Analyst Conference Summary

conference date: November 4, 2009 @ 1:30 PM Pacific Time
for quarter ending: October 24, 2009 (1st quarter fiscal 2010)

Forward-looking statements

Overview: Continues sequential revenue improvement, but still well below year-earlier levels.

Basic data (GAAP) :

Revenues were $9.02 billion, up 6% sequentially from $8.54 billion, but down 13% from $10.33 billion in the year-earlier quarter.

Net income was $1.79 billion, up 66% sequentially from $1.08 billion, but down 19% from $2.20 billion year-earlier.

EPS (earnings per share) were $0.30, up 58% sequentially from $0.19, but down 19% from $0.37 year-earlier.

Guidance:

Q2 fiscal 2010 revenue expected to increase 1% to 4% on a y/y basis.

Conference Highlights:

Fiscal Q4 was a tipping point; growth trends in Q1 exceed expectations for normal economic times. The improving economy and Cisco's strategy will "drive more value into the core of the network ... key market transitions across collaboration, virtualization and video will drive productivity and growth." Lots of hyperbole about future opportunities in this presentation.

Non-GAAP net income was $2.1 billion, down 15% from year-earlier. Non-GAAP EPS was $0.36, down 14% from year-earlier.

Cash flows from operations were $1.5 billion, down sequentially from $2.0 billion. Cash and equivalents ended at $35.4 billion, up $1.4 billion in the quarter. $1.8 billion of stock was repurchased. On November 4, 2009 a $10 billion addition repurchase program was authorized.

New products included Integrated Services Router Generation 2 (ISR G2), IronPort Web Usage Controls, TelePresence System 1100, and also the Smart Grid Ecosystem.

Acquisitions underway include Starent Networks and Tandberg ASA.

Product revenue was $7.20 billion. Service revenue was $1.82 billion.

Cost of sales was $3.13 billion, leaving a gross margin of $5.89 billion. Operating expenses of $3.76 billion included $1.22 billion for R&D, $2.00 billion for sales and marketing, $440 million for general and administrative, and $105 million amortization. Leaving operating income of $2.12 billion. Interest and other income were $115 million. Income tax provision was $452 million.

Gross margins were very strong at 66.3% non-GAAP.

Product book-to-bill was above 1.

Share based compensation expense was $321 million.

After the quarter ended a coalition with EMC and VMware was announced, a virtual computing environment coalition.

United States product orders were flat y/y, compared to down elsewhere. Shows recovery is well underway.

New "council" collaboration organizational structure allows for speed, scale, flexibility and rapid replication.

Will begin a targetted growth in headcount.

Revenues by segment: Routers $1.6 billion, down 17% y/y; switches $2.9 billion, down 21% y/y; advanced technologies $2.3 billion, down 15% y/y; other $0.5 billion, up 9% y/y; services $1.8 billion, up 7% y/y. But sequentially most product categories saw revenue increases.

There was a $50 million one-time benefit from accounting changes.

Repeatedly suggested not modeling the second half of fiscal 2010 until results are in for the December quarter.

Q&A:

UCS implications for next year? We need one more quarter before we can make predictions. Initial results look solid.

ASR routers? ASR 1000 is off to a great start, probably over $100 million in bookings. ASR 9000 number of customers more than doubled in the quarter.

Fourth quarter (fiscal Q2) revenue guidance? Acquisitions won't close until first half of next calendar year. We believe you will see some companies with availability to spend more in the fourth quarter. Clearly in enterprise accounts, followed by service providers.

Why do you expect mix to reduce gross margins? We saw better volume and revenue, which helps margins. Manufacturing costs were lower due to our efforts. For fiscal Q2 we expect the service margin to drop because we are investing there. Product mix in the quarter will have more consumer products and set-top boxes, which have lower margins. Emerging market price competition is brutal, too.

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