Cisco Systems Inc. (CSCO)
Q4 2008 Earnings Call
August 5, 2008 4:30 pm ET

Executives
Blair Christie – Senior VP of Corporate Communications
John Chambers - Chairman and Chief Executive Officer
Frank Calderoni – Chief Financial Officer
Ned Hooper – Senior VP of Corporate Development and Consumer Group
Pankaj Patel – Senior VP and General Manager of Service Provider Group

Analysts
Tal Liani - Merrill Lynch
Paul Mansky - Citigroup
Nikos Theodosopoulos - UBS
Simona Jankowski - Goldman Sachs
Jeff Evenson - Sanford Bernstein
Scott Coleman - Morgan Stanley
Mark Sue - RBC Capital Markets
Ehud Gelblum – JP Morgan
Paul Silverstein - Credit Suisse
Tim Long - Banc of America Securities

Presentation

Operator

Thank you for holding and welcome to Cisco Systems fourth-quarter fiscal year 2008 financial results conference call. At the request of Cisco Systems, today''s conference is being recorded. If you have any objections, you may disconnect. Now, I would like to introduce Ms. Blair Christie, Senior Vice President of Corporate Communications for Cisco Systems. Madam, you may begin.

Blair Christie – Vice President of Corporate Communications

Thank you Ken and good afternoon everyone. Welcome to our 74th quarterly conference call. I am Blair Christie and I am joined by John Chambers, our Chairman and CEO; Frank Calderoni, Chief Financial Officer; Rick Justice, Executive Vice President of Worldwide Operations and Business Development; as well as Pankaj Patel, Senior Vice President and General Manager of our Service Provider Group; Ned Hooper, Senior Vice President of Corporate Development and Consumer Group; and Jim McDonald, Chief Executive of our Service Provider Video Group.

The Q4 fiscal year 2008 press release is on Full National Marketwire and the European Financial and Technology Wire as well as on the Cisco website at, www.cisco.com. I would like to remind you that we have a corresponding webcast with slides. In those slides, you will find the financial information we cover during the call as well as additional financial metrics and analysis that you might find helpful. Downloadable Q4 financial statements will be available following the conference call, including revenue segments by product and geography, income statements, full GAAP to non-GAAP reconciliation information, balance sheets and cash flow statements can also be found on our website in Investor Relations section. Just click on the financial section of the website to access the slides and these documents. A replay of this call will be available via telephone from August 5 through August 12 at 866-357-4205 or 203-369-0122 for international callers. It is also available from August 5 through October 17 on Cisco''s Investor Relations website. Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results. Our commentary today will be providing information about our Q4 financial results as well as our fiscal year 2008 financial results and the results in the press release are un-audited.

As always, the matters we will be discussing today include forward-looking statements and as such are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent Annual Report on Form 10-Q and 10-K, and any applicable amendment which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. Unauthorized recording of this conference call is not permitted and I will now turn it over to John for his commentary on the quarter. John?

John Chambers -- Chairman and Chief Executive Officer

Blair, thank you very much. During the opening comments for the conference call, I will focus on what I view to be the key takeaways for Q4 and fiscal year 2008, an update on why we continue to be comfortable with our long-term growth projections of 12% to 17% and our revenue guidance going forward with the appropriate caveats. Frank will follow these opening comments with additional detail on Q4 and on the fiscal year 2008. The third section of the call will focus on business momentum and strategy from a geographic, product, and customer segment basis. Frank will then follow with additional financial parameters around our guidance. I will then wrap it up with some comments in terms of Cisco''s momentum going into Q1 and finally our Q&A session.

In this conference call, we are going to move to a more abbreviated format. For new areas or areas that have evolved, we will provide additional details in this call and in future calls. We encourage your feedback on these changes. We will cover fiscal year 2008 at this time and then cover Q4. First, from a fiscal year point of view and a financial perspective, we are very pleased with the following very solid financial results in fiscal year 2008.

Revenue was a record $39.5 billion, a 13% year-over-year increase. Cash generated from operations was $12.1 billion, a 20% year-over-year increase. Non-GAAP earnings per share were $1.56, a 16% year-over-year increase and GAAP earnings per share were $1.31, a 12% year-over-year increase.

Second, year-over-year order growth was also very solid for fiscal year 2008. Product order growth was approximately 12%. Service order growth was approximately 25%. Product book-to-billed was about 1. Third, in a year where there were a number of challenges, we were pleased with both our geographic balance and year-over-year order growth for fiscal year 2008. Our emerging countries'' focus continued with solid momentum. China order growth was approximately 30%. India order growth was 32%. Mexico had order growth of 32%, and Russia grew 23%. Brazil grew 48%. Emerging countries in Asia in total grew approximately 28%. That is our Asia-Pacific operation, not counting Korea and Australia and New Zealand. Our emerging market theater which consists of Eastern Europe, Latin America, the Middle East and Africa, and Russia and CIS grew in total approximately 19%. Asia-Pacific in total grew approximately 20%. European markets grew approximately 13%, while the US and Canada order growth was 9%. Japan grew 5%.

Fourth, from a fiscal year 2008 year-over-year product revenue growth perspective, routing revenues grew 14% year-over-year, again led by high-end routing with a CRS growth of approximately 119%. Switching grew 7% year-over-year. Our advanced technologies grew 21% year-over-year, led by Unified Communications with growth of approximately 51% and Application Networking Services with growth of approximately 36%. If, from a customer segment perspective for fiscal year 2008, enterprise public sector order growth was approximately 10% year-over-year, commercial continued strong at 20%, growth year-over-year, service providers grew approximately 10% year-over-year.

Now, moving on to Q4 fiscal year 2008, Q4 was a very solid quarter for Cisco, especially given some challenges that we are all seeing occur in the global marketplace. In terms of those areas that we can control or influence, we continue to feel very comfortable with both our progress in the quarter and our long-term differentiated strategy as we move into new market adjacencies. Again, let me review it first from a financial point of view where we were pleased with the following results in Q4. Revenue was a record $10.4 billion, approximately a 10% year-over-year increase and it was our first $10 billion quarter from a revenue perspective. Cash generated from operations with $3.5 billion. Non-GAAP earnings per share were $0.40 and a 11% year-over-year increase and GAAP earnings per share were $0.33, a 6% year-over-year increase. Non-GAAP gross margins were very solid at 65.2%. Non-GAAP operating expenses as a percentage of revenue for Q4, was 35.7%. Second, in terms of year-over-year order growth in Q4, balance was good. Product order growth was approximately 10%. Service order growth was approximately 20%. Product book-to-billed was comfortably above 1.

Third, from a geographic year-over-year order growth perspective, there were a number of positives in Q4 and a couple of challenges. Our emerging countries'' focus where orders tend to be variable, that is lumpy in my terms, continued at solid momentum and we achieved better balanced results across the majority of the emerging countries than we had seen in recent quarters. China order growth again was over 30%. India growth was approximately 20%. Mexico and Russia both had order growth above 40%. Brazil grew approximately 30%.
Emerging countries in the Asia-Pacific theater, again not counting Korea and Australia and New Zealand in the total number, in total grew approximately 23%. Our emerging market theater, which does not include Asia, grew in total approximately 10%. Asia-Pacific in total grew 19% in Q4. Japan, after a very strong Q3, grew year-over-year at 10%. European markets grew approximately 11%, while the US and Canada orders grew approximately 7%.

Fourth, from a Q4 year-over-year product revenue growth perspective, routing revenue grew 8% year-over-year again led by high-end routing with the CRS-1 growth of approximately 85%, switching grew 5% year-over-year. Our Advanced Technologies grew 15% year-over-year led by Unified Communications with growth of approximately 29% and Application Networking Services with growth of approximately 30%. This is an update of our early stage internal startups, what we call emerging technologies. Our strategy is to develop a regional, reasonable percentage of these emerging technologies into what we categorize as Advanced Technologies, with the realistic possibility of becoming one billion plus in sales and the number one market position in the respective product category that we execute properly.

Overall, progress was extremely strong in Q4. While these numbers are not significant at this point in time, we believe that with proper execution, they can become very significant to our growth ranges in the long run. Q4 was a very strong quarter for emerging technologies group and in total grew approximately 300% year-over-year. We will focus on year-over-year growth rates for the following breakouts within the emerging technologies group. TelePresence grew approximately 500% year-over-year. Digital Media Systems grew approximately 200% year-over-year and Physical Security grew approximately 250% year-over-year. Again, those are from order perspective on the emerging technologies. Six, from a global customer segment perspective, enterprise public sector orders'' growth in Q4 was approximately 10% year-over-year with the enterprise area growing approximately 13% on a global basis, and the public sector growing 4% year-over-year.