Cisco Systems, Inc., Q2 2007 Earnings Call, Feb-06-2007 - SEHK:4333

SEHK:4333

During the Cisco Systems, Inc. Q2 2007 Earnings Call, Dennis Powell, the Chief Financial Officer at the time, provided detailed insights into the financial performance of the company. Below is a comprehensive summary of Dennis Powell’s remarks:

Financial Results Overview

• Total Revenue: $8.4 billion, marking a 27% year-over-year increase.

  • Cisco Standalone Revenue: $7.8 billion, representing an 18% year-over-year increase.
  • Scientific Atlanta Revenue: $639 million, showing a 21% year-over-year increase.

• Product Revenue Breakdown:

  • Routing Revenue: $1.7 billion, up 18% year-over-year, driven by the high-end router portfolio, particularly the CRS-1.
  • Switching Revenue: $3 billion, an increase of 13% year-over-year, supported by the fixed switching portfolio.
  • Advanced Technologies Revenue: $1.9 billion, including $504 million from Scientific Atlanta, representing 66% growth year-over-year on a combined basis and 23% growth excluding Scientific Atlanta.
  • Other Products Revenue: $482 million, a 67% year-over-year increase on a combined basis and a 32% increase excluding Scientific Atlanta.
  • Service Revenue: $1.34 billion, up approximately 23% year-over-year.

• Gross Margins:

  • Total Non-GAAP Gross Margin: 64.8%, the same as in Q1.
  • Product-only Non-GAAP Gross Margin: 64.8%, up slightly from 64.7% last quarter.
  • Non-GAAP Service Margins: 64.4%, down from 65.5% last quarter due to investments in headcount and advanced services.

• Operating Expenses: Approximately 35% of revenue in Q2 FY '07, down from approximately 37% in Q2 FY '06.

• Tax Provision: Approximately 24% in Q2 FY '07, down from 28% in Q2 FY '06. Received a benefit from the legislative reinstatement of the US Federal Research Tax Credit.

• Net Income and Earnings Per Share:

  • Non-GAAP Net Income: $2.1 billion in Q2 FY '07, compared to $1.6 billion in Q2 FY '06.
  • Non-GAAP Earnings Per Share: $0.33, up from $0.26 in Q2 FY '06, representing a 27% increase year-over-year.
  • GAAP Net Income: $1.9 billion in Q2 FY '07, compared to $1.4 billion in Q2 FY '06.
  • GAAP Earnings Per Share: $0.31, up from $0.22 in Q2 FY '06, representing a 41% increase year-over-year.

Balance Sheet Highlights

• Cash and Investments: $20.7 billion at the end of Q2, up from $19.5 billion last quarter.
• Cash Flow from Operations: $2.7 billion in Q2.
• Proceeds from Stock Option Exercises and Employee Stock Purchase Plan Activity: $1.8 billion in Q2.
• Share Repurchases: $3.3 billion used to repurchase 121 million shares at an average price of $27.01.
• Accounts Receivable: Ended the quarter at $2.9 billion, down from $3.1 billion at the end of Q1.
  • Days Sales Outstanding (DSO): Improved to 31 days from 34 days at the end of last quarter.
• Inventory: $1.6 billion, up from $1.5 billion last quarter.
• Inventory Turns: 7.6 times, down from 8.1 times last quarter.
• Inventory Purchase Commitments: $2.5 billion at the end of Q2, up from $2.3 billion at the end of Q1.
• Headcount: Ended at 54,563, a net increase of 27,023 from Q1. New headcount concentrated in sales, engineering, services, and Scientific Atlanta's Juarez manufacturing facility.

Deferred Revenue

• Increased from $5.8 billion in Q1 to $6.1 billion in Q2, an increase of approximately $300 million.

Guidance

• Q3 FY '07 Revenue Guidance: $8.7 billion to $8.8 billion, representing 19% to 20% growth year-over-year. Cisco standalone growth of 15 to 17%.
• Q4 FY '07 Revenue Guidance: $9.0 billion to $9.3 billion, representing 14% to 16% year-over-year growth.
• Gross Margin Guidance: Slightly above or below 64.5% due to product mix.
• Operating Expenses: Slightly below or slightly above 35.5% of revenue.
• Interest and Other Income: Approximately $200 million in Q3.
• Tax Provision Rate: Approximately 25%, down from guidance of 26% last quarter.
• Share Repurchase Program: Continued, but difficult to predict exact weighted average shares outstanding.
• Cash Flow from Operations: Expected to generate $500 million to $700 million per month at these revenue levels.
• GAAP EPS: Expected to be $0.03 to $0.05 lower than non-GAAP EPS in Q3 FY '07, primarily due to acquisition-related charges and stock option expense.

Summary

Dennis Powell expressed satisfaction with the company's performance in Q2, highlighting strong growth in revenue, earnings per share, and operating leverage. He also noted the continued strength of both the Cisco standalone business and the Scientific Atlanta business.

During the transcript of the Cisco Systems, Inc. Q2 2007 Earnings Call, Rick Justice made the following comments:

1. On Sales Rep Productivity and Hiring:

   • Rick noted that the sales representative productivity has been remarkably consistent and increasing every quarter.
   • He mentioned that Cisco intends to continue adding sales representatives aggressively until the productivity growth slows down.
   • Even if the productivity growth were to slow below the current rate, Rick believes it would still represent a great return.

2. On Headcount Additions in Emerging Markets:

   • Rick highlighted that in emerging markets, Cisco is still in the early stages of adding headcount, with some countries having only one or two people.
   • He explained that the "country transformation, replicable business process model" that Cisco is implementing in virtually every country means they will continue to add people to these regions.
   • Rick emphasized that the emerging markets theater does not include Asia Pacific, which also has emerging countries where Cisco is expanding its presence.
   • He mentioned that Cisco will watch the productivity of sales representatives in mainstream markets closely but sees major coverage opportunities in these regions.

These comments provide insight into Cisco's strategy regarding sales force expansion, particularly in emerging markets, and the company's focus on maintaining and improving sales representative productivity.

During the transcript of the Cisco Systems, Inc. Q2 2007 Earnings Call, Blair Christie, Vice President of Corporation Communications for Cisco Systems, makes the following statements:

1. Introduction and Call Logistics:

   • Thanks the operator and greets everyone.
   • Introduces the 68th quarterly conference call and mentions the attendees.
   • Provides information on accessing the press release and webcast.
   • Offers instructions for obtaining a fax of the press release.
   • Notes the availability of slides and financial statements on the Cisco website.
   • Announces the recording of the conference call and provides the replay telephone numbers.
   • Mentions the use of both GAAP and non-GAAP financial results and provides guidance on reconciliations.
   • Discusses the format of the call, including sections on financial results, business momentum, and guidance.

2. Before Turning Over to John Chambers:

   • Reminds about the unaudited nature of the financial results.
   • Warns about forward-looking statements and the risks involved.
   • Prohibits unauthorized recording of the call.
   • Turns the call over to John Chambers for his commentary.

3. After John Chambers' Comments:

   • Thanks John and announces the opening of the floor to questions and answers.
   • Requests that sell-side analysts ask only one question.
   • Invites the operator to open the floor to questions.

4. During the Q&A Session:

   • Thanks participants for their questions and provides instructions for the next question.

   • Interjects humorously when a participant's phone connection fails.

   • Provides closing remarks and logistical information for the next quarterly conference call.

   • Reminds about the company's policy on financial guidance during the quarter.

   • Invites participants to contact Investor Relations for follow-up questions.

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

John Chambers made numerous comments during the earnings call, covering a wide range of topics. Below is a detailed summary of his statements:

General Comments and Strategy Overview

• Conference Call Format: John Chambers mentioned that they would be using a new format for the call to allow more time for questions and answers.
• Quarter Highlights:
  • John summarized the quarterly highlights under four main categories: key financial perspective, product and services, customer segments, and geography.
  • He highlighted the record revenue of approximately $8.4 billion, a 27% year-over-year increase, and a Cisco standalone increase of about 18%.
  • He expressed satisfaction with the growth in both revenue and earnings per share, as well as the market share gains.
• Product and Service Growth:
  • John discussed the strong growth across all product categories, including routing, switching, and advanced technologies.
  • He emphasized the importance of advanced technologies, which are now contributing significantly to Cisco's topline revenue.
  • He also highlighted the growth in customer advocacy services, which represent about 15% of total revenue.
• Customer Satisfaction:
  • John mentioned that Cisco's customer satisfaction numbers remained very high.

Geographic Performance

• Emerging Markets:
  • John commented on the strong performance in the emerging markets, with the Middle East and Africa leading the way with year-over-year order growth approaching 80%.
  • He noted that the emerging markets have become the third-largest theater for Cisco, behind the US and Europe.
• Europe:
  • John mentioned the solid improvement in Europe, with year-over-year order growth in the low teens.
  • He highlighted the strong growth in the UK, Germany, and France.
• US and Canada:
  • John discussed the balance across the Canadian operation and the strong growth in the US service provider market segment.
  • He noted the solid momentum in the commercial market and the mixed growth in the enterprise business.
• Asia Pacific:
  • John mentioned the solid momentum in Asia Pacific, with strong growth in Australia and India.
  • He commented on the slight year-over-year improvement in Japan.

Customer Segments

• Commercial Market Segment:
  • John highlighted the solid momentum with year-over-year growth of approximately 20%.
  • He noted the best balance across the commercial areas in the US and across all five theaters.
• Service Provider Segment:
  • John discussed the very solid growth with Cisco standalone growth in the mid-teens and Scientific Atlanta growth well above 20%.
  • He mentioned the leadership of the CRS-1 in the high-end routing market.
• Enterprise and Public Sector:
  • John commented on the mixed growth, with global order growth in the low double-digits.
  • He noted the growth in the public sector and the US federal business.

Product Discussions

• Core Technologies:
  • John discussed the strong revenue growth in routing (18%) and switching (13%).
  • He highlighted the growth in advanced technologies, with storage leading the way and unified communications growing approximately 38%.
• Advanced Technologies:
  • John mentioned the strong growth in advanced technologies, both standalone and combined with Scientific Atlanta.
  • He highlighted the growth in storage, unified communications, wireless, and security.

Guidance and Outlook

• Revenue Guidance:
  • John provided guidance for Q3 fiscal 2007, with year-over-year revenue growth of 19 to 20%.
  • He increased the guidance for Cisco standalone year-over-year revenue growth to approximately 15 to 17%.
• Confidence in Strategy:
  • John expressed high confidence in Cisco's strategy and business momentum, noting the strong standalone revenue growth guidance.
• Future Focus:
  • John mentioned the focus on what Cisco can control and influence, including market transitions, industry consolidation, and economic challenges.

Closing Remarks

• Summary of Momentum:
  • John summarized Cisco's momentum and opportunities entering the third quarter of fiscal 2007, emphasizing the strong balance across geographies, products, services, and customer segments.
• Strategic Value:
  • John commented on the increasing strategic value to service provider customers from both a technology and business architecture perspective.
• Scientific Atlanta Progress:
  • John noted that the progress at Scientific Atlanta is ahead of expectations.
• Pipeline and Product Development:
  • John discussed the strong product pipeline, including the continued evolution of advanced technologies and the emergence of a potential third wave with early-stage technologies.

Additional Points

• Services and Support Model:
  • John mentioned the movement of the Chief Globalization Officer, Wim Elfrink, to India, and the intention to differentiate Cisco in terms of customer satisfaction and service revenues.
• Financial Results:
  • John provided an overview of the financial results, including record revenue, earnings per share, and cash generated from operations.
• Order Growth:
  • John mentioned that order growth continued to be very solid, with product book-to-build greater than one.
• Advanced Technologies:
  • John discussed the strong growth in advanced technologies, highlighting the potential for market share gains and the expanding role of the network in delivering communications and IT capabilities.

Specific Product and Technology Comments

• Routing:
  • John commented on the 18% year-over-year growth in routing revenue, driven by the CRS-1.
• Switching:
  • John mentioned the 13% year-over-year growth in switching revenue, driven by strength in the fixed switching portfolio.
• Advanced Technologies:
  • John highlighted the 23% year-over-year growth in advanced technologies, excluding Scientific Atlanta, and the 66% growth on a combined basis.
• Storage:
  • John noted the over 45% year-over-year growth in storage.
• Unified Communications:
  • John mentioned the approximately 38% year-over-year growth in unified communications.
• Wireless:
  • John commented on the mid-20s year-over-year growth in wireless.
• Security:
  • John mentioned the high teens year-over-year growth in security.
• Home Networking:
  • John noted the low double-digits year-over-year growth in home networking.

Strategic Positioning

• Business Architecture Strategy:
  • John discussed the evolution of Cisco's business architecture strategy, moving from a tactical or strategic technology partner to a strategic business partner relationship with service providers.
• Market Differentiation:
  • John emphasized the differentiation of Cisco's product portfolio and architectural approach, highlighting the benefits for customers.

Future Guidance

• Q3 and Q4 Revenue Guidance:
  • John provided guidance for Q3 and Q4, indicating strong year-over-year revenue growth.
• Organic Growth:
  • John mentioned the combined organic revenue growth for Q3 and Q4, indicating growth above the long-term 10% to 15% range.

Closing Remarks

• Strategy and Execution:
  • John concluded by expressing confidence in Cisco's strategy and execution, noting the strong results and market positioning.
• Acknowledgments:

  • John thanked shareholders, customers, employees, and partners for their support and confidence in Cisco's ability to execute during industry consolidation, market transitions, and challenging economic times.