Cisco FQ2 results and outlook: Revenue slightly above consensus, EPS in line (misses whispers). Chambers says comfortable with long-term growth rate. However, January “very challenging,” as US and Europe customers are suddenly cautious. FQ3 guidance is 10% growth, below current expectations and below long-term target.
EPS benefited from lower-than-expected tax rate. Sales and Marketing slightly higher-than-expected, so operating margin did not get expected sequential lift.
Call at 4:30 EST / 1:30 PST. Notes below.
- Revenue: $9.83 billion, slightly ahead of consensus of $9.79 billion
- EPS: $0.38, in line (benefited from lower-than-expected tax rate)
- Gross Margin: 65.5%, in line
- Operating Income: $2.7 billion vs. $2.9 billion consensus
Outlook will be provided on conference call. Here are pre-earnings expectations:
- April Quarter: Guidance is $9.75 billion +10%, below current $10.2 billion, +15% / EPS of $0.39
- Full Year 2008 (July): $40.3 billion / $1.59 [REVENUE WILL COME DOWN]
- Full Year 2009 (July): $46.2 billion / $1.81 [MAY COME DOWN]
Comfortable with LT growth
Book to bill = 1
“Phase 2” of the Internet. Collaboration, Web 2.0. We’re No. 1.
Will transform business models at speed not seen since 1990s.
Routers up 18%
Switching up 11% (advanced tech 25%)
10 product families above $1 billion revenue
13 of top 20 had growth of 15% or better.
-Solid across all geographies
-Emerging markets up 24%
-Asia/Pac up 23%
-Europe 8% (our combined orders commercial and enterprise low 20s, service providers down 6%, public sector flat)
-Service providers 20% except Europe
-US high 20s (ex Sci Atlanta)
-Sci Atlanta very tough comps
-Video continues to drive demand
-Consumer video and bband build-outs driving this
-We think this is the killer app.
-Cisco corp 400% load growth…in telepresense
-High end routers…FQ07 20%… now we’re at 30% or better
-TRS 1 over 100%
-Global enterprise solid up 11%
One major area update:
-Next frontier is collaboration, Web 2.0
-Every quarter we have expanded position
-We are the example…we hear this from enterprise/service provider
-This market is why we’re comfortable with LT growth rate, even if economic weakness.
Continue to believe LT guidance 12%-17% year over year.
-Will be times above and below
-But very comfortable with vision/strategy
-We the challenges US customers are facing
–We are seeing US/Europe customers becoming increasingly cautious.
-December strong, January less than expected, “very challenging January”
This makes projecting this quarter very challenging. Possible Jan aberration, but…
Assume Jan will continue through quarter
Guidance is 10% growth in Q3, below target
US orders up 12%
service providers +high 20s (ex Sci Atlanta)
Combined US service provider orders +13%
-Federal flat Q2
-Other Enterprise +11%
Good balance across segments
Emerging Markets +24%
Enterprise, Commercial 20%
Service provides shrank 6%
Advanced Tech 25%
Networked home down 5%
Detailed FQ3 Guidance
Total revenue 10% plus or minus 1%
Unusual January + Uncertain economic and consumer confidence outlook
Prudent + conservative: Guidance Q3 only
NOT PROVIDING Q4 GUIDANCE YET
Total gross margin approx. 65%
Q3 operating expenses 37%
interest and other $200mm
Tax rate 24%
Shares out down 100mm (assumes no change in price)
CFLO ops: 700mm-900mm per month
Q3 GAAP $0.04-$0.06 lower than non-GAAP
Assumes no additional acquisitions, tax, etc.
CHAMBERS WRAP UP
Concerns about US market, concerned this will spread to other geographies
We think we will expand market share. This shouldn’t affect long-term growth
Geographic…optimistic about majority of globe outside US
Will continue to monitor spread, especially to Europe
Service provider market most comfortable.
Core service provider projections strong.
Commercial looks strong globally.
Q&A (Jonathan Kennedy reporting)
RBC analyst asks whether it’s fair to say, given disappointing guidance, that situation will continue to “deteriorate.” Answer: No
Lehman analyst asks whether slowness in the United States will spread into emerging markets and Europe. Answer: No, things look “very solid.” Growth in emerging markets will be “twice” that of developed markets. European Service Provider growth was weak, but financial accounts were “solid.”
Goldman Sachs analyst asks which verticals “saw most weakness” or “surprised the most.” Answer: Financial accounts were actually “very solid.” Retail and transportation “soft”.
JPMorgan analyst asks which segment was responsible for slower 10% growth. Answer: “It’s not just one vertical.” “lumpiness” seems to be the word du jour. Lot’s of talk about how big orders have, and will continue to contribute to volatility in revenue growth, especially in emerging markets.
UBS analyst asks whether low guidance is for real and indicates that things are “spiraling” downward, or is just an attempt to set the bar as low as possible. Answer: “I don’t want to give the impression that anything is spiraling.” Will come out strong in terms of market share and in terms of profit.”
Morgan Stanley analyst asks “how do you know slowdown will be short?” Answer: “Because that’s what our customers are telling us.” Commercial market “absolutely will be impacted,” but companies can’t afford to slow down cap ex for too long.
Bank of America analyst asks whether product mix will effect Gross Margin. Answer: “I see nothing” that will prevent expansion and push in market share.
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