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conference date: November 8, 2006
for quarter ending: October 28, 2006 (1st quarter fiscal 2007)
Overview: Record revenue and earnings above prior guidance. FY Q2 guidance is strongest in years.
Basic data:
Revenues of $8.2 billion, up 25% over year-earlier, 16% if acquisitions factored out. GAAP net income of $1.6 billion or $0.26 per share. Non-GAAP net income of $1.9 billion or $0.31 per share.
Scientific-Atlanta (acquired Q3 FY2006) contributed $584 million to net sales revenue (up 21% year-over-year).
Cash and equivalents ended at $19.5 billion. $2.3 billion cash generated from operations.
Guidance:
On a non-GAAP basis.
Q2 fiscal year 2007 year-over-year growth of approximately 25%. Stand alone 14% to 15%. Gross margins 65%. Cash flow from operations will be $500 to $700 million per month. Op ex 36% of revenue. Shares outstanding may rise up to 50 million shares.
Conference Highlights:
Believes that the market in networking is at an inflection point, with the next generation of Information Technology to be delivered over the Web. They believe they have positioned themselves to capture the income from this shift. Momentum remains strong because of this.
During the quarter stock repurchases of 66 million shares at average price of $22.85 totaling $1.5 billion.
DSO (day sales outstanding) dropped from 38 to 34 days during the quarter.
Acquisitions of Arroyo and Meetinghouse Data Communications were completed during the quarter. New products announced during the quarter were re-announced.
Book-to-build ration approximately 1. This is better than is seasonally normally. Orders grew faster than revenues in all segments.
Business growth remained strong overall. U.S. annual growth rate in upper teens. Emerging market growth over 40%. Asia-pacific in low teens. European growth comfortably in double digits. Japan growth in low single digits.
Balance good across routing ($1.6 billion, up 13% annual), switching ($3.0 billion, up 15% annual) and advanced technologies ($1.9 billion, 23% annual organic growth). Other revenue $455 million, up 53% on combined basis. Optical revenue is now included in Other revenue. Service revenue $1.24 billion up 17%. Gaining market share against competitors. Service provider business up 23% (30% in US). Scientific-Atlanta division showed 21% annual growth.
Gross margin (total non-GAAP) 64.8%, down from prior quarter 65.3%.
Operating expenses were $2.9 billion or 35.6% of revenue.
Tax provision rate of 26%; same for Q2 2007.
Accounts receivable ended at $3.1 billion, down from $3.3 billion prior quarter. Inventories $1.5 billion, up from $1.4 billion prior quarter.
51,840 employees end-of-quarter.
Enterprise accounts for roughly 45% of product business; commercial and service provider above 25% each, consumer 4%. Service provider growth was strongest, a new phenomena, in low 20% year-over-year. Commercial segment had solid growth. Gained market share against peers in service provider market, particularly with high-end CRS routers. Scientific-Atlanta did better than expectations with annual growth rate over 20%. Digital set top boxes showed strong growth; video expertise helped greatly.
Pipeline of new products looks good. Outlook for continued market share gains seems good.
Q&A:
Large increase in head count? 600 sales, 330 engineering, 400 manufacturing. 35% increase in sales head count over last year. But sales productivity is staying up.
Carrier market? Network load growth numbers are growing towards 200% annual rate, and video will drive that even higher. IPTV is going to be the future. Believes quad-play everywhere will be the next step.
Are emerging markets becoming a larger percent of revenue? Growth is from all regions and products and is very balanced.
Gross margins? largely from mix changes. Linksys and optical grew, which are both lower margin.
Service provider growth? Products (edge, core, consumer) will be tightly coupled going forward; video is the killer application.
Application delivery platforms? Getting good traction there. Integrating into overall infrastructure. Provides great value for data centers.
Scientific-Atlanta internationalization? Just beginning to do that, but still about 90% in North America, lots of interest elsewhere. IPTV interest strong around the world, particularly Japan.
Seasonality? Usually gets a slowdown from Q1 to Q2 sequentially, but year-over-year growth should be steady.
Why Cisco growing faster than enterprise budgets? Because nature of network is changing. Can use productivity investments to lower costs. Telepresence can reduce travel costs.
Advanced technology category growth? All advanced technologies growing well - unified communications, wireless, storage, telepresence likely to be leaders.
Dividends? Question of when, not if. Will continue buybacks for foreseeable future.
Edge routing products? Hardware and software releases have brought them up to speed and are now gaining market share.
Federal business? Is 16% of US, 8% worldwide Cisco revenue in federal peak season.
Microsoft in VOIP? Will be a partner with Cisco at times, at other times a competitor. Cisco has 3 to 5 year lead in marketplace.
Ethernet changeover? Cisco is leading in in growing metro-ethernet, growing for intra-office.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2006 William P. Meyers