Cisco's (CSCO) CEO John Chambers on Q1 2015 Results - Earnings Call Transcript

Nov.12.14 | About: Cisco Systems, (CSCO)

Cisco Systems, Inc. (NASDAQ:CSCO)

Q1 2015 Results Earnings Conference Call

November 12, 2014 4:30 PM ET

Executives

Melissa Selcher - Vice President, Corporate Communication and IR

John Chambers - Chairman and CEO

Frank Calderoni - Executive Vice President and CFO

Rob Lloyd - President, Development and Sales

Gary Moore - President and COO

Kelly Kramer - Senior Vice President, Finance

Analysts

Simona Jankowski - Goldman Sachs

Amitabh Passi - UBS

Brian Modoff - Deutsche Bank

Ehud Gelblum - Citigroup

Ben Reitzes - Barclays Capital

Mark Sue - RBC Capital Markets

James Fawcett - Morgan Stanley

Alex Henderson - Needham

Ittai Kidron - Oppenheimer

Operator

Welcome to Cisco Systems' First Quarter and Fiscal Year 2015 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 you. Good afternoon, everyone. And welcome to our 99th 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; Gary Moore, President and Chief Operating Officer; and Kelly Kramer, Senior Vice President of Finance.

I would like to remind you that we have a corresponding webcast with slides, including supplemental information that will be 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 on the Investor Relations website.

As it’s customary in Q1, we have made certain reclassification to prior period amounts to conform to the current periods presentation, the reclassified amount have been posted on our website. Click on the Financial Reporting section of the website to access these documents. Throughout this conference call, we will be referencing both non-GAAP and 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 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 conference call is not permitted. All comparisons through this call will be on a year-over-year basis unless other -- stated otherwise. As we have 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’ll now turn the call over to John for his commentary on the quarter.

John Chambers

Thank you very much, Mel. I’m pleased to report another solid quarter, our strongest Q1 ever in terms of revenues, non-GAAP operating income and non-GAAP earnings per share. We grew revenues this quarter to $12.2 billion, up from $0.01 year-over-year, returning to growth as we said we would.

We generated $2.5 billion in operating cash flow and returned closed to $2 billion to our shareholders through share repurchase and dividends. With strong total non-GAAP gross margins at 63.3% and non-GAAP operating margins of 29.2%, we delivered non-GAAP earnings per share of $0.54.

When I think about the quarter, there are three key takeaways that you will see we will call out in our following discussion. First, I would say, we are managing the business very well in a very tough environment. Second, we are seeing the results of our three-year transformational work. In this work moving from selling boxes to selling solutions and leading with innovation, speed, efficiency, as we disrupt the market. Third, we are leading the technology and business transitions in the market.

Our strategy is playing out as we delivered innovative solution based on intelligent networks to enable the next-generation of IP and the Internet of Everything. We continue to focus on what made us successful many times in the past leading through market transitions.

I give us very high marks on our execution. For example, in the data center where we are winning the SDN battle with application centric infrastructure. This quarter, we now over -- have over 900 Nexus 9000 customers, up from 580 last quarter with strong continued momentum.

And it is first full quarter of shipments we more than double paying customer adoption of APIC and our ACI controller that enables automation and programmability of the network and the skill that’s never been done before. The Nexus 9000 and ACI continue to see strong demand from customers, who are seeing the significant advantage of ACI in their application deployment and management.

As I said last quarter, we had two principal objectives, when we rolled out our transformational plan in 2011, Gary. So how are we doing against these objectives? The first one is about driving innovation, speed, agility and effectiveness in our business.

As you are all aware, we are navigating the same macro-environment as everyone else. At the same time, we are also executing on several transitions within our portfolio. Despite this, our results are at or near record levels and showing momentum on both top and bottomline. I'm optimistic as things play out this year and beyond, Cisco is very well-positioned.

The second objective, move our business from model that selling boxes and standalone services to selling architectures and solutions that drive business outcomes. As every company, every city, every country is becoming digitized and we are seeing this on the results of our customer visits around the world. We are engaging with entirely new business models, leading with software and services, and delivering integrated solution.

Recently we described an enterprise license agreement for our software portfolio we had signed with General Motors, a model we are replicating across our enterprise account at this time. In last month we discussed what success we've had together in Barcelona in Chicago as they digitized their city and evolved in the smart cities.

We are tying together the breadth of our product portfolio to deliver solutions that drive growth and economic opportunity, with security and scale. These large strategic deals are becoming a blueprint for how we will move forward.

In the last few quarters, we have talked about three headwinds, emerging markets, SP and product transitions at the hand of our switching and routing. The good news is that in the third quarter, the third area, high-end switching and routing has turn to a tailwind based on momentum in our new product introductions and we will share that with you shortly.

As we said last quarter, we are executing and progressing as expected, and I’m very comfortable with our growth trajectory. We are pleased that in spite of the headwinds, we are growing again and are very nicely positioned once we get a positive turn in service provider or emerging markets, ideally in both.

For Q2, we expect to see mid single-digit revenue growth in the range of 4% to 7% and non-GAAP earnings per share in the range of $0.50 to $0.52 which would be an increase of 6% to 11% in terms of the earnings per share given the range that we covered. Our Q2 guidance reflects an added nature of conservativism primarily related to reduce spend at several large U.S. service providers.

I will now provide more detail on the business momentum in our geographies and customer segments within our portfolio. As a reminder, geographies are the primary way we run the 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% and product book-to-bill below one in line with usual Q1s. EMEA was a highlight with growth of 6%. We saw very strong performance in the U.K., up 20% and strength in Germany, up 6%. Southern Europe grew approximately 20%.

We saw some stabilization in the emerging countries within an EMEA with growth of 2% in the emerging segment of Chris Dedicoat’s business. Based on the role we play in the digitization of countries and companies including our ability to bring innovation in job creation, we’re more positive on the future business in Europe than perhaps some of our peers are.

Our Americas business grew 2%. We saw growth in the U.S. of 3% and when you exclude U.S. service provider, growth in the U.S. was 12%. U.S. public sector had a very strong quarter with growth of 22%, U.S. federal grew an amazing 34% while state and local declined by 2%. U.S. commercial grew 7%. U.S. enterprise declined 1%.

Last quarter we shared the U.S. enterprise grew at a very strong 16% growth year-over-year. As I mentioned at the time that performance was higher than normal and expected it to balance out this quarter. Looking at the pipeline next quarter, we feel good that this business will again deliver double-digit growth. U.S. service provider however declined at 18%.

Within the Americas, Latin America grew 5%. Asia-Pacific, Japan and China declined 12% led by China down to 33% while India grew 6%. The remaining emerging countries in Asia declined 15%. Overall, emerging countries within the three geographies declined this quarter by 6%.

The BRICS plus Mexico were down 12% while the other emerging countries actually grew 1%. Our position in the emerging markets remain strong and we believe we are positioned well for the inevitable upturn. However, as we told you last quarter that is not factored into our plans.

Moving onto the view from a customer segments. In this quarter, global public sector grew 13%, global commercial grew 5%, global enterprise grew 2% and service provider declined on a global basis by 10%. Emerging markets remain challenged and we saw dramatically reduced spend at several large U.S. service providers. As you think about our service provider position, I would think about the following, all of which are in our control.

We recently reorganized the best-in-line with what our service providers customer would want from Cisco. That was true of engineering, sales, services and how we go to market. Second, we had the same power to part with customers as they transform during their own challenging time period in terms of their growth and their profitability. Third, our market share and share spend is strong. And fourth, our traditional box competitors have never been weaker.

At this point, I don't think many of them have the flexibility to reposition in a way to remain relevant to these service providers. So we are nicely positioned for rebound in NSP when it happens. I now will move on to the discussion of our momentum in terms of products and services.

I will discuss our momentum in terms of year-over-year product and services in terms of revenue but where appropriate we’ll share order information where it adds important color. As we move on, I want to draw out the convergence that we are driving across almost all of our portfolios.

As a first example, one that you are very familiar with in the data center, we simply converged networking with compute and storage and moved into what I believe is the number 1 data center position. Now we're converting networking with applications, security and scale and that's our ACI implementation.

In routing, our NCS platform converges IP and optical networking with virtualization. We successfully converged where in wireless into most all our products and convergence will also be very key for us for us in collaboration work, which we’ll talk about later. In the industry, we are the only player with the assets to drive to convergence for our customers. And this is a driver of both revenue and margins across our portfolio.

Now let me move onto routing. Routing declined 4%, reflecting both the lower CapEx spend by major service providers and challenges in the emerging markets. We did see growth in several of our high-end routing platforms this quarter. For example, the ASR 9K saw solid double-digit order growth and our new products the NCS 6000 and CRS-X continue to ramp well with new customer wins. Given the tough environment, we believe we are gaining market share in these routing areas.

Moving to switching. It was nice to see overall switching move back into positive territory, growing 3%. We returned to growth after three quarters of decline, driven by our strength in data center switching portfolio.

In addition to the 60% increase in the Nexus 9000 and ACI customers, we sold double-digit order growth from the Nexus 3K, 7K, 9K and ACI combined. We signed a record 600 new customers for the Nexus 3000 this quarter including several major Web 2.0 providers.

Looking at our performance relative to one of our merchant base competitors making a lot of noise in this market. In Q3 FY ‘14, from a comparison perspective, we saw orders of the Nexus 3K and 9K, our comparable portfolio to pass their total revenue for the first time.

In Q1, orders for the Nexus 3K and 9K were approximately 50% larger than their reported total revenues, growing in excess of four times faster than the reported growth rates. Yet again in just one year, we have grown back where they had gotten to in the whole history of their company.

A year ago we were fighting an SDN perception battle, with competitors using PowerPoint instead of products. Today with ACI, we are bringing programmability and automation to networking on a scale well beyond what competitors define as SDN.

Now we are in the market with products and solutions and don't see, either traditional box competitors or the PowerPoint newcomers able to keep up. And for those of you who were concerned about SDN’s effect on our switching margins, our switching gross margins have been incredibly consistent over the last five to six quarters and as far forward, as were modeling we see no change. In this quarter's example, our switching gross margins were above the mean level of this consistency.

Data center and cloud where we first converge networking compute and storage and today it has continued to hold the number one position in revenue share for x86 blade in the U.S. according to IDC. Data center grew 15% year-over-year. Five years ago, we invested in the market for converged infrastructures and brought it to life with our ecosystem partners.

Today FlexPod, with NetApp and Vblock with EMC, are the leading converged infrastructure architectures and there's two common tale elements. Cisco’s UCS and Cisco’s networking.

Also in the quarter, we announced innovation across our UCS portfolio, broadening the product line to meet demands of large cloud environments and also scaled down to environments with just a handful of servers. We continue to demonstrate that innovation is very much alive in markets, with standalone products considered largely commoditized.

I will also touch on InterCloud, where we announced this quarter a 30 new InterCloud partners, really nice job, Rob, including Deutsche Telekom, British Telecom, NTT DATA and Equinix. This brings our world's largest interoperable network of clouds to 250 data centers worldwide across 50 countries. All of which are working with us to ACI plus InterCloud fabric, plus OpenStack roadmap. This is truly unique to Cisco and being able to pull this all together.

We are frequently asked what Cisco is doing differently in the crowded cloud markets. Simply put, we see the same problem in cloud that we saw 20 years ago in networking, where numerous networks operated on different technologies that didn't talk to one another. As we blow down the silos with Ethernet, we made the Internet pervasive. We are running the same play in cloud as only we can, unifying private, public and hybrid clouds.

Customers want to seamlessly move their workloads between cloud with a common goal of policy and security. They need scale, feed and reliability and they care about data sovereignty and openness. We will place this market as a solutions play, meeting the network requirements of enterprise class applications and providing the platform to deliver Cisco's growing portfolio of software-as-a-service offers. This would drive our strategic role with customers and over time our recurring revenue.

I said earlier, the security was the number one issue facing many of our customers. Security revenues grew this quarter 25%. In this quarter, we combined our security products even more closely with the Sourcefire products and delivered a highly anticipated Cisco ASA with firepower services, which combined Cisco’s ASA firewall with Sourcefire into one platform.

Customer receptivity has been very positive. Our innovation and security is very strong. Security continues to be our customers’ number one business priority at the CIO level, but perhaps even more important at the CEO level. And we are doing very well in this market. Nearly every initiative we have at Cisco has security as a key component and we are committed to becoming the number one security company.

Compared with even a year ago, we are getting good marks from our customers as now more than ever. Customers need strong and trusted company like Cisco to lead. They see Cisco alone in the ability to deliver an integrated security architecture and security services and solutions across their business. I am very pleased that our leadership transition is going very smoothly in this area, and we are moving aggressively to capture the opportunity ahead of us.

Last quarter, wireless grew only 1%. This quarter, wireless grew 11%, with strong momentum in our 802.11ac portfolio, which now represents over 50% of our access point revenue. Cisco Meraki [continued out there] [ph] with another outstanding quarter growing at 86%.

In the area of collaboration, we are going to continue to transform a collaboration portfolio and move to more enterprise license agreements in subscription. In Q1, our collaboration business was down 10% in the quarter. As our new video products ramp well but at a dramatically lower price points, we saw declines in telepresence and unified communications.

WebEx continued to grow well and remains one of our largest -- remains one of the largest FAS businesses in the industry. As I mentioned before, collaboration should be the greatest productivity driver for our organizations. In the next week, you will see some bold moves that will secure our leadership position in cloud-based, simple, secure and converged collaboration.

I think we have great potential to grow this business over time. I really like our position and our pipeline and I’m very optimistic about returning back to positive growth levels relatively quickly in the collaboration arena. Service provider video declined 12%, with set-top box business down approximately 20%.

Revenue for service provider video software and solutions grew by 13%. The bet we are making is on the video transition to the cloud. And we are seeing our video software business continue to grow, as we help our customers’ transition to cloud-based video solutions.

Now moving onto services, pulling everything together is our services strategy and our services in this quarter grew 5%. Services now represent over 23% of Cisco’s revenue on a 12-month trailing basis. We’ve added around $2.3 billion in revenue over the last three years with strong margins. Today, at a $11.1 billion in trailing 12-month revenue, it is our second largest business after switching and that doesn't count the literally billions of dollars being delivered by approximately 70,000 strong partner channels around the world, where partners deliver solutions on behalf of Cisco, not just boxes.

In many ways, it's a bit unfair to refer to our services business by that name. Since it draws the comparison to what investors typically see at other companies, while our large component is driven by maintenance and support. Unlike our peers at Cisco, nearly 90% of our issues we handle for our clients are solved with automation. We have many large customers around the world to depend on us and depend on Cisco to run their networks.

We have also readout a unique set of consulting, cloud analytics and security services. As the network continues to increase in importance, our services become increasingly more important to our customers. To summarize my commentary, we have undergone a successful reorganization across the company and are seeing the results. Our employee sentiment data shows that employees both understand the challenges we have made and also are optimistic about our future and the changes we've made to deal with these challenges.

Thanks to a lot of hard work which will continue. I believe that we have positioned Cisco to lead the market transitions in front of us, to the benefit of our shareholders, our customers, our partners and our employees.

Frank, let me now turn it over to you.

Frank Calderoni

Thank you, John. We executed Q1 with financial performance slightly above our guidance. From a top and bottom line perspective, total revenue was $12.2 billion, growing 1% on a year-on-year basis.

The non-GAAP net income was $2.8 billion and non-GAAP EPS was $0.54. Our GAAP net income was $1.8 billion and GAAP earnings per share on a fully diluted basis was $0.35. Product revenue was flat and service revenue increased 5% on year-on-year basis, with product book-to-bill less than one. Overall, non-GAAP operating margin was 29.2%.

In Q1, our total non-GAAP gross margin was 63.3%, above our guidance of 61% to 62%. As we have said in the past, non-GAAP gross margin may vary quarter-to-quarter by a point in either direction of our guidance range. This quarter, we were above the range.

Non-GAAP product gross margin was 62.5%. As compared to Q4, product gross margin was positively impacted by productivity improvements and by product mix, partially offset by pricing. Non-GAAP service gross margin was 66%, consistent with historical levels.

Our non-GAAP operating expenses were $4.2 billion or 34.1% as a percentage of revenue, compared to 33.8% in Q4 of FY14. Non-GAAP operating expenses were flat quarter-over-quarter and up 3% year-over-year, reflecting investments in key growth areas.

Our GAAP net income and GAAP earnings per share for the first quarter of fiscal 2015 included a pre-tax charge of $188 million or $0.03 per share related to a patent litigation matter described in our most recently filed 10-K involving the Rockstar consortium.

A term sheet has been signed and we are hopeful to achieve a resolution of the associated litigation in a manner that is constructive for the whole industry.

Now moving on to the non-GAAP tax provision rate, it was 22% consistent with our expectations. We ended the quarter with our headcount at 72,247, a decrease of approximately 1,800 from Q4 of FY14. This reflects reductions from our restructuring activity, partially offset by key sales, service and engineering investments, as well as acquisitions.

As a reminder, as we outlined in our Q4 call, in Q1 we began taking restructuring actions focused on continuing to invest in growth, innovation, and talent, while managing costs and driving efficiencies, which would impact our global workforce during fiscal 2015.

We announced and completed two acquisitions during the quarter, Metacloud and Memoir Systems to enhance our innovation and long-term growth opportunities in key growth areas, such as the cloud and software-defined networking. Both were executed consistent with our portfolio approach to acquisitions to drive long-term returns.

Also we along with EMC and VCE announced during Q1 the next phase of VCE. Cisco will continue as a strategic partner and will have an approximately 10% equity interest in VCE. We expect the transition to close in Q2 of FY15.

Looking at our geographic segment results, in terms of total revenue on a year-over-year basis our Americas segment was up 3%, EMEA was up 2% and APJC was down 5%. Total gross margin for the Americas was 64.1%, EMEA was 63.8% while Asia Pacific, Japan and China was 58.8%.

From a balance sheet and cash flow perspective, total cash, cash equivalents and investments were $52.1 billion, including $3.8 billion, which is available in the U.S. at the end of the quarter. We generated operating cash flow of $2.5 billion during the quarter. And in Q1, we returned $2 billion to shareholders that included $1 billion to our share repurchases and approximately $973 million through our quarterly dividend.

Our balance sheet at the end of Q1 was strong with the DSO at 33 days and non-GAAP inventory turns at 11. Deferred revenue was $13.7 billion, up 4% year-over-year. Product deferred revenue grew 9%, driven largely by subscription-based offering while services deferred revenue grew 1%. Each quarter we are consistently driving a greater software mix and higher recurring revenue.

Let me now provide a few comments on our outlook or guidance for the second quarter. Let me remind you again that our comments include forward-looking statements. You should review our recent SEC filing 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 also be above or below this guidance.

The guidance we are providing is on a non-GAAP basis with a reconciliation to get. As John mentioned, we expect total revenue to be in the range of 4% to 7% growth on a year-over-year basis. For the second 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 very challenging due to various factors such as the volume, the product mix, cost savings as well as pricing.

And I said earlier, non-GAAP gross margins may vary quarter-to-quarter by a point in the direction of our guidance range. Our non-GAAP operating margin in Q2 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 second quarter. Our Q2 FY15 non-GAAP earnings per share is expected to range from $0.50 to $0.52 per share.

We anticipate our GAAP earnings to be lower than our non-GAAP EPS by $0.10 to $0.13 per share in Q2 FY15. The range includes a pre-tax benefit of approximately $125 million from the reduced VCE equity investment to 10% and also is offset by a pre-tax charge of approximately $100 million in Q2 FY15 as a result of the restructuring actions that we announced in the first quarter.

During Q1, we recognized pre-tax charges to our GAAP financial statements of $318 million related to that announcement and we are now expected total charge to not exceed $600 million during the fiscal year of 2015. Please see the slides that accompany this webcast for more detail.

Other than those identified and quantified items noted previously, there were no other significant differences between 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.

Our guidance does not assume a significant improvement in the emerging markets was a service provider segment in the near future. And although we believe we are executing well in a rapidly transforming market with 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 similar considerations.

As a reminder, Cisco will not comment on its financial guidance during the quarter unless it is done to an explicit public disclosure. John, I'll now turn it back to you for some summary comments.

John Chambers

Thank you, Frank. And well done. I'd like to talk now about the leadership transition at the CFO level and I would then summarize the call. When you look at the quality of the financial leadership team, it is something that all of us take a deal of pride in. As you know, Cisco has successfully transitions through multiple leaders often five to eight of them in every major functional group in the company over the years. And recently, Frank has been exploring the right time to step down as Cisco CFO. Frank joined Cisco over 10 years ago and has served as CFO for the last seven years.

Among his many accomplishments, frankly at our very successful capital allocation strategy, including implementing Cisco’s first dividend, managed effectively some of our almost challenging macro and industry environments, and he has been recognized time and time again for his strong leadership. While I know that Frank has other ambitions, I'm also very glad that Frank has agreed to stay on as an advisor to the financial leadership team and for me over not just hopefully next several months but over longer than that Frank if you'll have us.

Effective January 1st, Frank will be stepping down as CFO. At which time, Kelly Kramer will assume the role as Cisco’s CFO. One of Frank’s best and most defining leadership characteristics is his focus on building incredible leadership teams. Almost three years ago, Frank hired Kelly. It is a credit to the work of Frank that the leadership team and the board have concurred in appointing Kelly to assume the role of CFO. Kelly brings a wealth of experience to this role, both from her three years at Cisco and 20 years at GE.

Frank Calderoni

Kelly, you look too young to have that many years.

Kelly Kramer

Thanks.

John Chambers

Unlike Frank, you haven’t got any grey hair and like me, you’re not losing hair but that’s a separate topic. In your last role at GE, you were GE’s healthcare systems business group and CFO of that group. She is known for a business judgment, no-nonsense approach and strong strategic leadership style. At Cisco, Kelly has led both Cisco's corporate finance and business finance groups, managing among other things, all the controllers of Cisco's business units, with a particular focus around pricing and margins.

She has learned Cisco's business inside and out and has proven herself to be a highly strategic, thoughtful and influential leader. Kelly is not afraid to challenge all of us to think differently. And it has been impressive to see her do this, while becoming a trusted partner to our entire leadership team. Kelly, I’m going to give you the same advice that I once got when I became CEO and then I gave Frank seven years ago.

Do a great job, have fun and don’t mess it up. We know you won’t and I look forward to working with you even more closely. Frank, I mean this is really something I'm very proud of in your many accomplishments. Your integrity and ethics define you. And you have always kept our employees, customers, shareholders at the forefront of our long-term strategic business planning.

You have been a great finance leader but more importantly, you have been a great business leader. You have built a world-class financial organization that is driving Cisco’s transformation and ensuring we are positioned to execute on the opportunities ahead. I know the future will hold very exciting opportunities for you. And I look forward to our continued relationship. Thank you once again, Frank.

Frank Calderoni

Thank you, John.

John Chambers

And Kelly, congratulation.

Kelly Kramer

Thank you.

John Chambers

Frank, I’m just looking at you. You’ve weather this last seven years better than I have. I’ve lost lot of hair, you’ve got little bit of grey into it.

Frank Calderoni

We have to see how it continues, right?

John Chambers

Yes. All right. Now to summarize our call today. I've talked a lot about accelerating pace of change in the industry. Recognizing that in many cases, Cisco and our technology are driving that change. I am now more convinced than ever that the pace of change is providing an advantage for Cisco for number of reasons.

First, the role of the network is at the center of every major technology and business transition and that is becoming very clear to our customers and to the industry as a whole. Most customers are no longer interested in piecing together disparate infrastructure from different vendors or buying standalone technology. They are digitizing their businesses, their cities and countries and want Cisco to be a strategic partner delivering solutions and business outcomes.

They recognize that to move with agility and security they need, their solutions have to be based on an integrated architectures, combined with intelligent network. You are seeing this showing up in increased enterprise license agreements, enterprise services agreements, subscriptions, consulting contracts and other advanced services including cloud analytics and security.

Second, we have proven our ability to move quickly and aggressively to transform Cisco into a leaner and more effective company. Remarkably since FY ‘11, we have added around $4.1 billion in revenue, with about $61 million in incremental non-GAAP OpEx. Said another way, for every dollar of revenue we’ve added over this transitional period, we've only added about $0.01 of non-GAAP OpEx.

There is not a peer who can come anywhere near close to this by a factor of 10 to what that performance has represented for Cisco and for our shareholders. And what’s exciting is we're just getting started and our transformational evolution at a time that our peers are just starting their transformational work that we started 3.5 years ago.

We have also successfully redeployed this operating leverage in many ways. We’ve invested in innovation. We built entirely new skill sets within Cisco. We disrupted our largest businesses in order to move at the fast pace this market requires. And we built flexibility into our operating model, as we managed through these transitions. Throughout, we’ve driven record annual non-GAAP earnings per share for our shareholders.

Third, we have and we’ll continue to evolve the leadership team and the talent to drive us forward. As we focus on what our people can do with the support of Cisco, we are unleashing incredible innovation and energy.

And fourth, the power of our brand. Our global channels and our strategic relationships with our customers is only strengthening. We continue to earn the trust of our customers and that is translating into greater opportunity for Cisco. The day feels a lot like the mid-90s, when companies were coming to Cisco to learn about the Internet.

Today, they’re asking Cisco to help make the transition and transition them to digitize their companies, their cities and even their countries, as they prepare to take advantage of the opportunities presented by the Internet of Everything. To repeat where we started, we believe, we are managing very well in a very tough environment.

We are seeing the results of a three-year plus transformational program and work, moving from selling boxes to selling solutions and leading with innovation, speed efficiency as we disrupt the market. And we are leading the technology and business transitions in the market. We have been very clear with you, when we have seen challenges in our business. We are in the environment and we will continue to do so.

We have also managed the business very well in light of those challenges. We have made hard decisions, where we have needed to and are seeing the resulting benefits. To sum it all up, I'm very optimistic about Cisco's future and excited about the fact that we are on.

Mel, let’s move to my favorite part of the session, which is the Q&A and turn it over to you.

Melissa Selcher

Great. Thanks. Operator, let’s move to questions.

Question-and-Answer Session

Operator

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

Simona Jankowski - Goldman Sachs

Hi. Thank you. I just wanted to ask you first about your product order growth. I think you said, up 1% year-over-year. That comes on the back of relatively easy comps relative to the year ago number. And our method implies that sequentially, bookings declined something like the mid-teens, which I think would be well below normal seasonality for this quarter.

So just curious, if you can give us a little more color on the puts and takes in there, if you can touch on FX, China seemed to decline at a little faster rate and how much of that with some of the weakness in the U.S. carrier space that you referenced?

John Chambers

Okay. So, Simona, I’m going to go, as you would expect to the most positive and unlike last quarter where we had about fives up and fives down, this time most all the positives were in the right direction with the exception of service provider in emerging markets. So start with our high-end switching and high-end routing puts and takes. The high-end switching grew at 10%, as I alluded to earlier and that shows how good of a job we’ve done on the transition and taking not just market share but I think, moving very rapidly to pull away from some of our key smaller competitors.

Routing is probably gaining share. We have our best routing portfolio. We have at the high-end and both, Nick Adamo and Kelly Ahuja will head that up. [Like we say with Cedrik] [ph], we’d say we're very well positioned in routing as well. Securities saw 25% growth. Data center was at 15% growth, Simona. And that was probably a little bit lower than you might have expected. Q1 as Kelly, I think we were talking about it.

You see a slower quarter for us in terms of our server technologies and spins. I would expect that to come back up in Q2, more into the 20s. UCS at 16 % and I am saying the same type of number for that in terms of, and these again orders that I am referring to. I’ve got revenue on the left and bookings on the right, okay. I am sorry.

So using UCS as an example, revenues are 16% and bookings are 18% in the quarter. And I’d expect them to come back up in to comfortable growth well into the 20s as well. Services, Gary, it’s been very nice return to mid-single digits. We had hopefully what will be a bottom at 3% and not feel pretty comfortable about our services revenues more in the mid-single digits.

Wireless, which is one of the things you all rightly pointed out last quarter said was a little bit challenging for us, which was fair, retuned back to double-digit growth to 11% on revenues and mid-teens on bookings. I expect a solid quarter next quarter out of it as well.

Collaboration was the one area that I talked about that we didn't go into as deeply. I like, where we wore on bookings. Bookings were down just about 2% negative. The collaboration portfolio was 10% on revenues. And so that's the solid part, better growth in Europe that people anticipated, better growth in southern Europe, better solid area in the U.S. managed service providers.

The two big issues Simona are around service provider and emerging markets. Emerging markets went down as much as they were last quarter, minus 9%, but they were down 6% and the BRICS were down 12%, with China being the heaviest in terms of the approach. The rest of the emerging markets were actually slightly positive I think averaging out to be 6% odd number.

Service provider is the big challenge, let me be very explicit, that’s due to two to three U.S. service providers, who have dramatically slowed the order rates and I mean dramatically slowed the order rates with us. And that's an implication also I think of some of the -- what you're seeing in terms of net neutrality, Titled II discussions going on, where in my opinion it would be a very disappointing in result if we moved back to regulation, the Internet like we did voice many decades ago. It would dramatically slow the ability of service providers to be on our broadband and at time that our country is finally cut backup.

So my key takeaways, Simona, are the service provider business driven by primarily two or three large U.S. players. It’s the one area that has its most focused. And we saw that in order rate in this last quarter to the tune of a pretty substantial amount. In fact, if you take out those three service providers, you would have probably seen positive growth in our service provider business in total, which you are beginning to see now.

So our strategy in business is taking hold. And emerging markets are still a little bit, if you will, balancing with some very good ones and some challenging ones. That's how I would answer your question on puts and takes.

Melissa Selcher

Great. Thanks, Simona.

John Chambers

And I know you are going to say keep my answers [tight] [ph]. I don’t know how I will.

Melissa Selcher

Next question operator.

Operator

And your next question comes from Amitabh Passi with UBS.

Amitabh Passi - UBS

Hey, Frank, first sorry to see you though, but wishing all the best. And John, I just wanted to clarify on the guidance, maybe just picking off from the previous question. Your guidance implies about a 4% decline in revenues. Again, should we assume that most of that, in fact all of that pressure is from service provider and emerging markets? Are you seeing maybe potential some slowing momentum in your switching side as well? Or should we expect that to continue to remain robust? I just want to clarify what's embedded in the guidance?

John Chambers

Yeah. My three years of law school if I say it was entirely to do with something my team would spare me on, but it is almost primarily due to those major factors on. If you look at just repeating the U.S. number without service provider, it was 12% growth, major strength. And that was in spite of our enterprise business having a slow Q1 in terms of Brian Marlier’s team, got a lot of confidence in Brian. We went to the forecast pretty carefully with them, Rob. I think they are going to be back in double-digit growth this quarter and feel real good. The pipeline feels very, very solid on that.

Even within our service provider business, if you look out several quarters, our pipeline is increasing rapidly. And I think you are going to see us increase our share of wallet as well as our market share in many of our areas. The transformation that we've gone through over this last year with Nick Adamo, Cedrik and Kelly leading the group, you’re beginning to see our relationship with these service providers even when their challenge change a fair amount.

So I would say it is emerging markets, and again it's not all of them anymore, it’s a better standard deviation, but still we are not going to turn on that. And it’s service providers, but it's a lot of just a couple service providers here in the U.S. So I like our pipeline. I think we're going to be challenged here for a couple quarters. I think we will power through it and I feel very good about the end result.

Melissa Selcher

Hey, thanks, Amitabh. Next question operator.

Operator

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

John Chambers

Hey, Brian.

Brian Modoff - Deutsche Bank

Yeah, John. How are you doing? And Frank yes congratulations on your retirement and good luck dealing with us Kelly. So a question on the gross margin reached 63%. Your guidance is decent as well. How do you see your gross margin? Some of they call it with the net -- you would see pressure there. It doesn’t look like you have. How do you -- and looking at your mix in your forecast, how do you see your gross margins panning out over the next quarter?

And then real quick if I could slip in, you mentioned General Motors again, can you talk about what that means in terms of your ability to sell into big U.S. and European telcos and software opportunities in terms of offering that type of product pipeline to them to sell to their customers? And how it might be as a recurring revenue stream over time? Thanks.

John Chambers

Got you. Frank, why don’t you take first the one?

Frank Calderoni

So Brian, I am going to be a broken record at least one more time on this one. But from the gross margin standpoint, as we look at the gross margin, it’s 61% to 62% give or take 1%. Going back on the first quarter, yes they were higher over 62%. We tend to see high gross margin in the first quarter. We did see a benefit from a mix perspective. I think the stronger switching helped. As well as if you look at the mix from a UCS perspective, it tends to be lower. Where I think Q2, A2 especially after the end of the calendar year, it tends to be a stronger UCS quarter. So we’ll see a bit more of an impact from a negative mix standpoint in that quarter.

So when you take all those gives and takes, that’s where we get to that 61 to 62, give or take. And we’ll continue to keep managing that balance as we look out over several quarters.

John Chambers

Gary?

Gary Moore

Yeah. On the ELA that we did with General Motors that John did mention again this quarter, that’s a solid deal for them and for us. It has a lot of interest from other companies. And we are actually working a number them. And I think there's a lot of positive things about the structure of that deal certainly for the customer, but certainly for Cisco. And with the customer like GM, where they’ve gone all in on us, on our strategy, it’s very easy for them now to continue to grow and do innovative things that give them business outcomes that they weren't able to justify to the business before.

And I think that’s something that a visionary CIO will do with the company and the CEO and the CFO that really look for IT to be a competitive advantage and not an expense. And I think the team at GM has done that. And we have a number of other customers that we’re working with along those same lines.

John Chambers

What’s exciting is these enterprise licenses, think of it in enterprise software license where literally you can fill in the hardware and then meet that within integration. As you can move from security to collaboration, you can feed against white label, you can bring in your consultancy services, you knowledge of a network and ways that no one else can do.

You’ve seen us doing the same thing with services, enterprise services agreement. And that has even more impact, where you go across the whole large enterprise and you do services tying all together their networks, their directions, get efficiencies from it, but then it really opens up your consultancy, your security, your collaboration offers, then you combine that with our architecture plays and you take it from cloud all the way through mobility, take it all the way down to the edge. That's why we win.

One thing Kelly you pointed out to me the other night, you are educating Frank and I as well good potential detail. When you look Brian at the numbers, Q2 is usually a quarter. If you watch historically that has had lower gross margins than Q1, because we do a bigger mix of our products on service during Q2 because of the year end. So that’s been fairly typical in terms of our pattern. Did I learn that right?

Brian Modoff - Deutsche Bank

That’s right.

John Chambers

Yeah. Okay.

Melissa Selcher

All right. Thanks, Brian. Operator, next question?

Operator

I think our next question comes from Ehud Gelblum with Citigroup.

Ehud Gelblum - Citigroup

Hey guys. Appreciate. Thank you. Frank, likewise, great working with you and lots of luck. Just aside on that, if you can just give us some sense of your thought process as to -- a, what you plan on doing next and kind of, what you are thinking as you went through the situation to retire that would be awesome to have some rationale? But I was looking more for some a little bit more, good guide into the enterprise business, where enterprise orders were down from being up last quarter. And putting that together what’s happening were VCE and with the data center number of 15% that John said, you thought was little disappointing and I think it was about 30% last quarter.

So putting it all together in one piece, can you give us a sense as to, a, is the question to a, how much UCS went through VCE and how much will that impact you as your piece of VCE goes to 10% from 35%. B, were all the issues related to low enterprise growth, the low UCS and data center growth? And you’ve done your equity stake in VCE, was that all the same issue and what gives you confidence that all these issues, enterprise, UCS, data centers, et cetera, rebound next quarter and going forward? Thanks.

John Chambers

Got it. So let me take it. Frank, maybe you could handle that one question with him one-on-one. In terms of matter and now, I’d like to sit on that discussion. So let me address the enterprise question very directly. First, let use our Global Enterprise Theater run by Woody Sessoms. We didn’t talk about in the call. It’s our top-29 global enterprise accounts. It grew 15% this last quarter. And it grew across all those architectures and it is one of the very best with VCE, with FlexPod and total architectures. And so if you watch and we’re progressing and predicting they’re going to grow very well again this quarter, their pipeline looks really good.

So, as you what you expect, testing to make sure the pipelines good where we’re going, that would be an example and those are our global enterprise. In the U.S. enterprise, it was very simple. We finished up the quarter, they were in the running to become the top theater in the world and they won it. They pushed hard in the quarter and pushed financially to advantage and drive little bit out of the pipeline on that. They made organization changes to set up for this next year, got going on, even pushing harder on solutions, even harder on architectures and your CM.

You’ll not give it, extremely at 90% plus, you are going to probable see it. You will seem then returning to double digits and we’ve been through Brian’s pipeline. He is world-class, knows how to do it. There is no effect of our agreement with what we do with VCE that slowed at all. In fact, I think the VCE numbers, Gary felt very good. And I think both VCE and FlexPod are growing and also the billion dollar plus space is over 50% a year.

Frank Calderoni

I mean, VCE surpassed the billion annualized in the run rate. We’ve more than 2,000 people with thousands customers, 2,000 Vblocks up there and this did not slow them down at all.

John Chambers

And I guess, I will draw the parallel, government is nothing more than a public sector of enterprise and you saw 13% growth in government around the world. Digitization of countries has taken off and I cannot tell you what it means, when A. Merkel, the leader in Germany says about in Industry 4.0, she is going to digitize her country. And what we could do together with government and with Deutsche Telekom in her cities and rebuild all kinds of it high, in terms of direction. Same thing with commercial. Commercial was solid at seven. It doesn't quite go up and down as much. I’m sorry, I missed some? I will come a little bit closer.

I’m sorry. Frank was waving at me in a unique way and I wasn’t sure in terms of the direction. So that’s an answer that I feel really going on in enterprise. We are going to lead and breakaway from most every player in the enterprise and that applies across all products, including with our Applications Centric Infrastructure enterprise, which is going great guns. Nice way, I don’t miss transitions like this. If I were concerned, I would tell you, we always want to watch the numbers stuff.

Melissa Selcher

Thanks Ehud. Operator, next question?

Operator

And your next question comes from Ben Reitzes with Barclays Capital.

Ben Reitzes - Barclays Capital

Yeah. Thanks a lot. John, could you talk a little bit more there about service provider? When do you -- what you need to see to have it turn? I thought that was interesting that you talked about neutrality, which is obviously a hot button issue right now and obviously the spending. But I think we’re all trying to figure out, when it could possibly turn. It sounds like, there are several factors and your leadership on this issue, I think would be very helpful to us. Thanks.

John Chambers

Several questions and thank you for the nice comment. On our service provider business, first let's assume for now that it won't change in the couple quarters. We, however, with our new structure begin to build different relationships at every single major service provider. Rob, you’ve probably been the 30 of them in the last two months, at the CEO level, the CTO level, CMO level operations et cetera. And our relationship is changing with them and our ability to really bring a portfolio that addresses their top priorities in terms of what they are doing to mobility, what they’re doing on video, what they're doing with new services.

In a market that their traditional transport is commoditizing is pretty good. However, I don't want to ignore one issue, they are struggling big time in certain geographies with how to make money given the cost that are going flat to up, and their revenues that are coming back through. And so you are going to see certain service providers like AT&T said it very publicly. And obviously I’m very close to Randall and John and Ralph there. We know that their CapEx is going to be down by fair amount this next year regardless.

However, it will be down dramatically more, if we don't get our act together on this title to issues. There's a way to accomplish the goals of both sides. I thought Chairman Wheelers’ original approach to this was right on and right compromise in terms of direction. And I think, it's very important that we send a message because you are going to see these service providers flow if not pause completely on broadband buildout, because if they can’t make money on broad brand buildout, they aren’t going to build it out. It’s just simple as that. And we included that was the wild card factors that, Simona, you asked me about indirectly.

We started seeing service providers spending slow a lot less quarter among the three big guys that might be most affected here. And so I think getting their act together there is key. We do plan to be very aggressive on this and trying to educate people on all sides about why this is not right for our country.

I find it just last comment being very interesting that Europe looks at the U.S. that we’ve got our act together. We head the right amount of competition that allowed companies to make profits, and the right amount of government regulation that allowed them to build out broadband.

So they look at us like we’ve got our act together and here we are thinking about changing it. So I think it’s very important that the whole industry is active here. I think, it’s going to have a negative impact for all of us that are connected to those large service providers in the U.S. here and the just last quarter and maybe one or two more quarters. And that’s pretty much reflected in our approach, hope I'm wrong, but it feels like that’s going to be very tight.

Melissa Selcher

Thanks, John. Operator next question.

Operator

And your next question comes from Mark Sue with RBC Capital Markets.

John Chambers

Hey Mark.

Mark Sue - RBC Capital Markets

Thank you. Good afternoon. At a high level, the patterns that we’re seeing today is somewhat similarly. You have some regions positive, some regions negative and then we are seeing a subsequent reversion to the mean. Are their considerations to really think about -- can do things very differently, make big changes. So that all the effort that Cisco is making can lead to a corresponding outperformance, in terms of economic value added and also equity outperformance for Cisco. In terms, of looking at unlocking value, are there discussions going on or we had a point where Cisco will consider new inputs to change and formulate a better outcome.

John Chambers

Well, Mark, a couple of thoughts. You’ve asked your question that we could probably talk about for a half an hour but let me here it very high. We are winning almost all of our major market transitions moves. We’ve been on our architectures, we’re winning on convergence in the data center of storage and network and processing capability. We’re winning big-time on application-centric infrastructure, and pulling away from the start-up competitors that being very bold, I would say, we are not only pulling away from, I think, while they have news left on the table, I think, it’s game over, I think we have got them.

There is no doubt about where we are leading with Internet of Everything. Our products are very uniquely tied together. That’s why you have seen our gross margins be so strong. We moved to selling solutions and software and cloud.

We have redone and transformed our whole company to move resources and freeing up by keeping headcount flat into new areas. We have moved with InterCloud with tremendous efficiency. We realigned our organization.

So we transformed our company at a time that others have not transformed at all and are just beginning to get started, Mark, with some of the things that you are outlining, which I think is going to get into real trouble.

So I love our position in the market. Our position with customer, Gary, you and I were out there all the time. It has never been stronger. And Mark, we are winning with great gross margins and where there are growth opportunities, we are getting share of it plus a lot, gaining market share in many of the areas. So fair criticism perhaps three years ago probably not a fair criticism today.

Melissa Selcher

Okay. Thanks, Mark. Operator, next question.

Operator

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

James Fawcett - Morgan Stanley

Thank you very much. I wanted to go back to the question that was asked earlier on margins? Just wondering how we should think about opportunity to improve profitability. It seems like we are on the backside of a multiyear revamping of the internal organizational structure like you just said, John? And I am wondering if there is an opportunity to see some margin expansion as year-over-year growth persist or maybe to ask another way, what kind of topline growth do you think we would need achieve in order to show some margins expansion improved profitability as we get to the latter stages of the reorganization we have been under -- that’s been underway for last three years?

John Chambers

Yeah. So you are repeating first, I have seen that, I commented on and then we are in agreement the way you are leaving us. You look at the last three plus years to grow revenues by $4 billion and to grow operating expenses by $61 million. Our peers when we look at them, they were at $0.30, $0.50, $0.70, $1 per dollar revenue gain. We did it at 1%. I have to give us very high marks on that over the last three years.

To the second part of your question, Gary’s got the ball for me on that. Its about, how do we drive productivity and we are going to use, one, we can measure productivity per employee, which is just a easiest one to do, I know, its not anywhere near as sophisticated as, many of us would use different measurement that add up to that.

But how we drive productivity of our company on that and to your point, there times either within segments of our business or times when there are market segments where we will improve productivity dramatically, and routing and switching would be good example. But even though we are breaking away new products, we are moving resources into other areas at the same time. Gary, your thoughts on that?

Gary Moore

Yeah. I mean, there are several things that we have done. I mean, John spoke of the services revenue growth over the last three years and the fact that we are doing that with automation and analytics, and delivering higher value at a lower costs, I think, plays into that and there is a lot more that we can do there as we continue to buildout the things that we have been talking about, about cloud managed services, the security offering, the consulting, those kinds of things from services, as well as other things that, Rob, and the engineering team are doing with [broadcast] [ph] relative to the integrated portfolio.

So from a margin point of view, we still have, we maybe on the backside of this. But as we’ve said, this is the game that it doesn’t have nine innings to it. We are going to continually turn the dials that we need to turn and we have all of those levers available to us to coincide with the growth, we are well-positioned.

If things do uptick and we have moved a lot to Share Support, so we are at a really good position to expand margins, quite honestly in my opinion if the growth takes off, because of what we have build on the infrastructure that is global and scalable.

And you will see us, probably, I think, given the market growth numbers, fairly, small numbers, be more conservative about adding the headcount once we got the growth, as opposed to betting little bit on the company as you move forward especially in this market.

Melissa Selcher

Okay. Thanks, James. Operator, next question.

Operator

And your next question comes from Alex Henderson with Needham.

John Chambers

Hi, Alex.

Alex Henderson - Needham

Hi, guys. How are doing?

John Chambers

Good. So, I was hoping you could give us a little bit more granularity on the service provider segment. The piece that is confounding the analysis to some extend is the set-top box business continuing to fall off and its falling off so many quarters in a row, it’s kind of lost track of how big it is? Can you talk about what the service provider business would be doing ex the set-top box on an apples-to-apples basis, because that piece is obviously got a different trajectory?

John Chambers

Yeah. I have got it. My team will verify on the numbers. The business answer just the way you worded, global service providers were down 10%. If you take a set-top box out of that, it would have been down 6% in terms of the approach.

And it did vary globally, global service provider Europe group by 13% this last quarter and service provider in relationships with the companies like Deutsche Telekom, et cetera going extremely well in terms of where we go from that side. And you are seeing us build very strong relationship in new emerging markets with players like Reliance and Rob, you have got a list of 30 of our InterCloud type of partners in terms of the direction.

And again, understand, I am not aware the set-top box is, I am aware to winning the battle in the cloud. And so we clearly use set-top boxes, clearly it’s a stepping stone to get into the cloud and direction. And right now we have a pretty good portfolio and how this ties together. But it’s all about winning software in the cloud. And you will see us evolve our company that way in terms of products that don’t add much margin overtime.

Melissa Selcher

Thanks, Alex. Operator, next question.

Operator

And your next question comes from Ittai Kidron with Oppenheimer.

Ittai Kidron - Oppenheimer

Thanks. And Frank, the best wishes to you and thanks for the many years of good -- very good service and good luck to Kelly. I wanted to go back to the point of gross margin, John, if possible?

John Chambers

Sure.

Ittai Kidron - Oppenheimer

And I have heard all the explanations around it. But I have to go back literally two, three years to find a point in time where you had a product gross margin this high? And then, I looked at your guidance over the past few quarters and years, and you have beaten gross margin 10 out of the last 13, you never miss in the last 13 quarters? And I am kind of wondering, if we have gotten to a point in time where you feel that the, you have a much better handle on the product cycles, you have a much better handle on the competitive front, what is the possibility that you actually do start raising that gross margin range outlook going forward? Is that something completely unreasonable to assume?

John Chambers

Yeah. It’s a good question. We debated that at the operating committee, Gary, just a couple of weeks ago. And so to answer your question on part, we are -- all over gross margins.

Gary leads the project with Frank and now Gary will lead with Kelly, every aspect of gross margins from, in the product cycle improvement to designing products to your point, let’s not design a switch that comes in a 50% gross margins and we get at the 70% over three years.

That was very painful and we did that across our line the last time. And with our new switching product they came in at very high gross margins and I said earlier are actually improving as volume picks up in terms of direction.

I think the major issue quarter in and quarter out is more mix at the present time. We are going to go into next quarter, where UCS will be up and hopefully up dramatically and seasonally strong period for us in UCS, as well as otherwise. And I think there are certain transactions that we want to go after aggressively in an emerging markets are not which tend to swing it up and down.

But are we focused on this, yes, and are we focused in each category, even thought the real play is for architectures, about how to improve the category and gross margins, the answer would be, yes.

And then, final, the real issue on gross margins, if you can provide a solutions, it is three to five times the value to our customer providing products. And so when we tie together these architectures Mark at dramatically lower, dramatically lower operating expenses to get the solution to go to outcomes, that’s what customers pay you huge premium for, that’s where you are making a money, by Mark, I meant, Mark, referring back to his comment earlier.

Why you don’t change the structure when everybody else has left this wide open for us and we are breaking away. The last thing you do would be change that now that would result in opposite.

So I think there are areas that we can improve on. And as we move more into cloud, as we move more into software, we should move into collaboration. We’re looking at the margins and you’ll see us where we can’t get good margins, will walk them at the business. And we clearly are doing that with some service providers today.

If we can get a good margin deal, it’s important to us, we will walk and that’s advantage of, I think having the discipline this leadership team has. Mel, that’s probably a good way to summarize. If I would have to look at it, I’d say in the comments we started off the quarter review with, I’d end with. I think in the tough environment, we are managing very well. On the Enterprise, Commercial and Public sector, we are lighting up the world and I think we’re doing very well there.

The areas we make big bets on that some people challenges with its architectures or convergence or Application Centric Infrastructure or embracing SDN and bringing it to light with programmability and leading Internet of everything is finally taken off. You have an inflection point on that. We had the courage to change organization and make transitions that other companies struggle with and by the way, we're just now starting.

We have been up for 3.5 years. I love our position. And I think we’re going to win. So I want to thank you all for your confidence in Cisco. And thank you for the time.

Mel, let me turn it back to you.

Melissa Selcher

Great. Thanks John. Cisco’s next quarterly call which will reflect our FY ‘15 second quarter results will be on Wednesday, February 11, 2015 at 1:30 p.m. Pacific, 4:30 p.m. Eastern. Again I'd like to remind you that in light of Regulation FDs, 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

Thank you for participating on today's conference call. If you would like to listen to the call in its entirety, you may call 800-835-3804. For participants dialing from outside the U.S., please dial 402-280-1654. This concludes today’s conference. You may disconnect at this time.

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