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pww.comCisco Systems, Inc., Q1 2008 Earnings Call, Nov-07-2007 - SEHK:4333

SEHK:4333

Rick Justice [Executives] 💬

During the Cisco Systems, Inc. Q1 2008 Earnings Call on November 7, 2007, Rick Justice, Executive Vice President of Worldwide Operations and Business Development, provided insights and commentary on the company's performance and outlook. Here is a detailed list of his contributions:

  1. Global Component of Large U.S. Accounts:

    • Reinforced the global component of even the large global U.S. accounts.
    • Noted that much more of the technology is going outside to other countries.
    • Mentioned that there is no reversal in the direction of this trend.

  2. Financial Market Impact:

    • Commented specifically on the financial market which has been hit hard.
    • Noted that, other than areas like the UK or London, there is no impact anywhere else in the world in Cisco's markets.
    • Stated that the growth is fairly independent and that the "cold isn't spreading" from their perspective.

  3. Context on U.S. Enterprise Weakness:

    • Provided context on the U.S. enterprise weakness, indicating that it is tied to the global component of large U.S. accounts, with much more of the technology going outside to other countries.
    • Highlighted that there is no reversal in this trend, suggesting that the weakness in the U.S. enterprise is not indicative of a broader global trend.

Rick Justice's comments were focused on providing additional context and clarification on the performance of the U.S. enterprise segment, the global reach of Cisco's technology, and the limited impact of the financial market downturn on the company's global operations.

Blair Christie [Executives] 💬

Blair Christie, the Vice President of Corporate Communications for Cisco Systems, made the following remarks during the Q1 fiscal year 2008 earnings call:

  1. Introduction:

    • Thanked the operator and greeted attendees.
    • Introduced herself as Blair Christie, VP of Corporate Communications for Cisco Systems.
    • Mentioned the presence of other executives, including John Chambers (Chairman and CEO), Dennis Powell (Chief Financial Officer), Rick Justice (Executive Vice President of Worldwide Operations and Business Development), Charlie Giancarlo (Chief Development Officer), Ned Hooper (Senior Vice President of Business Development), and others.

  2. Overview of the Conference Call:

    • Noted that this was the 71st quarterly conference call.
    • Provided details about the Q1 fiscal 2008 press release, which was available on MarketWire and the Cisco website.
    • Mentioned the availability of a webcast with slides and downloadable information on the Investor Relations section of the Cisco website.
    • Announced that a replay of the call would be available via telephone and on the Cisco Investor Relations website from November 7 through January 18th.

  3. Financial Information:

    • Stated that the call would reference both GAAP and non-GAAP financial results.
    • Directed listeners to the financial section of the Cisco website for full GAAP to non-GAAP reconciliation information and financial statements.

  4. Forward-Looking Statements:

    • Reminded listeners that the matters discussed would include forward-looking statements subject to risks and uncertainties detailed in Cisco's SEC filings.

  5. Recording Notice:

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

  6. Introduction of John Chambers:

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

  7. Closing Remarks:

    • Thanked John Chambers and opened the call for the Q&A session.
    • Requested that sell-side analysts limit their questions to one each.
    • Directed the operator to open the floor for questions.

  8. Call Conclusion:

    • Thanked John Chambers for his remarks.

    • Announced the next quarterly conference call, scheduled for Wednesday, February 6, 2008, at 1:30 PM Pacific, 4:30 PM Eastern.

    • Reminded listeners of Cisco's policy regarding financial guidance during the quarter.

    • Invited listeners to contact the Investor Relations group for follow-up questions.

    • Thanked participants for their ongoing support and concluded the call.

John Chambers [Executives] 💬

John Chambers provided extensive commentary during the Cisco Systems, Inc. Q1 2008 Earnings Call. Below is a detailed summary of his remarks:

Opening Comments

  • Financial Highlights:

    • Total revenue of approximately $9.6 billion, a 17% year-over-year increase.
    • Product orders grew approximately 16%.
    • Non-GAAP net income was a record $2.5 billion, an increase of 31% year-over-year.
    • GAAP net income was $2.2 billion, a 37% increase year-over-year.
    • Cash generated from operations was $3.1 billion, the highest in history.
    • Exited the quarter with $24.7 billion in cash, cash equivalents, and investments.

  • Key Takeaways:

    • Unique balance in business models from a technology and business architecture perspective.
    • 17 consecutive quarters of average order growth rate in the mid-teens or better.
    • Phase II of the Internet, driven by collaboration enabled by network Web 2.0 technologies.

  • Product and Services Growth:

    • Routing revenues grew year-over-year by 18%.
    • Switching revenues grew year-over-year by 8%.
    • Advanced Technologies revenues grew year-over-year by approximately 27%.

  • Geographic Performance:

    • Europe continued to be strong with growth accelerating year-over-year to approximately 20%.
    • Emerging markets grew in the mid-30%.
    • Asia Pacific grew in the high-teens.
    • The U.S. grew approximately 13%.

  • Customer Segment Performance:

    • Global commercial markets segment grew approximately 25% year-over-year.
    • Global service provider business remained very strong with video driving network demand.
    • Global video implementations, such as IP TV, TelePresence, and Unified Communications, will provide future network loads.
    • Network load at Cisco is expected to increase to 400% over the next several years.

  • Guidance:

    • Long-term guidance is in the 12% to 17% range year-over-year.
    • Guidance for fiscal year 2008 is 13% to 16% year-over-year.
    • Revenue guidance for Q2 fiscal year 2008 is approximately 16% year-over-year.

Geographic and Customer Segment Discussion

  • Europe:

    • Strong order growth of approximately 20% year-over-year.
    • Seven of the nine operations in Europe achieved growth in the range of low teens to over 50%.
    • Germany and targeted top service providers had strong performances.

  • Asia Pacific:

    • Solid momentum with year-over-year growth in the high teens.
    • China grew in the high teens.
    • India grew approximately 50% year-over-year.

  • Emerging Markets:

    • Order growth of approximately 35% year-over-year.
    • Balance was good across the four emerging market operations.

  • United States:

    • Order growth was approximately 13% year-over-year.
    • Service provider market segment continued to lead the way with strong order growth.
    • Commercial market continued its solid growth of approximately 20%.
    • Enterprise business, including public sector, grew in the mid-single digits.

Products Review

  • Balanced Growth:
    • Good balance across routing, switching, and Advanced Technologies.
    • First wave of Advanced Technologies had year-over-year revenue growth of approximately 24%.
    • Second wave of Advanced Technologies is now approaching a $2.5 billion run rate.

Summary of Momentum

  • Geographic Perspective:

    • Optimistic about the majority of global economies outside the U.S.
    • Service provider and commercial market segments in the U.S. continue to be strong.
    • U.S. enterprise is experiencing some softness.

  • Strategic Relevance:

    • Increasing strategic relevance to service provider customers.
    • Commercial market remains solid and well-balanced globally.

  • Phase II of the Internet:

    • Enabling collaboration through network Web 2.0 technologies.
    • Potential for broad business acceptance and associated benefits.

  • Pipeline:

    • Product pipeline is in excellent shape.
    • Planning for a potential third wave with next-generation early-stage emerging technologies.

Q&A Session

  • U.S. Enterprise Market:

    • Softness seen in financial services, especially large financial institutions, and automotive.
    • Retail showed mixed results.

  • Balance and Growth:

    • Law of large numbers does not hinder growth due to an architectural approach to the market.
    • Ability to move into market adjacencies and generate growth.

  • Global Enterprise Market:

    • U.S. enterprise has squeezed IT departments and cut back on spending.
    • Expectation that U.S. enterprise will start to recover.

  • Switching Growth:

    • Deceleration in switching growth is partly due to the modular switching segment, which ties to enterprise and especially U.S. enterprise.
    • New product generations and transitions contribute to the slowdown.

  • China Investment:

    • Major investment in China is aligned with market transitions and opportunities.
    • Focus on software industry partnerships and investments.

  • U.S. Enterprise Trends:

    • Enterprise CEOs tend to be cautious and wait for economic clarity.
    • U.S. commercial market remains strong, driven by customer business conditions.

  • Service Provider Spending:

    • U.S. service provider spending is less dependent on the U.S. economy due to the focus on building out broadband and wireless networks for video.

  • Summary:

    • Overall balance feels good, and Cisco can handle two or three out of 20 areas of focus being off.

    • Law of large numbers may work in favor if the market evolves as Cisco expects.

    • CEOs will eventually need to innovate to remain competitive.

    • Cisco focuses on long-term trends and strategy rather than short-term fluctuations.

Dennis Powell [Executives] 💬

Dennis Powell provided detailed insights into Cisco's financial performance for the first quarter of fiscal year 2008. Here is a summary of his remarks:

  1. Financial Highlights:

    • Total revenue for the quarter was $9.6 billion, marking a 17% year-over-year increase.
    • Routing revenue was $1.9 billion, up 18% year-over-year, primarily due to growth in the high-end router portfolio (28% year-over-year).
    • Switching revenue reached $3.3 billion, representing an 8% year-over-year increase.
    • Advanced Technologies revenue was $2.4 billion, showing a 27% year-over-year increase, driven by strong performance in Unified Communications, video systems, and storage.
    • Other product revenue amounted to $492 million, an 8% year-over-year increase.
    • Total service revenue was $1.5 billion, up approximately 24% year-over-year.

  2. Gross Margins:

    • Q1 total non-GAAP gross margin was 65.6%, up from 65.2% in the previous quarter.
    • Product-only non-GAAP gross margin for the first quarter was 65.7%, up from 65.2% in the previous quarter.
    • Non-GAAP service margins for the first quarter were 65.2%, up slightly from 65.1% in the previous quarter.

  3. Operating Expenses:

    • Non-GAAP operating expenses as a percentage of revenue were 36% in Q1 FY08, up slightly from 35.6% in Q1 FY07.

  4. Net Income and Earnings Per Share:

    • Non-GAAP net income for the first quarter of fiscal 2008 was $2.5 billion, a 31% increase year-over-year.
    • Non-GAAP earnings per share on a fully diluted basis were $0.40, up from $0.31 in the first quarter of fiscal year 2007, a 29% increase year-over-year.
    • GAAP net income for the first quarter was $2.2 billion, a 37% increase year-over-year.
    • GAAP earnings per share on a fully diluted basis were $0.35, up from $0.26 in the same quarter of fiscal year 2007, a 35% increase year-over-year.

  5. Balance Sheet:

    • Cash, cash equivalents, and investments at the end of Q1 were $24.7 billion, up $2.4 billion from Q4.
    • Cash flow from operations was $3.1 billion, a record high.
    • Repurchased $3 billion of common stock or 96 million shares at an average price of $31.28 per share.
    • Unrealized gains on the public equity portfolio increased by approximately $900 million from Q4.

  6. Accounts Receivable and Inventory:

    • Accounts receivable ended the quarter at $3.4 billion, down from $4 billion at the end of Q4.
    • Days sales outstanding (DSO) was 33 days, down from 38 days in Q4.
    • Total inventory for Q1 was $1.3 billion, and non-GAAP inventory turns were 10, both approximately at the same level as Q4 FY07.

  7. Headcount:

    • Headcount at the end of Q1 was 63,050, an increase of approximately 1,500 from Q4 FY07.
    • Headcount increases were primarily due to new hires in sales, services, and engineering.

  8. Deferred Revenue:

    • Deferred revenue was $7.1 billion in Q1 FY08, an increase of $70 million from Q4 '07 and an increase of $1.3 billion from Q1 FY07.
    • Deferred product revenue was $2.5 billion, up $260 million from the last quarter.
    • Deferred service revenue was $4.7 billion, down $190 million from the last quarter due to the amortization of maintenance contracts.

  9. Accounting Standard Adoption:

    • Adopted FIN 48, a new accounting standard related to income taxes.
    • Recorded an increase to shareholders' equity of $450 million, of which $202 million increased retained earnings and $249 million increased additional paid-in capital.
    • Reclassified $682 million of income tax payable from short-term to long-term liabilities on the balance sheet.

  10. Guidance for Second Quarter:

    • Total revenue for the second quarter is expected to increase approximately 16% year-over-year.
    • Gross margin in Q2 is expected to remain at approximately 65.5%.
    • Operating expenses are expected to be in the range of 36% of revenue.
    • Interest and other income are estimated to be approximately $225 million in the second quarter.
    • Tax provision rate for Q2 is expected to be approximately 24%.

Dennis concluded by expressing optimism about the company's ability to achieve its long-term growth target of 12% to 17% due to the diversified technology portfolio strategy driving growth while delivering strong financial results.

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