CEO John Chambers and CFO Dennis Powell Discuss Cisco's Q2 Fiscal Year 2008 Performance
February 6, 2008
Cisco announced second quarter fiscal year 2008 financial results. John Chambers, chairman and CEO, and Dennis Powell, executive vice president and CFO, had the following to say regarding the company's results and business outlook.
How would you characterize this quarter?
John Chambers: This quarter was another solid quarter with good balanced results from a product, geographic and customer segment perspective. We achieved total record revenue of approximately $9.8B, a 16.5% year-over-year increase. We are pleased with the growth on both the top and bottom lines.
Order growth was good with product book to bill of approximately 1. GAAP net income was $2.1B, representing a 7% increase year-over-year. Non-GAAP net income was $2.4B, an increase year-over-year of approximately 14%. GAAP earnings per share were $0.33 and non-GAAP earnings per share were $0.38.
From a customer segment perspective, we again saw very solid balance across our commercial market, service provider and enterprise segments. The global commercial market segment remained our most steady segment with order growth of approximately 20% year-over-year in Q2. With the exception of Europe, the core global service provider business remains strong. Orders from a service provider perspective excluding Scientific Atlanta grew approximately 20% year-over-year. The global enterprise business which includes public sector was solid. Our enterprise customer segment orders on a global basis grew approximately 11% year-over-year.
How do you see Cisco impacting business on a global basis?
John Chambers: Whether it is with the government leaders in developed and emerging markets or the service provider or enterprise decision makers, our thought leadership, technology architecture, and our ability to help them achieve their business and government goals is increasingly understood at all levels. We saw this in November during visits to India and China and most recently at the World Economic Forum where we met with almost a dozen heads of state or key government leaders. We also saw the unique opportunity Cisco can play during a recent trip throughout the Middle East Gulf States where order growth opportunities remain very strong.
One example of this architectural and thought leadership would be in Saudi Arabia, where two weeks ago I spent three days meeting with various business and government leaders. Whether it was on the topic of their new economic cities, Cisco's role as their infrastructure partner, or Cisco's role in assisting in their global competitiveness our vision, strategy and execution is playing out as we envisioned. And as we become the trusted advisor and implementation engine for the government and business leaders, we can also get the growth that accompanies this leadership position. Saudi Arabia as an example had over 70% order growth year-over-year in Q2.
What differentiates Cisco's business strategy in terms of collaboration and Web 2.0 technologies?
John Chambers: We clearly intend to lead all companies in our implementation, organizational evolution and associated productivity of these new collaboration technologies with a competitive advantage of how we ourselves will become the best example for what this means to a company's future. This type of collaboration enabled by the network will allow Cisco instead of doing one to two major priorities a year, to target 20 for this fiscal year. We will do our best to provide the product architectures and the expertise to help in the implementation of these collaborative capabilities from a technology and business perspective, as well as share with our customers how we have done this internally.
I cannot overemphasize the importance of leading in this market transition from products to processes, to internal adoption and utilization, and what we believe this leadership position means for Cisco's future. Our ability to understand market transitions, whether technology or business model-based, has been one of the key contributing factors to our success.
Every quarter over the last year, Cisco has expanded our position in terms of thought leadership and how we use these capabilities internally. We believe we are the example in business for what's possible when an organization adopts a collaborative approach enabled by networked Web 2.0 technologies. We consistently hear this from both our enterprise and service provider customers as well as from key industry analysts.
This is built around our view of how the industry will evolve both from intelligent networks' role as well as the next generation of productivity, business and government models built around networked technology capabilities.
How is Cisco progressing in the advanced technology arena, and where is the company headed from a business and technology standpoint?
John Chambers: Our first wave of five advanced technologies in Q2 had year-over-year revenue growth of approximately 22%. That in total is approximately a $7B run rate in terms of revenue-and that is just the first wave. Unified Communications, including the addition of WebEx, continued to lead the way with revenue growth of approximately 60%. And just for a data point, Unified Communications growth without WebEx was 30% year-over-year.
In considering our ability to move into new markets to achieve both growth and profitability, our total advanced technologies revenue was more than 20% greater than revenue from our routing products. This again speaks to Cisco's balanced product portfolio and to our constant evolution of moving into new markets and product adjacencies.
Our second wave of advanced technologies that includes video systems, application networking systems, etc., is now approaching a $2.7B run rate and grew 31% year-over-year from a revenue perspective.
At the same time we are beginning to plant a potential third wave with our next generation of early stage emerging technologies. In summary, our product pipeline is in excellent shape and looks really exciting.
Q2 FY 2008 GAAP ReconciliationRECONCILIATION OF GAAP TO NON-GAAP NET INCOME(In millions, except per-share amounts)
Three Months Ended Six Months Ended January 26, 2008 January 27, 2007 January 26, 2008 January 27, 2007 GAAP net income $ 2,060 $ 1,921 $ 4,265 $ 3,529Employee share-based compensation expense 273 247 499 472Payroll tax on stock option exercises 8 11 19 17Compensation expense related to acquisitions and investments 34 27 73 48In-process research and development - 2 3 6Amortization of purchased intangible assets 177 132 355 273 Total adjustments to GAAP income before provision for income taxes 492 419 949 816Income tax effect (173) (189) (333) (290)Effect of retroactive tax legislation (1) - (60) - (60)Total adjustments to GAAP provision for income taxes (173) (249) (333) (350) Non-GAAP net income $ 2,379 $ 2,091 $ 4,881 $ 3,995 Diluted net income per share: GAAP $ 0.33 $ 0.31 $ 0.68 $ 0.56 Non-GAAP $ 0.38 $ 0.33 $ 0.78 $ 0.64 Shares used in diluted net income per share calculation: GAAP 6,202 6,291 6,273 6,255 Non-GAAP 6,197 6,281 6,267 6,243
(1) In the second quarter of fiscal 2007, the Tax Relief and Health Care Act of 2006 reinstated the U.S. federal research and development (R&D) tax credit, retroactive to January 1, 2006. GAAP net income for the second quarter and the first six months of fiscal 2007 included a $120 million tax benefit relating to the reinstatement of the U.S. federal R&D tax credit, including $60 million related to fiscal 2006 R&D expenses. Non-GAAP net income for the second quarter and the first six months of fiscal 2007 excluded the $60 million tax benefit related to fiscal 2006 R&D expenses.
Additional reconciliations between GAAP and non-GAAP financial measures are provided in the tables that follow on page 10.RECONCILIATION OF SHARES USED IN THE GAAP AND NON-GAAP DILUTED NET INCOME PER SHARE CALCULATION(In millions)
Three Months Ended Six Months Ended January 26, 2008 January 27, 2007 January 26, 2008 January 27, 2007 Shares used in diluted net income per share calculation - GAAP 6,202 6,291 6,273 6,255 Effect of SFAS 123(R) (5) (10) (6) (12) Shares used in diluted net income per share calculation - Non-GAAP 6,197 6,281 6,267 6,243# # #