Cisco Q1 FY09 Performance

John Chambers, Chairman and CEO, and Frank Calderoni, CFO, speak with CNBC and Bloomberg News about Cisco’s Q1 FY 09 financial results.

How would you characterize the strength of the quarter, and the strength of the company as a whole?
John Chambers says: “We exit the first quarter of fiscal year 2009 with an extremely strong position in the marketplace. We have approximately $27 billion in cash and investments. We also have solid balance from a product, geographic and customer segment perspective, which we consider perhaps one of the broadest balances across the IT industry. We have achieved continued success in being the number one or number two player in most of our 20+ targeted product areas.

We continued to drive an innovation engine that results in product leadership across the broadest range of products that we have had in our history, combined with a product pipeline of new innovations that we believe is also the strongest we have had. Not only is our end-to-end technology architecture, from the device to the data center across any combination of networks, enabling the next generation of entertainment and business models, but we also have what we believe to be the strongest position in terms of customer relationships at the enterprise and service provider level in helping to enable our customers’ business goals.

Just as we led in the first phase of the Internet, that is, Web 1.0, in both internal utilization and the expertise we offered our customers to enable this capability, we believe we are now uniquely positioned to provide very similar leadership in the second phase of the Internet, through collaboration enabled by networked Web 2.0 technologies. Once again we are leading in terms of our own utilization and partnering with our customers to drive their goals of changing business models enabled by the network.”

How will Cisco address the current financial and global economic challenges?
John Chambers: Just as we have done in prior challenges, we will implement action plan for dealing with these challenges while following our playbook for economic downturns. The game plan for the current downturn will have six major points.

Our six-point plan is:

  • Vision/Strategy/Execution Model. Fabric for implementation/success. First, we believe our vision of how the industry will evolve is being driven by the increasing role intelligent networks will play as all forms of communication and IT are enabled by the network. Our differentiated strategy enabled by networked collaboration is allowing us to move into market adjacencies with tremendous speed, scale and flexibility. Cisco will remain focused on both the technology and business architectures to enable our customers’ objectives. In short, our vision/strategy/execution model is working well and we plan to stay focused on continuing to expand our approach.
  • Collaboration/Web 2.0 driving future growth and productivity. Second, we will continue our rapid expansion of collaborative technologies and new business models in both our product architectures and our own internal IT implementation. We plan to quickly realign resources to focus on over two dozen market adjacencies that will loosely then tightly come together with our core technologies. And, we will be the best example of using Web 2.0 technologies such as TelePresence, WebEx, wikis, blogs, discussions forums, widgets, etc. in an architectural process-driven approach that drives productivity.
  • Resource management and realignment. Third, through our councils and boards structure, we have already realigned over $500 million of resources to these opportunities. Beginning in the second quarter, our goal is to realign another $500 million of resources while at the same time reducing our expenses for fiscal year 2009 by over $1 billion from our original budget. Our goal is to achieve these changes by the end of the fourth quarter of fiscal year 2009. This includes a pause on hiring, as well as reductions in travel, off site meetings, outside services, equipment, events, prototypes, marketing and other activities.
  • Aggressive in strategy. Prioritize and Execute. Fourth, we will also be bold in taking good business risk during this downturn to build on market transitions, opportunities, and put our many assets to use in existing and new markets as the recovery occurs. We will prioritize the top five objectives of both the company and each of our councils and boards. We will then align resources to these top objectives. The top objectives for the company are:
    • Next generation company and next generation customer relationships-what we call Cisco 3.0 internally;
    • Collaboration/Web 2.0;
    • Data center/virtualization;
    • Video;
    • Globalisation.
  • Investment in U.S. and Selective Emerging Countries. Fifth, we intend to invest aggressively in two geographies: the U.S. and selective emerging countries. In our opinion, the U.S. will be the first major country to recover. The strategy on emerging countries is simple. Over time we expect the majority of the world’s GDP growth will come from the emerging countries. In expanding these relationships during tough times, our goal is to be uniquely positioned as the market turn-around occurs. This is identical to what we did during Asia’s 1997 financial crisis.
  • Power of the Network as the Platform-Driving the Future of Communications/IT. Finally, we will remain focused on our stretch goal of evolving into the top communication and IT company which will be enabled by the expanding role of intelligent networks. This could be the definition of a very successful implementation of our six-point plan after the inevitable upturn occurs.

What are some of the financial specifics for the first quarter 2009?
Frank Calderoni says: “Total revenue for the first quarter was $10.3 billion, an increase of approximately 8% year-over-year.

Switching revenue was $3.6 billion, an increase of 8% year-over-year driven by growth in both our modular and fixed switching portfolio.

Routing revenue was $1.9 billion, up 1% year-over-year.

Advanced Technologies revenue totaled $2.7 billion, representing an increase of 17% year-over-year.

Other product revenue totaled $442 million, a decrease of 13% year-over-year, related to our optical and cable business this quarter.

Total service revenue was $1.7 billion, up 10% year-over-year with solid growth in Emerging Markets. We are pleased with our growth in advanced services of approximately 15%.

GAAP net income for the first quarter was $2.2 billion, flat compared to $2.2 billion in the first quarter of fiscal year 2008.

GAAP earnings per share on a fully diluted basis for the first quarter were $0.37, up from $0.35 in the same quarter of fiscal year 2008.

Non-GAAP net income for the first quarter of fiscal 2009 was $2.5 billion, flat year-over-year. As a reminder in the first quarter of fiscal year 2008 we recorded a one-time tax benefit of $162M.

Non-GAAP earnings per share on a fully diluted basis for the first quarter were $0.42, up from $0.40 in the first quarter of fiscal year 2008, a 5% increase year-over-year and our highest earnings per share to date. The one-time tax benefit in the first quarter fiscal year 2008 was approximately $0.03 per share.

Total gross margin by geography ranged from 63.4% for Emerging Markets to 69.0% in Japan this quarter. Across the geographies the margins have remained relatively stable over the last few quarters.

Interest and other income was $123 million for the first quarter, including the recognition of realized gains, losses and impairments. We remain very pleased with our diversified, high quality cash and investments portfolio.”


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