Cisco Systems, Inc., Q2 2006 Earnings Call, Feb-07-2006 - NasdaqGS:CSCO

NasdaqGS:CSCO

Rick Justice [Executives] 💬

During the Cisco Systems, Inc. Q2 2006 Earnings Call, Rick Justice, Senior Vice President of Worldwide Field Operations, did not provide any direct statements or responses. However, there are mentions of his role and contributions as part of the executive team's commentary. Here’s a summary of the context in which Rick Justice was mentioned:

Sales Force Expansion and Coverage:
- John Chambers mentioned that the company made a decision to expand sales coverage, particularly in the commercial, low end of the enterprise market, and the emerging market areas. Rick Justice is credited with overseeing this expansion, which appears to be paying off as hoped.
U.S. Commercial Market Segment:
- In the U.S. commercial market segment, there was good balance among the four commercial areas, with year-over-year growth of approximately 20%. Rick Justice is noted for his role in managing this market segment, which showed growth in the range of 15 to 25% year-over-year.
Pricing and Sales Growth:
- Rick Justice commented on the competitive pricing environment, noting that the pressure is always there and is increasing. He explained that the growth in sales is coming from increased coverage and taking advantage of opportunities, rather than any unique pricing strategies.

Based on these references, Rick Justice is portrayed as a key executive responsible for the company's sales force and its performance, particularly in the commercial and enterprise market segments. His efforts to expand sales coverage and manage the sales force are highlighted as contributing to the company's growth and success.

Dennis Powell [Executives] 💬

Dennis Powell, the Chief Financial Officer of Cisco Systems, provided a detailed financial overview during the Q2 2006 Earnings Call. Below is a summary of his comments:

Opening Remarks

Dennis welcomed everyone to the 64th quarterly conference call.
He introduced the executives present: John Chambers (President and CEO), Rick Justice (Senior Vice President of Worldwide Field Operations), and Charlie Giancarlo (Chief Development Officer).
He mentioned the availability of the second quarter fiscal year 2006 press release on First Call, Full National Business Wire, the European and Technical Wire, and the Cisco website at www.cisco.com.

Financial Results Overview

Total revenue for Q2 was $6.6 billion, an increase of over 9% year-over-year.
Product revenue was $5.5 billion, and service revenue was $1.1 billion.
Routing revenue was $1.42 billion, up 7% year-over-year.
Switching revenue was $2.67 billion, up 12% year-over-year.
Advanced technologies revenue was $1.28 billion, up 5% year-over-year.
Advanced technologies revenue increased across all markets except for the optical business, which declined 34% annually.
The other category was $175 million, down 1% year-over-year.
Service revenue was $1.1 billion, up 14% year-over-year.

Gross Margin

Q2 pro forma gross margin was 68%, up from 66.9% in the same period last fiscal year and down slightly from 68.1% last quarter.
On a GAAP basis, total gross margin was 67.4%.

Operating Expenses

Total pro forma operating expenses were $2.4 billion, compared to $2.1 billion in the same quarter of the previous fiscal year and compared to $2.4 billion for the last quarter.
Pro forma operating expenses as a percentage of revenue were 37% in Q2 FY '06, compared to 35% in Q2 FY '05 and 37% for the last quarter.
On a GAAP basis, with the effect of FAS 123R, operating expenses for Q2 were $2.7 billion.

Net Income and Earnings Per Share

Pro forma net income for the second quarter was $1.6 billion, representing a 10% increase year-over-year.
Pro forma earnings per share on a fully diluted basis for Q2 were $0.26, up from $0.22 in the same quarter of fiscal year 2005, representing an 18% increase year-over-year.
GAAP net income for the second quarter was $1.4 billion.

Balance Sheet

Cash and cash equivalents and investments were approximately $15 billion, up from $13.5 billion last quarter.
During Q2, Cisco generated approximately $1.9 billion in cash flow from operations.
Cisco repurchased $748 million or 42 million shares of its stock at an average price of $17.87.

Accounts Receivable and Inventory

Accounts receivable ended the quarter at $2.5 billion, up from $2.3 billion the previous quarter.
Total inventory for Q2 was $1.3 billion, with pro forma inventory turns at 6.4 times.
Inventory purchase commitments for Q2 were $1.156 billion.

Deferred Revenue

Total deferred revenue for Q2 FY '06 was approximately $5.1 billion, up from approximately $4.8 billion in Q1.
Of the total, deferred product revenue was $1.3 billion and deferred service revenue was $3.8 billion.

Headcount

Total reported headcount ended at 39,665, a net increase of 403 from Q1 and an increase of 3,703 year-over-year.

Lean Manufacturing Model

Cisco will begin a six- to eight-quarter transition to a lean manufacturing model.
This will be a controlled process, planned in close cooperation with contract manufacturing partners.
Over time, this process will result in incremental increases in purchase commitments, with a corresponding decrease in core manufacturing inventory.
Upon full implementation, core manufacturing inventory balance will be low.
Cisco expects inventory turns to improve moderately in Q3 and more significantly over time.
The lean model is expected to be neutral to Cisco's gross margins.

Conclusion

Dennis highlighted the company's achievement of approximately 9% revenue growth year-over-year and a pro forma profit of 24.6% of revenue.
He mentioned the strength in operating cash flow and the quality of earnings.
Return on invested capital remained above 50%.
Strategic investments will continue in certain customer segments, technologies, and theaters while maintaining a healthy and conservative balance sheet.

John Chambers [Executives] 💬

John Chambers provided extensive commentary during the Cisco Systems, Inc. Q2 2006 Earnings Call. Below is a detailed summary of his statements:

Summary of the Quarter

Revenue and Earnings: Described the quarter as solid from a revenue and earnings per share perspective, and strong from an orders perspective.
Balanced Approach: Noted the balanced approach to the market in terms of core customer segments, core and advanced technologies, business and technology architecture, and the five key geographic theaters.
Order Growth: Highlighted that the U.S., emerging markets, Asia-Pacific, and improvements in Europe contributed to the best order growth year-over-year in over a year.
Revenue Growth: Reported 9.3% year-over-year revenue growth, up slightly from Q1.
Product Orders: Mentioned that product orders grew faster than revenues, with year-over-year growth in the mid-teens range, exceeding guidance of 10-14%.
Book-to-Bill Ratio: Indicated that the product book-to-bill ratio was greater than 1.
Linearity of Orders: Noted that orders gained momentum in each of the three months in terms of year-over-year growth rates.

Financial Performance

GAAP Net Income: Announced a GAAP net income of $1.4 billion and GAAP earnings per share of $0.22, including a charge from stock options of $0.03 per share.
Pro Forma Net Income: Reported a record quarter for Cisco with pro forma net income of $1.6 billion and earnings per share of $0.26.
Margins: Noted that total pro forma margins were 68% and pro forma product gross margins were 68.2%.
Cash Flow: Mentioned solid cash flow from operations of $1.9 billion.
Stock Repurchases: Indicated that approximately $748 million of common stock was repurchased during the quarter.
Cash Holdings: Ended the quarter with approximately $15 billion in cash, cash equivalents, and investments.
Operating Expenses: Noted that pro forma operating expenses were 36.6% of revenue, down from 37% in Q1.
Headcount Increase: Reported a net increase of approximately 400 in total headcount, with over 80% going into sales coverage organizations.

Key Takeaways

Geographic Balance: Emphasized the advantage of having four large theaters that balance or offset the strengths of each other.
U.S. Market: Highlighted strong order growth of approximately 20% year-over-year in the U.S., the best growth rate in the last six quarters.
Asia-Pacific: Mentioned solid growth in the Asia-Pacific region, maintaining high order growth rates.
Emerging Markets: Noted continued order growth above 30% year-over-year in emerging markets.
Europe: Observed improvements in Europe, with order growth in the low double digits year-over-year.
Japan: Acknowledged the continued challenging environment in Japan, representing about 4% of the business.

Focus Areas

Commercial Market: Discussed the continued strong performance of the commercial market segment, with order growth in the low 20s.
Enterprise Market: Mentioned positive surprise in the enterprise market segment, growing in the high teens year-over-year globally.
Sales Coverage Expansion: Noted the decision to expand sales coverage, particularly in the commercial, low end of the enterprise market, and emerging markets, which appeared to be paying off.
Emerging Markets: Highlighted the continued acceleration of year-over-year order growth in emerging markets, now running above 30%.
Advanced Technologies: Mentioned solid growth in advanced technologies, identifying three new advanced technologies in Q2.
Support Model: Noted the evolving support model designed to help customers integrate technology and business architecture faster with lower risk.

Guidance

Revenue Growth: Forecasted solid Q3 from a year-over-year perspective, with product order growth in the 10-15% range.
Overall Revenue Guidance: Expected overall revenue to be up year-over-year approximately 10-12% in Q3 FY '06.
Sequential Revenue Guidance: Expected revenue to be up sequentially approximately 2.5-4.5% in Q3 FY '06.

Additional Points

Lean Manufacturing Model: Announced the transition to a lean manufacturing model, which is expected to improve inventory turns and be neutral to Cisco's gross margins.
Scientific-Atlanta Acquisition: Mentioned the impact of the Scientific-Atlanta acquisition, noting that it is expected to be neutral to slightly positive to Cisco's Q3 and Q4 pro forma earnings.

Chambers concluded his remarks by thanking shareholders, customers, employees, and partners for their support and expressed confidence in Cisco's ability to execute during industry consolidation, market transitions, and challenging economic times.