Cisco Systems’ (CSCO) CEO John Chambers on Q4 2014 Results – Earnings Call Transcript

August 14, 2014 1:26 am | By More

Source: Seeking Alpha

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Cisco Systems, Inc. (NASDAQ:CSCO)

Q4 2014 Earnings Conference Call

August 13, 2014 4:30 PM ET

Executives

Melissa Selcher – VP of Corporate Communication and IR

John Chambers – Chairman and CEO

Frank Calderoni – EVP and CFO

Rob Lloyd – President, Development and Sales

Gary Moore – President and COO

Analysts

Brian Modoff – Deutsche Bank

Simona Jankowski – Goldman Sachs

Mark Sue – RBC Capital Markets

Amitabh Passi – UBS Securities

Jim Fawcett – Morgan Stanley

Jess Lubert – Wells Fargo Securities

Subu Subrahmanyan – Juda Group

Ben Reitzes – Barclays Capital

Kulbinder Garcha – Credit Suisse

Paul Silverstein – Cowen and Company

Jeff Kvaal – Northland Securities

Operator

Welcome to Cisco Systems’ Fourth Quarter and Fiscal Year 2014 Financial Results Conference Call. At the request of Cisco Systems, today’s call is being recorded. If you have any objections, you may disconnect.

Now, I would like to introduce Melissa Selcher, Vice President of Corporate Communication and Investor Relations. Ma’am, you may begin.

Melissa Selcher – VP of Corporate Communication and IR

Thanks Kim. Good afternoon, everyone, and welcome to our 98th quarterly conference call. This is Melissa Selcher, and I’m joined by John Chambers, our Chairman and Chief Executive Officer; Frank Calderoni, Executive Vice President and Chief Financial Officer; Rob Lloyd, President of Development and Sales and Gary Moore, President and Chief Operating Officer.

I would like to remind you that we have a corresponding webcast with slides including supplemental information that will be available on our Web site in the Investor Relations section following the call. Income statements full GAAP to non-GAAP reconciliation information, balance sheets, and cash flow statements and other financial information can also be found on the Investor Relations Web site. Click on the Financial Reporting section of the Web site to access these documents.

Throughout this call, we will be referencing both, GAAP and non-GAAP financial results. The matters we will be discussing today include forward-looking statements and as such are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on the Form 10-K and 10-Q and any applicable amendments which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.

Unauthorized recording of this call is not permitted. All comparisons throughout this call will be on a year-over-year basis unless stated otherwise. As in the past we will discuss product results in terms of revenue and geographic and customer segment results in terms of product orders unless specifically stated otherwise.

I will now turn it over to John for his commentary on the quarter.

John Chambers – Chairman and CEO

Mel, thank you very much. I’m pleased with our solid performance in Q4 with non-GAAP earnings per share of $0.55 on revenues of 12.4 billion, exceeding the guidance we gave you and representing a record quarter for non-GAAP earnings per share and our second highest quarter in our history in terms of revenue. We generated over 3.6 billion in operating cash flow and returned approximately 2.5 billion to our shareholders through share buyback and dividends.

FY 2014 was a year with many big wins and several challenges. Our fiscal year began with the number of external headwinds including the federal government shutdown and the possibility of a U.S. default combined with significant slowdown in emerging markets. Even with this backdrop FY14 ended with revenues of 47.1 billion representing the second strongest year in our history and record non-GAAP earnings per share of — I wish 200, $2.06 per share.

We maintained our non-GAAP gross margins, generated strong non-GAAP operating margins and exceeded our capital return target, returning 120% of our free cash flow to shareholders. Our innovation engine dramatically accelerated this year as we brought new architectures to the market with a next generation of networking, security and collaboration. At the same time, the journey we began three years ago to transform Cisco continued at a rapid pace.

Let me take a step back for a moment. In 2011, we saw how rapidly the market was changing and understood that we require transformational change at our company. We saw these market changes earlier than our peers and understood the market dynamics were not unique to Cisco. We required a strategic approach, and not tactical responses to the coming transactions. That is the core of what you have seen from Cisco over the past several years. Even in 2011, we saw a much bigger picture.

We rolled out our transformational plan with two principal objectives. First, drive innovation, speed, agility and efficiencies in our business and second, to transform the company to move from selling boxes to selling first architectures, then solutions and now outcomes. Operationally, we’ve done a very good job against those objectives which has afforded us flexibility today and how we go after market opportunities.

Our results are evident, we created significant operating leverage in the past three years revenue has grown nearly $4 billion while our absolute non-GAAP OpEx expenses virtually unchanged. That is very good execution especially when compared with many of our peers. During the same time period, our U.S. commercial and U.S. enterprise business grew orders over 37% and 28% respectively over these three years. They grew double-digit this last year and closed with a very-very strong in Q4 with both segments growing orders over 15%.

These are the segments that have seen the early stages of our transformation, being this segment’s our most successful selling integrated architecture solutions and outcomes. Those of you who follow us closely and talk with our channels and our customers hear first hand that our strategy is not just gaining traction but most importantly getting results. The changes we’ve made over the three years have enabled us to bring innovative products and solutions to market while at the same time growing non-GAAP earnings per share to record levels and returning 25.2 billion to shareholders including 16.7 billion in share repurchase at the average price of $20.58.

Our innovation this period has secured us the leadership position in cloud and hybrid cloud, made us the recognized leader with our customers and SDN and has driven new opportunities with customers embracing the Internet of everything, but we’re far from finished.

As we head into fiscal year ’15 and beyond, we will continue our industry of innovation, the results of the past three years represents significant poor progress and you should expect that we will continue to take actions to transform Cisco in every possible aspect from how we’re organized, to how we develop products to help customers buy from us. Looking specifically at FY15, we executed well in Q4 and expect our revenues for Q1, revenues for Q1 of FY15 to range from flat to up 1%.

While we’re pleased with our improved performance, I would not extrapolate our improved performance into a more aggressive assumption but what we’re likely to do for the next several quarters. Our focus is on executing through our transitions and to manage that appropriately set this up for the long-term. We are assuming that as the weakness continues for the next several quarters and then not at expected any material rebound in emerging market conditions.

I think the best way to characterize this next year is to fully expect that we will exit Q4 in a stronger position that we’re in today. As we see changes in that view, we would tell you how we see it as we always do consistent with our disciplined approach to growing resources in important area while managing cost. When Frank details guidance later in this call, we will announce our plans to do a limited restructuring across several areas of our business.

These actions are focused on investing in growth, innovation, and talent while managing cost and driving efficiencies. We expect to reinvent — reinvest substantially all the cost savings from our restructuring actions in our key growth areas such as datacenter, software, security, cloud and others. While there are tremendous opportunities for our business and we are moving the resources to capitalize on them, there is also a significant risk as we discussed. This is the technology industry and change is constant and accelerating.

We have navigated this industry successful for almost three decades while nearly every competitor we faced 10 to 20 years ago is either exited or part of the market, stalled in terms of market share or has gone out of business. Our vision is clear and our strategy is working and it has largely played out as we expected, in 2011 I said customers will view the network has the most strategic asset not just in communication but in IT. And this would enable us to become the number IT Company. I am confident that we can make this aspiration a reality.

Now let me move onto business momentum and specifically in terms of our geographies and customer segments, as we reminder geographies are the primary way we win our business. In these areas, I will speak in terms of product orders year-over-year unless otherwise noted. We finished the quarter with product orders up 1%, product book-to-billed comfortably above 1 and a product backlog of $5.4 billion.

Our business in Americas grew 2%, U.S. grew 5%, with U.S. commercial and U.S. enterprise continuing the strong growth up 17% and 16% respectively. I think Robert has numbers I can remember in many years they are just a nice job by Alex and Brian. We are seeing the continuous strength in large deals as an example looking at deals in our U.S. Enterprise pipeline, the number of deals over $1 million increased by 22% and deals in the pipeline over $5 million increased by over 70%.

As we continue to engage strategically with our customers on their business opportunities, our enterprise customers are making more and bigger investment as they partner with us. U.S. public sector Pat Finn’s groups did a very good job. They grew over 6% in the quarter with state and local up 3% and U.S. federal up year-over-year 10% in terms of orders. U.S. service provider declined 9%.

Latin America declined 6% with ongoing pressures in some of the largest emerging countries and including a decline of 13% in our business in Brazil. EMEA grew 2% as we see continued relatively stabilization across Europe. In EMEA, enterprise business grew 8% and commercial grew 7%. Leading the way, the UK grew 6% and within the UK commercial was up 18% and enterprise was up 19%. Germany in this most recent quarter grew 16% and again within Germany we saw the same characteristics, commercial was up 13% and enterprise was up 17%.

In the UK and Germany, we are seeing similar success in these marketplaces as we begin to move to selling architectures, then solutions, then business outcomes. This is the transformation we’re working onto drive more broadly. Just to give you a sense of an emerging country’s impact on EMEA as an example and its growth excluding Russia which declined 30%, EMEA would have grown 4% instead of 2%.

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