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pww.comCisco Systems, Inc., Q1 2016 Earnings Call, Nov 12, 2015 - SEHK:4333

SEHK:4333

Melissa Selcher [Executives] 💬

During the Cisco Systems, Inc. Q1 2016 Earnings Call on November 12, 2015, Melissa Selcher, Vice President of Corporate Communication and Investor Relations, made the following statements:

  1. Opening Remarks:

    • Welcomed everyone to the call and introduced herself.
    • Announced that she was joined by Chuck Robbins, CEO, and Kelly Kramer, CFO.
    • Noted that the earnings release had already been distributed and that a webcast with slides would be available on the company’s website.
    • Mentioned where to find financial information on the Investor Relations website.
    • Clarified the use of both GAAP and non-GAAP financial results during the call.
    • Reminded listeners about the risks associated with forward-looking statements and referred them to the SEC filings for further details.
    • Stated that Cisco would not comment on financial guidance during the quarter unless done through an explicit public disclosure.

  2. Transition to Chuck Robbins:

    • Turned the call over to Chuck Robbins, CEO, after introducing him.

  3. Transition to Kelly Kramer:

    • Turned the call over to Kelly Kramer, CFO, after Chuck Robbins’ remarks.

  4. Q&A Session:

    • Asked for questions from analysts, reminding them to ask only one question each.

  5. Closing Remarks:

    • Thanked everyone for attending the call.

    • Announced the date and time of the next quarterly call, which would reflect the FY '16 second quarter results.

    • Reminded participants of Cisco’s policy regarding financial guidance during the quarter.

    • Closed the call, directing any further questions to the Cisco IR department.

Charles H. Robbins [Chairman & CEO] 💬

Charles H. Robbins, the Chairman & CEO of Cisco Systems, Inc., made several remarks during the Q1 2016 Earnings Call:

  1. Opening Remarks:

    • Q1 was a very strong quarter across the board with revenue growth of 4% and non-GAAP earnings per share growth of 9%.
    • Acknowledged that the Q2 guidance provided was below market expectations due to lower-than-expected order growth driven by macroeconomic and currency impacts, primarily outside the U.S.
    • Despite these headwinds, he believes the company is executing well and remains optimistic about the momentum and positioning for the second half of the year.

  2. Business Strategy:

    • Pleased with the speed of execution by the company's teams.
    • Confident in the company's strategy and ability to make the right transitions in its business, investing in future growth, profitability, and market leadership.
    • Accelerating the ability to deliver on growth opportunities and driving internal innovation at a record pace, with a 25% increase in major new product introductions in FY '16.
    • Highlighted three internal startups that brought solutions to market this quarter, working with key customers, and teased an upcoming announcement around a project co-developed with one of the world’s largest web-scale players.
    • Emphasized the company's aggressive pursuit of cloud businesses and its hybrid cloud strategy, noting strong growth in the business with the largest web-scale players (over 20% growth this quarter).
    • Highlighted the performance of the next-generation data center switching portfolio, which reached a $2 billion run rate with over $500 million in revenue this quarter, growing over 140% year-over-year and 26% sequentially.
    • Mentioned the strong growth of cloud services like WebEx, which grew revenue over 23% this quarter.

  3. Financial Performance:

    • Noted the consistent double-digit growth in software and subscription product deferred revenue, with software and subscription product deferred revenue up 36%.
    • Security deferred revenue grew 31%, driven by the sale of next-generation firewall and threat defense software to over 200,000 firewall customers.
    • Collaboration deferred revenue grew 18%, and the Meraki cloud networking business grew revenue over 60%.

  4. Customer and Partner Engagement:

    • Spent hundreds of hours with customers and partners worldwide, reinforcing his confidence in the company's ability to execute against the opportunities ahead.
    • Customers are embarking on digital transitions and understand the critical role of the network in this process, looking to Cisco as a strategic partner.
    • Capitalizing on the opportunity and remains optimistic about the future.

  5. Closing Remarks:

    • Reiterated his optimism about Cisco's future, despite the lower Q2 guidance.

    • Believes the company is moving incredibly fast and doing all the right things to drive growth and strategic relevance.

    • Expects the results of these moves to start showing up in the coming quarters.

    • Emphasized the strength and relevance of the company's portfolio and the strategic partnerships it has formed.

    • Remains confident in the company's ability to innovate and execute at a record pace.

Kelly A. Kramer [Former Executive VP & CFO] 💬

Kelly A. Kramer, the Former Executive VP & CFO of Cisco Systems, Inc., provided the following information and insights during the Q1 2016 Earnings Call:

  1. Financial Highlights:

    • Q1 saw good top-line growth with $12.7 billion in total revenue, up 4%.
    • Product revenue grew 4%, with solid growth in switching, data center, wireless, security, and collaboration.
    • Switching grew 5%, with continued strength in the Catalyst business and over 140% growth in the 3K, 9K, and ACI portfolios.
    • Data center grew 24%, demonstrating continued market leadership.
    • Wireless grew 7%, driven by the Meraki business.
    • Security was up 7%, with deferred revenue growth of 31%.
    • Collaboration grew 17%, with deferred revenue up 18%.
    • Deferred revenue had solid double-digit growth of 10%, with products deferred revenue up 16% and services up 7%.
    • Product deferred revenue, driven by the subscription and software businesses, grew 36%.
    • Routing declined 8%, but Cisco expects revenue to return to growth due to the timing of some large deals seen in Q1.
    • Services revenue grew 1%, largely driven by weakness in the Service Provider segment.
    • Product orders grew 3% with a book-to-bill ratio below 1, in line with typical Q1s but slightly lighter than expected.

  2. Geographic Performance:

    • Americas grew 1%, EMEA grew 3%, and APJC was up 9%.
    • Total emerging markets grew a very solid 11%, with the BRICS plus Mexico accelerating to 21% growth.

  3. Customer Segment Performance:

    • Service Provider grew 6%.
    • Enterprise declined 3% based on the uncertainty from macro challenges.
    • Commercial grew 7%, signaling the broad strength of the portfolio.
    • Public Sector was flat.

  4. Profitability:

    • Non-GAAP EPS was a record $0.59, up 9%.
    • Q1 non-GAAP net income was a record $3 billion, up 8%.
    • Non-GAAP gross margin was 63.2%, with non-GAAP product gross margin of 62.3% and non-GAAP service gross margin of 66.2%.
    • Non-GAAP operating expenses were well-controlled at 32.7% of revenue, and non-GAAP operating margin expanded to 30.5%.

  5. Portfolio Management:

    • Closed 3 acquisitions in Q1: OpenDNS and Pawaa in software and security, and MaintenanceNet in services.
    • Announced the acquisitions of Portcullis and Lancope in security, ParStream in data and analytics, and 1 Mainstream in cloud-based video.
    • These moves are consistent with the strategy of increasing investment in innovation and R&D efforts in growth areas.

  6. Shareholder Value:

    • Increased operating cash flow 11% to $2.8 billion.
    • Total cash, cash equivalents, and investments at the end of Q1 were $59.1 billion, with $5 billion available in the U.S.
    • Returned $2.3 billion to shareholders, comprised of $1.2 billion of share repurchases and $1.1 billion of dividends.
    • The total share returned to shareholders represents a return of 91% of free cash flow, consistent with the commitment to return a minimum of 50% of free cash flow annually.

  7. Q2 Guidance:

    • Expects revenue to be in the range of 0% to 2% year-over-year.
    • Anticipates non-GAAP gross margin rate to be in the range of 62% to 63%.
    • The non-GAAP operating margin rate is expected to be in the range of 28.5% to 29.5%.
    • The non-GAAP tax provision rate is expected to be 23%.
    • Non-GAAP earnings per share is expected to range from $0.53 to $0.55.
    • GAAP EPS is expected to be lower than non-GAAP EPS by $0.10 to $0.14.

  8. Impact of Currency:

    • Identified 2 points of just pure translation on top-line growth in a few countries where Cisco sells in local currency.
    • There is certainly an impact on demand from the strength of the U.S. dollar, although it is harder to quantify for the rest of the business sold outside the U.S.

  9. Services Revenue:

    • Up 1%, which is on the lower end of expectations, driven by challenges in the Service Provider segment.

  10. Deferred Revenue:

    • Services deferred revenue grew 7% year-over-year, indicating future revenue growth.

  11. Subscription and Software Businesses:

    • Focus on driving software and enterprise agreements across the board.
    • Continued acceleration of revenue coming off the balance sheet on the product side, contributing to more predictable revenue and strong margins.

  12. Operating Expenses:

    • Well-controlled at 32.7% of revenue, with disciplined management to balance the business and fund investments in R&D and go-to-market activities.

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