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Cisco Systems (CSCO)

Q2 2012 Earnings Call

February 08, 2012 4:30 pm ET


Melissa Selcher -

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

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

Robert W. Lloyd - Executive Vice President of Worldwide Operations

Gary B. Moore - Chief Operating Officer and Executive Vice President

Unknown Executive -


Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

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

Ehud Gelblum - Morgan Stanley, Research Division

Simona Jankowski - Goldman Sachs Group Inc., Research Division

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

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

Tal Liani - BofA Merrill Lynch, Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Brian T. Modoff - Deutsche Bank AG, Research Division



Welcome to Cisco Systems Second 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, Senior Director, Corporate Communications and Investor Relations. Ma'am, you may begin.

Melissa Selcher

Thanks, Kim. Good afternoon, everyone, and welcome to our 88th quarterly conference call. This is Melissa Selcher, Senior Director of Analyst Investor Relations, and I'm joined by John Chambers, our Chairman and Chief Executive Officer; Frank Calderoni, Executive Vice President and Chief Financial Officer; Rob Lloyd, Executive Vice President of Worldwide Operations; and Gary Moore, Executive Vice President and Chief Operating Officer.

The Q2 fiscal year 2011 press release is on U.S. high tech Marketwire and on the Cisco website at I would like to remind you that we have a corresponding webcast with slides. In those slides, you will find financial information that we cover during this call, as well as additional financial metrics and analysis that you may find helpful.

Additionally, downloadable Q2 financial statements will be available following the call in the Investor Relations section of our website, including revenue and gross margin by geographic segment, as well as revenue by product categories. 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 and these documents.

An audio replay of this call will be available from February 8 through February 15 at (866) 493-8039 or (203) 369-1749 for international callers. A webcast replay is available from February 8 through April 20 on Cisco's Investor Relations website at

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 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 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.

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

John T. Chambers

Mel, thank you very much. Over the last several quarters, we've continued to make consistent major progress on our comprehensive action plan to position ourselves for the next stage of our growth and profitability.

Q2 was a very solid quarter in terms of this continued progress, with record revenues and earnings per share, both GAAP and non-GAAP. We grew profits faster than revenues, and we achieved our $1 billion expense reduction targets one quarter ahead of schedule. Our value to our customers continues to increase as we focus on catching the major market transitions occurring in our industry sector.

By focusing on our 5 foundational priorities of core networking, data center cloud, video, collaboration and business architectures, we are positioned to lead across the most significant market transitions in our industry that our industry is facing today. These market transitions represent our customer's most important care-abouts, including mobility, cloud, BYOD or bring your own device, and the reality of pervasive video driven by new collaboration and social networking solutions.

Each of these transitions require the increased value of intelligent networks, along with technology architectures, that enable both better performance and integrated products, software and services. By building on Cisco's intelligent network, our customers are innovating and solving their toughest business problems. We believe our vision and strategy are working and Cisco's value to customer is -- our customers are -- is increasing. We appear to also be gaining that increasing share of our customers' total spend on IT, as evidenced by our revenue growth versus many of our peers and competitors.

The bottom line for Cisco is simple: innovation, speed and agility is in; costs and complexity are out. In the initial part of this call, I will first provide a high-level financial review, then cover our progress and results and how they relate to executing on our 3-year plan that we believe will drive the future of Cisco and of our intelligent networks.

Second, we will give an update on Q2 progress with regards to our 5 foundational priorities. And third, we will cover the order momentum in each of our 3 geographic regions and 4 customer segments. Those segments are enterprise, public sector, commercial and service provider. And finally, we will provide Q3 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 Q3 guidance. I will then make some summary comments regarding perspective on Q2, as well as our momentum for the second half of the fiscal year followed by Q&A.

First, we continue to make very solid progress in Q2, both in terms of our results and execution in the second quarter of our 3-year plan. Our performance in Q2 exceeded the guidance we provided last quarter for both revenues and earnings per share. We had record quarterly revenue of $11.5 billion, an 11% increase year-over-year compared to our guidance of 7% to 8%.

Non-GAAP earnings per share was a record $0.47, again, above our guidance, a year-over-year increase of 27%. GAAP earnings per share was also a record at $0.40, a year-over-year increase of 48%. Non-GAAP total gross margins were 62.4%, a little higher than our original expectations, while non-GAAP product gross margins were 60.9%. Our entire company continues to focus on gross margin improvements.

While revenue and earnings per share in Q2 were solid, we were especially pleased with our non-GAAP and GAAP net income, growing 23% and 43%, respectively, year-over-year, representing a revenue increase of 11%. We achieved our goal of $1 billion expense reductions, measured from a quarterly run rate perspective in Q2, one quarter earlier than our stated goals.

Overall, product book-to-bill was approximately one. Total product orders grew 7% year-over-year. As a reminder, in Q2 of last fiscal year FY '11, our product bill -- book-to-bill was greater than one. 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.

We've organized our business around our customers' buying patterns and with a focus on the most important business transaction -- transitions. These transitions are leading to a convergence of our products and solutions, as well as our customer segments: enterprise, service provider, commercial and public sector. These are no longer distinct silos at Cisco.

During Q2, we continue to see how the restructuring and the organizational changes benefit our customers and our shareholders.

Our U.S. enterprise performance is a strong example of how our shift is working. The close rate in this business, in terms of the pipeline of the sales organization, is nearly twice as high when we're talking about business technology and business budgets versus just IT budgets. We are continuing to expand our ability to sell solutions and innovation that align to our customers' business opportunities and problems.

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