Cisco Systems, Inc., Q1 2011 Earnings Call, Nov 10, 2010 - NasdaqGS:CSCO

NasdaqGS:CSCO

John T. Chambers covered various aspects during the Cisco Systems, Inc. Q1 2011 Earnings Call. Here is a detailed summary of his statements:

1. General Overview of the Quarter:

   • Q1 FY '11 evolved as expected and in line with guidance.
   • Revenue of $10.75 billion, a 19% year-over-year increase.
   • Non-GAAP operating income of $3.0 billion, a 14% year-over-year increase.
   • Non-GAAP net income of $2.4 billion, a 14% year-over-year increase.
   • Non-GAAP earnings per share of $0.42, a 17% year-over-year increase.
   • GAAP earnings per share of $0.34, a 13% year-over-year increase.
   • Cash generated from operations was $1.7 billion, bringing total cash, including investments, to $38.9 billion.

2. Geographies, Products, and Customer Segments:

   • Solid quarter from a financial, products, customer, and geographic perspective.
   • Business architecture and technology architecture gaining customer acceptance.
   • New Products category grew 22% year-over-year.
   • Data Center led with 59% year-over-year growth, followed by Collaboration with 45% growth.
   • Video Connected Home grew 11% year-over-year, followed by Wireless at 9%, and Security was down slightly.

3. Key New Products:

   • ASR Edge routers grew approximately 200% year-over-year with a current annualized run rate of approximately $1.4 billion.
   • Nexus product family continued to be strong with year-over-year growth in excess of 120% and an annualized run rate of approximately $1.5 billion.
   • UCS server product family had another extremely strong quarter with 550% year-over-year growth to an annualized run rate of almost $500 million.
   • Number of UCS customers has grown to approximately 2,800 in Q1 FY '11.

4. Country Perspective:

   • Balance was relatively good with 13 of the 15 countries growing orders year-over-year in the mid-teens or better.
   • Strategy of focusing the entire company on five leading emerging countries evolving as expected.
   • Russia led with order growth of over 100% year-over-year, followed by India and Brazil with growth above 60% year-over-year.
   • The U.S. had product quarter growth of only 6% year-over-year with mixed growth rates among service providers.

5. Product Orders:

   • Global product orders saw 10% year-over-year growth.
   • U.S. and Canada was up 7%, European markets were up 2%, Emerging markets up 32%, and Asia-Pacific markets were up 18%.

6. Industry Perspective:

   • Enterprise and Commercial Customers segments had good balance with order growth of 16% year-over-year for Enterprise and 13% for Commercial.
   • Service Provider order growth was mixed with an 8% year-over-year quarter growth.
   • Public Sector was also mixed with a 6% year-over-year order growth.
   • Consumer was flat year-over-year.

7. Positive Areas for Growth:

   • Collaboration saw very solid order growth globally over 60% year-over-year.
   • Video brings collaboration to light from an innovation and a business process change perspective.
   • Data Center Virtualization and Cloud momentum is extremely strong.
   • Making great progress on being the first new large architectural player in the Data Center in almost two decades.

8. Challenges:

   • Mixed results on a global basis from the Public Sector business.
   • Challenges in the U.S. State Government business, down approximately 25% year-over-year.
   • Similar challenges in the Japanese Government business and orders from certain central governments in Europe.
   • Service Provider business had a number of strong positives but also a couple of challenges, particularly in the MSO cable operators area.
   • Europe is experiencing some initial pressure on certain other customer segments by country.

9. Summary:

   • Gaining market share in many product areas.
   • Well positioned in Video, Collaboration, Data Center Virtualization, Cloud, Emerging countries, Smart + Connected Communities, and new innovative products.
   • New longer-term market adjacencies such as Smart Grid, Sports and Entertainment, Virtual Healthcare, and Virtual Education are off to an excellent start.

10. Guidance:

    • Revenue guidance for Q2 FY '11 is for revenue growth to increase 3% to 5% year-over-year.
    • Estimate for fiscal year 2011 is for yearly revenue growth to be in the 9% to 12% range.

11. Closing Comments:

    • Focuses on where Cisco wants to be three to five years from now.

    • Market transitions are playing out as expected.

    • Cisco is viewed as a safe and secure partner during periods of rapid change.

    • Big plays in traditional markets are going well with proof points in recent market share gains.

    • Next group of market adjacencies with large potential, such as collaboration, business video, and data center virtualization, all saw strong growth.

    • Enterprise and Commercial businesses are continuing strong consistent growth.

    • Challenges in part of the Public Sector, Service Provider, and European business are expected to be short-term.

    • Cisco is strongly positioned to win in traditional markets and new market adjacencies.

Frank A. Calderoni, the Former Chief Financial Officer and Executive Vice President of Cisco Systems, provided detailed financial results and guidance during the Q1 2011 Earnings Call. Below is a summary of his statements:

• Financial Results Overview:

  • Total revenue for Q1 FY '11 was $10.75 billion, a 19% increase year-over-year.
  • Service revenue was $2 billion, up 13% year-over-year.
  • Product revenue was $8.7 billion, up 21% year-over-year.
  • Switching revenue was $3.6 billion, up 25% year-over-year.
  • Routing revenue was $1.8 billion, up 13% year-over-year.
  • New Products revenue was $3.1 billion, up 22% year-over-year, with strong growth in Data Center (59%) and Collaboration (45%).
  • Security revenue was down 2% year-over-year, while Wireless was up 9% and Video Connected Home was up 11%.
  • Revenue growth across all geographic segments ranged from 41% in Emerging markets to 11% in European markets.

• Gross Margin:

  • Total non-GAAP gross margin was 64.3%, up slightly quarter-over-quarter but down 2 percentage points year-over-year.
  • Product gross margin was 64%, up quarter-over-quarter but down 2.3 percentage points year-over-year, driven by pricing, discounts, and higher manufacturing costs.
  • Service margin was 65.7%, down slightly from the previous quarter and from Q1 FY '10.

• Operating Expenses:

  • Non-GAAP operating expenses were $3.9 billion, or 36.3% of revenue.
  • Non-GAAP operating expenses increased 16.8% year-over-year, slower than the 19% increase in revenues.

• Net Income and Earnings Per Share:

  • Non-GAAP net income was $2.4 billion, up 14% year-over-year, representing 22.4% of revenue.
  • Non-GAAP earnings per share were $0.42, up 17% year-over-year.
  • GAAP net income was $1.9 billion, and GAAP earnings per share were $0.34.

• Balance Sheet and Cash Flow:

  • Cash, cash equivalents, and investments were $38.9 billion, down $936 million from the previous quarter.
  • Cash flow from operations was $1.7 billion.
  • Accounts receivable balance was $4.5 billion, with days sales outstanding (DSO) at 38 days.
  • Total inventory was $1.5 billion, with non-GAAP inventory turns at 10.8.
  • Inventory purchase commitments were $4 billion, down 6% quarter-over-quarter.
  • Deferred revenue was $10.7 billion, up 16% year-over-year.

• Headcount:

  • Headcount was approximately 72,600, an increase of about 1,900 from the previous quarter.

• Guidance:

  • For FY '11, total annual revenue is expected to grow 9% to 12% year-over-year.

  • For Q2 FY '11, revenue is expected to increase 3% to 5% year-over-year.

  • Q2 FY '11 operating margins are expected to be in the range of 23% to 25%.

  • Q2 FY '11 earnings per share are expected to range from $0.32 to $0.35.

  • GAAP EPS is expected to be $0.08 to $0.10 lower than non-GAAP EPS.

  • Guidance assumes no significant acquisitions, asset impairments, restructuring, or tax events.

Katherine Blair Christie, referred to as the Former Strategic Advisor, made the following statements during the Cisco Systems, Inc. Q1 2011 Earnings Call:

1. Introduction:

   • Thanks the operator and greets everyone, welcoming them to the 83rd quarterly conference call.
   • Mentions that she is joined by several executives including John Chambers, Frank Calderoni, Rob Lloyd, Ned Hooper, and Padmasree Warrior.

2. Press Release and Webcast Information:

   • Notes that the Q1 fiscal year 2011 press release is available on U.S. High-Tech Marketwire and Cisco's website.
   • Reminds attendees that there is a corresponding webcast with slides containing financial information discussed during the call, as well as additional financial metrics and analysis.
   • Indicates that downloadable Q1 financial statements will be available, including revenue by geographic segment and product category.
   • Directs attendees to the Financial Reporting section of Cisco's website for income statements, full GAAP to non-GAAP reconciliation information, balance sheets, and cash flow statements.

3. Replay and Webcast Availability:

   • Announces that a replay of the call will be available via telephone from November 10 through November 17.
   • Provides the telephone numbers for domestic and international callers.
   • Mentions that a webcast replay will be available from November 10 through January 21 on Cisco's Investor Relations website.

4. Forward-Looking Statements Disclaimer:

   • Reminds listeners that the call includes forward-looking statements and that actual results may differ materially from those contained in the forward-looking statements.
   • References the risks and uncertainties discussed in detail in the company's SEC filings, specifically the most recent annual report on Form 10-K and any applicable amendments.

5. Reporting Changes and Enhancements:

   • Announces that the company has made certain reporting changes and enhancements reflected in the financial results discussed during the call.
   • Explains that the company has consolidated its Asia-Pacific and Japan operations to achieve operational efficiencies, resulting in four geographic segments: the United States and Canada, the European market, Emerging markets, and Asia-Pacific markets.
   • Describes that the company has changed the way it reports revenue by product category, introducing a new category called New Products, which includes Data Center, Collaboration, Security, Wireless, and Video Connected Home.
   • Provides details on the subcategories within New Products and explains the components of these subcategories.
   • Mentions that the slides accompanying the call provide further details on these changes, including a mapping of products into the subcategories and a reclassification of fiscal year 2010 quarterly revenue based on the revised product categories.

6. Formatting Improvements:

   • Notes that the slides have been formatted and improved to better communicate key data points that will be consistently provided to investors in each quarter.

7. Call Handover:

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

8. Closing Remarks:

   • Thanks everyone for their participation and ongoing support, concluding the call.

9. Replay and Follow-Up Information:

   • Provides information on how to access the replay of the call and directs attendees to the Financial Reporting section of Cisco's website for further financial information.

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

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

Robert W. Lloyd highlighted the following key points:

• The company's sales forecast was generally solid, but the team missed it by about $500 million, primarily due to challenges in the Public Sector, Cable segment, and Europe.

• The Public Sector, particularly state and local government, saw a significant drop in orders, influenced by budget constraints and the timing of elections.

• The Service Provider segment experienced mixed results, with strong growth in traditional routing, switching, and next-generation networks, but a decline in the Cable segment, especially in North America.

• Despite the challenges, the company is winning major franchises and opportunities, but the conversion of these wins into orders is delayed due to funding and project completion issues.

• The company is maintaining strong win rates against competitors like Juniper, HP, and IBM in various product categories, including Data Center and architectural plays.

• The company is seeing good momentum in new product areas such as Data Center, Collaboration, and Video, with significant growth in these segments.