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.

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.

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…

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…

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.

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

Thanks.

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.

Thank you, John.

And Kelly, congratulation.

Thank you.

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.

We have to see how it continues, right?

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…

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

Thank you. Our first question comes from Simona Jankowski with 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?

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…

Great. Thanks, Simona.

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

Next question operator.

And your next question comes from Amitabh Passi with 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?

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.

Hey, thanks, Amitabh. Next question operator.

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

Hey, Brian.

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.

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

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.

Gary?

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.

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?

That’s right.

Yeah. Okay.

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

I think our next question comes from Ehud Gelblum with 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.

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.

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.

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.

Thanks Ehud. Operator, next question?

And your next question comes from Ben Reitzes with 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.

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…

Thanks, John. Operator next question.

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

Hey Mark.

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.

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.

Okay. Thanks, Mark. Operator, next question.

And your next question comes from James Fawcett with 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?

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?

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.

Okay. Thanks, James. Operator, next question.

And your next question comes from Alex Henderson with Needham.

Hi, Alex.

Hi, guys. How are doing?

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?

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.

Thanks, Alex. Operator, next question.

And your next question comes from Ittai Kidron with 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?

Sure.

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?

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…

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.