Cisco Systems, Inc., Q1 2010 Earnings Call, Nov-04-2009 - SEHK:4333

SEHK:4333

During the Cisco Systems, Inc. Q1 2010 Earnings Call, Rob Lloyd, Executive Vice President of Worldwide Operations, provided insights on the company's performance and strategy in several areas. Here is a detailed summary of his contributions:

1. Public Sector Growth:

   • Mentioned that the public sector grew globally and was the strongest vertical.
   • Highlighted that Cisco shifted some of its sales coverage to public sector teams around the world about a year ago, which has turned out to be a good investment.

2. United States Federal Trends:

   • Noted that Cisco is tracking the linkage of stimulus funds to key verticals and seeing the pipeline building in education, especially in advanced education.
   • Expected to see some of the broadband projects come to fruition in the next few quarters.
   • Observed investments being made into the healthcare space that could potentially be picked up in the private sector as spending gets placed in different ways but is subject to funding.
   • Emphasized that safety and security, public transportation systems, smart and connected buildings, especially for government, are very relevant today.

3. Key Verticals:

   • Identified education and healthcare as the two key verticals for Cisco.

4. Global Trend:

   • Stated that the focus on the public sector is a global trend.

5. Expectations:

   • Expressed expectation for continued positive momentum in the federal sector.

These insights provided by Rob Lloyd highlight Cisco's strategic focus on the public sector, particularly in education and healthcare, and the company's anticipation of growth driven by government stimulus funds and investments.

During the Cisco Systems, Inc. Q1 2010 Earnings Call on November 4, 2009, Laura Graves, the Director of Global Investor Relations, made the following remarks:

1. Introduction

   • Thanked the operator and greeted everyone.
   • Mentioned being joined by key executives including John Chambers, Frank Calderoni, Rob Lloyd, Ned Hooper, Padmasree Warrior, and Blair Christie.

2. Press Release and Webcast Information

   • Noted that the Q1 fiscal year 2010 press release was posted on US high-tech market wire and on the Cisco website.
   • Reminded attendees that there were accompanying webcast slides with financial information covered during the call and additional financial metrics and analysis.

3. Financial Documents Availability

   • Indicated that downloadable Q1 financial statements would be available following the call, including revenue by product and geography.
   • Stated that income statements, full-GAAP to non-GAAP reconciliation information, balance sheets, and cash flow statements could be found on the Cisco website in the Investor Relations section.

4. Replay and Webcast Access

   • Provided details on how to access the replay of the call via telephone from November 4th through November 11th.
   • Mentioned that the replay would also be available on Cisco’s IR website from November 4th through January 15th.

5. Forward-Looking Statements Disclaimer

   • Reminded listeners that the call included forward-looking statements and that actual results could differ materially from those contained in the statements due to risks and uncertainties.
   • Directed listeners to the company's SEC filings, specifically the most recent annual report on Form 10-K and any applicable amendments, for important risk factors.

6. Unauthorized Recording

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

7. Transition to John Chambers

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

8. Closing Remarks

   • Announced the date of the annual financial conference and provided details on the next quarterly conference call.

   • Mentioned the availability of downloadable Q1 fiscal year 10 financial statements and other financial documents on the Cisco website.

   • Reiterated the company's policy regarding financial guidance during the quarter in light of Regulation FD.

   • Invited listeners to contact the investor relations team with any follow-up questions and thanked everyone for their participation and support.

   • Concluded the call.

John T. Chambers covered several topics during the earnings call, including:

1. Summary of Q1 Fiscal Year 2010:

   • Very strong quarter versus expectations, despite global economic challenges.
   • Revenue of $9 billion, down approximately 13% year-over-year, better than expected.
   • Non-GAAP earnings per share of $0.36, well above expectations.
   • Expense management was solid, with non-GAAP OpEx decreasing approximately 10% year-over-year.
   • Non-GAAP product gross margins were extremely strong at 66.3%, the best in nearly four years.
   • Cash generated from operations in Q1 was approximately $1.5 billion.
   • Non-GAAP operating income as a percentage of revenue was a strong 29%.

2. Business Momentum:

   • Q3 FY09 felt like the bottom, with normal order flow but tough year-over-year results.
   • Q4 showed the first normal sequential order rates in fiscal year '09, marking the beginning of an upturn.
   • Sequential order growth rates during Q1 FY10 matched normal economic times, indicating a continuation of the economic recovery.
   • Almost all financial sequential measurements from Q4 to Q1 were strong compared to the same period in previous normal economic years.

3. Geographic Performance:

   • Solid indications of economic recovery in most geographies.
   • Orders on a global basis in Q1 were down in the high-single-digits year-over-year, while U.S. year-over-year orders were approximately flat.
   • Q1 orders in the U.S. growing year-over-year at a flat rate was seen as a major inflection point.

4. Strategy and Execution:

   • Strong execution on growth strategy due to organizational structure and innovative business model.
   • Moved into 30+ market adjacencies while reducing non-GAAP operating expenses by 10% year-over-year and reducing headcount.
   • Continued progress in Q1 in areas that Cisco can control or influence.

5. Customer Segments:

   • Enterprise business on a global basis in terms of product orders was down in the mid-single-digits.
   • Public sector was up in the mid-single-digits.
   • Service provider and commercial were down in the low double-digits.
   • Consumer was up approximately 20%.

6. Product Performance:

   • Switching revenues were down approximately 21% year-over-year.
   • Routing revenues were down approximately 17% year-over-year.
   • Advanced technology revenues were down approximately 15% year-over-year.
   • Telepresence revenues grew over 100% year-over-year.

7. Market Adjacencies:

   • Discussed virtualization, video, and collaboration as key market adjacencies.
   • Virtualization: Solid momentum with Nexus 5000 and 7000 families and UCS experiencing solid market reception.
   • Video: Telepresence revenues grew over 100% year-over-year, indicating customer understanding of the value of video.
   • Collaboration: Focus on transforming the way we collaborate with real-time voice and video interactions.

8. Revenue Guidance for Q2 Fiscal Year 2010:

   • For revenue to increase in the 1% to 4% range year-over-year.
   • Sequential revenue growth in the 2% to 5% range.

9. Optimism and Outlook:

   • Optimism applies to areas that Cisco can control or influence and to those that it cannot.
   • Leadership in products, innovation, architecture, and operational execution is solid and customers are rapidly expanding their views of Cisco's role.
   • Plans to aggressively invest in new and adjacent markets for the longer term, assuming current trends continue.

10. Cautionary Note:

    • Encouraged investors to wait until the Q2 quarterly conference call in early February before extrapolating results and guidance into projections for fiscal Q3 and Q4.

11. Additional Topics:

    • Announced intentions to acquire four companies and launched a new product, the IGISRG2.

    • Strategic partnership to drive the market transition around virtualization.

    • The virtual computing environment coalition with Cisco, EMC, and VMware.

    • Video architecture as a key competitive advantage.

    • Coalition with EMC and VMware to drive next-generation data centers and cloud computing.

    • Focus on catching market transitions around virtualization, combining the network with servers, storage, and applications.

Frank A. Calderoni, the Executive Vice President and Chief Financial Officer of Cisco Systems, provided detailed financial results and guidance during the Q1 2010 Earnings Call. Below is a summary of his remarks:

Total Revenue

• Q1 Fiscal Year 2010: $9 billion, a decrease of approximately 13% year over year.
• Service Revenue: $1.8 billion, up approximately 7% year over year.
• Product Revenue: $7.2 billion, down approximately 17% year over year.

Product Revenue Breakdown

• Switching Revenue: $2.9 billion, a decrease of 21% year over year.
  • Modular switching revenue down 19% year over year.
  • Fixed switching revenue declined 22% year over year.
• Routing Revenue: $1.6 billion, down 17% year over year.
  • High-end, mid-range, and low-end decreases of 15%, 19%, and 20% year over year, respectively.
• Advanced Technologies Revenue: $2.3 billion, a decrease of 15% year over year.
  • Unified communications down approximately 10%.
  • Video systems down approximately 29%.
  • Security down approximately 9%.
• Other Product Revenue: $481 million, an increase of 9% year over year.
  • Growth driven by the acquisitions of Pure Digital and strong growth in telepresence.

Sequential Revenue Changes

• Modular Switching: Up 11% quarter over quarter.
• Mid-range Routing: Up 9% quarter over quarter.
• Wireless LAN: Up 32% quarter over quarter.
• Security: Up 16% quarter over quarter.

Geographic Revenue Trends

• Emerging Markets: Down 30% year over year.
• Japan Theater: Up 2% year over year.
• U.S. and Canada Theater: Down 10% year over year.
• Asia-Pacific: Down 6% year over year.
• European Markets: Down 15% year over year.

Gross Margin

• Q1 FY10 Total Non-GAAP Gross Margin: 66.3%, up 1 percentage point quarter over quarter and 0.7 percentage points year over year.
• Product Only Non-GAAP Gross Margin: 66.3%, up 1.6 percentage points quarter over quarter.
• Service Margin: 66.3%, down from 67.5% last quarter and up from 62.4% in Q1 fiscal year 09.

Operating Expenses

• Non-GAAP Operating Expenses: Approximately $3.3 billion in Q1 FY10, relatively flat quarter over quarter and down 10% year over year.
• Operating Expenses as a Percentage of Revenue: 37% in Q1 FY10 versus 39.2% in Q4 FY09.

Interest and Other Income

• GAAP Interest and Other Income: $115 million, including a $42 million mark-to-market impact related to transactions to hedge a portion of the foreign currency consideration for the announced pending acquisition of Tambur.
• Non-GAAP Interest and Other Income: $73 million for Q1, reflecting higher than normal realized gains of approximately $40 million from the sale of a privately held investment.

Tax Provision Rate

• Q1 FY10 Non-GAAP Tax Provision Rate: 22%.

Net Income and Earnings Per Share

• Non-GAAP Net Income: $2.1 billion, representing a decline of 15% year over year.
• Non-GAAP Earnings Per Share: $0.36 versus $0.42 in the first quarter of fiscal year 2009, a 14% decline year over year.
• GAAP Net Income: $1.8 billion compared to $2.2 billion in the first quarter of fiscal year 2009.
• GAAP Earnings Per Share: $0.30 per share versus $0.37 per share in the same quarter of fiscal year 2009.

Balance Sheet and Cash Flow

• Total Cash, Cash Equivalents, and Investments: $35.4 billion, up approximately $400 million from the previous quarter.
• Accounts Receivable: $3.2 billion at the end of Q1.
• Days Sales Outstanding (DSO): 32 days, compared to 34 days in Q4 and 29 days in Q1 fiscal '09.
• Total Inventory: $1.1 billion, relatively flat quarter over quarter.
• Inventory Turns: 11.3 this quarter, flat compared to last quarter, and down three-tenths of a point from Q1 of the previous year.
• Inventory Purchase Commitments: $2.8 billion, an increase of approximately 30% from the end of Q4 FY09 and a decrease of approximately 2% year over year.

Stock Repurchase Program

• Stock Repurchased: $1.8 billion of common stock under the stock repurchase program, or 76 million shares at an average price of $22.99 per share.
• Board Approval: An increase to the repurchase program of $10 billion.
• Remaining Authorized Amount: Approximately $13.1 billion.

Deferred Revenue

• Total Deferred Revenue: $9.3 billion at the end of Q1, an increase of approximately 5% compared with Q1 fiscal year '09.
• Deferred Product Revenue: $3.1 billion.
• Deferred Service Revenue: Approximately $6.2 billion, increases of approximately 7% and 4% year-over-year, respectively.

Headcount

• End of Q1 Headcount: 63,756, a net decrease of approximately 1,800 from the previous quarter, primarily due to tight hiring constraints combined with prior quarter limited restructuring actions.

Revenue Recognition Accounting Standards

• Adoption of New Standards: EITS08-1 and 09-3.
• Impact: An increase to revenue of approximately $50 million and a half-penny benefit to earnings per share.
• Future Impact: Not expected to have a material impact on financial results in Q2.

Guidance for Q2 Fiscal Year 2010

• Total Revenue: Expected to increase in the 1% to 4% range year over year.

• Sequential Revenue Growth: Expected to be in the 2% to 5% range.

• Total Gross Margin: Expected to be approximately 64% to 65%.

• Operating Expenses: Expected to be approximately 37.5% to 38.5% of revenue.

• Interest and Other Income: Expected to be approximately $25 million in the second quarter.

• Tax Provision Rate: Expected to be approximately 22%.

• Share Count: Modeling share count to be down approximately 50 million shares quarter over quarter in weighted average shares outstanding for EPS purposes.