Cisco Systems Q2 2014 Earnings Conference Call Transcript

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

Question: Jess Lubert - Wells Fargo Securities, LLC - Analyst : Question's on the product gross margin, which declined quite a bit sequentially, and was at the lowest level we've seen in a while. And you went through some of the volume and mix issues in the call, so I was hoping you could touch upon the competitive environment, from both traditional and non-traditional vendors. To what degree there was any change in pricing. And perhaps beyond Q3, do you think you can get the gross margin back towards the mid-to upper end of the 61% to 62% gross margin range as volumes improve and new product ramp. Or should we be thinking about the lower end of this range longer-term?

Question: Amitabh Passi - UBS - Analyst : John, what is the risk that you've got yourself too spread across too many areas, where you're fighting multiple battles on multiple fronts, with just a massive rate of flux in each of your markets? And the reason I ask is, I'm a little surprised at the service provider segment for you continues to remain relatively weak. NCS has been up for some time, so I'm surprised we're not seeing any traction there. So I'd love to get your thoughts in terms of the portfolio, is there room for further rationalization, are you spread too thin?

Question: Subu Subrahmanyan - The Juda Group - Analyst : My question is on the product transitions you're seeing. Is there any way to quantify the impact of data center transition and core routing product trends on this quarter? John as you look at the recovery in these, is there a timing expectation, which one will rebound first? Between these two?

Question: Brian Modoff - Deutsche Bank - Analyst : Continuing on -- switching the Nexus 9000 order ramp, will we see that this quarter? Our checks in continue to indicate more of an evaluation phase of that product still. Will we start seeing that ramp this quarter? Will that help get switching back into positive territory heading into July, and into fiscal 2015? And then can you give us an update on campus switching, and how that's doing? Thank you.

Question: Ittai Kidron - Oppenheimer & Co. - Analyst : John, I want to focus on two specific segments, the wireless and the data center. Both for a couple of quarters now, have either completely flattened out, or in the wireless cases, have even declined on a sequential basis. And I'm trying to understand, I understand, I would assume that some exposure there relates to emerging markets and that's probably one of the sources of the weakness But nevertheless, for you, those are very high growth opportunities especially on the server side and on the wireless, many of your competitors are still growing at a very nice clips. So I'm trying to understand if there's something going on in those two businesses that's not related to the macro issues you've been discussing. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Paul Silverstein - Cowen and Company - Analyst : I'm hoping you treat this a clarification, but let me give it a shot. Going back to gross margin, I just want to confirm something. With respect to the pricing environment, I think John, if I go back to the previous quarter, you all were fairly assertive in your commentary about the health of pricing, especially with the new products, that they were coming in consistent with your current margin structure. So returning to this quarter, is it essentially a volume issue, or when we look at pricing, when you look at the platforms has there been any change in terms of the margin profile of those new products in particular, and more generally in terms of the overall product portfolio? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. I heard your response on the call previously. Not an issue, but I just want to clarify to what extent is this a volume issue or is this something more?

Question: Kulbinder Garcha - Credit Suisse - Analyst : Just a question on the services side. I think Frank mentioned early on in the call were services should follow product revenues, and I guess what we're seeing is that we're seeing the product revenues that obviously declining. Can you upsell services to offset that, or is there risk that one or two quarters out, we start to see services maybe decline? How should we think about that dynamic? And then just one for the clarification on gross margin if I can, are you saying that there's no real change in the pricing environment? It's all volume driven? The reason why I ask is that you knew that revenues were going to be pretty weak this quarter. And your guidance for lower gross margins will weaken part of this quarter, they are going to be relatively weak next quarter. So why aren't the cost efficiencies coming through, or is that more longer-term discussion? Any comment on that would be helpful. Thanks. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Mark Sue - RBC Capital Markets - Analyst : So I guess the bigger the better within our gross profit cash flow approach here. Some of your assets are past their peak cycle, and having a negative impact to your financial model. So are we at a point with where Cisco has to choose between customers and margins? And Cisco actually proactively look at some corporate ecology, so that we can actually have margin customers happy, and investors happy as well?

Question: Mark Sue - RBC Capital Markets - Analyst : Helpful. 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.

Question: Ehud Gelblum - Morgan Stanley - Analyst : It's not a Cisco, if it was, it would be easier for me to figure out how to get off of mute. Couple clarifications, and a couple of questions. One big one, really. Clarifications, first, if you can give us Frank, because you're buying back some stock just what the ending quarter share count was, that would be helpful. And then a comment on linearity, if you could. Clarification on the services business, I had thought at your analyst day in December, you said 80% of your services is maintenance. I had thought it was more a function of your installed base, than on quarter by quarter product revenue, so if you can clarify that? And then my real question is about service provider. Service provider video obviously continues to fall. Is there a bottom, is there a spot that you can calculate it, and you look at your cost base where that bottoms out and should we be modeling that? And on core routers, is that a cyclical funk that we're in right now in core routing?

Question: Tal Liani - BofA Merrill Lynch - Analyst : I have just one question left, which is, I'm still trying to understand, in your numbers, what's related to the last quarter, what's related to the next quarter? What I mean by that is, the quarter is definitely weak but I don't know if it's incrementally weaker than last quarter, and what are the parts that are incrementally better? So maybe you can just go through the major segments, just to tell us where did you see improvement from the previous time that you updated us about three months ago? And just overall the delta from the last time? Thanks.

Question: Brian White - Cantor Fitzgerald - Analyst : I'm curious, sales down 8% this quarter. 6% to 8% in the third quarter. To get growth moving again, here, do you feel like Cisco needs a new product category? You're obviously a leader in networking, you have done very well in servers in a short period of time. But to get the revenue growth to more reasonable levels, do you think Cisco needs a new product category?