Cisco Sees Long-Term Growth, But U.S. Customers Are Cautious (Update)

Speaking on the company’s post-earnings conference call, Cisco Systems (CSCO) CEO John Chambers Tuesday afternoon said he remains comfortable with the company long-term growth rate forecast of 12%-17%.

For fiscal Q4, the company sees revenue growth of 9% to 10%. Chambers thinks there is a “relatively short-term challenge going forward.” He said they continue to see caution from U.S. customers and some European customers.

CFO Frank Calderoni advised the Street to “model on the conservative side.” He says gross margin will be 65%, versus 64.4% in Q3; operating expenses 36%-37% of revenue, including the negative impact of foreign exchange. Tax rate about 24%. He says the company expects to continue its share repurchase program. Modeling share count flat to down 50 million shares in weighted average shares. On cash flow from operations, sees $700 million to $900 million per month. For Q4 GAAP earnings, sees 4-6 cents lower than non-GAAP earnings.

Here are some other takeaways from the call:

• Chambers says order growth in the latest quarter was within expectations; book-to-bill was greater than 1.
• Chambers said the company had a strong quarter in Japan for the first time in a number of years.
• Routing revenue grew 14% year over year, with high end in mid-20s; switching grew 3%; advanced technologies grew 17%.
• Service revenues grew mid-teens. Can grow in 20%-plus range in the future, and approaching one-fifth of total business.
• CRS-1 grew 150%; unified communications grew 45%; fixed switching 11%; WebEx 20%; security low double digits; high end routers 25%; applications networking 30%; telepresence grew over 1000% off small base.
• 11 product families with order run rates above $1 billion.
• Geography: Order momentum mixed. Asia/Pacific very solid, in high teens. Japan grew in mid 20s. Europe up 14%, up from 8% in Q2. U.S. experienced challenges, growth in mid-single digits. Emerging markets tend to be lumpy, does not include Asia. Revs grew 40%. but orders 10%.
• Service order growth above 30% year over year; product order growth 9% YOY. Commercial order growth 18%; enterprise 9%; service provider 6%.
• Continue to see 12%-17% long-term growth; some times will be higher and some times lower.
• Emerging market customers optimistic; U.S. and some European customers cautious.
• More on geographic breakdown. Asia/Pacific had good balance across segments. Public sector decreased year over year, though. India and China lead the way in A/P growth. High 30s growth in China in Q3; mid-teens in India. Japan had mid-20s growth, first time in 15 quarters with growth above 20% YOY, driven by build out of next generation networks, and evolution of leadership team in Japan. European growth in mid-teens; enterprise in mid-teens; commercial in mid-20s; consumer 30% higher; service provider mid-single-digits. Germany was up mid-20s.
• For U.S. 5% order growth; commercial low teens; enterprise mid-single-digits; federal up 20%; consumer 6%; however saw some challenges in service provider, down 3%.
• Emerging markets; 44% revenue growth, but 10% order growth. Latin America above 25% growth.
• Revenue: 14% growth in routers YOY. CRS-1 150%. Switching mixed. Modular switching slightly negative. Balance was good in advanced technology. Security 11% growth. Unified communications including WebEx up 46%. Wireless 7%. Storage 5%. Networked homes 4%.

In after hours trading Tuesday, Cisco was up 67 cents, or 2.5%, to $27.

Update

Cisco Systems CEO John Chambers says his U.S. customers are expecting a recovery in the economy around the end of the year. In a post-earnings interview with Tech Trader Daily Tuesday, Chambers asserted that the company is doing very well on things they can control. Revenue and profits in the April quarter were a tad better than the company’s guidance provided in February.

The one challenging area was in the U.S., where order growth was in the mid-single-digits. He notes that large enterprise orders were actually up about 6%, quite a contrast from two quarters ago, when the large U.S. enterprise customers were slowing. Chambers said the financial and manufacturing segments are now “growing better for us” than they did in the last two quarters. The service provider segment, however “was tough,” he says, with slightly negative growth, after 12 straight quarters of 20%-plus growth. Chambers says the number would have been positive without a tough comparison for the Scientific Atlanta business, but nonetheless would have been below recent performance.

Chambers is still highly optimistic on the long-term prospects for the carrier market, though. “IP still wins long term,” he says. “Video will drive network loads at levels higher than people think by a long ways.” If you look out 3-4 quarters from now, he says, the service provider segment should be growing in the mid-teens again.

Asked about how the company is coping internally with the softer economy, he said that Cisco tries to use downturns to strengthen its business and expand into adjacent areas. He says the company is looking for opportunities to buy private companies that might otherwise back been thinking about going public.

On the subject of the company’s $24 billion cash position, Chambers says the company “absolutely will pay a dividend in the future,” but not yet. He says at the company’s current valuation, large investors have told him they would rather he buy back stock.

Finally, Chambers says he is “doing my best” to get John McCain elected president; he remains the candidate’s national co-chair. Chambers downplayed any speculation that he would have an active role to play in a McCain administration, though. Chambers noted that last year he committed to the Cisco board that he would remain CEO for 3-5 years. “Right now,” he said, “I think it is very important that I stay at Cisco.”