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Following an upbeat report tonight by Cisco Systems (CSCO) of fiscal Q2 results and a Q3 forecast that both topped expectations, on revenue and profit, chief financial officer Kelly Kramer was kind enough to chat with me by phone.
The stock has added to gains in late trading, currently up $2.83, or almost 7%, at $44.92, and hit a new 52-week high of $44.98.
Kramer said the “biggest takeaway an acceleration from what we talked about last quarter,” in terms of seeing growth pick up while moving to more software revenue as a percentage of total revenue.
“Financially, it was a great quarter, super strong, with super-strong margins, super-strong cash flow, and the big increases in capital allocation.”
“That steady increase in the transformation of the business to more subscriptions and software, that just continues to grow, every quarter we make progress.”
She noted the company’s deferred revenue balance was up 36%, year over year, “again!” she emphasized. Kramer also noted out of total software revenue, “over half came from subscriptions.”
“It’s what we’ve been talking about the last few years here, doubling down on our core innovation pipeline, and we’re seeing the benefit of that with the take up in our switching portfolio.”
“And the return to revenue growth is a huge positive for us,” she added.
I noted that operating cash flow rose faster than revenue, up 8% versus revenue growth of 3%, and Kramer pointed out that free cash flow rose even faster, up 10%.
“We’ve been talking about the shift to software, and we’ve been deferring our revenue, and you’re seeing that it doesn’t impact our cash.”
I asked Kramer why she noted on the call this evening the expectation for a net cash position of about $12 billion to $14 billion.
Kramer said the company could get to zero, conceivably, and indicated the company is not totally averse to that, but that at the moment, it is working its way methodically through an enormous cash pile:
If you look at the balance sheet, we have $74 billion in cash, and $39 billion of long-term debt, so a $34 billion cash position, net. We had to pay for Broadsoft, we had to pay some tax, and then I have that $31 billion of the buyback, and then I have, say, dividends $12 billion the next year. On top of that, I will generate, say, $24 billion of free cash flow. That takes the net cash position down to $10 billion to $12 billion.
Now, we’re always doing small tuck-in acquisitions. We are very quickly trying to work through the excess cash. We’ve never been hampered by our cash being overseas. We’ve always taken on debt. Nothing has changed from an M&A strategy perspective. We’re always going to be doing acquisitions, in security, in software, and in cloud. What I’m saying is, let me digest — I don’t want to be buying my own stock and fighting against myself on price, but where we see these hundred-point drops in the stock, we want to be smart.
When we work through that, we want to be down [in cash.] We will always want to have that, say, $3 billion to $5 billion of cash on hand, always. But we’re not hung up on having more than that. We’re just continuing to work at it. We don’t want to be sitting there with a huge cash balance. We will certainly be at least at net cash, maybe even at negative. We want to do that smartly, to work through this big cash pile we have, to get the best return of that cash, whether it’s inorganic or negative.
I asked Kramer if the current yield, now about 2.9% at tonight’s price, with the increase in the dividend announced, is a response to anything investors have said to her about the kind of income yield they want.
Kramer pointed out “We have one of the highest yields, not just in tech, in the S&P 500. What we like, and what they like, is steady increases, with earnings growth. That’s what we have done consistently. We are continuing on that support of that dividend. But I do not get into a lot of discussions with investors of any kind of crazy yield. Honestly, the way I look at it is, I like being at a 3% [yield] and keep working up from a 3% yield. Do I want to be anywhere north of 4%? There’s no reason to do any kind of one-time thing.