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pww.comCisco Systems, Inc., Q3 2010 Earnings Call, May 12, 2010 - SEHK:4333

SEHK:4333

Laura Graves [Executives] 💬

During the Cisco Systems, Inc. Q3 2010 Earnings Call on May 12, 2010, Laura Graves, the Director of Global Investor Relations, Corporate Communications for Cisco Systems, made the following statements:

  1. Introduction:

    • Thanked the operator and welcomed everyone to the 81st quarterly conference call.
    • Mentioned she was joined by John Chambers, the Chairman and CEO; Frank Calderoni, the Executive Vice President and Chief Financial Officer; Rob Lloyd, the Executive Vice President of Worldwide Operations; Ned Hooper, the Chief Strategy Officer and Senior Vice President of the Consumer Business; and Padmasree Warrior, the Chief Technology Officer.

  2. Financial Information Availability:

    • Noted that the Q3 fiscal year 2010 press release was on the U.S. high-tech Marketwire and on the Cisco website at newsroom.cisco.com.
    • Reminded attendees about the webcast with accompanying slides that contained financial information covered during the call and additional financial metrics and analysis.
    • Mentioned that downloadable Q3 financial statements, including revenue by product and geography, income statements, full GAAP to non-GAAP reconciliation information, balance sheet, and cash flow statements, would be available on the Cisco website in the Investor Relations section.

  3. Replay Information:

    • Provided details about the replay of the call, which would be available via telephone from May 12 through May 19 and online from May 12 through July 23.

  4. Forward-Looking Statements Disclaimer:

    • Reminded listeners that the call would include forward-looking statements subject to risks and uncertainties discussed in detail in Cisco's documents filed with the SEC, including the most recent annual report on Form 10-K, quarterly report on Form 10-Q, and any applicable amendments.

  5. Unauthorized Recording:

    • Stated that unauthorized recording of the call was not permitted.

  6. Call Handover:

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

  7. Closing Remarks:

    • Provided information about the next quarterly conference call, which would reflect the fourth quarter fiscal 2010 results and be held on Wednesday, August 11, 2010, at 1:30 p.m. Pacific Time, 4:30 p.m. Eastern Time.
    • Mentioned that downloadable Q3 financial statements would be available following the call, including revenue segments by products and geographies, income statements, full GAAP to non-GAAP reconciliation information, balance sheets, and cash flow statements.
    • Reminded attendees about the policy to not comment on financial guidance during the quarter unless through an explicit public disclosure.
    • Invited attendees to contact the Investor Relations team with any follow-up questions and thanked everyone for their participation and ongoing support.

  8. Call Conclusion:

    • Announced the conclusion of the conference call.

John T. Chambers [Former Chairman Emeritus] 💬

John T. Chambers covered several key points during the earnings call:

  1. Summary of the Quarter:

    • The financial results for Q3 FY 2010 were outstanding and well-balanced across key areas, achieving record-level results from both total revenue and earnings per share (EPS) on a GAAP and non-GAAP basis.
    • Revenue was $10.4 billion, an increase of approximately 27% year-over-year, which exceeded the guidance provided last quarter of 23% to 26%.
    • Non-GAAP EPS was $0.42, a 40% year-over-year increase, while GAAP EPS was $0.37, a 61% increase year-over-year.
    • Expense management was solid, with non-GAAP operating expenses as a percentage of revenue at 36.3%.
    • Non-GAAP product gross margins were 65.3%.
    • Cash generated from operations in Q3 was approximately $3 billion, and Cisco repurchased $2.2 billion of stock during the quarter.

  2. Market Trends and Expectations:

    • The market over the last year and a half has evolved as expected, with Q3 marking the proof point for achieving goals and aspirations in handling challenging economic times.
    • Cisco emerged from the downturn gaining market share, a larger share of total wallet spend of customers, and improved customer relations.
    • Innovation and operational engines are hitting on all cylinders across products, organization structure, business models, and movement into 30+ new market adjacencies.
    • From almost every measurement perspective, Q3 was probably the strongest quarter in Cisco's history.

  3. Geographic and Market Segment Performance:

    • There was strong balance across the four large geographic theaters, all growing at or above 30% year-over-year in terms of orders.
    • The U.S. continued with strong pace and balance across enterprise, public sector, service provider, commercial, and consumer, all growing in excess of 25% year-over-year.
    • Emerging Markets, excluding China and India, returned to solid growth, comfortably above 40% year-over-year.
    • Asia-Pacific grew over 30% with solid balance across key customer segments.
    • Europe saw year-over-year growth numbers of approximately 30%.
    • Japan, representing about 3% of Cisco's business, grew in low single digits from an order perspective.

  4. Product Performance:

    • Core switching revenue growth was extremely strong with approximately 40% year-over-year growth.
    • The Nexus 2000, 5000, and 7000 product families showed strong growth, with the Nexus 7000 achieving an annualized run rate of over $1 billion.
    • Routing products had a strong quarter, with revenues up 23%, and the ASR 9000 showing strong growth.
    • Other products such as security, Unified Communications, wireless, and storage also showed solid growth.

  5. Acquisitions and Integrations:

    • The acquisitions of Starent and TANDBERG have had a smooth integration and broad customer acceptance.
    • The focus on a technology architecture from the data center to the home is gaining major traction with customers.

  6. Strategy and Outlook:

    • Cisco believes it is well-positioned in the industry due to new business models in terms of vision, differentiation strategy, and execution.
    • The company is entering the next phase of the Internet, with growth and productivity centered on collaboration, video, and virtualization.
    • Cisco will provide product architectures and expertise to partner with customers in implementing collaborative capabilities from a technology and business perspective.

  7. Financial Guidance:

    • Revenue guidance for Q4 FY 2010, including the acquisition of TANDBERG, is for revenue growth to increase 25% to 28% year-over-year.

  8. Closing Remarks:

    • John thanked the entire Cisco family for working together to ensure the company is in a solid position to weather challenging economic environments and continue to accelerate investments.

    • He encouraged investors to maintain realistic expectations and not to dramatically change models beyond Q4 guidance.

    • He expressed gratitude to shareholders, customers, employees, and partners for their support and confidence in Cisco's ability to execute during rapid industry consolidation, market transition, and challenging economic times.

Frank A. Calderoni [Former Chief Financial Officer and Executive Vice President] 💬

Frank A. Calderoni, the Former Chief Financial Officer and Executive Vice President of Cisco Systems, Inc., provided detailed financial insights during the Q3 2010 Earnings Call. Here is a summary of his remarks:

  • Financial Results Overview:

    • Total revenue for Q3 FY '10 was $10.4 billion, an increase of approximately 27% year-over-year.
    • There was an extra week in the quarter, which resulted in approximately a 4% to 5% increase in revenue year-over-year or 3% to 4% sequentially, Q2 to Q3.

  • Product Revenue Details:

    • Total product revenue was $8.4 billion, up 31% year-over-year.
    • Switching revenue was $3.7 billion, an increase of 40% year-over-year.
    • Routing revenue was $1.7 billion, up 23% year-over-year.
    • Advanced technologies revenue was $2.4 billion, representing an increase of 18% year-over-year.
    • Other product revenue was $630 million, an increase of approximately 71% year-over-year.

  • Services Revenue:

    • Total services revenue was a record $1.9 billion, up approximately 11% year-over-year.

  • Geographic Revenue Breakdown:

    • Revenue ranged from an increase of approximately 15% in Europe to approximately 41% in the Asia-Pacific theater.
    • Revenues in the U.S. and Canada theater were up approximately 29%.
    • Japan was up approximately 25% and Emerging Markets were up approximately 30%.

  • Gross Margin:

    • Q3 FY '10 total non-GAAP gross margin was 65.2%, down 0.4 percentage points quarter-over-quarter and up 1/10 of a point year-over-year.
    • Non-GAAP product gross margin for the third quarter was 65.3%, down 0.3 percentage points quarter-over-quarter.

  • Operating Expenses:

    • Non-GAAP operating expenses were approximately $3.8 billion in Q3, up approximately 9% quarter-over-quarter, driven by the extra week and increased investments in product innovation and strategic growth opportunities.

  • Interest and Other Income:

    • Non-GAAP interest and other income was $72 million for Q3.
    • GAAP interest and other income was $58 million for the third quarter of fiscal year '10.

  • Tax Provision Rate:

    • The Q3 FY '10 non-GAAP tax provision rate was 19.1%.

  • Net Income and Earnings Per Share:

    • Non-GAAP net income for the third quarter was $2.5 billion, representing an increase of 41% year-over-year.
    • Non-GAAP earnings per share on a fully diluted basis for the third quarter was $0.42 versus $0.30 in the third quarter of fiscal year 2009, a 40% increase year-over-year.

  • Balance Sheet Highlights:

    • The total of cash, cash equivalents, and investments for the quarter was $39.1 billion, down approximately $530 million from the previous quarter.
    • Accounts receivables balance was $4.1 billion at the end of Q3, down from $4.2 billion at the end of Q2, fiscal year '10.
    • Total inventory at the end of Q3 was $1.3 billion, up approximately 3% quarter-over-quarter.

  • Inventory Purchase Commitments:

    • Cisco's inventory purchase commitments at the end of Q3 were $4.3 billion, an increase of approximately 30% from the end of Q2.

  • Stock Repurchase Program:

    • During the quarter, Cisco repurchased $2.2 billion of common stock under the stock repurchase program or 87 million shares at an average price of $25.76 per share.

  • Deferred Revenue:

    • Deferred revenue was $10.3 billion at the end of Q3, up approximately 7% quarter-over-quarter, and an increase of approximately 17% compared with Q3 fiscal year '09.

  • Headcount:

    • Headcount totaled 68,574 at the end of Q3, an increase of approximately 2,700 from the previous quarter.

  • Financial Guidance:

    • For Q4 FY '10, total revenue is anticipated to be up approximately 25% to 28% year-over-year.

    • Total gross margin in Q4 is expected to be approximately 64% to 65%.

    • Operating expenses are expected to be approximately 36 1/2% to 37% of revenue.

    • Interest and other income is expected to be approximately $10 million in the fourth quarter.

    • The tax provision rate for Q4 is expected to be approximately 21%.

    • Cash flow from operations is expected to be $2 billion to $2.5 billion during the fourth quarter.

Robert W. Lloyd [Former President of Development & Sales] 💬

Robert W. Lloyd commented on the factors driving margin variability, which include volume, mix, cost, and price (discounting and rebates). He highlighted that the main drivers in the quarter were discounts and rebates, with benefits from higher volume and cost savings. On the services side, the mix between advisory services and technical services, along with the extra week, impacted higher costs. Lloyd also mentioned that the extra week was not the last week of the quarter but somewhere in the middle, and it did not significantly skew the results.

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