Cisco Systems, Inc., Q1 2013 Earnings Call, Nov 13, 2012 - NasdaqGS:CSCO

NasdaqGS:CSCO

During the Cisco Systems, Inc. Q1 2013 Earnings Call, Rob Soderbery made several comments. Here is a detailed list of his remarks:

1. On the Company's Roadmap and Customer Feedback:

   • "Our message is getting out there that the whole constructive software, separation of the control plane and the data plane means different things to different people."
   • "Large-scale controllers and agents mean something quite different to a large-scale cloud provider or a very large enterprise customer."
   • "We've had a chance to review our roadmap in this area, and our customers love it. They just want us to get there faster because we have what they're looking for."

2. On Overlay Networks and Virtualization:

   • "On the idea of overlay networks, where we actually are going to combine the construct of a virtual overlay with our significant footprint in physical networks."
   • "It's very clear that this migration that will go on over a decade in traditional data centers is going to require both, and I think we will lead in the transition from physical to virtual, if what we're doing with our Nexus 1000V and this family of network virtual services that we're leading with."

3. On Programmability and Operating Systems:

   • "The one we haven't talked that much about but could be the biggest impact for our customers, is creating programmability to the operating systems they've relied on, XR, IOS XR in service provider, IOS, which is predominant across the enterprise."
   • "When we start to touch the applications that our customers run, we start to touch the experience they can deliver to their clients."

4. On Software and Hardware Integration:

   • "The whole idea of software tied to the ASICs, and our very comprehensive platform is being understood by customers, and I think it's going to open a lot of opportunity for Cisco in the future."

5. On Unified Data Center Strategy:

   • "If we support any hypervisor any orchestration and management layer, any storage partnership, and we do so with really tightly integrated solutions, resolving with the problem that customers are challenged with."
   • "We're going to combine the [indiscernible], the Nexus 1000V with a series of virtualized services, virtualized WAAS, virtualized routing, virtualized security, and map those to the physical networks than our customers have relied on, across any hypervisor, that's actually what our customers want us to do."
   • "I think our strategy here is what they're looking for. I think a unified data center is what they're asking for, and then combining the physical with the virtual in a way that only Cisco can is actually our strategy."

These comments highlight Rob Soderbery's insights into the company's technological roadmap, customer feedback, and strategic direction, particularly in the areas of software-defined networking, virtualization, and unified data center solutions.

Melissa Selcher made the following statements during the Cisco Systems, Inc. Q1 2013 Earnings Call:

1. Introduction

   • "Thanks, Kim. Good afternoon, everyone, and welcome to our 91st quarterly conference call. This is Melissa Selcher, and I'm joined by John Chambers, our Chairman and Chief Executive Officer; Frank Calderoni, Executive Vice President and Chief Financial Officer; Rob Lloyd, President of Development and Sales; and Gary Moore, President and Chief Operating Officer."

2. Webcast and Financial Information Availability

   • "I would like to remind you that we have corresponding webcast with slides on our website in the Investor Relations section. Income statement, full GAAP to non-GAAP reconciliation information, balance sheet, cash flow statements, and other financial information can also be found on the Investor Relations website. Click on the Financial Reporting section of the website to access these documents."

3. Forward-Looking Statements Disclaimer

   • "Throughout this conference call, we'll be referencing both GAAP and non-GAAP financial results. The matters we will be discussing today include forward-looking statements and as such, are subject to the risks and uncertainties that we discussed in detail in our documents filed with the SEC, specifically the most recent Annual Report on Form 10-K and any applicable amendments, which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements."

4. Unauthorized Recording Disclaimer

   • "Unauthorized recording of this conference call is not permitted."

5. Financial Comparison Basis

   • "All comparisons throughout this call will be on a year-over-year basis unless stated otherwise."

6. Transition to John Chambers

   • "I will now turn it over to John for his commentary on the quarter."

7. Transition to Frank Calderoni

   • "To provide additional detail on our Q1 FY '13 results, I'd like to turn the call over to Frank. I will then walk through after, Frank, you're through, what we're seeing in the business and where we're focusing going forward. Frank will then come back with a detailed guidance, and then we'll wrap up with Q&A. Frank, over to you."

8. Transition Back to John Chambers

   • "Frank, let me turn it back over to you for our guidance for Q2."

9. Closing Remarks

   • "Great, thanks, John. Cisco's next quarterly call, which will reflect our second quarter for FY '13 will be on Wednesday, February 13, 2013, at 1:30 p.m. Pacific Time, 4:30 p.m. Eastern Time. Again, I would like to remind you in light of Regulation FD, Cisco plans to retain its long-standing policy to not comment on its financial guidance during the quarter, unless it is done through an explicit public disclosure. Please call the Investor Relations Department with any follow-up questions from this call. Thank you for your participation and continued support. This concludes our call."

John T. Chambers made several remarks during the Cisco Systems, Inc. Q1 2013 Earnings Call:

1. Condolences and Commitment:

   • Opened the call by recognizing the devastation caused by Hurricane Sandy in the eastern seaboard of the United States.
   • Expressed condolences for all that has been lost and committed to supporting employees, partners, customers, and local government agencies and support organizations working to rebuild.

2. Financial Performance:

   • Delivered a strong quarter of record revenue with 6% growth and record non-GAAP earnings per share of $0.48, with 12% growth.
   • Highlighted the benefits of focus on operational excellence with only a 1% increase in non-GAAP operating expenses and strong non-GAAP gross margins of 62.7%.
   • Mentioned a 11% increase in net income and record non-GAAP operating income.

3. Market Position:

   • Stressed the central role of the network in connecting people, processes, data, and things in a world of many clouds, mobility, and the Internet of Things.
   • Emphasized that the challenge of scale, agility, security, and resilience can only be addressed by an intelligent network, and Cisco is uniquely positioned to help customers meet these requirements.

4. Business Highlights:

   • Revenue growth of 6% in a challenging market where many peers are reporting declines.
   • Profitability growth in double digits with solid expense management and gross operating margins exceeding guidance.
   • Service business growth in double digits as customers partner with Cisco to build their technology and business architectures for the future.
   • Generated $2.5 billion in cash from operations this quarter, with a dividend yield of over 3%, adding value for shareholders.
   • Despite challenging order trends in Europe, pleased with order growth in the U.S. in the enterprise, service provider, and commercial sectors.

5. Product and Business Areas:

   • Switching revenues declined 2%, but saw solid growth in the Nexus data center switching with the Nexus 2000, 5000, and 7000 lines growing in the high teens or better.
   • NGN routing portfolio remained strong, especially relative to competitors, with double-digit growth in total Edge routing, driven by the ASR 9000.
   • Wireless business experienced 38% revenue growth, the fourth consecutive quarter of record revenue.
   • Security grew 6%, driven by high-end and midrange router firewall platforms, web security, and strong adoption of the Identity Services Engine.
   • Data center grew 61%, fueled by industry leadership and unified data center strategy.
   • Collaboration declined 8%, facing a difficult comparison with Q1 FY '12, which was a record quarter for collaboration products.
   • Service provider video revenue grew 30%, with NDS contributing approximately 20%.

6. Geographic and Customer Segments:

   • Discussed the growth rates in various geographic and customer segments, highlighting the U.S. as leading the global economy recovery.
   • Noted the challenging environment in Europe, with declines in enterprise and service provider segments.
   • Mentioned positive trends in the U.S. enterprise, service provider, and commercial segments, as well as continued growth in the Asia Pacific, Japan, and China region.

7. Future Outlook:

   • Anticipated continued growth opportunities in the commercial marketplace, cloud, mobility, and video.
   • Planned to aggressively expand the software and services business, pursue opportunities in emerging markets, and focus on security architecture.
   • Saw the Internet of Everything as a significant market transition and an opportunity to harness information flowing across networks into new capabilities and experiences.
   • Aimed to become the world's #1 IT company by addressing customers' business challenges through technology solutions and leveraging scale and reach.

8. Closing Remarks:

   • Thanked the team for delivering on commitments to shareholders, partners, and customers.

   • Emphasized the company's ability to evolve and emerge stronger, despite challenges from the economy and emerging competitors.

   • Looked forward to capitalizing on opportunities in the intelligent network and becoming the world's #1 IT company.

Frank A. Calderoni, the Former Chief Financial Officer and Executive Vice President, provided the financial details and analysis during the earnings call. Here are the key points he covered:

• Financial Overview:

  • Total revenue for the first quarter was $11.9 billion, an increase of approximately 6%.
  • Revenue increased 7% for the Americas, 10% for Asia Pacific, Japan, and China (APJC), with revenue for Europe, Middle East, and Africa (EMEA) being flat.
  • Total product revenue was $9.3 billion, up approximately 4% year-on-year.
  • Total service revenue was $2.6 billion, up approximately 12%.
  • Q1 FY '13 total non-GAAP gross margin was 62.7%, up 0.8 percentage points quarter-over-quarter and 0.3 percentage points year-over-year.

• Product and Service Margins:

  • Product-only non-GAAP gross margin for the first quarter was 61.5%, an increase of 1.1 percentage points quarter-over-quarter and 0.2 percentage points year-over-year.
  • Non-GAAP service margin for the first quarter was 66.9%, down from 67.1% last quarter but up from 66.8% in Q1 FY '12.

• Operating Expenses and Headcount:

  • Non-GAAP operating expenses were approximately $4.1 billion in Q1, up approximately $100 million when compared to Q4 FY '12.
  • Non-GAAP operating expenses as a percentage of revenue was 34.8% in the quarter.
  • Headcount totaled 72,360 at the end of Q1, excluding the addition of approximately 5,750 NDS (News Digital Systems) employees.

• Operating Margin:

  • Non-GAAP operating margin for the first quarter was 27.9%, representing growth of 13%, which grew faster than revenue.

• Earnings Per Share:

  • Non-GAAP earnings per share on a fully diluted basis for the first quarter were $0.48 versus $0.43 in the first quarter of fiscal year 2012, which is a 12% increase.

• Cash Flow and Cash Position:

  • Total cash, cash equivalents, and investments at quarter end was $45 billion, down $3.7 billion from last quarter due to the completion of the acquisition of NDS.
  • Cash flow from operations was approximately $2.5 billion.
  • Returned approximately $1 billion to shareholders through the stock repurchase program and the quarterly dividend.

• Acquisitions and Strategy:

  • Closed several strategic acquisitions, including NDS, vCider, and ThinkSmart.
  • Expects to be active with acquisitions to drive growth and value proposition with customers.
  • Prefers small to medium-sized deals that are a fit from a technology, strategy, culture, and return on invested capital (ROIC) perspective.

• Guidance:

  • For Q2 FY '13, expects revenue growth to be in the range of 3.5% to 5.5% on a year-over-year basis.
  • Non-GAAP gross margins expected to be approximately in the range of 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 22%.
  • Non-GAAP earnings per share expected to range between $0.47 and $0.48 per share.

• Restructuring and Acquisitions:

  • Incurred a total pre-tax charge of approximately $1.1 billion related to the July 2011 restructuring announcements.
  • Any remaining charges expected to be incurred during the remainder of FY '13 related to these actions are not expected to be significant.
  • Assumes no additional acquisitions, asset impairments, restructurings, and tax or any other event which may or may not be significant.

• Services Business:

  • Highlighted the strong growth in the services business, noting that it has a revenue compound annual growth rate of approximately 12% over the last decade.
  • Mentioned that the advance services business continues to perform well with growth over 20%.

• Cost Efficiencies:

  • Discussed various initiatives to drive cost efficiencies across the company, including an enterprise-wide shared services organization delivering improved global scalable capabilities and significant cost efficiencies.

• Cash Management:

  • Continued to closely manage the U.S. cash position, taking into consideration the dividend, stock buyback requirements, operating cash flow capital requirements, funding of the financing business, and acquisition strategy.