Analyst Conference Call Summary

conference date: May 11, 2011 @ 1:30 PM Pacific Time
for quarter ending: April 30, 2011 (3rd quarter fiscal 2011)

(at the time this was written)
Forward-looking statements

Overview: Struggling, with profits down and slow revenue growth.

Basic data (GAAP) :

Revenues were $10.9 billion, up 5% sequentially from $10.4 billion and also up 5% from $10.4 billion in the year-earlier quarter.

Net income was $1.8 billion, up 18% sequentially from $1.52 billion, but down 18% from $2.2 billion year-earlier.

EPS (earnings per share) were $0.33, up 22% sequentially from $0.27, and down 11% from $0.37 year-earlier.

Guidance:

Fiscal Q4 2011 will see restructuring to reduce costs in fiscal 2012. About $40 million in restructing charges in Q4. $500 million to $1.1 billion GAAP charge due to early retirement program. Revenue growth flat to up 2% y/y basis. 24% to 25% non-GAAP operating margin. $0.37 to $0.39 per share, non-GAAP, with GAAP EPS $0.14 to $0.23 lower.

Conference Highlights:

John Chambers tried to restore confidence by claiming Cisco now has a "clear game plan." Cisco, he says, has just a few problematic areas, which are being addressed. Business model overhaul is in process. Will reduce costs by $1 billion per year and divest underperforming operations. However, fiscal Q4 (ending July) will be problematic as changes are made.

Non-GAAP numbers: net income $2.3 billion, down 5% y/y. EPS $0.42, flat y/y. Gross margin 63.9%, declining from 65.2% year-earlier.

Company priorities will be around enterprise level opportunities including supporting the mobile internet. Areas of concern are consumer, set top boxes, government, and switching. Switch prices have been dropping per port, which is good for customers, but in short term hurts revenues. Gross margins are under pressure even in new, top line product line. Will benefit when the market stabilizes.

Public sector spending is declining, as it has for several quarters. Maintaining market share position, emphasizing datacenter and cloud computing. Most sell into the public sector is routers and switches.

Collaboration revenue growth continues to exceed 25%; was 39% in Q3. Now $1.15 billion per year run rate.

Virtualized datacenter and cloud is still a growth area. UCS server revenues growing; 5400 customers; gaining market share.

Emerging markets are still a major area of opportunity. Brazil, Russia, India and China order growth is still strong.

Video strategy is still of key importance, from service providers to set top boxes.

Closed Flip consumer video division and trimming other consumer areas.

Moving deck chairs around: board structure, administration, the usual. New functional leadership and accountability (WM: does that mean prior leadership was non-functional and un-accountable?) Will reduce workforce (WM: fire the followers, having hired more leaders).

Orders by geography: U.S. & Canada had 2% y/y growth. Europe up 2%. Emerging markets up 4%. Asia Pacific up 14%.

Orders by customer: Enterprise up 12%, public down 8%.

Revenue by segment: routers $1.86 billion, up 7%, switches $3.30 billion, down 9%, new products $3.26 billion, up 15% (led by collaboration, wireless, and datacenter), other up 11%, services up 14%.

Book to bill near 1.

$43.4 billion in cash and equivalents at end of quarter, most held overseas. $3.0 billion operating cash flow. $329 million was used for dividends.

Headcount ended at 73,408. Increase was mainly from acquisitions.

Q&A:

Switching correction? Pleased with newest Cisco products, competitive at all levels except highest 7000 series. Need to bring products to market faster, 3 year cycles instead of 5 years. When we get hit with new competitors, we get back up, but you can now do with a low end switch what you could do with a mid-range. Gross margin challenge is at high end transition from 6000 to 7000 series, where one 7000 might replace two 6000s, or one 6000 could be replaced by one 4000. But our switches are much more flexible for video and wireless than our competitors'.

Guidance of margins down on revenues up in Q4? Q4 is traditionally the strongest sales quarter. In Q3 we had a good booking of UCS, but did not get them all ship. So Q4 will be good for datacenter revenues. We may have a higher mix of low margin products in Q4.

Old 12% to 17% y/y growth goals? Clearly we have dropped that for now. Changes made in Q4 will take a while to drive through the organization.

We are not just looking to be number 1 or 2 in a segment, we are looking for good margins in the areas we compete in. The market is there, we need to align to it, that is what we are doing, and doing quickly.

Collaboration video vs. Skype type services? We bet on video five years ago, saying video would be the next voice. It won't be stand alone streaming through dumb pipes. You need to be able to pipe to communities, to search on it, and do other things that are architecture dependent. Cisco has a big lead, but we now have a lot of competitors.

Switching competition on price is coming from HP and Huawei, but there are other forms of competition, including bundling with other hardware, and companies that are focused on switches. Margins are not necessarily low because of this.

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