Opening Remarks
CEO John Chambers: I would like to start off our call by crystallizing for you where Cisco (CSCO, Financial) stands at this point in time. The network is driving the future of the core internet and has clearly become one of the most valuable assets in it. Cisco is well positioned to lead this change.
In short, Cisco is a very strong company in a healthy market, with a few problematic areas. And that we are taking comprehensive action to address. The first of these is simplifying actions that we’re going to do to focus on our organization and operation model. As we announced last week we are streamlining our organization and overhauling our business model dramatically. We are making it easier for our customers and partners to do business with us, and speeding up internal decision making.
Second, aligning our cost structure transitions in the market place. We will take out one billion dollar in costs for our FY12 expense run rate. We also expect changes in how we do business; we will assure a lower cost base going forward.
Third, divesting or exiting underperforming operations. As we have already started to do this, we are examining our operations through the filter of the five company priorities, as well as our own comprehensive metric.
Fourth, delivering value to shareholders. We are working on both the financial and operational front to realize value that rewards our shareholders for their investment and their support. We have initiated a quarterly case dividend. We are continuing our stock repurchase program, and we are focused on making changes that improve our operations in order to realize consistent growth and assure the most appropriate use of our domestic available cash. We are moving quickly and will continue to implement our action plan, to fix what is broken and solidify our foundation for the future. Gary will continue to lead that effort. We will be in a position to outline the next phase of our transformation when we report Q4 earnings.
As a result, while Q3 met expectations, Q4 will continue to show weakness, while we do hard work behind the scenes to be able to execute these changes. And we will provide for Q4 guidance that reflects that lag.
We know what we have to do; we have a clear game plan; we are a company with a track record of constant market shaping innovation.
We’ve had to make big changes before, and each time we made these changes we have emerged even stronger. We are embarking on a course that will address our challenges while building on our foundational strengths.
Areas of Concern
Areas of concern: As we have discussed before, we have had several areas of our business come under pressure, consumer, traditional switch-top boxes, switching and public sector. We have taken action in our consumer business and are executing well with our video delivery and step top boxes.
Two others are:
Switching
The switching market is in the midst of a significant transition across the industry, prices at each speed have been driving down price reports, along with significant transitions from 1g to 10 g we are at the forefront of this innovation.
This is good for our customers as it will enable faster and more efficient infrastructure long term and will enable even faster adoptations of cloud based solutions.
As we have said previously, in the short term this has placed pressure on our revenue opportunities across the market as customers have begun to adopt these new technologies.
Specific to Cisco our gross margins have come under pressure due to the transition of our products at the high end of our switching portfolio as customers adopt the nexus 10k.
The gross margins are the remaining catalysts. In order to address this shift, we have introduced a new series of innovative products in our switching portfolio in the last couple of quarters, our largest ever portfolio refashion in such a short time period. Introduced and have seen traction in our architectural approach, addressing the convergence of enterprises and service providers.
We are the only skilled player in these two customer segments and are uniquely positioned to address this opportunity.
We are transforming both our costs and organization structure to make us more efficient. Gary will be discussing this shortly with you.
From a product capability and innovation are positioned well. As a scale market leader with the broadest switching portfolio products to serve our clients, we are highly leveraged to benefit as this market stabilized, with all the appropriate caveats we feel we are also well positioned to get our fair share of any market growth.
Public Sector
We shared our initial concern about public sector spending in the us state and local government several quarters ago.
We are in almost every sector of government, every category of public sector.
And with the vast majority of our business being new every quarter, we tend to experience challenges and opportunities quicker than others.
You may be beginning to see these public sector challenges, granted in earlier stages, from some of our industry peers.
While we maintain our strong market share position in this customer segment, we are rapidly focusing our resources within these government environments with emphasis first on data center evolution, especially as it relates to cloud and second current collaboration and these are the areas where our customers are telling us they want the innovation and where we have to go in terms of they have budget to spend.
Public sector has historically been about 20% of our business. Routing and switching represent our largest market share in this segment. We must address very aggressively the dramatic spending changes that occur.
We have seen significant declines in the growth rate of the public sector business since the beginning of our fiscal year, going from over 30% year over year four quarters ago, to decline the current quarter growth rate of 8% in Q3.
No excuses we must adjust quickly. We are and we will.
Plan Going Forward
We are taking very specific steps to address our challenges and we are moving quickly. We are identifying key areas of work over the next several quarters.
Simplified focused more efficient organization and operating models. Aligning cost structure given the transitions occurring.
Managing our portfolio where we either eliminate or cut back on lower producing areas.
What We Have Done to Date
Aggressively addressed our organization and operating model.
First by appointing a COO. Second by reorganizing major functions of sales, engineering and services.
Third moving away from a broad counsel and board structure, implementing clear decision making responsibilities.
By strengthening the connection between strategy and execution across functional groups and finally, continuing to streamline operations across the company.
We have addressed core elements of our portfolio in the consumer business, closing Flip and restructuring home networking and cutting lower performing programs.
(TRANSCRIPT)
CEO John Chambers: I would like to start off our call by crystallizing for you where Cisco (CSCO, Financial) stands at this point in time. The network is driving the future of the core internet and has clearly become one of the most valuable assets in it. Cisco is well positioned to lead this change.
In short, Cisco is a very strong company in a healthy market, with a few problematic areas. And that we are taking comprehensive action to address. The first of these is simplifying actions that we’re going to do to focus on our organization and operation model. As we announced last week we are streamlining our organization and overhauling our business model dramatically. We are making it easier for our customers and partners to do business with us, and speeding up internal decision making.
Second, aligning our cost structure transitions in the market place. We will take out one billion dollar in costs for our FY12 expense run rate. We also expect changes in how we do business; we will assure a lower cost base going forward.
Third, divesting or exiting underperforming operations. As we have already started to do this, we are examining our operations through the filter of the five company priorities, as well as our own comprehensive metric.
Fourth, delivering value to shareholders. We are working on both the financial and operational front to realize value that rewards our shareholders for their investment and their support. We have initiated a quarterly case dividend. We are continuing our stock repurchase program, and we are focused on making changes that improve our operations in order to realize consistent growth and assure the most appropriate use of our domestic available cash. We are moving quickly and will continue to implement our action plan, to fix what is broken and solidify our foundation for the future. Gary will continue to lead that effort. We will be in a position to outline the next phase of our transformation when we report Q4 earnings.
As a result, while Q3 met expectations, Q4 will continue to show weakness, while we do hard work behind the scenes to be able to execute these changes. And we will provide for Q4 guidance that reflects that lag.
We know what we have to do; we have a clear game plan; we are a company with a track record of constant market shaping innovation.
We’ve had to make big changes before, and each time we made these changes we have emerged even stronger. We are embarking on a course that will address our challenges while building on our foundational strengths.
Areas of Concern
Areas of concern: As we have discussed before, we have had several areas of our business come under pressure, consumer, traditional switch-top boxes, switching and public sector. We have taken action in our consumer business and are executing well with our video delivery and step top boxes.
Two others are:
Switching
The switching market is in the midst of a significant transition across the industry, prices at each speed have been driving down price reports, along with significant transitions from 1g to 10 g we are at the forefront of this innovation.
This is good for our customers as it will enable faster and more efficient infrastructure long term and will enable even faster adoptations of cloud based solutions.
As we have said previously, in the short term this has placed pressure on our revenue opportunities across the market as customers have begun to adopt these new technologies.
Specific to Cisco our gross margins have come under pressure due to the transition of our products at the high end of our switching portfolio as customers adopt the nexus 10k.
The gross margins are the remaining catalysts. In order to address this shift, we have introduced a new series of innovative products in our switching portfolio in the last couple of quarters, our largest ever portfolio refashion in such a short time period. Introduced and have seen traction in our architectural approach, addressing the convergence of enterprises and service providers.
We are the only skilled player in these two customer segments and are uniquely positioned to address this opportunity.
We are transforming both our costs and organization structure to make us more efficient. Gary will be discussing this shortly with you.
From a product capability and innovation are positioned well. As a scale market leader with the broadest switching portfolio products to serve our clients, we are highly leveraged to benefit as this market stabilized, with all the appropriate caveats we feel we are also well positioned to get our fair share of any market growth.
Public Sector
We shared our initial concern about public sector spending in the us state and local government several quarters ago.
We are in almost every sector of government, every category of public sector.
And with the vast majority of our business being new every quarter, we tend to experience challenges and opportunities quicker than others.
You may be beginning to see these public sector challenges, granted in earlier stages, from some of our industry peers.
While we maintain our strong market share position in this customer segment, we are rapidly focusing our resources within these government environments with emphasis first on data center evolution, especially as it relates to cloud and second current collaboration and these are the areas where our customers are telling us they want the innovation and where we have to go in terms of they have budget to spend.
Public sector has historically been about 20% of our business. Routing and switching represent our largest market share in this segment. We must address very aggressively the dramatic spending changes that occur.
We have seen significant declines in the growth rate of the public sector business since the beginning of our fiscal year, going from over 30% year over year four quarters ago, to decline the current quarter growth rate of 8% in Q3.
No excuses we must adjust quickly. We are and we will.
Plan Going Forward
We are taking very specific steps to address our challenges and we are moving quickly. We are identifying key areas of work over the next several quarters.
Simplified focused more efficient organization and operating models. Aligning cost structure given the transitions occurring.
Managing our portfolio where we either eliminate or cut back on lower producing areas.
What We Have Done to Date
Aggressively addressed our organization and operating model.
First by appointing a COO. Second by reorganizing major functions of sales, engineering and services.
Third moving away from a broad counsel and board structure, implementing clear decision making responsibilities.
By strengthening the connection between strategy and execution across functional groups and finally, continuing to streamline operations across the company.
We have addressed core elements of our portfolio in the consumer business, closing Flip and restructuring home networking and cutting lower performing programs.
(TRANSCRIPT)
