conference date: November 5, 2007 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2007 (1st fiscal quarter 2008)
Partial notes; full notes after the conference ends.
Overview: Sequentially down quarter for revenues, but operating in black.
Revenues were $3.22 billion, down 16% sequentially from $3.835 but up 1% from $3.19 billion year-earlier.
Net income for the first quarter was $89 million, down sequentially from $329 million but up from a loss of $56 million year-earlier.
EPS (earnings per share) was $0.03 per share, down from $0.09 per share last quarter but reversing a loss of $0.02 year-earlier.
Annual fiscal 2008: expecting low to mid single digit revenue growth, better in second half that 1st half. 44-47% gross margins. Op ex excluding restructuring 5.6 to 5.8 billion; $250-2 amortization; $225-250 million stock-based compensation expense. Taxes $200-$250 million.
Q1 was seasonally challenging. There was strength in high-end enterprise systems. Was 4th quarter of being profitable. 1 to 2% revenue gains were due to currency exchange changes.
Gross margin was 48.5%, up 5.0% from year-earlier.
GAAP net income includes a $113 million, or $0.03 per share, restructuring charge.
Cash from operations was $574 million. Cash and equivalents ended at $5.19 billion. 244.6 shares repurchases or $1.25 billion share.
Product revenue was $1.98 billion, services revenue $1.24 billion.
Cost of sales was $1.66 billion. Gross margin was $1.56 billion. R&D expense was $446 million; SG&A $939 million; restructuring $113 million, for total operating expense of $1.50 billion. Operating profit was $63 million, gain on investments $22 million, interest and other income $58 million. Provision for taxes $54 million.
Inventories ended at $571 million. Inventory in channel was reduced.
$260 million revenue from educational and professional services.
Storage system revenues stabilized.
AMD and Intel quad-core servers are driving demand, as are UltraSPARC T2 servers. Product lineup has never been stronger and 2008 has a clear roadmap.
U.S. down year-over-year but strength in China and India.
Nearly 11 million Solaris licenses at end of quarter.
Demand environment? Within the U.S. have seen some slowing in financial services market, but mostly where exposed to mortgage issues. Traditional industries are slow.
Deferred revenue drivers? High-end products that require installation. Nothing unusual.
Services business? It is a competitive business, people come to us mainly for software support. Tends to have deferred revenues. Should pick up as high end of product line is refreshed.
Services margins? Fair degree of sustainability. They are mainly buying updates and patches rather that labor from us.
Acceleration of growth prediction? Planning for organic growth. Niagara billings up 70% year-over-year, we will be more exposed to high-growth lines as we go into 2008.
Niagara 2 is 64 way chip with floating point back in, so broader market for it. Virtualization built in and power-efficient.
Server units declined for 3 consecutive quarters? Trend is to buy fewer larger servers. Buyers will look to vendors who have expertise to provide large scale systems.
Pricing? That is not particularly the issue for is, total cost of operation is the big issue. Power bills of lifetime excede initial prices of servers.
Component costs? $25 to $35 million of gross margin that was better than expected was due to lower component costs. We feel good about raising our gross margin this last year. Don't expect further decreases in component costs.
Storage segment? Weaker in tapes than we would have liked. Thumper seasonally down. Looking to engineering discipline to build storage systems more like our server systems.
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