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Cisco Systems, Inc. (NASDAQ:CSCO)
Q3 2018 Earnings Conference Call
May 16, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Cisco Systems third quarter Fiscal Year 2018 financial results conference call. At the request of Cisco Systems, today's conference is being recorded. If you have any objections, you may disconnect. Now, I would like to introduce Marilyn Mora, head of Investor Relations. Thank you and you may begin.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Michelle. Welcome everyone to Cisco's third quarter Fiscal 2018 quarterly earnings conference call. This is Marilyn Mora, Head of Investor Relations. I'm joined by Chuck Robbins, our Chairman and CEO, and Kelly Kramer, our CFO.

By now, you should have seen our earnings press release. A corresponding webcast with slides, including supplemental information will be made available on our website in the Investor Relations section following the call. Income statements, full-GAAP to non-GAAP reconciliation information, balance sheets, cash flow statements, and other financial information can also be found in the Financial Information section of our Investor Relations website.

Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results, and we'll discuss product results in terms of revenue, and geographic and customer results in terms of product orders, unless stated otherwise. All comparisons throughout this call will be made on a year-over-year basis, unless stated otherwise. The matters we will be discussing today include forward-looking statements, including the guidance we will be providing for the fourth quarter of Fiscal 2018. They are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on Form 10-K and 10-Q, which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.

With respect to guidance, please also see the slides and press release that accompany this call for further details. As a reminder, Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. With that, I'll now turn it over to Chuck.

Chuck Robbins -- Chairman and Chief Executive Officer

Thank you, Marilyn. Good afternoon, everyone. We had another great quarter. We are executing well against the strategy we put in place three years ago. Our innovation pipeline has never been stronger, and we continue to transform our business to reflect the way customers want to consume our technology. We delivered another quarter of accelerating revenue growth up 4%, solid margins, and record non-GAAP EPS up 10%. Our performance was driven by the acceleration of our intent-based networking portfolio, continuing strong customer demand for our innovative solutions, and the increasing value of the network.

We also made steady progress in shifting more of our business toward software and subscriptions. This resulted in broad-based strength across our products and geographies. As I talk with customers around the world, it is clear that the network is playing an increasingly critical role in helping them manage their complex environments. They are consuming services from multiple cloud providers, multiple SasS applications, connecting billions of new devices, which are generating massive amounts of data, and the network is pervasive across all of these environments.

We have been evolving our portfolio to help our customers deal with this complexity and provide unprecedented simplicity, visibility, and security across on-premise, hybrid, and multi-cloud environments. Now, I'd like to review our momentum across key priority areas and share some of the innovations we're driving across our portfolio.

First, let's start with infrastructure platforms. We are leading the network industry's transformation to intent-based networking across the campus, branch, data center and the edge. We are paving the way to help customers simplify and manage the network. Only Cisco offers an end-to-end intent-based networking portfolio that delivers assurance, industry-leading security, policy-based automation, and segmentation. We continue to see very strong adoption of the Catalyst 9000, the fastest ramping, new product introduction in our history.

This includes another quarter of high uptake of our advanced subscription offer and DNA center, our automation and analytics platform. The Catalyst 9000 now has over 5,800 customers, up from 3,100 last quarter. This is an excellent example of how we've begun to scale our enterprise networking business into a subscription model. We've also recently introduced additional intent-based networking innovations. These include new access solutions and routing software subscriptions which expand our software defined WAN capabilities onto any platform.

We are extending our leadership in data center and cloud by providing highly secure and differentiated offerings, such as our ACISDN solution. With growing 100-gig deployments, especially in cloud infrastructure, we remain well positioned for future growth with our data center switching and intent-based portfolio. We also announced new hybrid cloud workload management solutions with ACI multi-side management and new flexible consumption models including SaaS for our titration platform.

Whether deploying enterprise applications or containers in a multi-cloud environment, customers are increasingly turning to Cisco's unique architectural approach. This is leading to strong momentum with UCS, our compute platform, and HyperFlex, our hyperconverged offering, as customers benefit from simplicity and scalability to support their hybrid cloud strategies.

Now, turning to security, which is foundational to everything we do. Our architecture delivers highly effective security from the network to the end point to the cloud. This unique ability to bring together networking and security at scale gives us a huge competitive advantage. With the largest customer base in enterprise security, it is clear that our strategy is working. The strength we saw in the quarter is driven by our integrated architecture, combined with best-of-breed products.

We are also leveraging artificial intelligence and machine learning to reduce time to detection and remediation. A great example of this is our Talos intelligence platform, where we block 20 billion threats every day. We continue to rapidly innovate in security to address key areas of concern for us customers, such as security in their complex data centers. We introduced a comprehensive integrated data center security architecture that is designed to product the modern data center by seamlessly following any workload anywhere, across physical and multi-cloud environments.

Now, moving to applications, this quarter we introduced new innovations across our collaboration portfolio, with the convergence of the Spark and Webex platforms, combined with new Webex Meetings and Webex Teams applications. We further enhanced our AI and machine learning capabilities across our collaboration portfolio, with the acquisition of Accompany, a relationship intelligence platform with robust insights and intelligence to improve Meeting and Team experiences. We completed this acquisition last week.

We are pleased with the consistent progress we've made to deliver on the strategy we put in place nearly 3 years ago. We have solid business momentum. We are confident in our pipeline of innovation and future growth opportunities and our commitment to driving value for our shareholders remains as strong as ever. This is clearly demonstrated by the fact that we delivered record capital returns this quarter.

As part of our commitment to shareholders, we are also very focused on our responsibility as a company to drive impact within our communities through innovation and active engagement. It is not only the right thing to do, but a key requirement for long-term business success. We are deeply committed to our long-standing efforts around sustainability, education, and disaster relief, as well as other key issues such as hunger and homelessness. I could not be prouder of our achievements or more excited about the impact we will have going forward.

Now, I'll turn it over to Kelly to walk through more details on our financials.

Kelly A. Kramer -- Executive Vice President and Chief Financial Officer

Thanks, Chuck. I'll start with a summary of our financial results for the quarter, followed by the guidance for Q4. We were pleased with the financial performance in Q3 with broad strength across the business. We executed well with very good orders momentum, strong revenue growth, and solid margins. Total revenue was $12.5 billion, up 4%, and non-GAAP EPS was $0.66, up 10%. We continued to focus on driving margins and profitability with a strong non-GAAP operating margin rate of 31.5%.

Let me provide some more detail on our Q3 revenue. Total product revenue was up 5%, demonstrating the strength of our portfolio. Infrastructure platforms grew 2%, with strength in all businesses with the exception of routing. Switching return to growth, with revenue growth in both data center and campus. Campus growth was driven by our new switch, the Cat 9K. We saw solid growth in wireless with strength in Meraki and our Wave 2 offerings.

Data center had very strong double-digit growth driven by servers, as well as HyperFlex. Routing declined largely with continued weakness in service provider. Applications was up 19% in total with broad strength across the businesses. We saw very solid growth in telepresence end points, UC infrastructure, and amp dynamics. Security was up 11% with strong performance in unified threat, advanced threat, and web security. Deferred revenue grew 38%, as we continued to drive more subscription-based software offers.

Service revenue was up 3%, driven by growth in advanced services, as well as software and solution support. We continue to transform our business, delivering more software offerings and driving more subscriptions and recurring revenues. In Q3, we generated 32% of our total revenue from recurring offers, an increase of 2 points from a year ago. Revenue from subscriptions was 55% of our software revenue. We drove good growth in deferred revenue, which was up 9% in total, with product up 18% and services up 4%. Deferred product revenue from our recurring software and subscription offers was $5.6 billion, up 29%.

We saw strong momentum in Q3 product orders growing 4% in total. Looking at our geographies, Americas grew 4%, EMEA was up 6%, and APJC was up 3%. Total emerging markets was up 7% with the BRICs plus Mexico up 12%. In our customer segments, enterprise was up 11%, commercial grew 7%, public sector was up 2%, and service provider declined 4%.

From a non-GAAP profitability perspective, total Q3 gross margin was 63.9%, down 0.5 points. Product gross margin was 62.9%, down 0.3 points, and service gross margin was 66.9%, down 0.9 points. We continue to be negatively impacted by the higher memory pricing we have discussed over the past several calls, which we expect to continue in the near term. Our operating margin was strong at 31.5%.

When we look at the impact of acquisitions on our results year-over-year, there's been a 120-basis point positive impact on revenue, and a negative $0.01 year-over-year impact on our non-GAAP EPS. In terms of the bottom line, non-GAAP net income of $3.2 billion was up 6%, while GAAP net income was $2.7 billion. We grew non-GAAP EPS 10% at $0.66, while GAAP EPS was $0.56.

We delivered operating cash flow of $2.4 billion, down 28%. We paid $1.3 billion of one-time foreign taxes during the quarter related to the Tax Cuts and Jobs Act. Operating cash flow increased 11%, normalized for these tax gains. We repatriated $67 billion of our offshore funds to the U.S. and ended Q3 with total cash, cash equivalents, and investments of $54.4 billion, with $47.5 billion available in the U.S. From a capital allocation perspective, we returned $7.6 billion to shareholders during the quarter, that included $6 billion of share repurchases and $1.6 billion for our quarterly dividend.

We recently announced an agreement to sell our service provider video software solutions business. We expect this transaction to close in Q1 Fiscal Year 2019, subject to any regulatory approvals and customary closing conditions. We are continually looking to optimize our portfolio.

To summarize, Q3 was a good quarter with solid top line growth, strong profitability, and order growth. We continue to make solid progress on our strategic priorities, making key investments to drive our long-term growth. Let me reiterate our guidance for the fourth quarter of Fiscal Year 2018. This guidance includes the type of forward-looking information that Marilyn referred to earlier.

We expect revenue growth to be in the range of 4% to 6% year-over-year. We anticipate the non-GAAP gross margin rate to be in the range of 63% to 64%, the non-GAAP operating margin rate is expected to be in the range of 29.5% to 30.5%, and the non-GAAP tax provision rate is expected to be 21%.

Non-GAAP earnings per share is expected to range from $0.68 to $0.70. I'll now turn it back to Marilyn so we can move on into the Q&A.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Kelly. Michelle, let's go ahead and open the line for questions.

Operator

Thank you.

Marilyn Mora -- Director, Head of Global Investor Relations

While Michelle's doing that, I'd like to remind the audience to ask just one question so that we have plenty of time for others in the audience to ask a question. So with that, I'll turn it to you, Michelle.

Questions and Answers:

Operator

Thank you. James Faucette from Morgan Stanley Investment Research, you may go ahead, sir.

James Faucette -- Morgan Stanley -- Analyst

Great. Thank you very much. Chuck and Kelly, I guess I wanted to ask, one of the key things that investors are looking at is the continued growth in subscriptions, etc. It seems like the deferred continues to grow nicely. One of the key questions that we have though is as you continue to show good demand for the new Catalyst 9K products and distribution expands, what are you seeing in terms of attach rates for subscriptions to that new product? Are they maintaining the levels that you'd see at the early stages of launch or are they starting to normalize back to more traditional levels? Just trying to get a little color on how well that tying strategy is working for you. Thank you.

Chuck Robbins -- Chairman and Chief Executive Officer

James, thanks for the message. I'll comment and then if Kelly wants to add anything, we'll let her do that as well. I would say it's been very consistent over the last four quarters I think since we put it in the marketplace in Q4 of last fiscal year. I think we had one month of activity. So, it's been incredibly consistent. We're really pleased with the acceptance of this product, I think. Adding 2,700 more customers in the quarter. If you think about that, that means we added over 40 customers per day that acquired the Catalyst 9000 for the first time. The acquisition of that product, in my opinion, is a clear belief in the next generation architecture with the automation platform that we're announcing, which is what the advanced subscription model requires. I think that's reflected in the continued high uptake that we see on the advanced subscription. Kelly?

Kelly A. Kramer -- Executive Vice President and Chief Financial Officer

I think that covers it. The vast majority is the advantage, which has the advanced features and the higher margin profile. Then the only other thing I would add is it is very evenly spread across commercial enterprise and public sector in terms of the demand and where we're seeing all the business.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, James, for the question. Michelle, let's go ahead and take the next question.

Operator

Thank you. Rod Hall from Goldman Sachs. You may go ahead, sir.

Rod Hall -- Goldman Sachs -- Analyst

Hi, guys. Thanks for the question. I just wanted to try to dig under the covers a little bit on the revenue guidance. Obviously, service provider orders are weak and it sounds like routing is weak in line with that. Just wondering if you could, Kelly, maybe give us any idea how much service provider video is affecting that guide and also, the routing within that guide. What are you assuming there? Are you assuming routing continues to kind of drag that growth down and then I have a follow-up.

Kelly A. Kramer -- Executive Vice President and Chief Financial Officer

Yeah, so in general, I think the trends in both routing and service provider video, which is in the other bucket, have been consistent and we're not assuming any improvement in either of those. So, I would say our guide includes what we see. We feel really good about the rest of the portfolio, actually. We see very good growth there, but those two trends are not improving, so that's basically what I have included.

Rod Hall -- Goldman Sachs -- Analyst

Okay. Then, Kelly, could you -- thanks for that -- could you also comment on the optics of sales? It's picking up a little in the guide, at least implied, and I'm wondering if you could maybe give us any color on what's moving around in OpEx for Fiscal Q4?

Kelly A. Kramer -- Executive Vice President and Chief Financial Officer

On OpEx, the increase is mainly driven by the acquisitions we brought in. Specifically, AppDynamics. As you know, when we bought AppDynamics, very early stage, we're in heavy investment phase with them. So, that's part of it. As well as we've consolidated BroadSoft and it also has a fairly high OpEx impact. If you look at my OpEx growth for the quarter, which was up a little less than 6%, 4 points of that alone is just purely the acquisitions. As I mentioned, the impact of acquisitions on my top line and it's hurting the EPS. It's mainly in the OpEx line. That's what's driving that. We're being very disciplined within the rest of the business to managing the portfolio. I think it'll continue kind of in that range as we look forward to Q4, but that's kind of the underlying driver.

Rod Hall -- Goldman Sachs -- Analyst

Great, OK, thank you.

Marilyn Mora -- Director, Head of Global Investor Relations

The next question, please.

Operator

Thank you. Ittai Kidron from Oppenheimer & Company. You may go ahead, sir.

Ittai Kidron -- Oppenheimer & Company -- Analyst

Thanks and congrats on a good quarter. Chuck, I had a couple questions. First on the Catalyst 9K, good progress, but help us understand how big is your Catalyst install base from a customer standpoint? What percent of it do you really think the Cat 9K is relevant to? Because it's hard to gauge whether you're moving too slow or too fast. 40 customers a day sounds like a lot. But maybe for a company like Cisco, it's not fast enough. So, help me understand how do you think about driving that throughout your install base, especially with now a risk of potentially coming to the marketplace?

Then second question, I had a question about China. Clearly, relations there have not been on the good side recently. You've been somewhat a little bit more optimistic on that country over the last year. What are you seeing out of there and how do you take that into your outlook commentary?

Chuck Robbins -- Chairman and Chief Executive Officer

First of all, thanks Ittai. Thanks for the positive comments. On the 9K, I think that we have roughly 840,000 customers. I would say that there's a very long list of customers that are still available to us to deliver this platform. If you look at the products that we have put in the market in the new Catalyst 9K family, if you stack our portfolio and you say we have a very low-end switch and then you have the old Catalyst 3000, the old Catalyst 4000, those are the platforms that the current 9K family replaced. So, there's still a very long tail of customers.

The other thing you have to remember is many of these customers are buying the 9K and then it will become the standard platform and they'll refresh the balance of their networks. The other thing I'll point out is that I think we said on one of the calls a while back that the enterprise segment we would expect to [inaudible] the commercial segment with the 9K and we did, in fact, see the enterprise business improve and the 9K was part of that. So, I think we still feel good about it.

This architecture has a long future for us. There's a portfolio of products that fit within it. I think if we're really honest, the number of customers who are making the decision to upgrade to the 9K, I would say it's not necessarily because wow, what a fantastic new ethernet switch. It's really because they're buying into this automation strategy of which the entire portfolio will fit over time. I think that's what we're banking on and that's what we're banking on the long-term success.

The China question, if you look at our China business this quarter, we actually saw strength in switching in both the enterprise and commercial segments. Overall, I think there's still uncertainty there. But I believe, and I have been optimistic and I remain optimistic that the two countries will come to some closure on the trade issues and that we'll get stability there. We still believe in it. It's going to be obviously the largest economy in the world in the coming decade. We remain committed and actually we're doing pretty well. If you look at the SP routing business in China, it continues to be stressed, like it is around the world. But much of the other portfolio elements we're very pleased with.

Ittai Kidron -- Oppenheimer & Company -- Analyst

Very good. Good luck.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Ittai. Michelle, go ahead with the next question.

Operator

Thank you. Vijay Bhagavath from Deutsche Bank Securities. You may go ahead.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Yeah, thanks. Hi, Chuck, Kelly. These are solid results here. You've hit on all major categories. A quick question for you, a bigger picture question, Chuck, and Kelly as well, which is as your software subscription attach rates sees strength, could we see the sales OpEx, for example, start to trend down? Are you already seeing that impact to your sales OpEx line? And then just a quick tactical question in terms of approximately what was the run rate of the SPV of the business you sold to Primera, because that would help us to inflate the July quarter guidance, if it wasn't sold so that it helps [inaudible] business. Thank you.

Chuck Robbins -- Chairman and Chief Executive Officer

Let me give some color around how we see the sales model evolving and then I'll let Kelly answer the financial side of those questions for you. Vijay, I think what you're going to see is we're actually building I'll say a traditional software model where we have a customer success organization that over time will take on more responsibility for all of the functions in the software company. You know, the whole adoption expansion, and particularly the renewal space, which will allow us to renew a lot of these offers over time. It's a multi-year renewal window.

But renewing over time at a much more cost of sale, I would suggest that may give us either some obviously operating leverage, or it may give us the ability to invest in more R&D or other areas, but that's the model. That's one of the key reasons that we brought in Maria Martinez, who is now our Chief Customer Experience Officer, who is helping us build out that capability, who has a long experience of doing that in several software companies. That is one of the major efforts that we have under way right now to not only increase our ability and our rates of renewal, but also to do that at a much different cost structure going forward. Kelly?

Kelly A. Kramer -- Executive Vice President and Chief Financial Officer

Just on the SPVSS business, it is in my guidance right now because we're going to, obviously, we continue to run this business until the deal closes. It is the majority of what's in the other bucket, Vijay. It's the bulk of that. But like we did when we divested the set-top box business, once we close the transaction, we'll give you all the history so we can adjust the models and go forward from there. So, you'll have complete visibility all the way through the P&L once we close the transaction.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Thank you.

Marilyn Mora -- Director, Head of Global Investor Relations

Next question, please.

Operator

Thank you. Pierre Ferragu, you may ask your question from New Street Research.

Pierre Ferragu -- New Street Research -- Analyst

Hi, Chuck and Kelly. Thanks for taking the question.

Marilyn Mora -- Director, Head of Global Investor Relations

Pierre, can you speak up just a bit?

Pierre Ferragu -- New Street Research -- Analyst

Thanks, Marilyn. Is it better now?

Marilyn Mora -- Director, Head of Global Investor Relations

Yes.

Pierre Ferragu -- New Street Research -- Analyst

Okay, thanks. On the cost margins, so you still suffer from these memory prices. Are they improved or has the pressure increased sequentially compared to last quarter? We've had this pricing for some time now in the market and I was wondering how are you going to reflect that in your pricing strategy and when should we expect you to start passing on these extra costs to your client. Then lastly, on the gross margin, I assume that you're still increasing very fast the share of software and subscription services in your revenue mix, so it should have a positive impact on gross margin. If you can comment on that as well, that would be great. Thank you.

Kelly A. Kramer -- Executive Vice President and Chief Financial Officer

I'll take that. First, on the memory. Yeah, memory is still hurting us year-over-year. In my product gross margin, it hurt is to the tune of about 60 basis points year-over-year. So, more than what we were down year-over-year. It is marginally less bad than it was last quarter, which was marginally less bad than it was a quarter before then. So, the slope of the increases are getting less, though it's still increasing year-over-year. So it was about 60 basis points.

I would say in terms of pricing, we had another very, very good quarter for price. We always have price erosion, but like you saw last quarter, our price erosion was at the very low end of what we've seen over the last three years. That continued. Part of that reason of why that continued is we have been passing on the memory de-ramp cost increases through price increases on our servers, like we have been, as well as a lot of our peers, as well as our product managers in other parts of the portfolio have been really being very disciplined about looking at where we have some price elasticity and have been selectively and surgically looking for areas that we could take advantage of price elasticity. So, I feel really good about where our price index was this quarter, much in line where it was last quarter.

Then to your third point on the software being a benefit, that is true, though I will say a portion of that is getting offset now that we're ramping the Catalyst 9K so quickly. As you know, a portion of that gets deferred because it's a subscription. That has a negative impact on our rate as well. So, this quarter it was about 30 basis points alone just for the Cat 9K alone, now becoming bigger in the revenue contribution and impact on our rate. So, again, the three things are: 60 basis points on memory, 30 basis points on the Cat 9 impact, and then we had pretty strong price and some favorable mix coming through from software.

The only other last point I will make -- we had a very, very strong quarter on our UCS, our service business, and that had a little bit of negative mix for us as well.

Pierre Ferragu -- New Street Research -- Analyst

Excellent. Thanks.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Kelly. Michelle, next question, please.

Operator

Thank you. Paul Silverstein from Cowen & Company, you may go ahead.

Paul Silverstein -- Cowen & Company -- Analyst

Thanks. Guys, against my better judgment, I'm going to ask you a wide-open question, which is for either or both of you, Chuck and Kelly, what are you most excited about in terms of upside opportunity, whether revenue or margin, and what are you most concerned about in terms of downside risk?

Chuck Robbins -- Chairman and Chief Executive Officer

I'll start, Paul. Thank you for the opportunity. Listen, I think that what I am most optimistic about is the renewed innovation that we have brought and will continue to bring in our enterprise portfolio, particularly into our core franchises, which was one of the things that when I spoke to many of you when I became CEO three years ago, and even when we were on the road last year, I said the No. 1 priority for us right now, and obviously we're going to continue the business model evolution, but the No. 1 priority was to get the enterprise portfolio, and particularly the switching business stabilized. Which our teams have done a great job.

Even if you look at the security portfolio of the team, and I will tell you on the enterprise routing space, Kelly talked a little bit about the overall routing business, but SP routing is about half and the enterprise routing I will tell you that our teams have been working on the integration with the Viptela acquisition into our enterprise routing portfolio. I actually feel really good about how that's coming along and I'm optimistic about where that goes in the future. I'm very optimistic about the overall innovation within the intent-based networking portfolio that we're going to bring forward over the next months, quarters, and years.

I guess if I had to say what I would be most concerned about in general, it's just sort of the micro and/or some geopolitical risk. You've obviously got lots of trade discussions, which I remain optimistic on, but as long as there's uncertainty, then we wait and see. Obviously, the dollar rising, while we had a good quarter in emerging countries and we're pleased with our execution there, the rising dollar obviously is another micro issue. But I'm very pleased with what the teams are executing on right now. That's how I'd leave it. Kelly, any comments? Good?

Marilyn Mora -- Director, Head of Global Investor Relations

Great. Thanks, Chuck. Michelle, go ahead and tee up the next question.

Operator

Thank you. Jeff Kvaal from Nomura Securities International, you may go ahead, sir.

Jeff Kvaal -- Nomura Securities International -- Analyst

Yes, thanks very much. You spoke about your progress in the data center switching side of things. I'm wondering if you could help us understand how things are going in the enterprise data center market and how your relationships are progressing in the web-scale data center market. Or just web-scale in general would be helpful too, outside of data center switching. Thank you.

Chuck Robbins -- Chairman and Chief Executive Officer

Thanks, Jeff. I am very happy with what our teams are doing in the data center switching market in general. I think that the 100-gig transition we're pleased with. The return to growth in both the data center and the campus from a switching perspective. On the web-scale side, I would say the story continues to remain as I've articulated it. We continue to make progress. You've seen the announcement we made obviously, with Google. We continue to work and execute on the details of those solutions that we announced with them. You'll see more coming out later from us there.

We continue to engage deeply with all of these players. We've had continued progress with several of them and continued favorable discussions. But these are, as I've said repeatedly, some of these are multi-year architectural decisions and they take a while. But, again, I'm optimistic and pleased with where we are right now. I think the other thing I'd point out is that this environment that our enterprise customers are facing right now where literally 4 or 5 years ago they thought they were going to move to the public cloud and have a much simpler IT world. They now find themselves with 3 or 4 public cloud providers that they're consuming services from. They have 50, 60, 100 SaaS providers. We're beginning to see this real explosion of IoT devices at the edge. They still have their private data centers. Those have not gone away. You've got all of the mobility and customers and suppliers. The network is so fundamental to making all that work. The web-scale providers know that as well, which has really enabled us to build these broad relationships that extend well beyond just the data center. We're still pleased with where we are and we have a long way to go.

Marilyn Mora -- Director, Head of Global Investor Relations

Next question, please.

Operator

Thank you. George Notter from Jefferies, you may go ahead.

George Notter -- Jefferies -- Analyst

Hi, guys. Thanks very much. I wanted to circle back to a conversation from prior earnings calls. You guys had talked about the revenue headwind associated with the move to more subscription-oriented models. Kelly, I'm wondering if you can give us an update there. Is there still a headwind this quarter? How do you see that progressing going forward? Thanks.

Kelly A. Kramer -- Executive Vice President and Chief Financial Officer

Thanks. The headwind is still there because we are very much increasing the number of offers that we have, as well as the revenue dollars that we're putting on the balance sheet. So, the headwind is increasing and just as we had talked in the past, now that the enterprise portfolio with the Cat 9K is starting to hit revenue, the headwind is increasing. So we've said in the past is was 1.5 to 2 points. It definitely now is approaching a 2 to 2.5. As we ramp more and more of the portfolio, we'll continue to see that.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, George, for the question. Next question, please.

Operator

[Inaudible] from Equerry Capital, you may go ahead.

Analyst -- Equerry Capital -- Analyst

Thank you. I guess my question is on the recurring revenue. It dipped a little bit to 32%. If you could give some color on that. And also, I think your target long-term is exceeding 37% in Fiscal '20. Is that primarily a function of Cat 9K ramping in volume? Are there any other products that could contribute to that? Also, I'm wondering if you need to expand the subscription model to other products to achieve that goal?

Kelly A. Kramer -- Executive Vice President and Chief Financial Officer

Thanks for the question. On the recurring revenue, it's basically in the round. If I look at our product recurring revenue, again it continues to grow over 30% to over 13% of our total product revenue. Overall, total recurring revenue is again growing in the double digits. So, it's really the math and a little bit of the mix, now that we have product revenue growing so much faster than services. That's driving the pure math of the round from 33% to 32%. But we feel great about how it's progressing.

If you go to our financial analysis conference, we feel we're right on track of what we projected as that goes out to Fiscal Year '20. The only caveat I'll give you on that is when we go into our Fiscal Year '19, we have to adopt the new revenue standards, which will have some implications on some of the products that are included in this. So, we plan to have a call where we can go through the anticipated areas that will be impacted to give you guys more clarity and then we'll adopt that Day 1 of our Fiscal Year '19. But overall, we feel great about the traction. We're executing very well and we're on track, if not slightly ahead of what we expected when we talked at the financial analyst conference.

Chuck Robbins -- Chairman and Chief Executive Officer

[Inaudible], just one last comment on the part of your question where you asked if we would need to extend this to other parts of our portfolio. I mean, we will. If you look at the new enterprise routing, some of the comments I made in my opening was that we are extending our software and subscription business in the routing space. Many of those are software solutions. We'll continue to evolve. Frankly, it's driven by how our customers want to consume the technology, which is great. As Kelly said, it will create this short-term headwind, but we think long-term for the business, it's absolutely the right thing to do.

Analyst -- Equerry Capital -- Analyst

Thanks, Chuck.

Marilyn Mora -- Director, Head of Global Investor Relations

Next question, please.

Operator

Thank you. James Suva from Citigroup Global Markets. You may go ahead, sir.

James Suva -- Citigroup Global Markets -- Analyst

Thanks. I have a brief question for Chuck and then Kelly, more of a clarification one. Chuck, there wasn't any mention yet, at least on the Q&A, about competitors going into the campus side of things with the rest to make an announcement. How do you look at that? I competition isn't anything new, but do you need to step up your sales efforts or how should we think about that?

Kelly, for the CFO question, how should we think about -- you've had time now to think about the tax law, sort through all the changes-is your outlook, 21% outlook long-term and stock cadence, you did a lot more stock buyback this quarter than normal with your announcement. How should we think about those financial metrics? Thank you so much.

Chuck Robbins -- Chairman and Chief Executive Officer

Let me hit the first one. Relative to the competition in the campus, what I would say is we launched this architecture last June and I think our customers have been incredibly excited about it. One of the very important things that we did is we made the architecture and DNA center backwards compatible with at least one generation of our wireless products, our switching products, our routing products, etc.

I think that taking a look at all of those products is incredibly important because our customers don't want to have an automation platform that handles switching. They want an automation platform that handles, at a minimum, the enterprise network, and then over time, as we integrate our automation platform in the data center and the campus, you'll be looking at the ability to automate from the data center to the campus to the wireless network to the routing and frankly, the security architecture. We think that is a unique architecture that we can deliver. We are leading right now. We see incredible acceleration of the Cat 9K and adoption by our customers. We're very comfortable with where we are in this transition.

Kelly A. Kramer -- Executive Vice President and Chief Financial Officer

On the tax question, again, we feel really good about where we stand in terms of that. As we said in the call, we brought back $67 billion from overseas. Like we said in last quarter's earnings, we announced a big increase to our share buyback authorization. So, we have $25 billion remaining in our share buyback and we anticipate using that in the next basically 18 to 21 months. We're being very aggressive there, like we had stated we would be once we got our cash back. So, that's going well.

As far as the tax rate, we also stated in Q2 that we expect our tax rate to be in the 21% for Fiscal Year '18 and we expect it to go down to 20% in Fiscal Year '19, when we get the full benefit of the new U.S. federal rate. Overall, we feel great about the tax law and the implications for us.

James Suva -- Citigroup Global Markets -- Analyst

Thanks so much for the details.

Marilyn Mora -- Director, Head of Global Investor Relations

Next question, please.

Operator

Thank you. Mitchell Steve from RBC Capital Markets. You may go ahead, sir.

Mitchell Steves -- RBC Capital Markets -- Analyst

Thanks for taking my question. I actually wanted to circle back a little bit and poke at the recurring revenue piece. Now that it's 32% and you're noting that you got 120 basis points from acquisitions, can you help me understand what really drove the decline Q over Q from 33% to 32%, given that the acquisitions you guys have done have been software in nature?

Kelly A. Kramer -- Executive Vice President and Chief Financial Officer

Again, I think basically AppDynamics has been in the numbers as we go along. I would say BroadSoft has a mix of both perpetual and recurring, so it is not all recurring. I would say the bigger impact on the numbers, and again, it's really just the mix of the products. When we have product revenue growing 5%, services growing 3%, and within that product number, we had very, very strong server revenue growth, which has a very low software recurring proponent of it. That's what's really driving it.

As I said, overall, the growth of product recurring revenue is over 30%, like it has been for the last 5 quarters. So, that just continues to grow. It's really more the denominator total revenue that's driving just the slight round down to 32%.

Mitchell Steves -- RBC Capital Markets -- Analyst

Got it. Perfect. Thank you.

Chuck Robbins -- Chairman and Chief Executive Officer

Thanks.

Marilyn Mora -- Director, Head of Global Investor Relations

Thank you. Next question.

Operator

Thank you. Tal Liani from Bank of America. You may go ahead.

Tal Liani -- Bank of America -- Analyst

Security was up 11%, which is an acceleration from previous quarters, the previous two quarters. Can you talk about what went right and what went wrong with security this quarter? What are the things that are driving this acceleration? Thanks.

Chuck Robbins -- Chairman and Chief Executive Officer

Thanks, Tal. We've remained confident in the security architecture that we've built, even when we had some deviation in the revenue run rate over the last year. I think that as you look at the architecture that we have, which extends from email to end points, to the network, to the cloud, and then has this massive state machine where we can correlate threats and then dynamically defend, it's a unique proposition. We say that we have this integrated architecture, but also best-of-breed products.

Where we are convincing customers that the architecture is right, then we're winning. I think that our teams are doing a really good job. I think that the engineering teams have continued to add new features and new capabilities that our customers are adopting, and I think it's as simple as that. We have reasonably good traction in the field right now.

Tal Liani -- Bank of America -- Analyst

Can you share with us maybe the areas where you think you need to strengthen your portfolio?

Chuck Robbins -- Chairman and Chief Executive Officer

Well, the great thing about this architecture when we built it, is that you can continue to add virtually any source of threat intelligence to this because it's built to digest massive amounts. We see 20 billion threats every day. You can assume that we can add any sort of capability that we'd like that includes threat sources, and frankly, the same thing from a defense perspective. Within the portfolio, I think there's always an opportunity for our teams to continue to improve and continue to add features. There's a lot of good competition in this space. It's very fragmented, so we just continue to execute against delivering that architecture.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Chuck. I think we have time for one more question.

Operator

Thank you. Mark Moskowitz from Barclays Capital, you may go ahead.

Mark Moskowitz -- Barclays Capital -- Analyst

Thank you. Good afternoon. Just one more revenue question for me. Kelly and Chuck, how should we think of the second half of calendar '18 relative to your fourth quarter revenue guidance in terms of the 4% to 6% goalpost year-over-year? Is there any inflection point with respect to the selling cycle? We've heard anecdotally from some of our checks that it is a slightly longer selling cycle, as customers try to understand more the subscription element and as they do become more receptive, could you actually see accelerating revenue growth maybe closer to that 6% or better as you go into the October/January quarters? Thank you.

Kelly A. Kramer -- Executive Vice President and Chief Financial Officer

Hey, Mark. As you guys know, we really do just give guidance one quarter in advance. We feel very good about the guidance we gave of the 4% to 6% growth. As we look forward, though, just to give you some color context, in the Cat 9K, the demand is great. We have fantastic demand. We are taking orders like crazy and there's great adoption out there by our customers that we don't see slowing down, so we feel great about that. But again, there's a lot of moving parts and we'll take it one quarter at a time. The only other thing I just want to remind you is we do have, when our fiscal year starts in August for '19, we do have the tweak on the new revenue standards that will take you through and any implications of. So, we feel really good about the Q4 guide and we're just going to take it one quarter at a time.

Chuck Robbins -- Chairman and Chief Executive Officer

I want to just thank everybody for joining us today. We appreciate you spending time with you. We appreciate the opportunity to answer your question. Marilyn, I'll kick it back to you for the details on the next call.

Marilyn Mora -- Director, Head of Global Investor Relations

Great. Thanks, Chuck. Cisco's next quarterly earnings call, which will reflect our full-year 2018 fourth quarter and annual results will be on Wednesday, August 15th, at 1:30 p.m. Pacific Time, 4:30 p.m. Eastern Time. Again, I'd like to remind the audience that in light of regulation FD, Cisco's policy is not to comment on its financial guidance during the quarter unless it is done through explicit public disclosure. We now plan to close the call. If you have any further questions, feel free to contact the Cisco Investor Relations department. We thank you very much for joining the call today.

Operator

Thank you for participating on today's conference call. If you would like to listen to the call in its entirety, you may call 888-568-0890. For participants dialing from outside the U.S., please dial 402-998-1566. This concludes today's call. You may disconnect at this time.

Duration: 48 minutes

Call participants:

Chuck Robbins -- Chairman and Chief Executive Officer

Kelly A. Kramer -- Executive Vice President and Chief Financial Officer

Marilyn Mora -- Director, Head of Global Investor Relations

James Faucette -- Morgan Stanley -- Analyst

Rod Hall -- Goldman Sachs -- Analyst

Ittai Kidron -- Oppenheimer & Company -- Analyst

Vijay Bhagavath -- Deutsche Bank -- Analyst

Pierre Ferragu -- New Street Research -- Analyst

Paul Silverstein -- Cowen & Company -- Analyst

Jeff Kvaal -- Nomura Securities International -- Analyst

George Notter -- Jefferies -- Analyst

Analyst -- Equerry Capital -- Analyst

James Suva -- Citigroup Global Markets -- Analyst

Mitchell Steves -- RBC Capital Markets -- Analyst

Tal Liani -- Bank of America -- Analyst

Mark Moskowitz -- Barclays Capital -- Analyst

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