Cisco Systems Q3 2014 Earnings Conference Call Transcript

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

Question: Simona Jankowski - Goldman Sachs - Analyst : I just wanted to understand, John, your guidance a little bit. You are guiding for better than normal seasonality in the July quarter and that's despite the continued weakness both in emerging markets and in service providers. Can you just expand on what is driving that? And to the extent that some of that is driven by the Nexus 9K ramp where you highlighted 175 customers, can you just dig into a little bit on how many of them are also licensing ACI and also, does that include any of the top 10 cloud providers? Thank you.

Question: Ittai Kidron - Oppenheimer - Analyst : Thanks. And congrats again on great execution. I'll also take a stab at a two-part question. First of all, referring to the last page of your press release --

Question: Ittai Kidron - Oppenheimer - Analyst : I'll give you another one if I can get three questions. Speaking on deferred revenue, Frank, looking at the breakdown of your deferred revenue you have a very nice increase on a year-over-year basis on the product side, but when we look at the split of that between current and non-current it seems like most of it is concentrated in the non-current area. Can you talk about how the change in deferred revenue relates to the change in your business model, as far as moving more into cloud, more into, as a service type of consumption model for your customers? And then for you, John, on the competitive front, from a high level standpoint, some of the switching vendors have talked about going aggressively after your cat 65 install base which is quite substantial still out there. How do you feel about your ability to defend that? And also with some of the clearly good progress you've been making on UCS, how do you feel against IBM and HP these days as far as going after the server footprint, both the standalone and on a converged basis as well?

Question: Pierre Ferragu - Bernstein - Analyst : Hi. Thank you for taking my question.

Question: Pierre Ferragu - Bernstein - Analyst : Can you give us some color on how your gross margin evolved sequentially? You have had a very good improvement in gross margin. I was wondering how much behind that was just a matter of having better volumes and if there was anything that you saw between this quarter and last in terms of product mix and of course, pricing as well. And lastly, if you had some specific cost actions over the last three months that helped the gross margin improve. Then I have just one very last question to ask on the switching weakness. I was just wondering if you could give us some color, geographically, is that the overlap between your weakness in emerging markets and switching or is switching a market that is seeing a weakness much more broad-based across the globe? Thanks.

Question: Pierre Ferragu - Bernstein - Analyst : Got you.

Question: Jeff Kvaal - Northland - Analyst : Yes. Thank you very much for taking the question. I would like to follow up on the gross margin question, if I could. And that is to say you have a couple new products that theoretically, should be very accretive to the gross margin structure that are in the pipeline, i.e. the new high-end switches and routers. Why wouldn't we see the gross margins be stable if not even a little bit above where we are today as those products blend into the overall mix? What are some of the offsetting forces there?

Question: Brian Modoff - Deutsche Bank - Analyst : Hey, John. Question around the AC or the wi-fi [phase]. Wireless was, I think, up 3% year on year, orders up 12%, if my memory's correct. Could you talk a little bit about what you see coming in the next quarter? Do you see this AC transition that you've gone through for the last couple quarters and you expect to come out of that? And when do you see wave two AC impacting the upgrade cycle in your campus switching business, the 3850 specifically? Thanks. If I could do a follow-on I'd appreciate that.

Question: Brian Modoff - Deutsche Bank - Analyst : The second question is really on your license agreement with your software portfolio for GM. I wanted to try to understand that a little bit more. You mentioned collaboration. What are you specifically licensing? How is this going to play out? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. Give us a little more color around what the agreement is and what products it might involve. And how could you see expanding this as your product line becomes more software versus hardware over time? Thanks.

Question: Tal Liani - Bank of America - Analyst : Hello. It's my birthday so I'm also going to ask two questions.

Question: Tal Liani - Bank of America - Analyst : I have a question on two things. Number one is service revenues are down. If you sum up the last four quarters, service revenue growth is down to 2.5%, down from 7% the same four quarters a year ago, so similar period, down from 10%, 11% before. I understand that there is a link between product growth and service growth, but on the other hand, you do offer and you mentioned it, you do offer more service based solutions. And with other companies, we've seen longer lag between the decline in products to the decline in services. So is there any fundamental change in services, is there any discounts on the services side or difficulties to charge for services? Can you tell us anything about it beyond just the product growth?

Question: Amitabh Passi - UBS - Analyst : Hi, guys. Good afternoon. John, I only have one question for you. I wanted to maybe understand your sort of strategic rational in some of the alternative areas where you're making investments. If I look at the radio access market, you made an investment in a company I think called Altiostar. Your Broadband Access investments were the M4600, you're going after the converged packet optical market with the NCS4k. When I look at each of these markets, they're large markets but they have very well established incumbents, all of them with relatively low gross margin. Given all the focus on gross margin, just wanted to understand how you're thinking about attacking these markets, how do you continue to extract a premium given the fact that they're highly competitive with relatively low gross margin?

Question: Ben Reitzes - Barclays - Analyst : Hey, John. I wanted to ask about the pickup you saw in the US and Europe. Is this it? Are things turning? And in particular, how sustainable would it be?

Question: Mark Sue - RBC Capital Markets - Analyst : The business is stabilizing and looking into your bookings linearity, more predictable. It feels like in a couple of quarters the revenues may actually start declining and then actually turn positive. Does it feel that you can hold this $46 billion to $48 billion annual revenue base because it's more predictable? Also, how should we think about the annual OpEx? Is $15 billion to $16 billion the right number or should we expect some cost cutting? On cash, eBay repatriated some cash. Recognizing your views on taxes, what else can Cisco do since half the market cap of Cisco is in overseas cash?

Question: Simon Leopold - Raymond James & Associates - Analyst : Thank you very much. Hello. Quick one. I wanted to see if you could talk a little bit more about the ethernet switch business and the transitions. You alluded to the idea that the transitions do take a long time. What I wanted to see if you could talk about is any kind of compare and contrast this transition to the 9K family versus the prior transition you experienced when you moved to the Nexus family? If we could understand a little bit better about how this situation is either similar or different from the past it might help us. 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: Inder Singh - SunTrust - Analyst : Hi, John. How are you?

Question: Inder Singh - SunTrust - Analyst : Good quarter. You sound excitedly upbeat, especially after the past couple of quarters. It sounds like the demand side has picked up for you, but also the product upgrades are starting to kick in. I think you've spent quite a time on the switching side of it. I wanted to ask you about routing as well. Clearly the company made a big bet with the CRSX and I think you alluded that you're seeing above expectations in terms of the demand for that, but can you provide some more color on that? And then just the other part of the question around the security business, same thing. We've seen all these networks come under threat. Clearly, perimeter security hasn't been working on networks. What are you doing differently here where the security business is starting to show growth for you now?