Analysis: Cisco Revenue in Line, EPS Beats Consensus

Summary: Revenue in line with reduced expectations: Up 10% year-over-year (below Cisco's long-term targets). This suggests that the business environment did not improve materially from a weak January. Pro forma EPS of $0.38 beats consensus by $0.02. The company's guidance for FQ4 was again weak -- 9%-10% -- due to ongoing economic problems in the US and Europe. That said, analysts have already reduced their estimates, and the guidance is slightly above the mid-point of the range.

Release out.
 

Key Stats

• Revenue: Consensus is $9.75 billion, up 10%. This is also the guidance figure.
• EPS: Consensus $0.36, 7% y/y
  
• Gross Margin: Guidance is 65%
• Operating Expenses: Guidance: 37%
• Tax Rate: Guidance: 24%
• Outlook:
  
  • July Quarter (FQ4): $10.3 billion of revenue, $0.39 EPS
  • FY09: $43.39 billion of revenue, $1.69 EPS
    

Conference Call Notes

4:32: Awaiting conference call
4:35: Usual rambling preamble and disclaimer.
4:38: Cisco feel "very comfortable with progress." "Another solid quarter given challenges." Results were geographically and materially "balanced."
4:40: Pleased with both top-line and bottom-line growth. One key takeaway was "strong product balance."
4:45: Strong y/y growth in emerging markets. In the 30's in China, teens in India.
4:47: Segment growth: Routing 14%, Switch 3%, Advanced Technology 17%.
4:48: Service revenues grew in the mid teens and now make up 1/5 of revenue. "No reason why service revenues can't grow in the 20%+ range in the near future.
4:50: Order momentum mixed... Asia Pacific "very solid." Japan "very strong" grew in mid 20s. Europe grew 14%. US did "experience expected challenges"... grew in mid single digits.
4:52: Continue to believe growth will be 12% to 17% year over year. Long-term Guidance maintained. "We do see economic challenges in US." Q4 revenue guidance will be 9% to 10% year-over-year.
4:54: Economic challenges will be "short-term," will use bumps to gain share.
4:55: Routing growth led by high-end router portfolio. Advanced technology led by uniform communications and video systems.
4:57: Gross margin flat quarter-over-quarter. Service margins down... experiencing variability due to change in mix.
4:58: Total cash and equivalents to $24.4 billion, up $1.7 billion. Accounts receivable flat. Days sale outstanding: 39 days, same as in Q2. Total inventory: $1.3 billion, same as in Q2.
5:04: "Pleased with performance." Broad and growing global footprint, innovation, and powerful business model drove performance.
5:07: Growth in Japan over 20% for first time in 15 quarters due to build-out of 2nd generation networks. Japan leads world in this regard, and other geographic segments may not be far behind.
5:09: Order growth in US was 5%. Commercial growth in the teens, enterprise in the low single digits.
5:11: Long lecture on "innovation," and how Cisco is really good at it... Overview of new product families and their capabilities and features.
5:20: Web 2.0 will move networking from "data networking" to "visual networking." Cisco is focussing innovation on where the market will be, not where it is now.
5:22: Q4 guidance: revenue growth between 9% and 10% year-over-year. Model on the conservative side due to continued macro uncertainty. Gross margin in Q4 to be 65%. Opex to be between 36% and 37%. Interest and other income to be $140 million. Tax provision to be 24% EBT. Cash from operations to be $700 and $900 million per month. GAAP EPS in Q4 to be 4 cents to 6 cents lower due to acquisition charges.
5:27: "We believe our vision, strategy, and execution have delivered."
5:29: Q&A begins. Lehman analyst asks for macro color. Answer: "The US evolved as we thought." "We have positioned ourselves very well as the economy picks back up." "The balance looks good, things playing out as we expected."
5:32: Thomas Weisel analyst asks about macro color on April. Answer: Varies with seasonality. "Nothing dramatic." "Good solid momentum... have seen some orders slide out... feels pretty solid."
5:34: JP Morgan analyst asks how there will be acceleration in growth given recent "lumpiness." Answer: Asia Pacific doing well. China and India also doing well. Japan is back. Emerging markets will grow twice as fast as core markets.
5:40: Morgan Stanley analyst asks about pipeline in FQ04. Answer: "Feel good about long-term momentum."
5:42: UBS analyst asks about commercial business. Answer: Growth was 18%. US commercial business in US only grew 13%. This offset outstand growth in Asia Pacific and emerging markets.
5:45: RBS analyst asks for color on duration of capex caution in US. Answer: "Our views haven't changed." Bumps will likely last two to three quarters.
5:47: Merrill Lynch analyst asks whether management feels better or worse about global growth since last quarter. Answer: Views haven't changed. In short term, will continue to see what we saw in January: 9% to 10%. But in the long term, 12% to 17% is very achievable.
5:50: Oppenheimer analyst asks for color on service provider growth rate. Answer: "Fundamentals have not changed." Video will drive next growth spurt. Activity will vary by geography and where one is in service provider cycle. Downturn is cyclical.
5:57: Citi analyst ask for order growth excluding Scientific Atlanta. Answer: "slightly negative."
5:59: Call ends.

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