CSCO

Cisco Systems, Inc. (CSCO)

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Cisco Systems (CSCO)

Q2 2011 Earnings Call

February 09, 2011 4:30 pm ET

Executives

Blair Christie - Chief Marketing Officer - Worldwide Government Affairs

Frank Calderoni - Chief Financial Officer and Executive Vice President

Ned Hooper - Chief Strategy Officer and Senior Vice President of Corporate Development & Consumer Group

John Chambers - Executive Chairman, Chief Executive Officer and Member of Acquisition Committee

Rob Lloyd - Executive Vice President of Worldwide Operations

Analysts

Mark Sue - RBC Capital Markets, LLC

Nikos Theodosopoulos - UBS Investment Bank

Tal Liani - BofA Merrill Lynch

John Slack - Citigroup Inc

Jeffrey Evenson - Bernstein Research

Brian Modoff - Deutsche Bank AG

Ehud Gelblum - Morgan Stanley

Simon Leopold - Morgan Keegan & Company, Inc.

Ittai Kidron - Oppenheimer & Co. Inc.

Jason Ader - William Blair & Company L.L.C.

Simona Jankowski - Goldman Sachs Group Inc.

Presentation

Operator

Welcome to Cisco Systems Second Quarter and Fiscal Year 2011 Financial Results Conference Call. [Operator Instructions] Now, I would like to introduce Blair Christie, Senior Vice President and Chief Marketing Officer. Ma'am, you may begin.

Blair Christie

Great, Thank you. Good afternoon, everyone, and welcome to our 84th Quarterly Conference Call. I'm Blair Christie; and I'm 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 Consumer Business; and Padmasree Warrior, our Chief Technology Officer and Senior Vice President of our Enterprise Business.

The Q2 fiscal year 2011 press releases is on U.S. high tech market wire and on the Cisco website at http://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 covered during this conference call as well as additional financial metrics and analysis that you might find helpful.

Additionally, downloadable Q2 financial statements will be available following the call, including revenue by geographic segment as well as product categories. Income statements, full GAAP to non-GAAP reconciliation information, balance sheet and cash flow statements can be found on our website in the Investor Relations section. Just click on the financial reporting section of the website to access the slides and these documents.

A replay of this call will be available via telephone from February 9 to February 16 at (866) 357-4205 or (203) 369-0122 for international callers. A webcast replay is available from February 9 through April 22 on the Cisco's Investor Relations website.

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 includes forward-looking statements and as such are subject to the risks and uncertainties that we discussed in detail and our documents filed with the SEC, specifically the most recent reports on Form 10-Q and 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.

And now I'd like to turn it 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, we are continuing to evolve the format of our quarters 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 feedback in terms of the effectiveness of this new format.

We will break the call into four sections. In the first section I will put out a summary of the quarter, focusing on key financials, geographies, customer segments and products. In this Section, I will focus on what went well and areas that we would like to see improve. We will finish with general comments on business momentum exiting the quarter as well as our guidance for both Q3 and Q4 fiscal year '11 with all the appropriate caveats.

In the second section, Frank will provide additional details about Q2 FY '11 as well as expand on our Q3 and Q4 guidance, investments, opportunities and challenges. In the third section of the call, I will expend on my opening comments on the second quarter as well as a discussion on how we're doing in the market, answering some of your key questions and what you can expect from us going forward.

And finally, in the fourth Section, I will provide some closing comments and then wrap up with Q&A.

Now beginning with the opening section, where I will cover some of the key results of the quarter in terms of highlights and challenges. First, from a financial perspective, the quarter evolved pretty much as we expected from a top and bottom-line perspective. Revenue of $10.4 billion, a 6% year-over-year increase was slightly higher than our guidance provided last quarter of 3% to 5%. Non-GAAP earnings per share were a little bit above our guidance at $0.32 to $0.35 per share at $0.37, which was a year-over-year decline of 8%. And GAAP earnings per share of $0.27 was a year-over-year decrease of 16%.

Case generated from operations was a solid $2.6 billion, bringing our total cash and investments to $40.2 billion. As we focused on expense reductions in Q2, and realigned resources to top priorities, we had very limited hiring and therefore our head count was relatively flat with an increase of only 300 people in the quarter.

At the very top of the list of highlights is the continued innovation and success of our new products across most all of our product families. For example, as we discussed in our Q1 fiscal year '11 last quarter's call, Cisco has grouped our newer technologies into a category called New Products. This new category aligns well to our strategic growth priority and allows investors to better understand our progress in the new markets we are entering. Our new product segments, just as a reminder, contain the following five subcategories: Data center, collaboration, security, wireless and video connected home.

In fiscal Q2, our New Product category revenue grew 15% year-over-year and now represents 39% of our total product revenue. I would like at this time to discuss two of these areas: Collaboration and second, data center virtualization based cloud. First, within the category from a collaborative perspective. Growth was again very strong with a 37% increase year-over-year in revenues to almost a $4 billion annualized run rate. This includes TANDBERG.

Balance was good across our entire TelePrescence portfolio and we continue to see an architectural approach with very large orders from key customers spanning our suite of video products from the high end TelePresence systems to the desktop and IP video enabled phones. Second, from a data center virtualization cloud perspective, we continue to make progress on our transformational approach to the data center. Our data center business grew 59% year-over-year from a revenue perspective in Q2 to over $425 million. Within this category, there was strong revenue growth with both the Nexus 5000 growing 56% year-over-year, and the Nexus 2000 growing over 150% year-over-year. The UCS saw year-over-year revenue growth of over 700% to an annualized run rate of over $650 million.

The data center evolution is playing out as we anticipated. Our Wireless business also contributed to new product growth with a year-over-year revenue increase of 34%, while security and video connected home both saw year-over-year declines of 9% and 4% respectively.

Moving on to our other two major product categories: Routing grew 4% year-over-year from a revenue perspective led by the high-end routing. ASR family 1000, 5000, 9000 achieved an almost $1.5 billion annualized run rate with revenue growth of 68% year-over-year in Q2.

Repeating the candor in last quarter's conference call, our routing architecture, while there's always room for improvement, is in the best shape from both an innovation and product leadership perspective in our history.

From the switching perspective, our movement into next generation switching products across the entire fixed and modular switching families positions us very well versus our competitors. Both from a product leadership perspective and even more importantly in architectural base. Make no mistake about it, we fully intend to own the transitions in the network specially in switching.

While I strongly believe we are very well positioned versus our competition, we are in the middle of a major product transition with dramatically higher price performance from these new products and architectural advantages versus our prior generation of products and that of our competitors. I will go into more detail in a moment, but with this environment in mind, we did see our switching revenues decline 7% in Q2.

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