Cisco Systems, Inc., Q3 2012 Earnings Call, May 09, 2012 - NasdaqGS:CSCO

NasdaqGS:CSCO

Melissa Selcher, the Senior Director of Analyst and Investor Relations at Cisco Systems, made the following remarks during the Q3 2012 Earnings Call:

1. Introduction:

   • Welcomed everyone to the 89th quarterly conference call.
   • Introduced herself as Melissa Selcher, Senior Director of Analyst and Investor Relations.
   • Mentioned that she was joined by John Chambers, the Chairman and CEO; Frank Calderoni, the CFO; Rob Lloyd, the EVP of Worldwide Operations; and Gary Moore, the EVP and COO.

2. Press Release and Webcast Information:

   • Noted that the Q3 fiscal year 2012 press release is available on the U.S. high-tech Marketwire and on the Cisco website at http://newsroom.cisco.com.
   • Reminded attendees that there is a corresponding webcast with slides available.
   • Indicated that downloadable Q3 financial statements would be available following the call in the Investor Relations section of the Cisco website, including revenue and gross margin by geographic segments, as well as revenue by product categories.
   • Mentioned that income statements, full GAAP to non-GAAP reconciliation information, balance sheets, and cash flow statements can also be found on the website in the Investor Relations section.

3. Call Recording and Access Information:

   • Stated that the audio replay of the call would be available from May 9 through May 16 at (866) 493-8039 or (203) 369-1749 for international callers.
   • Mentioned that a webcast replay is available from May 9 through July 20 on Cisco's Investor Relations website at investor.cisco.com.

4. Forward-Looking Statements Disclaimer:

   • Reminded attendees that the matters discussed during the call included forward-looking statements.
   • Noted that the actual results could materially differ from those contained in the forward-looking statements.
   • Advised attendees to review Cisco's recent SEC filings for important risk factors that could cause actual results to differ materially.

5. Unauthorized Recording Prohibition:

   • Stated that unauthorized recording of the conference call is not permitted.

6. Transition to John Chambers:

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

7. Q&A Session Announcement:

   • Announced the opening of the floor to questions after John Chambers concluded his remarks.

8. Closing Remarks:

   • Provided details about the next quarterly call, which would reflect Cisco's FY '12 Q4 and annual results, scheduled for Wednesday, August 15, 2012, at 1:30 Pacific Time, 4:30 Eastern Time.

   • Mentioned that downloadable Q3 FY '12 financial statements would be available following the call, including revenue and gross margin by geography and revenue by product categories.

   • Reiterated that income statements, full GAAP to non-GAAP reconciliation information, balance sheet, and cash flow statements can be found on the website in the Investor Relations section.

   • Reminded attendees of Cisco's policy to not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure.

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

   • Thanked everyone for their participation and continued support, concluding the call.

John T. Chambers provided extensive commentary during the Cisco Systems, Inc. Q3 2012 Earnings Call. Here is a detailed summary of his remarks:

1. Introduction and Overview

   • John expressed satisfaction with the company's execution of its three-year plan, noting record revenues, non-GAAP earnings per share, non-GAAP operating income, and non-GAAP net income for the second quarter in a row.
   • He highlighted the company's strong value proposition and mindshare with customers, particularly in the service provider segment, where Cisco has taken wallet share almost across the board.

2. Market Position and Trends

   • Cisco remains #1 or #2 in almost every product market it competes in and maintains or gains share year-over-year in the majority of product categories across service provider, commercial, and enterprise segments.
   • The company is often named the top IP vendor by its channel partners.
   • John emphasized the importance of the intelligent network in the context of cloud, video, and mobile device proliferation, stating that the role of the network has never been greater.

3. Product and Business Performance

   • The UCS (Unified Computing System) business grew 57% year-over-year, while Cisco's top two data center competitors had flat or negative growth.
   • Cisco has demonstrated its ability to capture market transitions that matter most to customers, delivering innovative products and solutions.
   • The company has executed well in the data center space, growing rapidly and demonstrating agility and responsiveness to market trends.

4. Geographic Performance

   • Cisco experienced year-over-year total revenue growth across all geographic regions: 3% for the Americas, 5% for EMEA, and 24% for APJC.
   • The APJC region's growth was driven by strength in both product and service revenues across most customer segments, led by service providers, which benefited from the completion of several large multiyear projects.

5. Customer Segments

   • Service providers grew 5% year-over-year in product orders.
   • Enterprise product orders were down 1% year-over-year.
   • Commercial product orders grew 8% year-over-year.
   • Public sector product orders were up 3% year-over-year.

6. Product Performance

   • Switching revenue grew 5% year-over-year to $3.6 billion.
   • Next-generation networks (NGN) routing revenue was flat at $2.1 billion.
   • Data center revenue grew 67%.
   • Collaboration revenue was flat.
   • Wireless revenue grew approximately 20%.
   • Service provider video grew 12%.
   • Security revenue grew 9%.

7. Strategic Priorities

   • Core: Continued performance of the switching portfolio, with the modular portfolio showing relative strength. Nexus 2000 and Nexus 5000 combined grew approximately 75% year-over-year.
   • Data Center: Strong traction with the UCS servers, growing approximately 57% year-over-year. The company is positioned well in the cloud and has a $1 billion order run rate in service provider cloud implementations.
   • Collaboration and Video: Collaboration performance was flat, and the company is putting an aggressive action plan in place to improve sales execution. The NDS acquisition is expected to accelerate the deployment and monetization of next-generation video experiences.
   • Architectures: Advanced services business has seen strong growth and margins, reflecting the company's relevance as a partner to address customer technology and business challenges.
   • Mobility: Wireless orders grew 19% year-over-year, and SP Wi-Fi orders grew 127% year-over-year.

8. Guidance and Outlook

   • John expressed confidence in the company's value proposition and market position, despite acknowledging the uncertain economic environment and cautious IT spending, particularly in the enterprise segment.

   • He highlighted the strength of Cisco's product portfolio and innovation engine, emphasizing the company's readiness to drive transitions in cloud, mobility, and video.

   • He thanked stakeholders, including shareholders, employees, customers, and partners, for their ongoing commitment and expressed excitement about the opportunities for Cisco and the network in major market transitions and evolutions.

Frank A. Calderoni, the Former Chief Financial Officer and Executive Vice President of Cisco Systems, Inc., presented the financial results for the third quarter of fiscal year 2012. Here is a detailed summary of his remarks:

• Financial Highlights:

  • Total revenue for the quarter was $11.6 billion, up 7% year-over-year.
  • Product revenue was $9.1 billion, up approximately 5% year-over-year.
  • Services revenue was $2.5 billion, an increase of approximately 13% year-over-year.
  • Total product book-to-bill for Q3 was approximately 1.

• Gross Margin:

  • Q3 FY '12 total non-GAAP gross margin was 63.1%, up 0.7% quarter-over-quarter and down 0.8% year-over-year.
  • For product-only, non-GAAP gross margin for the third quarter was 62.0%, an increase of 1.1% quarter-over-quarter.
  • The increase was primarily driven by favorable mix and cost savings, partially offset by pricing, discounts, and rebates.
  • Non-GAAP product gross margin decreased 1.1% on a year-over-year basis.
  • Non-GAAP services margin for the third quarter was 67.1%, down 0.9% quarter-over-quarter and up 0.1% year-over-year.

• Geographic Performance:

  • Revenue grew across all geographic regions, with increases of 3% for the Americas, 5% for EMEA, and 24% for APJC.
  • The growth in the APJC region was driven by strength in both product and service revenues across most of the customer segments, led by service provider.
  • Total non-GAAP gross margin by geographic region was 62.7% for the Americas, 63.9% for EMEA, and 63.3% for APJC.
  • On a quarter-over-quarter basis, Americas was flat, while EMEA decreased 0.6 points and APJC increased 5.8 points.

• Operating Expenses:

  • Non-GAAP operating expenses were 34.5% of revenue or approximately $4 billion in Q3 FY '12, up approximately $80 million as compared to the previous quarter.
  • Increased G&A expenses in Q3 reflected investments in operational infrastructure, including real estate, IT project implementations, and investments related to operational and financial systems.

• Operating Income:

  • Non-GAAP operating income grew 12% year-over-year and was 28.6% of revenue in Q3.
  • Profits grew faster than revenue, consistent with the overall strategic financial goals.

• Tax Provision:

  • The Q3 FY '12 non-GAAP tax provision rate was 22%.

• Net Income:

  • Non-GAAP net income for the third quarter was $2.6 billion, representing an increase of 11% year-over-year.
  • GAAP net income for the third quarter was $2.2 billion as compared to $1.8 billion in the third quarter of fiscal year 2011, an increase of 20% year-over-year.

• Earnings Per Share:

  • Non-GAAP earnings per share on a fully diluted basis for the third quarter was $0.48 versus $0.42 in the third quarter of fiscal year 2011, a 14% increase year-over-year.
  • GAAP earnings per share on a fully diluted basis for the third quarter were $0.40 versus $0.33 in the same quarter of fiscal year 2011, an increase of 21% year-over-year.

• Balance Sheet:

  • Cash, cash equivalents, and investments at quarter-end was $48.4 billion, up approximately $1.7 billion from last quarter.
  • Approximately $6.1 billion was available in the U.S. at the end of the quarter.
  • Cash flow from operations in the third quarter was approximately $3 billion.
  • Accounts receivable balance was $4 billion at the end of Q3 FY '12.
  • Days sales outstanding (DSO) was 31 days, consistent with last quarter and down from 37 days at the end of Q3 FY '11.
  • Total inventory at the end of the third quarter was $1.5 billion, down from $1.6 billion in Q2 FY '12.
  • Inventory purchase commitments at the end of Q3 were $4.4 billion, up approximately $180 million quarter-over-quarter.
  • Total deferred revenue was $12.6 billion at the end of Q3, an increase of approximately 8% compared with Q3 FY '11.

• Headcount:

  • Headcount at the end of Q3 totaled 65,223, up 1,353 quarter-over-quarter, driven primarily by hires in support of revenue growth opportunities in services and strategic engineering hiring.

• Capital Allocation:

  • In the third quarter, Cisco returned approximately $1 billion in cash to shareholders through stock repurchases and dividend payments.
  • A dividend payment of $432 million, representing $0.08 per share, was declared and paid during the quarter.

• Guidance:

  • For Q4 FY '12, revenue growth is expected to be in the range of 2% to 5% on a year-over-year basis.
  • Non-GAAP gross margin is anticipated to be in the range of 61% to 62%.
  • Non-GAAP operating margin is expected to be in the range of 26.5% to 27.5%.
  • Non-GAAP tax provision rate is expected to be approximately 22%.
  • Non-GAAP earnings per share is expected to be in the range of $0.44 to $0.46 per share, up approximately 10% to 15% year-over-year.

• Restructuring Charges:

  • Total restructuring charges are expected to be approximately $1 billion, with the remaining charges to be incurred in the fourth quarter of FY '12.

• Commitment to Long-Term Financial Model:

  • Throughout the fiscal year, Cisco has demonstrated its commitment to the long-term financial model of growing profits faster than revenue through areas such as selective changes to its portfolio and a strong focus on operational execution and efficiency.

Robert W. Lloyd highlighted the following points:

• Customers who initially chose Huawei for cost reasons are now returning to Cisco due to hidden costs and lock-in issues

• Innovation from Cisco is highly valued by customers, whereas Huawei is seen as imitating rather than innovating

• Integrity and privacy are crucial in a cloud-centric world, and customers recognize that Huawei lacks in these areas

• Cisco is confident in competing against Huawei, not just in defending its home turf but also in emerging markets

• Larger deal sizes, margin protection, and margin enhancement are benefits observed from leveraging Cisco Capital

• The sales team is being trained to effectively use financial innovations, such as Cisco Capital, to enhance sales and leverage the install base more regularly