While we get situated, I'll read the disclosure off the top of my head. For any research disclosures, please see the Morgan Stanley website at researchdisclosures.com or reach out to your Morgan Stanley sales representative. We are delighted today to have Cisco here with us. I'm Mita Marshall. I cover networking and cybersecurity here at Morgan Stanley. We're delighted to have the CFO, Mark Patterson, and Martin Lund, evp of hardware and silicon one systems i think martin this is one of your first more public appearances so we're very happy to have you here so oh he's been very public yeah it's hard to keep him off stage yeah exactly all right uh mark maybe let's start with you you know in fiscal q2 you guys delivered revenue with product orders accelerating 18 growth you subsequently raised your full-year guidance. Just what demand trends are you seeing? And, you know, maybe kind of contextualize that into the different end markets that Cisco serves it.

Sure. Happy to. Yeah. First off, I would just say, as you mentioned, 18 percent, really strong demand is what we're seeing right now. And I'd say the other word that I'd use is very balanced. As you look at it, the 18 percent, if you excluded hyperscale, which we all know was was a big number for the quarter it would still have grown 10 so double digits on a global basis just x hyperscale if you look at it by geography you look at it by vertical the geographies all three geographies that we we we manage grew double digits and all three of them showed accelerated growth in q2 than what they showed in q1 so really strong growth there Verticals were really strong. If you look at public sector, it grew double digits in all three of the geographies as well. Enterprise accelerated from Q1 to Q2. And SP and cloud also, we're seeing significant acceleration. The other thing that we talked a lot about on the call is two big, massive, multi-billion dollar opportunities that we're going after that are going quite well. One is on the AI infrastructure side, and the other is really this campus data center, or campus refresh, rather. And both show really good strength. If you look at the AI side, we took $2.1 billion in new orders from hyperscalers. That's what we did. So in 90 days, we did the same as we did all of last year. And so you're seeing from a lot of the work that Martin and his team are doing, really good momentum, really good relationship building, but also we're delivering the technology that they need most importantly. And then on the campus side, we saw, you know, really strong growth in campus overall. If you looked at the individual components and you looked at wireless routing, campus switching, all three of those areas, they're moving to the new platforms faster than prior generation launches. So we're very happy with what we're seeing in both of those spaces.

Got it. You know, maybe just jumping into memory and gross margins. You know, we can't save that for very long. You know, your gross margins of fiscal Q2 saw a little bit of pressure. This was, you know, you mentioned mixed shift towards hardware, but also just kind of rising memory prices. um you know just as you think about ai infrastructure ramping memory continuing to get more expensive can you just walk through the mitigation steps you guys are taking on gross margins and then just the trajectory of gross margins throughout the year yeah we should take

a moment on this one because as you can imagine this isn't the first question right not the first time you got on this topic so there's really two two big things that that are at play here so one is memory, and I'll talk about that here in a second, and then the other is mix in terms of what we're selling and the acceleration that we're seeing in different parts of the portfolio. So the first, in terms of memory, what we're really doing is looking to control what we can control. So obviously, everybody's seen the sort of unprecedented pace at which memory prices are going up. So there's three things that we really wanted to outline that we're doing that we can control and looking at proactively one is just updating our prices and so you're going to actually see our latest price increase will go in effect on monday and so we're going to stay very close to that in particular on the compute side more than anything but also some of the higher memory products just across the portfolio the second thing is really you know we've had some very generous t's and c's with partners and customers that allow a fairly lengthy time between when we announce a price increase to when it takes place as well as, okay, now it's taking place, but if you put a quote out already, we'll honor that for another 30 days. Both of those areas were tightening substantially. And so, you know, I've had discussions with both partners and customers and I think they all get it, right? They don't love it, but they understand this is a new way of doing business. And then the third thing that we just talked about was we're really leaning into our financial position and strength and in securing the supply that we need so if you look at our advanced purchase commitments just in the last 90 days those were up 1.8 billion and a lot of that is to meet the overall demand acceleration that we talked about in particular hyperscale but then also the memory supply that we need to On the mix side, so, you know, what I would tell you there is just we're seeing significant growth in our hardware business. It grew in excess of 20% in Q2. And our software business is a little bit softer right now, in particular with security. And so, you know, as you look at those two pieces, kind of how that impacts, you know, gross margins, on the hardware side i would just say we have very good margins actually in our hardware they're just not quite as good as software obviously right as you see you know just to give you kind of a data point on on on how significant of impact it has if we had grown security mid single digits in terms of revenue in q2 versus down four which we we posted that would have been a point of gross margin right off the top uh and as you look at the hyperscale uh acceleration you know they they they love our silicon and optics and they love the high performance systems they don't buy as much though of the software and the services but it's not like for every incremental dollar of of hyperscale revenue that we got to add incremental opex so it's got a very different go-to-market, very different ratio, if you will, in terms of our overall costs. And as that business really ramps, that'll help our overall operating margin. So net net, just to say the last piece on this, I think it's important to note that we're going to be very focused on profitability and very focused on operating margin. The last couple of quarters, we've guided 23 and a half or sorry, 33 and a half to 34 and a half percent in terms of our our overall you know operating margin we also guided that for q3 you're going to see that focus on despite the ups and downs you may see and and gross margin you're going to see us very focused on the overall operating margin performance q2 was a great example of that despite the the headwinds we saw and and gross margins we actually posted our highest operating margin in four quarters. And we're focused on EPS growth being faster than the top line growth. And you saw that in the first half of FY26. You also see it in our guide for

the full year of FY26 as well. Okay. You know, we're going to jump in with Martin in a second around kind of everything happening with silicon and cloud. But, you know, Cisco has been on this journey over the last five to ten years to have more software more more recurring revenue just how do you make sure that that kind of software security recurring revenue story continues to build even in light of kind of some of the greater opportunities you're seeing on the

AI side of the business right now yeah it's still a very important part of our business even though we're seeing this massive acceleration in hardware it was still you know a little over 50 percent of our business in terms of software and subscriptions in in q2 as i mentioned earlier it's a it's a big part of our overall profitability equation and and mix as well and so we're still you know we're still seeing good growth in arr and rpo we've got 43 billion dollars of rpo on on the books right now. And that's going to certainly help just drive the predictability and the durable growth

that we're trying to drive over time. Okay. I want to step into the kind of relationships you guys have had with the clouds and maybe a question for both of you guys, just in terms of what are the steps that you guys took over the last five to 10 years to increase, you know, to really kind of restart your relationships with the hyperscalers in some ways. And then just how do you think that that can continue to build over the next couple of years.

So I'll say a couple of words, and then Martin can jump in. I have to say some of this because he won't actually compliment himself. But I think there's two things that come to mind for me. One is we made some key acquisitions. I think certainly Lebo was a big acquisition for us. Acacia was another big acquisition for us. And then we brought in some of the very best talent in the industry. And that's certainly Martin. It's also a number of folks that Martin brought in on his team as well. And so I think starting with the very best talent was a big difference as well.

Yeah, I think it also started, if you go back, it's a strategy shift that Cisco was treating the hyperscalers a little bit like a big enterprise. But they're different. They're very different in that sense. And when buying Libra and investing into core technology, we changed the way we approached the customer and said, listen, we will meet you where you need us to be. If you want us to buy a branded Cisco box with all our capabilities in it, fine, we will do that. You want us to build your white box with our own silicon in it, we will do that. You wouldn't want just to buy the silicon or the components, and you will put the pieces together, then we will do that too. So it's complete change in posture. So that was sort of, I think, the pivotal point. Now you have to deliver. Now you can get eligible for doing business. Now you have to prove yourself. And over the last, I would say, five, ten years, Cisco have proven themselves in every one of the hyperscalers in terms of we can deliver good technology. We are reliable. We actually know how to support you much better now because it's a different way. It's not like a 1-800 number, right? I like to say doing business at hyperscalers is a little bit like going to final exams every day. Every day. It's just that you can't pass, but you can fail. You can mess up, and then you're out every day. And another way to think of it, I spent a little bit of time at other companies in the past, including Microsoft. And on the inside of that is you understand the stakes are so high. The scale is so big that there is no room for errors. And escalations are happening in nanoseconds or microseconds, not in hours. So that's the mindset that we have built up a culture around. And then, okay, so that's good. Now you have to be competitive, right? You have to build chips and systems and objects. Here we go. For example, this is one of those chips.

This is probably very expensive.

It's not functional, because once you touch it, it's game over. But this is a 100-terabit chip. This was announced just recently. We announced another version of that. I have a few of them in my pockets here, so just in case you can see. But what you may not know is that there are very, very few companies in the world that can actually design these solutions. Broadcom is one of them. This is a Tomahawk 6 equivalent. It's called G300. This is a Jericho equivalent. It's actually double Jericho, but it's called P200. And there's essentially two other companies that can do this in the world, Broadcom and Invidia. And now we're in good company, and I think what we come at is a slightly different approach. We come at it to systems with a systems background, with a networking background, and that sets us apart, I think, and it will do even more so over time. I think when we're moving the AI revolution, a lot of it is data movement that is at the essence of it, which is networking. And we are moving into a token economics model where it's about uptime and dollars per token. And so that's kind of what we do pretty well. We've done that with hyperscalers in the old days. They're called telcos, right? It's up times, five nines. It's about everything needs to be working. And I think that sets us apart as a strategic supplier. And now that we show up, we know how to do business with them. We've proven that we're willing to be flexible and do business on their terms. And now we have roadmaps and technology. I think that's what I think is different.

Yeah, okay. I mean, you just announced and showed us the G300 Silicon One chip. You know, maybe just how does that position you guys in the scale-out market, and how does the programmability of Silicon One kind of differentiate you guys in terms of total cost of ownership?

Yeah, I think that's a very important part. First of all, you have to be – time to market is definitely key in this space, And I think we're in the playing field alongside with others. But we're not just a me-too copycat of something else. We have a distinct and different approach to network silicon. And it's what we call the Silicon One architecture. It's a unified architecture that allows us to do both switching and routing in the same architecture where others are having different architectures that are distinct and different. And they kind of don't really actually play with each other. They're different software stack and behaviors. We have one. And at the heart of that is a programmable engine that allows us to basically drop down microcode, it's called P4, into the chip that will help it determine its behavior or forwarding behavior. And we can do that after the chip is in the network. We don't have to spin a chip. A new requirement shows up. We don't have to go back and build a new chip to bring it out. We can write some software and meet it. And that becomes increasingly important as you're seeing the networking for AI is changing so fast. you're moving towards more of a heterogeneous compute architectures where you have different types of compute. They will have different behaviors. We can meet those behaviors programmably. Others are hard-coded and have very, very fixed capabilities. We have this programmability. And what it also allows us to do is to have the same silicon serve in different roles in the network. So even in a scale-out network, there are many different roles, whether you're top of rack or whether you're end of row or whether you're sitting in aggregation functions. And what we can do is that we can give different personality to the same box, and that, over time, will give a lot of benefits. And I think play into this token economics architecture, which is like you want to have flexibility in your department models.

you know, you mentioned you've kind of expanded the portfolio for the P200, for DCI, or kind of scale across. Just how do you think of these distinct architectures work together to capture kind of the full AI opportunity? And, you know, you mentioned this is differentiated that you don't have these kind of two separate platforms, but kind of what is, you know, are you seeing the response from the customers of being excited about kind of that ability to have a centralized platform.

Definitely. I mean, that's part of why we are seeing our businesses going because it's resonating with customers. Architecturally, the fact that we have a unified approach gives us the ability to play independent of where the choices are. Some people will say scale across needs to be deep buffered. We believe in that. But we also can do the scale across with our G300 shallow buffered solution as well. We can have the same functionality there. So that's one example where maybe the scale across here is that you're 20 kilometers instead of 500 kilometers. And then you can now pick a solution for that. So that blending of blurring of roles, I think is very, we see that trend is happening definitely. And I see our architecture responding very well to that.

I guess the question is, do you end up getting down these rabbit holes where it's like, oh, everybody wants you to customize so much stuff? I mean, it's easier for you to customize it, but how is that relationship?

Well, we had examples of large, call them neoclouds as an example, where they come in and say, we need you to do this particular load balancing because that's how we have architected our network. Can you do it? Nobody else can do it. Can you do it? And we go back and we say, yeah, I think so. Give us a week. We'll come back. And we come back with something. And now we have an optimized solutions. on an existing platform, not something we had to go and re-engineer. That's software. And we could take that to extreme. We could, if we wanted to, and if customers really wanted to, we could hand them the compiler and say, dock yourself out. And I think long-term, that can be an advantage because the competitive nature where we are right now is like everybody's fighting with the same tools in a way. But when you start to can optimize your economic model and get your network 5% more efficient over time, I think that becomes a vector of competitive for the hyperscalers.

And what is that process of kind of, you know, we spend a lot of time about Silicon One with the hyperscalers, but kind of the cost benefit that you guys get or the process of moving that throughout the kind of whole Cisco portfolio?

Yeah, I would start by, and we can argue about that, But obviously, it costs money to build silicon. It's not for everybody. It's a big investment, has been a big investment for Cisco for a long period of time. And that investment is paying back and is starting to kind of get paid back as we are deploying our solutions into not only hyperscaler platforms, but also into the rest of our portfolio. And one way to think of that is the alternative is to go and buy these chips from companies like Broadcom. And if you look at Broadcom's gross margins, they're pretty healthy. So you can imagine that there is some margin stacking going on in there. And that over time, and there's some pricing power and all sorts of good things, supply and all sorts of things that we get out of this. And I think we will see some of those benefits show up as we're deploying and our product lines are migrating to full adoption. We're still at the beginning of that, I would say.

And then, you know, I'll ask it because somebody else in the audience will if I don't. Just how do you see your opportunities in the spine within hyperscalers, which seemingly gets the most attention?

I mean, we have adoption with hyperscalers, five out of six, I think we have said repeatedly, and we have adoption in many different roles. The scale-out opportunity is where we have seen a lot, but also in the scale across where we see a lot of adoption. And the silicon that we built is optimized for these applications, and we can reprogram them so they can fit the role that is needed. So I think we feel very good about the space. But there's a lot more dynamics than just technology. There's also business models and other partnership that gets into that. So I think when I look at our position, it's like you have to be eligible, right? You have to have products. You have to be eligible. You have to be a trusted vendor, and you can be trusted to show up and solve problems as there are. I think we're on that journey. I think we've earned our, you know, earned trust in these, which is a very big difference, like for 10 years ago where we were just not relevant.

Yeah. And then maybe just, you know, last question to, you know, co-packaged optics has been a, we've had every optical networking vendor here all week talking about it. You guys have, you know, not only Liba, you, like Sarah, you have a lot of pieces of the portfolio that kind of help. Just how are you guys thinking about the co-packaged optics opportunity?

Well, first of all, it will happen at some point in time, and there is a lot of push in the marketplace for it to happen maybe sooner than later. But at the end of the day, it's a big transition for the industry. customers will have to get comfortable with not only the business model associated with this and vendor concentration and so forth but also the operational realities of how does this stuff actually perform in a network so that stuff is not overnight it will not be flipper switch you mentioned LuxTerra and LuxTerra is an acquisition that was done a number of years ago It's also in my group, and it has some of the best silicon photonics technology, which is critical for the CPO adoption. And while we haven't announced anything yet, we did do a technology demonstration of a CPO solution in 2023. So, you know, watch the space.

Okay, got it. Mark, I'm going to circle back to you. you know you're seeing a lot of this campus switching base you know go through a larger refresh just what inning are we here and then just how is that conversation that maybe is starting with campus refresh accompanying accompanying kind of all this part of what you've called AI modernization across the greater stack yeah I'd say we are I think Chuck characterized it as the

the top of the first inning even so very early on multi-year multi-billion dollar opportunity i think that as i look at campus i would say there's there's probably more reasons today for customers to upgrade in terms of the ai capabilities making your network smarter faster are more autonomous, the bringing together of the network and security, the fact that there's a real recognition that aged-out equipment is a big-time security risk, given the sophistication of security threats today with AI. And so I think there's more reasons than ever to upgrade, and probably our portfolios in as good a shape or better than I've seen in a long, long time in terms of all the refresh that we've done kind of up and down the stack as well.

And then just, you know, you mentioned security. Maybe security has kind of underperformed expectations, at least from an investor standpoint over the past couple of quarters. You know, just where do you see your guys in terms of being able to kind of position yourself better or some of the changes that are just taking time to kind of show up?

Yeah, I'd say, you know, probably the biggest headwind that we've seen in terms of just revenue and security is this transition that we're seeing with Splunk and customers moving to cloud versus on-prem. The accounting is different. Instead of recognizing it up front, you recognize it radically over the life of the contract. In the end, that's actually a really good transition. We can deliver features faster. They can adopt technology. And we see the longer-term prospect of revenue actually much higher than we would on-prem. But that's a headwind we're facing. On the sort of organic or ex-Splank security side, we're actually seeing really good momentum that it's just going to take some time for it to translate into revenue growth, given a lot of the offers are ratable. And we still have some legacy business as well that is a headwind there. But in terms of the new offers, you look at hyper shield you look at secure access you look at xdr and ai defense that just that those products right there a thousand new customers that we signed up in in q2 alone which was a hundred percent more than we signed up in q1 and so we're seeing really good traction we think by the end of this fiscal, if you just kind of put the transition aside for Splunk, which is what we talked about, just the organic security business, we think we'll be approaching double digits. So we think we're on the right track. It's just going to take time. Recognize it's taking a little longer than we would have liked, but we also were real clear and took the risk out of the

guidance that we don't need a substantial increase from here. I get this question a lot from investors. I'm sure you get it as well, just in terms of why does Cisco need to stay together? You know, there's a lot of different businesses. There's a lot of different areas. And so just how do you kind of express what the value of Cisco together is? Yeah, I think that I think I have

gotten that question. But I think it's just a I think it's one of the unique advantages that we have and really providing a full stack for uh ai you know use cases as well as more traditional use cases that includes silicon optics networking observability security collaboration everything that our customers really need to get the most out of all of those technologies if you will and And I think that together, those really just provide our customers to be able to unlock value that they wouldn't be able to do otherwise. And we find it pretty compelling. We're really the only one that can bring all that together.

And then maybe just the last question.

It's also a key part of our overall profitability model. Each one of those plays a role as well.

Cash flow. Minor topic. You know, and that kind of rounds out the conversation of just in terms of capital allocation. You know, you talked about there's various pieces of the business generate a lot of cash. Just how do you think about capital allocation? And, you know, we've seen some depressed software valuations of late. Does that change your aperture for kind of our appetite for M&A?

Yeah, I think no real change in capital allocation policy. um what you have seen i think with g2 and what he's really driving is uh more build here and versus buy yeah but at the same time we're going to be very opportunistic and and understand that that uh there will always be opportunities to to ultimately get to market faster or build the technology that we need and and to drive revenues faster if we were to to do something in organics. We'll continue to look at it. But the big thing is just is there a moat and can we really drive differentiation? And I think that's why you're seeing more tech and talent, more stuff that is just going to either add a feature or get us to market faster or grow the top

line faster. Okay, perfect. Alright, well, Mark Martin, thanks so much for being here today. Thank you, Mina.

Appreciate it.