Highlights From CSCO's Q3 Conference Call: Sees Q4 Revenues Down 17-20% Y-o-Y, Issues Q4 GAAP EPS Guidance

Last night, Cisco Systems (Nasdaq: CSCO) reported Q3 EPS of $0.30, 5 cents better than estimates. Revenues were $8.2 billion vs. the consensus of $8.07 billion. Shares are down approximately 5% today.

Highlights From CSCO's Q3 Conference Call:

• (Chairman/CEO) In terms of those areas that we can control or influence, we continue to feel very comfortable with our long-term vision and differentiated strategy as we move into these new market adjacencies and prioritize our existing opportunities.
  
• We are pleased with our progress in aggressively managing our expenses and being close to exceeding our stretch goal of reducing the total annualized expense run rate by 1.5 billion.
  
• We repurchased 1.2 billion of stock during the quarter.
  
• TelePresence, which had another outstanding quarter growing over 70% year-over-year in terms of orders and over 130% in terms of revenues year-over-year with 45 new customers in Q3 and approx 400 new system orders.
  
• Perhaps the most important takeaway from this quarter in my opinion is our ability to execute and innovate in 29 new market adjacencies, combined with very solid operational execution to accomplish these ambitious stretch goals while at the same time dramatically reducing expenses.
  
• It would not be a major surprise to see the numbers vary either on the positive or negative side of revenue guidance that we provide for Q4.
  
• Our revenue guidance for Q4 including our usual caveats as discussed earlier in our financial reports is for revenue to decrease in the 17 to 20% range year-over-year in Q4.
  
• (CFO) Total revenue for Q3 was $8.2 billion, a decrease of approximately 17% year-over-year, within our guidance for the quarter of minus 15 to minus 20%. Total service revenue was $1.7 billion, up approximately 9% year-over-year with solid growth across our geographic theaters.
  
• Revenue from our recurring revenue streams represented approximately 23% of our total revenue mix this quarter versus 20% last quarter. Total product revenue was $6.4 billion, down approximately 22% year-over-year.
  
• Switching revenue was $2.6 billion, a decrease of 20% year-over-year. Modular switching revenue was down 22% year-over-year while fixed switching declined 17% year-over-year. Routing revenue was $1.4 billion, down 32% year-over-year representing a decrease of 36%, 25% and 23% year-over-year in high-end, midrange, and low-end, respectively.
  
• Deferred product revenue was $2.7 billion a decrease of approximately 6% year-over-year while deferred service revenue was $6.1 billion, up approximately 6% year-over-year.
  
• During the quarter we took a number of actions including reducing travel by approximately 50% compared to Q2, centralizing procurement activities to optimize our buying power, and aligning select core business processes for greater efficiency.
  
• (CEO) In other global customer environments, enterprise and service provider orders were both down by 27 and 33%, respectively on a global basis. Consumer was down by 19%. The commercial market was down by 31%.
  
• In emerging markets, not counting emerging markets in Asia, were down by 31% year-over-year. Enterprise was down in the low 20s, service provider was down in the mid-30s, commercial was down in the mid-30s.
  
• (CFO) We anticipate total revenue for the fourth quarter to be down approximately 17% to 20% year-over-year.
  
• We believe total gross margin in Q4 to be in the range of 63% to 64% reflecting the revenue guidance I just gave.
  
• For our Q4 FY '09 GAAP earnings, we anticipate that Q4 GAAP EPS will be $0.05 to $0.07 per share lower than the non-GAAP EPS, primarily due to acquisition charges and stock compensation expense.
  
• We have come to the decision at this point in time that the realignment and restructuring resources to new opportunities is the most effective way, rather than a large across the board layoff, to position us for the future.
  
• (Q&A) I have a question on - I am sure that other people will ask about expenses. I want to focus on the revenue side. Embedded in your guidance is growth in switching. Switching went down sequentially 16% two quarters ago, another 16, roughly 16% this last quarter and the embedded growth in the guidance is in the neighborhood of three to 5%. What is driving switching down so much? It's above and beyond every other - the trends we are seeing in every other division and why do you think next quarter we're going to see such a nice recovery? Thanks.
• Hi, thank you very much. John, acquisitions have always been a big part of your growth strategy and you have in fact commented again on numerous occasions in the last twelve months on that remaining the case, but it's interesting that when we look back at that period your cash flow generation has been some of the strongest it's ever been and valuations have been some of the lowest they've ever been and yet you made the fewest acquisitions you've ever made in such a period of time. So, can you just comment on why that is? And then related to that, with the UCS now launched, should we assume that the focus of your acquisitions going forward may be more in the video and home virtualization side or are there still pieces of the data center strategy that need to be filled out?
  
  

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