Cisco Conference Call Notes (CSCO)

Cisco Systems, Inc. (NASDAQ: CSCO) traded higher after its earnings came in not as light as analysts were expecting.  What we wanted to capture was a feel for the overall tone of things in the conference call after the company gave guidance and wanted include the Q&A session from analysts.  Here we captured the overall comments and tone of the call.  With this being such a pivotal quarter, and hopefully a stabilizing one, we wanted to cover the larger aspects of the post-earnings conference call.

As far as guidance, the company sees a drop of 17% to 20% in sales from last year’s Q4 period, which comes to an implied $8.29 billion to $8.6 billion in revenues.  Thomson Reuters has a consensus estimate of $8.26 billion.  What is more important than this notion is the overall tone CEO John Chambers signaled to listeners.

Chambers argued that this is the first time in multiple quarters where he noticed that large enterprise customers were signaling a hint of business stabilizing.  That is not a turn to the upside nor any hint of great growth ahead, but you already gathered  that by the revenue forecasts by the company.

There are also other metrics that have been noted. Cisco expects to continue cash flows of  roughly $500 million to $700 million per quarter.  Again, that compares to $2 billion in this last quarter.

The company’s gross margins are expected to be in a range of 63% to 64% and operating expenses were put at 39% to 40% of total revenues.

This drop in deferred revenue is one key concern that was brought up in the call.  You might want to see a building up here as a sign that business may get a sudden spring-load as soon as project spending improves.  This came in at $8.8 billion as of the end of the quarter, compared with $8.9 billion at the end of fiscal 2008, and compared with $9.3 billion at the end of the second quarter of fiscal 2009.

It does not appear that Cisco is going to pull the “YOU’RE FIRED!” line on employees on any major scale.  The signal is that the company can avoid serious layoffs and pay cuts.

We did not capture every single question and answer from analysts, but here are some of them.

As far as talking to global leaders, most saythat it almost has to be the U.S. that leads the world out of the economic contraction.  Chambers said he believes the U.S. can and will.  China, India, and Mexico are where Cisco is pushing the most in emerging markets right now.

As far as the product deferred revenu, that was an 8% decline in products and much larger than normal.  UBS wanted to know what this means to the book-to-bill.  The answer here is that products, services, and its distribution channel as the segments.  Part has to do with overall declines in business across the board.  The distribution partners have also been reducing inventory levels and that has affected the deferred revenues.

Credit Suisse asked about product orders off 14%, and now with a translation between the order book and revenues.  Chambers said the book-to-bill was 1.0 and services are about 22%.  Services are solid, but the area seems to be leveling out.  Chambers did say that is not an upturn, but it has to stabilize before a turn up can happen.  Chambers also said this is actually better than a quarter ago.

JPM Securities asked about the IBM and H-P relationship about how it is now and how that will change.  Chambers said partner relationships continue to evolve and there can be different partners.  H-P is going to be a competitor in some markets, and he said they have some partner and some competing interests with IBM and Microsoft.  With a track record of being #1 and #2 some partners will say that is too close, and he thinks Cisco will feel that some partners will be too close to its operation.  But he thinks competition is healthy.

Chambers also concluded that Cisco’s product introductory cycle is coming at a speed of 5 to 10 times what anyone else has done.  Chambers believes that the long term growth opportunities are very large for the company.

Cisco set the earnings date for the next quarterly (and its annual) report for Wednesday, August 5, 2009.

The conference webcast ended right after 6:00 PM EST.

-JON C. OGG