Cisco Systems, Inc., Q3 2015 Earnings Call, May 13, 2015 - SEHK:4333

SEHK:4333

Melissa Selcher made the following statements during the Cisco Systems, Inc. Q3 2015 Earnings Call:

1. Introduction:

   • Thanks, Kim. Good afternoon, everyone, and welcome to our 101st quarterly conference call.
   • She introduced herself as Melissa Selcher and mentioned that she was joined by several executives including John Chambers, Kelly Kramer, Rob Lloyd, Gary Moore, and Chuck Robbins.

2. Webcast Information:

   • Reminded attendees that there was a corresponding webcast with slides, including supplemental information available on the company’s website in the Investor Relations section.

3. Financial Information Availability:

   • Noted 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 in the Financial Reporting section.

4. Forward-Looking Statements Disclaimer:

   • Reminded listeners that the call would include forward-looking statements and that actual results could differ materially from those contained in the forward-looking statements due to risks and uncertainties detailed in the company’s SEC filings.

5. Recording Disclaimer:

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

6. Call Handover:

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

7. Closing Remarks:

   • Announced the date and time for the next quarterly call, which would reflect the FY '15 fourth quarter and annual results.

   • Reminded attendees of Cisco's policy to not comment on financial guidance during the quarter unless done through an explicit public disclosure.

   • Invited attendees to call the Investor Relations department with any follow-up questions.

   • Thanked everyone for their participation and continued support, concluding the call.

John T. Chambers provided extensive commentary during the Cisco Systems, Inc. Q3 2015 Earnings Call. Below is a detailed summary of his remarks:

1. Quarterly Performance Overview:

   • Reported revenues of $12.1 billion, up 5%.
   • Non-GAAP earnings per share grew to $0.54, up 6%.
   • Maintained strong non-GAAP gross margins at 62.5%.
   • Generated $3.0 billion in operating cash flow.
   • Returned $2.1 billion to shareholders through share repurchases and dividends.

2. CEO Transition:

   • Announced Chuck Robbins as the new CEO.
   • Praised Chuck Robbins, expressing confidence in his leadership.

3. Reflection on Leadership:

   • Reflected on his tenure as CEO, emphasizing Cisco's impact on changing how the world works, lives, learns, and plays.
   • Highlighted Cisco's focus on innovation and disruption in markets.

4. Market Positioning and Strategy:

   • Emphasized Cisco's strong leadership position and the effectiveness of its vision and strategy.
   • Noted that every company, city, and country is becoming digital and recognizing Cisco's unique ability to help them.

5. Competitive Advantage:

   • Stressed Cisco's sustainable differentiation, reflected in strong gross margins, profitability, and cash generation.
   • Mentioned Cisco’s ability to deliver integrated architectures and solutions with scale, speed, and security.
   • Highlighted the total cost advantage, operational efficiency, security, and speed to results that Cisco provides compared to competitors.

6. Geographic and Customer Segment Performance:

   • Discussed the performance of different regions, including the Americas, Europe, Middle East, and Africa (EMEA), and Asia Pacific, Japan, and China (APJC).
   • Noted the strength of the U.S. Public Sector, U.S. Enterprise, and U.S. Commercial segments.
   • Acknowledged the challenges in the Service Provider business globally and in the U.S.
   • Mentioned the volatility in emerging markets, particularly in the BRICs plus Mexico, but expressed confidence in capturing market share in these regions.

7. Product and Service Business Performance:

   • Discussed the performance of various product lines, including switching, data center, routing, wireless, security, collaboration, and services.
   • Highlighted the strong growth in switching, data center, and security.
   • Mentioned the solid performance in wireless and collaboration.
   • Acknowledged the challenges in the Service Provider business and the SP Video segment.

8. Guidance:

   • Provided guidance for Q4, expecting revenue growth in the range of 1% to 3% and non-GAAP earnings per share in the range of $0.55 to $0.57.

9. Strategic Focus:

   • Emphasized the shift from selling products to selling outcomes.
   • Discussed the importance of integrated architectures and solutions.
   • Mentioned the focus on security, cloud, and software.

10. Cloud Momentum:

    • Highlighted Cisco’s leadership in the hybrid cloud market and the progress with InterCloud.
    • Discussed partnerships, such as with Microsoft, and investments in OpenStack.

11. Future Outlook:

    • Expressed excitement about Cisco’s future and Chuck Robbins’ leadership.
    • Stressed the opportunities presented by digitization and the Internet of Everything.
    • Mentioned the focus on delivering business outcomes and addressing the need for security consultancy services.

12. Closing Remarks:

    • Reflected on his tenure and the achievements of Cisco.
    • Praised the leadership team and expressed confidence in Cisco’s future under Chuck Robbins.

Chambers’ comments were comprehensive, covering financial performance, strategic direction, and future outlook for Cisco.

Kelly A. Kramer, the Former Executive Vice President and CFO of Cisco Systems, provided financial details and analysis during the Q3 2015 Earnings Call. Below is a detailed summary of her remarks:

• Financial Overview:

  • Total revenue was $12.1 billion, marking a 5% increase.
  • Non-GAAP operating margin expanded to 28.6%.
  • Both non-GAAP net income and non-GAAP EPS grew 6% to $2.8 billion and $0.54, respectively.
  • GAAP net income was $2.4 billion, and GAAP earnings per share on a fully diluted basis was $0.47.

• Revenue Breakdown:

  • Product revenue increased by 6%.
  • Service revenue increased by 3%.
  • Product book-to-bill ratio was greater than 1.

• Geographic Segment Results:

  • Americas segment revenue increased by 8%.
  • EMEA revenue grew by 2%.
  • APJC revenue declined by 1%.
  • Total gross margins were 62.9% for the Americas, 62.5% for EMEA, and 61.2% for APJC.

• Non-GAAP Operating Expenses:

  • Non-GAAP operating expenses were $4.1 billion, up 3%.
  • As a percentage of revenue, non-GAAP operating expenses were 33.9%, compared to 34.6% in Q3 of fiscal year 2014.

• Headcount:

  • Headcount increased by approximately 800 to 70,951.
  • This reflects investments in key growth areas such as security, cloud, and software.

• Tax Provision Rate:

  • The non-GAAP tax provision rate was 22%, consistent with expectations.

• Balance Sheet and Cash Flow:

  • Total cash, cash equivalents, and investments were $54.4 billion.
  • $2.6 billion was available in the U.S.
  • Operating cash flow was $3.0 billion during the quarter.

• Deferred Revenue:

  • Deferred revenue was $14.2 billion, up 8%.
  • Product deferred revenue grew in the double digits at 12%, driven by subscription-based offerings.
  • Services deferred revenue also grew by 6%, reflecting an increase in multiyear service arrangements.

• Return to Shareholders:

  • Returned $2.1 billion to shareholders, including $1.0 billion through share repurchases and $1.1 billion through the quarterly dividend.
  • Increased the quarterly dividend by 11% last quarter.
  • So far in fiscal year 2015, returned approximately $6.2 billion or 83% of free cash flow to shareholders.

• Guidance for Q4:

  • Expected total revenue growth in the range of 1% to 3% on a year-over-year basis.

  • Anticipated non-GAAP gross margin 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%.

  • Q4 non-GAAP earnings per share expected to range from $0.55 to $0.57.

  • GAAP earnings expected to be lower than non-GAAP EPS by $0.10 to $0.13 per share in Q4 '15.

  • Included a pretax charge of approximately $100 million as a result of restructuring actions announced in the first quarter.

  • Expected total charges not to exceed $600 million during fiscal year '15.

Robert W. Lloyd highlighted the progress of the InterCloud strategy, noting the launch of Phase 2, which links different clouds using interoperable and app-centric software to create hybrid clouds. He emphasized the partnership with Microsoft to integrate Cisco cloud innovations with Microsoft Azure, enabling service providers to launch new applications more quickly and cost-efficiently. Additionally, he mentioned the launch of Cisco OpenStack Private Cloud solutions aimed at on-premise cloud capabilities for application developers. Lloyd also discussed the success of the InterCloud strategy in accelerating Cisco's success in private cloud, with notable growth in UCS and APIC customers. He highlighted the company's focus on innovation through open-source development, particularly with OpenStack, and the richness of the software catalog in the InterCloud marketplace, including Hosted Collaboration Solution and Cisco Collaboration Knowledge SaaS offers.