Motley Fool Cisco CC synopsis
Excerpt: " Partnership with Lucent or Nortel. In the recent past, Cisco has said
they would be interested in a partnership with Lucent (NYSE: LU) or
Northern Telecom (NYSE: NT). President and CEO John Chambers
said that his optimism about a partnership with Lucent is wearing down
considerably. The more the two companies talked, the clearer it became
that differences in company culture and business strategies provide
significant obstacles to the kind of partnership that Cisco envisions. Nortel
presents some of the same challenges, but time will tell whether a
partnership is possible."
motleyfool.com
ANN ARBOR, Mich. (May 5,
1998)/FOOLWIRE/ -- Cisco Systems Inc.
today reported its third quarter results for the
period ending April 25, 1998. Net sales for the
quarter were $2,184 million, compared with
$1,648 million for the same period last year, an
increase of 33%. Pro forma net income, which
excludes the write-off of purchased in-process
R&D discussed below, was $483 million or
$0.45 per share (diluted), compared with pro forma net income of $358
million or $0.35 per share (diluted) for the third quarter of 1997, increases
of 35% and 29%, respectively.
Acquisitions. During the third quarter of fiscal 1998, Cisco completed
the acquisitions of LightSpeed International Inc., WheelGroup Corp., and
NetSpeed Inc. for a combined purchase price of $521 million and took a
one-time charge of $419 million or $0.39 per share (diluted) as a
write-off of in-process R&D. Additionally, the company completed its
acquisition of Precept Software Inc. for approximately $84 million in a
transaction accounted for as a pooling of interests.
Nine-month Results. Net sales for the first nine months of 1998 were
$6,069 million compared with $4,675 million for the same period last
year, an increase of 30%. Pro forma net income was $1,356 million or
$1.27 per share (diluted), compared with pro forma net income of $1,031
million or $1.00 per share (diluted) for the first nine months of 1997,
increases of 32% and 27%, respectively.
Earnings Statement Details. Sequential revenue growth was 8.3%.
Gross margin increased sequentially to 65.7% versus 65.4% in the second
quarter and 65.3% in the year-ago quarter. The increase was due
primarily to improvements in value-engineering cost reduction and ongoing
material cost reductions, as well as lower memory pricing. These
improvements offset unfavorable product mix comparisons and aggressive
pricing from various competitors. Total operating expense increased to
34.0% of sales, as compared with 32.7% last quarter. This includes
approximately $5 million of additional expense related to the four
acquisitions that closed during the quarter. R&D expense increased
slightly as a percent of sales from 11.8% in the preceding quarter to
12.0% in Q3. Sales and marketing expenses were 18.8% of sales, up
from 18.0% in Q2. General and administrative expense was 3.1% of
sales, up slightly from last quarter. Cisco's tax provision remained at 35%.
Pro forma net income for the quarter was 22.1% of sales, compared to
22.7% last quarter and 23.0% a year ago.
Orders. Linearity of orders was reasonable throughout the quarter.
Book-to-bill was once again above 1.0.
Balance Sheet Details. Cash and investments increased by
approximately $819 million to $4.9 billion. Accounts receivable increased
slightly sequentially, by $17 million, to $1.3 billion. Given linearity of
shipments, Days Sales Outstanding (DSO) declined from 57 days in the
prior quarter to 53 days in Q3.
Inventory. Inventory increased by $40 million sequentially to $380
million, due to flexibility requirements to meet customer order patterns,
product mix shifts, and new product ramp-ups. Inventory turns were 10.4
versus 10.9 last quarter. Inventory breakdown is as follows: raw
materials, $68 million; work in process, $123 million; finished goods $81
million; and demo systems, $35 million. Cisco continues to manage
inventories; inventory levels should be expected to increase, however, in
order to satisfy customer order expectations and continued growth of
two-tiered distribution.
Headcount. Cisco continues to focus its hiring on engineering and field
sales. Total headcount at the end of the quarter was 13,353, a net
increase of 1,278 from Q2. The increase includes 324 additions from the
acquisitions closed during the quarter. The plan is to add 1,000 to 1,200
additional personnel during the fiscal fourth quarter, focused again on sales
and engineering.
E-Commerce. Cisco is now booking more than 52% of its orders over
the Internet, at greater than a $4.1 billion annualized run rate.
Geographic Breakdown. Cisco saw balanced growth across almost all
countries in both Europe and the Americas. The market in Europe
continues to improve, with revenue growth in France and Germany well
above the 50% level, year-over-year, for Cisco. The company anticipates
continuing challenges in Asia, however, with the situation getting worse
before it gets better. China is the only bright spot in that region, but even
that could change. Japan's business community appears pessimistic,
although Japan may have some short-term upside potential, depending on
how the new supplemental budget is applied. The Americas accounted for
60% of revenues for the quarter, as compared with 62% in Q2; EMEA
(Europe, Middle East and Africa) was 29% versus 28% in Q2; and Asia
was 11% versus 10% in Q2. Japan accounted for about 6% of total
revenues in the quarter, up form about 5% in Q2.
Enterprise Market
Cisco continued its market leadership in LAN switching by announcing
new Layer 3 and gigabit networking products and extending its multiphase
data/voice/video strategy, as well as extending its implementation of
end-to-end network services. In gigabit networking, Cisco announced its
new Catalyst 8500 series of Layer 3 gigabit routing switches. These
products deliver broader functionality than competing Layer 3 products,
providing better scalability and smoother migration through multiprotocol
Cisco IOS functionality. Cisco projects that by the year 2001, the market
for Layer 3 routing switches will total about $2 billion.
Cisco believes that by adding the right application recognition features, the
8500 series is capable of recognizing Layers 4 through 7 and can thus
perform higher-level switching.
The 8510 will be shipping in June. The 8540 is scheduled to ship in
September. The volume of ramp-up in 8500-series products is therefore
expected to begin to occur in the second half of calendar 1998.
Service Provider Market
The level of service provider activity that Cisco is seeing on a worldwide
basis is very encouraging, and service providers accounted for about 30%
of Cisco's revenues for the quarter. Continuing consolidation among
service providers and seasonality of order patterns can add challenges,
however. Cisco believes it sees signs of three trends in the service
provider space: first, the emergence of the data network infrastructure as
a strategic part of the service provider business going forward; second,
increasing investment in broadband networks for data, voice, and video
integration; and third, the increasing acceptance of a strategic end-to-end
partner for data networking infrastructures.
Across the entire industry, competition continues to intensify, with new
entries from startups and large circuit-switch players. Many of the latter
have deep pockets and close relationships with service providers. That
said, Cisco continues to believe that its ability to successfully partner and
acquire new technologies is a major competitive advantage for Cisco.
Broadband. Broadband to the home is increasing, represented by xDSL
devices and cable modem deployments. This creates an opportunity for
Cisco to serve both cable providers and telcos, extending its end-to-end
market leadership. Cisco saw revenue from these markets in the quarter
and expects the total market to increase to multi-billion dollar size within a
few years. Cisco announced a new cable partnership with Time-Warner,
delivering broadband Internet service to cable subscribers. Cisco also
expanded its Cisco Powered Network program to more than 70 service
providers, adding 25 service providers in the third quarter.
Data/Voice/Video. Customers are developing plans to integrate
data/voice/video over a single data network. Cisco believes that the
convergence of data, voice, and video will be a major inflection point
within the networking industry, particularly as data and video traffic begin
to rapidly surpass voice traffic in the future. This trend will contribute to
lower voice costs and may eventually lead to voice becoming "free" over
time, first in the enterprise and eventually, in the service provider market,
as voice becomes a smaller part of the total load on the network. Two of
three acquisitions announced this quarter, and five of the last six
acquisitions, were in data/voice/video integration. Going forward, Cisco
still expects to make a total of 10 to 15 acquisitions this year, at least half
of them in data/voice/video.
AT&T Outage. Data networks will experience periodic traffic jams and
outages, and because Cisco is involved in the vast majority of large data
networks, the company will be involved in those events. In the AT&T
(NYSE: T) frame relay outage in April, AT&T was an excellent partner
throughout the entire scenario. The majority of the responsibility for the
outage was Cisco's. Both AT&T and Cisco have taken steps on the
product and operational sides to prevent this type of network failure from
occurring again. Although network failures from time to time are
inevitable, you will see improvements in quality and reliability, reflecting
the importance of the network to businesses and breakthroughs in product
capabilities. As businesses come to rely more and more on data
networking, customer expectations will rise at an increasingly rapid pace.
In the short term, Cisco has not seen any effect on its relationships with
customers as a result of the outage. In the long term, as Cisco puts
profitable, reliable network services into the market with its partners, that
will define how the relationships go forward.
Partnership with Lucent or Nortel. In the recent past, Cisco has said
they would be interested in a partnership with Lucent (NYSE: LU) or
Northern Telecom (NYSE: NT). President and CEO John Chambers
said that his optimism about a partnership with Lucent is wearing down
considerably. The more the two companies talked, the clearer it became
that differences in company culture and business strategies provide
significant obstacles to the kind of partnership that Cisco envisions. Nortel
presents some of the same challenges, but time will tell whether a
partnership is possible.
Small to Medium Business Market
This market is going well above expectations for Cisco. The two-tier
approach enjoyed better than a $1 billion annualized run rate in Q2, and in
Q3 growth was comfortably in the double-digits in terms of sequential
growth. The majority of that two-tier business goes to the small to medium
business market. Cisco is doing a much better job of addressing its key
competitors in this market, such as 3-Com (Nasdaq: COMS) and Bay
(NYSE: BAY); there's still room for improvement in this area, however.
Networking Technology Comments
ATM and Fast Ethernet. Cisco continues to see good growth in the
overall ATM market, with growth well into the double digits sequentially
in Q3. In the WAN, sequential growth was in the single digits for Q3,
whereas in Q2 it was well into the double-digits. [Looks like ASND/NN are kicking butt] Fast Ethernet products
are providing well over 100% annual growth; ATM is showing about half
that growth rate. ATM price-per-port has been decreasing at an annual
rate of around 25% to 30%, and is now around $1000 per port. Fast
Ethernet pricing is now around $250 to $300 per port.
Routers. The high-end router business is growing in the high single-digit
rate, year over year. The lower-end router business is growing at a
somewhat faster pace.
Switching. Cisco's LAN switch business is growing faster than the
industry average, as the company continues to take market share. Overall,
the total switch business accounted for approximately 35-40% of
revenues in the quarter.
Optical Internetworking. The future of the core of networks is optical
internetworking, and Cisco saw an exciting response to this at
Networld+Interop this week. Cisco is partnering with Ciena (Nasdaq:
CIEN) in optical internetworking.
Guidance
What's Going Well. Cisco believes it is growing significantly faster than the
combination of its traditional competitors. The company continues to gain
market share versus traditional competitors in almost all key product
areas. Over the last 12 months, Cisco has gained more market share
versus this group than in any of the recent years. Chambers said that
Cisco's product development pipeline was in the best shape he had ever
seen. New high-end products provide greater functionality and
performance than competitors' products. The two-tier distribution system
is going well. Cisco continues to expand its partnering relationships.
Areas of Concern. Economic conditions in specific countries will
continue to be a major factor in determining internetworking growth rates.
Cisco remains "paranoid" about competition both from startups and from
large players, including well-funded players in the voice market.
Year-2000 challenges could divert resources from Internet spending.
Government temptations to regulate the Internet could also affect its
growth.
Cisco's goal continues to be to grow as fast as or faster than the overall
industry growth rate, which industry pundits project to be 30% to 50%
annual growth in countries with reasonably good economies. Cisco has
not seen any fundamental changes in terms of the technology or business
drivers in the industry. Given uncertain macroeconomies and increasingly
shorter lead times between bookings and orders, however, quarters could
come in above or below expectations.
Guidance continues to be that gross margins will decline over time due to
product mix shifts, reduced component cost savings, a more diverse
customer and channel mix, and ongoing competitive pressures. Going
forward, the recent acquisitions will add approximately $15 million in
engineering expense per quarter and an additional $6.5 million per quarter
for ongoing goodwill expense, which will be included in the general and
administrative costs. As a result, the target over the next three to five
quarters is for operating expenses is to remain in the 34.0% to 34.5%
range. A tax provision rate of 35% is expected to continue into Q4.
Looking ahead, the tax rate is expected to decline to 34% in fiscal 1999.
Fiscal fourth quarter results will be released on Tuesday, August 4, after
the close of the market, with a conference call to follow.
* A Fool conference call synopsis represents an effort to highlight the salient
points of a conference call and should not be taken as an authoritative
accounting or transcription of the entire event. Note: Statements made by a
company other than historical information may constitute forward-looking
statements for which the company can claim protection under the Safe Harbor
Act. Please consult the company's filings with the SEC for information on risk
factors which might cause actual results to differ materially from the information
contained in these forward-looking statements.
c Copyright 1996-8, The Motley Fool. All rights reserved. This material is for personal
use only. Republication and redissemination, including posting to news groups, is
expressly prohibited without the prior written consent of The Motley Fool. The Motley
Fool is a registered trademark and the "Fool" logo is a trademark of The Motley Fool,
Inc.
|
