CSCO

Cisco Systems, Inc. (CSCO)

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Cisco Systems (CSCO)

Q1 2012 Earnings Call

November 09, 2011 4:30 pm ET

Executives

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

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

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

Melissa Selcher -

Analysts

Brian J. White - Ticonderoga Securities LLC, Research Division

Simona Jankowski - Goldman Sachs Group Inc., Research Division

John Slack - Citigroup Inc, Research Division

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Simon M. Leopold - Morgan Keegan & Company, Inc., Research Division

Ehud Gelblum - Morgan Stanley, Research Division

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

Shaw Wu - Sterne Agee & Leach Inc., Research Division

Brian T. Modoff - Deutsche Bank AG, Research Division

Rod B. Hall - JP Morgan Chase & Co, Research Division

Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division

Tal Liani - BofA Merrill Lynch, Research Division

Jeffrey T. Kvaal - Barclays Capital, Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Welcome to Cisco System's First Quarter and Fiscal Year 2012 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 Melissa Selcher, Director of Corporate Communications and Investor Relations. Ma'am, you may begin.

Melissa Selcher

Thank you. Good afternoon, everyone, and welcome to our 87th quarterly conference call. This is Melissa and I'm joined by John Chambers, our Chairman and Chief Executive Officer; Frank Calderoni, Executive Vice President and Chief Financial Officer; and Gary Moore, Executive Vice President and Chief Operating Officer.

The Q1 fiscal year 2012 press release is on U.S. high tech market wire and on the Cisco website at newsroom.cisco.com. I'd like to remind you that we have corresponding webcast with slides. In those slides, you will find financial information that we cover during this conference call, as well as additional financial metrics and analysis that you may find helpful.

Additionally, downloadable Q1 financial statements will be available following the call in the Investor Relations section of our website, including revenue by geographic segments, as well as product category. Income statements, full GAAP to non-GAAP reconciliation information, balance sheet and cash flow statements can also be found on our website in the Investor Relations section. Click on the Financial Reporting section of the website to access the webcast slides in these documents.

A replay of this call will be available via telephone from November 9 through November 20, at (866)493-8039 or (203)369-1749 for international callers. A webcast replay is available from November 9 through January 20, on Cisco's Investor Relations website at investor.cisco.com.

Throughout this conference call, we'll be referencing both GAAP and non-GAAP 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 discussed in detail in our documents filed with the SEC. Specifically, the most recent annual report on Form 10-K, and in 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.

As we start the fiscal year, I wanted to identify some reporting changes that are reflected in our commentary. We have included the details of the changes in the slides, and we will provide reclassified historical financial information as applicable, on our website following this call.

As we discussed in our last earnings call, we transitioned our region reporting from 4 geographic regions to 3. As a reminder, the 3 regions are the Americas, EMEA and Asia-Pacific, Japan and China or APJC. Our geographies continue to be the primary way we run the business. We've also updated our product revenue reporting to better align with our 5 foundational priorities. Expect that this enhanced reporting will be helpful to investors. This change provides revenue reporting for a number of components of our prior new products category.

Effective this quarter, we are providing total revenue and year-over-year growth disclosures, switching, next-generation or NGN routing; collaboration; security; wireless; service provider video; data center and other products. There are also certain reclassifications which are outlined in the slides that accompany this call. I'll now turn it over to John for his commentary on the quarter.

John T. Chambers

Well, thank you very much. Since last quarter's conference call, we continue to make major progress on our comprehensive action plan to position ourselves for the next stage of growth and profitability. In this conference call, we will reduce the amount of detail covered in the formal part of the call, focusing more on the highlights and our interpretation of the results, while providing a lot of the detail we've traditionally covered in the script, through the accompanying slides. This will allow more time for questions, we welcome your feedback on this approach.

First, in my part of the call, I will do a high-level financial review, then cover in reasonable detail, our progress and results as it relates to executing on our 3-year plan, that we believe will drive the future of Cisco and our intelligent networks; second, we will give you an update on our Q1 progress with regards to our 5 foundational priorities; third, we will cover the order momentum in each of our 3 geographic regions; fourth, we will cover order momentum in our 4 customer segments: enterprise, public sector, commercial and service provider; and finally, I will provide a quick summary, and then Q2 FY '12 revenue guidance.

In the second part of the conference call, Frank will go into more detail from a financial perspective, as well as expand on our Q2 FY '12 guidance. I will then make some summary comments regarding the perspective on Q2, and our momentum going into the remainder of fiscal year '12.

First, we made very solid progress in Q1, both in terms of our results and execution in the first quarter of our 3-year plan. Our performance in Q1 FY '12 exceeded the guidance we provided last quarter, for both revenue and earnings per share. We had record quarterly revenue in Q1 and our revenue grew year-over-year was 5% compared to our guidance of 1% to 4%. Non-GAAP earnings per share were $0.43, again above our expectations. Non-GAAP gross margins were 62.4%, higher than our original expectations, while the non-GAAP product gross margins were 61.3%. Make no mistake about it, our entire company continues to be focused on gross margin improvements.

While revenue and earnings in Q1 were very solid, we were especially pleased with our product order growth year-over-year, of approximately 13%. Overall, product book-to-bill was approximately 1, which is a solid, given the historical Q1 results. We are a very strong company, with a very strong balance sheet, solid customer relationships and leadership in many healthy markets. However, we will continue to address a few areas for improvement. With the power of the entire company focused on these improvements.

In Q1, we are beginning to see how the restructuring and organizational changes benefited not only our shareholders, but also our customers. We are, in our opinion, in the sweet spot of what our customers are focused on, whether it is in cost reductions, productivity, business transformation or revenue growth. This ties 1:1 to our 5 foundational priorities, and our customers clearly understand this.

When I reflect over the last 20 years I've spent at Cisco, I continue to be impressed with the expanding franchise value, that is Cisco. Our ability to change with industry trends, customer needs and get in front of major technology shift, is quite remarkable. When I look back at the last 2, 3 quarters, the steadfast commitment of our people to adapt to a rapid change, and continue to execute against market demands, reflect the intangible value of Cisco and our relationship with our customers. The ability of a $40 billion revenue company to turn quickly and move forward, and not emerge weaker but much stronger.

Our customers not only expect this. It was interesting when you talk to them, they almost assume that is a given, that we would adjust to these market trends. Of particular importance to me, is the feedback that I'm receiving from the meetings I've had with enterprise CEOs and CIOs and service provider CEOs and Chief Technical Officers. They are strongly supportive of the changes we've made. In short, we've organized our business around how they want to buy their key technology, how the business transitions they're focused on, and as I said above, their goals whether they;re expense reduction or revenue growth is a 1:1 correlation.

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