CEO John Chambers and CFO Dennis Powell Discuss Cisco's Q4 and Year End Fiscal Year 2006 Performance
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August 8, 2006
Cisco announced fourth quarter and fiscal year end 2006 financial results. John Chambers, president and CEO, and Dennis Powell, CFO had the following to say regarding the company's results and business outlook. How would you characterize this quarter?John Chambers: I would characterize the quarter as a very strong and record quarter from a revenue, net income, and GAAP and non-GAAP earnings per share perspective. We achieved record revenue of approximately $8.0B, a 21.3% year-over-year increase including Scientific Atlanta and a Cisco standalone increase of 12.5%, which was slightly above the high end of our guidance of 10-12%. Order growth was very strong with product book to bill comfortably above one. The key takeaway here is that when you see our ending backlog for fiscal 2006 as published in our Form 10-K in September, we will have increased our Cisco standalone product backlog approximately $700M over the ending backlog of fiscal 2005. This increase was due almost entirely to the strong order growth in Q3 and Q4. For Q4, GAAP net income was $1.5B. Non-GAAP net income was $1.9B, an increase of 15.1%. GAAP earnings per share were a record $0.25 and non-GAAP earnings per share were a record $0.30. Cash generated from operations was approximately $2.3B. We repurchased approximately $2.8B of common stock. And we exited the quarter with approximately $18B in cash, cash equivalents, and investments. What were some of the highlights from the quarter?John Chambers: I will summarize the quarter highlights from a geographic, customer segments, and products perspective. From a Cisco standalone geographic perspective, momentum was strong from an orders perspective and balance was very good across the five theaters during Q4. Four of the five geographic theaters experienced stronger annual product order growth when compared to a strong Q4 of last fiscal year, Europe being the exception. In Europe we did see some improvement versus earlier in the fiscal year, with order growth slightly improving to the high single digits. In the U.S. orders grew in the upper teens year-over-year while total worldwide orders grew in the mid teens. As anticipated we saw very strong order growth from the Emerging Markets theater of approximately 40% year-over-year. Asia Pacific and China again had solid quarters with year-over-year order growth of approximately 20% and 40% respectively. From a Cisco standalone product perspective the balance was extremely good across routing, switching, and advanced technologies. Routing revenue grew year-over-year by 12%, switching revenue grew year-over-year by 8%, and advanced technologies' revenue grew year-over-year by 23%. Of the advanced technologies, storage area networking, unified communications, formerly known as enterprise IP communications, and wireless led the way. We believe we are gaining market share versus almost all of our competitors, but we also believe we are getting a larger share of our customers' total spend on communications and IT. From a Cisco standalone customer segment perspective we saw continued strength in the commercial market, with product order growth of approximately 20% year-over-year. The service provider business remained strong, with standalone orders growing approximately 18%. Scientific Atlanta was above the high end of our guidance with approximately 15% growth year-over-year. Of particular interest in the service provider market was the very strong order growth rate of the CRS-1 comfortably exceeding the $100M per quarter order rate. The U.S. service provider segment continued an extremely strong pace growing in the mid 20s year-over-year. The global enterprise business was solid with growth in the low double digits, while our U.S. enterprise orders grew in the mid teens year-over-year. To what do you attribute the strong growth?John Chambers: These record results for Q4 are due in part to our successful implementation of our strategy given our vision of how the communications and IT industry would evolve. As intelligence moves throughout the network, the network is becoming the platform that enables most forms of communications and IT. Our business and technology architectural approach to this evolution is gaining both market share results and share of total customer spend. This is the second quarter where Scientific Atlanta has been included in Cisco's financials. How did the Scientific Atlanta division track to your overall expectations?John Chambers: The integration of Scientific Atlanta is actually ahead of what Jim McDonald and I would have anticipated to be at this point in time. While success is still dependent upon solid execution, our role with Scientific Atlanta in service providers has the potential to continue to expand in this next fiscal year. In positioning our acquisition decision of Scientific Atlanta we shared that their growth, at the time of the acquisition, was in the 10-12% range, and that if the acquisition and synergies were effective that the growth potential was in the 12-14% range. We were very pleased with year-over-year revenue growth this quarter of approximately 15%. Of particular interest in this quarter was the shipment of 1.44M in digital set-top boxes, a 33% increase in units shipped versus Q4 of last year. Perhaps of even more importance is the role that Scientific Atlanta's video expertise plays in our service provider accounts from a strategic business partner perspective. |
More InformationNews Release Related Links Q&A: Dennis Powell on Cisco's Q4 and Fiscal Year 2006 Financial Position
How would you characterize the financial position of fiscal year 2006? Dennis Powell: We are very pleased that revenue for both Cisco stand-alone and Scientific Atlanta exceeded our expectations this quarter. The business was strong across geographies, product categories, and customer segments. We continued our strength in operating cash flow, generating cash of $7.9B for fiscal year 2006. Finally, our strategy around the network as a platform is working really well and we are strongly positioned for the next year. Total revenue for fiscal year 2006 was $28.5B, an increase of approximately 15% over fiscal year 2005 revenue of $24.8B. Total Cisco stand-alone revenue for fiscal year 2006 was $27.5B, an increase of approximately 11%. GAAP net income for fiscal year 2006 was $5.6B. GAAP earnings per share on a fully diluted basis for fiscal year 2006 were $0.89. Non- GAAP net income for fiscal year 2006 was $6.9B, up approximately 14%. Non-GAAP earnings per share on a fully diluted basis for fiscal year 2006 were $1.10, representing a 20% increase year-over-year. Product backlog at the end of fiscal year 2006 was $2.65B, excluding Scientific-Atlanta, compared with $1.95B at the end of fiscal year 2005, an increase of $700M. In our Form 10-K we will report a backlog of approximately $3B, which includes approximately $400M for Scientific Atlanta. The company's purchase commitments have doubled year-over-year, and despite your initiation of a transition to a Lean manufacturing model, inventory levels are still high. How do you explain this? Dennis Powell: Our inventory purchase commitments for Q4 were $2.0B, as compared with $1.7B for Q3, and $954M for Q4 of the prior fiscal year. The year-over-year increase reflects the inclusion of $295 million of purchase commitments for Scientific-Atlanta and the continuing transition to the lean manufacturing model. The rise in purchase commitments is also due to higher backlog on a year-over-year basis, and longer lead times in the broader supply chain. In response to longer lead times, we have increased our purchase commitments of certain component items for targeted, high-demand products such as the CRS-1, 12000 series routers, and Catalyst 6000 switches. |
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RECONCILIATION OF GAAP TO NON-GAAP NET INCOME
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| Three Months Ended | Twelve Months Ended | |||
| July 29, 2006 |
July 30, 2005 |
July 29, 2006 |
July 30, 2005 | |
| GAAP net income | $ 1,544 | $ 1,540 | $ 5,580 | $ 5,741 |
| Stock-based compensation expense related to employee stock options and employee stock purchases | 211 | - | 1,050 | - |
| Impact to cost of sales from purchase accounting adjustments to inventory | 4 | - | 26 | - |
| Payroll tax on stock option exercises | 2 | 5 | 15 | 12 |
| Compensation expense related to acquisitions and investments | 21 | 39 | 123 | 165 |
| In-process research and development | 1 | 6 | 91 | 26 |
| Amortization of purchased intangible assets | 215 | 56 | 453 | 227 |
| (Gain) on publicly traded equity securities | - | - | - | (53) |
| Income tax effect | (126) | (20) | (452) | (61) |
| Non-GAAP net income | $ 1,872 | $ 1,626 | $ 6,886 | $ 6,057 |
For the three month period ended April 29, 2006, non-GAAP net income and non-GAAP net income per share excluded the following items: stock-based compensation expense related to employee stock options and employee stock purchases of $261; impact to cost of sales from purchase accounting adjustments to inventory of $22; payroll tax on stock option exercises of $8; compensation expense related to acquisitions and investments of $32; in-process research and development of $88; amortization of purchased intangible assets of $123 million; and income tax effect of ($121).
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RECONCILIATION OF SHARES USED IN THE CALCULATION
OF GAAP TO NON-GAAP DILUTED NET INCOME PER SHARE
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| Three Months Ended | Twelve Months Ended | |||
| July 29, 2006 |
July 30, 2005 |
July 29, 2006 |
July 30, 2005 | |
| Diluted shares used in per-share calculation - GAAP | 6,187 | 6,480 | 6,272 | 6,612 |
| Effect of SFAS 123(R) | (6) | - | (13) | - |
| Diluted shares used in per-share calculation - Non-GAAP | 6,181 | 6,480 | 6,259 | 6,612 |
For the three month period ended April 29, 2006, diluted shares used in per-share calculation - GAAP and Non-GAAP were 6,289 and 6,291, respectively. Diluted shares used in per-share calculation - Non-GAAP excluded the effect of SFAS 123(R).
This executive question and answer document may be deemed to contain forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events and the future financial performance of Cisco that involve risks and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including: business and economic conditions and growth trends in the networking industry and in various geographic regions; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; the growth of the Internet and levels of capital spending on Internet-based systems; variations in customer demand for products and services, including sales to the service provider market; the timing of orders and manufacturing and customer lead times; changes in customer order patterns or customer mix; insufficient, excess or obsolete inventory; variability of component costs; variations in sales channels, product costs or mix of products sold; our ability to successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses and technologies including the businesses and technologies of Scientific-Atlanta, Inc.; increased competition in the networking industry; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; manufacturing and sourcing risks, including risks relating to our transition to a new manufacturing model; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters; natural catastrophic events; a pandemic or epidemic; achievement of the benefits anticipated from our investments in sales and engineering activities; our ability to recruit and retain key personnel; our ability to manage financial risk; currency fluctuations and other international factors; potential volatility in operating results and other factors listed in Cisco's most recent reports on Form 10-K, 10-Q and 8-K. The financial information contained in this executive question and answer document should be read in conjunction with the consolidated financial statements and notes thereto included in Cisco's most recent report on Form 10-Q and report on Form 8-K filed on February 10, 2006, each as it may be amended from time to time. Cisco's results of operations for the three and twelve months ended July 29, 2006 are not necessarily indicative of Cisco's operating results for any future periods. Any projections in this executive question and answer document are based on limited information currently available to Cisco, which is subject to change. Although any such projections and the factors influencing them will likely change, Cisco will not necessarily update the information, since Cisco will only provide guidance at certain points during the year. Such information speaks only as of the date of this executive question and answer document.
This executive question and answer document includes non-GAAP net income, non-GAAP net income per share data and non-GAAP shares used in net income per share calculation.
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