PWW

Portfolio AI Insights

pww.comCisco Systems, Inc., Q2 2020 Earnings Call, Feb 12, 2020 - SEHK:4333

SEHK:4333

Marilyn Mora [Director of Global Investor Relations] đź’¬

Marilyn Mora, the Director of Global Investor Relations for Cisco Systems, Inc., made the following statements during the Q2 2020 Earnings Call:

  1. Opening Remarks:

    • "Thanks, Michelle. Welcome, everyone, to Cisco's Second Quarter Fiscal 2020 Quarterly Earnings Conference Call. This is Marilyn Mora, Head of Investor Relations, and I'm joined by Chuck Robbins, our Chairman and CEO; and Kelly Kramer, our CFO."

  2. Financial Information Availability:

    • "By now, you should have seen our earnings press release. A corresponding webcast with slides, including supplemental information, will be made available on our website in the Investor Relations section following the call."
    • "Income statements, full GAAP to non-GAAP reconciliation information, balance sheets, cash flow statements and other financial information can also be found in the Financial Information section of our Investor Relations website."

  3. Conference Call Guidelines:

    • "Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results, and we'll discuss product results in terms of revenue and geographic and customer results in terms of product orders, unless stated otherwise."
    • "All comparisons made throughout this call will be made on a year-over-year basis."
    • "The matters we will be discussing today include forward-looking statements, including the guidance we will be providing for the third quarter of fiscal 2020."
    • "They are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on Forms 10-K and 10-Q, which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements."

  4. Guidance and Public Disclosure Policy:

    • "With respect to guidance, please also see the slides and press release that accompany this call for further details."
    • "Cisco will not comment on its financial guidance during the quarter, unless it is done through an explicit public disclosure."

  5. Introduction of Chuck Robbins:

    • "With that, I'll now turn it over to Chuck."

  6. Transition to Questions and Answers:

    • "Thanks, Kelly. Michelle, let's go ahead and open the line for questions."

  7. Closing Remarks:

    • "Thanks, Chuck. Just to wrap the call, Cisco's next quarterly earnings conference call, which will reflect our fiscal 2020 third quarter results, will be on Wednesday, May 13, 2020, at 1:30 p.m. Pacific Time, 4:30 p.m. Eastern Time."

    • "Again, I'd like to remind the audience that in light of Regulation FD, Cisco's policy is not to comment on its financial guidance during the quarter, unless it is done through an explicit public disclosure."

    • "We now plan to close the call. If there are any further questions, feel free to contact Cisco's Investor Relations group, and we thank you very much for joining today's call."

Charles H. Robbins [Chairman & CEO] đź’¬

Charles H. Robbins, the Chairman & CEO of Cisco Systems, Inc., provided opening remarks and responded to various questions during the Q2 2020 Earnings Call. Here’s a detailed summary of his comments:

Opening Remarks

  • Customer Commitment: Despite longer decision-making cycles among customers due to macro uncertainty and geographical issues, Robbins expressed confidence in the strong commitment of customers to Cisco’s products and services.
  • Business Transformation: Noted progress in the shift towards more software and subscriptions, with 72% of software sold as a subscription.
  • Long-Term Growth Trends: Highlighted the ongoing trends of 5G, WiFi 6, 400 gig, and cloud adoption as key drivers for the company’s future growth.
  • Strategic Focus: Emphasized Cisco’s focus on helping customers build simpler, more secure, and cost-effective networks, leveraging significant investments in software, silicon, and optics.
  • Product and Portfolio Updates:
    • Introduced Cisco Silicon One, the Cisco 8000 carrier-class router family, and the new IOS XR7 operating system, along with flexible purchasing options.
    • Collaborated with major web-scale and service provider companies.
  • Business Update:
    • Infrastructure Platforms: Mentioned the strong adoption of Catalyst 9000 platforms and the extension of secure SD-WAN solutions.
    • Security: Noted solid performance across advanced threat and cloud-based solutions, including Duo and Umbrella.
    • Applications: Highlighted the company’s leadership in providing a cognitive, secure, and analytics-driven collaboration platform.

Question-and-Answer Session

  • Macro Environment and Recovery Timing:
    • Robbins believes that the pause in customer spending is temporary and expects recovery as some uncertainties dissipate.
    • He noted that customers remain committed to technology investments, and the uncertainty is causing caution rather than a deep downturn.
  • Sales and Channel Transformation:
    • Acknowledged significant work on transforming the sales and channel organizations to support the software and subscription models.
    • Shared that the company has been preparing for renewals of early subscription businesses and feels good about the progress made.
  • Service Provider Vertical:
    • Robbins addressed the challenges in the service provider vertical, emphasizing the company’s commitment to the market through substantial R&D investments.
    • He highlighted the introduction of Silicon One and the Cisco 8000 series routers, noting early wins in supporting 5G rollouts globally.
    • Anticipated that the 400-gig transition and 5G build-out will drive recovery in the service provider segment over the next few years.
  • Competitiveness of WebEx Platform:
    • Robbins expressed confidence in the re-architected WebEx platform, which integrates the backends and offers a modern solution.
    • He mentioned workshops with major customers to transition them to the modern portfolio.
  • 5G Investment and Government Commentary:
    • Robbins commented on the U.S. government’s interest in U.S. companies leading in 5G and emphasized the importance of educating policymakers on the components of a 5G network.
    • He noted that the U.S. has strong positions in packet core, cell site and radio backhaul, IP routing core, and security, and is working with industry peers to ensure a robust 5G infrastructure.
  • Service Provider Orders:
    • Robbins discussed the complexities surrounding service provider orders, noting that recent telecom consolidation may not necessarily slow down investment.
    • He suggested that the pace of 5G deployment and the decision to build standalone 5G networks for enterprises will influence the trajectory of service provider orders.
  • Catalyst 9000 Product Portfolio:
    • Robbins reiterated the strong growth of the Catalyst 9000 portfolio, attributing the momentum to the product’s features and the ongoing Campus switching refresh cycle.
    • He dismissed concerns about the subscription model impacting adoption, suggesting that the pause in enterprise spending is the primary factor.
  • Secular vs. Cyclical Trends:
    • Robbins distinguished between cyclical and secular trends, highlighting the 5G backbone build-out as a key driver for the routing business.
    • He anticipated that the Campus switching business will recover as customers resume their refresh cycles.
  • Security Business:
    • Robbins discussed the importance of Duo and Umbrella as key growth drivers within the security portfolio.
    • He noted the company’s focus on integrating these solutions with its secure SD-WAN offerings to differentiate in the market.

Robbins concluded by expressing confidence in Cisco’s ability to drive profitable growth and generate strong shareholder returns, emphasizing the company’s strategic alignment with customer needs in the evolving technology landscape.

Kelly A. Kramer [Former Executive VP & CFO] đź’¬

Kelly A. Kramer, the Former Executive Vice President and Chief Financial Officer of Cisco Systems, Inc., provided financial details and insights during the Q2 2020 Earnings Call. Here is a detailed list of her comments:

Financial Results Overview

  • Total Revenue: Down 4% to $12 billion.
  • Non-GAAP Operating Margin Rate: 33.7%, up 1.6 points.
  • Non-GAAP Net Income: $3.3 billion, flat year-over-year.
  • Non-GAAP EPS: $0.77, up 5%.
  • Product Revenue: Down 6% to $8.7 billion.
    • Infrastructure Platforms: Down 8%.
      • Switching Revenue: Declined in both Campus and Data Center.
      • Routing: Driven by weakness in service provider.
      • Wireless: Overall decline, but strong growth in Meraki and the ramp of WiFi 6 products.
      • Data Center: Revenue declined, driven by servers, offset by strong growth in HyperFlex.
    • Applications: Down 8%, driven by a decline in Unified Communications, partially offset by double-digit growth in AppDynamics.
    • Security: Up 9%, with strong performance in identity and access, advanced threat, and unified threat management.
  • Service Revenue: Up 5%, driven by software and solution support.
  • Software Subscriptions: 72% of total software revenue, up 7 points year-over-year.

Orders and Geographic Performance

  • Total Product Orders: Down 6%.
  • Geographies:
    • Americas: Down 8%.
    • EMEA: Down 1%.
    • APJC: Down 4%.
  • Emerging Markets: Down 7%, with the BRICS plus Mexico down 20%.
  • Customer Segments:
    • Public Sector: Flat.
    • Enterprise: Down 7%.
    • Commercial: Down 4%.
    • Service Provider: Down 11%.
  • Remaining Performance Obligations (RPO): $24.9 billion, up 11%.

Gross and Operating Margins

  • Total Q2 Gross Margin: 66.4%, up 2.3 points.
    • Product Gross Margin: 65.9%, up 3.1 points.
    • Service Gross Margin: 67.7%, flat year-over-year.
  • Non-GAAP Operating Margin Rate: Expected to be in the range of 32.5% to 33.5%.

Cash and Capital Allocation

  • Cash, Cash Equivalents, and Investments: $27.1 billion.
  • Operating Cash Flow: $3.8 billion, flat year-over-year.
  • Share Repurchases: $0.9 billion.
  • Quarterly Dividend: Announced a $0.01 increase to $0.36 per share, up 3% year-over-year.

Guidance for Q3 FY2020

  • Revenue: Expected to decline in the range of minus 1.5% to minus 3.5% year-over-year.
  • Non-GAAP Gross Margin Rate: Expected to be in the range of 64.5% to 65.5%.
  • Non-GAAP Operating Margin Rate: Expected to be in the range of 32.5% to 33.5%.
  • Non-GAAP Tax Provision Rate: Expected to be 20%.
  • Non-GAAP Earnings Per Share (EPS): Expected to range from $0.79 to $0.81.
  • Coronavirus Impact: Guidance does not reflect any potential disruptions in the global supply chain that could result from the coronavirus.

Additional Insights

  • Margin Drivers:
    • Software transformation benefiting margins.
    • Price discipline, taking advantage of raising prices where there is elasticity.
    • Managing the decline in the pricing and the server market balanced with the decrease in DRAM prices.
  • DRAM Pricing Impact:
    • Benefited margins this quarter, but becoming less of a benefit as DRAM prices tick back up.
    • Expect a little bit more pressure from DRAM pricing in the future.
  • Orders Insights:
    • Enterprise and public sector product orders got incrementally more challenged.
    • Service provider orders marginally improved compared to the previous quarter.
    • Tough compares in enterprise due to the Catalyst 9K ramp and Collaboration having a record quarter a year ago.
  • Services Growth:
    • 5% growth in services driven by the customer experience team focusing on driving renewal rates and adoption.
    • Efforts to find more ways to drive incremental growth beyond just maintenance tied to product orders.
  • Product Revenue Guidance:
    • Guidance for Q3 reflects a similar sequential pattern to historical Q3 to Q2 seasonality.
    • The decline in order rates is accounted for in the guidance.

Acquisition

  • Exablaze Acquisition: Closed in early Q3, a designer and manufacturer of advanced network devices aimed at reducing latency and improving network performance.

Feedback