Cisco Systems (CSCO) Q4 2023 Earnings Call Transcript

Cisco Systems (CSCO -0.50%)
Q4 2023 Earnings Call
Aug 16, 2023, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Cisco's fourth quarter and fiscal year 2023 financial results conference call. At the request of Cisco, today's conference is being recorded. If you have any objections, you may disconnect. Now, I would like to turn the call over to Marilyn Mora, head of investor relations.

Ma'am, you may begin.

Marilyn Mora -- Head of Investor Relations

Welcome, everyone, to Cisco's fourth quarter fiscal '23 quarterly earnings conference call. This is Marilyn Mora, head of investor relations, and I'm joined by Chuck Robbins, our chair and CEO; and Scott Herren, 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 made throughout this call will be done on a year-over-year basis. The matters we will be discussing today include forward-looking statements, including the guidance we will be providing for the first quarter and full year of fiscal 2024.

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 accompanied this call for further details. 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

Thanks, Marilyn, and good afternoon, everyone. Fiscal '23 was a milestone year for Cisco. We delivered on our operational and financial goals while accelerating our transformation. We achieved record revenue and earnings per share in both the fourth quarter and the full year.

We also generated strong margins, record operating cash flow, and strong shareholder value, returning 10.6 billion via share repurchases and increasing cash dividends. In FY '23, We delivered nearly 57 billion in revenue, up 11% year over year, the highest revenue growth rate in over a decade. Overall customer demand also remained solid. In Q4, we achieved over 30% total sequential product order growth, the second highest in 20 years with double-digit increases across all customer markets. As we look to build on this strong performance going forward, we remain focused on the following: first, growing market share in all key areas of our business; second, driving innovation and extending our leadership by investing in significant new opportunities for growth in AI, cloud, and security; third, delivering long-term sustainable value creation for our stakeholders; and fourth, transforming our business model by growing recurring revenue.

Consistent with what we said last quarter, we expect to build on our record results, delivering modest revenue growth in fiscal year '24 with the bottom line growing faster than the top line, demonstrating operating leverage. Our outlook reflects good visibility and predictability driven by healthy backlog ARR and RPO. We remain deeply committed to building shareholder value and increasing returns to our investors. We will do this through a long-term commitment to greater operating leverage while increasing our annual share repurchases and growing our dividend. Now let me share additional detail on the quarter and key growth opportunities ahead for Cisco.

First, one of our greatest competitive advantages is our pace of innovation. This quarter, we announced new solutions spanning generative AI, hybrid work, security, full-stack observability, and sustainability. In addition, we remain focused on delivering a more unified and simpler experience for our customers. As I've stated in the past, we knew that as our backlog cleared, we would see corresponding market share gains. With the release of the calendar Q1 results, we gained over three percentage points of market share year over year in our three largest networking markets: campus switching, wireless LAN, and SP routing. We expect further share gains in these areas as market share numbers are released for calendar Q2.

Second, the acceleration of AI will fundamentally change our world and create new growth drivers for us. While AI has been an important element in our products for several years, this quarter, we announced new market-leading AI technologies across our collaboration and security portfolios designed to boost productivity, enhance policy management, and simplify tasks. We also launched new AI scale infrastructure innovation to allow our customers to process AI workloads more efficiently. Cisco's ASIC design and scalable fabric for AI position us very well to build out the infrastructure that hyperscalers and others need to build AI ML clusters. This is a huge opportunity for Cisco, and we are laser-focused on leading and winning in this space. As a result of our innovation in this area, we expect Ethernet will lead in connecting AI workloads over the next five years.

To accelerate this transition, Cisco became a founding member of the Ultra Ethernet Consortium, an industrywide effort to drive open, large-scale Ethernet-based fabrics for high-performance networking. In June, we launched our next-generation Silicon One switching ASICs to support large-scale GPU clusters for AI and ML workloads. We are seeing early success in hyper-scale Ethernet AI fabric deployments. To date, we have taken orders for over half a billion dollars for AI Ethernet fabrics. We are also piloting 800-gig capabilities for AI training fabrics. Overall, Cisco is committed to helping our customers navigate this transition in a trusted and responsible way to deliver on the full promise of this technology, and we are well positioned to win.

Next, security remains a top priority. Our AI-driven security cloud platform has comprehensive capabilities across the network, endpoint, and the cloud, helping to simplify security management while increasing efficacy. Our new technologies like XDR, multi-cloud defense, and cloud-secure access, a secure service edge solution, are seeing rapid early adoption. For example, Goldman Sachs has been one of our early adopters of our multi-cloud defense solution. In addition, we are working with Apple to incorporate Cisco Secure Access solution into iOS and macOS.

These innovations, combined with our recent acquisitions, show how we are extending our security portfolio with deep telemetry, AI, and identity threat capabilities. Given our installed base of 300,000 Cisco security customers, we believe we have the opportunity to accelerate revenue growth in security over the next few quarters. To summarize, we had a phenomenal year. Our fiscal year '23 and Q4 results demonstrate the strength of our business today and are a solid foundation for future growth. I also want to be very clear on our commitment to increasing shareholder returns through capital return, innovation, and strong execution. Last quarter, we committed to operating leverage in Q4 and fiscal year '24, and our guidance today reflects this.

Today, I want to confirm that this will be our long-term strategy beyond fiscal year '24. We will also drive a high degree of consistency into our stock repurchase program and will maintain the quarterly levels in the range that we have over the past few quarters. Finally, I want to take a moment to thank our teams who all played an important role in delivering these record full-year results and their deep commitment to our -- to the success of our customers and partners. With our focus on innovation and our commitment to operational excellence, I have tremendous confidence in our ability to capitalize on the many opportunities ahead. I'll now turn it over to Scott.

Scott Herren -- Chief Financial Officer

Thanks, Chuck. I'll start with a summary of our financial results for the quarter, then cover the full fiscal year, followed by our guidance. As Chuck said, we delivered another record quarter driven by focused execution, continued business transformation, and the actions we took during the year to mitigate supply issues. We reported our strongest-ever revenue, non-GAAP operating margin, earnings per share, and operating cash flow in Q4. Total revenue was $15.2 billion, up 16% year on year, at the high end of our guidance range.

Non-GAAP net income was $4.7 billion, up 36%. Non-GAAP EPS was $1.14, up 37%, exceeding the high end of our guidance range. Looking at our Q4 revenue in more detail. Total product revenue was 11.7 billion, up 20%.

Service revenue was 3.6 billion, up 4%. Within product revenue, Secure Agile Networks, our largest product -- product category, was very strong, up 33%. Switching revenue had double-digit growth with strength in both campus and data center switching, driven by our Catalyst 9000, Nexus 9000, and Meraki offerings. Enterprise routing declined driven primarily by access, partially offset by strength in our Catalyst 8000 series SD-WAN and IoT routing. Wireless had double-digit growth driven by our Wi-Fi 6 products and Meraki wireless offerings.

Internet for the Future was up 3% driven by growth in our core routing products, including strong growth in our Cisco 8000 offering. We also saw double-digit growth in web scale. Collaboration was down 12% driven by declines in collaboration devices and meetings, partially offset by growth in cloud calling and cloud contact center. End-to-end security was flat with growth in our zero-trust offerings, offset by a decline in our network security offerings. And optimized application experiences was up 15% driven by growth across the portfolio, including double-digit growth in ThousandEyes and AppDynamics. We continue to make progress on the transformation of our business to more recurring revenue-based offerings driven by higher levels of software and subscriptions.

We saw solid performance in our ARR of 24.3 billion, which increased 5%, with product ARR growth of 10%. Total software revenue accelerated to 4.6 billion, an increase of 17% with software subscription revenue up 20%. Eighty-five percent of our software revenue was subscription based. Total subscription revenue was 6.6 billion, an increase of 13%. And RPO was 34.9 billion, up double digits at 11%.

Both product and service RPO had strong growth with product RPO up 12% and service RPO up 9%. Total short-term RPO grew to 17.9 billion. Total product orders were down 14% year on year but grew sequentially by more than 30%. This was against a strong performance in the year-ago quarter where we delivered the second-highest orders and absolute dollars in the history of the company. The aging of our backlog has continued to improve as the supply situation normalizes, and as expected, increased customer deliveries reduced our year-end backlog to roughly double historical levels as we enter fiscal '24.

Order cancellation rates remain below pre-pandemic levels, which reflects the true demand and criticality of our technologies to our customers. Total non-GAAP gross margin came in at 65.9%, exceeding the high end of our guidance range and up 260 basis points. Product gross margin was 65.5%, up 420 basis points. The increase was primarily driven by positive pricing and product mix as we realized the benefits from the actions we took in the prior fiscal year. We also drove productivity improvements with lower freight and logistics, component, and other costs. Service's gross margin was 67.5%, down 150 basis points year over year.

Non-GAAP operating margin came in at 35.4%, exceeding the high end of our guidance range and up 300 basis points. This improved leverage was driven by both our strong non-GAAP gross margin and ongoing cost management. Shifting to the balance sheet. We ended Q4 with total cash, cash equivalents, and investments of 26.1 billion. We had record operating cash flow for the quarter of 6 billion, up 62%, driven primarily by strong top-line performance and the deferral of our Q4 federal tax payment.

Consistent with our prior commentary, the IRS tax relief related to the California floods postponed our current-year federal income tax payment until Q1 of our fiscal '24. Consequently, in Q1 of fiscal '24, our federal income tax-related cash outflows will include an incremental 2.8 billion of payments for these prior quarters. This quarter, we returned 2.8 billion to shareholders comprised of 1.6 billion for our quarterly cash dividend and 1.3 billion of share repurchases. Consistent with our capital allocation strategy that we outlined last quarter, we are committed to increasing shareholder returns through a greater operating leverage while increasing our annual share repurchases and growing our dividend. Turning to the full fiscal year. We delivered record results in revenue, net income, earnings per share, and operating cash flow.

Revenue for the year was 57 billion, up 11%, and non-GAAP earnings per share was $3.89, up 16%, demonstrating again the operating leverage that we've been driving. In terms of our software metrics, total software revenue for the full year was up 12% at 17 billion, with the product portion up 14%. Eighty-four percent of software revenue was subscription based, which is up 2 percentage points. Total subscription revenue was 24.6 billion, an increase of 10%. Total non-GAAP gross margin was 64.5%, down 10 basis points.

On the bottom line, non-GAAP net income was 16 billion, up 13%. We delivered record operating cash flow of 19.9 billion, up 50% compared to fiscal '22, driven primarily by strong results, linearity, collections, and the federal tax deferral, as noted previously. We returned 10.6 billion in value to our shareholders via cash dividends and stock repurchases comprised of 6.3 billion in quarterly cash dividends and 4.3 billion of share repurchases. We increased our dividend for the 12th consecutive year in fiscal 2023, reinforcing our confidence in the strength and stability of our ongoing cash flows. We continue to invest organically and inorganically in our innovation pipeline during Q4.

We closed the acquisitions of Lightspin Technologies, Smartlook, and Armorblox. These investments are consistent with our strategy of complementing our internal innovation with our -- and R&D with targeted, strategic M&A. To summarize, we had a very strong quarter and fiscal year with record results. We executed well, delivering double-digit top-line growth, profitability, and cash flow. We continue to make progress on our business model shift to more recurring revenue while making strategic investments in innovation to capitalize on our significant growth opportunities.

Turning now to our guidance. For fiscal Q1, our guidance is we expect revenue to be in the range of 14.5 billion to 14.7 billion. We anticipate the non-GAAP gross margin to be in the range of 65% to 66%. Our non-GAAP operating margin is expected to be in the range of 34% to 35%, and non-GAAP earnings per share is expected to range from $1.02 to $1.04. Fiscal year '24, our guidance is as follows.

We expect revenue to be in the range of 57 billion to 58.2 billion. Non-GAAP earnings per share is expected to range from $4.01 to $4.08. In both our Q1 and full-year guidance, we are assuming a non-GAAP effective tax rate of 19%. I'll now turn it back to Marilyn so we can move into the Q&A.

Marilyn Mora -- Head of Investor Relations

Thanks, Scott. Michelle, let's go ahead and queue up for questions.

Questions & Answers:

Operator

Thank you. Tim Long with Barclays, you may go ahead. 

Marilyn Mora -- Head of Investor Relations

Tim?

Tim Long -- Barclays -- Analyst

Hi, thank you. Yeah, Chuck, maybe we'll start with kind of the order backlog performance, sounds a lot better than seasonal in Q4. Could you talk a little bit about what you attribute that to? And then, maybe looking into next year, doesn't look like you're baking a lot of that into either Q1 or the full year. So, what's -- you know, what's kind of the expectation for, you know, kind of the pull-through of those orders into what you're going to see in revenues in fiscal '24? Thank you.

Chuck Robbins -- Chairman and Chief Executive Officer

Thanks, Tim. So, I'll provide some color. And, Scott, maybe you can talk about the conversion of -- of the orders. Look, first of all, we're -- we're obviously dealing within a world that has a lot of dynamics right now, but our team's executed incredibly well.

As I've said on prior calls, with our sales organization, when -- when we see transitions in sort of customer buying, you know, if it's getting worse, what we see is that our teams will forecast a quarter, and then by the end of the quarter, they will have dropped and/or missed. And then, when it's beginning to stabilize and get better, they tend to actually exceed the forecast. And so, what we saw in Q4 was they had their opening forecast, they nailed month one, they nailed month two, and they exceeded month three by several hundred million dollars. So, it was one of those quarters that they actually overperformed what they thought they would do at the beginning of the quarter, which is -- which is a positive sign. But again, it's one quarter.

We also had the largest quarter in our history of enterprise software agreements from an orders perspective. So, we had a lot of big customers making big commitments, which was a positive thing. The -- if you think about what was going on around the world, I'd say service provider just continue to be weak. Enterprise improved, commercial improved. U.S.

enterprise was basically flat, so that was better than we'd been experiencing for sure, which is a good sign. Public sector remains steady. And verticals we saw strength are financial services, transportation, and energy, and we saw some good strength in countries like India and Saudi around the world. So, it's one quarter, but if you compare it to the prior few quarters where the teams had opening forecast that they generally missed by the time we got to the end of the quarter, this was -- this was one where I'd say that it was much more stable as we went through the quarter. Scott, you want to talk about the order conversion?

Scott Herren -- Chief Financial Officer

Yeah, as we think about fiscal '24, we've got pretty good visibility driven by really the business model shift that we've talked about. So, a couple of data points that I think you already have, Tim. One is current RPO of 17.9 billion. So, total RPO approaching 35 billion, of which 17.9 is current, meaning it turns into revenue in the next 12 months. We ended the year as we -- as we expected with roughly double our normal backlog levels.

That excess backlog will work down in the first half of fiscal '24 with the majority of that being worked off in Q1, by the way. And we've got 24.3 billion of ARR that we get a chance to renew. Now, obviously, some of that will already be captured in RPO, but there's opportunity that's not already captured in RPO as well. So, we -- we enter the year with round numbers, 40% of that top line pretty much already in hand between those -- those three categories. So, feel good about the way we've -- the way we see the -- the year laying out. You know, if I could make one more comment, Tim, on the sequential, we said, you know, given that the year over year is just sort of difficult to -- to -- to -- they don't really provide a clear view on what's going on.

We've been -- we've been talking about sequentials a fair amount. And I did say in my opening comments that sequentials from Q3 to Q4 were in excess of 30%. To put that in perspective, is typically 18 to 20. And from a customer segment perspective, enterprise was well above that. Public sector was well above it.

Commercial was pretty close to it. And service provider was -- was the -- was the low one. However, it was still above historical trends on a sequential basis. So, just to try to give you as much color as we can.

Tim Long -- Barclays -- Analyst

Thank you. Very helpful.

Marilyn Mora -- Head of Investor Relations

Michelle, let's go ahead and move to the next question.

Operator

Thank you. Amit Daryanani with Evercore. You may go ahead, sir.

Amit Daryanani -- Evercore ISI -- Analyst

Yep, thanks a lot for taking my question, and congrats on a nice set of numbers here. You know, maybe two things I'd love to get your perspective on. You know, Chuck, when you talk about consistency in capital allocation, can you just expand a bit more on what does that mean? Are you going to think about this as a percent of free cash flow that's going to go for buybacks or some other metric? Do you just talk about -- what does that mean? And how do you intend to deploy the cap allocation will be helpful. And then, perhaps somewhat related to that, I guess, you know, when we think about the fiscal '24 revenue guide that you folks are providing, you know, 7% growth in Q1, I think 1% for the full year.

That's how it would imply back half will decline. So, what are you assuming in the back half that gives you that kind of worry? That would be helpful. Thank you.

Chuck Robbins -- Chairman and Chief Executive Officer

Let me -- let me make some -- just a couple of comments, and I'm going to hand it to Scott and let him answer probably both of these. On the capital allocation and the leverage comments, what I would say is that we've -- we've spent a lot of time talking to our shareholders over the last few months. And it's clearly important to our shareholders that we -- that we commit to and we deliver on operating leverage in our P&L. And we've been doing it, but we haven't committed to it for a long term. So, that's what we're basically doing today is saying that we are going to continue to commit to do -- to provide operating leverage in the P&L as we look to the future.

And then, on the -- the buybacks, we had also increased -- there are two things we wanted to do was increase the amount as well as drive more consistency and predictability for our shareholders. And so, the rate, as I said, that we've been running at like the last three quarters is sort of the target that we would be at on a quarterly basis as we go forward. Scott, you want to add to that and then talk about the revenue guide?

Scott Herren -- Chief Financial Officer

Yeah, will do. And -- and, Amit, I think you were one of those voices that talked about cap allocation at Cisco.

Chuck Robbins -- Chairman and Chief Executive Officer

I remember that.

Scott Herren -- Chief Financial Officer

At a -- at a higher level and also being consistent. And what you've seen over the last three quarters is that share buyback has been very consistent at 1.25, right around 1.25 billion per quarter. We see that continuing into the future, that's 5 billion a year in share buybacks. The dividend right now runs round number 6.5 billion.

So, you know, you add those two together, that's 11.5 billion of capital return to shareholders, doesn't feel like it's in a bad place but -- but responding to the need to be both elevated and more consistent in share buybacks is what you're hearing. You've seen us do it already, you know. The difference is we're verbalizing it in advance now, I guess. And on your revenue guide question, I think it's easy to get a little confused by the year-on-year growth rates when, you know, we've had the supply constraints that we've had over the last few years. I mean, the reality is some of the revenue that we ended up posting this year in fiscal '23, our orders that we took and customers wanted the product back in fiscal '22, we just couldn't -- we just couldn't get it out. We couldn't get it delivered because of the supply constraints.

So, the -- the -- the better way to think about this is what's been the, you know, the compound annual growth rate from when we started building that backlog and the supply constraints set in, which was the end of our fiscal '21 through -- and I'll just pick the midpoint of our guide for fiscal '24. If you do the compound annual growth rate on revenue through that time, it's right around 5%, which is, as you know, in line with what we see as our opportunity longer term. So, I think it's a little -- it's a little bit tough to track what's happening when you just rely on year on years because the year on years have just been so skewed by the supply chain. If you step back from it and look at end point to end point, that growth rate feels pretty good.

Amit Daryanani -- Evercore ISI -- Analyst

No, that three-year CAGR is really helpful. Thank you.

Scott Herren -- Chief Financial Officer

Mm-hmm.

Marilyn Mora -- Head of Investor Relations

Great. Thanks, Amit. Next question.

Operator

Meta Marshall with Morgan Stanley, you may go ahead.

Meta Marshall -- Morgan Stanley -- Analyst

Great, thanks. You know, fantastic kind of data points around the traction with the hyperscalers. When it comes to kind of the half a billion of orders you noted or even kind of the 800-gig trials, you know, is that with scheduled fabric as that with Silicon One? Just kind of trying to get a sense of what piece of the portfolio that is. And then, just on the security portfolio, you know, clearly, you're rolling out a new -- a lot of new products, changing some of the sales approaches.

Just when do you think we could see an inflection in that business? Thanks.

Chuck Robbins -- Chairman and Chief Executive Officer

Yeah, Meta, thank you. So, on the -- on the Ethernet underneath the AI GPU networks, it is Silicon One for sure. And, you know, I think for the next 12 months or so, I think we'll be doing trials. I think we'll have some -- some opportunities, but they'll still be a lot of InfiniBand and that's why we -- we joined as a founding member of this Ultra Ethernet Coalition so that we can -- we can help guide the standards and really deliver scheduled fabric, to your point, in a very effective way. So, we think, you know, into FY '25 and beyond, this thing will begin to shift to more of an Ethernet-based infrastructure.

On the security front, yeah, we've had some -- some early traction. I mentioned Goldman in the multicloud defense, which is -- which is a great sign of confidence in that solution. If you look at our XDR platform, which, candidly, we -- we just went GA with it right at the end of the quarter, and we already took a seven-figure order from a retailer in Europe. So, that was positive. We took one of our largest security orders ever.

We took an eight-figure security order from a Fortune 10 company in Q4. So, there's some early green shoots, and the teams are executing. The early feedback and early, you know, commentary from analysts and customers, etc. is positive. But we've got to actually deliver on it, and hopefully, in the second half of this year, we'll see -- we'll see some real positive impact, and in '25 for sure.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thank you.

Marilyn Mora -- Head of Investor Relations

Next question, please.

Operator

Michael Ng with Goldman Sachs, you may go ahead, sir.

Mike Ng -- Goldman Sachs -- Analyst

Hey, good afternoon. Thanks for the question. I just have two. First, it was encouraging to hear about the share gains on campus switching, SD routing, and wireless, as well as the expectation to continue to grow share.

I was wondering if you could talk a little bit about, you know, the sales execution, the product road map there that gives you the most confidence in that continued share growth. And then, second, I was just wondering if you could talk a little bit about your expectations as it relates to the trajectory of orders going forward. It sounds like if the backlog kind of gets back to normal levels in the first quarter, it should just grow along with revenue growth as we think about order growth beyond the first quarter. But just would love your thoughts there. Thank you.

Chuck Robbins -- Chairman and Chief Executive Officer

Thanks, Michael. On the share gains in the -- in the enterprise networking space, which is what you're asking about, we expect Q2 will be equal to or maybe slightly above the incremental gains that we see when those numbers come out based on some estimates that we have done internally. I would say the thing that is -- is really helping, beyond being great products, but we have done a couple of things. Number one, we have begun to deliver on monitoring and then subsequent management of our catalyst for the traditional catalyst portfolio with the Meraki dashboard.

And that's a real advantage for customers. It allows them to run a hybrid of the two portfolios. It allows them to have, you know, visibility from one dashboard to -- to both sets of portfolios. And so, that's been really well received. It has been a -- a key driver in significant improvement in our renewal rates on the software side.

And while I'm talking about it, I thought I would share one milestone with you. I've been asked for a few years when do we think the software renewals in the enterprise networking space would be meaningful. And FY '24 is the first year, I think, it'll be meaningful. So, just to give you a perspective on it, we have -- we expect this year to renew enterprise networking software at close to $1 billion. So, the transition that we've been going through for all these years is going to hopefully begin to start to pay solid benefits for us going forward. But that's what's going on in that portfolio.

Scott, you want to talk about?

Scott Herren -- Chief Financial Officer

Trajectory of orders?

Chuck Robbins -- Chairman and Chief Executive Officer

Yeah.

Scott Herren -- Chief Financial Officer

Yeah. And, Michael, thanks for that question. What I'd say is, if you remember our commentary from the last call, we said there were kind of three things going on inside product orders. One was the lead times were normalizing, going from being fairly lengthy to going back to -- to a normal level, which of course, if the lead time yesterday was 30 weeks and today it's 10 weeks, means you don't have to place another order for 20 weeks. Those are mostly normalized.

They will -- they will finish being normalized certainly in the first half of fiscal '24. And so, that effect will -- will be dampened. The second is backlog. And as we were still sitting on excess backlog, and we still do, but we've obviously been working our way through that and delivering product to customers. As we get their backlog orders in their hands, they can complete that project and then place the order for the next project.

And so, that's also been a little bit of a headwind to bookings. And then, it's whatever's happening in the macro would be the third factor. We think those first two will normalize in the first half of fiscal '24. Lead times will be normalized certainly by the time we get to the end of the first half. And much of the backlog, the excess backlog, will ship out during the first quarter of fiscal '24.

So, I think we'll have a clearer view, and I expect to see more normal ordering patterns. Of course, we don't guide orders, but I expect to see more normal ordering patterns in the second half of the year.

Mike Ng -- Goldman Sachs -- Analyst

That's all very helpful. Thank you, Chuck. Thank you, Scott.

Chuck Robbins -- Chairman and Chief Executive Officer

Thank you.

Marilyn Mora -- Head of Investor Relations

Great. Thank you. Let's go ahead and take the next question.

Operator

Ittai Kidron with Oppenheimer, you may go ahead.

Ittai Kidron -- Oppenheimer and Company -- Analyst

Thanks, guys. High energy, I like this. Chuck, maybe you could talk about the RPO. Very strong performance there, especially when you look at the same matrix a year ago.

Maybe you can unpack this a little bit in the context of a few matrix, meaning duration of contracts customers are willing to go into now, size of deals are willing to move into now. I'm just trying to kind of get in a little bit into the -- the elements of this significant increase in RPO. Appreciate it.

Chuck Robbins -- Chairman and Chief Executive Officer

Yeah, thanks, Ittai. I'll give you a little color, and I'll ask Scott to comment again too. You know, a lot of this is we've -- we made this transition to, you know, virtually our entire enterprise networking portfolio now is a subscription model, and so that -- that contributes. And Scott can talk about the -- the year-over-year contribution that we've seen. But I mean, we have $35 billion in RPO.

And I -- I think it's an important thing because when you think about market share and some of the concerns that -- that people have had, you have to remember that we put a reasonable amount of each order in our core networking portfolio on the enterprise side goes into RPO and doesn't get reported as revenue. It's ratable, so it's a headwind to market share. And the other thing that I would point out is that, you know, we had a record year at 50 -- almost $57 billion at a time where we were building RPO to 35 billion and we have the backlog that we have. So, we've had a lot of solid customer demand, I'd say, in Q4. We -- we certainly saw a fair amount of the enterprise networking as we ship those products. We saw that software come out of backlog, as we've talked about, and move into RPO.

We saw a lot of these enterprise agreements that we did with our customers, and enterprise contributed to it as well. Those were reasonably large deals. And, Scott, I'll let you comment anything -- any more you want to comment on [Inaudible].

Scott Herren -- Chief Financial Officer

Yeah, you specifically asked about duration. There's not much change in duration overall, so that's not it. Q4, typically, is a quarter where we have more large -- large multiyear transactions. We talk about enterprise agreements and whole portfolio agreements.

And so, you typically will see a little bit of a bump in Q4 driven by that and then, a little bit of a -- sorry, on RPO in Q4. And then, in Q1, that typically -- the typical pattern would see it come down just slightly as we work our way through those. I think the -- the other thing to just bear in mind, you know, we've got net RPO growth this year of 3.3 billion, of which product had a net growth of 1.7 billion. If you look at our current RPO when we began the year, it was about 16.8 billion, which means all of that came out of RPO, and then on top of that, we got short term. On top of that, we added, you know, 1.7 billion, so we added quite a bit of current year sales into that RPO balance. Back to Chuck's point, that's revenue that many of our competitors recognize immediately as they ship it.

For us, we have the advantage of recognizing it over time, which makes us more predictable and gives us greater visibility into where things are headed.

Ittai Kidron -- Oppenheimer and Company -- Analyst

Appreciate the color. Thank you.

Scott Herren -- Chief Financial Officer

Mm hmm.

Marilyn Mora -- Head of Investor Relations

Thanks, Ittai. Let's move to the next question.

Operator

Matthew Niknam with Deutsche Bank, you may go ahead, sir.

Matt Niknam -- Deutsche Bank -- Analyst

Hey, guys, thank you for taking my question. A two-parter if I could. First, as we think about fiscal '24, so you're forecasting 1% top-line growth and about 4% non-GAAP EPS growth with a fairly strong exit rate on gross margin. So, is it fair to assume the lift from gross margins may get offset somewhat by some opex reinvestment? Just trying to think about the puts and takes there.

And then, broadly, at the analyst day a couple of years ago, I think, Scott, you laid out a 5% to 7% target for both top and bottom line. I'm just wondering if that's evolved at all in light of some of the greater emphasis on operating leverage that you're talking about today. Thanks.

Scott Herren -- Chief Financial Officer

Yeah, Matt, on your first question, I think gross margins settle, and you saw our guide for Q1 of gross margins in the 65% to 66% range. And I think it settles in there for the full year. So, you can do the math with what we've projected on the top line. That drops down to a mid-single-digit opex growth number.

So -- so, in line with -- with expectations certainly given the -- the environment of merit increases. It doesn't provide a lot of incremental investment, but I think that's in sync with what you've seen us do over time. To the long-term model, look, that was -- that was opportunity based. If you look backwards, what you've seen is we have delivered the bottom line growing faster than the top line.

I think the only difference that you hear from us now is, as I said, we're articulating it in advance instead of once it's happened. That's really the way to think about that.

Matt Niknam -- Deutsche Bank -- Analyst

Great. Thank you.

Scott Herren -- Chief Financial Officer

Mm-hmm.

Marilyn Mora -- Head of Investor Relations

All right. Thanks, Matt. Michelle, let's take the next question.

Operator

Jim Fish with Piper Sandler, you may go ahead.

James Fish -- Piper Sandler -- Analyst

Hey, guys, thanks for the questions. Maybe just diving in on the go-to-market side. You know, we're hearing you guys are looking to move more of the specialist sales teams out more toward kind of a cross-sale, more portfolio kind of motion. Are you doing a larger sales restructuring right now? And is there anything you can do to better package solutions across these multiple X segments, especially on the growth segments that are kind of struggling here as Meta kind of pointed out earlier with even security? And lastly, on the capital return side, I know you guys get asked about this ad nauseam, but -- and you talked about potential, you know, being strategic and all of that.

But how do you feel about the push-first pull of either further acquisitions in either of the key growth segments that you outlined, Chuck, versus possibly even spinning off some of those segments like some of the larger companies you're starting to see do? Thanks, guys.

Chuck Robbins -- Chairman and Chief Executive Officer

Thanks, Jim. That was a lot. Let me -- let me tell you a little bit of the history on the specialist model. I'll tell you what we're doing in the product portfolio, which allows us to -- to clean up the specialist model a little bit and get them a little more focused.

So, historically, like, let's use security as an example, we've had these different products and we've sold them all individually. And therefore, you need to compete with those individual competitors. So, you need subspecialists, you need specialists in every little area of security. And what we've been doing across the portfolio is moving to more of a platform approach, and so it makes it easier to sell.

And in -- in certain areas of our portfolio like collaboration and security, we've moved to a suite strategy. So, we're -- we're now packaging up the security portfolio in different suites, which allows for us to sort of optimize the -- the security specialist, or actually align them more effectively is probably the best way to say it. And so, that's the work that's been going on. And I think as we continue to execute on this platform strategy, it certainly simplifies the selling cycle for some of these technologies. And I think getting to the suites, we've seen it work in collab.

This past quarter, we had very strong order growth in collaboration. We had positive order growth in security as well. And so, for collab to be showing positive order growth is -- is really a byproduct of the suites and leading with calling as the lead part of the suite. And then, also a big focus on cloud contact center, which grew triple digits last quarter from an orders perspective. So, those are the things that we're trying to do.

We're trying to get the portfolio put together in a way that makes it easier and -- and requires fewer subspecialists in the field as we move forward. Scott?

Scott Herren -- Chief Financial Officer

On the cap return question, Jim, I'd just reiterate what I said earlier. With the consistency of buybacks now running right around 1.25 billion per quarter, so 5 billion a year, the dividend consumes another 6.5 billion, that's 11.5 billion of cap return that we're committed to. And I do expect to continue to, as you've seen us through for the last 12 years, make increases in our -- in our dividend payment as you look ahead. So, that's one lens on it. I would say, on the M&A and spin-off part of that, we're constantly evaluating that.

We're constantly evaluating what's available in the marketplace. You saw we closed three, albeit small, kind of tech tuck-in, the three acquisitions during the quarter. The team's very active. We're constantly looking at that space as well as evaluating our own portfolio. And so, there's nothing -- there's nothing new to report there, but those are constant things that we look at, yeah.

James Fish -- Piper Sandler -- Analyst

Appreciate the color, guys. Thanks.

Scott Herren -- Chief Financial Officer

Mm hmm.

Marilyn Mora -- Head of Investor Relations

All right. Next question, please.

Operator

Thank you. Ben Reitzes with Melius Research, you may go ahead, sir.

Ben Reitzes -- Melius Research -- Analyst

Hey, guys, thanks for the questions. I wanted to double-click on an earlier question with regard to hyperscalers, the 500 million in AI orders. You know, you had a briefing in June. I was wondering, have things picked up in terms of activity there? It seems like maybe it has, and I wanted to see if there's further traction that you could articulate in Silicon One, like, you know, what -- what kind of activity are you seeing there and how big a business can this be?

Chuck Robbins -- Chairman and Chief Executive Officer

Yeah, well, Ben, welcome, and thank you for the question. You know, we -- we -- we -- we have definitely seen traction in this space, lots of discussions, lots of architectural discussions, lots of input from those customers on what they'd like to see in the next generation of silicon, as an example. And the teams are off building that we just delivered in June, as I said earlier, the next generation ASIC that actually is built for this. But there's -- there's going to be more and more purpose-built silicon over the next couple of years, and the teams are working on that.

And those customers are having a great deal of input in how that silicon gets designed, and in some cases, it's unique to each one. And so, that's the beauty of us having such an advanced silicon capability. It allows us. if we need to, to actually build unique silicon by customer because these opportunities are so large. I think in the last call, we talked about the fact that this would probably be three to four times the opportunity size of the -- of the original cloud build-out. And, you know, unfortunately for us, as has been well documented, we miss the original cloud build-out.

But I can say with every bit of confidence right now that as we go through this AI transition to Ethernet, we are super well positioned. We have incredible silicon that they have been using in other parts of their portfolio. We won three more use cases last quarter. We now are installed in 21 use cases across the top six of these providers, and we expect that that momentum will just continue over the next few years. I do think that, in the short term, InfiniBand is probably going to still be the preferred in most cases, but they -- they -- they are trialing, and we will -- much like we already have, we'll get some opportunities to run Ethernet underneath silicon. And then, as we deliver scheduled fabric, it'll become even more prevalent.

Ben Reitzes -- Melius Research -- Analyst

OK. Thanks a lot, Chuck. It's good to be back.

Chuck Robbins -- Chairman and Chief Executive Officer

Thanks, man. Thanks, Ben.

Marilyn Mora -- Head of Investor Relations

Thanks, Ben. We'll take the next question.

Operator

Tal Liani with Bank of America, you may go ahead.

Tal Liani -- Bank of America Merrill Lynch -- Analyst

Yes, hi, I have one kind of big-picture question and one more specific. Maybe I'll start with a specific question. If I look at the 400-gig Ethernet market share cloud, if I take Arista and white boxes, it's like over 90% of the market. Cisco doesn't have much of a 400-gig market share by the data, but you are talking about growing market sharing 800-gig. Can you talk about the dynamics of 400, and then, why was it this way in 400, and how it changes in 800, and your expectations? Second is about the big picture, and I need -- I want to understand kind of the numbers.

Product revenues last year were 38, product revenues this year is 43, so that's 5 billion increase. And the decline in backlog is about 5 billion. Your -- your implied guidance for next year for product revenues is roughly flat, flat plus. So, without the support of backlog, how do you get to product revenues? What are the other parts that could go to product revenues and compensate for the fact that backlog is going to be normal by the end of next quarter or next -- next two quarters maybe? Thanks.

Chuck Robbins -- Chairman and Chief Executive Officer

Yeah, Tal, thank you for that. And so, on the 400-gig, 800-gig, I don't know that I've seen the exact reports that you're talking about in the 400-gig, but our teams, we -- the volume of ports that we're shipping on 400-gig would imply that -- that that's a -- I don't know, we've had a great deal of success, and it's been growing quite significantly. So -- but we obviously had -- over the last few years, we've been rebuilding our -- actually building our presence in this space. So, it wouldn't surprise me to see us as a low market share player, but we certainly want our fair share. On the 800-gig, I think it's just a matter of we're -- we're engaged there, we're installed already.

We've got trust with these customers. They've seen what we can do, and -- and I think that we're just -- we're just in the game at the right time as opposed to where we started. And so, I think from now on, it's just -- it just gives us an opportunity to be there from the beginning as opposed to trying to catch up.

Scott Herren -- Chief Financial Officer

And, Tal, to your question on the math you're trying to do on product revenue, I think, you know, some of this goes back to the answer that I gave Tim earlier. One of the things you have to consider is some of the product revenue we delivered this year was actually demand from the prior year, right, demand from fiscal '22 that, because of the supply constraints, we simply couldn't get out the door. Had that not been the case, you would have seen higher product revenue in fiscal '22 and slightly lower product revenue in fiscal '23, and you would have seen a steady increase then from '22 to '23 and '23 to '24. So, the things that are driving that are the things that we've talked about, right? We continue to see good traction and market share gains in our enterprise networking products. We are invested early in the AI game and see a great opportunity there. We're getting early success, although, you know, you're not seeing a lot of it yet in the P&L.

But we're seeing some pretty early success with our revamped security strategy and the great work that team has done. And so -- but instead of trying to do it the way you're doing it, the delivery has been lumpy. The demand has been less lumpy is probably the right way to think about it.

Tal Liani -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you.

Marilyn Mora -- Head of Investor Relations

All right. Thanks, Tal. Next question?

Operator

Samik Chatterjee with J.P. Morgan, you may go ahead, sir.

Unknown speaker

Hi, thanks. This is a [Inaudible] on for Samik. Just one question for me. You mentioned double-digit growth across all your customer verticals from an order perspective but also mentioned service provider continue to be weak.

I was just hoping you could touch on what you're seeing under the hood in service provider and specifically if I split it up between telco, AI, and non-AI cloud. How did those track compared to 90 days ago? And then, just quickly -- a quick clarification on the half a billion in orders in AI, any way you can parcel out like how many customers is reflected in that order number? And then, just quickly clarify if that's all hyperscale or if there's any Tier 2 cloud or enterprise customers in that mix. Thanks for the question.

Chuck Robbins -- Chairman and Chief Executive Officer

Yeah, thank you. So, on the service provider side, the first question you asked, let me -- let me write my notes down, hold on a second so -- so I don't have to ask you for the question again. On SP, I think I'd say Q4 for the telco side of it, the communication service provider was probably fairly consistent with what it was a quarter before. It's -- it's just relatively weak right now. We see, you know, a lot of these customers have -- are digesting a lot of the infrastructure that they bought over the next few months.

We think that -- our team believes that orders will stabilize on the telco side of the business in the second half of our fiscal year. On the cloud side, we believe that, you know, they'll continue to invest. And they kind of invest in six-month cycles. And we think that in the middle of our fiscal year, we'll see a, you know, growth in that investment for the first part of 2025. On -- on the 500 million, it is definitely in the Tier 1 hyperscalers, so I'll just leave it at that.

On the opportunity that we see, we still see -- we won three use cases last quarter, and I would say those were primarily non-AI. So, there's still -- we're still winning new use cases in the core infrastructure. And -- but we're in trials in different -- you know, different discussions with most all of them relative to AI fabric.

Unknown speaker

Thanks, Chuck. Appreciate the color.

Chuck Robbins -- Chairman and Chief Executive Officer

Thank you.

Marilyn Mora -- Head of Investor Relations

All right. Thank you. Next question.

Operator

David Vogt with UBS. You may go ahead.

David Vogt -- UBS -- Analyst

Great. Thanks, guys, for squeezing me in. I'm not going to belabor the point on orders, but I wanted to ask a question about AI orders specifically in terms of your ability to ship to customers and where you are in trials. The reason why I ask is we've heard from a lot of companies in the industry that there's some supply chain considerations that are maybe causing commercial deployments and revenue rec maybe pushed out to 2025. So, just want to get a sense for, you know, that 500 orders that you referenced in your prepared remarks, how does that flow through? And then, along with that, you know, in the guidance Scott provided for fiscal '24, how much, if any, is AI related this year? And if not, why? And, you know, going back to my first point, when do we start to see it in your P&L? Thanks.

Chuck Robbins -- Chairman and Chief Executive Officer

Yeah. Yeah, we do not -- Scott and I are both looking at each other. We don't -- we don't know of any supply chain issues we have around AI. It's -- It's our standard Ethernet portfolio based on the Silicon One ASIC, and we're delivering it today. So, I don't think there's any supply chain issue for us on that front.

Scott Herren -- Chief Financial Officer

We might be at a bit of a better position than some because it is our own ASICs. It is our own [Inaudible], you know.

David Vogt -- UBS -- Analyst

Right.

Chuck Robbins -- Chairman and Chief Executive Officer

Yeah. On the FY '24 contribution of AI, I don't have that information on top of my head. Go ahead.

Scott Herren -- Chief Financial Officer

Yeah, sorry, I didn't mean to interrupt you there. Here's what I'd say. Here's the right way to think about it, David. Those orders, what we see is, within the broader hyperscaler world, which is where a lot of these AI sales are going, they're obviously in digest mode.

I think you've heard that from us and all of our peers for what they've bought. We do see -- toward the end of this calendar year, so toward the mid-year of our fiscal year, we see them beginning to place orders again for delivery of product that'll happen in the second half. So, while I don't want to get into parsing the guide down to that level of granularity, I think what you should expect is it to be something that we begin to see show up in the P&L late in the second half.

Chuck Robbins -- Chairman and Chief Executive Officer

Yeah, what I was going to add, David, is I think, you know, until we evolve some of the -- get some of the scheduled fabric technologies built out, they're certainly running -- they're running some of these on traditional Ethernet, which is what we're deploying today. But as we get scheduled fabric out and these customers get more comfortable moving from InfiniBand to Ethernet, I think that's when we'll start to see the real impact of AI. And maybe it's late '24, but I would suspect into '25 for sure.

David Vogt -- UBS -- Analyst

And maybe just a quick follow-up, so Scott, were there orders from AI last quarter in the product order commentary? And are these -- are these basically new orders in this most recent fiscal quarter? Is that maybe the right way to think about it?

Scott Herren -- Chief Financial Officer

Yeah, don't think of the 500 million is all coming in the last quarter. Those are orders to date that we know are going into AI infrastructure. That's not a Q4-specific comment.

Chuck Robbins -- Chairman and Chief Executive Officer

And by the way, a portion of that, for sure, is deployed. It's -- it's in and running.

Scott Herren -- Chief Financial Officer

Yeah.

David Vogt -- UBS -- Analyst

Got it. OK, that's helpful. Thanks, guys.

Scott Herren -- Chief Financial Officer

Yeah. Mm-hmm.

Marilyn Mora -- Head of Investor Relations

All right. Thanks, David. We have time for one last question.

Operator

Thank you. Simon Leopold with Raymond James and Associates, you may go ahead, sir.

Simon Leopold -- Raymond James -- Analyst

Great. Thanks for taking the question. I wanted to see if you could talk a little bit about what your assumptions are for your campus-related business, and I'm including both switching and wireless LAN. I assume that roughly almost 15 billion of trailing four-quarter sales, somewhere in that ballpark.

And I've seen market research saying that business declined, some saying it's growing. And, Chuck, you highlighted that 1 billion renewal. I'm just trying to get my head around how material that is and what's built into the full-year forecast for campus. Thank you.

Chuck Robbins -- Chairman and Chief Executive Officer

I'll make two comments. And, Scott, I'll let you add to it. First of all, as we said, we think that, as you see, you know, the Q2 calendar year share numbers come out, you'll continue to see us gain share in that space. And so, we would expect to continue doing that.

The -- the renewal number that I thought was close to a billion. And, Scott, I'll just let you comment on how you -- how you want to break down or if you want to --

Scott Herren -- Chief Financial Officer

Yeah, no, I don't think there's a whole lot else to add. I -- you know, we're encouraged by what we're seeing in campus. It's one of the things that -- that we've said all along is as the -- the supply -- the backlog begin to be delivered, you'll start to see more and more of those customer decisions that went to us actually show up in the numerator. Those market share equations, that's exactly what you're seeing. So, I think the concern over the several quarters while we had supply constraints that maybe impacted us more than some of our peers, you should see those unwind as we can now -- now deliver that backlog.

The, you know, billion dollars of renewal that -- that Chuck -- roughly billion dollars of renewal that Chuck talked about, that is a subset of our fiscal '24 guide.

Chuck Robbins -- Chairman and Chief Executive Officer

Yeah.

Simon Leopold -- Raymond James -- Analyst

Great.

Operator

All right, so we'll go ahead and turn it over to you, Chuck, for some closing remarks.

Chuck Robbins -- Chairman and Chief Executive Officer

Thanks, Marilyn. First of all, I want to thank our teams and just say how proud I am of the work that's gone into the last couple of years to actually deliver the record results that we did. We're incredibly proud of the share gains that we expected to gain and we are. I'm proud of the team and the new innovation that's being delivered in areas like AI and security and across the portfolio, in observability, in core networking, and SP routing, all of these areas. The teams are doing an amazing job.

And our portfolio is very relevant to the customer priorities that we see around the world. I've never seen such consistency around the priorities in virtually every customer around the world, and our portfolio lines up nicely against the key things that our customers are trying to achieve. I'm also very proud of the team and Scott and the rest of the finance organization for what they've done. And we're very happy to provide clarity on our commitment to our shareholders with operating leverage in the buybacks and our dividend as we look to the future. So, thanks for joining us today.

Marilyn Mora -- Head of Investor Relations

Thanks, Chuck. I'll go ahead and wrap us up. Cisco's next quarterly earnings conference call, which will reflect our fiscal year 2024 first-quarter results, will be on Wednesday, November 15th, 2023 at 1:30 p.m. Pacific Time, 4:30 p.m.

Eastern Time. This concludes today's call. And of course, if you have any further questions, feel free to reach out to Cisco's investor relations group. And we thank you very much for joining today's call.

Operator

Thank you for participating in today's conference call. If you would like to listen to the call in its entirety, you may call (866) 405-7294. For participants dialing from outside the U.S., please dial (203) 369-0606. This concludes today's call.

You may now disconnect.

Duration: 0 minutes

Call participants:

Marilyn Mora -- Head of Investor Relations

Chuck Robbins -- Chairman and Chief Executive Officer

Scott Herren -- Chief Financial Officer

Tim Long -- Barclays -- Analyst

Amit Daryanani -- Evercore ISI -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Mike Ng -- Goldman Sachs -- Analyst

Ittai Kidron -- Oppenheimer and Company -- Analyst

Matt Niknam -- Deutsche Bank -- Analyst

James Fish -- Piper Sandler -- Analyst

Ben Reitzes -- Melius Research -- Analyst

Tal Liani -- Bank of America Merrill Lynch -- Analyst

Unknown speaker

David Vogt -- UBS -- Analyst

Simon Leopold -- Raymond James -- Analyst

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