Anything you could share with that?

Mark Paterson, CFO, Cisco: Yeah. As you mentioned, I think this is a multi-year, multi-billion dollar opportunity. It's not gonna hit in a quarter or a couple of quarters or anything like that. I think that, you know, in the campus, our customers are basically saying, "Look, we've got equipment that's aging out. It's become a security risk for us. We need to deploy AI applications and use cases, and we need to upgrade our network posture, our security posture. The threats that are coming at us these days are more sophisticated than ever." They really want, you know, I think that the fact that we've said we're gonna really embed security deep into the fabric of the network is an appealing thing for them. You have kind of return to office as well.

There are a number of reasons why our customers are looking to upgrade. At the same time, we had our biggest customer event in June where we announced pretty much a, you know, across-the-board refresh to our campus switches, which are smart switches, which incorporate AI as well as security. You can run security as well as networking processes over those. We have secure branch routers, and we have new firewalls we have announced with new products in the data center, new IoT products, new Wi-Fi. Pretty much across the portfolio, you have a real refresh and probably the biggest innovation payload that we have announced in a long, long time in connection with a lot of, you know, sort of drivers on why companies are looking to actually upgrade their networks as well.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: And those drivers would be Wi-Fi 7, you know, and you've got a large install base that comes end of support.

Mark Paterson, CFO, Cisco: Yep.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: As well over the next.

Mark Paterson, CFO, Cisco: We do. Yeah. We've got tens of billions of dollars of, sort of pre, even pre Cat 9K, that are still installed, which again pose a security risk to our customers. I think the AI build-outs are big. If you look at agentic AI and the traffic flows that we expect associated with that, it's gonna be, it's gonna put a strain on the network that we've never seen before.

Again, Sammy put together a slide that we showed in our investor deck that basically shows you that as you add agents and they're working 24/7 and their agents are working and collaborating with other agents, it's as if the number of employees on your campus or your branch are significantly more than you've had before, double or even three times depending on the kind of workloads and work that the agents are doing. That's gonna put a strain on the networks, and it's gonna also require a lot more security to be built into the networks as well.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: By the way, you brought up the Sammy slide deck several times. I agree. There's a lot of, there's a lot of detail in that.

Mark Paterson, CFO, Cisco: There is.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Everybody hasn't looked through it. There's some good stuff in there. The competitive dynamics in campus, right? I think everybody's talked a lot about, you know, campus upgrade cycle. You had one of your competitors recently get acquired.

Mark Paterson, CFO, Cisco: Mm-hmm.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Did that create dislocation? You've got another competitor that sees campus as a large, you know, incremental opportunity for them to go after. I'm curious of how you would, you know, describe the competitive landscape you're seeing for this opportunity.

Mark Paterson, CFO, Cisco: Yeah. It's always been a, it's always been a competitive market, for us, certainly. I think if you just look at the orders though, 13% on a global basis. If you excluded web scale from that, we'd still have grown 9%. Really strong growth.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yeah.

Mark Paterson, CFO, Cisco: We feel good competitively there. We talked also about this campus refresh and how we believe it's underway. If you look at our campus networking, which includes enterprise routing, campus switching, and wireless, all of those technologies grew in the quarter quite nicely, but they all accelerated in terms of their growth in Q1 versus Q4.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Mm-hmm.

Mark Paterson, CFO, Cisco: If you dig into it also, the move to the new platforms in each of those, we go back and we look at, you know, prior launches and how quickly our customers actually, you know, moving to the new platform. It's happening faster than prior launch in all three of those, wireless, routing, and switching. Real good strength. We think that the order growth kinda tells the story for us.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: That's perfect. Moving again, Silicon One maybe should have been tethered to the AI, but I think it's broader than that, right?

Mark Paterson, CFO, Cisco: It is.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: It's definitely, we're still early, you know, earlier. Maybe, maybe we're moving towards the middle or innings of, of what the strategy is around Silicon One.

Mark Paterson, CFO, Cisco: Mm-hmm.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Maybe just unpack that strategy. Talk a little bit about Silicon One, how important that is for the company, how does that differentiate Cisco, and where's it going?

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Or?

Mark Paterson, CFO, Cisco: Silicon One's, I would say, one of our most strategic assets that we have at the company. It is the reason, I think, or the biggest reason that the hyperscalers are looking at our technology. All the systems that we sell into that space are Silicon One based. They really like the technological advantages that it gives us, the power savings, the cost savings overall. It gives them diversity in terms of silicon as well, which I think all the hyperscalers are looking for. As you then kinda, you know, and I would just also add to that, basically when you sell to a hyperscaler, there are two fundamentally, you know, two areas that really differentiate you in terms of delivering value and what they really care about.

I was gonna stop short of calling it a critical control point, but.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Mm-hmm.

Mark Paterson, CFO, Cisco: It, it's basically the what they're really buying, right? One is the silicon. The other is the software.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Mm-hmm.

Mark Paterson, CFO, Cisco: You know, companies that don't have the silicon and more and more are being asked to deliver open system kinda, you know, software are really not able to add a whole lot of value in the hyperscale space. We feel good about that. As you look at the whole portfolio then, as I mentioned earlier, we've got five different product families around Silicon One now that go across enterprise and public sector and service provider business. We've said by FY2029, all of our high-powered systems will be Silicon One based. That gives us really two things. If you think about it, one, I think more and more important today is just controlling your own destiny and your own supply chain. It gives us much more control there.

We do not have to, we do not have the margin stacking in, in terms of buying somebody else's silicon. I think over time it will be a tailwind for us in the gross margin area as well.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: The gross margin tailwind, the pace of innovation, I think that's one thing I asked Chuck about last week is, you know, you mentioned it's a critical asset within the company.

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: How do you think about investing into that business and keeping.

Mark Paterson, CFO, Cisco: I'm glad.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Up with the pace of this?

Mark Paterson, CFO, Cisco: Martin, who runs our, Martin Lund runs our silicon business, he's like, he's first in line every time somebody asks for money. You know, as a CFO, everybody's always asking for money. It's usually, "No, no, no, no, no. Martin, here you are.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yeah.

Mark Paterson, CFO, Cisco: There is a lot that we need to invest in there. As I mentioned earlier, we're having a lot more success with different web scalers and different design wins. To keep that going and to have different sort of tracks, if you will, and some bespoke silicon for different players and different use cases, we're gonna need to continue to invest there. This is exactly what we're doing.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yeah.

Mark Paterson, CFO, Cisco: A lot of what I'm actually trying to do is kinda extract productivity and efficiency relative to AI and really get the company moving to adopt AI in a much bigger way so that you've got sort of savings across all functions that we can then move into what matters most to us.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Makes sense. Before we go to the model a little bit, 'cause I would be remiss if I didn't ask the CFO about some model inputs. You know, the security business has kinda been a topical area these last couple quarters.

Mark Paterson, CFO, Cisco: Yep.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Can you talk about that for a second? You know, what are you seeing, you know, as far as is there fundamental changes going on? You know, given the recent performance that we saw last week, it seemed to be a key discussion point.

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Maybe, give you opportunity to unpack that a little bit.

Mark Paterson, CFO, Cisco: Yeah. What we've said is, we believe this is a double-digit, you know, opportunity, kinda mid to even high teens for us over time. The big thing during this quarter, which we actually saw a decline of 2% revenue growth—I say growth, but revenue decline in the quarter—is really just the move, which is a very good thing, but the move of our customers to more of the cloud offers relative to Splunk versus the on-prem. The rhetoric and accounting standards basically say if you deliver it on-prem, you recognize revenue in the quarter, and cloud is ratable over the life of the contract. Now, having said that, there's a bit of a dip temporarily. It's pure timing. The health of the business is strong.

If you look at product RPO, you look at product ARR, both growing double digits for Splunk. Over time, we actually find that the cloud offers are stickier. Customers are able to adopt the technology and new features a lot faster and will recognize more revenue over time, which is a really good thing. It is a bit of a headwind earlier on in some of the growth rates. The other areas of the portfolio, so there are kind of three big things, if you will, if you look at our security portfolio. One, Splunk, which I just talked about. The other two are we have got sort of a basket of new and refreshed technologies, really good customer adoption there, with the new offers around AI defense, secure access, hypershield, and others.

We've got now 3,000 new customers across that part of our portfolio. It's only about a third of the total weighting of our total security portfolio, but it's growing quite nicely. It grew faster in Q1 than it did in Q4. Again, good signs in terms of where we're moving there. We've got a basket of, you know, more, I hate to use the word, but more legacy or sort of prior generation products. Those are declining at a slower rate. We're moving people to the new portfolio as quickly as we can. Those declining at a lower rate, the new and refreshed grew faster. Both really good there. Splunk was really just a timing difference for us.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: That timing difference on Splunk, I mean, it probably surprised you, you know, surprised obviously some of the street. I think, you know, where, maybe you, you know, punt the question, but where do you think that kind of is normalized again? Where is that a couple quarters from now? Is it further out than that?

Mark Paterson, CFO, Cisco: Yeah. I think so, it's a, it's a really good question. I, I think that first off, we, we wanna meet customers where they are.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Right.

Mark Paterson, CFO, Cisco: As opposed to some of the competitors we have in that space, we'll offer it on-prem, where others do not have that. That can be a competitive advantage for us. We'll continue to do that. At the same time, I do think more are gonna lean into the cloud offer and the fact that they can much more easily adopt the new features and technology, which again is a good thing for us. I think you're gonna start to see more of a move probably towards cloud over time. That'll be good for us over time.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: I think to be clear on that, that's factored into the guidance, right?

Mark Paterson, CFO, Cisco: Yes.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: You set the guidance appropriately for that.

Mark Paterson, CFO, Cisco: Yeah. That was a big thing. You know, I think that we wanted to really take the risk out of, and be really clear that we do not need security to materially improve from kinda from where it is today in order to meet our updated guide. We raised our guide for the year $1.1 billion. Just wanted to be very clear that, like, we are not counting on some big recovery there. We know it is gonna take time. We have a lot of faith actually in the things that we are doing in that business. I mentioned kinda the really good data points that we are seeing across the portfolio that should say that our growth will be improving steadily.

I think as you get into FY2027 and hopefully sooner, but the guide's not dependent on it, I think you'll start to see the double-digit growth.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: You mentioned data points. I mean, can you talk about the cross-sell and, you know, call it, you know, portfolio go-to-market leverage that.

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: You've seen with Splunk at this point?

Mark Paterson, CFO, Cisco: Yeah. So, a couple things. I think as you look at new logos for Splunk, and that was a big focus for us, is, okay, look, between the two companies and a joint go-to-market, we can really drive a lot more new logos. We had 250 new logos in the quarter. We think we're on track to get to 1,000 plus for the year. Feel good about that. We've also done in the quarter, we did, and this was a move to cloud for us. I believe it was from on-prem to cloud. Sami can correct me if I'm wrong, but, second largest order that we've ever taken in Splunk's history was a good, you know, kind of joint go-to-market that we did and moved them to cloud. Really pleased there.

We also did our largest Splunk deal ever in the last couple of quarters as well, as a joint company. We think the momentum's good there. It's just, like I said, it's just gonna take a little time.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep. Perfect. In the minutes I've got left, I think again, I have to ask a CFO about the model and stuff like that. There is a lot of discussion right now, as you would imagine, on components, supply dynamics.

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Memory, cost. Can you walk us through what you're seeing? And is this causing pressures on the margin or any of the kind of headline and the demand dynamics of your business that you've seen?

Mark Paterson, CFO, Cisco: Yeah. Certainly on everybody's mind.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: I also wanted to be really clear, what we're seeing and what's kinda in the guide. We are seeing, obviously same as everybody else in terms of memory price increases. We're also seeing some strain in DRAM, in particular, DDR4 and some in the DDR5 space as well. We've factored that into the updated guide that we gave the street. I feel good about that. There'll certainly be things that we gotta work through. We got a world-class supply chain team that will do everything that they can to get as much supply as possible. We've factored in any risk there.

I also think that some others have talked about some lead times and risk on the silicon side because we use Silicon One and control a lot of our own supply chain there earlier. Like I mentioned, we're not seeing quite as much, you know, impact there, I guess, as maybe some others. On the pricing, I think, you know, everybody always asks, "Hey, what about memory pricing? What about hyperscale? What about opti?" You know, "How are you dealing with this? Is it lower margin?" If you just look at, you know, what we're focused on in the guide we gave, very similar gross margins Q4 to Q1 of this year. A similar guide Q1 to Q2 in terms of gross margin. Q4, you know, or for the year, we don't guide gross margin.

If you just look at operating leverage and the profitability of the company, bottom line's growing faster than top line in Q4, Q1, Q2 guide, and then also for the full year for FY2026.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: I guess this kind of encompasses that same question a little bit, but the tariff impacts, the mitigation.

Mark Paterson, CFO, Cisco: Yep.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Efforts. How are you managing the pricing strategy? Have you implemented some price increases? You know, have you not? Because I, I think to your point, I mean, one of the things that's pretty remarkable about, you know, Cisco is, is the margin profile's very.

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Very consistent, right? That from gross margin down to the op margin line.

Mark Paterson, CFO, Cisco: Yeah. The team does a great job on driving productivity improvements and doing what they can to manage the logistics and components and everything that's involved in it and moving things from different countries to have the best sort of strategy in terms of where we source products, where we build them, etc. On the tariff front, we've just said it's not a material,

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: Number to it, there's certainly, obviously, an impact to gross margins, but it's not been a material drag on us. We did have a component, you know, price increase or, I should say really rather a price increase relative to our global price list that we put into place at the beginning of the quarter. It was not specific to tariffs whatsoever, but really just kind of general costs of components, logistics, etc. that we were seeing. That, I think, has really helped us and navigate some of this.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: That's perfect. Government exposure, maybe we, we talk about that. I think it's, it's been a little bit of a factor. Again.

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Going back to Splunk, obviously coming off of a, you know, shutdown, you know, I think in the past you've, you've been very adamant like you are overweighted towards the good pieces, if you will.

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Within the spend bucket of the federal government.

Mark Paterson, CFO, Cisco: Yeah. The defense and intelligence pieces for us are, gosh, are almost 80% of our public sector business now, for U.S. Fed in particular versus civilian. Less exposure to some of the areas that are seeing real heavy cuts. Q1 is our biggest quarter relative to just the seasonality and how the sort of the Fed business falls throughout the year. We saw kind of mid to upper single-digit growth there just as the teams had called actually in Q1. Pretty pleased with how they executed there. If you look at public sector for us on a global basis, it's actually been really strong outside of the U.S. Held up here nicely in Q1, and we think it'll continue to do so for the rest of the year.

You gotta remember we've got much easier comparison.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yep.

Mark Paterson, CFO, Cisco: In terms of growth, we think somewhere in the mid to even upper single digits is probably a good number. If you look at, outside the U.S. in Q1, orders were up double digits. A lot of focus on defense. Certainly technology is becoming a bigger and bigger part of the spend of the defense budgets around the globe, particularly in Europe. You're seeing.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Mm-hmm.

Mark Paterson, CFO, Cisco: A lot of spend there. That's been a big tailwind for us there.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: In the two and a half minutes, I got two questions left. One is, is the obligatory, you know, capital return.

Mark Paterson, CFO, Cisco: Yeah.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: How do you think about that? You've integrated Splunk. We talked through that. How are you thinking about capital return versus maybe, you know, Cisco's been very acquisitive over its history, right? How do you think about balancing, you know, those two?

Mark Paterson, CFO, Cisco: We have always said, and no change to this, number one priority is just to fund the business and the opportunities that we have in front of us. Two is really to support the dividend. We will continue to do that. We have also continued to increase that annually. We will continue to support the dividend. The third area is really on buybacks. In order to give people a better ability to plan, we have said you can count on $1 billion in a quarter in terms of the run rate each quarter. We are going to be opportunistic over and above that. Certainly this past quarter, we bought back about $2 billion worth of stock at an average price of about $68.

We felt like this was a good time to kinda lean in there. You know, you'll see us continue to do that.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Perfect. The final thing, I'm gonna put an open-ended question out there. I mean, when you're, when you and Sammy are talking with investors and we think about, you know, the moving parts of the Cisco story, I'd love to just give you the opportunity to talk. Like, what are the two or three things that you feel investors maybe either don't understand, maybe don't appreciate enough.

Mark Paterson, CFO, Cisco: Mm-hmm.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: That you would leave us to kinda think about, you know, coming out of this?

Mark Paterson, CFO, Cisco: Maybe a couple things. I think the first thing is we all see all the news on all the circular funding. I'll hit on that a little bit. You know, you hear about the LLMs. You hear about the GPUs and different companies that are making the GPUs and now TPUs and XPUs. You hear about all the power requirements, everything. One thing you probably do not hear enough about is networking. It does not matter whose GPU or XPU it is, you gotta have networking. It does not matter whose LLM it is. There is networking. I think that the relevance of the network and the criticality of the network has significantly escalated, in hyperscale and now into the enterprise as well.

I think also that, you know, there's a lot of concern here, particularly the last few days with kinda is there an AI bubble.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yeah.

Mark Paterson, CFO, Cisco: What's gonna happen here, and the numbers that are being thrown around. If you just, so Lisa Su was on CNBC last week. She talked about the TAM for GPUs by 2030 being a trillion dollars. The numbers may be off of that by some order of magnitude. Just, you know, if you're one that says, "Hey, there's a bit of a bubble here. I don't see the, completely coming to the numbers that people are talking about today." That trillion dollars, I mean, somewhere between 10% and 20% of that is typically the networking spend that would be associated with that. Even if that were to come off by an order of magnitude, there's a ton of opportunity.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Yeah.

Mark Paterson, CFO, Cisco: For us in particular. I think that's probably a couple of things that maybe aren't quite as well understood.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: Perfect, Mark. Thank you so much.

Mark Paterson, CFO, Cisco: Thank you.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: I appreciate it.

Mark Paterson, CFO, Cisco: Appreciate it. Thanks.

Aaron Rakers, IT Hardware and Semiconductor Analyst, Wells Fargo: That's great. Okay.

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