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Cisco Systems Inc. F4Q10 (Qtr End 07/31/10) Earnings Call Transcript

Cisco Systems Inc. F4Q10 (Qtr End 07/31/10) Earnings Call Transcript

Cisco Systems Inc. (CSCO)

F4Q10 (Qtr End 07/31/10) Earnings Call Transcript

August 11, 2010 4:30 pm ET


Laura Graves – Director, Global IR

John Chambers – Chairman & CEO

Frank Calderoni – EVP & CFO

Rob Lloyd – EVP, Worldwide Operations


Tal Liani – Banc of America/Merrill Lynch

Brian Modoff – Deutsche Bank

Mark Sue – RBC Capital Markets

Jeff Evenson – Sanford Bernstein

Simona Jankowski – Goldman Sachs

Brent Bracelin – Pacific Crest

Ehud Gelblum – Morgan Stanley

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Brian White – Ticonderaga

Paul Silverstein – Credit Suisse

Simon Leopold – Morgan Keegan

Jayson Noland – Robert W. Baird

Matt Robison – Wunderlich Securities

John Slack – Citigroup



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Welcome to Cisco Systems fourth quarter and fiscal year 2010 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’d like to introduce Ms. Laura Graves, Senior Director of Global Investor Relations for Cisco Systems. Ma’am, you may begin.

Laura Graves

Thank you, operator, and good afternoon, everyone and welcome to our 82nd quarterly conference call. This is Laura Graves of Investor Relations, and I am joined today 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 our Consumer Business; Padmasree Warrior, Chief Technology Officer and Senior Vice President; and Blair Christie, Senior Vice President of Global Corporate Communications.

The Q4 fiscal year 2010 press release is on the U.S. High Tech Marketwire and on the Cisco Web at I would like to remind you that we have a corresponding webcast with slides. In those slides, you will find the financial information that we cover during this call as well as additional financial metrics and analysis that you may find helpful.

Additionally, downloadable Q4 financial statements will be made available following the call, including revenue by product and geography, income statements, full GAAP to non-GAAP reconciliation information, balance sheets and cash flow statements can be found on our Website also in the Investor Relations section. Click on the Financial Reporting section of the Website to access the webcast slides and these documents.

A replay of this call will be made available via telephone from August 11 through August 18 at 866-357-4205 or 203-369-0122 for international callers. A replay will also be available from August 11 through October 22 on Cisco’s Investor Relations Website, at

Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results. Our commentary today will be providing information on both our Q4 and our full fiscal year 2010 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 our detailed documents filed with the SEC, specifically the most recent annual report on Form 10-K, quarterly report on Form 10-Q 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.

With that, I’d like to now turn it over to John for his commentary on the quarter.

John Chambers

Thank you, Laura. Based in part on the feedback from a number of you, we are going to try a new format for this 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 the call. Please do not hesitate to give us your feedback in terms of the effectiveness of this new format.

We will break the call into four sections. In the first section, I will provide a high level financial review of the quarter, followed by a discussion primarily in financial terms on geographies, customer segments and products. I will then briefly describe our progress on our long-term strategy, first in terms of progress on that strategy from a technology and a business architectural perspective, and then on how our new business models and dynamic organization structures are enabling speed, scale, flexibility and growth in new markets. Finally, we will provide our guidance for Q1 FY ‘11 with all the appropriate caveats. During the second section, Frank will provide a review of fiscal year 2010 and provide additional details on Q4 as well as expand on our Q1 fiscal year ‘11 guidance and resource investments.

In the third section of the call we will focus on business momentum in terms of what we can control and influence, our expanding business and partnership position with our customers, with focus on key issues on their mind, including what they are saying in terms of the economy, job creation and momentum in the relationship with Cisco.

In this section each quarter we will cover our progress in several new market adjacencies. Some of the adjacencies growth opportunities may be tied to the economy and others may be new markets for us and at times new for the entire industry. In the fourth section, we will wrap up with Q&A.

Now, beginning with the opening section, from a high level perspective, there are a number of key takeaways from the results in Q1 FY ‘10 and our momentum going into Q1 FY’11. First, this was a very strong quarter for Cisco and we closed FY ‘10 in a tremendous position of strength.

We have a compelling financial position, a well-tuned innovation engine and it’s showing solid execution on our growth strategy. It is a real pleasure to return to our desired operating position in the markets to once again announce a number of record financial results achieved this quarter.

In Q4 we had a record revenue of $10.8 billion, a 27% year-over-year increase, which was at the higher end of our guidance provided last quarter of 25% to 28%, record non-GAAP operating income of $3.1 billion was a year-over-year increase of 39%, non-GAAP net income was $2.5 billion, a 36% year-over-year increase, and non-GAAP earnings per share of $0.43, a year-over-year increase of 39%. All of these were also records.

Other Q4 financials that were also very strong included GAAP earnings per share of $0.33, an increase of 74% year-over-year. Expense management continued to be very tight with operating expenses at 35.4% of revenue on a non-GAAP basis.

Non-GAAP operating expenses increased 15% year-over-year versus a 27% increase for revenues. Therefore, as you would expect, productivity remained very strong at $622,000 per person in Q4, representing a year-over-year increase of approximately 20% from Q4 fiscal year ‘09 $517,000 per employee.

In my opinion, these results are extremely positive proof in terms of the effectiveness of our organization structure, business models, innovation and execution capabilities, while focusing on over 30 major new market adjacencies at the same time. Product book-to-bill was slightly above 1. Cash generated from operations was a very strong $3.2 billion, bringing our total cash including investments to $39.9 billion.

We repurchased $2.3 billion of stock during the quarter or 99 million shares at an average price of $23.33 per share. The remaining authorized repurchase amount under the stock repurchase program was approximately $7 billion at the end of the quarter.

We also delivered on our hiring projections with an incremental increase of approximately 2,000 additions to the Cisco team in Q4 FY ‘10, not including acquisitions. This follows on our last quarter’s new hires, again, not including acquisitions, of over 1,000 people in Q3 fiscal year ‘10.

It is our intent to continue to hire in proportion to our global business assuming support from government decisions on private job creation in the U.S. This quarter we added over 70% of the additions in the U.S. and over 600 of those in California.

In summary, from a financial perspective, we exit Q4 FY ‘10 in a tremendous position of strength from a financial, execution, innovation and a growth strategy perspective.

The second area I would like to now cover is a higher level of geographic overview, which is the primarily way we run our business and one which we felt would be a key area of interest given some of the uncertainties from a global perspective. The discussion for this section would be on product orders in terms of year-over-year growth. From a global perspective, Q4 product orders grew 23% from a year-over-year perspective.

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