Cisco Systems, Inc., Q4 2018 Earnings Call, Aug 15, 2018 - NasdaqGS:CSCO

NasdaqGS:CSCO

Marilyn Mora, the Director of Global Investor Relations for Cisco Systems, Inc., made the following statements during the Q4 2018 Earnings Call:

1. Opening Remarks

   • Welcomed everyone to the Fourth Quarter Fiscal Year 2018 Quarterly Earnings Conference Call.
   • Introduced herself as the Head of Investor Relations and Chuck Robbins, Chairman and CEO, and Kelly Kramer, CFO.

2. Financial Disclosure

   • Mentioned that attendees should have seen the earnings press release.
   • Announced that a webcast with slides, including supplemental information, would be made available on the company’s website in the Investor Relations section after the call.
   • Noted that income statements, full GAAP to non-GAAP reconciliation information, balance sheets, cash flow statements, and other financial information could be found in the Financial Information section of the Investor Relations website.

3. Conference Call Guidelines

   • Clarified that the conference call would reference both GAAP and non-GAAP financial results.
   • Explained that the discussion would focus on product results in terms of revenue and geographic and customer results in terms of product orders, unless stated otherwise.
   • Reminded listeners that the call would include forward-looking statements subject to risks and uncertainties, referring them to the company’s SEC filings for important risk factors.
   • Advised that Cisco would not comment on its financial guidance during the quarter unless done through an explicit public disclosure.

4. Transition to CEO

   • Turned the call over to Chuck Robbins, Chairman and CEO.

5. Closing Remarks

   • Thanked Chuck Robbins and acknowledged that the last question had been answered.

   • Announced the date and time for the next quarterly earnings conference call, which would reflect fiscal 2019 first quarter earnings results.

   • Reminded the audience of Cisco's policy regarding commenting on financial guidance during the quarter.

   • Provided contact information for the Investor Relations department for any further questions.

   • Thanked everyone for joining the call and announced the end of the conference call.

Charles H. Robbins, the Chairman & CEO of Cisco Systems, Inc., provided an overview of the company’s performance and highlighted key achievements and strategies. Below is a detailed summary of his remarks:

Highlights of the Quarter and Fiscal Year:

• Strong Financial Performance: Noted a strong finish to a great year with the highest quarterly revenue of $12.8 billion and non-GAAP EPS of $0.70, with growth accelerating for another consecutive quarter.
• Broad-Based Momentum: Mentioned that the company's momentum was broad-based across the portfolio, customer segments, and geographies.
• Margins and Returns: Stated that Cisco continued to generate solid margins, cash flow, and returns for shareholders.

Innovation and Product Areas:

• Infrastructure Platforms:
  • Rapidly innovating and transforming the technology portfolio to drive customer value.
  • Continued strength in Infrastructure Platforms, driven by the Catalyst 9000, as customers look to simplify and automate their networks.
  • Introduction of additional innovations across the networking portfolio, including new access, WAN, and data center offerings.
  • Announced new developer capabilities across the intent-based networking portfolio, spanning all network domains: Campus switching, wireless, WAN, data center, and cloud.
  • DevNet surpassed 500,000 registered members, and new offerings were introduced to help developers and network engineers innovate throughout the intent-based architecture.
  • SD-WAN portfolio, leveraging leading networking products, automation, and robust security architecture, has been deployed at over 800 customers, driven by the ability to provide higher capacity at a lower cost.
• Security:
  • Security is the customers’ #1 concern and a top priority for Cisco.
  • Strategy is to simplify and increase security efficacy through an architectural approach, with products that work together and share analytics and actionable threat intelligence.
  • Continued strong momentum with revenue again accelerating and growing double digits year-over-year.
  • Acquisition of Duo Security to further enhance how Cisco delivers simple, automated, trusted access anywhere for customers’ environments.
• Applications:
  • Launched WebEx Teams, bringing together meetings, calling, and teamwork into an integrated experience as part of the WebEx platform.
  • Introduced major new enhancements to the platform, including a new user design for WebEx Meetings and a new solution with Google, combining their contact center AI service with the WebEx platform.
  • Achieved another robust quarter of growth with AppDynamics, underscoring the importance and value of unique end-to-end visibility and analytics from the end user to the network to the application.

Strategic Focus and Execution:

• Multi-Cloud Environments:
  • The broad adoption of multi-cloud environments is changing the nature of how modern IT infrastructures are built and secured, and Cisco is at the center of this transition.
  • Intent to acquire Duo Security to extend the intent-based networking portfolio for the multi-cloud world.
• Customer Transformation:
  • Cisco is well-positioned to capture growth across the portfolio with its pipeline of innovation and to be one of the most strategic partners to customers as they go through their digital transformation.

Subscription Model:

• Software Subscription Strategy:
  • Mentioned the success of the Catalyst 9000 in selling a subscription software offering on top of a core networking product.
  • Plans to extend the software subscription model across the portfolio, focusing on ensuring the operational infrastructure is prepared and customers derive value from the software.

Networking Business:

• Catalyst 9000:
  • Fastest-ramping product Cisco has ever built, with approximately 9,650+ customers as of the end of the quarter.
  • Great Q4 adoption, and Cisco is very happy with the product and architecture.

Service Provider Segment:

• Service Provider Spending:
  • Noted the return to growth in the service provider segment, driven by the nature of the business, which is dominated by large customers.
  • Discussed the anticipation and engagement around 5G, with customers beginning to discuss network requirements to support 5G, although it is not yet a material factor in the results.

Europe:

• Strength in Europe:
  • Mentioned the strength in Europe, despite political dynamics, with the U.K. up double digits on product orders.
  • The team in Europe is executing well and leading with new technology areas, particularly in the core enterprise networking space.

Multi-Cloud World:

• Impact of Multi-Cloud:
  • Explained how the transition to a multi-cloud world is changing how customers look at building their IT infrastructure and securing it.
  • Described how traffic flows and data movement are becoming more complex, requiring customers to re-architect their networks to accommodate diverse traffic flows.
  • Discussed the partnership with web-scale providers, emphasizing how Cisco is working with these providers to integrate hybrid cloud solutions and provide security and policy, whether applications are in private data centers or public clouds.

Conclusion:

• Fiscal Year 2019 Outlook:

  • Looked forward to fiscal year 2019 with a clear focus on growth, execution, and innovation.

  • Emphasized the incredible opportunities across the business and Cisco’s unique positioning to deliver on its vision to be a strategic partner to customers during their digital transformations.

Kelly A. Kramer, the Former Executive VP & CFO of Cisco Systems, Inc., provided financial details and insights during the Q4 2018 Earnings Call. Here is a detailed summary of her comments:

Summary of Q4 Financial Results

• Revenue: Total revenue was $12.8 billion, up 6%.
• Operating Margin Rate: Non-GAAP operating margin rate was 30.9%.
• Net Income: Non-GAAP net income was $3.3 billion, up 8%.
• Earnings Per Share (EPS): Non-GAAP EPS was $0.70, up 15%.
• Product Revenue: Total product revenue was up 7%.
• Infrastructure Platforms: Grew 7%, with growth in all businesses except for routing, which was down slightly.
• Switching: Had another great quarter with strong growth in campus, driven by the ramp of the Cat 9K, and growth in data center driven by the Nexus 9K.
• Wireless: Saw good growth with strength in Meraki and Wave 2 offerings.
• Data Center: Very strong double-digit growth driven by servers and HyperFlex.
• Routing: Declined slightly driven by weakness in SP routing.
• Applications: Up 10% in total with growth across all the businesses.
• Security: Up 12%, with strong performance in network security, unified threat, policy and access, and web security.
• Service Revenue: Up 3%, driven by growth in advanced services as well as Software and Solution Support.

Recurring Revenue and Subscriptions

• Recurring Revenue: 32% of total revenue, an increase of 1 point from a year ago.
• Subscriptions Revenue: 56% of total software revenue, up 5 points year-over-year.
• Deferred Revenue: Up 6% in total, with product up 15% and services up 1%.
• Unbilled Deferred Revenue: Strong increase, not reflected on the balance sheet.
• Total Deferred Revenue Plus Unbilled Deferred: Up 28%.

Geographical Performance

• Americas: Grew 6%.
• EMEA: Was up 6%.
• APJC: Was up 12%.
• Total Emerging Markets: Was up 12%, with the BRICS plus Mexico up 22%.

Customer Segments

• Enterprise: Up 11%.
• Commercial: Up 9%.
• Public Sector: Up 1%.
• Service Provider: Returned to growth, up 6%.

Gross Margins

• Total Q4 Gross Margin: 62.9%, down 0.8 points.
• Product Gross Margin: 61.5%, down 0.4 points.
• Service Gross Margin: 67.1%, down 1.7 points.

GAAP Results

• GAAP Net Income: $3.8 billion.
• GAAP EPS: $0.81.
• Tax Cuts and Jobs Act Benefit: $863 million, excluded from non-GAAP results.

Cash Flow

• Q4 Operating Cash Flow: $4.1 billion, up 2%.
• Free Cash Flow: $3.9 billion, also up 2%.
• Capital Allocation:
  • $6 billion of share repurchases.
  • $1.5 billion for the quarterly dividend.

Full Fiscal Year 2018

• Revenue: $49.3 billion, up 3%.
• Non-GAAP Operating Margin Rate: 31.1%.
• Non-GAAP Net Income: $12.7 billion, up 5%.
• Non-GAAP EPS: $2.60, up 9%.
• Total Non-GAAP Gross Margin: 63.8%, a decrease of 0.5 points.
• GAAP Net Income: $110 million.
• GAAP EPS: $0.02, includes charges related to the Tax Cuts and Jobs Act of $10.4 billion.
• Operating Cash Flow: $13.7 billion.
• Shareholder Returns: $23.6 billion, representing 184% of free cash flow.

Guidance for Q1 Fiscal Year 2019

• Revenue Growth: Expected in the range of 5% to 7% year-over-year.

• Non-GAAP Gross Margin Rate: Expected to be in the range of 63% to 64%.

• Non-GAAP Operating Margin Rate: Expected to be in the range of 30% to 31%.

• Non-GAAP Tax Provision Rate: Expected to be 19%.

• Non-GAAP Earnings Per Share (EPS): Expected to range from $0.70 to $0.72.

• Impact of ASC 606: Estimated to be a benefit of about 1%.

• Exclusions: Guidance includes the Service Provider Video Software Solutions business that Cisco recently agreed to sell and excludes the Duo acquisition, as both transactions have not closed.