Cisco Systems (CSCO) reported fiscal fourth quarter results that beat analyst estimates, but the company's outlook was cautious. In an interview with Yahoo Finance Live, Cisco Systems CEO Chuck Robbins says the the company benefited from a more "diverse book of business" than its rivals and some supply chain challenges starting to ease. On the economy, Robbins says "it's clearly mixed," with some industries, like financial services and transportation, showing strength.

When it comes to AI, Robbins says the company is getting some "early wins with some of this next generation ethernet." Robbins says the company provides the networking equipment that connect the "brains" behind the AI systems. He adds that the company will see some benefit in its 2024 fiscal year, but "we think the real move to this new technology" will be in fiscal 2025. Robbins add that he thinks "the opportunity over the next 5,6,7 years could be three times what the original cloud buildout was."

Video Transcript

BRIAN SOZZI: Cisco 2.0 looks to be unfolding in front of investors. Tech giant beat big on the top and bottom lines as it continues to ramp up and focus on artificial intelligence and also give more money back to shareholders. Joining me right now is Cisco chairman and CEO Chuck Robbins. Chuck, nice to see you.

CHUCK ROBBINS: Nice to see you, Brian. Thanks for having me.

BRIAN SOZZI: So, coming into this quarter, I think there was a lot of pessimism on what you would report. Some company, I would say called Juniper, I think sparked a lot of worry in the marketplace, but I didn't really see that in your results. Sales up-- product sales up 20%, service revenue up 4%. What did the market get wrong?

CHUCK ROBBINS: Well, I think the primary difference between some of our peers is that they have a higher concentration or a higher exposure to the service provider segment, which was weak for us as well. But we have a much more diverse book of business. And so the enterprise and public sector, and commercial all offset it. But look, it was one quarter. Teams did a great job. We were really happy with how they executed. But still a lot of dynamics out there.

BRIAN SOZZI: And the margins in your business up pretty significantly as well. Is that just inflation coming down, and you benefiting from that?

CHUCK ROBBINS: Well, a lot of it is-- a lot of the costs that we incurred with the supply chain challenges have subsided a bit. But it's also just the teams do a great job. Our supply chain team and our engineering teams do a great job on just continuing to find efficiencies in how we build our products.

BRIAN SOZZI: This is a strange time in the economy. And look, I mean, today we have Walmart coming out here saying more people making over 100 grand are shopping it stores. Who would have thought. It's Walmart. What's your read on the economy here? Make sense of it for us.

CHUCK ROBBINS: Well, I'm not sure I can make sense of it for you. But I think it's clearly mixed. I mean, we-- as I said, we saw improvement in our commercial, which is sort of the mid-market down, we saw improvement in our enterprise business, and public sector was pretty steady, but service provider was very weak.

And I think there's industries that are doing OK. We saw financial services, transportation was strong. But I think it's just a little mixed and just a lot of dynamics that we're watching on a very regular basis.

BRIAN SOZZI: What are you most concerned about as we go into the back half of the year from an economic standpoint?

CHUCK ROBBINS: Well, first of all, I think that technology has become so core to how organizations run. This is not an optional thing, it's not a cost center, it's not some underlying ERP system anymore, it's deep in the heart of the strategy of these organizations. So there's not as much likelihood that you just completely stop spending on technology. Most of our customers will say that's the last thing we'll stop spending on right now.

They're being more thoughtful about which projects are being funded, which ones are the most important, and which ones that they're going to focus on. But as we look to the second half of the year, I think obviously getting inflation under control will be really important, geopolitical dynamics around the world are very important. And hopefully, we will see inflation continue to subside over the next few months.

BRIAN SOZZI: What's your read on the China economy? I think markets are really under pressure right now because of a China economic slowdown. You have exposure there, are you seeing that?

CHUCK ROBBINS: Well, we are very lightly exposed to China. It's less than 2% of our business. So it's not a significant part. But clearly, it seems to not be coming back online as fast as everyone expected them to. And I think that they'll continue to work the policy, they lowered their rates, which was interesting. And I know that the economic growth in China is one of the most important topics for the leadership there. So I expect they'll continue to make whatever moves they need to make.

BRIAN SOZZI: Do you think we'll see, or are you seeing any signs of a contagion? China's slowing down. We're going to get that here in the US.

CHUCK ROBBINS: Not at this point. In fact, we saw improvement sequentially in the US. Again it was one quarter, but we saw improvement.

BRIAN SOZZI: In terms of sequential improvements, you did call it out in the earnings call, where are you seeing customers come back little quicker than you thought?

CHUCK ROBBINS: Well, the enterprise in the United States, our large enterprise customers, particularly financial services, it was our largest enterprise software agreement quarter in the history of the company. So big customers making big commitments. And didn't hear a lot of, well, I think we're just going to push that off a bit.

I mean, when you think about the need to invest in cybersecurity, the need to invest in this whole technology re-architecture for this multi-cloud world we live in, everybody's rebuilding applications and needs observability and insights that we can provide to them. Everybody's trying to solve this hybrid work problem, and everybody's focused now on leveraging technology for sustainability. So I mean, every customer. And so we're just fortunate there are a lot of things that we have a role to play in.

BRIAN SOZZI: When does Cisco start cleaning up on AI?

CHUCK ROBBINS: Well, it's important to understand the actual technology. And these GPUs, which you're the brains in these AI networks, they have to be connected. And what we-- there's a technology that has existed for a while that is currently connecting those. And we build obviously ethernet infrastructure which is what the cloud providers want to move to. And so we're getting some early wins with some of this next-generation ethernet. And-- but we think that FY 24, which we're just starting, we'll see some benefit, but we think the real move to this new technology for connecting these GPUs will be in fiscal '25.

BRIAN SOZZI: Was that-- so you've incurred a $500 million in the most recent quarter from AI-related what chips Silicon One is it called.

CHUCK ROBBINS: We said we've booked-- we've taken $500 million in orders to date. It wasn't all in that quarter. It's actually systems that are connecting these AI processors, basically. So we-- they have to be connected at the end of the day. And so we actually provide the networking equipment underneath. And we think that the opportunity over the next five, six, seven years could be three times what the original Cloud Build out was.

BRIAN SOZZI: Can you make enough of this technology? I think all the stories right now are what you look at in what Nvidia is doing. They're leading in many respects these AI chips, but they can't make enough of them. Can you make enough products to service the demand you're seeing?

CHUCK ROBBINS: Absolutely.

BRIAN SOZZI: All right fair enough. Now, in addition to AI, you're also-- sound a little different in terms of capital commitment. Returning more cash to shareholders, why that shift in tone?

CHUCK ROBBINS: Well, we've been talking to a lot of our shareholders. We talk to them quite regularly, obviously. And it just became apparent that what they really wanted to see was they wanted to see more consistency and a higher level of buybacks, which we have the balance sheet and the cash to do. And they wanted to see operating leverage. They wanted to see earnings per share grow faster than revenue.

And ironically, we've been doing both of those things for the last-- we had leverage in the model growing EPS faster for the last couple of years. And we had increased and gotten very consistent with our buyback, but we had never declared that as a permanent strategy. So really, what we did yesterday is we told them that this is our strategy going forward, and you should expect it from us in the future.

BRIAN SOZZI: Does a commitment like that mean Cisco is out of the big M&A game?

CHUCK ROBBINS: No, we have plenty of-- we have a strong balance sheet. We have a lot of flexibility.

BRIAN SOZZI: Lastly, the Webex business under a little pressure as people, I guess, go back into the office and do their thing. What's your commitment to that business? And then, more broadly, on the return to office, where do you stand? Do you want to see your employees back in the office?

CHUCK ROBBINS: So, first of all, in our collaboration portfolio, the teams have done an amazing job. Most every customer right now is transitioning to cloud-based calling. And so our teams have shifted and are leading with cloud-based calling and collabora-- and the meetings portion of it is part of the suite that they get to do that.

So actually, meetings orders last quarter were up double digits. It was actually quite positive. And the overall portfolio was up significantly. Our cloud contact center, which is also part of that, which is customer experience being delivered from the cloud, was up triple digits. And so we're very committed to that business.

As it relates to hybrid work, what we've told our teams is that we let the team decide how frequently and how valuable is it for you to be in the office together, and then they make that call. But we see a slight increase as employees are starting to want to come back to the office. And our general belief is that we're changing all our offices because we want them to be a magnet and not a mandate, and we want people to want to come back.

BRIAN SOZZI: Do you see your productivity go up as people get back in the office?

CHUCK ROBBINS: We just had a record year. So I think, I mean-- but you got to remember, we were in this mode to some extent before the pandemic. 70 plus percent of our first-line managers have at least one remote employee already. We already had 12% to 14% of our employees that worked from home full-time. Based on the job they were doing was fine to work from home. So this was not a radical new thing for us it's just a little more broad-based than it was before the pandemic.

BRIAN SOZZI: All right. Let's leave it there. I know it's busy post-earnings day for you.

CHUCK ROBBINS: Yes.

BRIAN SOZZI: Cisco chairman and CEO Chuck Robbins. Always nice to see you. Thanks for coming down.

CHUCK ROBBINS: Thanks, Brian.

BRIAN SOZZI: Appreciate it.