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conference date: February 6, 2007
for quarter ending: January 27, 2007 (2nd quarter fiscal 2007)
Overview: Very strong quarter and strong guidance.
Basic data:
Net sales were $8.4 billion, up 2.4% sequentially and up 27.3% from $6.6 billion in Q2 2006.
Net GAAP income was $1.9 billion, up 19% sequentially and up 39.7% from $1.4 billion in Q2 2006.
Earnings per share were $0.31, up 19% sequentially and up 41% from $0.22 in Q2 2006.
Cash and equivalents ended at $20.7 billion, up $1.2 billion sequentially.
Guidance:
Including Scientific Atlanta, revenue growth year over year expected at 19% for Q3 FY 2007. Stand-alone revenue up 15 to 17% for Q3.
On non-GAAP basis, including Scientific-Atlanta:
Q4 9.0-9.3 B revenues or 14-16% year-over-year growth. Combined organic growth is 16-17%.
That is above the previous 10 to 15% annual growth range guidance from last year.
Q3 2007: 64.5% gross margins. Operating expense near 35.5% of revenue. 25% tax rate. Flat share count. Cash flow from operations $500 to $700 million per month.
Conference Highlights:
121 million shares of common stock were repurchased at an average of $27.01 per share.
Inventory turns were 7.8, down sequentially from 8.3.
Agreed to acquire IronPort Systems. Completed acquisitions of Tivella, Orative, and Greenfield Networks. Introduced iPhone models, Digital Signage, MDS 9124 Fabric Switch.
Routing revenue up 18% year-over-year. Switching up 13% year-over-year. Advanced Tech 23%. Scientific Atlanta 21% year-over-year. Services grew 20% year-over-year. Believes gaining market share over all major competitors. Customer satisfaction is very high. Momentum remains strong.
Commerical segment 20% year-over-year. Service Provider Segment mid-teens growth with Scient-A above 20% growth. Public Sector orders up 12% year-over-year.
Emerging market orders up 40% year-over-year, Europe up low teens. US order up low double digits. Asia up low teens. Japan low single digits.
Market transitions happening today were anticipated years ago. End to end architectural approach working.
Sientific-Atlanta revenues $639 million, up 21.5%. Routers $1.6 billion, swicthes $3.0 billion, advanded $1.93 billion other $282 million. Product todal $7.1 billion. Services $1.34 billion.
Non-Gaap gross margin 64.8%, down from 68% year-earlier. Product gross margin 65.8%. Services gross margin 64.4%.
Taxes non-GAAP going forward expected at 25%, down from 26% due to R&D tax credit.
Operating income $2.1 billion. Operating expense $2.9 billion or 34.6 % of reenue.
Accounts receivable $2.9 billion, down from $3.1 billion; day sales outstanding 31. Inventory $1.6 billion up from $1.5 billion. Increased finished goods and raw materials anticipating increased demand.
Headcount 54,563, up from 51,840 in Q1.
Enterprise is about 45% of busieness, service provider 25%, commercial 25%, consumer 4%. Commerical year-over-year 20% growth, Service in mid-teens, enterprise low double digit growth.
Routing up 18% year-over-year. Switching 13% , advanced 23%, optical 40% year-over-year.
Momentum strong, balance good, strategic value to service providers is increasing. Scientific-Atland ahead of anticipated results. Commercial maket remains solid and well balanced globally. Product pipeline in excellent shape; product momentum is balanced. Of course some uncertainty continues. Highly confident in strategy.
Q&A:
Application networking update? Overall technologies include acceleration and compression, grew at mid-double digit rates. Believes picking up some market share and strong product pipeline.
Order growth momentum toward April? This is the best pipeline I've seen with Scientific-Atlanta. Strong book-to-bill. Set top boxes, HDTV, subscriber, transmission and service. Lots of 1 GHertz network upgrades to deal with video. IPTV with HDTV drives compression and other technologies. 707 security transition coming up.
Emerging market strategy has legs for a decade.
Productivity of new employees? 1100 new employees were in manufacturing for Scientific-Atlanta. Sales rep productivity is great and pay for themselves quickly.
Scientific-Atlanta regulatory impact? Have projections, which are above the current growth rate. Customers businesses are doing well, growing 15% per year themselves, talking of increasing capital spending. HDTV momentum really taken hold, and IPTV boxes shipping. So it isn't just 707 driving growth.
US Enterprise softness? Some US businesses are buying outside the US for their foreign branches. Rejects idea that are losing market share; just some lumpiness. Customers believe their businesses are on track. Moving into new areas like security and storage area networking.
Pipeline looks good. Segment behind growth? Fundamentally adding intelligence to convergence. Video is the killer application. Enterprise, service provider, and consumer markets are coming together. Service providers say they are going to fewer venders and want them to be more end-to-end.
Operating margin guidance and nature of eps? Operating income went from 29% to 30%. Operating expense as % of revenue good. EPS solid. Employee stock options balanced buybacks, but price went up $5 per share, which also effectively increased number of shares.
Book-to-bill for core Cisco? For full company was above 1.
Confident of overall growth guidance, but sub-segments may fluctuate. US enterprise is now less of global enterprise "than you would think."
Deferred revenue? Went up in all categories.
Emerging markets to continue in 40% growth mode for 12 to 18 months, continued high growth about twice global rate for 10 years out.
Has leadership back on edge routing. ISR model momentum strong.
10 gig switching? Recently introduced 10 gig line card, plus faster backplanes over time. By supporting platform with smooth upgrades pleases customers.
Did orders grow as fast as revenue? Revenues did grow faster than orders. Always gives conservative guidance. Doe not want to up long-term growth rate yet.
Investments in sales reps versus margins? Hopes to keep hiring in sales, hopes to improve margins over time. Some countries only have a couple of people in them so far.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2007 William P. Meyers