Cisco: Live From The Analyst Meeting, CFO Repeats 12%-17% LT Rev Growth Goal; CEO Chambers To Stay At Least 3-5 More Yrs (Updated)

Time for round 2 at the Cisco Systems (CSCO) analyst meeting, where earlier this morning CEO John Chambers announced that the company plans to start paying a 1%-2% dividend, starting in the spring of 2011. Next up: CFO Frank Calderoni. Expect more details on the company’s thinking on the dividend strategy – and a peak ahead on the financial front.

• 9:47 Here’s Calderoni, who is channeling Chambers, wandering around with the slide show remote in his hands. He’s asking the audience if the company will continue its profitability and growth that the company has produced over the last 20 years. He’s asking if they can keep growing 12%-17% going forward; the room is not that convinced. But Calderoni says he has strong conviction that they can maintain profitability and hit growth goals. He says his goal is to get more people comfortable with the idea that 12%-17% is realistic despite the size of the company.
• 9:50 He will talk about the company’s track record; value and differentiation; and strategic growth and business model.
• 9:51 Calderoni says having vision/strategy/execution allows Cisco to cascade the 12%-17% growth goal throughout the company, to make sure they can deliver. Financial vision is to maximize the company’s performance going into the future. They balance innovation – investing in innovation – to make sure they have a robust portfolio, with the required payback in the future, supported by infrastructure to scale the business to meet the needs of the growing opportunity into the future.
• 9:53 On track record. Revenue for Cisco over 20 years shows a steep climb. Past inflection points: Internet growth in the 1990s; voice over IP in early 2000s; late 2000s, a market expansion phase. The company sees video, virtualizaton and collaboration as the next three inflection points.
• 9:56 On margins, he notes that gross margins have been stable� in recent years, despite adding some lower margin businesses to the portfolio. There have been some supply chain bumps in the latest 1-2 quarters; those things will happen from time to time. But despite that, margins – gross and operating – have been consistent over time.
• 9:57 Calderoni is going to a little back-of-the-envelope math on margin scenarios. Emerging countries mix increasing 10 points, would affect gross margins over a multi-year period by 10-15 basis points. A 5 point share increase in data center and unified communications, he says, could hit gross margin by 50-100 points. A 2.5x increase in the consumer business – Flip, Linksys, in particular – could hit gross margin by 25-50 basis points.
• 10:00 On cash flow, the company has been a constant cash generating machine. They how have close to $40 billion in cash. What to do with it? From 200o-2010, the company has spent $45 billion in R&D; made $30 billion in acquisitions; and repurchased $65 billion in stock. The company has made 141 acquisitions, and integrated them better than almost anyone.
• 10:05 Share count has come down 22%, as they bought back 3.1 billion shares. There is another $7 billion in share repurchases authorized; they will keep buying them back to improve EPS.
• 10:05 And then there’s a dividend – Chambers, as noted, says they will start paying a dividend starting this spring. Calderoni says that a “dividend makes sense for Cisco this fiscal year.” The yield, he says, will be “competitive.”
• 10:07 Calderoni is moving on to talk about value and differentiation, repeating the focus on video, virtualization and collaboration. He says only Cisco has the ability to address all of those transition points. On video, he says there is a “true voracity” for video. IP traffic will increase 4x from 2009 to 2014. 90% of network traffic will be video by 2013. On virtualization, he says 25% of network IP growth will be driven by virtualization. $50 billion addressable market over next 3-5 years. Collaboration: nearly a third of the market will be hosted by 2013. Market opportunity of $38 billion in two years.
• 10:14 Calderoni is talking how the company is using a “one Cisco” approach, to leverage the strength they have and sustain profitability – the idea is to sell more than just individual products, but instead to focus on network architecture. Not just about selling switches.
• 10:19 Calderoni says they have an architectural approach on about 200 accounts; they get 3.5x the account value as they move in that direction; the plan is to move from 200 “architectural accounts” to 500 accounts.
• 10:21 Moving on, to talk about growth. Long-term business model is 12%-17% revenue growth with operating income 28%-31% of revenue, no change.� He’s going to walk through how the company expect to grow going forward.
• 10:23 Global market view is for 11% growth in addressable market over 3-5 years.
• 10:24 Revenue mix to get to $40 billion, which is where it was in FY 2010. Heavily weighted still to switching and routing. Annual growth for next 3-5 years: mid-single digits for switching; high-single digits for routing, low teens for advanced technology and other; low-double-digit growth for services. Gives you 9%-10% long-term growth. So, how do you get to 12%-17%?
• 10:26 To get there, he says, they add another 3%-4% from gain in wallet share, with 1% from telepresence alone. Other gains in unified communications and other advanced and emerging technologies. He also expects gains of 0%-1% in emerging countries (including Brazil, Russia, China and India) and 0%-2% from market adjacencies, including smart grid, safety and security, smart and connected networks, communities and health care. And that gets you to 12%-17% range. Over 3-5 years, switching and routing becomes a bit less significant, but still a major contributor to revenue.

OK, time for Q&A. Chambers has rejoined Calderonia on stage.

• Q: John, are you retiring? A: As long as they want me, I will be here a minimum of 3-5 years.
• Q: On sentiment about large-cap tech, which has been quite negative. Talk about valuation. A: IT is a show-me market. We are 6 quarters into the recovery. Market not slowing; we’re back into normal growth area. About to see a decade-long run of productivity in the U.S. and elsewhere around the 3%-5 range. We are in the hottest spots there is to be.� He says there will be winners and losers in technology; very similar to what you saw in the mid-90s, and in service provider with a number of large companies. Talk to CEOs, they all have the same agenda. Productivity, competitiveness, flexibility, it is all about technology. I’m very bullish on our long-term prospects; but you are in a series of product transitions.
• Q: What about the big cash piles that large cap companies have? We have over $30 billion outside the U.S. There are problems having the highest tax rate in the world in the U.S. I think it would be a tremendous opportunity lost not to bring back the cash, even if you tie it to job creation. Of top 20 companies in the world, we used to have 18, and now in the single digits. Easiest way to generate jobs is to bring back the money, Implore people to do that. Of Fortune 100, we may be only one that is growing headcount in the U.S. by 10%. Repatriation is something we ought to do quickly at the beginning of this calendar year.
• Q: On macro economy and the current quarter? A: Not going to comment on the quarter. There are no major surprises. Asia has remained strong as expected. Europe we said was doing better, and seen some surprises in Europe. U.S. challenged a little bit, as expected.
• Q: On the dividend? A: It is right for a whole bunch of reasons. Probably will pay 25%-35% of the cash generated in the U.S.; could be at higher end of 1%-2% range if they can repatriate the cash outside the U.S.
• Q: Why not do it right now? A: Calderoni says they want to see how tax policy plays out, and how repatriation issue is settled. He notes that they need to invest internally, make acquisitions and buy back stock, as well as paying a dividend. But he says they will pay a dividend this fiscal year.
• Q: On increasing operating expenses? Calderoni says the company needs to continue invest in the business over the long term. Increased spend and headcount. Committed to adding another several thousand people. Balancing where things are today, but “we want to play and go for the long term.”
• Q: Any drive to take bigger risks to drive higher growth?� Chambers says on routing and switching, part is tied to GDP, but large part is tied to the Internet and video explosion.
• Q: Will 12%-17% growth be primarily organic? Chambers says he sees no problems with growth. He also says he factors out acquisitions from the growth rate. He says they prefer to buy small and medium-sized companies, rather than large acquisitions.
• Q: Valuation about as low as it has ever been for Cisco shares; there has been perception that Cisco is just a GDP stock; how can we think about a point where the company can disengage from the GDP numbers and to get the valuation back? Chambers says people have associated Cisco with high single digit growth rate numbers; companies with high P/Es are in markets where Cisco is operating.� He says they need to articulate the current opportunity better.
• Q: Do you think there will be a need for a tax holiday on repatriation in order to see large company consolidation? Chambers says they see a Y in the road coming – and hope that we can bring the cash home and create jobs. Whether you acquire for cash or stock depends on growth and P/E rations. Either is fine for small deals. Repatriation, if it occurs, some will be used for job creation, some to drive up stock prices.
• Q: In core markets, investors are questioning ability to innovation in core router and switching? Chambers basically says, he doesn’t think so. It is an architectural play, he says. Watch when we enter a market – how often do we not end up #1? I think we will do very well in advanced technologies, which are now 25% of our business. I’m real comfortable with where we are, he says.
• Q: With Mark Hurd at Oracle, how do you view them as a competitor? Chambers says they are very savvy; there will be consolidation in architectural plays, around Oracle, IBM, Microsoft, Cisco. Networking is probably not the top 1, 2 or even 3 priority for Larry Ellison or Safra Catz. In our best interests to work with both Oracle and SAP. We’re good on taking on big competitors; against big competitors, we almost never lose.
• Q: On supply chain right now? Calderoni says the company made a conscious decision to increase its purchase commitments to deal with the supply chain, as many suppliers pulled back on capacity. He notes they are not just for the next quarter, but for multiple quarters. We looked at requirements over the next couple of quarters. We will continue to monitor the situation as we go forward. The number of components on expedite situation started last quarter at 500, and ended at around 300, and continue to make progress.
• Q: Some investors have been concerned about a difference in tone from Cisco and from other peers in the space on the big picture, which leads to questions on market share, with more competitors that have gained operating margin than in years past. Chambers responds that there are advantages to seeing trends ahead of time. Within market share games, we will more than hold our own, he says. Chambers says he is comfortable about competition with every one of their peers.
• Q: On expectations for how to get to 12%-17% growth, the details are slightly different than last year, can you talk through the differences in growth? Also, have you ever thought about breaking up Cisco into 2 or more pieces, to generate some pieces with higher growth rates? Calderoni said some assumptions do change every year, including GDP expectations. GDP growth expectations and industry growth forecast is slightly lower than last year. Services piece is about in line with last year, growing at faster rate than the rest of the business. He says he wanted to be a little more conservative on market adjacencies – and demonstrate that they can even then get to the 12%-17%. Chambers says in terms of breaking up the organization, he says the speed of execution with the current organization rivals that of smaller companies. He says law of large numbers applies to 1-2 product companies – but he notes that Cisco is not a company that fits that description. They are not a traditional conglomerate, command-and-control company, he says.
• Q: What percentage of enterprise switch market is an architectural play – and what part of the market is vulnerable to market share loss. Chambers says HP will be a good competitor; we will take them on in architecture and culture. He says his own view is that the last place he would want to be in routing or switching in the long run is between Cisco and the Chinese. Not a given we will succeed; you have to have a healthy paranoia.

That’s it for the CFO session.

CSCO is up 49 cents, or 2.3%, to $21.75.