$CSCO – earnings + conf call update;Chambers notes that business trends weakened in the back half of June and into mid-Jul

CSCO – earnings + conf call update
· Bottom Line - revs for the Jul Q a touch light (revs came in +27% vs. the St +27.5%); GMs fell short by ~800bp while op margins beat and EPS was ~.01 ahead of the St.  The outlook for the Oct-end period was light of the St too on both revs (up 18-20% vs the St +21.4%) and GMs (64% vs. the St 64.8%).  Chambers tone at the start of the call spooked people as he talked about seeing higher levels of uncertainty and mixed signals from his customer base.  However, by the end of the call, his commentary was a bit more balanced.  Chambers notes that business trends weakened in the back half of June and into mid-Jul but finished out the month of Jul very strong (he thinks the weakness coincided w/all the headlines around Europe); Chambers was asked about business so far in Aug but didn't comment other than to say that he was "not seeing anything unusual in the overall business momentum".  Order trends in the Q were strong (orders overall were up 23% and Chambers said Europe was actually stronger than expected) and product B2B was above 1 (the pipeline of business opportunities also was strong according to mgmt).  Chambers noted that his customers are a bit more cautious on their outlook but are still calling for growth (~2%) in H2 and that odds of a double dip were v low.  On components, it looks like procurement problems and supply chain challenges hurt GMs (they say by ~100bp - on the call they talk about "chasing" components and having to use air freight more, etc, all of which added to their COGS) but mgmt was sanguine on the outlook here (Chambers said supplier lead times have started to stabilize).  For CSCO's own lead times, Chambers said they are back within the normal range (for the first time within 1 year).  Finally, CSCO said its public business (i.e. governments around the world) was pretty strong (this has been a big worry for tech in light of all the austerity measures) and the outlook was pos. here too.

· revs came in $10.836B vs. the ST $10.884B
· revs came in +27% vs. the ST +27.5%
· EPS 0.43 vs. the St 0.42
· GMs 64% vs. the St 64.8%
· says global eco showing mixed signals
· inventory $1.327B vs $1.25B last Q (up 6% Q/Q)
· inventory purchase commitments were $4.3B, up 7% Q/Q
· def revs $11.088B vs $10.3B last Q
· EPS would have been 41.2c w/21% tax rate (vs headline 43c)
· op margin 28.6% was ahead of the St 28.2%
· Product B2B was slightly >1
· Cash $39.9B as of the end of the Q
· Hired ~2K incremental people in the Q (not including acquisitions) – this compares to ~1K headcount adds in FQ3.  70% of those 2K came in the US.
· Product orders: +23% in the Q overall.  4 largest theaters up 20-35% Y/Y.  EM +35% w/EU up mid-20%s while AsiaPac and US were +20%.  Japan was flat.  China was up 20%+.  Chambers says Europe didn’t have as tough a Q as people feared.  Chambers says balance across Europe was pretty good, even in Southern Europe (Italy +9% and Spain +20%).
· Product linearity during the Q (in terms of product orders) was normal, but Chambers says that business trends weakened in the back half of June and into mid Jul.  However, the end of Jul was very strong.
· Customers (orders): public and enterprise up mid 20%s while consumer was flat Y/Y.
· Prodcucts (revs): Advanced Tech revs +27%; switching +27%; routing +15%.  Networked Home dwn a bit more than 10%.
· Says continue to see challenges in procurring components although some improvement.
· Supplier lead times have stabilized but are still longer than we would have liked.  Says component procurement issues could last for the remainder of this calendar year.
· Product lead times to customers within normal range for customers as we have continued to make progress on this front.  Says for the first time in nearly 1 year, lead times getting back to normal.
· Seeing some uncertainty and mixed signals from customer base.  CSCO says its large customers would agree w/what the Fed said yesterday (i.e pace of recovery is slowing).
· Chambers says the odds of a double dip are v low.
· Says many of their customers expecting 2% growth in H2.
· They reit long-term growth targets
· Chambers says not seeing any major shifts on the competitive front
· Says higher manufacturing costs + supply chain constraints hurt margins by 100bp; they also saw unfavorable mix impact driven by new products (which have lower GMs than older products); pricing + higher discounts also hurt margins.
· The order pipeline looks pretty good.  Some large orders seeing double checks by the customers (i.e. approval process getting a bit longer).
Guidance
· Revs seen up 18-20% Y/Y in FQ1 – the St was +21.4%
· They see GMs 64% for the Q (they say as supply chain improves, GMs will return to 64-65% range).  Opex seen 37-38% of revs.  Op margins seen 27%