Cisco Systems Inc Q1 2017 Earnings Call Transcript

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

Question: Ittai Kidron - Oppenheimer & Co. - Analyst : Chuck, I want to talk a little bit about the product mix between the divisions. The switching results are very disappointing. Clearly the wireless is now declining. Data center, and I have been asking you about data center for three quarters in a row and it's still not delivering and you've had changes in the leadership over there as well, which suggests still not where it needs to be. I guess I'm trying to gauge how much of the challenges that you are seeing here right now, in your opinion, are macro driven versus perhaps portfolio driven, because it seemed like a lot of competitors in some of these areas are actually doing very well in switching, for example, and (inaudible) and wireless, HP, even in the data centers doing well, (inaudible) clearly doing well. These are key major areas for you and we're seeing revenue decline. Help us understand kind of a little bit of what's going on under the surface here and what is it that makes you feel comfortable that there's no big problem. On the flip side, is there anything on the portfolio side that you think could turn the tide here?

Question: Vijay Bhagavath - Deutsche Bank - Analyst : Oh, yes, I'm here. I'm sorry, I was talking to myself on mute. Yes, so once again, a replay. Hi, Chuck, Kelly. In some sense, the January quarter guide is a snapshot in time and it lags what CEOs, CIOs could be thinking latest in terms of their spending intentions for the New Year. My question for both of you is in your latest cause for business leaders, post elections in particular, has CEO/CIO sentiment here in the US in particular improved in your view? Where do you think would be focus areas of spending in the context of your portfolio? Kelly, internally in the Company, where would you invest the most in terms of the product roadmap? Thanks.

Question: Pierre Ferragu - Bernstein & Company - Analyst : Hi, Chuck, Kelly and Marilyn. Thanks for taking the question. I just wanted to dig a bit into your deferred product revenues this quarter that have increased I think by a bit more than $1 billion year on year and actually $700 million or so, almost $700 million sequentially. It's a very impressive performance. The question I have is how do I take that into account when I look at your overall product performance that you had (inaudible) revenues slightly down in the quarter, but I would assume that a lot of that is related to the transition towards your subscription business. Do you have an estimate as how much this transition has impacted your number this quarter? Then of course I have the same question for next quarter. Your guide is very conservative. How much of this transition is actually impacting your guide for Q2 as well? Thank you.

Question: Simona Jankowski - Goldman Sachs - Analyst : Hi, thank you very much. I just wanted to confirm, Chuck, that the reason for the guidance being a little weaker is entirely to do with the softness you described in Service Provider orders. Just to dig into that and understand that a little better, it looked like your routing business was I think 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 16, 2016 / 9:30PM, CSCO.OQ - Q1 2017 Cisco Systems Inc Earnings Call you said up 7% in the prepared remarks, although I see it as up 17% in the numbers posted online. Regardless, it looks like routing was quite strong. What other products within that Service Provider vertical accounted for the weakness. When we look at the CapEx trends, they definitely have been weak year to date, but they are implied to improve quite a bit into year end, so just curious if you aren't seeing that.

Question: James Faucette - Morgan Stanley - Analyst : Thank you very much. I wanted to ask just around the security business. Obviously, as been pointed out, is that it's developing pretty well, but I'm wondering two things. First, the pace of acquisitions, and specifically what looked to be tuck-in acquisitions, seemed to have slowed a little bit this 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 16, 2016 / 9:30PM, CSCO.OQ - Q1 2017 Cisco Systems Inc Earnings Call quarter versus what it had been running. I'm just wondering if you're feeling like you've got the portfolio and the technology where you need it or should we expect to see acquisitions continue to run pretty high and that perhaps those reaccelerate. My second question is on security. I think, Kelly, you kind of alluded to this, but at what point do we start to see incremental benefit on some of the other businesses from security footprint? It seems like a lot of the value of security could be tied to new hardware and switching and networking, et cetera. Should we expect to see some incremental pull through or benefit to the more traditional hardware businesses and if so, when should we expect that? Thanks.

Question: James Suva - Citigroup Global Markets, Inc. - Analyst : Great, thanks very much. Chuck and Kelly, when you mentioned putting the brakes on for some of the demand, can you clarify a little bit? Was that mostly due to the uncertainty around the election or just more uncertainty global demand and now that the election is over, there's a political uncertainty about how the tax and policy changes, what happens, cause those brakes to last in your opinion? How long or when do the brakes come off? Thanks.

Question: Jess Lubert - Wells Fargo Securities, LLC - Analyst : Hi, guys. Thanks for taking my question. I was hoping you could update us on what the saw in the cloud vertical last quarter. You saw weakness there so I was curious if that bounced back, what products you're seeing success with, with this customer set and where you are in your process to drive share with these operators. Thanks.

Question: Paul Silverstein - Cowen and Company - Analyst : Thanks. Kelly, a clarification and then a question. The question is what's the pricing environment look like? Has there been any change? I was hoping, I don't know if you gave the number earlier, but if not, what was software as a percentage of total revenue? Can you remind us, I think it was 29% last quarter but if you could remind us what it was and what it was this quarter?

Question: Steve Milunovich - UBS - Analyst : Thank you very much. Chuck, we just wrapped up our tech conference and we had a panel on folks who helped companies move to the cloud. The general consensus was that private cloud implementations generally are not working in many companies that begin on a private cloud path, end up going down a public cloud path. Obviously there's still a lot of legacy and so forth, but if in fact private cloud is not going to do very well, you and others are very focused on that business and the risk is that on-prem pie is declining. Are you seeing something different and do you believe the on-prem business will grow for Cisco?

Question: Mark Moskowitz - Barclays Capital - Analyst : Yes, thanks, good afternoon. Chuck and Kelly, I want to get a sense here if there's been any change tactically related to how the teams are incentivized around margin, just given the Company continues to outpace the guidance on the gross margin line. Is there something going on there tactically or is this all just because of mix due to the broader macro weaknesses? Thank you.

Question: Tal Liani - BofA Merrill Lynch - Analyst : Hi guys. I had some macro questions and I want to ask it in the context of switching. There's a very big gap between the next quarter guidance year-over-year growth rate and your long term growth rate. The question that I have is, what part of the difference is macro, so if the macro slightly improves can you get there?

Question: Tal Liani - BofA Merrill Lynch - Analyst : Or is there anything that you can do on the product side that will get you closer? I want to ask it in the context of switching given that you had a major overhaul or major upgrade to your switching in the last two years, but we haven't seen the growth rates improving that dramatically. What can you do and what is macro?

Question: Jeff Kvaal - Nomura Securities - Analyst : Thank you very much. Can you hear me okay?

Question: Jeff Kvaal - Nomura Securities - Analyst : Wonderful, thanks. I wanted to swift gears and talk about the balance sheet, if I could. Obviously, you and many other companies in tech space have been advocating for repatriation for a decade, a very long time. Could you help us understand or remind us where you would like to take that money, should you bring it back to the US? The second part of that question is there's some sentiment that investment, or I'm sorry, interest rates will start heading north again. Do you take that into account when considering your dividend policy? Thank you.