Cisco Systems, Inc., Q2 2010 Earnings Call, Feb 03, 2010 - SEHK:4333

SEHK:4333

Blair Christie, the Senior Vice President of Corporate Communications for Cisco Systems, made the following statements during the Cisco Systems, Inc. Q2 2010 Earnings Call:

1. Introduction:

   • "Welcome to Cisco Systems Second Quarter and Fiscal Year 2010 Financial Results Conference Call."
   • "I am joined by John Chambers, our Chairman and CEO; Frank Calderoni, Executive Vice President and Chief Financial Officer; Rob Lloyd, Executive Vice President of Worldwide Operations; Ned Hooper, Chief Strategy Officer and Senior Vice President of Consumer Business; and Padmasree Warrior, Chief Technology Officer as; well as Laura Graves, our Director of Global Investor Relations."

2. Conference Call Logistics:

   • Mentioned the availability of a webcast with accompanying slides.
   • Noted that downloadable Q2 financial statements would be available following the call, including revenue by product and geography, income statement, full GAAP to non-GAAP reconciliation information, balance sheet, and cash flow statements.

3. Replay Information:

   • Provided details for accessing the replay of the call via telephone from February 3 through February 10 and via Cisco's Investor Relations website from February 3 through April 23.

4. Forward-Looking Statements Warning:

   • Reminded listeners that the matters discussed included forward-looking statements and were subject to risks and uncertainties as detailed in Cisco's SEC filings, specifically the most recent annual report on Form 10-K, quarterly report on Form 10-Q, and any applicable amendments.

5. Unauthorized Recording Notice:

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

6. Handover to John Chambers:

   • "And now I'd like to turn it over to John for his commentary on the quarter. John?"

7. Closing Remarks:

   • "The Cisco's next quarterly conference call which will reflect our Third Quarter Fiscal 2010 Results will be on Wednesday, May 12, 2010, at 1:30 p.m. Pacific time, 4:30 p.m. Eastern time."

   • Provided information on where to find downloadable Q2 financial statements and reminded listeners of Cisco's policy to not comment on financial guidance during the quarter unless done through an explicit public disclosure.

   • "Please call the Investor Relations department with any follow-up questions for this call."

   • "Thank you for your participation and continued support. And this concludes our call."

During the Cisco Systems, Inc. Q2 2010 Earnings Call, Ned Hooper, who is identified as one of the executives, made the following comments:

1. Consumer Electronics Show (CES) and Consumer Strategy:

   • Ned Hooper mentioned attending the Consumer Electronics Show (CES) at the beginning of January.
   • He stated that Cisco's strategy, focused on the intersection of video and networking for consumer experiences, is starting to resonate with consumers, as evidenced by the numbers and results for the quarter related to Cisco's video products, including the Flip products and overall video systems products.
   • Ned noted that Cisco's story is also resonating strongly with partners, media companies, and service providers.

2. Focus on Consumer Experiences:

   • Ned highlighted Cisco's focus on delivering compelling experiences around personal video, branded video, and video communications for consumers.
   • He expressed satisfaction with how this strategy is playing out at the time of the call.

3. Integration of Consumer Offerings:

   • Ned acknowledged the integration of Cisco's consumer offerings, including sports and entertainment, music, film, Flip video, home entertainment, and virtual capability, which allows for self-installing capability on any device to access any content.
   • He mentioned the excitement around these offerings and how they are starting to come together across different groups within Cisco.

4. Collaboration with Other Groups:

   • Ned mentioned collaborating with Dan Scheinman's group and Cisco's core group, as well as service providers, indicating a cohesive approach across different divisions within the company.

In summary, Ned Hooper's comments focused on the success of Cisco's consumer strategy, particularly in relation to video products and experiences, and the integration and collaboration across different groups within Cisco to deliver a comprehensive and compelling consumer experience.

John T. Chambers provided extensive commentary during the Cisco Systems, Inc. Q2 2010 Earnings Call. Here is a detailed summary of his statements:

1. Introduction and Financial Performance Overview:

   • Described the financial results of Q2 FY '10 as "remarkably well-balanced" from a product, geographic, and market segment perspective.
   • Noted that revenues of $9.8 billion were up 8% year-over-year, well exceeding expectations.
   • Mentioned that non-GAAP earnings per share of $0.40 represented a 25% year-over-year increase.
   • Highlighted the sequential increase in revenue of 9% over Q1, which he stated was the highest fiscal Q1 to Q2 sequential increase in a decade.
   • Commented on the strong performance of the company, including non-GAAP operating income as a percentage of revenue at 30.3% and non-GAAP net income of $2.3 billion, up 25% year-over-year.

2. Market Recovery and Economic Outlook:

   • Observed that Q2 marked the second phase of the recovery with additional across-the-board acceleration.
   • Indicated that the U.S. product order growth was up approximately 17% year-over-year, while Asia-Pacific and Japan both grew in double digits year-over-year.
   • Mentioned that Europe saw low single-digit growth, and emerging markets were flat.
   • Emphasized the strong balance of growth from a year-over-year perspective in major geographies and market segment categories.

3. Product and Geographic Performance:

   • Noted that switching revenue was up 13% year-over-year, with modular and fixed switching showing almost identical growth.
   • Commented on the 2% year-over-year increase in routing revenue, highlighting the 12% increase in high-end routing and decreases in mid-range and low-end routing.
   • Mentioned the 46% year-over-year increase in other product areas, primarily due to the inclusion of the Pure Digital acquisition.
   • Discussed the strong year-over-year and sequential improvements in advanced technologies, with unified communications up 17% and wireless growing in the high single digits.

4. Strategic Direction and Execution:

   • Highlighted the company's ability to return to its prior financial operating model quickly after the global economic slowdown.
   • Mentioned the effectiveness of the new organizational structure of councils, boards, and working groups in managing through the downturn and positioning the company for the acceleration of results.
   • Stated that the company is proud of its ability to expand its leadership in the marketplace and innovate in traditional routing and switching product families.
   • Emphasized the interrelation of market adjacencies and their eventual coupling from both a technology and business architecture perspective.

5. Future Outlook and Guidance:

   • Announced the company's intention to grow headcount by 2,000 to 3,000 people in the next several quarters, targeting strategic opportunities and productivity improvements.
   • Provided guidance for Q3 FY '10, predicting revenue to increase in the 23% to 26% range year-over-year.
   • Mentioned that the company's revenue guidance included the benefit of an extra week in Q3, which is expected to contribute an incremental one-time 2% to 3% of total product orders.

6. Closing Remarks and Acknowledgments:

   • Concluded by thanking the Cisco team for their execution and expressing gratitude for the confidence shown by shareholders.
   • Mentioned the company's charitable efforts in response to the earthquake in Haiti, encouraging others to contribute and support relief organizations.

Chambers's commentary throughout the call reflects a strong sense of optimism about the company's performance and future prospects, while also acknowledging the uncertainties surrounding the strength and sustainability of the economic recovery.

Frank A. Calderoni, the Former Chief Financial Officer and Executive Vice President of Cisco Systems, Inc., provided detailed insights into the company’s financial performance and guidance during the Q2 2010 Earnings Call. Below is a comprehensive summary of his statements:

Opening Remarks

• Acknowledged the strong results for Q2 FY '10, demonstrating the company's ability to execute on innovation and operational excellence.
• Mentioned the completion of acquisitions of Starent and ScanSafe during the quarter.

Revenue Overview

• Total revenue for Q2 FY '10 was $9.8 billion, an 8% increase year-over-year, exceeding guidance of 1% to 4%.
• Service revenue was $1.8 billion, up approximately 6% year-over-year.
• Product revenue was $8 billion, up 9% year-over-year.
• Switching revenue was $3.4 billion, an increase of 13% year-over-year.
• Routing revenue was $1.6 billion, up 2% year-over-year.
• Advanced technologies revenue was $2.4 billion, representing a 1% increase year-over-year.
• Other product revenue was $604 million, a 46% increase year-over-year, driven by the Pure Digital acquisition and growth in emerging technologies.

Sequential Revenue Changes

• Sequential revenue increased 9% quarter-over-quarter, with notable growth in fixed switching (up 21%) and modular switching (up 18%).

Geographic Revenue Changes

• Revenue increased across all geographic segments year-over-year, except Europe.
• Revenue ranged from a decline of approximately 3% in Europe to growth of approximately 16% in the Asia-Pacific theater.
• U.S. and Canada theater revenue grew approximately 12%, Japan grew approximately 12%, and emerging markets grew approximately 1%.

Gross Margins

• Total non-GAAP gross margin was 65.6%, down 0.7 percentage points quarter-over-quarter and up 1.6 percentage points year-over-year.
• Non-GAAP product gross margin was 65.6%, down 0.7 percentage points quarter-over-quarter.
• Non-GAAP service margin was 65.9%, down from 66.3% last quarter and up from 65.7% in Q2 FY '09.
• Gross margins varied across theaters due to product mix and discounting.

Operating Expenses

• Non-GAAP operating expenses were approximately $3.5 billion in Q2 FY '10, up 4% quarter-over-quarter, driven by investments in growth opportunities.
• Non-GAAP operating expenses were down 2% year-over-year.
• Non-GAAP operating expenses as a percentage of revenue was 35.3% in Q2 FY '10 versus 37% in Q1 FY '10.

Interest and Other Income

• Non-GAAP interest and other income was $23 million for Q2, reflecting increased interest expenses on the $5 billion bond offering.
• GAAP interest and other income was a loss of $15 million for the second quarter, including a $38 million mark-to-market loss related to hedging transactions for the Tandberg acquisition.

Acquisition Rate

• Non-GAAP acquisition rate was 22%.

Net Income and Earnings Per Share

• Non-GAAP net income for the second quarter was $2.3 billion, representing a 25% increase year-over-year.
• Non-GAAP earnings per share on a fully diluted basis were $0.40 versus $0.32 in the second quarter of fiscal year 2009, a 25% increase year-over-year.
• GAAP net income for the second quarter was $1.9 billion, and GAAP earnings per share were $0.32 per share.

Balance Sheet

• Cash, cash equivalents, and investments were $39.6 billion, up approximately $4.3 billion from the previous quarter.
• $8.8 billion was held within the United States at the end of Q2 FY '10.
• Successful bond offering in November 2009 contributed approximately $5 billion to the cash balance.
• Acquisitions of Starent and ScanSafe resulted in a net use of approximately $2.3 billion of cash.
• Cash flow from operations was approximately $2.5 billion.

Accounts Receivable

• Accounts receivable balance was $4.2 billion at the end of Q2.
• Days sales outstanding (DSO) was 39 days, up from 32 days in Q1 FY '10 and 29 days in Q2 FY '09.

Inventory

• Total inventory was $1.2 billion, up approximately 12% quarter-over-quarter.
• Non-GAAP inventory turns were 11.7% this quarter, up from the previous quarter and year-over-year.
• Inventory purchase commitments were $3.3 billion, an increase of approximately 19% from the end of Q1 FY '10 and 25% year-over-year.

Stock Repurchase Program

• Repurchased $1.5 billion of common stock under the stock repurchase program or 63 million shares at an average price of $23.96 per share.
• Remaining authorized repurchase amount was approximately $11.6 billion at the end of the quarter.

Deferred Revenue

• Deferred revenue was $9.7 billion at the end of Q2, an increase of approximately 4% compared with Q2 FY '09.
• Deferred product revenue was $3.3 billion, and deferred service revenue was approximately $6.3 billion, increases of approximately 3% and 4% year-over-year, respectively.

Headcount

• Headcount totaled 65,874, a net increase of approximately 2,100 from the previous quarter, primarily due to acquisitions and investments in growth initiatives.
• Authorized 2,000 to 3,000 incremental external hires, expecting to add this headcount over the next several quarters.

Closing Remarks

• Expressed satisfaction with the Q2 results and the strong foundation for continued focus on growth and capturing market transitions.
• Highlighted the company's well-positioned state to move into market adjacencies with speed, scale, and flexibility.
• Noted the ongoing efforts to improve efficiency and productivity, allowing for strong Q2 performance and positioning for the future.

Guidance for Q3 FY '10

• Anticipated total revenue to be up approximately 23% to 26% year-over-year, factoring in the extra week in Q3.
• Estimated a 2% to 3% sequential increase in revenue attributed to the extra week.
• Expected total gross margin to be approximately 64% to 65%, reflecting the revenue guidance.
• Projected operating expenses to be approximately 36.5% to 37% of revenue.
• Anticipated interest and other income to be approximately negative $10 million to negative $20 million.
• Tax provision rate was expected to be approximately 22%.
• Modeled share count to be down approximately 25 million shares quarter-over-quarter.
• Expected the Starent acquisition to be slightly dilutive to non-GAAP EPS by a little less than $0.01 per share on a quarterly basis.
• Anticipated generating $2 billion to $2.5 billion in cash flow from operations during the third quarter.
• Expected GAAP EPS to be $0.06 to $0.08 per share lower than non-GAAP EPS, primarily due to stock compensation expense and acquisition-related charges.

Summary

Frank Calderoni provided a detailed overview of the financial results, emphasizing the strong performance and the company's ability to execute on its operational and strategic objectives. He also outlined the guidance for the upcoming quarter, highlighting the company's optimism about the economic recovery and its preparedness to capitalize on growth opportunities.

Robert W. Lloyd emphasized the company's focus on profitability with channels and partners during the downturn, noting that partners responded very well to these programs. He highlighted that, in addition to end-users, the company ensured partners had appropriate liquidity worldwide, which paid off. Lloyd also mentioned that the company has been focusing on partners to ensure they have the necessary liquidity, which has been beneficial for business.