Cisco Systems' (CSCO) CEO John Chambers on Q4 2014 Results - Earnings Call Transcript

Aug.13.14 | About: Cisco Systems, (CSCO)

Cisco Systems, Inc. (NASDAQ:CSCO)

Q4 2014 Earnings Conference Call

August 13, 2014 4:30 PM ET

Executives

Melissa Selcher - VP of Corporate Communication and IR

John Chambers - Chairman and CEO

Frank Calderoni - EVP and CFO

Rob Lloyd - President, Development and Sales

Gary Moore - President and COO

Analysts

Brian Modoff - Deutsche Bank

Simona Jankowski - Goldman Sachs

Mark Sue - RBC Capital Markets

Amitabh Passi - UBS Securities

Jim Fawcett - Morgan Stanley

Jess Lubert - Wells Fargo Securities

Subu Subrahmanyan - Juda Group

Ben Reitzes - Barclays Capital

Kulbinder Garcha - Credit Suisse

Paul Silverstein - Cowen and Company

Jeff Kvaal - Northland Securities

Operator

Welcome to Cisco Systems' Fourth Quarter and Fiscal Year 2014 Financial Results Conference Call. At the request of Cisco Systems, today's call is being recorded. If you have any objections, you may disconnect.

Now, I would like to introduce Melissa Selcher, Vice President of Corporate Communication and Investor Relations. Ma'am, you may begin.

Melissa Selcher

Thanks Kim. Good afternoon, everyone, and welcome to our 98th quarterly conference call. This is Melissa Selcher, and I’m joined by John Chambers, our Chairman and Chief Executive Officer; Frank Calderoni, Executive Vice President and Chief Financial Officer; Rob Lloyd, President of Development and Sales and Gary Moore, President and Chief Operating Officer.

I would like to remind you that we have a corresponding webcast with slides including supplemental information that will be available on our Web site in the Investor Relations section following the call. Income statements full GAAP to non-GAAP reconciliation information, balance sheets, and cash flow statements and other financial information can also be found on the Investor Relations Web site. Click on the Financial Reporting section of the Web site to access these documents.

Throughout this call, we will be referencing both, GAAP and non-GAAP financial results. The matters we will be discussing today include forward-looking statements and as such 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 the Form 10-K and 10-Q and any applicable amendments which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.

Unauthorized recording of this call is not permitted. All comparisons throughout this call will be on a year-over-year basis unless stated otherwise. As in the past we will discuss product results in terms of revenue and geographic and customer segment results in terms of product orders unless specifically stated otherwise.

I will now turn it over to John for his commentary on the quarter.

John Chambers

Mel, thank you very much. I’m pleased with our solid performance in Q4 with non-GAAP earnings per share of $0.55 on revenues of 12.4 billion, exceeding the guidance we gave you and representing a record quarter for non-GAAP earnings per share and our second highest quarter in our history in terms of revenue. We generated over 3.6 billion in operating cash flow and returned approximately 2.5 billion to our shareholders through share buyback and dividends.

FY 2014 was a year with many big wins and several challenges. Our fiscal year began with the number of external headwinds including the federal government shutdown and the possibility of a U.S. default combined with significant slowdown in emerging markets. Even with this backdrop FY14 ended with revenues of 47.1 billion representing the second strongest year in our history and record non-GAAP earnings per share of -- I wish 200, $2.06 per share.

We maintained our non-GAAP gross margins, generated strong non-GAAP operating margins and exceeded our capital return target, returning 120% of our free cash flow to shareholders. Our innovation engine dramatically accelerated this year as we brought new architectures to the market with a next generation of networking, security and collaboration. At the same time, the journey we began three years ago to transform Cisco continued at a rapid pace.

Let me take a step back for a moment. In 2011, we saw how rapidly the market was changing and understood that we require transformational change at our company. We saw these market changes earlier than our peers and understood the market dynamics were not unique to Cisco. We required a strategic approach, and not tactical responses to the coming transactions. That is the core of what you have seen from Cisco over the past several years. Even in 2011, we saw a much bigger picture.

We rolled out our transformational plan with two principal objectives. First, drive innovation, speed, agility and efficiencies in our business and second, to transform the company to move from selling boxes to selling first architectures, then solutions and now outcomes. Operationally, we’ve done a very good job against those objectives which has afforded us flexibility today and how we go after market opportunities.

Our results are evident, we created significant operating leverage in the past three years revenue has grown nearly $4 billion while our absolute non-GAAP OpEx expenses virtually unchanged. That is very good execution especially when compared with many of our peers. During the same time period, our U.S. commercial and U.S. enterprise business grew orders over 37% and 28% respectively over these three years. They grew double-digit this last year and closed with a very-very strong in Q4 with both segments growing orders over 15%.

These are the segments that have seen the early stages of our transformation, being this segment’s our most successful selling integrated architecture solutions and outcomes. Those of you who follow us closely and talk with our channels and our customers hear first hand that our strategy is not just gaining traction but most importantly getting results. The changes we’ve made over the three years have enabled us to bring innovative products and solutions to market while at the same time growing non-GAAP earnings per share to record levels and returning 25.2 billion to shareholders including 16.7 billion in share repurchase at the average price of $20.58.

Our innovation this period has secured us the leadership position in cloud and hybrid cloud, made us the recognized leader with our customers and SDN and has driven new opportunities with customers embracing the Internet of everything, but we’re far from finished.

As we head into fiscal year ’15 and beyond, we will continue our industry of innovation, the results of the past three years represents significant poor progress and you should expect that we will continue to take actions to transform Cisco in every possible aspect from how we’re organized, to how we develop products to help customers buy from us. Looking specifically at FY15, we executed well in Q4 and expect our revenues for Q1, revenues for Q1 of FY15 to range from flat to up 1%.

While we’re pleased with our improved performance, I would not extrapolate our improved performance into a more aggressive assumption but what we’re likely to do for the next several quarters. Our focus is on executing through our transitions and to manage that appropriately set this up for the long-term. We are assuming that as the weakness continues for the next several quarters and then not at expected any material rebound in emerging market conditions.

I think the best way to characterize this next year is to fully expect that we will exit Q4 in a stronger position that we’re in today. As we see changes in that view, we would tell you how we see it as we always do consistent with our disciplined approach to growing resources in important area while managing cost. When Frank details guidance later in this call, we will announce our plans to do a limited restructuring across several areas of our business.

These actions are focused on investing in growth, innovation, and talent while managing cost and driving efficiencies. We expect to reinvent -- reinvest substantially all the cost savings from our restructuring actions in our key growth areas such as datacenter, software, security, cloud and others. While there are tremendous opportunities for our business and we are moving the resources to capitalize on them, there is also a significant risk as we discussed. This is the technology industry and change is constant and accelerating.

We have navigated this industry successful for almost three decades while nearly every competitor we faced 10 to 20 years ago is either exited or part of the market, stalled in terms of market share or has gone out of business. Our vision is clear and our strategy is working and it has largely played out as we expected, in 2011 I said customers will view the network has the most strategic asset not just in communication but in IT. And this would enable us to become the number IT Company. I am confident that we can make this aspiration a reality.

Now let me move onto business momentum and specifically in terms of our geographies and customer segments, as we reminder geographies are the primary way we win our business. In these areas, I will speak in terms of product orders year-over-year unless otherwise noted. We finished the quarter with product orders up 1%, product book-to-billed comfortably above 1 and a product backlog of $5.4 billion.

Our business in Americas grew 2%, U.S. grew 5%, with U.S. commercial and U.S. enterprise continuing the strong growth up 17% and 16% respectively. I think Robert has numbers I can remember in many years they are just a nice job by Alex and Brian. We are seeing the continuous strength in large deals as an example looking at deals in our U.S. Enterprise pipeline, the number of deals over $1 million increased by 22% and deals in the pipeline over $5 million increased by over 70%.

As we continue to engage strategically with our customers on their business opportunities, our enterprise customers are making more and bigger investment as they partner with us. U.S. public sector Pat Finn’s groups did a very good job. They grew over 6% in the quarter with state and local up 3% and U.S. federal up year-over-year 10% in terms of orders. U.S. service provider declined 9%.

Latin America declined 6% with ongoing pressures in some of the largest emerging countries and including a decline of 13% in our business in Brazil. EMEA grew 2% as we see continued relatively stabilization across Europe. In EMEA, enterprise business grew 8% and commercial grew 7%. Leading the way, the UK grew 6% and within the UK commercial was up 18% and enterprise was up 19%. Germany in this most recent quarter grew 16% and again within Germany we saw the same characteristics, commercial was up 13% and enterprise was up 17%.

In the UK and Germany, we are seeing similar success in these marketplaces as we begin to move to selling architectures, then solutions, then business outcomes. This is the transformation we’re working onto drive more broadly. Just to give you a sense of an emerging country’s impact on EMEA as an example and its growth excluding Russia which declined 30%, EMEA would have grown 4% instead of 2%.

Asia Pacific, Japan and China was down 7% with China down 23% and India up 18% while the remaining emerging countries in Asia actually declined 34%. Those are countries that did not include China and India. Overall emerging countries within the three geographies declined this quarter by 9%. We saw the impact of economic and geopolitical challenges in China, Brazil, Russia, Argentina, Turkey, and Thailand and in a number of emerging markets that many of other peers are seeing. These declines are reducing our growth by several points from what was expected and typically seen. Though the trends were looking better in Q2 and Q3 for emerging markets, the emerging countries lost momentum in Q4, the breakdown continued in double-digit declines and the next 15 emerging countries went from positive growth to mid single-digits in Q2 and Q3 to a 9% decline in Q4. Unfortunately as we look out we don’t see emerging markets growth returning for several quarters and believe it possibly could get worst.

When we see these markets coming back, we will share that with you as we always do. We’ve been on to our customer segments. As we’ve been indicating earlier we saw strength around the globe in our enterprise business up over 9% and similar strength in commercial up over 8%, public sector on a global basis was flat.

The same challenges continue in several IP and the service provider market which declined 11%. Within the service provider market the largest impact came from continue to decline SP Video with orders down 13% and the ongoing decline in emerging markets where service provider is the higher mix of the business. Our service provider customers are dealing with transitions in their own business and have been aggressively consolidating with the transaction volumes of these consolidations over the last 12 months about as much as we have seen in the past four years combined.

Let me now move on to products. I’ll discuss our product momentum in terms of year-over-year revenue but we will share order information where it adds important color. Routing declined 7% we saw a continued strength in the ASR 9000 growing in double-digits with strong penetration among the Web 2.0 customers offset by softness in MOB and optical and mobile business.

Our new product platforms the NCS 6000 and the CRS-X continue to ramp with each of our products crossing 100 million in orders for the year, with approximately half of that coming in Q4. In these markets we’re a relatively small number of customers due to majority of the volume, we added non-new customers for our NCS product line and 39 new customers for CRS-X during the last two quarters of the fiscal year.

Switching, overall switching declined 4% similar to the last quarter our campus switching business declined specifically at the high-end with a notable exception of Catalyst 3850 continuing to grow very well at over 80% growth. In the datacenter our momentum with the Nexus 9000 and application-centric infrastructure continues to be very strong. Since the end of last quarter, the number of customers has tripled to over 580 customers, last quarter it was 180.

We continue to deliver on a application-centric infrastructure roadmap and during the quarter we began shipping to application policy infrastructure controller which we call APIC this industry first innovation provides a central place to configure, automate and manage an entire network based upon the needs of applications. In less than one month of availability we have over 60 paying customers using the APIC with very positive feedback.

We continue to see the strong growth for the Nexus 9000 and our application-centric infrastructure portfolio with key wins across all major verticals including cloud providers, hosting, financial services and technology providers. We believe, we are leading this SDN transition and you would hear to saying from many of our customers. As we discussed, we’re continuing to manage the transitions with the Nexus 7000 and Nexus 9000 and we are seeing some impact on our numbers.

As we said last quarter we expect the negative impact to continue for a few more quarters. Datacenter, datacenter continued to be very strong. Growth of over 30% year-over-year, demonstrate that customers continue to embrace our architecture approach in this critical space. I’m very proud of the success we do into the datacenter market. In 2009 many questions about Cisco was entering the traditional server market. UCS was far from a traditional server and while we have displaced many of our traditional competitors, we did it with an innovative architectural approach to the market.

This quarter Cisco UCS grew 30% with more than 36,500 UCS customers and this quarter we grew our repeat business by 49%. In a market many thought we would exit, we gained share for the 18th consecutive quarter to gain the number one position in revenue share for the X86 blade servers in the U.S. with 41% market share, six points above our nearest competitor and currently we have the number two position worldwide, which I expect us to close to the number one if we execute the way I believe we can run.

Our UCS business now has a run rate of over $3 billion and we continue to lead the converged infrastructure market with FlexPod, with NetApp and with Vblock to VCE. The innovation pipeline is very strong and you should expect to see announcements in the fall that we’ll continue to accelerate our momentum with UCS and add to our competitive advantage. Wireless, wireless grew 1% with orders up 8% while we experienced softness in the service provider segment we saw continued adoption of 802.11AC portfolio in both our enterprise and cloud managed network business.

In this business Meraki had another amazing quarter with growth of 116% year-over-year and subscriptions growing approximately 80%, accelerating our software and reoccurring revenue business. Collaboration declined 4% as we transitioned our portfolio in this space. We saw declines in TelePresence and Unified Communications as we introduced additional new products including our cloud family of solutions, DX70 and DX80 which are incredibly cool desktop collaboration endpoints at dramatically lower price points. Collaboration remains a top priority for our customers wanting to drive employee productivity. We are confident our new portfolio would drive the next stage of productivity that is yet to be delivered by collaborations through this market.

We did see continuous strength in conferencing and an increased customer shift towards software based models with enterprise license and agreements ELAs while our collaborative solutions up 42%. SP Video revenues declined 10%.Video soft and solutions grew driven by deployments by satellite customers and growth in the control playing business, but this was offset by a decline in video infrastructure due to lower CPE business and consolidation among our major service providers. We have made key top leadership changes in both of these areas.

Maturity grew 29% driven by strength across our product portfolio with network security up 35% and content security up 12%. Product orders grew faster than revenue as we continue to see solid momentum with our advanced threat solutions including Advanced Malware Protection Everywhere, Sourceware, ThreatGRID.

Additionally we also saw improved growth from our core business including our high-end firewalls and ASA. A key part of our software growth strategy security ELAs grew by 250% year-over-year. We are pleased to see revenue from our Sourceware acquisition accelerate even faster than before they were acquired, which speaks to the power of our combined security architecture in the marketplace today. We have taken security from a lower single-digit growing business to a business that we expect to grow comfortably in double-digits growing forward. Chris Young that one's yours that I know you'll bring home for us a little bit of pressure Gary you think that is ok.

Gary Moore

It is perfect.

John Chambers

Services revenue grew 5%, up from 3% last quarter and it is trending very well. Strong renewals large multiyear service wins strong technical services performance and growth in new businesses such as consulting, cloud and managed services. And security services drove our growth in the quarter. We continue to deliver our strongest margins of this business well above the industry norms. We are focused on the continued integration of our services and product sales teams to accelerate our ability to drive integrated solutions and business outcomes. We are also investing with more focus on our renewal engine while these multiyear journeys we see both efforts as creating more opportunities over the long-term.

There is strong interest in our InterCloud approach which again we bet Rob Lloyd to lead for the entire company. Customers and partners view our approach to the cloud as differentiated and unique recognizing that we offer the only solution to federated, private, hybrid, and public could that enable them to move their cloud workloads across heterogeneous private and public clouds with the necessary policy, security, and management. Over the last quarter, we expanded our InterCloud ecosystem with partners who are embracing the Cisco ACI Vision and Cisco’s open approach to differentiating their cloud offers through the value of the network. We announced that NTT the Dimension Data and SunGard Availability Services will both use Cisco InterCloud architectures to deliver cloud services to customers and resellers. You will see us announce additional partnership soon.

In the quarter, we entered into a three-year go-to-market program with Microsoft to build InterCloud-ready integrated infrastructure solutions leveraging Cisco UCS, Nexus switching, and the Microsoft cloud operating system. We are growing a developer network to build applications on top of InterCloud and that work is gaining momentum. We believe we can grow debt net developer community to at least a million developers by 2020.

We feel that our focus on delivering enterprise class hybrid cloud solutions along with growing InterCloud ecosystem is resonating with customers and our partners around the world. Cloud as an example of an area where we are making significant investments to fuel our future growth. In FY14, we allocated over 2,000 employees to our InterCloud organization including several of our top leaders. These investments will drive our leadership and opportunity to results -- though the results will not show up in our numbers in a meaningful way for a number of quarters.

I would now like to turn the call over to you Frank for additional financial details.

Frank Calderoni

Thank you, John.

John Chambers

You are welcome.

Frank Calderoni

I will start with Q4 results and later discuss our full fiscal year results. In Q4, we continue to manage through the transitions in our business and markets resulting in our financing performance at or above our expectation. From a top and bottom line perspective, total revenue was $12.4 billion flat on a year-over-year basis. Non-GAAP net income was $2.8 billion and non-GAAP EPS was $0.55 per share. Our GAAP net income was $2.2 billion and GAAP earnings per share on a fully diluted basis was $0.43 a share.

Product revenue declined 2% and service revenue increased 5% with product book-to-bill comfortably above 1. We ended the year with product backlog of approximately $5.4 billion as compared to approximately $4.9 billion at the end of fiscal 2013. Overall non-GAAP operating margin was 28%. In Q4, our total non-GAAP gross margin was 61.8%. Non-GAAP product gross margin was 60.3% as compared to Q3 product gross margin was negatively impacted by pricing and product mix partially offset by productivity. Non-GAAP service gross margin was 66.8% consistent with historical levels.

Our non-GAAP operating expenses were $4.2 billion or 33.8% as a percentage of revenue compared to 33.9% in Q4 of fiscal year ’13. Operating expenses were up 5% quarter-over-quarter due to seasonality and down 1% year-over-year.

We ended the year with our headcount at 74,042, an increase of approximately 200 from Q3. For the full year, headcount decreased by approximately 1,000 from a year ago which is net of an addition of headcount from acquisitions during the year of approximately 1,300. As we outlined in our headcount actions last year, we realigned and reinvested in talent to drive key priorities such as cloud.

We continue to executive consistent with our portfolio approach to acquisitions aligned to driving long-term returns. We announced and completed three acquisitions during the quarter: Tail-f, ThreatGRID and Assemblage to bolster our innovation and long-term growth opportunity in key growth areas such as software and security. Looking at our geographic segment results, in terms of total revenue on a year-on-year basis, the performance was relatively balanced across segments with the Americas and EMEA both down 1% while APJC was up 1%. Total gross margins for the Americas was 62.3%, EMEA was 63.5% and while APJC was 57.1%.

Moving on to our full year performance, our total revenue was $47.1 billion, a decrease of 3% from the prior year as we worked through the challenges in the emerging markets and service provider as well as several product transitions. We were disciplined with our cost structure during the year as we addressed those areas. We held our non-GAAP net income flat at $10.9 billion and grew our non-GAAP earnings per share on a fully diluted basis 2% to $2.06 delivering profitability which was slightly above our expectations for the full year.

GAAP net income was $7.9 billion or $1.49 per share on a fully diluted basis. We generated strong operating cash flow of $12.3 billion, free cash flows of $11.1 billion and returned a record $13.3 billion to shareholders through both the buyback as well as the dividends. This represented a 120% of our free cash flow. We are firmly committed to continuing our capital allocation strategy returning a minimum of 50% of our free cash flow to shareholders annually.

Looking back on this past fiscal year, we effectively managed our portfolio and investments which enabled us to invest in our key long-term growth areas such as cloud, data center, software and security. From a balance sheet and cash flow perspective, total cash, cash equivalents and investments were $52.1 billion including $4.7 billion available in the U.S. at the end of the quarter. We generated operating cash flows of $3.6 billion during the quarter and in Q4 returned $2.5 billion to shareholders that included $1.5 billion through share repurchases and approximately $974 million through our quarterly dividends.

Our balance sheet continued to be an area of strength with DSO at 38 days and non-GAAP inventory turns at 12.1. Deferred revenue was $14.1 billion up 5% year-over-year, product deferred revenue grew 12% driven by subscription based offering and deal related deferrals while services deferred revenue grew 2%. We continue to make progress in driving a greater software mix and higher recurring revenues.

Let me now provide a few comments on our outlook for the first quarter. Let me remind you again that our comments include forward-looking statements. You should review our recent SEC filings that identify important risk factors and understand that actual results could materially differ from those contained in the forward-looking statements and actual results could be above our below our guidance. The guidance we are providing is on a non-GAAP basis with also reconciliation to GAAP.

As John mentioned earlier, we expect total revenue to be in the range of flat to up 1% on a year-over-year basis. For the first quarter, we anticipate non-GAAP gross margin to be in the range of 61% to 62%. As we have said in the past, forecasting non-GAAP gross margin has always been challenging due to various factors such as volume, product mix, cost savings as well as pricing. As a result, non-GAAP gross margin may vary quarter-to-quarter by a 1 point in either direction of our guidance range.

Our non-GAAP operating margin in Q1 is expected to be in the range of 27.5% to 28.5%. Our non-GAAP tax provision rate is expected to be approximately 22% in the first quarter. This is up 1 point from the prior fiscal year, largely driven by the exploration of the R&D tax credit. This represents approximately $0.01 of impact on EPS. If the R&D tax credit is reinstated, we would reflect that benefit in our effective tax rate.

Our Q1 FY15 non-GAAP earnings per share are expected to range from $0.51 to $0.53 per share. As John also discussed earlier, we will be taking a restructuring action in FY15 that will be focused on continuing to invest in growth, innovation and talent while managing cost and driving efficiencies. These actions will impact up to 6000 employees representing approximately 8% of our global workforce. We expect to take these actions starting in Q1 FY15 and currently estimate that we will recognize pre-tax charges to our GAAP financial results of up to $700 million. We expect that approximately 250 million to 350 million of these charges will be recognized during the first quarter of FY15 with the remaining amount recognized during the rest of the fiscal year.

We expect to reinvest substantially all of the cost savings from the restructuring actions in our key growth areas. We anticipate our GAAP earnings to be lower than our non-GAAP EPS by $0.14 to $0.18 per share in Q1 FY15. Please see the slides that accompany this webcast for further details. Other than those quantified items noted previously there were no other specific differences between our GAAP and non-GAAP guidance. This guidance assumes no additional acquisitions, asset impairments, restructuring and tax or other events which may or may not be significant.

We are executing well in a rapidly transforming market. As we have mentioned, we’re not expecting a significant improvement in the emerging markets or the service provider segment in the near future. With all of these types of uncertainties in mind we will continue to provide our guidance with all the appropriate caveats one quarter at a time. We encourage our shareholders to have the same considerations. As a reminder Cisco will not comment on its financial guidance during the quarter unless it is done through an exclusive public disclosure.

John, I’ll now turn it back over to you for some summary comments.

John Chambers

Thank you, Frank. The dynamics in our business and market continue to play out as we said they would. Our management team is executing well, driving innovation and discipline across the entire company to disrupt our industry and our sales when necessary. I am pleased with our leadership position and the strong receptivity we are getting from customers as we have grown company that delivers architectures, solutions and finally business outcomes. We’ve transformed Cisco over the past three years and remain as focused as ever on the future.

Moving to become the number one IT Company our customers turn to, to enable their innovation, drive their growth, cut their cost and mitigate the risk. What does that mean for our investors? First, we remain focused on shareholder value creation by maintaining the flexibility to make the right long-term strategic decisions with the business driving efficiencies in our cost structure and returning capital through dividends and share repurchase to our shareholders. Second, investors need to remember that change is nothing new for Cisco we embrace it we see opportunities for disruption all around us and in nearly every case Cisco is positioned extremely well.

In this environment companies who use technology for speed and innovation will differentiate themselves. You see it in places never imagined and it happens quickly, things like a new business model, delivering through a network application that disrupts the taxi industry. Every company is becoming a technology company and the common element is the network at the center driven by applications, allowing for rapid introduction of new business models disrupting old models in record time.

We’ve talked about this opportunity for a while and now you are seeing it play out. Every company is increasingly dependent on the network not just for communications but for how they run, analyze and grow their business and disrupt their competitors. In this paradigm, the reliability, scale, speed and application centricity of the network is even more important and this is where our unique strength lies. As the leader trust of our business in governments with 17,000 sales people, approximately 70,000 partners and install base of approximately $200 billion. Cisco is very well positioned to capture this opportunity and I’m more confident than ever that we are doing just that.

As always, we have to deliver the innovation to new business models and value to our customers to win in the market and that requires continually reshaping how we operate. If we do not disrupt ourselves, if we don’t have the courage to change, if we don’t need the change, we’ll get left behind. Disruption is happening amongst our peers and throughout our customer base. Management teams are being tested every day. The question is whether they will make the right investments and take the bold actions in order to move forward.

At Cisco, we are making these tough choices, transforming our company at a rapid pace, whether it is introducing revolutionary new platforms in our core and at a speed where we knowingly disrupt ourselves we’re making long-term bets like we did with UCS and Internet of everything and are now doing with InterCloud and ACI application-centric infrastructure. We are investing in our leadership for years to come. We understand that the results of our strategy and many of the decisions we make may not be evident in a single quarter and in fact at times we’ll create volatility through our results from time-to-time. We also know that some of the investments we are making today would take several years to pay off. Taking a multi-year view, I’m confident that when we look back in time, this transformative period will be a distinguished part of Cisco’s history, where we made both choices, moved aggressively and ensured our long-term strategic value for our customers, shareholders, partners and employees.

Mel, let me now turn it over to you for question and answer.

Melissa Selcher

Hey, thanks Don. We will now open the floor to Q&A. We still request that sell-side analysts please ask only one question. Operator, please open the floor to questions.

Question-and-Answer Session

Operator

Thank you. And our first question comes from Brian Modoff with Deutsche Bank.

Brian Modoff - Deutsche Bank

So let us talk a little bit about switching, it’s 30% of your revenues are you talking about this transition to the 9000 and then you’ve also got the 3850. And from what we understand you are bringing forward the 802.11AC Wave 2 ACs later this year that because of the change in voltage requirements and higher data rates create an uptick -- desired upgrade switches. And on the campus side in the back half of the year, can you talk about how you see the switching market from what you are doing in fiscal ’15, from these two transition do you see growth in the market, do you see better switching in that area than perhaps ’14? Thanks.

John Chambers

The answer is absolutely yes. If you watch, we disrupted ourselves at the high-end segment of the switching market. The way I look at it and what we said last quarter, that will take several quarters more to work out and in today’s market the 7000 was down in the mid to high-teens and 9000 obviously was growing very, very well overall. So I kind of consider those two products together in our Nexus line. You will begin to see a switch over in Q2 and Q3 in terms of this transition and with all the appropriate caveats I feel good about growth late Q3 and Q4 on with good market leadership. So I do see our high-end switching and switching as a whole growing. We are positioned extremely well. And if can just to note on our competitors, our competitors are coming at us with boxed solutions and we are going to approach them with an architectural play that includes software and hardware and that wins. We have been in 580 accounts as I said earlier and we’ve also taken back a number of one of the startups key flagship accounts again in multiple areas. So I think we are positioned well and yes it is a great market. And the transition is more 10 gig to 40 gig that I think will help drive these volumes as well.

Melissa Selcher

Great. Thanks, Brian. Next question.

Operator

Thank you. Our first question comes from Simona Jankowski with Goldman Sachs.

Simona Jankowski - Goldman Sachs

Hi, thank you. I wanted to put your guidance in context a little bit. So you are guiding for zero to 1%, first of all that’s a bit narrower than it has been in the past few quarters. So I just wanted to understand if there is better visibility or what’s driving that? And then secondly, it’s a lot lower than your product deferred has actually grown, I think you indicated something like 12% as a result of the transition to software. So can you just expand on that a little bit? It seems like that’s something that’s taking place at a relatively rapid pace?

John Chambers

The visibility is improved in most of the areas, the two wild cards we talked about. As you come off of a very solid book to bill in Q4 which is normal and we did it at the high-end of normal book to bill and as you said we exited with 5.4 billion in backlog I think last year it was 4.9 billion. So the visibility for Q1 is pretty solid and I like how we are positioned on that. We want to also realize we still have some headwinds we’ve got to get through. So I think we’re just being our normal conservative self, Simona, I am not signaling any unusual lack of confidence on it. I like our hand a lot and we actually did something, some of you suggest we put our negatives at the front in the call and the positives afterwards, so we don’t get excited in the front end and then say here are a couple of challenges. But I think we’re positioned extremely strong, our switching players, as I said to Brian is very solid we’ve transitioned to high-end routing will. The outcomes are selling if you look purely at commercial and enterprise these are the best numbers we have seen worldwide in a very long time even when the economies are struggling. So I think we’re doing very well in the tough market, now feel very good about our future here and very good about our Q1 in a tight range that we did give you.

Simona Jankowski - Goldman Sachs

Want to touch on the deffered?

John Chambers

I did a little. The deferred revenue, do you want to comment on it Frank?

Frank Calderoni

No just pretty much what I said in the script I mean the deferred revenue was up 12% primarily that product deferred revenue mostly driven by product subscription. So kind of shows that the WebEx products like the Meraki as well as the collaboration enterprise license agreement, are really kind of showing some traction and they provide us with single revenue going forward. The recurring revenue increased as well as far as going to the air. So all good times from that perspective but again we have to put it in the context of John what you just said as far as some of the factors that we’re considering.

John Chambers

Yes. If you want, we are making that transition and Gary you’ve seen it from the General Motors that are well to others, we’re starting to accelerate with the enterprise license agreements and just using security as an example the security orders were dramatically higher than the revenues and so you begin to see both as going up our recurring revenues as well as deferred revenues.

Melissa Selcher

Operator next question please.

Operator

Thank you. Your next question comes from Mark Sue with RBC Capital Markets.

Mark Sue - RBC Capital Markets

I just want to have a large discussion John on just kind of your stock price and the stock multiple. And when we talk to investors, the worry is that despite the consistent free cash flow we might see the trough off into future cash flow and you will not be able to grow your dividends. Is there a way we can convince investors that Cisco can consistently generate 12 billion to 13 billion of free cash flow each and every year and continue to grow their dividend. And subsequently should M&A be more about cash flow contributions so investors can worry less about that and can you also may be Frank, if you want to chime in explain why the weakness is emerging market and service provider orders does not really impact annual free cash flows?

John Chambers

Okay so do you want give me one or two questions, let me address the cash flow question a little bit and then a comment tax policy. And Frank keep me honest on this one, I feel very good about our cash flow. We are committed to the dividend and the share repurchase. We see no indication ever-changing our direction. We have a minimum of 50% free cash flow return to our shareholder and as Frank said, it was 120% of last year. Obviously we are pleased with the share repurchase. When we started down the dividend path, we knew that there would be periodic rate as expected and we have full intention of at the right time raising the dividends to move forward, so not changing that at all. Frank any additional comments?

Frank Calderoni

No, again we’ve been down this path for the last couple of years. Thanks to a lot feedback from the investors to support both the dividend and the buyback clearly we’ve had a very active year in both. We continue to support the dividend over a longer period of time. And I think as you said John, we are generating the cash. We are very pleased about the ability to generate that cash. Our cash flow has been fairly consistent even throughout this past year and the assumptions going to the next year is about the same.

Melissa Selcher

Great, thanks for much, operator next question?

Operator

Your next question comes from Amitabh Passi with UBS Securities. Your line is open.

Amitabh Passi - UBS Securities

John, I understand and realize the workforce restructuring decisions always tough decisions to make, I just wanted to better understand the context of why now, and if you can give us any shedding your light in terms of the areas where you might be deemphasizing and should we think of the 6000 employees as a net reduction or is it simply a reallocation of resources into some of the other areas?

John Chambers

In reverse order, reallocation of resources is the way you should address it. It is an investment in our growth areas that we felt strongly we needed to do quickly. In terms of why now, it’s the uncertainties in the market you’re seeing a few headwinds and a lot of tailwinds. The pace to change is accelerating and we felt we had to move with tremendous speed on it. We are going to put in these investments into our growth areas such as cloud such as software such as security and these are often skill set that you have in one element of engineering that you have to move to another. And causes have been planning that Rob I think for almost 10 or 11 months in terms of how they do this smoothly, focus more on the customers and then you have the same issue in your markets.

Some of our markets are slowing down unfortunately you can’t move sales reps from one country to another with different language characteristics and Gary in services it’s hard to move a person that is really good about installing networks to business outcomes from a manufacturing shop floor with deep security experience. So the why now is if we’re going to become one number IT player which we are going to do our ability to move requires decisiveness and it requires investing in these growth and it really keeps this innovation engine and while this last year which our best innovation engine ever new high-end routing, new high-end switching, new security moves, new collaboration moves aggressive moves on wireless Internet of everything took shape, architectures moved solutions. We think we have to move even more rapidly and get these groups coordinated so we focus the whole company horizontally on getting business outcomes. And so you’re right it is the most difficult decision we make as an operating committee, but it’s one the market waits for no one and we’re going to lead this market we’re going to be decisive in it.

Melissa Selcher

Thanks Amitabh, operator next question?

Operator

And your next question comes from Jim Fawcett with Morgan Stanley.

Jim Fawcett - Morgan Stanley

I just wanted to touch base quickly on the emerging markets. You’ve suggested that they had slowed down in the most recent months et cetera and you weren’t willing to talk about when you might see a recovery, can you talk about a little bit about what you think contributed to that slowdown and clarify will you talk not wanting to talk about recovery are you talking about when you like you don’t to speculate as to when those stop declining or should we expect the baseline but you don’t want to expect to talk about when there was expect to return growth? Thank you.

John Chambers

If I could predict when the emerging markets were up or down, I would love to do that for us all. We tend to be a very early indicator and just kind of taking the step back to year ago or 15 months ago, we saw the emerging markets of brick slowdown first and then one quarter later the best emerging markets slowdown. They felt like they were turning around in Q2 and Q3 and our numbers instead of being in double-digit decline where in the mid single-digits. We saw this last quarter the brick plus Mexico stay at about 12%, but it was the next 15 countries than in total balanced out.

Now these can turn up or down rapidly and so what we did today was to share with you that they had declined more than anticipated and that we weren’t sure when you see a turnaround in Russia or in Ukraine and Middle East opportunities and challenges in China. Thailand obviously the issues we’re all familiar with and election in Indonesia. There are some bright spots for the first time in a while. I think Modi in India is going to turnaround that country. You can see the enthusiasm both the citizens and the businesses there are betting on a single emerging market. I would bet on India right now in a big way. And if you watch, we navigated through challenges regardless of where they’re in China or Russian pretty smoothly and so you see us continue to stay focused on emerging markets, but we just want to levels that you that you solved this problem at the present time and we are not sure if they’re going to decline or not, but again they can turn very well, so we just want to give you the exposure on that.

Melissa Selcher

Great, next question.

Operator

Thank you, your next is from Jess Lubert with Wells Fargo Securities.

Jess Lubert - Wells Fargo Securities

Hi John, thanks for taking my question. I was hoping you could provide some additional details on the U.S. federal vertical orders picked up there so just hoping to understand their signs of fiscal year-end flush how you are to give up with federal market and moving forward and then if you could also touch on the wireless business how fast the non-carrier segment is growing, what the impact of Meraki is on overall growth and perhaps comment on the competitive environment as it seems like some of your competitors are growing a little faster there? Thanks.

John Chambers

Okay, so, I think our federal team and the state and local team have done very-very well, Pat Finn has done an amazing there and Pat if you are listening, congratulations. I do not think it was one quarter phenomena, too early to call and know probably take into again too much detail but I feel good about how we’re positioned both on federal and state local as we go into this next year and I feel very good about obviously U.S. enterprise and commercial. Don’t normally be in the 8% to 12% range I think this last quarter, they just done an amazing job on big deals and they had a lot of financial incentives work employee at the end of the year but I feel good about the U.S. economy, we’ve got to do better in service provider and that’s why you saw last change everything, change our engineering organization, change our global go to sales marketplace took one of our stars Rob out of here in Chuck’s sales team and Nick Adamo, he is leading that globally, you’ll see Pankaj Lodi within engineering team and Kelly Ahuja lead service provider across the whole team so we are now organized around our customers as oppose to selling them routers and switches and wireless and direction on it.

So, I think you will see us move well on commercial and enterprise globally as long as the economies continue to do, I think we need to do better in service provider that’s a couple of quarter phenomena if we execute right and then it’s one of the service provide stand so we have a little bit of headwinds there but if you would have say how do I feel go into Q3, Q4 next year I think we execute well you’ll see us in better shape on the search matters and then it’s more matter of the CapEx spend as you go forward. And you had one other question Jess, which I’m excited to answer but to remember what it is.

Jess Lubert - Wells Fargo Securities

Meraki growth.

John Chambers

Meraki growth has been outstanding I think there is an example of taking a architecture in a play combining it with collaboration and just learn a expanding that in security and expanding across our whole base blowing it through our channels, I don’t know Rob should add any else to that. I haven’t done the math on the question you asked within that come to think of it but I will see it by next call we think about how we answer that. Okay next question. Thank you, Jess.

Operator

I think your next question is coming from Subu Subrahmanyan with Juda Group.

Subu Subrahmanyan - Juda Group

Thank you, my question is on gross margin. Could you talk about some of the points you made on price pressures and mix, how those are impacting especially as core products including switching and routing start to rebound should we expect an improvement from a gross margin perspective?

John Chambers

If I’m looking to see whether Frank wants to do it or I want to do it we are seeing no abnormal gross margin pressures, we compete aggressively in the market but we hold our gross margins pretty well. It’s normally more of a mix issue. In terms of the switching, I like our switching gross margins and I think contrary to some of the comments that are being made out in the market you can see new switching product gross margin to be extremely good and that’s the base is still in architectures that lower your customers operating expense and give them solutions as opposed to selling boxes which I think time has come and box competitors are going to face white label guys the tremendous pressure something we’ve called out 3.5 years ago and moved to overall.

You still have the mix going on, I love how fast our UCS is growing when your $3 billion market growing at 30% or 30% plus I think looking to even little bit above that, you will see pressure from that side but to your point as we move into software and as we move into high-end switching coming back growth wise that kind of balances it. So no I would not model an increase, there will be pressure on gross margins, Gary, you and Frank are owning that across the company for us just Gary, you might spend a moment because I know it’s important to William is talking about, how we are going after this in every aspect of our business even more aggressively in the last year.

Frank Calderoni

Yes, I think this last year we had tremendous performance out of the teams and I think we focus the entire company on gross margins there is not just the engineering team or supply chain it is the entire company, a lot of the work on the systems we put in place to help the salesforce had better visibility, better control on a deal-by-deal basis to see what discounting we’re doing as well as the pricing in the market understanding that competitors better in that landscape. While continuing to do the value design, value engineering work in the continued investments that Frank and I funded off the top if you will to allow that work to continue. So, we are very comfortable with what has happened and our ability to manage this going forward. We have asked the team to step up even more significantly as we go into next year and we’re going to get them a lot of help to do that.

Mel, is probably going to lecture me after making this mix comment, but those of you who are out there who think SDN is going to drive down our gross margins, in my opinion, you’re just wrong. You’re going to see us embrace SDN, you’re going to see us implement it for the value that it has, we not only will lead with this implementation, it will allow us to get higher gross margins on our switching and architecture. And we will do it off of an open standard and end results. And different than our peers, when we talk about 60 paying customers we mean 60 paying customers not taking an enterprise license and spreading it across the group. So, we’re going to take it to our competitors big and small it doesn’t matter if you are a major server player, we’re going to gain share on you, it doesn’t matter if you are new start up and one of the nice things about Cisco is our barriers to entry are very low they are very so we’d love taking on the competitors big or small and I feel very, very good about how we’re positioned there. And Rob unless you are seeing something different I am, I see SDN actually being something that will be great and get the benefits out of and I see almost no gross margin negative implications from it.

Gary Moore

Yes, John. We clearly are the only company are there talking about connecting applications to the infrastructure and we’re the only company talking about the applications not only in the context of the data center network but the entire network including at the wide area and at the access layer. So we’ve got more work to do, we are seeing customers every day, our partners are embracing this, cloud providers are embracing this. So when we talk about one of our competitors being a great underlay to another companies kind of feel like being the foam pad between the hardwood floors in the carpet. And we are not going to leave that alone, we are going to continue to drive the integration we have and we are going to compete very hard.

Melissa Selcher

Operator, next question.

Operator

Thank you. Our next question comes from Ben Reitzes with Barclays.

Ben Reitzes - Barclays Capital

Lot of good questions asked about margins and emerging markets so I want to ask about carriers. There is a lot of debate about what the spending patterns and what consolidation is doing to the marketplace and what are you seeing and what’s embedded in your guidance for carrier. I know you said you are assuming service providers get better but what you think is going on and how does it get better and what you are thinking as we go throughout the year? Thanks a lot.

John Chambers

Service providers just to give you a context, if you look in today’s market, service provider enterprise and commercial are all about 25% to 27% of our business. And so it gives you an idea of kind of the things that drive it and public sector is down about 20%. In terms of where we see service provider overall, there are some headwinds there. And so let me talk first about what we are doing differently. We have focused our company on becoming entirely solutions and outcome based selling including our consultancy. We are moving to where we used to sell to the service providers. We’d go, they watch your business objectives and then we’d sell them a router or a switch. We are not saying how do we sell you solutions, how we help you go to market, how do we lower your operating expense, and that’s the transformation in the field, some of our field are well underway to doing that, other areas have ways to go.

We also completely change the engineering where we look horizontally across the engineering and how we go to market. The service provider customers love the approach it makes all the sense in the world to them, and the only comment I have got Gary was why didn’t you do it earlier. And so you will see us as we get our arms around this, make a pretty good transformation and now Mel I am defining the new job. In the next year to two, just like we did on the enterprise because two and a half, three years ago we were just in great shape and service provider, intently we started to lose our lead on enterprise and what you watched over the last two years, we went with architectures, we combined the data center, with cloud with security with mobility. We talked about operating cost savings, we talked about outcome based savings, out number of big deals have increased dramatically and we are selling the business unit more than we are the CIO now when we do our job right with the CIO support in terms of direction.

In terms of SP services, you are beginning to see a global delivery at that type of capability and Gary that’s where you got get start really getting all cylinders on our consultancy in. We feel good, do you haven’t asked a question but we feel good at services at the 5% level. So you can kind of feel that starting to gain momentum again and we are finally looking at a global delivery as opposed can it be an organized by geography which is not how our customers want us to be organized. There absolutely is when you have two major combinations, Time Warner and Comcast just being one of them. And when you have more combinations dollar volume wise in the last 12 months and you had in four years, there are a lot of these going on. Those tend to have temporary slowing effects, not shutting off the slowing effect until they get their decisions together on how the networks come together where they make investments and then over a longer term period if we do our job right, there are actually increased opportunities for us in that market.

And then they are struggling with their own business models. They're having fits making money which means they are squeezing the vendors as hard as they can. Having said that, that’s why you move to an architectural cell and value added cell as opposed to selling boxes which I do think would be kind of idling. So that’s why I think if you look at probably going to be tough for a little while, I’d like to see us make steady progress, I’d like to see us exit this next year in a lot stronger position than we are today and doing just a replay of what we did in the enterprise and commercial market.

Melissa Selcher

Operator, next question.

Operator

Thank you. Your next question comes from Kulbinder Garcha with Credit Suisse.

Kulbinder Garcha - Credit Suisse.

So my question is maybe for John how you actually see the year playing out from a revenue perspective. It sounded at the beginning of the call you said don’t extrapolate the near-term revenue visibility and strength you have. I am very excited about some of your new products and I kind of saw that you are going to see, are we looking into period of easier compares. So I am just trying to think as we go through this year, when is this year that Cisco will intend to grow using meaningfully at some point, how do you see that playing out? And then the other question I have is that with the Nexus 9000 you announced for a while and the ASIC control now being out, why doesn’t the share and the volume that can drive through you business does that mean for some point even that really positive driver six months at all am I thinking about the timing of this transition to be much longer?

John Chambers

Okay. So if I gave you early guidance, Frank would tread me in. And we knew we would get at the number different ways on that. I feel good about where we are. You should read in my comments they are very, very positive on what we can control and even on issues we don’t control as well I see us exiting the year in a stronger position and potentially very much stronger than we are today. Therefore let me answer your question about the 9000 and ACI. It’s on fire guys.

The key is once you get in the counts, they are going to put the pilots in. You have got to get the controller in place and you got to begin to scale -- I have been through his with the team just this last week. We look at crossover points based upon forecast for when the 7K and 9K get to approach it that Rob and I will do back flips over. And you can argue which quarter that we’re currently year but somewhere in the middle toward the end of the year that will occur, if we do our job right. And the acceptance from customers is really good. I have not missed from calling that when we outlined our architecture and our whole approach to market where we’re going on, so it’s really going very well.

I have almost no criticism, if I look at number of customers and the growth quarter-to-quarter we are growing dramatically faster than starting up as growing. In five years, we have the run rate in one year that gets very exciting in this next fiscal year. So I would challenge a little bit the data about where we are. It is going to extremely well and currently I expect very big things from this next year. Going about 180 customers to 580 in a quarter off the chart in terms of direction, but then you got to scale you got to get ACI and the control we’re working in volume and ACI implemented crossover, so I look for that those type of crossover in Q2, Q3 to be meaningful. Rob, what else would you add?

Rob Lloyd

I just add John that in some of our conversations with cloud providers who really focused not on choosing the commodity cloud business but are focused on enterprise workload, they love the APIC controller they love the scale, they love the integration we can deliver. They love the automation. So we’re seeing that as a key building block of our InterCloud conversation and when we built that APIC controller into so many public clouds, we are really going to nail the hybrid cloud market place which is where we see all the growth and it will augment the growth we’re seeing right now with our UCS.

Melissa Selcher

Operator, next question.

Operator

And your next question comes from Paul Silverstein with Cowen and Company.

Paul Silverstein - Cowen and Company

John, just a clarification if I may, One, I think you’ve touched it earlier on services, this was first quarter in the past seven or eight where there was a turn up in the growth rate the obvious question being is that one-off or should we start to see that in a stabilized or improved from here, there wasn’t an meaningful improvement over the past trend? And then the clarification on your wireless LAN business if we ask out the small cell business and we just focused on the Wi-Fi piece what would the growth rate look like?

Frank Calderoni

Got you, I am going to verify numbers on it. First part of the question was on services, I feel normal that Gary brag about it. So look, I mean, services revenue they grow 5% up from 3% growth last year. I think the trend is its trending well. I think we had in Q4 very strong renewals. We had some very large multiyear service wins. We had very strong technical support services as well as advanced services in the quarter and I think some of the growth is coming from our new businesses that we have been investing in consulting, cloud, managed services as well as our security services offering not only security services and consulting but the new managed threat defense service that we’ve launched. And I think all of those things contributed the growth in the quarter and as John pointed out during the call, we’re very confident in where we’re at services we have not only a great team we have a great installed based and we’re doing things that continue to optimize that and bring value to customers.

John Chambers

And I don’t have the individual wireless LAN data in front of me. I am not dodging the question but by definition Meraki was strong that was a little bit weaker than we would like to have seen over on it all. And I think you will see us address that appropriately in terms of getting back on track on the wireless LAN capability. Next question please?

Operator

And your next question from Jeff Kvaal with Northland.

Jeff Kvaal - Northland Securities

I was hoping to get a little bit more color into the trajectory that the recurring revenue is on, could you tell us a little bit about how much of a percentage of sales that is growing how quickly that’s growing year-over-year? And then also to what extent that cost you on your top-line growth? Thank you.

John Chambers

The recurring revenue is about slightly under about $2 billion, if you look it from that perspective. It’s been growing I would say in the range of about $100 million this quarter, and as far as I mentioned before, it’s a combination of looking at WebEx some of the security products that we have that’s recurring collaborating enterprise license agreement and is also the Meraki, there is a portion of Meraki was part of the recurring that’s part of the recurring that’s been adding to it since we’ve done the acquisition. It’s a big piece as a production description in all these categories that adding it and that gets said recurring revenue over the period of time.

Frank Calderoni

So if you look at it -- we’re going to move faster and faster in this area. We understand fully that when you do recurring revenue, deferred revenue, pay-as-you-go services, subscription as opposed to onetime fees, you have all the expenses upfront and you don’t get the payback on that and that is probably one of the reasons six or seven reasons why we’re moving our expenses so aggressively on the limited restructuring if we didn’t free up resources and move them over 2,000 people in the InterCloud and so that it would be a number of quarters before we start to get the payback there and these recurring revenues are many of the deals we’ve done on enterprise licensing Gary, and you don’t get your revenue upfront of course you do much better two, three and four years but we get all of the expenses upfront.

So, that’s why we felt we had to move one of the reasons we had to move aggressively to position ourselves for the future and you’re going to see us move aggressively the market doesn’t wait for anyone we’re going to lead it period and the ability to that it requires making some very-very tough decisions but it will be about growing force innovation and at the same time focus on our own talent and we’ll make our calls very aggressively and drive efficiencies which really if you think about engineering that’s what Pankaj is doing probably Gary more than anything else, he is driving efficiencies across and free enough to resource for the new areas. So, Mel, I think that’s a pretty good wind to end on that’s your call, you want to do anything else.

Melissa Selcher

No, I think we can end there.

John Chambers

Yes, I think if you would have take a step back, we execute it very well in a tough market, I feel stronger now than I did a quarter ago about where we’re today, you’re going to see us lien in and drive on transformation anytime you do restructuring that’s part of our leadership team I don’t want to mislead you but we will always make the decision what’s right for our shareholders, our employees, our customers in the long run and partners. The results are very good, I like what I see in front of us, I think the challenges are largely ones that are more external but with the headwinds that doesn’t mean we shouldn’t do better in certain areas and I feel very strong going into fiscal year ’15 in terms of where we’re positioned.

Melissa Selcher

Great, thanks John. Cisco’s next quarterly call, which will reflect our FY15 first quarter results will be on Wednesday, November 12, 2014 at 01:30 PM Pacific, 4:30 PM Eastern. Again I'd like to remind you that in light of Reg FD, Cisco plans to retain its long standing policy to not comment on its financial guidance during the quarter unless it's done through an explicit public disclosure. Please call the Investor Relations Department with any follow-up questions from this call. Thank you for your participation and continued support. This concludes our call.

Operator

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