Cisco Systems, Inc., Q4 2011 Earnings Call, Aug 10, 2011 - NasdaqGS:CSCO

NasdaqGS:CSCO

Terry Anderson, Vice President of Corporate Communications and Investor Relations at Cisco Systems, made the following statements during the Q4 2011 Earnings Call:

1. Introduction:

   • Welcome to Cisco Systems' 86th quarterly conference call.
   • Joined by John Chambers (Chairman and CEO), Gary Moore (Executive Vice President and Chief Operating Officer), and Frank Calderoni (Executive Vice President and Chief Financial Officer).

2. Financial Information Availability:

   • Q4 fiscal year 2011 press release is available on the U.S. high tech market wire and on the Cisco website at www.newsroom.cisco.com.
   • There is a corresponding webcast with slides containing financial information covered during the conference call and additional financial metrics and analysis.

3. Webcast Slides and Documents:

   • Click on the Financial Reporting section of the website to access the webcast slides and documents including:
     • Downloadable Q4 and full fiscal year 2011 financial statements.
     • Revenue by product and geography.
     • Income statements.
     • Full GAAP to non-GAAP reconciliation information.
     • Balance sheet and cash flow statements.

4. Replay Availability:

   • Replay of the call will be available via telephone from August 10 through August 17 at (866) 357-4205 or (203) 369-0122 for international callers.
   • Replay will also be available from August 10 through October 21 on Cisco's Investor Relations website at www.investor.cisco.com.

5. Forward-Looking Statements Disclaimer:

   • The call includes forward-looking statements and is subject to risks and uncertainties discussed in detail in the company's SEC filings, including the most recent annual report on Form 10-K, quarterly report on Form 10-Q, and any applicable amendments.

6. Unauthorized Recording Disclaimer:

   • Unauthorized recording of the conference call is not permitted.

7. Turnover to John Chambers:

   • Turned the call over to John Chambers for his commentary on the quarter.

8. Closing Remarks:

   • Cisco's next quarterly conference call will reflect the first fiscal quarter 2012 results and will be held on Wednesday, November 9, 2011, at 1:30 p.m. Pacific Time, 4:30 p.m. Eastern Time.

   • Cisco will host its annual Financial Analyst Conference on Tuesday, September 13, 2011, in San Jose, with a live webcast.

   • Reminded listeners that Cisco plans to retain its long-standing policy to not comment on financial guidance during the quarter unless it is done through an explicit public disclosure.

   • Invited callers to contact the Investor Relations department with any follow-up questions from the call.

   • Concluded the call.

John Chambers provided extensive commentary during the Q4 2011 Earnings Call. Below is a detailed summary of his remarks:

Opening Remarks

• Acknowledged progress made on the comprehensive action plan to position Cisco for the next stage of growth and profitability.
• Achieved revenue growth of approximately 3% year-over-year and non-GAAP earnings per share of $0.40, slightly above expectations.
• Non-GAAP gross margins were 62.7%, with product gross margins at 61.2% and service gross margins at 68.6%.
• Book-to-bill ratio was comfortably above 1, with total product orders growing year-over-year by 11%.
• Geographic and customer segment order growth was balanced, with year-over-year order growth ranging from 9% to 19% across theaters and customer segments.
• Public sector spending decreased globally by approximately 4% year-over-year.
• Emphasized the need to address ongoing technology shifts, market transitions, and changing competitive environments.

Progress on Action Plan

• Simplified and focused the organization and operating model, including reorganization of sales, engineering, services, and operations to accelerate decision-making and improve productivity.
• Aligned cost structure to reduce operating expenses by $1 billion annually, leveraging this shift to fund future innovation and deliver value to shareholders.
• Managed the portfolio by evaluating and taking decisive action to realign and divest underperforming operations.
• Delivered value to shareholders through a quarterly cash dividend, stock repurchase program, and changes aimed at improving the operating model for consistent, profitable growth.
• Expressed confidence in the changes implemented, which will now be a competitive advantage in an uncertain macroeconomic environment.

Priorities and Challenges

• Stated that Cisco will stay focused on five company priorities: leadership in core (routing, switching, and services), security and mobility solutions, collaboration, data center and cloud, and video.
• Highlighted the public sector and switching as areas requiring additional focus.
• Public sector order growth decreased globally by 4% in Q4, with U.S. public sector orders decreasing by 7% year-over-year.
• Switching faced dynamics including declines in average selling prices per port speed, increased competition, and the impact of lower public sector spending.
• Despite challenges, Cisco maintained market share in switching, with revenue share in the high 60s and port share at approximately 50%.

What is Going Well

• Noted solid order growth across key geographies, products, and customer segments.
• Leadership in core: routing orders grew 17% year-over-year, switching orders 6%, and new products 11%.
• Collaboration: suite of new products grew revenue and orders 11% year-over-year, with TelePresence leading the way at 24% revenue growth and 35% order growth.
• Data center/cloud: Q4 revenues grew 32% year-over-year, with UCS exceeding $1.1 billion order run rate, 129% year-over-year growth.
• Video: strong results across all customer segments, with $1.3 billion in revenue and 13% year-over-year growth.
• Architecture: gaining strong momentum and driving value to customers, especially in the U.S. enterprise and commercial environment.

Emerging Countries

• Goal is to achieve 40% of product growth from emerging countries over the next 3 to 5 years.
• Solid growth in BRIC countries and Mexico, with double-digit year-over-year growth in Q4.

Geographic Performance

• Balanced order growth across the four theaters, with year-over-year growth of 11% in total in Q4.
• U.S. had 9% year-over-year order growth, with commercial and enterprise segments experiencing strong growth.
• European operations had 9% order growth, with double-digit growth in most major operations.
• Emerging markets achieved 12% year-over-year order growth.
• Asia Pacific operations achieved 19% year-over-year growth in terms of orders.

Q1 FY '12 Guidance

• Expected revenue growth of 1% to 4% on a year-over-year basis.
• Acknowledged the tough comparison with the previous year’s Q1, which had 19% revenue growth.
• Noted the uncertainty in global markets and the potential impact on capital spending.

Future Plans

• Emphasized the need to accelerate and drive through the simplification process at an even faster pace.
• Discussed the realignment of resources to focus on growth opportunities in the public sector and the realignment of some resources from public sector to enterprise and commercial markets.
• Highlighted the strength of Cisco's product line and how products are integrated together as a unique differentiator and major competitive advantage.

Closing Remarks

• Summarized the company’s readiness to accelerate and the focus on driving shareholder value while remaining committed to the success of customers, employees, and partners.

• Expressed gratitude to shareholders, employees, customers, and partners for their support during the transition.

During the Cisco Systems, Inc. Q4 2011 Earnings Call, Gary Moore provided updates on the progress of the company's restructuring and simplification initiatives. Here is a detailed summary of his comments:

1. Progress on Simplification and Efficiency Initiatives:

   • Swift actions have been taken to simplify the operating models within Sales, Services, Engineering, Operations, Marketing, and Finance.
   • The goal is to better align people, processes, and investments around the company's top 5 priorities, increase the speed of innovation, and focus more of the field and services sales force directly on customers and partners.

2. Organizational Changes:

   • There has been a sharp reduction in boards and councils, and clear and accountable leadership has been appointed to steer them.
   • The engineering organization has been streamlined from 7 individual engineering leads to 2 co-leaders, who are now accountable and empowered to make decisions on the portfolio holistically.
   • The aligned structure allows the company to adjust and execute on the evolving needs of customers and capture opportunities in the market more quickly.

3. Realignment of Employees:

   • Approximately 23,000 people across Cisco have been realigned to bring accelerated decision-making, cost efficiency, scale, and improved quality.
   • Within sales organizations, approximately 4,400 employees have been aligned.
   • About 90% of sales teams are now directly managed by the 3 regional leaders, empowering the geographic regions.
   • Service provider and Enterprise segment teams have been established to maintain a global customer perspective.

4. Operations Improvements:

   • A globally consistent approach is being established, and most operations teams are being brought into one aligned team.
   • Processes are being changed to reduce duplication and increase execution speed, with a focus on customer needs.
   • The deal approval process time for large quotes has been reduced by 65% to 70%, resulting in a better experience for customers and faster conversion rates for sales teams.
   • Considerable work has been done to improve the ordering process to speed up booking times.

5. Cost Structure Reduction:

   • The goal is to reduce annual expenses by $1 billion using Q4 as a baseline.
   • The regular full-time workforce is being reduced by approximately 6,500 employees, including a reduction of the VP and above population by approximately 17%.
   • The set-top box manufacturing facility in Juarez, Mexico, is being sold, which will reduce the workforce by approximately 5,000 people.
   • The contract workforce is being reduced by approximately 1,200 people in Q1.

6. Portfolio Optimization:

   • Decisive action has been taken on the portfolio to better align it with the company's priorities and structure to meet and capture market and customer needs.
   • Investments have been rightsized across all businesses through exiting businesses, reducing investment, and reinvesting in priorities.
   • Increased financial commitment has been made in areas such as collaboration, data center virtualization, mobile internet technologies, TelePresence, security, cloud, systems management, and video.
   • Reductions in investments were made in businesses where the company was overinvested in certain non-core aspects, while remaining committed to the long-term potential of these areas.

7. Engineering Structure Changes:

   • Disparate engineering groups across the company have been consolidated to increase focus on strategy and roadmap synergies.
   • Separate switching, routing, and optical groups have been consolidated into one Core Technology Group.
   • Four software groups have been moved into one integrated operating system group.
   • The voice, social networking, and WebEx organizations have been consolidated into one communications and collaboration group.
   • The cable and set-top box video teams, along with the business video groups, have been aligned under a single leader.

8. Technology Strategy:

   • The company will continue to pursue a strategy to build, partner, or buy to ensure it is best positioned to meet customer and market requirements.

9. Future Plans:

   • The company is on a multi-year journey to become more nimble and aggressive with sustainable and profitable growth.

   • Further actions will be driven to address market transitions with greater speed, agility, and consistency.

   • Continuous evolution of policy, process, and system enhancements will be focused on clear decision-making, productivity, accountability, and cost savings.

   • Cost savings identified will be used to fund innovation and development of new capabilities within and across organizations to drive increased shareholder value.

   • The company is committed to making the necessary changes to remain the leader in the industry.

Frank Calderoni, the Executive Vice President and Chief Financial Officer of Cisco Systems, provided detailed financial information during the Q4 2011 Earnings Call. Here’s a summary of his comments:

Financial Results for Q4 FY 2011

• Total Revenues: Increased to $11.2 billion, up approximately 3% from the prior year.
• Product Revenue: $8.9 billion, grew 1% year-over-year and 3% quarter-over-quarter.
  • Switching Revenue: $3.4 billion, a decline of 4% year-over-year and a 4% growth from the previous quarter.
  • Routing Revenue: Down 2% year-over-year to $1.7 billion and down 7% quarter-over-quarter.
  • New Products Revenue: Totaled $3.5 billion, an increase of 7% year-over-year and 6% quarter-over-quarter.
• Service Revenue: $2.3 billion, up approximately 12% from the prior year.
  • Technical Support Services: Experienced strong year-over-year growth of 11%.
  • Advanced Services: Grew approximately 17%.

Geographic Performance

• U.S. and Canada: Up 1% year-over-year.
• European Markets: Up 1% year-over-year.
• Asia-Pacific Markets: Up 17% year-over-year.
• Emerging Markets: Up 3% year-over-year.

Gross Margins

• Non-GAAP Total Gross Margin: 62.7%, consistent with expectations and down 1.2 percentage points quarter-over-quarter and down 1.4 percentage points year-over-year.
  • Non-GAAP Product Gross Margins: 61.2%, down 1.9 percentage points from the previous quarter.
  • Non-GAAP Service Margins: 68.6%, attributed to strong margins from both technical support and Advanced Services business.

Expense Overview

• Non-GAAP Operating Expense: Approximately $4.2 billion, representing 37.5% of revenue, consistent with expectations.
• Expense Reduction Plan:
  • Workforce Reduction: Approximately 6,500 employees, including approximately 2,100 who elected to participate in a voluntary early retirement program.
  • Restructuring Charges: Pretax charges aggregating approximately $1.3 billion over several quarters.
    • Q4 FY '11 Restructuring Charges: $772 million, including:
      • $453 million related to the voluntary early retirement program.
      • $204 million related to employee severance for approximately 2,600 employees in the U.S. and Canada.
      • $61 million non-cash charge related to the planned sale of the Juarez, Mexico manufacturing facility.
      • Remaining $44 million related to the completion of restructuring actions previously announced related to the consumer business.

Headcount

• End of Q4 Headcount: 71,825, down approximately 1,600 from the previous quarter.
• Voluntary Early Retirement Program: Most of the headcount reductions were from this program and the consumer restructuring announced in Q3.
• Remaining Headcount Reductions: Related to the reduction of force and the disposition of the Juarez manufacturing facility, expected to occur in Q1 FY '12.

Non-GAAP Operating Margin: 25.2%

• Non-GAAP Net Income: $2.2 billion, representing a decrease of approximately 12% year-over-year.
• Non-GAAP Earnings Per Share (EPS): $0.40 per share, representing a decline of 7% year-over-year.

Balance Sheet Highlights

• Cash, Cash Equivalents, and Investments: $44.6 billion, up $1.2 billion from the previous quarter.
• Accounts Receivable: $4.7 billion, with DSO of 38 days.
• Inventory: $1.5 billion, with non-GAAP inventory turns of 11.4.
• Deferred Revenue: $12.2 billion, an increase of 10% year-over-year.
  • Deferred Product Revenue: $3.7 billion.
  • Deferred Service Revenue: $8.5 billion, representing increases of approximately 1% and 15% year-over-year, respectively.
• Product Backlog: $4.3 billion, compared to $4.1 billion at the end of FY '10.

Share Repurchases and Dividends

• Share Repurchases: $1.5 billion or 95 million shares.
• Dividend Payment: $329 million.

Guidance for Q1 FY '12

• Operating Expenses: Expected to be approximately $150 million lower than Q4 or $600 million on an annual run rate basis.
• Pretax Restructuring Charges: Up to $300 million in Q1 FY '12.
• Revenue Growth: In the range of 1% to 4% on a year-over-year basis.
• Non-GAAP Gross Margin: Approximately in the range of 61% to 61.5%.
• Non-GAAP Operating Margin: In the range of 24% to 25%.
• Non-GAAP Tax Provision Rate: Approximately 22%.
• Non-GAAP Earnings Per Share: Expected to range from $0.38 to $0.41 per share.
• GAAP Earnings Per Share: Expected to be $0.10 to $0.14 per share lower than non-GAAP EPS.

Other Financial Information

• Long-Term Gross Margin Profile: To be discussed further at the Financial Analyst Conference.
• Tax Rate: Non-GAAP tax rate was 22.3% in Q4.
• Full Fiscal Year 2011 Performance:

  • Total Revenue: $43.2 billion, an increase of 8% over FY '10.

  • Non-GAAP Net Income: $9 billion, down approximately 4% from FY '10.

  • Non-GAAP Earnings Per Share: $1.62 per share, up slightly from $1.61 in FY '10.

  • GAAP Net Income: $6.5 billion or $1.17 per share on a fully diluted basis, representing year-over-year decreases of 16% and 12%, respectively.