Analyst Conference Summary

conference date: February 6, 2008 @ 1:30 PM Pacific Time
for quarter ending: January 26, 2008 (2nd quarter fiscal 2008)

Forward-looking statements

Overview: Solid quarter, but expenses grew faster than earnings compared to year-earlier quarter. Guidance is not as optimistic as it has been lately.

Basic data:

Revenues were $9.8 billion, up 2% sequentially from $9.6 billion, and up 16.5% from $8.4 billion year-earlier.

Net income was $2.1 billion, down 5% sequentially from $2.2 billion and up 7.2% from $1.9 billion year-earlier.

EPS (earnings per share) were $0.33, down 6% sequentially from $0.35 and up 6.5% from $0.31 year-earlier.

Guidance:

Long term 12% to 17% year-over-year growth, but times may come when a quarter is above or below these growth rates.

Forecasting next quarter is challenging. So we are going to be cautious in guidance.

Fiscal Q3 2008 guidance is for revenues up 9% to 11% from year-earlier. [See fiscal Q3 2007 Cisco summary.] Gross margin 65%. Tax rate 24%. Cash flow from operations $700 to $900 million per month. Operating expenses around 37% of revenue. Share count is estimated down 50 to 100 million shares.

Conference Highlights:

We are comfortable with our long-term revenue growth guidance of 12% to 17% per year. European and U.S. customers are becoming increasingly cautious, but we believe this will be a short term challenge. China and India customers expect continued strong growth. This is the first time we have missed our forecast for a January quarter.

non-GAAP numbers: net income of $2.4 billion up 14% from year-earlier. EPS $0.36 up 15% from year-earlier.

Balanced results in all product lines and geographies.

Cash flows from operations were $2.4 billion, down sequentially from $3.1 billion and down from $2.7 billion year-earlier. Cash and equivalents ended at $22.7 billion. 139 million shares of stock were repurchased at an average of $28.67 per share, total $4.0 billion. $11.8 billion remains authorized for repurchases. Inventory ended at $1.27 billion. Deferred revenue ended at $7.98 billion.

Headcount ended at 64,087.

Navini Networks and Securent acquisitions were completed.

Cisco TelePresense customer base reached 100 customers.

Product revenue was $8.25 billion. Routing revenue grew 18% y/y to $2.0 billion. Switching grew 11% to $3.3 billion. Advanced technologies grew 25% to $2.4 billion. 10 product families now have annual run rates over $1 billion. Other product revenue was $0.5 billion.

Advanced technology components: Unified Communications (including WebEx) revenue growth y/y 60%; storage 30%; wireless 10%; networked home 5%; security 12%.

Service revenue was $1.59 billion, up 18% y/y. It was 16% of total revenue.

Cost of sales was $3.5 billion, leaving gross margin of $6.3 billion. R&D expense was $1.22 billion, sales and marketing $2.08 billion, general and administrative $520 million, amortization of purchases intangible assets $116 billion, for total operating expenses of $3.94 billion. Interest and other income was $234 million. Income tax provision was $578 million.

Order growth was good with product book-to-bill of approximately 1.

Market transitions is a core competency for Cisco. Phase 2 of the Internet, driven by Web 2.0 technologies, will be driven by collaboration technology. We are dramatically differentiated from our competitors in this and are leading the market transition.

Geographic order growth (y/y): emerging markets 24%; Asia Pacific 23%; U.S. 12%; Europe 8%. But emerging market sales tend to be lumpy.

By segment, orders were up (y/y) 20% for commercial, 20% for service providers and up 11% for global enterprise including public sector.

Non-GAAP gross margin was 65.5%, down 0.1% sequentially.

We plan to expand our market share during these challenging times.

Q&A:

Guidance implies continued deterioration? I am optimistic the problems will be short term. We did see a rapid slowdown in orders between December and January. We don't expect further deterioration. We are always transparent and conservative in guidance.

Impact by division? We are better at forecasting overall trends than specific segments. But service provider market is solid except in Europe. Datacenter growth is expected. Switching is tied to enterprise and commercial, could be more challenging going forward, but has been strong.

Keep in mind we are guiding to 10% growth, so it is slower growth, not a decline. Emerging markets are building infrastructure and we expect them to keep expanding at a rapid rate compared to U.S. and Europe. Europe only saw drop for service providers, but enterprise market had strong growth.

Vertical weaknesses? U.S. financial vertical was solid, up 21%. Retail and transportation were softer. Europe service providers in January, the weakness was in challengers, not established providers.

Emerging market growth rate? Better to watch order growth, which is less lumpy than revenue growth. Look for 30% year to year.

What actually slowed down in January? Was not any particular segment.

Why not manage operating expenses lower in this situation? We view this as an opportunity to execute our strategy and prepare for the upturn and market share capture.

Why do you think this will be short? Our customers have strong balance sheets. We are transitioning to a new Internet so service providers cannot afford to be left behind.

Hiring slowdown? We won't stop hiring, but we may be more careful and move resources around internally. We need to add headcount in emerging markets.

As P/E ratio's come down, acquisitions become more attractive, but our ability to develop internally is our main advantage.

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