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pww.comCisco Systems, Inc., Q1 2007 Earnings Call, Nov-08-2006 - NasdaqGS:CSCO

NasdaqGS:CSCO

Rick Justice [Executives] 💬

During the Cisco Systems, Inc. Q1 2007 Earnings Call, Rick Justice, Senior Vice President of Worldwide Field Operations, provided the following comments:

  1. Sales Productivity:

    • Rick commented on the sales productivity, noting that the company continues to monitor the productivity of newly hired sales personnel.
    • He mentioned that the company tracks the performance of new hires over several quarters to ensure they are meeting standard productivity levels.
    • According to Rick, the company has observed high levels of productivity being maintained in major markets like U.S. enterprise, even as new hires are integrated.

  2. Overall Productivity:

    • Despite the aggressive hiring, overall productivity for the quarter was flat to slightly up compared to the same period in the previous year (Q1 FY '06).

  3. Scientific-Atlanta Market Representation:

    • Rick mentioned that Scientific-Atlanta has a significant field headcount representation in Europe, indicating a focus on this region.
    • He noted that while the number of accounts in the U.S. is higher, there is significant representation in Europe, suggesting a strategic emphasis on expanding the business there.

  4. Interest in IPTV:

    • Rick reinforced the point that interest in IPTV is widespread around the world, indicating a global opportunity for the company.

These comments provide insights into the company's sales strategy, productivity management, and international expansion efforts, particularly regarding the Scientific-Atlanta acquisition.

Blair Christie [Executives] 💬

Blair Christie, Vice President of Corporate Communications for Cisco Systems, made the following statements during the Cisco Systems, Inc. Q1 2007 Earnings Call:

  1. Introduction:

    • "Great. Thank you and good afternoon everyone. Welcome to our 67th quarterly conference call. This is Blair Christie, Vice President of Corporate Communications and I'm joined by John Chambers, our President and CEO; Dennis Powell, Chief Financial Officer; Rick Justice, Senior Vice President of Worldwide Field Operations; Charlie Giancarlo, Chief Development Officer."

  2. Logistics:

    • Provided information about accessing the Q1 fiscal year 2007 press release on various platforms.
    • Offered instructions for obtaining a fax of the press release.
    • Mentioned the availability of a webcast with slides and downloadable financial information.
    • Announced that a replay of the call would be available via telephone.

  3. Financial Guidance:

    • Noted that the call would reference both GAAP and non-GAAP financial results.
    • Mentioned the availability of a reconciliation of GAAP to non-GAAP information in the slides accompanying the webcast and on the Cisco website in the Investor Relations section.

  4. Call Format Changes:

    • Announced changes to the call format based on feedback, including reducing the narrative part of the call, presenting key takeaways and revenue guidance upfront, and focusing on financials, business momentum, and strategy.
    • Explained the three sections of the call: financial results, business momentum and strategy, and Q&A.
    • Mentioned the goal to reduce the call duration by 15 to 30 minutes.
    • Requested feedback on the new approach.

  5. Handover:

    • Introduced John Chambers for his commentary on the quarter.

  6. Closing Remarks:

    • Thanked John Chambers after his closing remarks.

    • Announced the date and time for the next quarterly conference call.

    • Reminded participants about Cisco's policy regarding financial guidance during the quarter.

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

    • Concluded the call.

John Chambers [Executives] 💬

John Chambers made numerous comments during the earnings call, covering a variety of topics related to Cisco's performance and strategy. Below is a detailed summary of his remarks:

General Remarks

  • Opening Comments:

    • He thanked Blair Christie and introduced the team members present.
    • He outlined the structure of the call, emphasizing a shorter format with more detailed information provided in accompanying slides.

  • Q1 Highlights:

    • He highlighted that Q1 was another very strong and record quarter from a revenue, GAAP, and non-GAAP net income perspective.
    • He summarized quarterly highlights from a key financial perspective, geographic perspective, customer segment, and products.

  • Financial Highlights:

    • Record revenue of approximately $8.2 billion, a 25% year-over-year increase.
    • Cisco standalone revenue increased by approximately 16%, above guidance.
    • Non-GAAP net income was $1.9 billion, an increase of approximately 21% year-over-year.
    • Non-GAAP earnings per share were a record $0.31, and GAAP earnings per share were a record $0.26.
    • Cash generated from operations was $2.3 billion.
    • Cisco repurchased $1.5 billion of common stock.
    • Cash, cash equivalents, and investments totaled $19.5 billion.

  • Geographic Momentum:

    • The U.S. maintained strong momentum with service provider order growth of approximately 30% and commercial order growth of approximately 20% year-over-year.
    • Emerging markets continued with over 40% year-over-year order growth.
    • European momentum improved with double-digit year-over-year order growth.
    • Japan showed slight year-over-year improvement with growth in the low single-digits.

  • Customer Segment Discussion:

    • Commercial market segment continued solid momentum with year-over-year order growth of approximately 20%.
    • Service provider segment achieved the highest growth with orders growth in the low 20%.
    • Enterprise order growth was good year-over-year in the U.S., European markets, and emerging markets.

  • Product Discussion:

    • Revenues for routers grew 13% and switching grew 15% year-over-year.
    • Advanced Technologies revenue grew approximately 23% standalone.
    • Wireless led Advanced Technologies with revenue growing over 40% year-over-year.
    • Unified communications grew approximately 30% year-over-year.
    • Networked home grew in the low 30%.
    • Storage grew in the mid-teens.
    • Security grew in the high single-digits.

  • Service Provider Market:

    • Technology and business architecture strategy is moving Cisco from a tactical or strategic technology partner to a strategic business partner relationship with service providers.
    • Strategic business partner relationship is similar to the evolution achieved in the enterprise market in the mid-1990s.

  • Q2 Guidance:

    • Year-over-year revenue growth guidance of approximately 24% to 25%.
    • Cisco standalone year-over-year revenue growth guidance of 14% to 15%.

  • Summary:

    • Momentum remains strong following a strong Q4.
    • Record results are due to the successful implementation of Cisco's strategy.
    • The network is becoming the platform for all forms of communications and IT.

Specific Questions Addressed

  • Headcount Addition:

    • Approximately 600 in sales, 330 in engineering, 300 in customer advocacy, and 400 in manufacturing operations at Scientific Atlanta.

  • Customer Decision-Making in Carrier Market:

    • Load on networks is driving growth, with video contributing significantly.
    • Service providers are in various stages of building out IPTV and considering quad play services.

  • Set-Top Box Breakdown:

    • High-end DVR shipments were almost half of the 1.3 million set-top boxes.
    • HD shipments were 193,000 units.

  • Gross Margins:

    • Broad-based discounts, offset by volume and cost savings.
    • Linksys business growth impacted margins due to the back-to-school program.

  • Decoupling from GDP:

    • Part of the business is tied to GDP growth, but a larger portion is tied to service provider buildouts and new markets.

  • Service Provider Growth:

    • Video is the killer application, driving loads and influencing service provider decisions.
    • Architectural play is the key advantage, offering investment protection, total cost of ownership, and flexibility.

  • Application Acceleration Products:

    • Good uptake and momentum as companies leverage web-based applications and push them to the edge.

  • Scientific-Atlanta International Expansion:

    • Interest is good around the world, with Europe and Eastern Europe showing significant interest.
    • Currently, approximately 90% of the Scientific-Atlanta business is in North America.

  • Strategic Partner to Enterprises:

    • Cisco's evolution to become a strategic partner to enterprises started in the mid-1990s.
    • Similar opportunity exists with service providers, with some expressing interest in a strategic business partnership.

  • Enterprise IT Budgets:

    • Enterprises are allocating more of their total spend to Cisco due to the changing role of the network.
    • Companies are focusing on productivity enablers like collaboration and traditional IT data applications.

  • Advanced Technologies:

    • Unified communications and wireless are expected to continue strong growth.
    • Storage and telepresence are also expected to perform well.

  • Edge Routing and Service Provider Ethernet Switching:

    • Cisco is taking market share at the core, edge, and access.
    • Comfortable with the architectural strategy in this area.

  • Microsoft Entry into VoIP Market:

    • Microsoft will be both a partner and a competitor.
    • Cisco has a three to five-year lead in the unified communications marketplace.

  • Japan NGN Build:

    • Japan is playing out as expected, with a leveling out before meaningful orders for the next generation build-out.
    • Positioned well for opportunities in Japan.

  • Service Provider Market:

    • Migration to IP and Ethernet is driving demand for Cisco's products.
    • Ethernet becoming more prevalent in service provider infrastructure.

  • Scientific-Atlanta Position:

    • Strong market share in cable modem and EMTA shipments.
    • Growing well in both modems and EMTA area.

Closing Remarks

  • Record Quarter:

    • Extremely pleased with the record quarter and strong results.

    • Vision of the industry's evolution aligns with Cisco's strategy.

    • Dramatically differentiated Cisco in strategy and market transitions.

    • Balance was unusually good across all areas.

    • Market share growth and positioning in all customer segments.

Dennis Powell [Executives] 💬

During the Cisco Systems, Inc. Q1 2007 Earnings Call on November 8, 2006, Dennis Powell, the Chief Financial Officer, provided several comments and details about the company's financial performance and outlook. Here is a detailed summary of his remarks:

Financial Results Overview

  • Revenue Growth: Total revenue for Q1 was $8.2 billion, marking a 25% year-over-year increase. Cisco's standalone revenue was $7.6 billion, or 16% year-over-year growth. Scientific-Atlanta's revenue was $584 million, up 21%.
  • Product Revenue Breakdown:
    • Routing revenue: $1.6 billion, up 13%.
    • Switching revenue: $3 billion, up 15%.
    • Advanced Technologies revenue: $1.9 billion, including $467 million from Scientific-Atlanta, representing a 64% increase. Excluding Scientific-Atlanta, it grew 23%.
    • Other product revenue: $455 million, up 53% including Scientific-Atlanta and 23% excluding it.
  • Service Revenue: $1.24 billion, up 17%.
  • Gross Margin: Total non-GAAP gross margin was 64.8%, down from 65.3% last quarter. Product-only non-GAAP gross margin was 64.7%, down from 65.1%. The decrease was due to mix and discounts, partially offset by cost savings and volume.
  • Operating Expenses: Non-GAAP operating expenses as a percentage of revenue were approximately 36% in Q1 FY '07, down from approximately 37% in Q1 FY '06.
  • Tax Provision Rate: Approximately 26% for the non-GAAP and GAAP results, down from approximately 28% in Q1 FY '06.

Profitability

  • Net Income:
    • Non-GAAP net income: $1.9 billion, up 21%.
    • GAAP net income: $1.6 billion, up 28%.
  • Earnings Per Share (EPS):
    • Non-GAAP EPS: $0.31, up 24%.
    • GAAP EPS: $0.26, up 30%.

Balance Sheet Highlights

  • Cash and Investments: $19.5 billion, up from $17.8 billion.
  • Cash Flow from Operations: Approximately $2.3 billion.
  • Stock Repurchases: $1.5 billion to repurchase 66 million shares at an average price of $22.85.
  • Accounts Receivable: $3.1 billion, down from $3.3 billion. Days Sales Outstanding (DSO) was 34 days, down from 38 days.
  • Inventory: $1.5 billion, up from $1.4 billion. Non-GAAP inventory turns were 8.1 times, down from 8.3 times.
  • Purchase Commitments: $2.3 billion, up from $2 billion, due to increased volume and longer lead times.
  • Headcount: Ended at 51,840, a net increase of 1,914.

Guidance for Q2 FY '07

  • Revenue Growth: Anticipated to be in the range of 24% to 25% year over year, reflecting Cisco's standalone growth of 14% to 15%.
  • Gross Margin: Expected to be slightly above or below 65%, assuming consistency in core Cisco and Scientific Atlanta gross margins.
  • Operating Expenses: Expected to be in the range of 36% of revenue.
  • Interest and Other Income: Approximately $195 million.
  • Tax Provision Rate: Expected to be approximately 26%.
  • Share Count: Modeling to be flat to up 50 million in weighted average shares outstanding for EPS purposes.
  • Cash Flow from Operations: Expected to generate $500 million to $700 million per month.

Forward-Looking Statements

  • Dennis reminded listeners that the comments included forward-looking statements and advised reviewing recent SEC filings for important risk factors that could cause actual results to materially differ from those contained in forward-looking statements.

These comments by Dennis Powell provide a comprehensive overview of Cisco's financial performance for Q1 FY '07 and the outlook for Q2 FY '07.

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