Cisco FY Q3 Revs $10.4B; Non-GAAP EPS 42 Cents; Beats Ests; Sees Q4 Revs Up 25%-28% Including Tandberg (Updated)

Cisco Systems (CSCO) reported better-than-expected results for its fiscal third quarter ended May 1.

For the quarter, the company reported revenue or $10.4 billion, up 27% from a year ago, and ahead of the Street at $10.24 billion. Non-GAAP profits of 42 cents a share were ahead of the Street at 39 cents. Revenue had been for 23%-26% growth year-over-year.

Update: The company on the post-earnings conference call said it sees 25%-28% growth on a year-over-year basis for FY Q4, including the acquisition of Tandberg. CFO Frank Calderone notes that the acquisition accounts for about two points of the expected growth.

Cash flow from operations was $3 billion, up 49% from a year ago.

GAAP gross margin was 63.9%, down slightly from 64.1% a year ago.

In a statement, Cisco CEO John Chambers said that the results were “outstanding,” with record revenue and EPS.

“We witnessed a return to strong balanced growth across geographies, products and customer segments that we haven’t seen since before the global economic challenges began,” he said. “We emerge from this downturn gaining market share, a larger share of the total wallet spend of our customers, dramatically improved customer relations as a trusted technology and business partner, and having next-generation products in almost every product category. It is clear that our game plan for how to handle economic downturns is hitting on all cylinders.”

He said that this was “probably the strongest quarter in our history.”

The company finished the quarter with $39.1 billion in cash, down a hair from $39.6 billion one quarter earlier. Cisco said it bought back 87 million shares in the quarter an average price of $25.76, for an aggregate $2.25 billion. The company has $9.3 billion remaining on the current repurchase authorization.

In late trading, CSCO is off 17 cents, or 0.6%, to $26.57, heading into the conference call.

Update from the call:

• Chambers noted that non-GAAP product gross margin was 65.3%.
• Product book-to-bill was about 1.
• Non-GAAP net income was up 41% year-over-year.
• Market this year has unfolded about as the company expected.
• All four largest geographies, all up 30% or more in orders.
• U.S. strong; all customers segments up at least 25%.
• A/P up over 30% in orders. “Very pleased” with about 30% growth in Europe. Japan up in low single digits in orders.
• 12 of top 15 countries saw growth of more than 20% in orders; all but one was positive.
• New products growing at the high end of expectations. Includes Nexus and ASR product families, among others.
• Gaining share of customer spending, even in areas where the company is already a leader.
• Gained share in both switching and routing.
• Expenses will grow at a faster pace from here.
• Expect 2,000-3,000 headcount additions in next few quarters. (About 1,000 of those have already been hired.)
• Will continue to provide guidance one quarter at a time.
• Q3 had extra week, adding 4%-5% in year-over-year growth.
• For Q4, including Tandberg, Chambers sees revenue growth of 25%-28%.
• In the quarter, routing revenue was up 23% year-over-year; switches was up 40%; advanced technologies was up 18%; services were up 11%. “Other” revenue was up 71%.
• U.S. revs was up 29%; Europe was up 15%; Emerging markets was up 30%; A/P was up 41%; JApan was up 26%.
• Non-GAAP gross margin was 65.2%, down from 65.6% in FY Q2. Product gross margin was down to 65.3%, from 65.6%. Service was down to 64.8%, from 65.9%.

Stock Update: CSCO in late trading is off 95 cents, or 3.6%, to $25.79.

• DSOs are 39 days, flat with Q2. Inventory is $1.25 billion, up from $1.22 billion.
• Inventory turns were 11.1, down from 11.7 in FY Q2, but up from 10.7 a year ago.
• Headcount at quarter end was 68,574, up from 65,874 at the end of Q2, and 66,558 a year ago. (That includes about 1,700 from acquisitions, Chambers said on the call.)
  
• Service provider orders up about 30% year-over-year.
• Commercial orders up 40%.
• Enterprise orders up 26%.
• Consumer orders up over 50%.
• In U.S., enterprise orders were up 27% year-over-year, public sector up 44%, service providers up 30%, commercial 34%, consumer 64%.
• Order growth was up 28% in the U.K., with Germany up 12%, France up 27%, India up 40%, China up 24%. Italy was down 1%.
• Sequential revenue will be up 3%-5%; normally, the sequential increase in Q4 from Q3 is 5%-6%, the company said; but adjusting for the extra week in Q3, that drops the increase by 3%-4%; Tandberg adds 2% to sequential growth. The upshot is that revenue should be $10.71 billion to $10.92 billion, above the Street at $10.68 billion.
  
• Gross margin is expected to be 64%-65% in the quarter.
• Operating expenses will be 36.5%-37.5% of revenue.
• Cash flow from operations will be $2 billion to $2.5 billion.

Stock update: The stock as the call winds well into the Q&A is now down 51 cents, or 1.9%, to $26.23.