CISCO SYSTEMS, INC. Q4 FY 2004 CONFERENCE CALL

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1 CISCO SYSTEMS, INC. Q4 FY 2004 CONFERENCE CALL August 10, , Cisco Systems, Inc. All rights reserved. 1

2 GAAP Reconciliation and Forward-Looking Statements GAAP RECONCILIATION During this presentation references to financial measures of Cisco will include references to pro forma financial measures. Cisco provides a complete reconciliation between GAAP and pro forma financial information on our website at under About Cisco in the Investor Relations section. FORWARD-LOOKING STATEMENTS This presentation contains projections and other forward-looking statements regarding future events or the future financial performance of Cisco, including future operating results. These projections and statements are only predictions. Actual events or results may differ materially from those in the projections or other forward-looking statements. Please see Cisco s filings with the SEC, including its most recent filings on Forms 10-K and 10-Q, for a discussion of important risk factors that could cause actual events or results to differ materially from those in the projections or forward-looking statements. 2004, Cisco Systems, Inc. All rights reserved. 2

3 Q4 and FY 2004 Financial Highlights Q4 FY04 GAAP Net Income up 41% year-over-year FY 2004 GAAP Net Income up 23% year-over-year Q4 FY04 Net Income GAAP: $1.38B Pro Forma: $1.48B 25% Pro Forma Net Income as a Percentage of Revenue Q4 FY04 EPS GAAP: $0.20 Pro Forma: $0.21 FY 2004 Net Income GAAP: $4.40B Pro Forma: $5.34B 20% 15% 10% 5% FY 2004 EPS GAAP: $0.62 Pro Forma: $0.76 0% Q4 FY02 Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 Q1 FY04 Q2 FY04 Q3 FY04 Q4 FY , Cisco Systems, Inc. All rights reserved. 3

4 Q4 FY 2004 Operational Excellence Profits Margins Q4 FY 2004 Operational Excellence in Key Focus Areas Profitable Market Share Gains Geographic Balance Revenue Growth 2004, Cisco Systems, Inc. All rights reserved. 4

5 Q4 FY 2004 Summary Record net income and EPS GAAP Net Income up 14% sequentially; 41% year-over-year Pro Forma Net Income up 9% sequentially; 36% year-over-year GAAP EPS up 18% sequentially; 43% year-over-year Pro Forma EPS up 11% sequentially; 40% year-over-year Continued execution on profitability 9 th consecutive quarter of pro forma profit, as a percentage of revenue, above 20% Pro forma profit of 25% of revenue Strong financial metrics Gross Margin of 68.4% Pro Forma Operating Expenses at 36% of revenue Cash flow from operations of $2.1B Product revenue growth 30% year-over-year Pleased with revenue and order growth in a number of product and geographic areas 2004, Cisco Systems, Inc. All rights reserved. 5

6 Agenda Financial Overview Quarterly Overview What Went Well & Where We Can Improve Guidance 2004, Cisco Systems, Inc. All rights reserved. 6

7 Q4 FY 2004 Net Sales Net Sales of approx. $5.9B Product sales approx. $5.0B Service sales approx. $919M Revenue categories: Category Q4 FY03 Q3 FY04 Q4 FY04 Routers Switches Advanced Tech Other Services 26% 40% 12% 4% 18% 23% 41% 16% 4% 16% 24% 41% 16% 3% 16% 2004, Cisco Systems, Inc. All rights reserved. 7

8 Q4 FY 2004 Pro Forma Gross Margin Pro Forma Gross Margin down slightly to 68.4% in Q4 from 68.8% in Q3 75% 70% 69.9% 68.7% 68.5% 68.8% 68.4% 65% 60% 55% Q4 FY03 Q1 FY04 Q2 FY04 Q3 FY04 Q4 FY , Cisco Systems, Inc. All rights reserved. 8

9 Q4 FY 2004 Pro Forma Income Statement Pro Forma Net Income up approximately 9% sequentially; while maintaining healthy operating model $M Q4 FY03 Q3FY04 Q4 FY04 Net Sales 4,702 5,620 5,926 Gross Margin 69.9% 68.8% 68.4% Operating Expenses 1,945 2,147 2,134 Operating Income 1,344 1,720 1,921 Net Income 1,089 1,359 1,480 Net Income (% of Revenue) 23.2% 24.2% 25.0% Pro Forma EPS (diluted) $0.15 $0.19 $ , Cisco Systems, Inc. All rights reserved. 9

10 Reconciliation of GAAP to Pro Forma Net Income $M Q4 FY03 Q3 FY04 Q4 FY04 GAAP Net Income $ 982 $1,211 $1,380 Reconciling Items: In-process research & development Payroll tax on stock option exercises Amortization of deferred stock-based compensation Amortization of purchased intangible assets Income tax effect (33) (18) (20) Pro Forma Net Income $1,089 $1,359 $1, , Cisco Systems, Inc. All rights reserved. 10

11 Q4 and FY 2004 Financial Highlights Q4 FY04 Pro Forma Net Income up 36% year-over-year FY 2004 Pro Forma Net Income up 24% year-over-year Q4 FY04 Net Income GAAP: $1.38B Pro Forma: $1.48B 25% Pro Forma Net Income as a Percentage of Revenue Q4 FY04 EPS GAAP: $0.20 Pro Forma: $0.21 FY 2004 Net Income GAAP: $4.40B Pro Forma: $5.34B 20% 15% 10% 5% FY 2004 EPS GAAP: $0.62 Pro Forma: $0.76 0% Q4 FY02 Q1 FY03 Q2 FY03 Q3 FY03 Q4 FY03 Q1 FY04 Q2 FY04 Q3 FY04 Q4 FY , Cisco Systems, Inc. All rights reserved. 11

12 Q4 FY 2004 Balance Sheet Strong Balance Sheet Performance; 54% of Cisco s Assets in Cash and Investments $M ASSETS: Cash and Investments Accounts Receivable Inventories Property and Equipment Other Total Assets LIABILITIES & EQUITY: Liabilities Deferred Revenue Minority Interest Shareholders Equity Total Liabilities and Equity Q4 FY03 20,652 1, ,643 10,588 37,107 5,260 3, ,029 37,107 Q4 FY04 19,267 1,825 1,207 3,290 10,005 35,594 5,176 4, ,826 35, , Cisco Systems, Inc. All rights reserved. 12

13 Q4 FY 2004 Cash Flow from Operations Cisco has $19.3B in Cash & Investments Cash flow from operations of approx. $2.1B in Q4 Uses of cash may include: Stock repurchase: approx. $2.0B repurchased in Q4, a total of $16.9B since inception; $8.1B remaining in program Strategic investments Potential acquisitions Funding financing activity in Cisco Capital Note: Cash flow statement available via press release and website 2004, Cisco Systems, Inc. All rights reserved. 13

14 Weighted Average Diluted Shares 7.5B Diluted Shares Diluted Shares have decreased 7.3% since inception of Share Repurchase Program 956M Shares Repurchased vs. 195M Options Exercised 5X 6.9B Q1 FY02 Q4 FY , Cisco Systems, Inc. All rights reserved. 14

15 Share Repurchase Program Event Repurchase Program Approved for $3B FY 2002 Purchases Repurchase Program Increased by $10B FY 2003 Purchases Repurchase Program Increased by $12B Q1 FY 2004 Purchases Q2 FY 2004 Purchases Q3 FY 2004 Purchases Q4 FY 2004 Purchases FY 2004 Purchases Total amount repurchased since inception Total shares repurchased since inception Average price per share since inception Remaining funds in repurchase program Amount Purchased (M) $1,854 $5,984 $1,998 $2,036 $3,048 $1,998 $9,080 Number of Shares (M) $ , Cisco Systems, Inc. All rights reserved $16.9B 956M $17.70 $8.1B Avg Price Per Share $14.93 $14.10 $19.55 $23.99 $23.32 $22.30

16 Q4 FY 2004 Key Financial Measures Cash and Investments ($M) Q4 FY03 20,652 Q1 FY04 19,688 Q2 FY04 19,834 Q3 FY04 18,946 Q4 FY04 19,267 Accounts Receivable ($M) 1,351 1,388 2,040 1,540 1,825 Days Sales Outstanding Inventory ($M) ,121 1,207 Inventory Turns Revenue ($M) 4,702 5,101 5,398 5,620 5,926 Sequential Growth % 2% 8% 6% 4% 5% Deferred Revenue ($M) 3,808 3,707 4,065 4,357 4,502 Headcount 34,466 34,237 34,093 34,307 34,371 Sequential Growth % 0% (1%) 0% 1% 0% 2004, Cisco Systems, Inc. All rights reserved. 16

17 Agenda Financial Overview Quarterly Overview What Went Well and Areas of Concern Guidance 2004, Cisco Systems, Inc. All rights reserved. 17

18 Q4 FY 2004 Geographic Product Bookings EMEA 30% U.S. 48% Asia/ Pacific 11% Japan 7% Americas Int l 4% 2004, Cisco Systems, Inc. All rights reserved. 18

19 Agenda Financial Overview Quarterly Overview What Went Well and Areas of Concern Guidance 2004, Cisco Systems, Inc. All rights reserved. 19

20 What Went Well US Enterprise & Commercial sequential order growth in mid teens US Service Provider sequential order growth in high teens Year-over-year total revenue growth of approx. 26% Good order growth balance Enterprise and Service Provider up low double digits sequentially, Commercial up mid-single digits sequentially Good year-over-year order growth balance across geographic theaters 2004, Cisco Systems, Inc. All rights reserved. 20

21 What Went Well Continued momentum in Advanced Technologies IP Telephony revenue up 15% sequentially - shipped approx. 470K phones Wireless revenue up 15% sequentially and 45% y/y Storage revenue up 41% sequentially and approx. 180% y/y Optical revenue up 8% sequentially and 16% y/y Security down 2% sequentially and up approx. 45% y/y Networked Home down 5% sequentially; best estimate up approx. 60% y/y Cash flow from operations of $2.1B and record pro forma and GAAP earnings Modular and fixed switches with sequential order growth in mid-teens; GSR revenue grew over 40% sequentially 2004, Cisco Systems, Inc. All rights reserved. 21

22 Areas of General Concern / Challenges CEOs a little more cautious in their optimism than a quarter ago given the recent economic data points Continue to be aggressive in taking business risks Lower lead times are likely to result in more exposure to order seasonality Maintain normal concern and focus on competitors Network evolution strategy & business partner model not fully embraced by all competitors Capital spending linked to GDP growth 2004, Cisco Systems, Inc. All rights reserved. 22

23 Agenda Financial Overview Quarterly Overview What Went Well and Areas of Concern Guidance 2004, Cisco Systems, Inc. All rights reserved. 23

24 Macro Guidance for Q1 FY 2005 We tend to follow our customers guidance of a little more caution in their optimism about their business Q1 is a seasonally weaker quarter for Cisco; especially in Europe Q1 increase in US Federal may not be as much as in prior years due to government spending becoming more balanced throughout the year Our revenue guidance for Q1 in comparison to Q4 is flat to up slightly 0% to 2% 2004, Cisco Systems, Inc. All rights reserved. 24

25 Pro Forma Guidance for Q1 FY 2005 REVENUE: flat to up 2% sequentially; up 16 18% y/y GROSS MARGIN: approx % OPERATING EXPENSES: up approx. 2 4% in terms of dollars, due to additional headcount from hiring & acquisitions INTEREST AND OTHER INCOME: approx. $120M TAX RATE: 28% SHARE COUNT: flat to down approx. 30 million shares CASH FLOW FROM OPERATIONS: $300M $600M per month at current revenue levels 2004, Cisco Systems, Inc. All rights reserved. 25

26 Guidance Reconciliation for Q1 FY 2005 We anticipate Q1 FY 2005 GAAP EPS will range $0.01 $0.02 per share lower than pro forma EPS due to ongoing amortization of purchased intangible assets and deferred compensation costs arising from various purchase acquisitions. These charges will be reported as GAAP operating expenses. Guidance assumes no additional acquisitions, asset impairments, restructuring or other unanticipated events which may or may not be significant. 2004, Cisco Systems, Inc. All rights reserved. 26

27 Q4 FY 2004 Summary Record net income and EPS GAAP Net Income up 14% sequentially; 41% year-over-year Pro Forma Net Income up 9% sequentially; 36% year-over-year GAAP EPS up 18% sequentially; 43% year-over-year Pro Forma EPS up 11% sequentially; 40% year-over-year Continued execution on profitability 9 th consecutive quarter of pro forma profit, as a percentage of revenue, above 20% Pro forma profit of 25% of revenue Strong financial metrics Gross Margin of 68.4% Pro Forma Operating Expenses at 36% of revenue Cash flow from operations of $2.1B Product revenue growth 30% year-over-year Pleased with revenue and order growth in a number of product and geographic areas 2004, Cisco Systems, Inc. All rights reserved. 27

28 Forward-Looking Statements These presentation slides and the related conference call contain forward-looking statements, which are subject to the safe harbor provisions of the Private Litigation Reform Act of These forward-looking statements include, among other things, statements regarding future events and the future financial performance of Cisco that involve risks and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including: business and economic conditions and growth trends in the networking industry in various geographic regions; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; the growth of the Internet and levels of capital spending on Internet-based systems; variations in customer demand for products and services, including sales to the service provider market; the timing of orders and manufacturing lead times; changes in customer order patterns or customer mix; insufficient, excess or obsolete inventory; variability of component costs; variations in sales channels, product costs or mix of products sold; the ability to successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses and technologies; increased competition in the networking industry; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; manufacturing and sourcing risks; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters; the ability to recruit and retain key personnel; our ability to manage financial risk; currency fluctuations and other international factors; potential volatility in operating results and other factors listed in Cisco s most recent reports on Form 10-K, 10-Q and 8-K. The financial information contained in these presentation slides and the related conference call should be read in conjunction with the consolidated financial statements and notes thereto included in Cisco's most recent reports on Form 10-K and Form 10- Q, each as it may be amended from time to time. Cisco's results of operations for the three and twelve months ended July 31, 2004 are not necessarily indicative of Cisco s operating results for any future periods. Any projections in these presentation slides and the related conference call are based on limited information currently available to Cisco, which is subject to change. Although any such projections and the factors influencing them will likely change, Cisco will not necessarily update the information, since Cisco will only provide guidance at certain points during the year. Such information speaks only as of the date of the presentation slides and the related conference call. 2004, Cisco Systems, Inc. All rights reserved. 28

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