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pww.comCisco Systems, Inc., Q2 2009 Earnings Call, Feb-04-2009 - SEHK:4333

SEHK:4333

Robert Lloyd [Executives] 💬

During the Cisco Systems, Inc. Q2 2009 Earnings Call, Robert Lloyd, who is referred to as "Rob" and is the Senior Vice President of Sales for the United States, Canada, and Japan, provided insights into the company's focus on the public sector and the opportunities it presents. Here is a detailed summary of what Robert Lloyd said:

  1. Public Sector as a Bright Spot:

    • Public sector was one of the bright spots around the world, especially in Europe and the U.S.
    • Cisco has seen continued investments in this area.

  2. Reorganization for Public Sector Focus:

    • In the U.S., Cisco had a successful Federal sales model and began this fiscal year by shifting resources for state, local, education into that group, creating a new public sector organization.
    • Timing was good because Cisco is well-aligned with the activities of the Obama government.

  3. Opportunities in the Public Sector:

    • Opportunities exist in smart buildings, smart transportation, infrastructure, public safety and security, health information networks, and smart grid.

  4. Alignment with Government Spending:

    • Cisco has moved resources already and is in a good position to catch the upcoming spending, which is expected to help bolster the budgets of state and local jurisdictions.

These comments highlight Cisco's strategic shift to focus more on the public sector, which has continued to invest in technology despite the economic downturn. Lloyd emphasizes that Cisco is well-positioned to capitalize on the government's planned spending, particularly in areas like smart infrastructure and public safety.

Blair Christie [Executives] 💬

Blair Christie, the Senior Vice President of Corporate Communications for Cisco Systems, made the following statements during the Q2 2009 Earnings Call:

  1. Introduction:

    • Welcomed everyone to the 76th quarterly conference call.
    • Introduced herself and the other executives present: John Chambers (Chairman and CEO), Frank Calderoni (Chief Financial Officer), Rick Justice (Executive Vice President of Worldwide Operations and Business Development), Ned Hooper (Senior Vice President of Corporate Development and Consumer Groups), and Rob Lloyd (Senior Vice President of Sales for the United States, Canada, and Japan).

  2. Press Release and Webcast Information:

    • Noted that the Q2 fiscal year 2009 press release was available on the Cisco website and national and European market wires.
    • Mentioned the availability of a webcast with accompanying slides that included financial information covered during the call and additional financial metrics and analysis.

  3. Financial Statements Availability:

    • Announced that downloadable Q2 financial statements, including revenue by product and geography, would be available following the call.
    • Stated that income statements, full GAAP to non-GAAP reconciliation information, balance sheets, and cash flow statements could be found on the Cisco website in the Investor Relations section.

  4. Call Replay and Webcast Access:

    • Provided information about the replay of the call, which would be available via telephone from February 4 through February 11 and online from February 4 through April 17.

  5. Forward-Looking Statements Disclaimer:

    • Reminded listeners that the call would include forward-looking statements subject to risks and uncertainties detailed in the company's SEC filings, including the most recent annual report on Form 10-K and quarterly report on Form 10-Q.

  6. Handover to John Chambers:

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

  7. Closing Remarks:

    • Provided information about the next quarterly conference call, scheduled for May 5, 2009, at 1:30 PM PT / 4:30 PM ET.

    • Reiterated the availability of downloadable financial statements and reminded listeners of Cisco's policy not to comment on financial guidance during the quarter unless through an explicit public disclosure.

    • Invited listeners to contact the Investor Relations Department for any follow-up questions.

    • Concluded the call.

John Chambers [Executives] 💬

John Chambers provided extensive commentary during the Q2 2009 Earnings Call. Below is a detailed summary of his remarks:

  1. Opening Comments:

    • He focuses on key takeaways from Q2 FY09, including a candid discussion about the global market's effects on the quarter and its implications for Q3 expectations.
    • Updates on how Cisco is reducing expenses, prioritizing opportunities, and realigning resources, particularly in emerging markets, new market adjacencies, and emerging technologies.
    • Discusses Cisco's six-point plan for economic challenges and its comfort with long-term growth goals assuming the global economy returns to normal growth rates.
    • Provides revenue guidance for Q3 with appropriate caveats.

  2. Financial Highlights:

    • Generated $3.2 billion in cash in Q2, with cash and investments totaling approximately $29.5 billion, the second-highest level of cash flow from operations.
    • Solid balance across products, geographies, and customer segments.
    • Continued success in being the number one or number two player in most of its targeted product areas.
    • Innovation engine across the entire range of products, with a strong product pipeline.

  3. Market Transitions:

    • Notes the acceleration of key market transitions related to collaboration, virtualization, and digital networking, which will drive productivity and network growth over the next decade.
    • Emphasizes the importance of rapidly positioning the company to weather the storm and lead as the downturn inevitably ends.
    • Mentions that Cisco has already positioned itself to handle the downturn effectively.

  4. Approach to Economic Challenges:

    • Outlines Cisco's approach to economic downturns, emphasizing realism about challenges, determining the length and depth of the downturn, preparing for the upturn, and expanding customer relationships.
    • Details the six-point plan, which includes focusing on resource prioritization, new products, and market adjacency decisions through Cisco's vision, differentiated strategy, and execution model.
    • Highlights the importance of collaboration and Web 2.0 technologies in driving future growth and productivity.

  5. Resource Management and Realignment:

    • Mentions that Cisco has realigned over $500 million of resources to market adjacencies and expects to realign another $500 million by the end of FY09.
    • Discusses the continuation of a hiring pause and significant reductions in non-headcount-related expenses.
    • Explains that the company is prioritizing its top five opportunities, including next-generation customer relationships, collaboration/Web 2.0, video and visual networking, data center and virtualization, and globalization.

  6. Investment in the U.S. and Selected Emerging Countries:

    • Plans to invest aggressively in the U.S. and selected emerging countries, expecting the U.S. to be the first major country to recover.
    • Emphasizes the potential for smart digital infrastructure to transform the nation and spur economic recovery in areas like healthcare, energy, broadband, and education.
    • Mentions the focus on China and India as the best-positioned emerging countries to minimize the effects of global challenges.

  7. Power of the Network:

    • Reiterates the focus on evolving into the top communications and IT company enabled by the expanding role of intelligent networks.

  8. Market Momentum:

    • Provides data on product order growth rates, noting that total year-over-year product order growth deteriorated throughout the quarter, with November and December showing decreases of 9% and 11% respectively, and January showing a decrease of approximately 20%.
    • Discusses the challenges faced by customers across various industry segments and geographies.
    • Mentions that Cisco is different from many peers due to the high proportion of non-recurring business each quarter, making it a good indicator of spending patterns.

  9. Revenue Guidance for Q3:

    • Assumes that the order momentum challenges seen in January will continue into the next quarter, leading to a revenue decrease in the 15-20% range year-over-year.

  10. Long-Term Outlook:

    • Expresses confidence in Cisco's long-term growth opportunities, assuming global GDP growth returns to historical levels.

  11. Closing Comments:

    • Summarizes Cisco's momentum and opportunities entering Q3 FY09, highlighting leadership in product innovation, operational execution, and the focus on new and adjacent markets.
    • Discusses the realignment and restructuring of resources instead of a broad company-wide layoff.
    • Mentions the potential for a reduction of 1,500 to 2,000 jobs as part of normal business processes.
    • Reiterates the company's commitment to avoiding a broad layoff and emphasizes the importance of aligning resources with growth opportunities.

Chambers' remarks provide a comprehensive overview of Cisco's performance, strategy, and outlook during a challenging economic period.

Frank Calderoni [Executives] 💬

During the Cisco Systems, Inc. Q2 2009 Earnings Call, Frank Calderoni, the Chief Financial Officer, provided insights and details about the company's financial performance, cost management strategies, and financial guidance. Below is a detailed summary of his comments:

Financial Results Summary

  • Total Revenue: $9.1 billion, a 7.5% decrease year-over-year.
  • Service Revenue: $1.7 billion, up approximately 10% year-over-year.
  • Product Revenue: $7.3 billion, down approximately 11% year-over-year.
  • Switching Revenue: $3 billion, a decrease of 11% year-over-year.
  • Routing Revenue: $1.5 billion, down 23% year-over-year.
  • Advanced Technologies Revenue: $2.4 billion, an increase of 1% year-over-year.
  • Video Systems Revenue: Grew approximately 18% year-over-year.
  • Security Revenue: Grew approximately 2%.
  • Application Networking Services Revenue: Grew approximately 1%.
  • Unified Communications Revenue: Declined by approximately 5% year-over-year.
  • Home Networking Revenue: Declined by 11% year-over-year.
  • Other Product Revenue: $415 million, a decrease of 22% year-over-year.

Gross Margins

  • Total Non-GAAP Gross Margin: 64.0%, down 1.6 points quarter-over-quarter and 1.2 points year-over-year.
  • Product Non-GAAP Gross Margin: 63.6%, down 2.6 points quarter-over-quarter and 2.2 points year-over-year.
  • Service Non-GAAP Gross Margin: 65.7%, up from 62.4% last quarter and 61.8% in Q2 fiscal year 2008.

Operating Expenses

  • Non-GAAP Operating Expenses: $3.52 billion in Q2 fiscal year 2009, down from $3.7 billion in Q1 fiscal year 2009, representing a 5% reduction quarter-over-quarter.
  • Expense Management Performance: Drove discretionary spend down 15% quarter-over-quarter by reductions in travel and outside services.

Balance Sheet Highlights

  • Cash, Cash Equivalents, and Investments: $29.5 billion at the end of Q2, up from $2.8 billion in Q1 fiscal year 2009.
  • Cash Flow from Operations: Generated $3.2 billion in Q2, representing near-record operating cash flow.
  • Accounts Receivable: Reduced by 12% from Q1 fiscal year 2009, with a remaining balance of $2.9 billion.
  • Inventory: Reduced by approximately $100 million quarter-over-quarter to $1.1 billion.
  • Headcount: Totaled 67,318, a net decrease of approximately 329 from the end of Q1.

Financial Guidance

  • Q3 Fiscal Year 2009 Revenue: Expected to decrease in the 15-20% range year-over-year.
  • Gross Margin: Expected to be approximately 63%.
  • Operating Expenses: Expected to be approximately 40-42% of revenue.
  • Interest and Other Income: Expected to be approximately $80 million in the third quarter.
  • Tax Provision Rate: Expected to be approximately 22%.

Expense Reduction Goals

  • Annual Run Rate Reduction: Targeted to remove $1 billion from the annual run rate by Q4 fiscal year 2009.
  • Quarterly Expense Run Rate: Targeted to be reduced by about $250-300 million as compared to what was in Q1 2009.

Restructuring and Layoffs

  • Resource Realignment: Committed to a realignment approaching $500 million for the remainder of the fiscal year.
  • Layoffs: Not planning any across-the-board workforce reductions at the time but may experience limited restructuring that may result in a loss of some job functions.

Financial Position Strength

  • Investment Portfolio: Managed conservatively with an average credit rating of AA or better.
  • Cisco Capital: Continued to provide financing to customers and channel partners, originating or facilitating approximately $2.1 billion in lease and longer-term loan arrangements in the first half of fiscal 2009.

Summary

Frank Calderoni highlighted the company's financial strength, portfolio diversification, and the ability to navigate market transitions effectively. He emphasized the disciplined approach to expense management and the strategic realignment of resources to prioritize growth opportunities while maintaining a focus on profitability.

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