Cisco Systems, Inc., Q2 2013 Earnings Call, Feb 13, 2013 - NasdaqGS:CSCO

NasdaqGS:CSCO

During the Cisco Systems, Inc. Q2 2013 Earnings Call, Robert Soderbery made the following statements:

1. Regarding the Environment and Business Indicators:

   • Acknowledged the validity of John Chambers' points about the business environment.
   • Emphasized the importance of watching the U.S. enterprise and commercial markets, as well as the company's performance in its top 5 emerging countries, as indicators of how economies are beginning to grow.

2. On the Strategic Focus in Japan:

   • Noted that Cisco has done well in winning market share across the service provider business in Japan.
   • Highlighted that there is still upside among major Japanese enterprise accounts, which is where the company is focusing.
   • Mentioned that Japanese companies are turning global, presenting an opportunity for Cisco to work with them around the world.

These statements indicate Robert Soderbery's perspective on key business indicators and strategic focus areas for Cisco.

Melissa Selcher provided the following statements during the Cisco Systems, Inc. Q2 2013 Earnings Call:

1. Introduction:

   • Thanked everyone and welcomed them to the 92nd quarterly conference call.
   • Introduced herself as Melissa Selcher, Senior Director, Analyst and Investor Relations.
   • Mentioned that she was joined by John Chambers, the Chairman and CEO; Frank Calderoni, the CFO; Rob Lloyd, the President of Development and Sales; and Gary Moore, the President and COO.

2. Webcast and Slides:

   • Noted that there was a corresponding webcast with slides on the company’s website in the Investor Relations section.
   • Instructed listeners to click on the Financial Reporting section of the website to access income statements, full GAAP to non-GAAP reconciliation information, balance sheets, cash flow statements, and other financial information.

3. Forward-Looking Statements:

   • Reminded attendees that the call would include forward-looking statements and that actual results could differ materially from those contained in the forward-looking statements.
   • Advised listeners to review the company’s SEC filings for risk factors that could cause actual results to differ from those in the forward-looking statements.

4. Call Management:

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

5. Conclusion:

   • Announced the date and time of the next quarterly call (May 15, 2013, at 1:30 Pacific, 4:30 Eastern).

   • Reminded listeners of the company’s policy not to comment on financial guidance during the quarter unless it is done through an explicit public disclosure.

   • Invited any follow-up questions to be directed to the Investor Relations department.

   • Concluded the call, thanking everyone for their participation and continued support.

John T. Chambers provided extensive commentary during the Q2 2013 Earnings Call for Cisco Systems, Inc. Here is a detailed summary of his statements:

1. Introduction and Overview

   • Expressed satisfaction with the company's strategy, value proposition to customers, and the execution by the company and its partners.
   • Highlighted the delivery of solid profitable growth with record revenue up 5% and record non-GAAP earnings per share of $0.51, up 9% year-over-year.
   • Mentioned cautious optimism from conversations with global business and government leaders, believing technology will play a significant role in moving towards a world driven by opportunity rather than scarcity.

2. Five Key Takeaways

   • Solid execution on the financial model with record revenues, earnings per share, net income, and non-GAAP operating income.
   • Strong results in key technology transitions such as data center cloud virtualization, mobility, and video despite a challenging economic environment.
   • Continued growth in the services business at 10%.
   • Observations of a soft global recovery, with Europe and Southern Europe under stress, but improvements in the U.S. enterprise and commercial orders.
   • Generated operating cash of over $3 billion while returning almost $1.25 billion to shareholders with dividends and buybacks.

3. Strategic Acquisitions

   • Closed 14 acquisitions totaling approximately $7 billion, with 13 of the 14 adding software, cloud, and recurring revenue assets across the portfolio.

4. Business Momentum and Trends

   • Discussed the performance and trends in the business, including the core business, data center, wireless, security, collaboration, and video.
     • Switching revenues increased 3%.
     • Data center grew 65%.
     • Wireless grew 27%.
     • Security grew 1%.
     • Collaboration declined 11%.
     • Total SP Video grew 20%.

5. Geographic and Customer Segments

   • American region grew 2%.
   • U.S. enterprise and U.S. commercial grew 9% year-over-year.
   • Public sector showed state, local, and education accelerating with 7% growth.
   • Asia Pacific, Japan, and China region grew orders 3%.
   • Europe, Middle East, Africa, and Russia region declined by 6%.

6. Guidance and Outlook

   • Emphasized cautious optimism, assuming continued strength in U.S. commercial and U.S. enterprise, early signs of stability in parts of Europe, reacceleration in many of the top emerging countries, and continued leadership with service providers.

7. Future Opportunities

   • Transition from the #1 communication company to the #1 IT company.
   • Ability to drive the future of programmable networks.
   • The Internet of Everything market opportunity.

8. Q&A Session

   • Addressed questions regarding security, service provider, switching business, environment and recovery, order growth, EMEA gross margin, Japanese yen depreciation, and gross margin stability.

Chambers concluded by summarizing the company's strategy and vision, expressing satisfaction with the company's positioning in the market and its ability to navigate potential challenges. He also highlighted the company's aggressive revenue guidance of 4% to 6% and the focus on earnings per share.

Frank A. Calderoni, the Former Chief Financial Officer and Executive Vice President of Cisco Systems, provided detailed financial insights and updates during the Q2 2013 Earnings Call. Below is a summary of his statements:

1. Financial Performance Overview:

   • Executed on the strategy of driving profitable growth.
   • Total revenue was a record $12.1 billion, up 5%.
   • Non-GAAP earnings per share (EPS) was $0.51, up 9%.
   • Non-GAAP EPS included a $0.01 benefit related to a tax item.
   • Product revenue growth was 3%.
   • Total product book-to-bill ratio was slightly less than 1.
   • Revenue growth was 9% in the Americas and 8% in APJC, while EMEA saw a 5% decrease.
   • Services revenue grew by 10%.

2. Portfolio Management:

   • Focused on innovation, portfolio management, and operational discipline.
   • Data center, wireless, video, and services businesses drove growth.
   • Managed the data center business to drive profitable growth for Cisco and shareholders.
   • Core business performed well despite global economic challenges.

3. Acquisitions and Divestitures:

   • Announced strategic acquisitions including Meraki, Cloupia, Cariden, BroadHop, and Intucell.
   • Acquisitions aimed at accelerating growth and profitability.
   • Sale of the Linksys product line expected to be accretive to overall return.
   • Continued successful integration of NDS.

4. Gross Margins:

   • Made substantial progress with operational excellence initiatives.
   • Non-GAAP gross margin was 62.3%, compared to 62.7% last quarter and 62.4% a year ago.
   • Non-GAAP product gross margin was 60.9%, compared to 61.5% last quarter and 60.9% a year ago.
   • Non-GAAP service gross margin was 67.6%, compared to 66.9% last quarter and 68.0% in Q2 FY '12.
   • Geographic and product area perspectives showed reasonable stability and consistency in total gross margins.

5. Operating Expenses:

   • Non-GAAP operating expenses were $4.1 billion or 34.1% as a percentage of revenue.
   • Headcount increased by approximately 1,100, with about 500 additions from acquisitions and the remainder from strategic hires.
   • Targeted headcount investments focused on areas expected to drive profitable returns.

6. Profitability:

   • Strong non-GAAP operating margins at 28.2%, at the high end of the long-term financial model.
   • Non-GAAP net income was $2.7 billion, representing an increase of 6%.
   • Non-GAAP earnings per share on a fully diluted basis was $0.51, a 9% increase.
   • GAAP net income was $3.1 billion.
   • GAAP earnings per share on a fully diluted basis were $0.59.

7. Tax Benefits:

   • Had a tax benefit related to the signing of the American Taxpayer Relief Act, resulting in a tax law change retroactively reinstating the federal R&D tax credit.
   • The benefit had a $132 million positive impact, with $72 million related to FY '12 and $60 million related to Q1 and Q2 of FY '13.
   • Settled IRS tax audits covering 6 years, resulting in a $794 million benefit, which is only included in GAAP earnings.

8. Capital Allocation Strategy:

   • Committed to successfully executing the capital allocation strategy.
   • Cash flow from operations was $3.3 billion, up 8%.
   • Returned $1.2 billion to shareholders through share repurchases and dividends.
   • Total cash, cash equivalents, and investments were $46.4 billion, including $7.0 billion available in the U.S.

9. Balance Sheet Performance:

   • Balance sheet performance was very strong, serving as a competitive differentiator.
   • Metrics were solid, with DSO at 34 days, non-GAAP inventory turns of 11.1, and total deferred revenue growth of 7%.

10. Guidance for Q3 FY '13:

    • Expected revenue growth of 4% to 6% on a year-over-year basis.
    • Anticipated non-GAAP gross margin of approximately 61% to 62%.
    • Non-GAAP operating margin expected to be in the range of 26.5% to 27.5%.
    • Non-GAAP tax provision rate expected to be approximately 21%.
    • Non-GAAP earnings per share expected to range from $0.48 to $0.50 per share.
    • GAAP earnings expected to be $0.08 to $0.11 per share lower than non-GAAP EPS.
    • Modeled cautious optimism, assuming continued strength in U.S. commercial and enterprise, early signs of stability in parts of Europe, reacceleration in many top emerging countries, continued execution in growth markets, and continued leadership with service providers.

These statements provide a comprehensive overview of Cisco's financial performance, strategic direction, and outlook for the future.

Robert W. Lloyd highlighted the company's strategy to accelerate growth and profitability through strategic acquisitions and divestitures. He mentioned the acquisition of Meraki, Cloupia, Cariden, BroadHop, and Intucell, which added important software, cloud, and recurring revenue assets to Cisco's portfolio. Lloyd also noted the sale of the Linksys product line, which was expected to be accretive to Cisco's overall return. He emphasized that these actions aligned with Cisco's strategy to drive innovation and future growth. Additionally, Lloyd pointed out the importance of watching the U.S. enterprise and commercial market, as well as the top 5 emerging countries, as indicators of economic growth and business performance.