Cisco conference call: or hunting snow leopards in a blizzard
Three markets:
Enterprise --- market share leaders. Have introduced the 8500 routers; 5500 surpassed $1 billion in first year.
Small to medium business --- alliance with IBM.
Service provider --- Sprint for data/voice networks. Moving from circuit to packet. Internet is catalyst of change.
Book to bill above one. Gross margins from 65.1% last year to 65.7% this. U.S. bookings are 57%. Gross margins will decrease due to competitive pricing from competitors and product shifts. Sales and marketing increased from 18.9% to 19.1%. G&A 3.2% from 3.1% last quarter.
Goal is to focus on market share with EPS growth. DSO 53 to 50 days 4Q. $54m inventory increase. 9.8 inventory turns. U.S. 10.4. $362M in inventory. Will increase in future. 4Q head count 14,623. Increases in sales and engineering. From 1100 to 1300 will be added in FY 1Q, primarily in sales and engineering.
Cautiously optimistic for sector. There is a sea shift in Internet perception.
Three key variables:
Economy --- business is solid in Europe and the Americas. Asia is challenging and will get worse before it gets better. Asia is not in model for this year's growth.
Service provider activity --- consolidation will create unpredictability. Early adopters need to be successful. Three trends: data/voice/video conversion, end-to-end partnerships, and move to new world networks. Can expect consolidation, long sales cycles, old world tactics, lumpy orders, and unpredictability of initial roll-outs.
Effectiveness of competition --- increase in competition from start-ups and old world voice players with deep pockets and established relationships. We fully expect mergers, acquisitions, and partnerships to occur with increasing frequency. Integrated data/voice/video will encourage vast number of large acquisitions. Higher % or partnerships will not succeed. Our ability to partner and acquire is competitive advantage. Increased acceptance, particularly in data networking market. Expanding acceptance of voice networks converging into data. Government participation and regulation a concern. Internet must be unregulated.
There is more market share momentum. We're number one or two in almost all markets where we compete. [Listed product awards.] Market leader in enterprise LAN and small-medium market.
Have $0.5 billion savings per year by using Internet. E-commerce of $5.6 billion in revenues --- 64% booked on Internet ---$20 million per business day. Largest e-commerce site in world. Revenues generated per employee, $650,000, versus $250,000 in old world companies.
Geography: US --- 57% Q4 vs. 54% in Q3; Canada and Latin America 7% Q4 vs. 6% Q3; Europe, Middle East, Australia and Africa 29% Q4 vs. 29% Q4; Asia, including China, and Japan, 7% Q4 vs. 11% Q3.
Americas over 40% growth year to year. Balanced bookings. Canada particularly strong acceptance of convergence.
Europe over 40% growth, including UK, Germany, Netherlands, and East Block. Russia doubled year to year.. France --- first time we've seen strength. Momentum building to IP-based networks.
Asia --- negative 5% year to year. Korea a big concern. Greater China a bright spot, including Hong Kong and Taiwan. 80% year to year. Top 10 generators of revenues.
Japan --- government and business leaders are slow to adopt new technology.
U.S. holds key opportunities. No slow-downs here.
Europe - cautiously optimistic for next 12 to 18 months. Increased attention in Europe on value of infrastructures and investments.
Service Provider market --- In 12 months, new line of carrier class products. 12000 router is cornerstone.
ATM --- pleased with MGX (?) 8000 series. VoIP wanted. Room for improvement in core ATM.
Cable and ADSL - design wins are exciting.
Packet gateway focus: voice quality, services, scaleability.
Q&A
Q: will you be able to build latency --- best in market using Lightspeed and Suma Four?
A: [They'll] be able to meld fighting (?) class C/O products this year. [I replayed that sentence 3 times and couldn't catch the word.] Mention of a new set of management tools. . . new service applications. Pleased with growth. Distribution - high tech shelf (?) model key to delivering integrated solutions. Short to mid term don't see limit to opportunities in this industry. Growth estimated to be 35% --- we'll grow revenues above industry rates. Long term 30-50% growth in countries with good economies. Depending on Americas and Europe. Normal seasonality in Q1.
Restating of strengths: Data will replace voice, core strength in partnerships, ability to retain talent and leadership, global support and service.
Q: Is there slowdown in UK?
A: Solid growth in UK as a whole. There's a little softness in Scandinavia. I'm more optimistic than most. Over 60% year to year growth. Strong going into 4Q. Their economy best in decade.
Q: Can you talk about primary product groups?
A: I can talk in generalities. 40% switches; 40% routers, with a good balance between them; 6% service and maintenance. LAN switching grew 90% year to year. Gains in routers for small - medium, but distinction will be tougher because they'll be combined --- routing and switching.
Q: Regarding Lightspeed and Suma Four, can you compare and contrast with Stratus and ASND?
A: Access and Switch = Cisco; call control = Lightspeed; services = Suma Four. Stratus is another layer: operations and support, but doesn't address all requirements. We work with partners, Bellcore, HP and others to offer OSS capability, global presence and large installed customer base. [It] addresses high end of space. In enterprise space, 70% going to preferred end-to-end vendor for much of network. Same movement in service providers --- will go to primary vendors. You have to partner or have the products yourself.
Q: Are you bullish on Europe and America [enough] to balance losses in Asia?
A: Yes. Optimistic on industry. New market opportunities. Service providers play key role. Bullish on industry in long run. We can't be distracted by Q to Q issues. The number of opportunities is overwhelming. Tremendous opportunities in many areas. No lack.
Q: Competitive pricing environment from old world competitors?
A: Marketing position is to get into our market through acquisitions. Routing market same as before. Switching pricing pressure --- channels need help [in dealing with customers]. 8500 is on target. Well-received. Will take a few quarters to ascertain.
Q: Size of service provider opportunities and what revenue streams?
A: [We hope to] move to 40-50% of total business. Market is $250-350 billion globally. 10% for Cisco --- $10 to 20 billion. [doesn't add up] Could grow 100% year to year.
Q: Comments on Japan and stimulus package?
A: Talking to Prime Minister and other leaders, we pushed hard for building infrastructure for Information Revolution over roads and highways. . . not successful there. Not optimistic at this time. In talking to our peers, they're all pessimistic. All-time low in confidence. We're assuming Asia is not there.
Q: Comments on the optical market?
A: Consolidation in every sector. Would like to partner. No indication of change [re: Ciena]. Optics plays a role, long term. The first squeeze will be TDM squeeze on SONET and SDH. Those systems survivability will be put on top of switching first. It's practical to continue to partner with Ciena. Sonet-like capability upgraded this year.
Q: Regarding 2-tier distribution, what's the level of inventory in channel?
A: 6 wks average. We recognize sell-through carefully. Recognize revenues on pt. of sale. Inventories will go up at times.
Q: What's your view of channel?
A: good. The challenge is in enterprise market.
Q: Core switching decisions at back of this year, what's competitive position?
A: Need to make large improvement and aggressively compete in Europe and here. Must have best multi-services edge. Will compete aggressively. Where different decisions have gone forth, for example BT, we will surround those decisions and offer customers over-all service. [I took this to mean where they lose business they will offer customers over-all service as a means of luring them away.] We'll have new products at the end of this year and into '99.
Q: Can you comment on the 10% of global telecom market you're targeting. What products and services? How much today?
A: Packet-based infrastructures will evolve. The faster it occurs the better we'll be. The longer it takes, competition will heat up. [What follows will have to be interpreted by marketing semanticists.] We're going after traditional leading positions. Carrier routers and giga routers --- 70%. ATM --- strength of franchises, we have mid 30% market share in dial-up. Data access, by year 2000, these will be billion markets. SONET - this is mature market. We'll have a piece. Goal is to be leader. Key area is voice and 4E and 5E class systems. $25Billion market. VoIP --- early wins. Partnership announcements coming up.
Wireless - not competing.
OSS --- not competing.
Optical --- not competing.
Professional services - not competing.
LAN switching - leaders.
Q: Regarding Sprint ION announcement, what is you consumer electronics position?
A: Very early thinking. Initial goals: to create multi-billion market. Compete in high-end professional market. Will bring partners and let them participate. Help industry solve problem in home - around broadband in home.
Q: Competitors?
A: 3Com, Fore, Bay, Cabletron, and Newbridge. Fore and Newbridge for ATM and service providers; LU and Nortel will emerge as key competition if they execute properly. LU and Nortel have senior management.
Goal is to be number one, but challenges for us are from old world players like Lucent and Nortel.
I had to hang up and didn't get the rest of the Q&A. Everyone on the CC spoke/read very rapidly and even using the rewind key, I couldn't catch all that was said. All errors are unintentional and all numbers should be cross-checked.
I noticed Chambers wouldn't pull out figures for routers versus switches and managed to dodge the issue every time it was brought up. Competition from "old world voice providers" was emphasized over and over. "Old world" was spoken as if a dog had fouled the carpet. Wording surrounding the launch of the 8500 was guarded, leading me to wonder what the figures were. They also admitted their ATM needed more work.
I'm pleased business in the Americas and Europe is strong enough to counter-balance Asia. Let's hope tomorrow's market sees it as well.
Pat |
