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pww.comCisco Systems, Inc., Q3 2006 Earnings Call, May-09-2006 - SEHK:4333

SEHK:4333

Rick Justice [Executives] 💬

During the Cisco Systems, Inc. Q3 2006 Earnings Call, Rick Justice, Senior Vice President of Worldwide Field Operations, provided insights and responses to several questions. Here’s a detailed summary of his comments:

  1. Sales Force Efficiency:

    • Rick addressed the issue of sales force efficiency, stating that Cisco measures the productivity of new salespeople very closely and expects them to reach full productivity within four to six quarters.
    • He mentioned that the trend of productivity continues to be positive, indicating that the salespeople hired over the last six quarters are performing as expected.
    • He explained that the first priority for adding salespeople is the commercial market, focusing on coverage, followed by the low end of the enterprise market and aggressively adding staff in emerging markets.

  2. Federal Government Business:

    • Rick commented on the federal government business, noting that the Department of Defense (DOD) had just released a supplemental budget, which they were waiting for.
    • He mentioned that civilian and intelligence budgets were flowing as expected, but DOD budgets were not flowing until the supplemental budget was released.
    • He expressed hope for improvement in the DOD sector and highlighted that Q4 is typically a strong quarter seasonally for federal government business.

In summary, Rick Justice provided insights into Cisco's sales force efficiency, emphasizing the company's focus on adding salespeople in key areas such as the commercial market and emerging markets. He also discussed the federal government business, highlighting the impact of the DOD supplemental budget release and expressing optimism for the future.

Blair Christie [Executives] 💬

Blair Christie, Vice President of Investor Relations for Cisco Systems, made the following remarks during the Q3 2006 Earnings Call:

  1. Introduction:

    • Thanked everyone and welcomed them to the 65th quarterly conference call.
    • Noted the absence of Dennis Powell, Chief Financial Officer, due to recent back surgery.
    • Mentioned that Dennis would be listening to the call and wished him well in his recovery.

  2. Press Release and Webcast Information:

    • Announced the availability of the third quarter of fiscal year 2006 press releases on various platforms including First Call, First National Business Wire, European Business and Technical Wire, and the Cisco website.
    • Provided a phone number for those who wanted a fax of the press release.
    • Mentioned the availability of a webcast with slides and additional financial information on the Cisco website in the investor relations section.
    • Announced the availability of a replay of the call via telephone.

  3. Financial Results Presentation Format:

    • Noted that the conference call would reference both GAAP and non-GAAP financial results.
    • Provided information on where to find complete GAAP reconciliation information on the Cisco website.
    • Mentioned that the financial results in the press release are unaudited.

  4. Forward-Looking Statements Disclaimer:

    • Reminded listeners that the matters discussed included forward-looking statements subject to risks and uncertainties.
    • Directed listeners to review Cisco's documents filed with the SEC, specifically the most recent reports on Forms 10-K and 10-Q, for important risk factors.

  5. Conference Call Recording Policy:

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

  6. Call Timing and Handover:

    • Announced that the call would conclude promptly at 3:00 PM.
    • Turned the call over to John Chambers for his commentary on the quarter.

  7. Q&A Session Introduction:

    • Requested that sell-side analysts ask only one question.
    • Announced the end of the call at 3:00 PM Pacific Time and opened the floor for questions.

  8. Next Quarterly Conference Call Announcement:

    • Announced the date and time for the next quarterly conference call, which would reflect the fourth quarter and fiscal 2006 results.
    • Reminded listeners of Cisco's policy not to comment on financial guidance during the quarter unless done through a public disclosure.

  9. Closing Remarks:

    • Invited listeners to contact the investor relations department with any follow-up questions.

    • Thanked everyone for their participation and support.

    • Concluded the call.

John Chambers [Executives] 💬

John Chambers provided extensive commentary during the Q3 2006 Earnings Call. Below is a detailed summary of his remarks:

  1. Quarter Summary:

    • John Chambers summarized the quarter as strong in terms of orders, revenue, and earnings per share.
    • Noted balanced performance from a geographic perspective, especially in the U.S. and emerging markets.
    • Strong product order growth rate, continued strength in the commercial market segment, and in advanced technologies.
    • Balanced performance across almost all key product categories and continued strong financial results.

  2. Market Positioning:

    • Highlighted the unique positioning of Cisco as the network becomes the primary driver of IT and all forms of communications.

  3. Financial Results:

    • Record total revenue of $7.3 billion, resulting in 18% year-over-year growth.
    • Revenue growth without Scientific-Atlanta was 12% year-over-year and 4% sequentially.
    • Product book-to-bill was greater than one, and product orders grew faster than revenues.
    • GAAP net income was $1.4 billion, and GAAP earnings per share were $0.22.
    • Non-GAAP net income was $1.8 billion, and non-GAAP earnings per share were $0.29.
    • Scientific-Atlanta's net contribution to earnings per share was less than one-half of one cent.
    • Total non-GAAP gross margins, including Scientific-Atlanta, were 65.7%.
    • Cash flow from operations was $2.3 billion.
    • Exited the quarter with $18.2 billion in cash and cash equivalents and investments.

  4. Geographic Highlights:

    • U.S. experienced an extremely strong quarter with year-over-year growth of almost 20% in terms of orders.
    • Emerging markets theater saw a year-over-year order growth rate of approximately 40%.

  5. Key Focus Areas for Fiscal 2006:

    • Emerging markets, commercial market, additional sales coverage, advanced technologies, and evolving support model.

  6. Product Order Balance:

    • Core routing and switching grew in the mid-teens year-over-year.

  7. Financial Perspective:

    • Pleased with record revenue, strong cash generated from operations, and earnings per share.

  8. Quarterly Overview:

    • Highlighted information from geographies and customer markets.
    • Continued balance in geographies, market segments, architectural evolutions, and product families.
    • Good balance across the three major customer market segments: commercial, enterprise, and service provider.

  9. What Went Well:

    • Continued strength and balance in the U.S. across all three major customer market segments.
    • Success in the emerging markets.
    • Solid order growth in Asia-Pacific and Europe.
    • Good year-over-year customer segment balance order growth.
    • Even better balance in terms of product families.
    • Initial success with Scientific-Atlanta.
    • Continued strong financial performance.

  10. Concerns:

    • Global economic activity and capital spending swings.
    • Challenges faced by industry peers.
    • Competition from low-priced competitors from Asia.
    • Opportunities and risks in advanced and emerging technologies.
    • Potential market share gains and resource commitments.
    • Concerns about cautious guidance from peers.
    • Impact of GDP changes on capital expenditures.

  11. Guidance:

    • Anticipated product order growth in the range of 10% to 15% for Q4 FY06.
    • Guidance for Cisco's business excluding Scientific-Atlanta for Q4 is for year-over-year revenue growth in the 10% to 12.5% range.
    • Expected Scientific-Atlanta's Q4 revenue contribution to be approximately in the mid $500 million range.
    • Combined revenue growth expected to be in the 18% to 21% range.

  12. Business Momentum:

    • Solid business optimism among leaders worldwide.
    • Vision and strategy well-received by customers and partners.
    • Confidence in Cisco's future opportunities.
    • Commitment to pursuing opportunities aggressively.

  13. Summary:

    • Optimistic about Cisco's future opportunities.
    • Commitment to partnership with shareholders.
    • Gratitude to shareholders, customers, Cisco family, and partners.

These points provide a comprehensive overview of John Chambers' remarks during the Q3 2006 Earnings Call.

Betsy Rafael [Executives] 💬

Betsy Rafael provided detailed insights into Cisco's financial performance for the third quarter of fiscal year 2006. Here is a summary of her remarks:

Opening Remarks

  • Acknowledged the presence of FAS-123R charges for stock option expensing in the GAAP income statement.
  • Noted that financial statements for prior periods have not been restated for the effect of FAS-123R.
  • Mentioned that a table reconciling Q3 FY06 net income with prior periods is available in the press release and on the website.
  • Indicated that Cisco's Q3 FY06 financial statements include two months of Scientific-Atlanta's financial results.
  • Stated that additional information regarding the impact of Scientific-Atlanta would be provided for the next few quarters to facilitate year-over-year comparisons.

Profit and Loss (P&L) Overview

  • Total revenue for Q3 was $7.3 billion, an 18% increase year-over-year.
  • Scientific-Atlanta contributed $407 million in revenue.
  • Without Scientific-Atlanta, total revenue grew 12% year-over-year.
  • Categorized Scientific-Atlanta's product revenue into Cisco's product revenue segments, with approximately 75% to video systems, 10% to home networking, 5% to optical, and 5% to other.
  • Video systems, a new category, includes solutions and systems dedicated to enabling video-specific systems sold directly to service providers.
  • Product revenue was $6.15 billion, and service revenue was $1.17 billion.
  • Routing revenues were $1.52 billion, up 5% year-over-year.
  • Switching revenues were $2.69 billion, up 13% year-over-year.
  • Advanced technology revenue was $1.69 billion, up 42% year-over-year. Without Scientific-Atlanta, the growth would have been 12%.
  • Other revenue was $257 million, up 49% year-over-year. Without Scientific-Atlanta, the growth would have been 35%.
  • Service revenue was $1.17 billion, up 17% year-over-year.

Gross Margins

  • Total non-GAAP gross margin was 65.7%, down from 66.8% in the same period last fiscal year and down from 68% last quarter.
  • Product-only non-GAAP gross margin was 65.3%, down from 67.3% in Q3 FY05 and down from 68.2% last quarter.
  • Service margins on a non-GAAP basis were 67.9%, up from 64.4% in Q3 of last year and up from 67% last quarter.

Operating Expenses

  • Non-GAAP operating expenses for Q3 were $2.6 billion, up from $2.2 billion in the same quarter of last year and up from $2.4 billion last quarter.
  • Non-GAAP operating expenses as a percentage of revenue were 36% in Q3, the same as Q3 FY05 and compared to 37% for last quarter.

Tax Provision and Net Income

  • Q3 FY06 tax provision rate for non-GAAP and GAAP results was 22.7% due to a favorable foreign tax settlement of approximately $124 million.
  • Non-GAAP net income for the third quarter was $1.8 billion, up 21% year-over-year.
  • Non-GAAP earnings per share were $0.29 per share, up 26% year-over-year.

Balance Sheet Highlights

  • Cash and cash equivalents and investments were approximately $18.2 billion, up from $15 billion last quarter.
  • Accounts receivable ended the quarter at $3 billion, up from $2.5 billion in the previous quarter.
  • Total inventory at the end of the quarter was $1.3 billion, with non-GAAP inventory turns at 7.4.
  • Inventory purchase commitments for Q3 were $1.7 billion, up from $1.2 billion for Q2 and $945 million for Q3 of the prior fiscal year.
  • Total deferred revenue for Q3 was approximately $5.5 billion, up from $5.1 billion in Q2.

Headcount

  • Total Q3 FY06 reported headcount ended at 48,296, a net increase of 8,631 from Q2, with 7,924 additions related to acquisitions completed in the quarter.

Conclusion

  • Noted the company's continued execution on profitable growth objectives, achieving 12% revenue growth year-over-year excluding Scientific-Atlanta, and non-GAAP profit of 25% of revenue.

  • Highlighted the strength in operating cash flow, illustrating the quality of earnings.

  • Congratulated the Scientific-Atlanta and Cisco teams on a successful combined first quarter of operations.

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