Times are tough for Cisco Systems (CSCO), but things could have been worse. In reporting earnings, the company beat analyst expectations despite a 7.5% y/y slump in sales.
- Q2 Revenue: $9.1 Billion vs $9.00 billion consensus
- Q2 EPS: $0.32 vs $0.30 consensus
- Q3 Revenue Guidance: Down 15-20%, which is $7.7 to $8.3, below $8.7 consensus
Cisco’s stock is up 1.4% after hours.
No guidance yet. Stay tuned for LIVE analysis of Cisco’s earnings call starting at 4:30 pm ET — refresh for the latest.
4:27 Still waiting to get started. Mellow hold music.
4:31 New song, little jazzier.
4:34 Call beginning.
4:36 Standard disclaimers…
4:36 Here we go, John Chambers charming Southern accent.
4:37 Growth goals: 12 – 17%, “if the economy returns to its normal performance.”
4:38 “A solid quarter” given economic trouble.
4:39 $3.2 billion in cash generated Q2. Best ever.
4:40 Talks up relationships with customers. Met with 100 customers personally.
4:42 “We are not immune from the economy, but still doing well. Revenue $9.1 billion, down 7.5% y/y. Cash generated $3.2 bilion. Reviews EPS numbers.
4:43 Mexico, Australia, and Switzerland all have mid-teens growth. Negative in countries like US and Canada.
4:45 Short-term strategy not changed. Moving into new markets where possible. “We are in a global economic slowdown and will obviously be impacted.”
4:46 Trying to reduce expenses by $1 billion.
4:47 Guidelines for surviving recession: 1. Be realistic. “Our long-term strategy is wokring well.” 2. Determine length and depth of downturn. Says Cisco saw it coming better than most.
4:48 “I tend to be more optimistic than most of our customers:
4:49 3. Prepare for upturn. Still trying to differentiate Cisco from competitors. Second time John mentions “differentiation.”
4:50 Again, Cisco moving into “over two dozen market adjacencies.”
4:51 Intelligent networks will be a big market. “Web 2.0,” WebEx, Wikis… all part of Cisco’s diversification push.
4:53 The hiring pause and non-headcount savings lead to 15% opex reduction in Q2
4:54 “We intend to invest aggressively in US”.” US will be first to recover. The downturn is “biggest challenge of our lifetime.”
4:55 Talking up “digital infrastructure.” A nod to Obama’s broadband plan?
4:56 China and India most likely of non-US countries to recover. “We will continue to invest in the downturn.” Then Mexico, Brazil, Saudi, and Russia.
4:58 Economic problem not just banks and automotive. All Cisco’s customers hit
4:59 Product growth continues to decline. January DOWN 20% y/y. Q2 down 14% overall.
4:59 80% of business non-recurring, says Cisco is a good indicator of overall economic health
5:00 Hardest time of John’s career to give guidance given economic flux
5:01 January problems will extend into Q3.
5:02 Guidance: Revenue down in 15-20% range.
5:04 CFO takes over
5:04 Reviews Q2 numbers. Revenue within guidance. Product revenue $7.3b, down 11%. Routing: 1.5B, down 23%. Video tech up 18%. Home networking down 11%.
5:06 Japan and EU up 1%, Asia/Pac down. US and Canada down 9%.
5:07 Decline driven by lower volume and product mix. Higher discounts too.
5:07 In US Canada margins are inline with overall company. Gross margins improved in Europe and Japan.
5:09 Still trying to remove $1 billion in run rate by Q4. On track to meet target. Reducing travel and outside services.
5:10 Reviewing EPS numbers.
5:11 Pleased with balance sheet. Near record cash flow. Reduced receivables 12%
5:13 Headcount 67K, down 729 positions. Hiring pause continues.
5:15 Talking a bit about Cisco capital. Strong balance sheet, cash conservatively invested.
5:16 Customers are still paying their bills on time.
5:18 Virtualzation, collaboration, video, and “Web 3.0” are priorities.
5:19 John takes over again
5:20 Public sector a bright spot everywhere. Up in mid single digits. Enterprise and service providers down 20%. Commercial down in high single digits. Europe down 5% y/y. Germany a bright spot, UK and Italy were tough. Japan down 4%. Asia down 12%, China down low single digits. Enterprise down in mid-20s.
5:22 US down 18%. Emerging markets down in low 20s.
5:23 Switching down 11%, Routing down 23%. Video up, biggest gainer in revenue. “The area I find most interesting is collaboration.”
5:25 Collaboration up over 3000% (not a typo – three thousand per cent). “Despite the downturn our vision of how the industry will evolve is very much how we expected.”
5:26 Frank (CFO) again. Here comes guidance. Standard disclaimers.
5:27 Revenue guidance: down 15 to 20%. Margins about 63%. Opex 40-42% of rev. Will keep hiring freeze and defer capital-related projects.
5:28 Repeats on track to exceed $1 billion opex reduction target.
5:28 May “de-emphasise” certain areas. Jobs cuts may come. Not planning across-the-board workforce reductions.
5:30 $500-$700 million cash per month to be generated.
5:31 John again.
5:35 Layoffs could be necessary. Already “realigned” about 1000 jobs out of 67K. Expect 1500-2000 more.
5:36 “If you’re going to do a layoff, it has to be a critical mass — which means 10% of workforce.” But “odds are reasonable we can avoid large downsizing events.”
5:38 Challenge for Cisco is prioritization, not long-term growth, expected 12-17% when economy recovers.
5:39 Q&A Time. Goldman Sachs: How big of a problem is pricing? Juniper said pricing will get more competitive.
5:40 John: Discounts not out of line with “what we have traditionally seen.”
5:42 Q: What are customer IT budgets like? Do they know what they’ll have for first half of the year?
5:43 John: It depends. Customers can only hold out so long before they need networking equipment. Enterprise budgets are like Cisco’s: Budgets are tight. Customers will be conservative.
5:44 Might see uptick if economy improves.
5:51 Q from Cowen: Will US come back first, or just the first one hit is first to recover?
5:52 John: Not first in first out. US looks good as first to recover but not sure.
6:01 John apologizes for length of call. Taking more questions.
6:01 Q: Acquisitions?
6:01 John: The good thing about this market is almost everyone is for sale. “It would not surprise me to see us move on the consumer side first.” So why hasn’t Cisco moved? Because the market keeps going down!
6:03 John hedges a bit, says not trying to time the market bottom.
6:04 Q: Which segments are looking particularly weak?
6:04 John: Routers were bad. Cable companies, telcos slowing.
6:09 John repeats: Collaboration/Web 2.0 will be the hottest thing, reminds him of web build-up.
6:09 That’s it. Thanks all for tuning in.
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