CSCO

Cisco Systems, Inc. (CSCO)

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Cisco Systems (CSCO)

Q4 2011 Earnings Call

August 10, 2011 4:30 pm ET

Executives

Gary Moore - Chief Operating Officer, Head of the Services Organization and Executive Vice President

Terry Anderson -

Frank Calderoni - Chief Financial Officer and Executive Vice President

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

Analysts

Brian Marshall - Gleacher & Company, Inc.

Mark Sue - RBC Capital Markets, LLC

Tal Liani - BofA Merrill Lynch

Nikos Theodosopoulos - UBS Investment Bank

John Slack - Citigroup Inc

Rod Hall - JP Morgan Chase & Co

Brian Modoff - Deutsche Bank AG

Ehud Gelblum - Morgan Stanley

Simon Leopold - Morgan Keegan & Company, Inc.

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

Simona Jankowski - Goldman Sachs Group Inc.

Presentation

Operator

Welcome to Cisco Systems Fourth Quarter and 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 would like to introduce Terry Anderson, Vice President, Corporate Communications and Investor Relations. Thank you. You may begin.

Terry Anderson

Thank you. Good afternoon, everyone, and welcome to our 86th quarterly conference call. This is Terry Anderson and I'm joined today by John Chambers, our Chairman and CEO; Gary Moore, Executive Vice President and Chief Operating Officer; and Frank Calderoni, Executive Vice President and Chief Financial Officer.

The Q4 fiscal year 2011 press release is on U.S. high tech market wire and on the Cisco website at www.newsroom.cisco.com. I'd like to remind you that we have a corresponding webcast with slides. In those slides, you will find financial information we cover during this conference call as well as additional financial metrics and analysis that you may find helpful.

Additionally, downloadable Q4 and full fiscal year 2011 financial statements will be available following the call, including revenue by product and geography. 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. Click on the Financial Reporting section of the website to access the webcast slides and these documents.

A replay of this call will be available via telephone from August 10 through August 17 at (866) 357-4205 or (203) 369-0122 for international callers. A replay will also be available from August 10 through October 21 on Cisco's Investor Relations website at www.investor.cisco.com.

Throughout this conference call, we'll be referencing both GAAP and non-GAAP financial results. Our commentary today will be providing information on both our Q4 and full fiscal 2011 financial results. The financial results in the press release are unaudited. The matters we'll be discussing today include forward-looking statements and, as such, are subject to the risks and uncertainties that we will discuss in detail in our 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. I'll now turn the call over to John for his commentary on the quarter.

John Chambers

Terry, thank you very much. Since the last quarter's conference call, we've made solid progress on our comprehensive action plan to position ourselves for the next stage of growth and profitability, what we will call the next Cisco, which I will review at a high level in just a moment.

In terms of Q4 FY '11 overall guidance, we accomplished what we outlined in our Q3 conference call, achieving a little bit more in revenue growth and earnings per share than consensus expectations. Revenue growth for the quarter was approximately 3% year-over-year versus our guidance of 0% to 2%, and non-GAAP earnings per share were $0.40, slightly above expectations.

Total non-GAAP gross margins were 62.7%, with non-GAAP product gross margins at 61.2% and non-GAAP service margins -- gross margins at 68.6%. Overall book-to-bill was comfortably above 1, with total product orders in Q4 growing year-over-year by 11%. We also saw book-to-bill comfortably above 1 in all of our major product areas.

In terms of Q4 orders, there was very good balance from a geography, customer segment and most key product families. From a geographic point of view in Q4, our 4 theaters achieved year-over-year order growth ranging from 9% to 19%. Our enterprise, service provider and customer orders grew year-over-year between 15% and 19%. However, public sector spending continues to be a challenge, decreasing on a global basis year-over-year by approximately 4%. From a key products perspective, routing orders grew 17% year-over-year, switching orders 6% and new products grew 11% year-over-year.

The results in Q4 echoed our comments in the Q3 conference call. We are a very strong company with a very strong balance sheet, solid customer relationships, leading in many healthy markets. However, we need to address a few areas with the entire focus of the company. As with any technology company, we'll have to continue to focus and address the ongoing technology shifts, market transitions and changing competitive environment.

Since the last call, we've moved very rapidly on our plan to simplify operations and focus on our operating model and align our investments. We have driven this process in order to reinforce our ability to execute on our strategy, which is to take advantage of the global opportunity using intelligent networks to transform our customers' business and enable them to achieve their goals. I will provide a high-level summary, and Gary will provide more specifics on this.

First, simplifying and focusing our organization and operating model. During Q4, we reorganized our sales, engineering, services and operations organization, providing clear line of sight, accountability, accelerating the speed of decisions, driving toward major improvements in productivity and driving innovation at a faster pace. The changes we have now made position us to continually evolve our business models for the continued success in leadership.

Second, aligning our cost structure given transitions in the marketplace. We are well into the implementation of reducing our operating expenses by $1 billion on an annualized basis using Q4 FY '11 as a base. We will leverage this shift in cost structure coupled with the effectiveness in evolving our organizations and operating model to fund our future innovation and achieve value for our shareholders. This new cost and organization structure positions us very well to succeed in uncertain economic environment.

Third, managing our portfolio and divesting cutting back or exiting underperforming operations. As we planned, we have moved swiftly to evaluate and take decisive action to realign our portfolio. We made changes across the engineering to create simplified organization structures that allow for faster innovation, integrated product roadmaps, reduced costs and simplicity in the decision process. We have also made the decision to either exit or materially lower our investments in several areas of our Product and Solutions portfolio. Where material, we have announced these decisions publicly.

With these decisions behind us, we are confident we will deliver a total OpEx reductions of approximately $1 billion on an annualized basis and can move forward with a more focused set of portfolio investments. We will continue to pursue our innovation strategy to build, buy and partner to ensure that we are the best positioned in our priority markets moving forward.

Fourth, delivering value to our shareholders. Our financial and operating models are evolving to deliver value to both our customers and our shareholders. For shareholders, we have initiated a quarterly cash dividend, continue to be aggressive on our stock repurchase program and are in the process of making changes designed to improve our operating model in order to realize consistent, profitable growth and assure the most appropriate use of cash.

You can expect a broader dialogue around our business model and capital structure at a financial analyst conference for shareholders in September.

Many of our peers are now experiencing the same challenging -- same challenges in network capital spending, the public sector and the macro environment. We believe the changes that we implemented, well ahead of our peers, will now be a competitive advantage for us as we go forward in this uncertain macro environment. During periods of uncertainty, customers value companies with a strong balance sheet, existing strong relationships with these customers and one that can continue to help them with their innovation. It would be very easy to rest upon the changes that we've already made and continue to gradually evolve our company for the future. That is clearly what we will not do. We will continue to accelerate and drive through the simplification process at an even faster pace.

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