Cisco CEO John Chambers and CFO Dennis Powell Discuss Q3 Fiscal Year 2004 Results
May 14, 2004
Cisco has announced its Q3, Fiscal Year 2004 financial results. John Chambers, president and CEO, and Dennis Powell, CFO and senior vice president, had the following to say regarding the company's results and business outlook.
How would you characterize this most recent quarter?
John Chambers: We are pleased to have achieved record earnings per share this quarter-marking our eighth consecutive quarter with pro forma net income exceeding $1 billion, and the strongest cash flow from operations in the company's history.
We were very pleased with almost all of our operational measurements for the quarter-with a good balance in terms of our focus on profit contribution, net income, gross margins, profitable market share gains, geographic balance, Advanced Technologies and revenue growth. We were pleased with our Q3 revenue results of $5.6 billion, a 4 percent sequential quarter-over-quarter increase and year-over-year product revenue growth of approximately 25 percent. This represents the fourth quarter in a row with a sequential revenue growth. We continue to believe we have uniquely positioned Cisco in the market as the recovery continues to gain momentum on a global basis.
Did you see momentum in your core technologies and Advanced Technology markets?
John Chambers: Our record-setting earnings per share and profits were achieved through sequential order growth across all major product categories and solid progress in our Advanced Technologies including the areas of security, wireless LAN and IP telephony. Order momentum continued to be very strong for our major routing and switching product categories, with year-over-year growth of approximately 80 percent and sequential growth of approximately 13 percent for Advanced Technologies. Additionally, we are beginning to see a very good balance between the enterprise, commercial and service provider market segments in terms of order growth both sequentially and year-over-year.
The top three areas that generated the most interest in our enterprise accounts are security, wireless and IP telephony. This quarter, security revenue rose sequentially in the mid teens and both wireless and IP telephony rose sequentially a little over 20 percent. In the IP telephony area we also shipped our 3 millionth phone. To put this in proper perspective, it took us over 30 months to ship our first million phones, it took approximately 13 months to ship our next million phones, and in the last eight months, we shipped our next million phones.
During this quarter, where did Cisco see geographic strengths?
John Chambers: We were very pleased with the growth that occurred in terms of orders in the US enterprise and commercial market segments. Order growth in these segments represented the first major growth, adjusted for normal seasonality, that we have seen in a very long time with a good balance across all verticals. CEO opinions continue to show increasing optimism toward the economy and toward their own industries and companies. Time will tell if this momentum continues, but we were obviously pleased with this quarter from a US enterprise/commercial perspective.
In EMEA, Cisco saw order growth in the low double digits. In terms of major operations, the UK led the way in terms of sequential order growth in the 20 percent plus range, followed by Northern Europe in the low double digits. There was also solid sequential growth in Germany in the high single digits, which was the best we've seen in terms of sequential growth in over two years.
Japan increased from 7 percent in Q2 to 8 percent of our business, and had very solid sequential order growth of approximately 20 percent. Asia Pacific, represented a 10 percent of our total bookings with a slowing of orders in China, Hong Kong, and Taiwan from a sequential perspective due primarily to seasonal factors, although year-over-year growth in these areas remains solid. We saw good sequential order growth in India and other parts of Asia. In Americas International, after two strong quarters of double digit growth, Q3 growth continued in the high single digits. Canada posted the best sequential order growth rate of the large countries in Americas International, in the high teens.
In the coming year, where do you intend to focus your partnership and investments and acquisition strategies?
John Chambers: In the next year, we expect we will be increasingly active in acquisitions and investments and we will continue to grow our investment in our partners. We've identified a number of existing and adjacent markets that offer strong growth opportunities for Cisco across the service provider, enterprise and consumer markets, that include voice, security and video. Our alliance activity will focus on increasing the adoption of our Advanced Technologies and driving our service provider alliances.
What is your acquisition strategy?
John Chambers: As Dan Scheinman, our senior vice president of Corporate Development said on today's call, Cisco's fundamental acquisition strategy remains unchanged, and we will continue to take strategic risks. First, the ability to integrate and link acquisitions with Cisco's internal innovation and deep customer knowledge allows us to create multiple generations of products and technology leadership, including LAN switching, telephony and security. Second, acquisitions can provide unique ways to support new business models. For example, Linksys allowed Cisco to quickly and successfully enter the consumer market, while supporting a significantly different business model. Finally, we acquire to augment and enhance our current Advanced Technology strategy which includes the following spaces, such as security and IP telephony.
Have your recent acquisitions been successful?
John Chambers: The acquisitions we've made over the past two-and-a-half years have grown at almost 60 percent within the last year, and we believe have solid potential for growth going forward. What has changed recently is that we are seeing high quality teams, at more favorable prices, and at a much stronger point in their development cycle. In all, we expect that we will be busy over the next 12 to 18 months focused on creating more value for Cisco shareholders.
Q&A: Dennis Powell On Cisco's Q3 Financial Position
You have set forth three long-term financial priorities, can you provide an update?
Dennis Powell: Cisco's results this quarter are reflective of our continued focus on our three long-term, key financial priorities. First, we continued to generate profitable growth, as evidenced by our increase in revenue of 22 percent year-over-year, and our pro forma profit increasing 26 percent year-over-year and representing 24 percent of revenue. Second, I am pleased with our progress to date on Cisco's productivity, as measured in terms of pro forma operating expense as a percentage of revenue, at 38 percent quarter to quarter. However, we remain committed to our longer term objective to achieve 35 percent of operating expense as a percentage of revenue. Finally we maintained our healthy and conservative balance sheet, and we continue to effectively manage our working capital, helped by our strong cash flow from operations.
GAAP net income increased 67 percent quarter-over-quarter, while pro forma net income was up only 3 percent--why such a large difference between the two?
Dennis Powell: GAAP net income was impacted in Q2FY04, due to an accounting charge related to the acquisition of Andiamo. The $567 million, non-cash variable stock compensation charge was taken at the end of Q2FY04. As a one-time charge, the charge from this accounting change was not included in our Q2 pro forma results, however it impacted Q2 GAAP earnings by $.08 per share, and accounts for a significant portion of the difference between Q3 and Q2 GAAP net income results. This is a good example of why we offer pro forma results as a supplemental measure to provide greater transparency to our financial results.