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pww.comCisco Systems, Inc., Q3 2007 Earnings Call, May-08-2007 - SEHK:4333

SEHK:4333

Dennis Powell [Executives] 💬

During the Cisco Systems, Inc. Q3 2007 Earnings Call, Dennis Powell, the Chief Financial Officer at the time, provided a detailed financial overview and guidance. Below are the key points and statements made by Dennis Powell:

Key Financial Highlights for Q3

  • Total Revenue: $8.9 billion, a 21% year-over-year increase.
  • Cisco Standalone Revenue: $8.1 billion, a 17% year-over-year increase.
  • Scientific-Atlanta Revenue: $752 million, a 32% year-over-year increase.
  • Record Revenue Drivers: Several factors including the impact of regulation 707, shift in the installed base to HD set-top boxes, network upgrades, and international expansion.

Revenue Breakdown

  • Routing Revenue: $1.8 billion, up 16% year-over-year.
  • Switching Revenue: $3.1 billion, up 15% year-over-year.
  • Advanced Technologies Revenue: $2.1 billion, including $589 million of Scientific-Atlanta sales, representing a 36% year-over-year increase on a combined basis.
  • Other Product Revenue: $554 million, up 33% year-over-year on a combined basis.
  • Service Revenue: $1.4 billion, up approximately 19% year-over-year on a combined basis.

Gross Margins

  • Non-GAAP Gross Margin: 64.5%, down from 64.8% last quarter.
  • Product Only Non-GAAP Gross Margin: 64.7%, down slightly from 64.8% last quarter.
  • Non-GAAP Service Margins: 63.2%, down from 64.4% last quarter, due primarily to investments in headcount and advanced services.

Operating Expenses

  • Non-GAAP Operating Expenses as a Percentage of Revenue: Approximately 35% in Q3 FY '07, down from approximately 36% in Q3 FY '06.

Net Income

  • Non-GAAP Net Income: $2.1 billion, a 16% increase year-over-year.
  • GAAP Net Income: $1.9 billion, a 34% increase year-over-year.

Earnings Per Share

  • Non-GAAP Earnings Per Share: $0.34, up from $0.29 in Q3 FY '06, a 17% increase year-over-year.
  • GAAP Earnings Per Share: $0.30, up from $0.22 in Q3 FY '06, a 36% increase year-over-year.

Balance Sheet

  • Cash and Cash Equivalents and Investments: $22.3 billion, up from $20.7 billion last quarter.
  • Cash Generated from Operations: $2.4 billion.
  • Stock Option Exercises Proceeds: $940 million.
  • Share Repurchases: $1.5 billion to repurchase 56 million shares at an average price of $26.85.
  • Inventory: $1.3 billion, down from $1.6 billion last quarter.
  • Inventory Turns: 8.6 times, up from 7.6 times last quarter.
  • Headcount: 56,790, an increase of 2,227 from Q2.

Deferred Revenue

  • Deferred Revenue: Increased from $6.1 billion in Q2 FY '07 to $6.3 billion in Q3.

Guidance for Q4

  • Total Revenue: Expected to be in the range of $9.2 billion to $9.3 billion, representing a 15% to 16% growth year-over-year.
  • Gross Margin: Expected to remain at approximately 64.5%.
  • Operating Expenses: Expected to be slightly below or above 35.5% of revenue.
  • Interest and Other Income: Expected to be approximately $200 million in the fourth quarter.
  • Tax Rate Provision: Expected to be approximately 25%.
  • Weighted Average Shares Outstanding: Expected to be flat to up approximately 40 million shares.
  • Cash Flow from Operations: Expected to generate $500 million to $700 million per month.

GAAP Earnings

  • GAAP EPS: Expected to be $0.03 to $0.05 per share lower than the non-GAAP EPS, primarily due to acquisition-related charges and stock option expense.

Additional Guidance Notes

  • Acquisitions Impact: Incremental revenue from the acquisitions of WebEx and IronPort expected to be approximately $50 million, with no impact to non-GAAP earnings per share.

Dennis Powell's statements provide a comprehensive financial overview of the company's performance and future expectations.

Rick Justice [Executives] 💬

During the Cisco Systems, Inc. Q3 2007 Earnings Call, Rick Justice provided updates and insights on various aspects of the company's performance and strategy. Here is a detailed list of his comments:

  1. US Enterprise Business Stability:

    • Rick commented on the stability of the US enterprise business, noting that the key observation from Q2 to Q3 was that there was no downward trend.
    • He explained that large enterprises are making investments in other countries, which shows up in Cisco's growth in other parts of the world.

  2. Sales Force Productivity:

    • Rick discussed the close monitoring of sales force ramp rates and productivity, looking at productivity one, two, three, four, five, and six quarters out.
    • He mentioned that Cisco is seeing rapid improvement in productivity over classical models, with people reaching full productivity in four to six quarters.
    • Rick stated that Cisco adds people at a slower percentage than the overall business growth, allocating resources based on productivity.

  3. Japan Network Build-Out:

    • Rick provided an update on the situation in Japan, mentioning that he had recently returned from a trip there.
    • He met with senior executives from NTT, SoftBank, KDDI, and confirmed the commitment to IP Next Generation Networks (IPNGN).
    • Rick stated that the guidance for the start of the build-out remains by the end of the year or the beginning of the next year (Q1 or Q2 of FY '08).
    • He expressed confidence that once the build-out begins, it will span several years, not just quarters.

These comments highlight Rick Justice's insights into the stability of the US enterprise business, the productivity of the sales force, and the expected timing for the network build-out in Japan.

Blair Christie [Executives] 💬

Blair Christie, the Vice President of Corporate Communications for Cisco Systems, made the following statements during the Q3 2007 Earnings Call:

  1. Introduction:

    • "Thank you, Marty. Good afternoon, everyone, and welcome to our 69th quarterly conference call. This is Blair Christie and I'm joined by John Chambers, our Chairman and CEO; Dennis Powell, Chief Financial Officer; Rick Justice, Senior Vice President of Worldwide Operations and Business Development; Charlie Giancarlo, Chief Development Officer; and Jim McDonald, Chief Executive Officer of Scientific-Atlanta."

  2. Press Release and Webcast Information:

    • "The Q3 fiscal year 2007 press release is on the First Call, Full National Market Wire and European Financial and Technology Wire as well as on the Cisco website at www.cisco.com."
    • "If you'd like a fax of the press release, please call 408-526-8890 and follow the instructions."
    • "A corresponding webcast with slides and downloadable information regarding Cisco's financial statements can be found on our website in the Investor Relations section."

  3. Conference Call Recording and Format:

    • "Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results. Please note, we have provided a reconciliation table of GAAP to non-GAAP information in the slides accompanying this webcast."
    • "We have also posted full reconciliation information along with all of our financial statements to our website. Please go to the financial section in the Investor Relations website for further details."

  4. Forward-Looking Statements Disclaimer:

    • "The matters we will be discussing today include forward-looking statements and as such, are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent report on Forms 10-K and 10-Q and any applicable amendments which identify important risk factors that could cause the actual results to differ materially from those contained in the forward-looking statements."

  5. Unauthorized Recording Notice:

    • "Unauthorized recording of this conference call is not permitted."

  6. Handover to John Chambers:

    • "And I will now turn it over to John for his commentary on the quarter. John."

  7. Opening Q&A Session:

    • "Okay. Thank you, John. Now, we're going to open up the call to our Q&A session. As we have before and I will remind you, we do request that sell-side analysts please ask only one question."

  8. Closing Statement:

    • "Please feel free to call the Investor Relations' department with any follow-up questions from this call and thank you for your participation and continued support. This concludes our call."

These statements outline the agenda, provide logistical details about accessing the press release and webcast, and emphasize the importance of considering the risks associated with forward-looking statements. Blair Christie also introduces the executives and sets the stage for the presentation and the Q&A session.

John Chambers [Executives] 💬

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

Opening Comments

  • John Chambers thanked Blair Christie and expressed his intent to reduce the narrative part of the call to allow more time for Q&A.
  • He outlined the structure of the call, which includes key takeaways for the quarter, revenue guidance for the next quarter, a discussion on the next phase of growth driven by collaboration and Web 2.0 capabilities, financial highlights by Dennis Powell, and a focus on business momentum and strategy.
  • He mentioned that the call will be supplemented with slides accompanying the webcast.

Q3 Highlights

  • Chambers highlighted that Q3 was another strong record quarter in terms of revenue, non-GAAP net income, and non-GAAP earnings per share.
  • He summarized the quarterly highlights in four categories: key financial perspective, product and services perspective, customer segment perspective, and geographic perspective.
  • Key financial highlights included record revenue of approximately $8.9 billion (21% YoY growth), Cisco standalone revenue growth of 17%, and Scientific-Atlanta revenue growth of 30% YoY.
  • Non-GAAP net income was $2.1 billion (16% YoY increase), and GAAP net income was $1.9 billion (34% YoY increase).
  • Non-GAAP earnings per share were $0.34 (17% YoY increase), and GAAP earnings per share were $0.30 (36% YoY increase).

Product and Services Momentum

  • Chambers analyzed the results in five categories: routing, switching, advanced technologies, Scientific-Atlanta, and customer advocacy services.
  • Routing revenue grew 16% YoY, switching revenue grew 15% YoY, and advanced technologies revenue grew 24% YoY (excluding Scientific-Atlanta).
  • Advanced technologies are now contributing more to the top line than routing.
  • Customer advocacy service revenue represents 16% of total revenue and grew 19% YoY.

Geographic and Customer Segment Perspective

  • From a geographic perspective, there was strong order growth from the emerging markets (40% YoY), solid order growth in Europe (low teens YoY), mid-teen order growth in the US, and approximately 20% order growth in Asia Pacific.
  • From a customer segment perspective, the commercial market saw 20% YoY order growth, the service provider business remained strong with 17% YoY standalone order growth, and the enterprise business grew approximately 14%.

Future Outlook

  • Chambers discussed the potential of collaboration enabled by Web 2.0 technologies to drive growth over the next decade.
  • He mentioned the one-year anniversary of the Scientific-Atlanta acquisition and the company's shift to providing guidance based on combined numbers.
  • Revenue guidance for Q4 FY 2007 is 15% to 16% YoY growth, above the high end of previous guidance.

Detailed Discussion

  • Chambers provided a more detailed discussion of the geographic, customer segment, and product performance in Q3.
  • He highlighted the strong performance of the emerging markets, the solid improvement in European operations, the strong service provider market in the US, and the solid momentum in the Asia Pacific region.
  • He mentioned the mid-single-digit growth in the US enterprise segment and the potential for continued expansion with service providers through the Scientific-Atlanta acquisition.

Closing Remarks

  • Chambers summarized Cisco's momentum and opportunities entering Q4 FY 2007, emphasizing the company's strong performance across geographies, products, services, and customer segments.

  • He expressed confidence in the company's strategy and execution, particularly in the context of industry consolidation, market transitions, and changing economic times.

  • He thanked shareholders, customers, employees, and partners for their support and confidence in Cisco's ability to execute during rapid industry consolidation, market transitions, and changing economic conditions.

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