Cisco Systems CEO Discusses F1Q2011 Results - Earnings Call Transcript

Cisco Systems Inc. (CSCO)

F1Q2011 Earnings Call Transcript

November 9, 2010 4:30 pm ET

Executives

Blair Christie – SVP, Corporate Communications

John Chambers – Chairman & CEO

Frank Calderoni – EVP & CFO

Rob Lloyd – EVP, Worldwide Operations

Analysts

Jeff Evenson – Sanford Bernstein

Mark Sue – RBC Capital Markets

Tal Liani – Bank of America

Ehud Gelblum – Morgan Stanley

Brian Modoff – Deutsche Bank

Nikos Theodosopoulos – UBS

Ittai Kidron – Oppenheimer

Simona Jankowski – Goldman Sachs

Brian White – Ticonderoga Securities

Richard Gardner – Citigroup

Jason Ader – William Blair

Presentation

Operator

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Welcome to Cisco Systems first quarter fiscal year 2011 financial results conference call. At the request of Cisco Systems today’s conference is being recorded. If you have any objections, you may disconnect.

Now, I’ll like to introduce Ms. Blair Christie, Senior Vice President of Global Corporate Communications for Cisco Systems. Ma’am, you may begin.

Blair Christie

Thanks, Kim. Good afternoon, everyone, and welcome to our 83rd quarterly conference call. I’m Blair Christie and I am joined by John Chambers, our Chairman and CEO; Frank Calderoni, Executive Vice President and Chief Financial Officer; Rob Lloyd, Executive Vice President of Worldwide Operations; Ned Hooper, Chief Strategy Officer and Senior Vice President of Consumer Business; and Padmasree Warrior, Chief Technology Officer and Senior Vice President of our Enterprise Business.

The Q1 fiscal year 2011 press release is on U.S. High Tech Marketwire and on Cisco’s Web site at newsroom.cisco.com. I would like to remind you that we have a corresponding webcast with slides. In those slides, you will find financial information that we cover during this conference call as well as additional financial metrics and analysis that you might find helpful.

Additionally, downloadable Q1 financial statements will be available following the call, including revenue by geographic segments as well as product categories.

Income statements, full GAAP to non-GAAP reconciliation information, balance sheets and cash flow statements can be found on our Web site in the Investor Relations section. Just click on the Financial Reporting section of the Web site to access the slides and those documents.

A replay of this call will be available via telephone from November 10 through November 17 at 866-357-4205 or 203-369-0122 for international callers. A webcast replay is available from November 10 through January 21 on Cisco’s Investor Relations Web site.

Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results. The financial results in the press release are unaudited.

The matters we will be discussing today include forward-looking statements, and as such, are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent annual report on Form 10-K and any applicable amendments which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. Unauthorized recording of this conference call is not permitted.

As we typically do when we begin a fiscal year, we’ve made certain reporting changes and enhancements that are reflected in the financial results we will be discussing today. First, in Q1, we consolidated our Asia Pacific and Japan operations in order to achieve operational efficiencies in our business.

As a result of this operational change, we now have the following four geographic segments; United States and Canada, European markets, emerging markets and Asia Pacific markets. Asia Pacific markets now include the prior Asia Pacific and Japan segment. As a reminder, the geographies are the primary way we manage our operations.

Second, we have also changed the way we report revenue by product categories. Given the ongoing evolution of our business, we are grouping our newer technologies into a category called New Product. This new category better aligns to our strategic growth priorities and allows investors further understanding of our progress in the new markets we are entering.

Our new products category will replace advanced technologies and include some products that had been in our other category. The new product segment contains five subcategories; data center, collaboration, security, wireless and video connected home. Our core routing, switching and service categories remain unchanged.

In terms of components of these subcategories, data center includes Application Networking Services, Storage and Unified Computing Systems. Collaboration includes Unified Communications, TelePresence and TANDBERG. Security and wireless remain unchanged and video connected home includes Networked Home, Pure Digital, video systems and cable.

In the slides that accompany this call, you will find we provided further details on these changes, including a mapping of products into the subcategories as well as a reclassification of fiscal year 2010 quarterly revenue based on the revised product categories.

Lastly, we have made formatting and other improvements to the slides in order to better communicate key data points that we will consistently provide to our investors in each quarter. I will now turn the call over to John for his commentary on the quarter. John?

John Chambers

Blair, thank you very much. Based in part on the feedback from a number of you, we are continuing to evolve the format of our quarter’s conference call, the objective being to share more information in a tighter format, while leaving more time for Q&A at the end of call. Please do not hesitate to give us feedback in terms of the effectiveness of this new format.

We will break the call into three sections. In the first section, I will provide a general overview of the quarter, focusing on key financials, geographies, customer segments and products, followed by a discussion of key accomplishments in the quarter and what we would like to do better, and ending with general comments on business momentum exiting the quarter as well as our guidance for Q2 FY’11 with all the appropriate caveats.

In the second section, Frank will provide additional details about Q1 FY ‘11 as well as expand on our Q2 FY’11 guidance, investments, opportunities and challenges. In the third section of the call, I will provide some brief closing comments and then we will wrap up for Q&A.

Now, beginning with the opening section, I will cover five key areas in the following discussions. First, from the financial perspective, Q1 FY’11 evolved pretty much as we expected and in line with our guidance for about the last quarter. In this first section, we will provide a high level financial review of the quarter, primarily in terms of revenue and other financial information.

Second, this will be followed by discussion on momentum and the geographies, products and customer segments.

Third, I will then focus on what’s working from our strategy and architectural approach, and briefly discuss three areas where we are seeing the most new revenue opportunities for the next year, those being collaboration; second video; and third the combination of data center virtualization and cloud.

Fourth, we will then cover certain of our areas that we are watching and experience some interesting challenges in the quarter. Two of them are areas that we have limited ability to control or influence and one is an area that expects us to improve over time.

Finally, the last section will be a summary of what you can expect from Cisco over the next several quarters, closing with how we feel about the business going forward.

Now, beginning with the opening section, from a high level perspective there are number of key takeaways from the results in Q1 FY’11 and our momentum going into Q2 FY’11. First, Q1 was a solid quarter from a Cisco, from the financial, product, customer and geographic perspective.

We continue to execute well with the compelling financial position expanding innovation engine and execute in both our core markets and market adjacencies.

However, what I am most pleased about is how our business architecture and technology architecture is gaining customer acceptance. We were pleased with the financial results achieved during the quarter. Revenue of $10.75 billion, a 19% year-over-year increase was right in the middle of our guidance for about the last quarter of 18% to 20%.

Non-GAAP operating income of $3.0 billion was a year-over-year increase of 14%; non-GAAP net income was $2.4 billion, a 14% year-over-year increase; and non-GAAP earnings per share of $0.42 which was a year-over-year increase of 17%. GAAP earnings per share of $0.34 was an increase of 13% year-over-year.

Operating expenses were at 36.3% of revenue on a non-GAAP basis. Non-GAAP operating expenses increased 16.8% year-over-year versus 19% increase in revenue. Non-GAAP gross margins was 64.3% and non-GAAP product gross margins was 64%.

Cash generated from operations was a solid $1.7 billion bringing our total cash including investments to $38.9 billion.

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