Cisco Systems, Inc., Q2 2015 Earnings Call, Feb 11, 2015 - SEHK:4333

SEHK:4333

Melissa Selcher made the following remarks during the Cisco Systems, Inc. Q2 2015 Earnings Call:

1. Introduction

   • She thanked the operator and welcomed everyone to the 100th quarterly conference call.
   • She introduced the executives present: John Chambers, Kelly Kramer, Rob Lloyd, and Gary Moore.

2. Website Information

   • She reminded attendees that a webcast with slides, including supplemental information, would be available on the company's website in the Investor Relations section following the call.

3. Financial Information Availability

   • She informed attendees that income statements, full GAAP to non-GAAP reconciliation information, balance sheets, cash flow statements, and other financial information could be found on the Investor Relations website under the Financial Reporting section.

4. Forward-Looking Statements Disclaimer

   • She noted that the call would include forward-looking statements subject to risks and uncertainties, referring attendees to the company's SEC filings for important risk factors.

5. Recording Disclaimer

   • She mentioned that unauthorized recording of the conference call is not permitted.

6. Call Handover

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

7. Question and Answer Session

   • She thanked John Chambers and announced the opening of the call for questions.

8. Closing Remarks

   • She provided the date and time for the next quarterly call, reflecting the FY '15 third quarter results.

   • She reminded attendees of the company's policy not to comment on financial guidance during the quarter unless through an explicit public disclosure.

   • She invited attendees to contact the Investor Relations department with any follow-up questions.

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

John T. Chambers provided extensive commentary during the Q2 2015 Earnings Call. Here is a detailed summary of his remarks:

Opening Remarks

• Q2 Results Overview:

  • Revenue grew to $11.9 billion, up 7%.
  • Non-GAAP earnings per share grew to $0.53, up 13% year-over-year.
  • Generated $2.9 billion in operating cash flow.
  • Returned $2.2 billion to shareholders through share repurchases and dividends.

• Company Transformation:

  • Cisco is transforming to become the #1 IT company.
  • Strong momentum is a result of how well the company has managed its transformation over the last 3+ years and its leadership position in key technology transitions.

• Key Takeaways:

  1. Executing well and growing at a healthy pace in a tough environment.
  2. Balanced growth across the majority of key geographies, product categories, and customer segments.
  3. Strong financials with strong earnings, cash generation, and capital return.
  4. Every country, city, business, home, and car is becoming digital, and Cisco is well-positioned to help customers reinvent their business and technology strategies.

• Why Cisco:

  • Network-centric approach with a portfolio and ability to bring customer solutions.
  • Track record of disrupting markets and leveraging the power of the Internet.

• Market Transition:

  • Market is moving fast, and change is exponential.
  • Bold moves have been made in innovation, interfacing with key customers, and organizational alignment.
  • Realigned 40% of employees to priority areas and replaced more than 30% of leaders.
  • Best-in-class performance in adding revenue with minimal increases in non-GAAP operating expenses.

Guidance

• Q3 Guidance:
  • Revenue growth expected in the range of 3% to 5%.
  • Non-GAAP earnings per share expected in the range of $0.51 to $0.53.

Business Momentum

• Geographies:

  • Americas: U.S. accelerated, growing 7% compared with Q1; Latin America returned to double-digit growth at 12%.
  • EMEA: Grew 7% year-over-year, with strong execution in the UK, Germany, and Southern Europe.
  • Asia Pacific, Japan, and China: Challenges in China, with business declining by 19%; India grew by 11%.
  • Emerging Markets: Total grew 1%, with emerging markets excluding BRICs plus Mexico up 8%.

• Customer Segments:

  • Global Commercial: Grew a healthy 8%.
  • U.S. Commercial: Very strong, up 12% in Q2.
  • Global Service Provider: Down 1% after being down on average 10% or more for the last 5 quarters.
  • Global Enterprise: Grew 10% versus 2% in Q1.

• Products and Services:

  • Switching: Very strong growth of 11%.
  • Data Center: Impressive 40% growth.
  • NGN Routing: Grew 2% year-over-year.
  • Wireless: Another strong quarter, up 18% year-over-year.
  • Security: Grew 6%.
  • Collaboration: Made good progress, with growth of 10%.
  • SP Video: Declined 19%.
  • Services: Grew 5%.

Cloud Momentum

• Leadership in Cloud Infrastructure:
  • Retained and strengthened #1 position for sales of hardware and software used to build cloud infrastructure.
• Growing Cloud Services:
  • Managed security, Project Squared, Collaboration, EnergyWise, and Meraki for enterprise.
  • Cisco and Telstra in production with OpenStack-based public cloud services.
• InterCloud Ecosystem:
  • Exceeds over 50 partners within 400 data centers across more than 50 countries.

Closing Remarks

• Summary:
  • Results reflect increased relevancy of Cisco worldwide.
  • Cisco brand is the strongest it's ever been.
• Vision:
  • Changing the way people work, live, play, and learn.
  • Digitization is the next and perhaps the most significant evolution of this vision.
• Internet of Everything:
  • Every country, company, city, home, and car must be digital.
  • Intelligent network is central to digital business and technology strategy.
• Transformation:
  • Will continue to help customers digitize everything, secure everything, and organize for the Internet of Everything.

Question-and-Answer Session

• Services Gross Margin:
  • Lower due to investments in advanced services and consultancy, particularly in security and cloud.
• Security Business:
  • Order growth was actually at 9% for security.
  • Expect security to grow healthily as the company moves forward.
• Meraki:
  • Growing very quickly at 100% with a $400 million annual run rate.
  • Geographic expansion planned.
• Bullish Outlook:
  • Across-the-board momentum and relevance in major government and enterprise bids.
  • Winning bids that would not have been possible a year ago.
• Service Provider and Emerging Markets:
  • Not expecting a turn for several quarters despite better results.
  • Modeling for continued challenges in Service Provider CapEx.
• Gross Margins:
  • Consistent and stable, with the ability to maintain margins across product categories.
• Software Company Progress:
  • Multiyear progress towards becoming a software company.
  • Focus on improving cash flow and driving improvements in gross and operating margins.
• VCE Relationship:
  • Very good relationship with EMC, with 50% year-over-year growth.
  • Continuing to partner with NetApp and deepening strategic partnerships with other companies.
• Revenue Impact of VCE:
  • Significant revenue source for UCS products and some switching products.
  • Positive growth from the relationship.
• Price Erosion and Productivity Improvement:
  • No significant change in the rate of price erosion or productivity improvement.

Closing

• Summary:

  • Never felt better about the business and its future.

  • Back and well-positioned for the future.

  • Pace of change will continue to accelerate.

Kelly A. Kramer, the Former Executive Vice President and CFO of Cisco Systems, provided financial details and insights during the Q2 2015 Earnings Call. Here is a detailed summary of her remarks:

1. Financial Performance Overview:

   • Total revenue was $11.9 billion, growing 7%.
   • Non-GAAP net income was $2.7 billion, up 9%.
   • Non-GAAP earnings per share (EPS) was $0.53, up 13%.
   • Product revenue increased 8%, and service revenue increased 5%.
   • Product book-to-bill ratio was greater than 1.
   • Non-GAAP operating margin was 28.4%.

2. Gross Margins:

   • Non-GAAP total gross margins and non-GAAP product gross margins were 61.7% and 60.8%, respectively.
   • Non-GAAP service gross margin was 64.8%.
   • The guidance for total non-GAAP gross margins was in the range of 61% to 62%.
   • Non-GAAP gross margins may vary quarter-to-quarter by 1 point.

3. Operating Expenses:

   • Non-GAAP operating expenses were $4.0 billion or 33.3% as a percentage of revenue.
   • Non-GAAP operating expenses decreased 5% quarter-over-quarter and increased 6% year-over-year.
   • Investments were made in key growth areas such as security, cloud, and software.

4. Tax Provision Rate:

   • Non-GAAP tax provision rate was 22%.
   • The U.S. Federal R&D tax credit extension did not have a material impact on the non-GAAP tax rate.

5. Headcount and Acquisitions:

   • Headcount was at 70,112, a decrease of 2,135 from Q1.
   • Restructuring actions were taken to invest in growth, innovation, and talent.
   • One acquisition was completed during the quarter: Neohapsis, a provider of network and security consulting services.

6. Geographic Segment Results:

   • Americas segment revenue was up 10%.
   • EMEA revenue was up 7%.
   • APJC revenue was down 3%.
   • Gross margins for the Americas, EMEA, and APJC were 62.0%, 61.8%, and 60.3%, respectively.

7. Balance Sheet and Cash Flow:

   • Total cash, cash equivalents, and investments were $53.0 billion.
   • $3.2 billion was available in the U.S.
   • Operating cash flow was $2.9 billion.
   • Deferred revenue was $14 billion, up 6% year-over-year.
   • Product deferred revenue grew 14%, largely driven by subscription-based offerings.
   • Services deferred revenue grew 2%.
   • Days Sales Outstanding (DSO) was 35 days.

8. Shareholder Returns:

   • Returned $2.2 billion to shareholders, including $1.2 billion through share repurchases and $974 million through the quarterly dividend.
   • Approximately $4.2 billion or 86% of free cash flow was returned to shareholders in the first half of fiscal year '15.
   • Board approved an increase of $0.02 to the quarterly dividend to $0.21 per share, representing a yield of approximately 3.1%.

9. Guidance for Q3 2015:

   • Revenue growth expected to be in the range of 3% to 5%.
   • Non-GAAP gross margin expected to be in the range of 61% to 62%.
   • Non-GAAP operating margin expected to be in the range of 27.5% to 28.5%.
   • Non-GAAP tax provision rate expected to be approximately 22%.
   • Non-GAAP EPS expected to range from $0.51 to $0.53.
   • GAAP earnings expected to be lower than non-GAAP EPS by $0.09 to $0.12 per share.

10. Restructuring Charges:

    • Pretax charge of up to $100 million in Q3 '15.
    • Total charges not expected to exceed $600 million during fiscal year '15.

11. Other Guidance Notes:

    • Guidance does not assume significant improvement in emerging markets or the Service Provider segment.
    • Guidance assumes no additional acquisitions, asset impairments, restructurings, and tax or other events.

12. Closing Remarks:

    • Reminded listeners that Cisco will not comment on financial guidance during the quarter unless through an explicit public disclosure.

Robert W. Lloyd highlighted the following points:

• Expansion of Meraki globally with recent additions in EMEA and building out in Europe

• Meraki is a very profitable business model with no margin impact

• Announced the expansion of the Meraki portfolio at Cisco Live! in Milan, including an expansion of the Enterprise offer and a mobile device manager

• Meraki is growing very quickly at 100% and is one of the better acquisitions Cisco has made