CSCO
Cisco

conference date: May 8, 2007 @ 1:30 PM Pacific Time
for quarter ending: April 28, 2007 (3rd quarter fiscal 2007)

Forward-looking statements

Overview: Strong revenue and profit growth year-over-year, slightly above guidance, but not up to some wilder expectations.

Basic data:

Revenue of $8.9 billion is up 6% sequentially from $8.4 billion and is up 21% from year-earlier.

GAAP net income was $1.87 billion, down 2.6% sequentially from $1.9 billion but up 34% from year-earlier. GAAP EPS was $0.30.

Non-GAAP net income was $2.1 billion; up 16% over year-earlier. Non-GAAP EPS was $0.34.

Cash and investments ended at $22.3 billion, up sequentially from $20.7 billion.

Guidance:

Fiscal Q4 2007 (first full year with Scientific Atlanta) 15 to 16% year-over-year revenue growth. Without Scientific-Atlanta would be in mid-teens. Non-GAAP gross margin 64.5%, operating expense 35.5% of revenue, $200 million interest and other income, tax rate 25%, cash flow from operations $500 to $700 million per month. Share count flat to up 40 million.

GAAP to be $0.03 to $0.05 per share less than non-GAAP due to acquisitions and stock based compensation.

Guidance excludes acquisitions planned for quarter.

Conference Highlights:

Momentum is stronger than a year ago. U.S. service provider customers are seeing our strategic value. The global commercial market is solid and well balanced. Scientific-Atlanta is doing better than plan. The total market available to Cisco is expanding due to our intelligence in the network architectural approach. Believes approaching an inflection point. Ability to move into "market adjacencies" will allow continued strong growth. Most competitors have products in a limited number of categories.

Believes gaining market share against all major competitors. Consumer video and broadband build-out are driving purchases.

Stand-alone Cisco revenue was $8.1 billion, up 17% from year-earlier.

Product book to bill was greater than 1.

Stock buybacks were $1.5 billion. Cash flow from operations was $2.4 billion.

Routing segment revenue was up 16% from year-earlier to $1.8 billion.

Switching revenue was up 15% from year-earlier to $3.1 billion.

Advanced Technologies revenue was up 24% from year-earlier to $2.1 billion. Within that storage revenue grew 50%; communications high 30's; security mid-20s; wireless mid-teen percent. Home networks was flat.

Other revenue was $0.5 billion.

Scientific-Atlanta revenue grew 30% to $752 million.

Services revenue, on a combined basis, grew 19% year-over-year to $1.4 billion.

Geographically, all areas showed growth. Year over year, emerging market orders were up 40%; Euope low teens; United States mid-teens; Asia Pacific about 20%; Japan down slightly. Revenue was: U.S. 52%; Europe 22%; emerging 12%; Asia 11%; Japan 3%.

Commercial orders were up 20%; Service Provider orders 17%, with Scientific-Atlanta subset up 30%; Global Enterprise up 14% year-over-year.

Non-GAAP gross margin was 64.5%, down slightly sequentially from 64.8%.

Non-GAAP tax provision was 25%.

Non-GAAP operating expense was $3.125 billion or 35.2% of revenues.

Inventories were down to $1.29 billion. Deferred revenue was up to $6.3 billion.

Headcount rose to 56,790.

Product pipeline is strong.

There are still uncertainties in macroeconomics and capital spending.

Acquisition, new product, and new customer announcements from the quarter were rehashed.

Webex and Ironport acquisitions are expected to conclude in fiscal Q4.

Q&A:

Similar mix going forward for slower US growth? U.S. business is solid across segments. Enterprise was a valid concern for this quarter. Commercial was stronger this quarter than last. Service providers were on fire. Outside U.S. the economies are growing faster than the U.S., so would not be surprised to see emerging markets continue to grow faster.

Scientific-Atlanta mix? 707 effect is hard to quantify. Market shift to HD (67% of all units). 32 million set tops are installed, those a mainly SD. So at subscriber level have a HD, DVR movement. Transmission business had a great quarter as customers seek more bandwidth. 29% of total was international business.

Weak dollar impact? No, we bill in US dollars and pay in dollars so our exposure is minimal and hedged.

Trend going forward above 10 to 15% growth? When we get there we will tell you. For now growth in the mid-teens is aggressive, we don't want to promise something we cannot deliver.

Software opportunities? Using 2.0 collaboration capabilities we have evolved out organizational structure. We plan to expand software area in coming year. 65% of engineers in company are software engineers already.

Seasonality? Quarters based on normal seasonality are remarkably predictable. But best way to look at it is by comparing quarters year-over-year.

US Enterprise market going forward? Stayed fairly flat, in mid-single digits this quarter. Customers being conservative on budgets, expecting a soft landing. Has better confidence for fiscal Q4 than they had for Q3.

Services outlook? Our services gross margins are very predictable and solid. In advanced services we have partnerships which we are expanding. Major variable is how much the mix is and how much we add headcount ahead of sales. Services sell traditional hardware.

IPTV market? The market is evolving to Cisco's advantage. Scientific-Atlanta has helped us get shots at accounts we did not have access to a couple of years ago. You have to have the triple play to compete (voice, data, video). Telephone companies realize the importance of adding video. Shipped over 150,000 IPTV set-tops this quarter.

Operating margins going forward? Goal is 29 to 31% range. Scientific-Atlanta did bring the range down 1%. We are going to increase head count to take advantage of market adjacency expansions.

Routing business color? In Japan we are dependent on service providers, won't see a great deal of growth until next round of insfrastructure build. Believes will see some growth by end of 2007. CRS1 did well as did GSR and 7600. In midrange are having a product transition which is causing short-term lesser growth.

China? Hard market to predict. Have very tough competitors and playing field is not always level.

Revenue grew faster than net income, year-over-year? Operating income grew 19% year-over-year. But one-time benefit a year ago of $0.02; excluding that earnings grew as fast as revenue. We are investing heavily in new areas where the payoff may be more than a year away.

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Copyright 2007 William P. Meyers