Chairman and CEO John Chambers and CFO Frank Calderoni Discuss Cisco Fourth Quarter and Fiscal Year 2009 Year End Performance
August 5, 2009
Cisco announced fourth quarter and fiscal year end 2009 financial results. John Chambers, chairman and CEO, and Frank Calderoni, CFO, had the following to say regarding the company's results and business outlook.
What are some of the financial highlights of the quarter?
John Chambers: The fourth quarter was a very solid quarter from a financial perspective. Perhaps the financial measurement that we are most pleased with overall is our ability to focus on preparing Cisco for the future and still maintaining very strong profits as a percentage of revenue during what is clearly the toughest economic challenge of our lifetime.
The following are some high-level financial takeaways from the quarter:
Revenue was $8.5 billion.
Earnings per share on a GAAP basis were $0.19 and non-GAAP earnings per share were $0.31.
We exceeded our previously announced stretch expense reduction goals.
Cisco generated $2 billion in cash in the fourth quarter, resulting in total cash and investments of approximately $35 billion. The company repurchased $800 million of stock during the quarter.
Product book to bill was comfortably above 1.
Looking at our overall customer segments, our position in terms of both a technology partner and a business partner to our customers in service provider, enterprise, and government is continuing to expand in a very positive way. However, the numbers in terms of year-over-year order growth in these markets are challenging.
From a sequential order point of view, comparing the third quarter to the fourth quarter, we saw double digit order growth in Enterprise, Commercial and Government. Service Provider growth continues to be challenging on a global basis with sequential order growth in the low single digits.
Looking at year-over-year order rates in our customer segments, the Public Sector was the least impacted by the economic challenges of all customer segment markets, but was still down globally 3%.
In other global customer segments, our Enterprise business continued to be tough and was down approximately 30% year-over-year in the fourth quarter on a global basis. Service Provider spending continued to be tight and was down in the upper 20s year-over-year. The Commercial market was also down in the mid 20s year-over-year, while Consumer was up in the low single digits.
Moving on to orders by geography, on a global basis, most of our markets began to stabilize and show sequential third quarter-to-fourth quarter improvement. The U.S., Asia Pacific, Japan and Emerging Markets theaters all grew orders sequentially from the third quarter to the fourth quarter in double digits. The one exception, Europe, continued to be challenged, growing sequentially in the mid single digits.
As you would expect from a year-over-year perspective, the geographic order rate numbers were all challenging. The U.S. was down approximately 20%, Emerging Markets was down approximately 30%, Asia Pacific was down in the low 20s, European Markets was down in the high twenties and Japan was down in the low single digits.
Given current economic conditions, what indicators beyond financial results did you look at to formulate assessments about the health of the company?
John Chambers: Even more positive than the financial discipline and results in the quarter, the fourth quarter had both the first positive sequential product order growth and was also the first quarter for the entire year that was anywhere close to having normal sequential order seasonality.
For me personally, this was the most important takeaway on the quarter. In other words, while it is too early to say this is a definite trend, and therefore the much-anticipated recovery, the sequential numbers were very solid and more along our normal seasonal quarterly results for the first time in the last four quarters.
During normal economic times, year-over-year numbers are very indicative of the health of the business. However, during economic transitions, upturns and downturns, sequential comparisons to the same quarters are very useful in determining the health of the business and possible directional changes.
Our sequential order growth rates traditionally follow similar patterns during normal times. This clearly has not been the case over the first three quarters of fiscal year 2009 where we saw very large swings averaging 10-15% below our normal sequential order patterns.
However, we saw a dramatically different trend in the fourth quarter. The order rate on a sequential basis in the fourth quarter was in line with our normal patterns of up approximately 10% from the third quarter to the fourth quarter.
While it is too soon to call a recovery, this return to a normal pattern is the first major positive order trend we have seen over the last several quarters. The trends also occurred across most of our theaters on a global basis.
Although this is a very important trend, I would want to see the sequential trends continue for several more quarters before we would be comfortable with saying that we are returning to normal business momentum.
And as we return to normal business momentum, I will go back to focusing on year-over-year numbers as the primary measurement of business momentum.
How would you characterize progress the company has made in the area of expense management and what can you say about further changes?
John Chambers: We are very pleased with our progress in aggressively managing our expenses and exceeding our stretch goal of reducing our annualized expense run rate.
We also have realigned approximately $1 billion of resources to new market adjacencies and opportunities. During the fourth quarter, we also aligned our engineering and our sales organizations around an expanding focus on customer segments and solutions.
When we saw the market change early in fiscal year 2009, we made a decision to accelerate our normal process to realign and restructure resources, rather than go through a broad-based layoff. Two quarters ago, we announced our plan to have a limited restructuring as part of our portfolio realignment that would result in the reduction of 1,500 to 2,000 jobs during the second half of the fiscal year 2009.
Limited restructurings are an ongoing part of our business process, although this recent action was unusual as the number of job reductions was higher than normal. We have completed these recent limited restructurings and expect the total number of jobs reduced will be slightly over the high end of the range provided.
Assuming there are no major surprises to our expectations on economic trends, we have completed our major expense reductions and limited restructurings. We are now moving the entire focus of the company to growth, starting first with improvements in seasonal sequential quarter growth, followed by year-over-year growth.
What other key initiatives and growth opportunities can you share?
John Chambers: In the fourth quarter, Cisco continued to balance innovation and operational effectiveness in almost every aspect of our business. The innovation and execution has never been broader and more successful ranging from product announcements, technology architecture, acquisitions, and rapidly evolving business architecture leadership in our customers' minds.
The company has had a continued explosion of collaboration enabled by networked Web 2.0 technologies in everything we do. I always listen carefully to our customers. And in many ways, feedback from our leading-edge customers about this activity in the fourth quarter was pivotal, truly a tipping point, in terms of both their understanding, and in many cases, their commitment, to next generation intelligent networks becoming their platform for productivity, standard of living, and global competitiveness.
Today, we are investing in 30+ new opportunities that are adjacent to our core business. And in each of these cases, the technology architectures drive innovation in our core products - which we believe translates to growth. The 30+ new opportunities, what we call market adjacencies, all tie to the common theme of the network being the platform for transformation in business models, government services and the connected consumer.
Our innovative organizational structure of councils and boards brings together leaders from across functions to define, plan, execute and monitor our progress in these market adjacencies.
This disciplined approach allows our team to scale and work across the opportunities with speed, flexibility and replication. You can expect these market adjacencies to become a growing part of our business over time, just as Advanced Technologies did.
In some cases these market adjacencies allow Cisco to lead in key market transitions, like Video and Virtualization, or open up new markets for us, like SmartGrid and Smart+Connected Communities. Others represent new global business models and go-to-market plans, like emerging markets in China, India and Mexico, and still others refer to how we are transforming Cisco and our own business processes.
We see interdependencies across these market adjacencies, and although each are in different phases of execution, they all build on the increased role of the network.
What examples can you highlight of progress in these market adjacencies?
John Chambers: A good example of progress we've made is in the area of Smart+Connected Communities, where we continue to advance our initiative to help cities use the network to deliver better city management, enhance quality of life, drive economic development and cultivate environmental sustainability.
Last quarter we mentioned we had reached an agreement with Incheon, Korea Mayor Ahn and Gale International, a major global city developer. We are proud to announce we will join them this week in opening the city of Songdo in Incheon, where we are Gale's technology partner. We expect our partnership with Gale to lead us into several other opportunities around the world, as we expand our partnership to go after new projects in China like the Meixi Lake Project in Changsha, the capital of Hunan province.
Additionally, this quarter we announced the launch of a major Smart+Connected Communities product - the "Mediator." This product converges 60-plus building systems onto the IP network, ranging from air conditioning to lighting, security, and access control.
Similar to how voice services transformed as they came onto the IP network, we are now transforming real estate by bringing building systems onto the network - driving down operational costs, generating additional revenue, and decreasing a building's carbon footprint.
In another example, in the area of Small Business we are continuing to make strong progress in this market, potentially one of the fastest-growing growth opportunities for Cisco. Our current market share, in most industry analysts' opinion, is in the low double digits, and therefore provides Cisco with opportunities for growth even if IT spending is constrained. While small businesses are quick to pull back at the start of a downturn, they traditionally start buying sooner and more broadly as the general economy recovers.
Over the past year, we have created dedicated teams across all functions to meet the needs of small business customers and the channel partners that serve them. We now offer purpose-built Cisco Small Business products for customers who want simple but reliable networking solutions. As an example, in the fourth quarter we introduced the new Cisco ESW 500 switches that are highly competitive based on price, features, and support. As a snapshot of what is possible in the future, we could combine our Small Business products with our investment in cloud services to provide "as-a-service" offerings delivered through Cisco partners.
A third example is in the area of Smart Grid, where we have a well-defined vision and strategy, and we are now focused on execution - to extend our thought leadership, develop an ecosystem of partners to drive open standards, and deliver an end-to-end solution for our customers.
Cisco will lead in defining the end-to-end architecture that will enable our vision of securely managing energy on electrical grids all the way from generation to consumption in homes and buildings. These efforts are highlighted by our collaboration with partners Landis+Gyr, IBM and GE, utilities such as Florida Power & Light and Duke Energy, and standards bodies such as National Institute of Standards and Technology (NIST), Federal Regulation and Oversight of Energy (FERC) and North American Electric Reliability Corporation (NERC).
Cisco's SmartGrid approach is complemented by our recently announced Smart+Connected Communities and Smart Connected Building solutions.
Frank Calderoni on Cisco's Q4 and Fiscal Year End 2009 Financial Position
What is a key takeaway from the quarter?
Frank Calderoni: I am pleased with how well we managed the business this quarter in what continues to be a difficult economic environment. During this quarter we maintained our focus on reducing our annual expense run rate while continuing to invest in our strategic growth areas.
Our solid results in the fourth quarter of fiscal year 2009 once again showcase our ability to manage profitability across varying economic cycles, while delivering innovative products and services that provide real value to our customers.
What are some of the financial highlights for fourth quarter 2009?
Frank Calderoni: Total revenue for the fourth quarter was $8.5 billion, a decrease of approximately 18% year-over-year-a tough comparison given that the fourth quarter of fiscal year 2008 was the highest revenue-generating quarter in Cisco's history.
Total service revenue was $1.8 billion, up approximately 5% year-over-year.
Total product revenue was $6.7 billion, down approximately 22% year-over-year.
Switching revenue was $2.8 billion, a decrease of 20% year-over-year. Modular switching revenue was down 23% year-over-year, while fixed switching revenue declined 17% year-over-year.
Routing revenue was $1.5 billion, down 27% year-over-year, representing a decrease of 27%, 29% and 24% year-over-year in High End, Mid Range and low end, respectively.
Advanced Technologies revenue totaled $2.0 billion, representing a decrease of 19% year-over-year. This was primarily due to declines in Video Systems of approximately 30%, Unified Communications of approximately 5%, and Security of approximately 19%.
Other product revenue totaled $387 million, a decrease of 32% year-over-year.
Total revenue declined across all geographies on a year-over-year basis. Quarterly revenue declines ranged from 5% in Japan to 38% in Emerging Markets. Quarterly revenue was down 13% in the U.S. and Canada, down 20% in Asia Pacific and down 19% in European Markets.
Interest and other income was a higher-than-expected $73 million for the fourth quarter, reflecting one-time realized gains of $41 million from investment sales.
GAAP net income for the fourth quarter was $1.1 billion, compared with $2 billion in the fourth quarter of fiscal year 2008.
Non-GAAP net income for the fourth quarter was $1.8 billion, representing a decline of 23% year-over-year. As a percentage of revenue, Non-GAAP net income was 21.5%.
GAAP earnings per share on a fully diluted basis for the fourth quarter were $0.19 versus $0.33 in the same quarter of last year.
Non-GAAP earnings per share on a fully diluted basis for the fourth quarter were $0.31, versus $0.40 in the fourth quarter of fiscal year 2008, a 23% decline year-over-year.
How would you characterize fiscal year 2009 with respect to performance?
Frank Calderoni: Total revenue for fiscal year 2009 was $36.1 billion, a decrease of approximately 9% compared with fiscal year 2008 revenue of $39.5 billion.
Routing revenue ended the year at $6.3 billion, down 21% year-over-year. Switching revenue was $12.0 billion, a decrease of 11% over last fiscal year. Advanced Technologies revenue was down 4% year-over-year to $9.2 billion. Total service revenue was approximately $7.0 billion, growth of 8% in fiscal year 2009.
GAAP net income for fiscal year 2009 was $6.1 billion or $1.05 per share on a fully diluted basis, compared with $8.1 billion or $1.31 per share on a fully diluted basis in fiscal 2008, representing 24% and 20% decreases year-over-year, respectively.
Non-GAAP net income for fiscal year 2009 was $8.0 billion, down approximately 17% from fiscal year 2008 Non-GAAP net income of $9.6 billion.
Non-GAAP earnings per share on a fully diluted basis for fiscal year 2009 were $1.35, down from $1.56 in fiscal year 2008, representing a 13% decrease year-over-year.
Product backlog at the end of fiscal year 2009 was $3.9 billion, compared with $4.8 billion at the end of fiscal 2008.
|RECONCILIATION OF GAAP TO NON-GAAP NET INCOME|
(In millions, except per-share amounts)
|Three Months Ended||Twelve Months Ended|
| July 25, 2009 || July 26, 2008 || July 25, 2009 ||July 26, 2008|
|GAAP net income||$ 1,081||$ 2,014||$ 6,134||$ 8,052|
|Non-GAAP net income||$ 1,839||$ 2,395||$ 7,956||$ 9,585|
|Diluted net income per share:|
|GAAP||$ 0.19||$ 0.33||$ 1.05||$ 1.31|
|Non-GAAP||$ 0.31||$ 0.40||$ 1.35||$ 1.56|
|Shares used in diluted net income per share calculation:|
(1)Effective in the third quarter of fiscal 2009, Cisco no longer excludes payroll tax on stock option exercises for purposes of its non-GAAP financial measures.
(2)Other acquisition-related costs consist primarily of cash and share-based compensation expenses related to acquisitions and investments.
(3)In the first quarter of fiscal 2009, a $106 million tax benefit was included in the GAAP net income as a result of the Tax Extenders and Alternative Minimum Tax Relief Act of 2008, which reinstated the U.S. federal R&D tax credit retroactive to January 1, 2008.
(4)In the fourth quarter of fiscal 2009, the U.S. Court of Appeals for the Ninth Circuit overturned a 2005 U.S. Tax Court ruling. The decision changes the tax treatment of share-based compensation expenses for the purpose of determining intangible development costs under a company's research and development cost sharing arrangement. While Cisco was not a named party to the case, the decision resulted in a change in Cisco's tax benefits recognized in its financial statements.
Additional reconciliations between GAAP and non-GAAP financial measures are provided in the tables that follow on page 11.
| RECONCILIATION OF SHARES USED IN THE GAAP AND NON-GAAP |
DILUTED NET INCOME PER SHARE CALCULATION
|Three Months Ended||Twelve Months Ended|
| July 25, 2009 || July 26, 2008 || July 25, 2009 ||July 26, 2008|
|Shares used in diluted net income per share calculation-GAAP||5,813||6,034||5,857||6,163|
|Effect of SFAS 123(R)||27||(16)||19||(10)|
|Shares used in diluted net income per share calculation-Non-GAAP||5,840||6,018||5,876||6,153|