Good afternoon, everyone. I'm Samik Chatterjee. I cover hardware and networking companies at J.P. Morgan. For the next fireside chat, we have the pleasure of hosting Cisco, and I have with me Scott Herren, Chief Financial Officer. Scott, thanks for taking the time to be at the conference. Thank you to Sami as well from Investor Relations. Thank you. Scott, I'll start you off with a few questions, primarily from the earnings report that you had-
Sure.
Last week. You reported last week with an update on stable demand trends, and we are asking all of our companies to really comment about how they think about demand trends 12 months out.
Sure.
Just offer your insights in terms of... I know it's a difficult question in itself to forecast demand 12 months out, but how do you think about where we would be in 12 months in relation to demand, as well as the magnitude of the change from where we stand today?
Yeah. First of all, Samik, thanks for having us. It's always, always a pleasure to get a chance to spend time with you and, and with the, the group in the room. Yeah, we just had our earnings call last week, and as a part of that, one of the things that we announced was total product order growth, which is a leading indicator, obviously, of revenue growth. Total product order growth was plus 4%. That included Splunk, 'cause we had about six weeks of Splunk, right? That, that transaction closed March eighteenth for us, so we had about half a quarter of Splunk. If you net that out, product order growth on a more apples-to-apples basis was flat year-on-year.
And that's an improving trend from where we've been, 'cause remember, You know, we've had this disruption that hit the supply chain, and we had three consecutive quarters of 30%+ order growth, while lead times extended and people had to buy ahead. And then as we solved those, the kind of supply chain, the individual constraints, we actually solved it really quickly and got a lot of products shipped out in the third quarter a year ago. So our last week earnings call was our fiscal third quarter. So tough compare to a year ago, where we shipped a lot of backlog out as we worked through those constraints. This current quarter, we also shipped a lot of excess backlog out a year ago, so tough compare. Q1 will be the last of the tough compares.
But in the wake of that, once we got all that product shipped out into the field, what we saw is now that kind of we had this bottleneck at our level, and we got it shipped out pretty quickly, and now that bottleneck just moved to the customer level. And their ability to implement everything that we had shipped to them, it. By the way, they had ordered it all, but their ability to implement it as quickly as we would like them to was limited. And we said on our Q1 call, as we took down our expectations for the year, we thought it would take a couple quarters. And then in Q2, it became clear to us it was actually gonna be more like the end of this quarter. So this is our fiscal fourth quarter right now.
We tracked this pretty carefully, as you can imagine, given the impact it's had on demand. We tracked it pretty carefully, and it looks like the overwhelming majority of that product inventory that got shipped out as we cleared the backlog will all be implemented by the end of this fiscal quarter. So what that'll mean for demand, it's obviously been a headwind. It's like: "Hey, I'm busy. I've got to implement what you've already shipped me before I start the next project." Starting the next project means now I've got to go ahead and place the orders for that, and our lead times have been back to normal for a couple of quarters. Backlog has been back to normal really since early in our second fiscal quarter of this year.
So I think most of the perturbances from the supply chain are through the system, but now the compare points still reflect some of those changes. Feel good about... I mean, it's hard to say you feel good about flat demand, but given the trend, what we're seeing is, as we were able to track product that was shipped out and, you know, we know serial number X left the loading dock on this date, when did it actually get set up and configured? And we know that, especially within Meraki, because there's a cloud-based control plane for Meraki. We see those times coming back down to where they had been pre-pandemic and pre some of the supply chain issues. So feeling good about that.
Where we've seen it recover, we're seeing order growth return at the same time, and that's part of what you saw during the quarter with enterprise still being modestly down, public sector growth, growth in service provider and cloud, growth in our security portfolio, and growth in collaboration. We're really seeing a positive trend through that.
Okay. Yeah. Let's dive into campus switching and how orders also grew for data center switching and campus switching together in the quarter. Just give us more color in terms of what you're seeing on those two aspects, given that I think both were probably facing the same headwinds from the supply chain of until the last quarter or the prior quarter, I guess. Just give us more color, what you're seeing both in relation to campus switching and data center, and the drivers there. What is the customer really sort of now starting to reengage in?
Sure. Pretty encouraging couple of data points, given where we've been over the last, you know, 6 or 7 quarters. To see those both return to positive growth, particularly in campus switching, I think, is the one that surprised a lot of people. I think data center networking growing, there's, we've all seen. You know, one of the big drivers of that, of course, are the big hyperscalers, and so I think that was probably less surprising than campus switching. And what's happening in campus switching, there's a lot of, a lot of excess commercial real estate. I don't, I feel bad for anyone in the room that's in that space, but there is. But what is happening, and we're doing this at Cisco, too, is companies are now saying: "You know what? It's time to get back to the office. Maybe not 5 days a week.
Maybe I don't need the space that I needed previously, but for cultural reasons, for, frankly, the training and the growth of the early-in-career people... When we survey our own teams and say, you know, "What's your propensity to wanna come back to the office?
... The people that are most interested in coming back to the office are people like me with a lot of gray hair and the people that are early in their career. You're smiling, but I know it's true. And people that are early in their career, because it not only provides a little bit of a social structure for them, but it provides a bit of an apprenticeship aspect. You know, I didn't learn to do what I do in school. I learned it on the job, and I learned it from role models that I got to sit next to and ask questions. So more and more companies are saying: "You know what?... two days a week, three days a week, we want you in the office. And as they do that, it's, you know, work in the office.
Everyone's not gonna be there on any given day, so the network intensity of the people who are there is going up. And so it does seem a little bit odd that with commercial real estate having, you know, high vacancy rates, that campus switching would grow, but it's really an outgrowth of what the office needs to look like in this world, where more and more companies are saying it's time for people to get back to the office.
Okay. I'll come back to that in a bit, just to parse out wireline, wired versus wireless. But since you mentioned campus switching, I think, and the recovery there, one obvious place that investors will go is: how much of this is a benefit from a large M&A with some of your competitors versus, actual market recovery?
Yeah. I think, so we clearly have seen some uptick in wireless. We gave a couple of stats on the previous call. We continue to see large orders in that space grow in the Wi-Fi, and particularly in the wireless access point space. I think some of that is people looking at that acquisition and trying to understand, you know, the... I think what they're gonna have to do, clearly, is merge the control plane for those two. I can tell you because we've been doing this within our Catalyst and Meraki lines, technically, that's super challenging to do. So it's gonna take some time, and as it does, you know, there's this, which architecture is gonna win out?
and so I do think it's created some opportunity for us in the wireless space. It's certainly something that we've gone after with our sales team and, you know, going into those accounts that we know were heavy with either of those two competitors who we've known for a long time. We've competed against them pretty effectively for a long time. Seeing them come together, I think, has just created some more opportunity for us.
Okay, you didn't talk about wireless, so I'll skip that. Now, when we talk to distributors, resellers, a term that often comes up is every enterprise has a lot of technical debt that they haven't really addressed, and some of the headwinds we've seen in the last couple of sort of quarters or more have actually increased that. When you think about the recovery here, how are you thinking in terms of the drivers for customers to come out and say: "Okay, this is what I need to address," and which product areas in your portfolio does that help? And maybe go beyond sort of the core, the core networking to also help us address security and collaboration and observability within that.
Yeah, I think, you know, technical debt builds up in a lot of places. You probably don't have any at J.P. Morgan, but, you know, other companies do that have built it up, and I think where you feel it is partly in your infrastructure, whether that's, you know, compute infrastructure, network infrastructure, just core systems infrastructure, you feel it there. You feel it in applications. A lot of older applications that are not gonna be retired, and they're gonna have to continue to be run, and that drives demand for things like observability and application performance monitoring, right? We're not gonna unplug this app. It doesn't make sense to rewrite it. We're gonna continue to run it. I need to run it efficiently.
You see it build up in data structures, and I think that's one of the benefits that we ultimately... That'll be a tailwind for us ultimately with Splunk, is it—companies that have been around long enough to have technical debt probably didn't sit down 15 years ago and say: "Here's a pristine data model that we're gonna put in across the company, and here's the specific owners and the governance around that." The data models just kind of grew as the company grew, and so there's gonna be some rationalization that needs to be done there. For us, what it means is there's an opportunity, of course, in core networking infrastructure and campus switching, as we've talked about. There clearly will continue to be opportunities in security. I don't think that's necessarily based on technical debt within security.
I think it's based on the world we live in and some of the geopolitical stress that's out there that seems to be getting worse, not better, at this point. That's gonna drive, continue to drive security. There is some cycles within the security business, firewalls that need to be refreshed and things like that, but I don't view that as normal refresh as opposed to technical debt. Within collaboration, there's no question that as people come back to the office, the way the office needs to be configured to work effectively in a hybrid world, which I think we're all gonna be in for quite some time, there's no question that you need better devices. You've got to improve what that experience is like.
If you want people to take the time to drive to the office to work, you need to make the office experience one that... One of the things we talk about is having a return on commute. Okay, if I'm gonna spend the time commuting, what's the return I get for that commute? And so I think there's clearly an opportunity on the device side within collaboration as well.
Okay, let's switch gears here a bit, and we are asking, obviously, as you can imagine, a lot of questions to our companies are about AI. But before we delve into the product set, what we also were curious to hear from all of our companies, including yourself, is: How do you adopt AI internally? What can that drive in terms of improvement, and where can it be a bit more tangible for investors to also sort of think of those improvements?
What other companies should everybody invest in around AI?
Or how sustainable is this?
No, I think it's a great question, and there's a lot of use cases, obviously, just within the finance organization that we're looking at. Everything from account reconciliations, which are pretty basic, to the way you prepare and kinda self-service data, right? If you think of what happens inside the finance organization of big companies, it's a lot of, "Hey, can you get me X?" All right, yeah, I gotta go pull data from here and here and here and here, and put it all together, and then try to massage it into something that makes sense. That's gonna lend itself very clearly to AI beyond RPA, which has already helped in that space.
But then if you zoom out from finance, there's huge opportunities for us to be more efficient in the, you know, 1-800 Cisco, in our call center space, both on the inbound calls that we take. You know, one of the big advantages, I think, of these large language models that have come out, I know you've played with it, I have, too, is there's a dialogue capability to it. It's not submit, you know, kind of a query and get an answer. There's a dialogue, and it's back and forth, and I think that lends itself, as you know very well, to customer support, customer service.
We've just moved Liz Centoni, who was our Chief Strategy Officer, just moved into the role running our customer experience team, which includes customer success and our, you know, our customer support teams. No one's better positioned to drive AI through that space than Liz is, kind of, given her background. She has engineering background. So I think it's a-- there's real opportunity for us there. And, of course, there's the opportunity to make sales and marketing much more efficient. I think everyone sees that as well.
Okay. Okay. Let's move to then the product side, and this is a big change for Cisco, particularly for the investment community, where, Cisco's positioning for the upcoming cycle, relative to some of the prior generations, is materially different, materially improved. Talk to us about the impact you think AI will have on Cisco's product demand. How do you think about growth beyond the $1 billion of AI orders that you've talked about for fiscal 2025?
Yeah. The billion is kind of the first step, right? And just to be clear about what that number is, 'cause you've asked me about it a couple times, everyone has asked me about that. That is within AI, it's back end, not front end. We already have-
Yeah
... a significant business in the front-end networks. It's back end, it's Ethernet, and optics in the back end, driven by largely the large hyperscalers. There's a couple of tier two in there, almost no enterprise in there today, and we should come back and talk about the opportunity in enterprise as well. So that's what drives it. The way that works is they don't just buy off the price list, right? These all of these hyperscalers have slightly different architectures, and what they do is they come and say, "This is what I need." So they take their own network topology or their own network architecture and say, "Here's three or four different places that I need networking gear in here. I need it at the spine. I need it at the top of rack," as example.
This is exactly what it needs to look like in terms of specifications. We go off and build that. Sometimes we have to build the chipset that goes in it, but we build that, ship it to them. They go through a full certification process. Once that happens, you hear us talk about design wins. Once that happens, they say, "You are designed in on this use case." It doesn't mean we're the only ones designed in on this use case, but you're designed in on that use case. And then, as they look to scale up whatever, you know...
However, data centers they're looking to scale up, they look at those particular use cases for networking gear, as an example, and say, "Who's qualified at each of these?" And then what they wanna do is have more than one viable supplier at each place, right? No one wants to have—I, I don't wanna have it at Cisco, but particularly the hyperscalers, because of the, the magnitude of what they buy, they don't wanna have single vendor dependency at any level, across the board. And so if you're designed in at that level, then you get an allocation of, of the demand that they're looking for at that space. What drives the $1 billion then is clear line of sight to use cases where we've got design wins, and with conversations with the hyperscalers, knowing what that's gonna look like in for fiscal 2025.
So our fiscal 2024 ends at the end of July. Fiscal 2025 starts at the beginning of August. We see that $1 billion in orders coming in during fiscal 2025, more toward the second half than the first half, right? As they're working their way through, and of course, there's a lot of things that go into that. It's not just the networking gear. They need GPUs, they need electricity, they need facilities, et cetera. So the, you know, the delivery is what will drive the revenue side of that, but those orders we see coming in in fiscal 2025, largely. I think the enterprise opportunity then for AI is on top of that. So that's the- that's our AI opportunity to sell into the AI infrastructure build-out, which is a significant opportunity. It's well beyond the $1 billion that we've talked about.
By the way, our pipeline is significantly bigger than that. That's not total pipeline. We talked about pipeline being about 3x that number. $1 billion is where we have clear line of sight to those orders. The enterprise opportunity is much more nascent at this point, and I guess we'll come back and touch on that.
Yeah. Maybe before we get to the enterprise, so you talked about the pipeline being 3x. How much of that pipeline is hyperscaler versus the tier two cloud?
It's the majority.
Yeah
... the large majority. I don't want to give you a percentage on that, but it's, it is the large majority of that, of that total pipeline-
Got it
... not just-
You've talked about wins with three out of four hyperscalers, but the way you're building up to that visibility into the $1 billion of orders also suggests you have a fair allocation or a fair view into what allocation or share you're being sort of promised. In terms of visibility into that $1 billion of orders, how much more sort of new customer wins do you need, versus you already have a line of sight that this is what's ramping, we have the share, we're going to get to it easily?
Yeah, well, getting to it easily, you know, it, it's $1 billion at the end of the day, but it's clearly, it's more the former, it's more we understand the demand, we understand what our allocation's gonna look like, we understand what they need to buy, when they need to buy it. We understand our ability to deliver at those levels. So it, it, it's that. If new customers, that's where you talk about the $3 billion pipeline, as opposed to the $1 billion that we have line of sight to.
Yeah. Before we go any further, what's changed in that whole sort of landscape? Because it's not a surprise to anyone that Arista did have major share gains in this area in the prior generation. What if you had to identify, is this saying, "Okay, we now, cloud customers are more aware that they need to have two sources
-versus one? Or is this just the product portfolio that is making sure that you have your fair share? Just walk, just walk us through that.
I'd say it's all the above. So if you go back to the original build-out of the big compute and storage infrastructure, so 10, 15 years ago, as that was being built out, and this was under our previous CEO, but we, you know, the Cisco kind of had the mindset of, "No one knows more about networking than we do, so buy what's on the truck" kind of mindset. And the hyperscalers kind of said, "That's not the way this is gonna work," right? "We've got our own designs. We've got our own architecture. We're gonna build our own control layer on top of it. This is specifically what we need from you." Scroll forward, so we missed that initial wave of build-out. Scroll forward, Chuck becomes CEO. We acquired a company called Leaba.
We started the Silicon One strategy of building our own chipsets inside there, and really went back to the hyperscalers and said: Look, we'll meet you where you are. So if what you wanna buy from us is the chipset, and you want to build all the rest of the switch infrastructure around it, we'll sell you just the chipset. If you want to buy a white box, we'll sell you the white box. If you want to buy full systems... So you tell us how you want to buy, and that's what led to the pretty rapid growth that we had a little more than a year ago within our service provider business, right? If you remember, we kept giving you those statistics on the calls.
We actually ended up, we were late to the game, but ended up making pretty good strides in that space. Now, the AI infrastructure build-out is beginning. We already have the relationships. We already have a very effective chipset that's designed for low-power consumption. We have the we'll-meet-you-where-you-are set of business models, so we are far better positioned to catch the initial wave, and then obviously, the subsequent waves of the build-out of the AI infrastructure than we were when the initial compute infrastructure got built out.
Got it. So, okay, let's move over to talking about the enterprise AI opportunity. And as much as I want to sort of give you in that open-ended question of, Tell me, how do you think about enterprise AI in itself?
Also, what's interesting to me is NVIDIA, you announced a partnership with NVIDIA.
To me, it read like NVIDIA wants your expertise in accessing the enterprise market. So help me think if I'm interpreting this correctly. Basically, your expertise in managing the enterprise networks is what's being valued, and the partnership, that's what you bring to the partnership as well.
Yeah, that's right. It's their GPUs at the core, but it's built in, you know, a chassis. And by the way, we're working through the architecture, so watch this space. We have our Cisco Live, our big end customer event, coming up the first week of June in Las Vegas, so kind of watch this space. But the architecture that we're working on, of course, has their GPUs at the middle, but they're built onto servers that sit in our chassis with the Intersight, which is our inside the rack control system, and our top-of-rack Ethernet switches on top of it, so kind of preconfigured. If you're an enterprise, and you're looking for inferencing or low-level training, this is, you know, what you need, AI in a box, for you. NVIDIA came to us for a couple of reasons, on that.
One is what you just said, our expertise in managing enterprise networks and the significant footprint we have on the front end of all those. But also because of the reach that we have, the enterprise reach that we have from a sales standpoint made it attractive to them. So, that's. I think that's a today nascent, but a pretty substantial opportunity over time, as the sensitivity of the data that companies use is gonna drive them to, "I can do some training up in the cloud, but if I ship my data up and train my model, others can leverage that same data and train their model on my data. I don't want that." It's not that, it's not that it exposes your data as much as it allows other people to train on your data.
Data becomes a source of competitive advantage over time. So I think you'll see more and more, you'll see, particularly if there's sensitive data, you'll see those being run inside the enterprise, potentially even at the edge, within the enterprise.
How do you think about the AI demand on enterprise from the enterprise segment carrying over to your campus products as well and, you know, outside the data center?
Yeah. Well, I think there's—I think it's pretty clear that in a world where you're using a lot of AI to drive your business in whatever way, whether that's to drive your sales and marketing team or to drive your customer support desk or, you know, your finance team, however you're using that internally, there's a lot of data that has to move. There's a lot of network intensity involved in leveraging AI to drive your business. So I don't think there's any question that network intensity accretes to a stronger growth segment for us in campus and in enterprise.
Yeah. Let me take a pause here and see if there's a question. Just wait for the mic.
Just need to get a mic. But while they're walking the mic up, the opportunity that we haven't talked about yet is, you know, internally, we continue. We've had AI capabilities built into our products for quite some time. So there's to sell the infrastructure, but there's also to make our products better and more competitive by building AI capabilities into our products, and in particular, in security. I think it's an obvious use case to apply. Much like it is in customer support, it's obvious to apply that in security. We've been doing that for some time, but we've doubled down on that as you look ahead, and now with the advent of easily usable large language models, it makes it even easier to go off and do that.
That's a space where having Splunk on board and the data that Splunk brings will be a significant advantage for us.
... Hi, I have a question on the data center switching, especially the back end for AI networking. You guys have lost a ton of share to Arista. I mean, you just look at the market share now, Arista is now number one, and in particular, they dominate 200 and 400 gig, and probably gonna be 800 gig as well. I was at Cisco when that acquisition of Leaba happened, and Leaba was supposed to be the one that puts the stop to that. But you guys just recently changed leadership from Eyal to Martin.
Martin's fantastic because-
Of his Broadcom days. When do we start to see that turnaround, and where does your fully scheduled fabric, which is what Rakesh have been pushing for a long time, play a role? So I guess my question is, how does Leaba stop the share gains from Arista, and where does the fully scheduled fabric play a role? Because I think your big deployments with Meta, with the Wedge 400C, but I haven't heard anything about fully scheduled fabric. So-
Still two questions. Thanks.
Yeah. So we've made great progress. So first of all, you obviously know a lot about that space. I assume you were in that semiconductor space inside Cisco when you were there. We've made great progress, as you know, with Silicon One, and it now underpins not just data center networking. So you remember, the vision isn't just to support the hyperscalers with it, it's, you know, it works its way across the Catalyst line, across the Meraki line, through the wireless devices. So we've made good progress on that front. You know, honestly, I think Arista has done a nice job with the two big customers that drive almost the majority that drive 40%+ of their revenues out of those two customers.
Yeah, I can't use their names, but we might be in both of them. It's a possibility. Yeah, exactly. So I think there's a great opportunity for us, you know, to as we continue to build out that line, to actually drive more and more of that allocation away from, I shouldn't say away from, to us. More and more of that allocation, even in those accounts, I think will come to us. But the big win for Silicon One is going beyond just using it inside hyperscalers, but using it across the rest of the product line. And it's very simple. This will. This, I think, will appeal to you.
More and more of the real value, if you say, you know, "Hey, here's a switch or here's a router," what's driving the value of that? It's that core chipset, right? And owning that core chipset allows us to own that value-add, instead of having to buy it from a third party and pay them a profit on top of it, and then encapsulate it, the added value of the encapsulation gets smaller and smaller through time. So I think it's a longer term play for us to drive that kind of value. Yeah. Well, I think we're going to drive more and more allocation across the board within the hyperscalers. Go ahead.
Thank you. Just to clarify one thing you said before, in terms of the backlog, they went from you after, you know, the glut of...
Yeah. Right. We had a bunch.
Yeah. Went into the, the carriers, now sits there. Do you say probably two quarters, and from now, you think that will be a normalization in terms of their throughput, putting it, green-lighting those devices, and then the order patterns matching more demand?
Yeah. So it wasn't just the carriers, by the way. It was across the board. It was enterprise, actually, probably more so in enterprise than it was in telco, where they had placed orders because our lead times went from, you know, 2-4 weeks to, you know, 40 and 50 weeks. So anything you needed for 40 weeks all got pulled back. And you remember, we had those three quarters of 30%+ product order growth while lead times were extending, and then we had to deliver it all, and our customers were all over us, like: "I need this. You've got to get me this gear. You got..." So we did a lot of work, product redesign work, looked for alternatives where we could work around particular supply constraints, and then we're able to clear that.
The vast majority of that backlog cleared within three quarters: Q3 of last year, Q4 of last year, and Q1 of this year. A lot of that shipped out the door. And to your point now, so the big bottleneck that we had at our level became their bottleneck in terms of implementing, and that became a headwind to demand. What we said on the last call, on the call that we just had. Actually, if you go back to our second quarter call, we said we think it takes two quarters, so Q3, the one we just closed, and Q4, to work through most of that inventory being consumed by our customers. We reiterated that message on our call last week.
It looks like by the end of this current fiscal quarter, which ends for us at the end of July, the vast majority of that will be consumed by our customers, and so that'll stop being a headwind.
It sounds like on the carrier side, maybe a longer tail, though, compared to other segments.
We actually talked about this on the most recent call. We actually had some nice green shoots in telco last quarter. I mean, so we talk about our service provider segment, there's three things inside there: There's cable, telco, and then the big hyperscalers are all in there, and there's a very different set of dynamics, frankly, around all three of those, right? But we saw some good green shoots and orders even in telco last quarter. I think it's been no secret, it's been a tough run for the telcos. It wasn't as much about inventory with them as it was about, "Hey, we invested a lot in 5G, and now we've got to find a way to load these networks because there's no competitive advantage.
If everyone's got 5G, you're back in a race to the bottom on pricing." And so I think what they've been working on is, how do I consume all the added capacity that I've got in 5G? Saw some nice green shoots on that last quarter.
Scott, let's get to a couple of questions on the fiscal 25 guide that you shared. Yeah-
Someone wrote a note that said they thought I would do that.
Thank you, and sorry. I mean, it's fair to say your view for revenue growth was optimistic relative to the investor view heading into the print itself, but margins appeared less optimistic in terms of your back target there. So maybe start with the revenue outlook, low to mid-single unit growth. What is embedded in the revenue guide for Splunk?... and the core business separately?
Yeah. Splunk, the last time they announced results publicly was their fourth quarter, which ended at the end of January, and what they said then is their revenue was just north of $4 billion and had grown in the quarter at about a 15% rate, all right? They continued to drive that revenue stream forward. That's $4 billion was their ARR, it wasn't just the fourth quarter number, obviously. So you think about that kind of continuing as we look into fiscal our fiscal 2025. The second is we've got, you know, I just talked about it as I talked about inventory consumption. We've got we had a tough compare in revenue for the quarter we just announced, our third quarter, because of the way we cleared backlog a year ago.
We have that same tough compare in this current quarter. Again, lots of excess backlog shipped out a year ago. Q1 is the last of those three quarters with a lot of excess backlog shipped out. You don't get to do that every year, right? Once we've shipped out the excess backlog, it's out there, and that's a significant number. That was a significant tailwind to our Q1 results. So if you think about the core business versus Splunk, now as you go to fiscal 2025, we see Splunk continuing to grow nicely, as they have been, and in fact, you know, accelerating that growth with access to our channel, with our own sales. We talked about the 5,000 accounts where we have good relationships, and they have no Splunk footprint today.
Like, there's a real opportunity for us to accelerate them through our sales organization, our customer contacts, and our channel, ultimately. So, there's—I think that is the Splunk side of the equation. On the core networking piece, if you net it out, the inventory or the backlog that we shipped out in Q1 of this year, of fiscal 2024, and said, "What's fiscal 2024 without that excess backlog compared to what's implied in the guide I just gave?" You see the core business growing in kind of that low to mid-single digit range. That. All of that is built into... So you've got the upside of Splunk in terms of year-on-year growth rates, but you got the downside, and we had a lot of excess backlog clearage in fiscal 2024. That's what nets to the number on the top line.
In terms of margins, you know, Splunk is accretive to our gross margins already, and we, we saw that in the quarter that we just shipped. Gross margins were well ahead of expectations. There are several one-off kind of benefits inside there, but, you know, they're, they'll be accretive to gross margins from the start, not so at the op margin line, right? And so that's. So there's, you know, their numbers, again, go back to their Q4 and say, "What was their OpEx line?" And, and Gary Steele, who came into Splunk, has done a really nice job kind of taking control of the company and shaping things up. But they're and they're running an OpEx number that's about $600 million per quarter. That's what they announced with their Q4 results.
So if you think of that for 4.5 months of fiscal 2024, but obviously for 12 months of fiscal 2025, that's part of what's built in to the op margin range. I think the second is, and this is one that not a lot of people had visibility to, 'cause we don't talk about it publicly a lot. It was a tough year for Cisco, and all... A big chunk of our employee base, everyone who is not hourly, has some element of variable compensation built into their comp plan for the year. When you have a tough year and don't perform up to the operating plan, the metrics that drive that are largely financial metrics based on our operating plan.
When you have the kind of year that we had, there's big savings in our OpEx for this year, driven by the underperformance of our variable comp plans. You have to reset that when you get to next year. So that's what underpins kind of the high-level guidance that we gave you.
Before we wrap up, last question for you. What should investors expect on the June fourth Investor Day?
I think, come to Las Vegas and see what we have to say. The goal will be to spend a little more time than you can do on an earnings call and talk about our products, the markets that we're serving, the products, what that future looks like for those products, how we come together with Splunk, and what the next wave of that looks like, and then, of course, to give you some of the financial metrics that talk about the combined company.
Great. Thank you.
All right.
Thank you for doing the conference.
Thanks.
Thank you to the audience as well.