Cisco (CSCO) was the first company to sound the alarms about the recession. So what do they have to say now?
Things aren’t getting better, and CEO John Chambers says October was especially terrible — a 9% year-over-year drop in orders.
Cisco expects Q2 revenues to shrink 5% to 10% year-over-year. It’s also aiming for $1 billion in cost savings via a six-part plan that includes a hiring “pause,” reduced travel, events, prototyping, etc.
Specifically, Cisco’s guidance suggests Q2 sales of $8.85 billion to $9.34 billion, way below analysts’ expecations of $10.4 billion.
Meanwhile, Cisco’s Q1 sales were in line with expectations and EPS beat the Street by 3 cents. Shares are up 1.3% after hours to $17.61, according to Google.
Q1 Revenue: $10.3 billion vs. $10.3 billion consensus
Q1 EPS: $0.42 vs. $0.39 consensus
Q2 Revenue Guidance: $8.85 billion to $9.34 billion vs. $10.41 billion consensus
LIVE Conference Call Notes:
4:31 Classical music.
4:32 Call begins.
4:33 Standard disclaimers.
4:35 Chambers: Still comfortable with 12-17% growth rates (long term) if economy gets back to normal growth rates.
4:35 Q1 was a solid quarter for Cisco from a rev. and EPS perspective, especially given many challenges. We exit Q1 with an extremely strong position in the market place, etc.
4:36 Not only is end to end technology architecture enabling the next generation of entertainment and busines models, strongest customer relationships, etc.
4:38 Chambers going over high level results.
4:38 Core tech and services: Switching 8%, Routing 1%, service 10%. Advanced 15% y/y, Unified comm 22%, wireless 21%, security 19%, networked home decreased 2%, storage 4%. Advanced second phase 22%. App net services 25%, video systems 21%. Early stage “emerging tech” not material financially, but believe they can become very significant. Grew 180% y/y. Strong growth from mid teens from low 30s in China, Canada, Japan, Russia. US, UK, Italy negative order growth y/y in Q1.
4:41 All of us are seeing same challenges, especially in the month of October. First, we start with a culture of using economic challenges to gain market/profit share.
4:41 One year ago when Cisco said starting to get challenges. We do believe these challenges have expanded to Europe, Asia. If there’s one lesson learned, it’s importance of taking action early while not using track of long term objectives.
4:42 Our approach to all of the economic slowdowns has remained very similar. When we see market transitions occurring, we determine: 1) Is problem macro or your strategy? 2) Length and depth of a downturn? Then adjust and realign asset utilization appropriately. 3) Prepare for the upturn and for how you’re going to gain share and differentiate yourselves from peers. 4) Expand customer relationships, differentiation with customers.
4:43 Six point plan: 1) Vision, strategy, and execution model. 2) Collaboration/Web 2.0 driving growth. Both for products and internal IT implementation. 3) Resource realignment. Goal is to realign another $500 million of resources, cut fiscal ’09 expenses by $1 billion. Includes pause in hiring, reductions in travel, offsite, equipment, events, prototypes, marketing, other activities. Missed 4! 5) Invest in US and other emerging countries. Believe US will be first major country to recover. Strategy in emerging countries is simple: Believe majority of GDP will eventually come in these countries. 6) Power of “the network is the platform.”
4:48 Plenty of positives in the quarter. Also even more challenges as well as global customer feedback on the health of their businesses, especially in the US and Western Europe; both experienced negative y/y order growth in Q1.
4:49 Order growth decreased 9% year-over-year in October, increased 7% in August. Rev growth solid 8%, book to bill was low. First high-tech companies to report our quarter that included October. Environment has changed dramatically.
4:50 Very difficult to provide a forecast giving dramatic variability. Second most difficult time in terms of comfort level of forecast. Would not be a major surprise to see numbers vary. Assuming what we saw in October momentum challenges will continue into the next quarter. As we’ve said in conference calls, Cisco will always be affected by economy, etc.
4:52 Also assuming vision of how industry and market will evolve will be accurate. Rev guidance for Q2 is rev to decrease 5-10% year-over-year.
4:56 Going over growth in different categories.
4:57 Stock now down 5.7% to $16.40
5:04 Still very high quality receivables. Remain comfortable with our portfolio.
5:10 Chambers is back. Talking about geographies, products in growth terms etc. Europe slowed to negative mid single digits.
5:14 Guidance is non GAAP. Very difficult to provide forecast. Rev guidance makes prudent assumption that order momentum challenges will continue. Expect total revs down 5-10%. Cisco will not comment on financial guidance in quarter unless press release. Forecasting GM very challenging. Believe 64% total GM, reflecting revenue guidance. Opex 39-41% of rev, as expect in this environment. Also making calculated investments where we think we can extend Cisco’s leadership.
5:18 GAAP EPS to be 5 cents to 8 cents per share lower than non GAAP.
5:19 Still think we can get back to long term growth targets someday. Plan to aggressively invest in new and adjacent markets.
5:24 Q&A begins.
5:25 Very few comparisons to 2001.
5:30 Analyst makes a funny! Will buy Linksys router in exchange for two questions.
5:31 What will you need to see to get more aggressive on opex cutting? One thing people give us credit for is how we handle economic challenges.
5:37 Why switching and routing backwards? If you watch, enterprise marketplace was most challenged. Commercial and public sector relatively flat. While routing will swing up or down based on loads on networks, etc.
5:44 Cost cuts: Cut out some of the “not fat, but … not muscle either”.
5:57 Call over.
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