Cisco Systems, Inc., Q4 2008 Earnings Call, Aug-05-2008 - SEHK:4333

SEHK:4333

Pankaj Patel, Senior Vice President and General Manager of the Service Provider Group at Cisco Systems, Inc., made the following comments during the Q4 2008 Earnings Call:

1. Strength in High-End Router Portfolio:

   • Pankaj highlighted that the company's high-end router portfolio, particularly the CRS-1, has been performing well.
   • He mentioned that the innovations and R&D investments in the high-end routers like the CRS-1 have paid off, and Cisco has a strong position in this market.

2. Market Share Gains:

   • Pankaj noted that Cisco has been gaining market share, particularly in the high-end, multi-chassis routers segment.

3. Architectural Leadership:

   • He emphasized that Cisco excels in providing end-to-end solutions and has gained both mindshare and market share in the router market.
   • Pankaj stated that Cisco is in a better position than ever in the market, particularly in terms of architectural leadership and system offerings.

4. Response to Competitor Performance:

   • Pankaj responded to questions about competitor performance, noting that while some competitors may have had a good quarter, Cisco's position and product range, from core to edge, are strong.
   • He acknowledged that there might be some work to do in certain segments of the edge market, such as the ASR-1000, but expressed confidence in closing any gaps.

In summary, Pankaj Patel's comments focused on Cisco's strengths in the high-end router market, particularly the CRS-1, and the company's overall position in providing architectural leadership and end-to-end solutions. He also addressed the competitive landscape and expressed confidence in Cisco's ability to maintain its market leadership.

Blair Christie, the Senior Vice President of Corporate Communications for Cisco Systems, made the following statements during the Q4 2008 Earnings Call:

1. Introduction:

   • Thanked the operator and welcomed everyone to the 74th quarterly conference call.
   • Mentioned the presence of John Chambers, the Chairman and CEO; Frank Calderoni, the Chief Financial Officer; and other executives.
   • Noted the availability of the Q4 fiscal year 2008 press release on Full National Marketwire, the European Financial and Technology Wire, and the Cisco website.

2. Webcast and Slides:

   • Reminded attendees about the webcast with accompanying slides, which contain financial information and additional financial metrics.
   • Directed attendees to the Cisco website's financial section for downloading Q4 financial statements, including revenue segments by product and geography, income statements, GAAP to non-GAAP reconciliation information, balance sheets, and cash flow statements.

3. Replay Availability:

   • Announced that a replay of the call would be available via telephone from August 5 through August 12 and online from August 5 through October 17.

4. Forward-Looking Statements Disclaimer:

   • Reminded listeners that the call included forward-looking statements subject to risks and uncertainties, referring to the detailed risks discussed in the company's SEC filings.

5. Unauthorized Recording Disclaimer:

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

6. Transition to John Chambers:

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

7. Opening of Q&A Session:

   • Announced the opening of the call to Q&A and requested that sell-side analysts ask only one question.

8. Closing Remarks:

   • Provided details about the next quarterly conference call, scheduled for November 5, 2008.
   • Reiterated the availability of downloadable Q4 financial statements on the Cisco website.
   • Reminded attendees about Regulation Fair Disclosure and Cisco's policy not to comment on financial guidance during the quarter unless through an explicit public disclosure.
   • Invited attendees to contact the Investor Relations Department with follow-up questions and thanked everyone for their participation and support.

These statements outline Blair Christie's role in facilitating the call, providing logistical information, and ensuring compliance with regulatory requirements.

John Chambers provided extensive commentary during the Q4 2008 Earnings Call. Below is a detailed summary of his remarks:

Opening Comments:

• Focus: John Chambers focuses on key takeaways from Q4 and fiscal year 2008, updates on long-term growth projections of 12% to 17%, and revenue guidance.
• Format Changes: He mentions that the call will have a more abbreviated format, covering fiscal year 2008 and the fourth quarter, with additional detail on new or evolving areas.

Fiscal Year 2008 Highlights:

• Financial Results:
  • Revenue: $39.5 billion, a 13% year-over-year increase.
  • Cash Generated from Operations: $12.1 billion, a 20% year-over-year increase.
  • Non-GAAP EPS: $1.56, a 16% year-over-year increase.
  • GAAP EPS: $1.31, a 12% year-over-year increase.
• Order Growth:
  • Product Order Growth: Approximately 12%.
  • Service Order Growth: Approximately 25%.
  • Product Book-to-Bill: Above 1.
• Geographic Balance:
  • China Order Growth: Over 30%.
  • India Order Growth: 32%.
  • Mexico Order Growth: 32%.
  • Russia Order Growth: 23%.
  • Brazil Order Growth: 48%.
  • Emerging Countries in Asia: Approximately 28% growth.
  • Emerging Market Theater (Eastern Europe, Latin America, Middle East, Africa, Russia, and CIS): Approximately 19% growth.
  • Asia-Pacific: Approximately 20% growth.
  • European Markets: Approximately 13% growth.
  • US and Canada Order Growth: 9%.
  • Japan: 5% growth.
• Product Revenue Growth:
  • Routing Revenues: 14% year-over-year growth.
  • Switching: 7% year-over-year growth.
  • Advanced Technologies: 21% year-over-year growth, led by Unified Communications (51%) and Application Networking Services (36%).
• Customer Segment Growth:
  • Enterprise Public Sector: Approximately 10% year-over-year.
  • Commercial: Continued strong at 20% year-over-year.
  • Service Providers: Grew approximately 10% year-over-year.

Q4 Fiscal Year 2008 Highlights:

• Financial Results:
  • Revenue: $10.4 billion, a 10% year-over-year increase.
  • Cash Generated from Operations: $3.5 billion.
  • Non-GAAP EPS: $0.40, an 11% year-over-year increase.
  • GAAP EPS: $0.33, a 6% year-over-year increase.
  • Non-GAAP Gross Margins: 65.2%.
  • Non-GAAP Operating Expenses: 35.7% of revenue.
• Order Growth:
  • Product Order Growth: Approximately 10%.
  • Service Order Growth: Approximately 20%.
  • Product Book-to-Billed: Comfortably above 1.
• Geographic Growth:
  • China: Over 30% order growth.
  • India: Approximately 20% order growth.
  • Mexico and Russia: Over 40% order growth.
  • Brazil: Approximately 30% order growth.
  • Emerging Countries in Asia-Pacific: Approximately 23% growth.
  • Emerging Market Theater: Approximately 10% growth.
  • Asia-Pacific: 19% growth.
  • Japan: 10% year-over-year growth.
  • European Markets: Approximately 11% growth.
  • US and Canada Orders: Approximately 7% growth.
• Product Revenue Growth:
  • Routing Revenue: 8% year-over-year growth, led by high-end routing (85% CRS-1 growth).
  • Advanced Technologies: 15% year-over-year growth, led by Unified Communications (29%) and Application Networking Services (30%).
• Emerging Technologies Group Growth:
  • TelePresence: Approximately 500% year-over-year.
  • Digital Media Systems: Approximately 200% year-over-year.
  • Physical Security: Approximately 250% year-over-year.

Strategic Direction:

• Collaborative Business Process Changes:
  • Discussions with customers are moving from conceptual collaboration to implementation of collaborative network-enabled Web 2.0 productivity tools.
• Service Provider Perspective:
  • Cisco is positioned strongly with global service providers from both a technology and business partnership perspective.
  • Service providers are in different phases: loading networks and adding services, starting next-generation IP buildouts, or slowing CapEx until achieving more top-line growth.
• Revenue Guidance:
  • Q1 Fiscal Year 2009: 8% year-over-year revenue growth.
  • Q2 Fiscal Year 2009: 8.5% year-over-year revenue growth.
  • Challenges: Mixed signals in the market, uncertain macroeconomic environment, mixed service provider expenditure signals.
• Long-Term Strategy:
  • Aggressive investments during the slowdown to expand share of customer spend and move into new market adjacencies.
  • Focus on collaboration enabled by network Web 2.0 technologies.

Closing Remarks:

• Momentum:
  • Strong product leadership, innovation, and thought leadership.
  • Good balance across geographies, products, services, and customer segments.
• Opportunities:
  • Expansion into new and adjacent markets, from the data center to the home market and from the service provider to the small business and consumer.
• Investment Strategy:
  • Aggressive investments in areas of opportunity while maintaining focus on financial models.
• Guidance:
  • Q1 Fiscal Year 2009: 8% year-over-year revenue growth.
  • Q2 Fiscal Year 2009: 8.5% year-over-year revenue growth.
• Long-Term Growth Opportunities:
  • Remains in the 12% to 17% range, assuming proper execution.
• Vision and Strategy:

  • Well-positioned in the industry from a vision, differentiated strategy, and execution perspective.

  • Entering the next phase of the Internet centered on collaboration enabled by network Web 2.0 technologies.

Frank Calderoni, the Chief Financial Officer of Cisco Systems, provided detailed financial insights during the Q4 2008 Earnings Call. Below is a summary of his remarks:

Key Financial Highlights of Q4 FY2008:

• Total Revenue: $10.4 billion, up approximately 10% year-over-year.
• Routing Revenue: $2 billion, up 8% year-over-year, driven by high-end router portfolio growth of 12%.
• Switching Revenue: $3.5 billion, up 5% year-over-year, driven by Fixed Switching portfolio growth.
• Advanced Technologies Revenue: $2.6 billion, up 15% year-over-year, led by unified communications (29%) and application networking services (30%).
• Service Revenue: $1.7 billion, up approximately 16% year-over-year, with solid growth across all geographies and advanced services growth of about 23%.
• Geographic Revenue Growth: Ranged from 5% year-over-year in the US and Canada to 42% in emerging markets.

Gross Margins:

• Total Non-GAAP Gross Margins: 65.2%, down slightly quarter-over-quarter and flat year-over-year.
• Product Non-GAAP Gross Margin: 65.3%, down 0.6 points quarter-over-quarter and up slightly year-over-year.
• Non-GAAP Service Margin: 64.7%, up from 62.7% last quarter.

Operating Expenses:

• Non-GAAP Operating Expenses as a Percentage of Revenue: Approximately 35.7% in Q4 FY2008, up from 35.5% in Q4 FY2007.
• Foreign Exchange Impact: $82 million, adding approximately 0.8 point to the ratio.
• Excluding Foreign Exchange: Non-GAAP operating expenses grew at 8% year-over-year.

Interest and Other Income:

• Q4 FY2008: $157 million, down from $228 million in Q4 FY2007, due to lower gains from the sale of public equity investments and lower interest rates.

Tax Provision Rate:

• Q4 FY2008 Non-GAAP Tax Provision Rate: 25.6%, reflecting realignment of foreign subsidiaries.
• Full Year Non-GAAP Tax Rate: 23.1%, reflecting a tax audit settlement benefit.

Earnings Per Share (EPS):

• Non-GAAP Net Income for Q4 FY2008: $2.4 billion, up 6% year-over-year.
• Non-GAAP EPS on a Fully Diluted Basis for Q4: $0.40, up from $0.36 in Q4 FY2007, an 11% increase year-over-year.
• GAAP Net Income for Q4: $2 billion, up from $1.9 billion in Q4 FY2007.
• GAAP EPS on a Fully Diluted Basis for Q4: $0.33, up from $0.31 in Q4 FY2007.

Full Fiscal Year Performance:

• Total Revenue for FY2008: $39.5 billion, up approximately 13%.
• Routing Revenue: $7.9 billion, up 14% year-over-year.
• Switching Revenue: $13.3 billion, up 7% year-over-year.
• Advanced Technologies Revenue: $9.7 billion, up 21% year-over-year.
• Services Revenue: $6.4 billion, up approximately 18%.
• Total Non-GAAP Gross Margins: 65.4%, up 0.6 points year-over-year.

Balance Sheet Highlights:

• Cash, Cash Equivalents, and Investments: $26.2 billion, up $1.8 billion from Q3.
• Cash Flow from Operations: $3.5 billion in Q4 and $12.1 billion for the full fiscal year.
• Stock Repurchases: $1.35 billion of common stock or 54 million shares at an average price of $25.11 per share in Q4 and $10.4 billion or 372 million shares at an average price of $27.80 for the full fiscal year.
• Headcount: 66,129, a net increase of approximately 900 from Q3 FY2008, primarily due to hires in engineering, sales, and services.

Guidance:

• Q1 FY2009 Revenue Guidance: 8% year-over-year growth, plus or minus 1%.
• Q2 FY2009 Revenue Guidance: 8.5% year-over-year growth, plus or minus 1%.

Q1 FY2009 Financial Guidance Details:

• Total Gross Margin: Approximately 65%.
• Operating Expenses: Approximately 37% of revenue, including the impact of foreign exchange.
• Interest and Other Income: Approximately $175 million.
• Tax Provision Rate: Approximately 24%.
• Weighted Average Shares Outstanding: Flat to down approximately 50 million for EPS purposes.

Frank Calderoni emphasized the company's solid financial performance and strong cash flow generation, highlighting the resilience of Cisco's business model amidst uncertain macroeconomic conditions. He also provided detailed guidance for the upcoming quarters, reflecting the company's cautious yet optimistic outlook.