CSCO

Cisco Systems, Inc. (CSCO)

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Cisco Systems, Inc. (CSCO)

F1Q13 (Qtr End 10/27/2012) Earnings Call

November 13, 2012 4:30 PM ET

Executives

Melissa Selcher - Senior Director, Analyst and Investor Relations

John Chambers - Chairman and Chief Executive Officer

Frank Calderoni - Executive Vice President and Chief Financial Officer

Robert Lloyd - President, Development and Sales

Gary Moore - President and Chief Operating Officer

Analysts

Simona Jankowski - Goldman Sachs

Jeff Kvaal - Barclays

Ittai Kidron - Oppenheimer

Tal Liani - Bank of America Merrill Lynch

Ehud Gelblum - Morgan Stanley

Mark Sue - RBC Capital Markets

Brian Modoff - Deutsche Bank

Paul Silverstein - Credit Suisse

Simon Leopald - Raymond James

Rod Hall - JPMC

Subu Subrahmanyan - The Juda Group

Brent Bracelin - Pacific Crest

George Notter - Jefferies

Michael Genovese - MKM Partners

Presentation

Operator

Welcome to Cisco Systems' first quarter and fiscal year 2013 financial results conference call. (Operator Instructions) Now, I'd like to introduce Melissa Selcher, Senior Director, Analyst and Investor Relations.

Melissa Selcher

Good afternoon, everyone, and welcome to our 91st quarterly conference call. This is Melissa Selcher, and I'm joined by John Chambers, our Chairman and Chief Executive Officer; Frank Calderoni, Executive Vice President and Chief Financial Officer; Rob Lloyd, President of Development and sales; and Gary Moore, President and Chief Operating Officer.

I would like to remind you that we have corresponding webcast with slides on our website in the Investor Relations Section. Income statements, full GAAP to non-GAAP reconciliation information, balance sheets, cash flow statements and other financial information can also be found on the Investor Relations website. Click on the financial reporting section of the website to access these documents.

Throughout this conference call, we'll be referencing both GAAP and non-GAAP financial results. The matters we'll 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. All comparisons throughout this call will be on a year-over-year basis unless stated otherwise.

I will now turn it over to John for his commentary on the quarter.

John Chambers

Thank you, Mel. As we open this call, I want to recognize the devastation in the eastern seaboard of the United States in the wake of Hurricane Sandy. Knowing many on this call consider the impacted area, home, we want to share our sincere condolences for all that has been lost. We remain committed to doing all we can to support and enable our employees, partners and customers, and the local government agencies and support organizations, who will work to rebuild and move forward.

Now, moving on to a discussion of our year-over-year performance in Q1 FY '13. We delivered another strong quarter of record revenue with growth of 6% and record non-GAAP earnings per share of $0.48 with growth of 12% from an earnings per share perspective.

As we continue to manage through a challenging macroeconomic environment, we continue to see the benefits of our focus on operational excellence with only a 1% increase in non-GAAP operating expenses, Gary nice job there; and strong non-GAAP gross margins at 62.7%, Rob, the teams are doing well sales and engineering, yielding 11% increase in net income and record non-GAAP operating income.

In a world of many clouds mobility, bring your own device, and the internet literally connecting everything. The network has never played a more central role, connecting people, the process, data and things, anywhere, anytime, across any device. In this cloud of mobile world, the challenges of scale, agility, security and resilience can only be addressed by an intelligent network, and Cisco is uniquely positioned to help our customers meet business requirements and drive this new growth.

From my perspective, our strong results this quarter are improved that our vision for the evolution of this market and our strategy for Cisco's leadership role is playing out as we expected. My key takeaway for this quarter are the following.

First, revenue growth of 6% in a very challenging market, where many of our peers are reporting declines and bringing down future expectations. Second, profitability growth in double digits, with solid expense management, with gross and operating margins exceeding our guidance. Third, our service business continues to grow double digits as our customers ask Cisco to partner to build their technology and business architectures for the future.

Fourth, $2.5 billion cash from operations generated this quarter with more than a 3% dividend yield took a boot, continuing to drive value for you, our shareholders. And fifth, while we continue to see very challenging order trends in Europe, we are pleased with our order growth in the U.S., where enterprise group 9% year-over-year, U.S. Service Provider grew 13%, and U.S. Commercial which is not included in public sector grew 5%.

We continue to deliver the innovation, quality and leadership, our customer expect, and we are evolving the role we play in our customer accounts moving from the top communications company to our goal of becoming the number one IT company.

To provide additional detail on our Q1 FY '13 results, I'd like to turn the call over to Frank. I will then walk through, after Frank you are through, what we're seeing in the business and where we're focusing going forward. Frank will then come back with a detailed guidance, and then we'll wrap up with Q&A. Frank, over to you.

Frank Calderoni

Thank you, John. In Q1 FY '13, we executed consistent with our operating model of driving profit faster than revenue, contributing to our long-term profitable growth, driving operating leverage and increasing shareholder value. Total revenue for the first quarter was $11.9 billion, an increase of approximately 6%.

From a geographic perspective, total revenue increased 7% for the Americas, 10% for Asia-Pacific, Japan and China, with revenue for EMEA about flat. Total product book-to-bill for Q1 was slightly under 1 similar to most prior Q1. Total product revenue was $9.3 billion, up approximately 4% year-on-year.

We believe our position in the industry after conversions of the major transitions occurring in the market, allows us to continue to drive solid financial performance, despite the challenging macroeconomic environment.

Total service revenue was $2.6 billion, up approximately 12%. We have seen strong growth in our services business with a revenue compound annual growth rate of approximately 12% of the last decade, which has provided consistency to our financial results. Our services business contributes to both long-term revenue growth as well as adding stability to our gross margins.

Our advance services business continues to perform well with growth over 20%. This business is a growing strategic asset, while we are partnering with customers to build the architectures and end-to-end solutions to deliver business outcomes.

Q1 FY '13 total non-GAAP gross margin was 62.7% that was up 0.8 percentage points quarter-over-quarter and also up 0.3 percentage points year-over-year. While we have variations in gross margins from quarter-to-quarter, most often impacted by product mix driven by growth in several product areas, I am pleased with the benefits from the strong focus that the entire company has had on gross margins.

For product only, non-GAAP gross margin for the first quarter was 61.5%, an increase of 1.1 percentage points quarter-over-quarter and also up 0.2 percentage points year-over-year. We saw a strong execution in driving cost savings, lower overall manufacturing cost and improvements in our commodity pricing. We have invested and will continue to invest in value engineering, which has driven more stability of our product gross margins over these last multiple quarters.

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