Cisco Systems Inc Q1 2016 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Vijay Bhagavath - Deutsche Bank Securities - Analyst : Thanks. Hi, Chuck. I took over the practice from Brian Modoff, so looking forward to working with you and your team. Chuck, my question is around, we had done independent checks and had noted near-term weakness in US enterprise. Like to get your qualitative color. I know you work very closely with the sales teams and also with some of your bigger customers.

Question: Vijay Bhagavath - Deutsche Bank Securities - Analyst : My question was around we did independent checks with the channel who had noted near-term order weakness, US Enterprise in particular. Could you give us qualitative color from your end? Is it just endemic weakness, customers just pushing out because their own near-term fundamentals are weak, like the US industrials? Or is it relating to any indecision around migration to public clouds? I'd like to get your commentary on the weakness in the enterprise. Thanks.

Question: Simona Jankowski - Goldman Sachs - Analyst : I wanted to ask you a couple of questions on margins. First, they came in pretty strong in the quarter even though routing was weaker, and that tends to be a higher margin product line. So, just curious what drove that upside. And the bigger question related to that, Chuck, is that you've had margins exceeding expectations for a few quarters now, and in the meantime your growth is decelerating quite a bit here. Some of that is REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 12, 2015 / 9:30PM, CSCO.OQ - Q1 2016 Cisco Systems Inc Earnings Call driven by FX and international issues. Do you feel like you're dialing that equation sufficiently in the direction of revenue growth versus margin preservation?

Question: Mark Sue - RBC Capital Markets - Analyst : If I look at it at a high level, the Company has gone through many rounds of layoffs and reorgs. And we've seen this impact other tech companies such as IBM and HP. Having said that, do you feel that we should see some accelerated innovation coming out of Cisco as we look towards the back half -- product catalyst, for example, pipeline of innovation? If you could give us those positive things to look for in the second half. Thank you.

Question: Jim Suva - Citigroup Global Markets - Analyst : Thank you very much. And congratulations to you and your team. My question is, I believe, unless my memory is wrong, that you had a long-term organic sales growth rate of about 3% to 6%. I think that might have been the case. And the outlook now is 0% to 2%. Can you help us understand or quantify, is some of this due to FX? And how much? And it looks like probably service providers is also driving that down, so maybe Ericsson, new partnership you have, can help out at some point. Just help us bridge the gap of the 0% to 2% outlook for the next quarter versus your long-term goal of 3% to 6%. Thank you.

Question: Tal Liani - BofA Merrill Lynch - Analyst : Yes, hi. I have two questions and I'll ask them, hopefully you can answer at least a part of the second one. Switching was very weak the past few quarters on the sequential basis. It was sub seasonal last quarter also. But this quarter was very strong. And I'm wondering if you can give a little bit of color on what's going right and what's going wrong, and how sustainable is the strength in switching. And the second question, which is related but not related, your service growth is below your product growth, if I sum up the last four quarters. You mentioned it a little bit at the beginning of your opening comment so if you can just clarify why is it happening. Thanks.

Question: Pierre Ferragu - Sanford C. Bernstein & Co. - Analyst : Hi, Chuck, thank you for taking my question. I'd like to come back on your gross margin. You're up more than 1 point sequentially, 1 point above what you had guided for. And at the same time, you have subscription and licensing deferred revenues are up very significantly, I think 36%. My first question would be, could you give us a bit of a breakup of what are the important drivers of the positive surprise on gross margin. And then my second question is when I look at your guidance on next quarter, you guide 62% to 63%, this is going to be exiting the set-top box business. So, from like a 63% level this quarter it almost feels like not a very challenging guidance. Ar am I missing maybe some kind of sequential headwinds on that number? Thank you.

Question: James Faucette - Morgan Stanley - Analyst : Thank you very much. Just a couple of questions. First, Chuck, just wondering if you can give a little more color on routing. If I'm understanding you correctly, it sounds like there may just be some timing issues that made the first quarter, the October quarter, look a little weaker, but you expect that to bounce back strongly. And maybe you can give a little color on outlook how we think about routing developing as we go through calendar 2016. And then my second question is somewhat related. Just trying to get a sense for how we should think about security. I know that's been a sector or segment that's been growing slower than the market. It's clearly a point of emphasis for Cisco. Just wondering how we should think about that and your efforts there starting to manifest themselves. Thank you.

Question: Brent Bracelin - Pacific Crest Securities - Analyst : I'll squeeze in two and we'll go from there. Chuck, for you, real quickly, APAC growth 3%. That's the best growth rate we've seen in two years. What's driving the reversal in APAC relative to orders this quarter? And then, Kelly, if you could talk a little bit more about this shift to software subscription accelerating. What does that mean from a revenue growth standpoint for your guide? And obviously with op margins at the highest in nine years, what does that mean from an op margin perspective?

Question: Jeff Kvaal - Nomura Securities International - Analyst : Thanks very much. I wanted to throw my two in, as well. Chuck, maybe this is less of a question than giving you an opportunity to talk about the second half. It sounds like you have a few irons in the fire that you're excited about. I'm cognizant that new product introductions usually take two-plus quarters to get going. So, I imagine there's something else up your sleeve there a little bit. And then, Kelly, I was wondering, could you help us perhaps understand a little bit in more detail the impact of the mixed shift to subscription billing, how much that is costing you in terms of revenue growth, and when you think that it may normalize so that the revenue growth matches the deferred revenue growth? Thanks.

Question: Victor Chu - Raymond James & Associates - Analyst : Hi this is Victor Chu in for Simon Leopold. I'd like to ask about trends in the public cloud migrations. Some of the networking names that we follow have recently begun to flag the migration of applications from enterprise data centers to the public cloud as a secular headwind to their core business. Can you speak to the trends that you've observed and how that's impacting Cisco or how you envision that impacts your results going forward?

Question: Tim Long - BMO Capital Markets - Analyst : Thank you. Just to head back to switching for a minute. A two-parter. On the campus side, it sounds like that was pretty strong in the quarter, as well. What are you seeing? Is it Wi-Fi? What are you seeing drive that and how sustainable do you think it is? And then on the data center side it sounds like regaining some market share there. What do you think is helping with the greater-than-industry growth rate that you're seeing currently from the likes of the 3K, the 9K, and ACI? Is it platform? Is it performance? What do you think is driving that? Thank you.

Question: Jayson Noland - Robert W. Baird & Company, Inc. - Analyst : Okay, great, thank you. Chuck, I wanted to ask you to comment on the storage market given the acquisition of EMC or the planned acquisition of EMC. Do you need to own storage IP? Or maybe the better questions is, does it make sense for Cisco to own some storage IP given the pace of innovation in storage and your success with UCS? Or is status quo the best plan forward from here?

Question: Paul Silverstein - Cowen and Company - Analyst : Thanks. Chuck, you mentioned that your largest webscale customers were up by over 20% again this quarter. It implies that's been the historical trend, but that's the question. What that been the historical trend? Is that the right number? -- if you'd give us insight on that. And then I've got a question about OpEx as a percentage of revenue going forward for Kelly. What we should expect? Is there more you could do in terms of further improvement? And, finally, just quickly, employee turnover, both desirable and not desirable, can you update us on that? Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 12, 2015 / 9:30PM, CSCO.OQ - Q1 2016 Cisco Systems Inc Earnings Call

Question: George Notter - Jefferies LLC - Analyst : Hi. Thanks very much, guys. Earlier you gave a customer count number on the Nexus 9000. I was curious about the ACI version of that product. It's a number I think you've given in the past. And then and also I wanted to dig down into currency a little bit more. Kelly, I think you gave a nice comment on the translation impact on currency. I think there was some comments about Asia and some of the transactional impact, as well. But, just digging into your numbers historically, particularly on the BRIC countries, I get the sense that the BRIC countries, some of them, like Brazil and Russia, where you've had a real severe impact, you've seen the big down comparisons for a period of time now. I'm wondering, do you hit a bottom in some of those areas of the world and the foreign exchange currency impact starts to come off over time? How big is the impact and when does it come off, is the question?