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pww.comCisco Systems, Inc., Q2 2012 Earnings Call, Feb 08, 2012 - NasdaqGS:CSCO

NasdaqGS:CSCO

Melissa Selcher [Executives] 💬

Melissa Selcher, the Senior Director of Analyst Investor Relations, made the following statements during the Cisco Systems, Inc. Q2 2012 Earnings Call:

  1. Introduction:

    • Thanks, Kim. Good afternoon, everyone, and welcome to our 88th quarterly conference call.
    • Identified herself as Melissa Selcher, Senior Director of Analyst Investor Relations.
    • Mentioned the presence of John Chambers, Chairman and Chief Executive Officer; Frank Calderoni, Executive Vice President and Chief Financial Officer; Rob Lloyd, Executive Vice President of Worldwide Operations; and Gary Moore, Executive Vice President and Chief Operating Officer.

  2. Press Release and Webcast Information:

    • Noted that the Q2 fiscal year 2011 press release is available on U.S. high tech Marketwire and on the Cisco website.
    • Advised that there are corresponding webcast slides with financial information covered during the call, as well as additional financial metrics and analysis.

  3. Financial Documents Availability:

    • Announced that downloadable Q2 financial statements would be available after the call in the Investor Relations section of the website.
    • Included details on the availability of income statements, full GAAP to non-GAAP reconciliation information, balance sheets, and cash flow statements.

  4. Audio Replay and Webcast Replay:

    • Provided information about the audio replay of the call, which would be available from February 8 through February 15.
    • Noted that a webcast replay would be available from February 8 through April 20 on Cisco's Investor Relations website.

  5. Forward-Looking Statements Warning:

    • Reminded listeners that the call included forward-looking statements and that actual results could differ materially from those contained in the forward-looking statements.
    • Directed listeners to review the company's documents filed with the SEC, specifically the most recent reports on Form 10-Q and 10-K, for important risk factors.

  6. Call Management:

    • Introduced John Chambers to provide commentary on the quarter.
    • Managed the opening of the floor to questions and answers after the presentation.

  7. Future Earnings Calls Schedule:

    • Announced that Cisco's next quarterly conference call would be on Wednesday, May 9, 2012, at 1:30 p.m. Pacific Time, 4:30 p.m. Eastern Time.
    • Noted that future quarterly earnings calls would take place one week later than the historical schedule effective Q4 FY '12.

  8. Closing Remarks:

    • Provided information about the availability of Q2 FY '12 financial statements and reminded listeners of the company's policy not to comment on financial guidance during the quarter unless done through an explicit public disclosure.

    • Invited follow-up questions to the Investor Relations Department.

    • Concluded the call and thanked participants for their participation and continued support.

Unknown Executive [Executives] 💬

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John T. Chambers [Former Chairman Emeritus] 💬

John T. Chambers provided extensive commentary during the Q2 2012 Earnings Call. Below is a detailed summary of his remarks:

Opening Remarks

  • Praised the team for making consistent major progress on the comprehensive action plan to position Cisco for the next stage of growth and profitability.
  • Highlighted that Q2 was a solid quarter with record revenues and earnings per share, growing profits faster than revenues, and achieving the $1 billion expense reduction target one quarter ahead of schedule.
  • Noted that Cisco's value to customers continues to increase as they focus on major market transitions such as mobility, cloud, bring-your-own-device (BYOD), and pervasive video.
  • Emphasized that Cisco is positioned to lead across significant market transitions through its five foundational priorities: core networking, data center/cloud, video, collaboration, and business architectures.
  • Mentioned that these transitions require the increased value of intelligent networks and technology architectures that enable better performance and integrated products, software, and services.
  • Asserted that Cisco's vision and strategy are working and that the company appears to be gaining an increasing share of its customers' total spend on IT.

Financial Review and Progress

  • Reported record quarterly revenue of $11.5 billion, an 11% increase year-over-year, exceeding guidance.
  • Non-GAAP earnings per share were a record $0.47, a year-over-year increase of 27%.
  • GAAP earnings per share were also a record at $0.40, a year-over-year increase of 48%.
  • Non-GAAP total gross margins were 62.4%, slightly higher than expected, while non-GAAP product gross margins were 60.9%.
  • Achieved the goal of $1 billion in expense reductions one quarter earlier than planned.
  • Overall, product book-to-bill was approximately one, and total product orders grew 7% year-over-year.

Strategy and Vision

  • Discussed how the restructuring and organizational changes have benefited customers and shareholders.
  • Highlighted the U.S. enterprise performance as a strong example of how the shift is working, with a close rate nearly twice as high when talking about business technology and business budgets versus just IT budgets.
  • Emphasized that the market transition from information technology to business technology appears to be playing out as outlined in Cisco's vision and strategy.
  • Mentioned that Cisco is in the sweet spot of where customers are focusing their efforts, whether it is innovation, cost reductions, productivity, business transformation, or revenue growth.

Foundational Priorities

  • Provided updates on the five foundational priorities:
    • Leadership in the core (routing, switching, and services): Total switching grew 8% in revenue, and routing grew 8% in revenue.
    • Data center: UCS product grew 91% in revenue, and the Nexus 2000 and 5000 combined revenue grew over 100% year-over-year.
    • Collaboration: Grew revenues by 10%.
    • Video: Had the strongest end-to-end architecture for video, with SP Video growing 23% in revenue.
    • Architectures for business transformation: Gaining momentum across enterprise, public sector, commercial, and service provider customers.

Geographic Regions and Customer Segments

  • Discussed the performance across the three geographic regions (Americas, EMEA, and APJC) and four customer segments (enterprise, public sector, commercial, and service provider).
  • Mentioned that the Americas grew product orders by 5% year-over-year, EMEA by 7%, and APJC by 14%.
  • Noted that service provider revenue grew 12% year-over-year, highlighting the power of Cisco's integrated architectural approach and the benefits of its intelligent network.

Outlook

  • Provided Q3 FY '12 revenue guidance, expecting revenue growth to be in the range of 5% to 7% on a year-over-year basis.
  • Highlighted that Cisco is better positioned than most of its competitors from an architectural leadership, product leadership, innovation leadership, emerging market leadership, and strength of customer and partner relationships.

Closing Remarks

  • Praised the team for their solid performance and progress.

  • Mentioned the importance of focusing on operational excellence, driving productivity, and making Cisco a simpler place to work and do business with.

  • Emphasized that Cisco is on its way to doing the same once again in terms of emerging stronger and with more market share.

  • Acknowledged the challenges in the industry and internally but expressed confidence in the company's ability to continue changing and transforming.

  • Thanked employees, shareholders, customers, and partners for their support during the transition to a reinvigorated, focused, and simplified Cisco.

Frank A. Calderoni [Former Chief Financial Officer and Executive Vice President] 💬

Frank A. Calderoni, the Former Chief Financial Officer and Executive Vice President of Cisco Systems, Inc., provided detailed financial insights during the Q2 2012 Earnings Call. Below is a summary of his remarks:

  • Financial Performance Overview:

    • Reported record revenues of $11.5 billion, an 11% increase year-over-year.
    • Non-GAAP net income was $2.6 billion, up 23% year-over-year.
    • Total product revenue was $9.1 billion, up approximately 11% year-over-year.
    • Highlighted growth in key areas:
      • Switching revenue grew 8% to $3.6 billion.
      • Next generation networks (NGN) routing grew 8% to $2.1 billion.
      • Collaboration revenue increased 10% to $1 billion.
      • Service provider video revenue grew 23% to $1 billion.
      • Data center revenue grew 88% year-over-year to $333 million.
    • Services revenue was $2.4 billion, up approximately 11% year-over-year.

  • Gross Margin:

    • Total non-GAAP gross margin was 62.4%, flat quarter-over-quarter and year-over-year.
    • Product-only non-GAAP gross margins for Q2 were 60.9%, a slight decrease of 0.4% quarter-over-quarter.
    • The decrease was primarily driven by strengths in lower-margin data center and service provider video products, as well as pricing, discounts, and rebates, partially offset by higher volume and lower overall manufacturing costs.
    • Non-GAAP service margin for Q2 was 68%, up from 66.8% last quarter and up from 67% in Q2 FY '11.

  • Operating Expense:

    • Non-GAAP operating expense was 34% of revenue or approximately $3.9 billion in Q2, down approximately $158 million compared to the previous quarter.
    • Realized the full targeted savings of $1 billion on an annualized expense run rate, one quarter ahead of schedule, using Q4 FY '11 as the base.

  • Headcount:

    • Headcount totaled 63,870 at the end of Q2, up approximately 400 quarter-over-quarter, driven primarily by growth in advanced services and technical services and strategic engineering hiring, partially offset by workforce restructuring actions.

  • Operating Margin:

    • Non-GAAP operating margin for Q2 was 28.4%.

  • Tax Provision Rate:

    • Q2 FY '12 non-GAAP tax provision rate was 22%.

  • Earnings Per Share (EPS):

    • Non-GAAP EPS on a fully diluted basis for Q2 was $0.47, up from $0.37 in Q2 FY '11, a 27% increase year-over-year.
    • GAAP EPS on a fully diluted basis for Q2 was $0.40, up from $0.27 in the same quarter of FY '11.

  • Balance Sheet:

    • Total cash, cash equivalents, and investments at quarter-end were $46.7 billion, up approximately $2.4 billion from the previous quarter.
    • Approximately $5 billion was available in the U.S. at the end of the quarter.
    • Cash flow from operations in Q2 was approximately $3.1 billion, the strongest operating cash flow since Q4 FY '10.

  • Days Sales Outstanding (DSO):

    • DSO was 31 days at the end of Q2, compared to 35 days at the end of Q1 FY '12 and 40 days at the end of Q2 FY '11.
    • The decrease was driven by continued shipment linearity, strong collections performance, and service billings linearity during the quarter.

  • Inventory:

    • Total inventory at the end of Q2 was $1.6 billion, relatively unchanged from Q1 FY '12.
    • Non-GAAP inventory turns were 10.8, down 1/10 compared to the last quarter and up 8/10 from Q2 of FY '11.

  • Dividend Increase:

    • Announced a 33% increase in the quarterly dividend to $0.08 per share, payable on April 25, 2012, to shareholders of record as of April 5, 2012.

  • Stock Repurchase Program:

    • Repurchased $466 million of common stock under the stock repurchase program or 26 million shares at an average price of $17.84 per share.
    • Remaining approved amount for stock repurchases under the program was approximately $8.2 billion as of quarter-end.

  • Deferred Revenue:

    • Total deferred revenue was $12.5 billion at the end of Q2, an increase of approximately 6% compared to Q2 FY '11.
    • Deferred product revenue grew to $4 billion or roughly 6% year-over-year.
    • Deferred services revenue was approximately $8.5 billion, an increase of about 5% year-over-year.

  • Outlook for Q3 FY '12:

    • Expected revenue growth to be in the range of 5% to 7% on a year-over-year basis.
    • Non-GAAP gross margin expected to be approximately in the range of 61.5% to 62%.
    • Non-GAAP operating margin expected to be in the range of 27% to 28%.
    • Non-GAAP tax provision rate expected to be approximately 22%.
    • Non-GAAP EPS expected to range from $0.45 to $0.47 per share.
    • GAAP EPS expected to be $0.07 to $0.10 per share lower than non-GAAP EPS.

  • Restructuring Charges:

    • Included total non-GAAP pretax charges of approximately $925 million to GAAP financial results to date.

    • Expected the total restructuring charges to be approximately $1 billion, with the remaining charges to be incurred in the second half of FY '12.

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