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Cisco Systems, Inc. (CSCO)

F2Q13 Earnings Call

February 13, 2013 4:30 pm ET


Melissa Selcher – Senior Director, Analyst and Investor Relations

John T. Chambers – Chairman and Chief Executive Officer

Frank A. Calderoni – Executive Vice President and Chief Financial Officer

Robert Lloyd – President of Development and Sales


Amitabh Passi – UBS Securities LLC

Brian Modoff – Deutsche Bank Securities, Inc.

Ehud A. Gelblum – Morgan Stanley & Co. LLC

Mark Sue – RBC Capital Markets

Simona Jankowski – Goldman Sachs

Tal Liani – Bank of America Merrill Lynch

Sanjiv Wadhwani – Stifel Nicolaus & Co.

Simon Leopold – Raymond James

Rod B. Hall – JPMorgan Securities LLC

Brian J. White – Topeka Capital Markets



Welcome to Cisco Systems' Second Quarter and Fiscal Year 2013 Financial Results Conference Call. At the request of Cisco Systems, today's call is being recorded. If you have any objections, you may disconnect.

Now I'll like to introduce Melissa Selcher, Senior Director, Analyst and Investor Relations. Ma'am, you may begin.

Melissa Selcher

Thanks you. Good afternoon, everyone, and welcome to our 92nd quarterly conference call. This is Melissa Selcher and I am 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 a 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 will be referencing both GAAP and non-GAAP financial results. 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 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. 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 T. Chambers

Mel, thank you very much. As we exit Q2 FY13, we continued to be pleased with the traction of our strategy, our value proposition to our customers and the execution of our company and our partners.

We delivered another quarter of solid profitable growth with record revenue of 5% and record non-GAAP earnings per share of $0.51, up 9% year-over-year. In my recent conversations with global business and government leaders, the tone is cautious, optimism. I am not suggesting that optimism would translate and lead into immediate GDP growth. But there is a bleak, weaken move to a world driven by opportunity, not scarcity, and that technology will play a very large role in that opportunity.

Cisco’s strategy delivering integrated architectures that address the top business opportunities and the biggest market transitions is differentiating us from our peers, and will help enable us to achieve our goal of becoming the number one IT Company in the world.

As I translate these observations to this quarter, I have five key takeaways. First, our execution on our financial model is very solid, with record revenues, earnings per share, net income and non-GAAP operating income. Gross margins continue to be very stable, expenses are growing inline with revenue growth and operating margins are strong.

Second, we continue to drive strong results in most of the key technology transitions. The transition such as datacenter, cloud, virtualization, mobility and video had very solid results in the quarter in what remains a challenging economic environment.

We continue to invest in a market transitions that we believe will drive our next phase of growth. Notably, the Internet of Everything of everything and programmable networks where we continue to lead the market with our execution on our Cisco ONE portfolio.

Third, our services business continued the solid growth in Q3 of 10%. Our services lead engagements and innovation together with our partners are driving our wallet and man share with customers. Fourth, we continue to see a soft global recovery with Europe and especially Southern Europe still on distress.

On the positive side, we continue to see improvements in the U.S. Enterprise, and U.S. commercial orders, which we believe is likely an early indicator of future GDP growth.

Finally, we generated operating cash of over $3 billion by returning almost $1.25 billion to shareholders this quarter with the dividend and the buyback. Over the last year and a half, we closed 14 acquisitions, totaling to approximately $7 billion with 13 of the 14 adding important software, cloud and recurring revenue assets across our portfolio. We remain very committed to our capital return strategy to drive the value to our shareholders.

In summary, we believe that our Q2 results once again demonstrate that our vision and strategy are working. In simple terms, we did what we said we will do and what I think we will all agree as a challenging market.

As we continue to deliver on the innovation, quality and leadership, our customers expect we are pleased with our execution. We are managing our portfolio and operations investing for the future and delivering the integrated architecture solutions to become our customers more strategic IT partner.

To provide additional details on our Q2 FY ‘13 results, I’d like to turn the call over to Frank. I will then walk through what we’re seeing in the business and where we’re focusing going forward. Frank will detail our guidance and we’ll wrap up the call then with Q&A at the end. Frank, over to you.

Frank A. Calderoni

Thank you, John. In Q2, we continue to execute on our strategy of driving profitable growth, which contributes to increasing shareholder value over the long-term. At our financial analyst conference, we discussed our focus on innovation, portfolio management and operational discipline and we believe you are seeing the results in that focus. While we continue to operate in the challenging macroeconomic environment, we’re pleased with the discipline and execution of the company with total revenue, a record $12.1 billion, up 5% and non-GAAP earnings per share of $0.51, up 9%, delivering our fifth straight quarter of growing earnings faster than revenues. Our non-GAAP EPS include a $0.01 benefit related to a tax item I will discuss in more detail later.

In terms of our business momentum, we saw product revenue growth of 3% with total product book-to-bill of slightly less than 1%. With total revenue globally, we had 9% growth in the Americas and 8% in APJC while Europe’s macroeconomic challenges continued resulting in a decrease of 5% for EMEA.

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