Cisco Systems Earnings Call Insights: Purchasing Decisions and Gross Margins Outlook

Cisco Systems (NASDAQ:CSCO) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Purchasing Decisions

Ittai Kidron – Oppenheimer: John, as we went through the last three weeks and listened to every one of your competitors things didn’t seem as rosy as you see them. Now clearly, you are taking business away and you’re executing to a higher level than others. But what is it that you are seeing on the enterprise side in the U.S.? You’ve highlighted that vertical specifically in the past as very critical for the continued recovery process. How are you seeing purchasing decisions being executed over there? Are you seeing some delays and also if you can revisit your perspective on Fed is there a bottom for that pit?

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John T. Chambers – Chairman and CEO: In sequence, first, thank you very much for the compliment on behalf of us all here at Cisco. In terms of what is changing the market, our architectural approach tying together our products to solve our customer’s top proprieties quicker than anyone else is regaining traction. That’s especially true in enterprise where brands, team focuses on selling to the business customer in conjunction with the CIO and meeting CEO’s top priorities. In terms the momentum there, the pipeline looks good. Pipeline actually increased Rob again faster than natural growth this quarter and is well over $2 billion for Brian’s group alone. The number of large deals Ittai, are actually increasing. However, you are seeing a little bit slower rate in bringing the deals home, which is a nice way of saying, you’re going to have more opportunities and it might come in pieces versus before. In terms of commercial, where you really look at what Alison has done, leading our Group, that’s 13% growth year-over-year, and it’s probably an even more accurate indicator of economic potential in the U.S. looking out a couple of quarters, and we’ve seen this trend interestingly enough, improve steadily in both enterprise and commercial for four quarters in a row. Alison grew at 13%, but again she sells solutions not routers or switches or data center or UCS type solutions. Service provider was very strong. Michael’s team did very well there, 8% core growth, 2% from NDS, making 10% growth and you’re seeing our relevance to the large players, the AT&T, the Verizons, the Time Warners to Comcast continue to be very solid and really make a difference. So, I like the trends in the U.S. The state and local business, as you all know, almost two, two and half years ago was the start of the decline that unfortunately we experienced first and shared with the market and fast forward two years later, you’re starting to see it lead the upturn. The Federal business will be a market share change. It’s who is able to really make a difference to this market, but if you look, we experienced our slowdown a couple of quarters ago in federal and now you’re at a minus 3%, but I think you will see some of the FX make this a difficult growth market. So, we’re focused on building relationships and maintaining value. So, I guess the key takeaway and Rob, we saw this last night at a dinner with one of the large boards of big global multinational bank and the day before with a global search provider and they bring their whole boards to Cisco now as we focus on business transformation. Our ability to bring innovation to them. Our ability to take the CEOs top five goals and make a difference in their ability to achieve all the top five goals in ways that others are not, and I think what you’re beginning to see Ittai is a transition for us moving from a communications company selling boxes five or 10 years ago to being a solutions company selling (NYSE:IT) to our customers. So if I were to summarize, I think the U.S. was the example of what we want to do in the future and I think it is also a positive trend and probably what you are going to see in the second half of year from economic growth.

Gross Margins Outlook

Mark Sue – RBC Capital Markets: If I think about one of the reasons why the multiple in (text box) and in ComTech in particular why they have been compressing, it’s been the lack of pricing power and the declining gross margins. There were deals in the past, such as China, where you took a margin hit, since they were strategic, now you are saying – now you are doing the opposite which is walking away from set-top deals, which are not, only now at a point of structural changes for the industry. You are going from selling boxes to selling solutions so that rational pricing can prevail and are we now at a point where these things give you confidence that your (need) on gross margins can actually improve further from here?

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John T. Chambers – Chairman and CEO: So in reverse sequence, the gross margins we like the 61%, 62% range and I’d encourage people not to get above that. But we clearly have done there a huge amount of work across the whole Company on focus on gross margins and the direction. If you sell solutions and IT solutions to the CEOs top priorities, you have earned a major premium. If you’re dealing with a standalone switch or a standalone server and competing purely on a reverse option RFP type of response the margins are very low. But I think what it does speak much to what you are alluding to, our ability to maintain and to add value to our customers as its on very strong ground even in the datacenter where most people thought we could ‘not compete’ and not get good margins on market share and we were obviously very successful in all three. So, I think it’s a combination, I would not encourage you to move the models around in terms of your gross margins on that. We’re doing a better job of getting software in, a better job of getting value for our ASICs. Frank, you wanted to add something else?

Frank Calderoni – EVP and CFO: Mark, as we talked about, I mean the whole thing we look at gross margin and overall profitability as a the portfolio play, not only to the current, but also the long period of time, and we want to make sure that we have the flexibility to make trade-offs. So, as we talked about today set-top box is an area, we’re making some trade-offs. There’s other parts of the portfolio we’ll continue to make trade-offs. In the range of gross margin as I talked about back in December, looking at 61 to 62 over the long-term and there could be some things that could factor it in on the positive side, as we continue to kind of look at investments in the software area. There’s things that could also kind of be more challenging on the lower side. So, there’s always going to be that balance that we’re going to work to in the portfolio and we want to stay reasonable with that kind of range over that longer period of time, and the overall focus for us is bottom line profitability.

A Closer Look: Cisco Earnings Cheat Sheet>>