Analyst Conference Summary

conference date: August 5, 2008 @ 1:30 PM Pacific Time
for quarter ending: July 26, 2008 (4th quarter fiscal 2008)

Forward-looking statements

Overview: Resumed sequential revenue growth. First $10 billion quarter in company history. Guided to slower growth in second half of calendar 2008 (first half fiscal 2009).

Basic data (GAAP) :

Revenues of $10.4 billion were up 6% sequentially from $9.8 billion and up 10% from $9.4 billion year-earlier.

Net income was $2.0 billion, up 11% sequentially from $1.8 billion and up 4% from $1.9 billion year-earlier.

EPS was $0.33, up 14% sequentially from $0.29 and up 6% from $0.31 year-earlier.

Guidance:

Believes the economy is a relatively short challenge going forward, but it is hard to predict when customer spending will pick up again. Guidance will be only for first half of fiscal 2009.

Q1 fiscal 2009 revenue growth of 8% y/y. Expect 65% gross margin. Operating expenses 37% of revenue. $175 million interest and other income. 24% tax provision. Modeling share count to be flat to down 50 million. $600 to $800 million per month cash flow from operations. GAAP earnings to be 4 cents to 6 cents per share lower than non-GAAP EPS.

Q2 fiscal 2009 revenue growth of 8.5% y/y.

Conference Highlights:

Still very confident in long-term growth guidance of 12% to 17% annual growth. We plan to continue to invest heavily in markets and technologies. Seeing same uncertainties, but U.S. enterprise market appears to be stabilizing. However, worldwide service provider orders appear to be moderating.

Non-GAAP results: net income $2.4 billion, up 6% from year-earlier. EPS $0.40. Excluded were stock-based compensation of $258 million, $68 million for compensation expense for acquisitions and investments, and $203 million amortization, less an income tax effect of $151 million.

The market is in transition and Cisco is using that opportunity to "expand our share of customer spend and to aggressively move into market adjacencies.

Cash flow from operations was $3.5 billion, up from $2.7 billion year-earlier. Cash and equivalents (including investments) ended at $26.2 billion, up $1.8 billion sequentially. $1.35 billion was spent on repurchasing stock. Inventories were $1.24 billion. Accounts receivable $3.82 billion. Deferred revenue $8.86 billion.

DiviTech acquisition completed. Intends to purchase Pure Networks. Invested in Almaz Capital venture fund for Russian technology sector.

Product sales were $8.64 billion. Service revenue $1.72 billion.

Cost of sales was $3.70 billion. Gross margin $6.67 billion. Operating expenses of $4.14 billion consisted of R&D $1.31 billion, sales and marketing $2.16 billion, general and administration $0.52 billion, and amortization of $149 million. Leaving operating income of $2.53 billion. Interest and other income was $157 million. Income tax provision $672 million.

65.2% non-GAAP gross margin, flat from year-earlier. Operating margin was 29.5%.

Book to bill was comfortably above 1.

Emerging company orders were up 10% overall. Better than 30% in China, 20% in India, 40% Russia and Mexico, 30% Brazil. Japan was 10% y/y. Europe 11%. Canada and United States 7%. Revenues were $5.5 billion in U.S. and Canada, up 5% y/y. European revenues were $2.1 billion, up 7% y/y. Emerging markets $1.3 billion, up 42%. Asia Pacific $1.2 billion up 14%. Japan $0.4 billion up 8%.

Routing revenue of $2.0 billion grew 8% y/y, led by high-end. Switching $3.5 billion revenues showed 5% growth. Advanced technologies revenues were $2.6 billion, up 15% y/y. Other revenue $551 million, up 9%. $1.7 billion in service revenue, up 16% y/y.

Emerging technology revenues are not significant, but growing rapidly, including telepresence, digital media systems, and physical security.

Enterprise and public sector growth was approximately 10% y/y, with enterprise at 14% (13% in U.S.) and public sector at 4%. Commercial orders grew 17%. Service Provider orders grew 5% y/y.

Web 2.0 collaboration productivity tools are beginning to show traction.

Service Provider capital spending signals are currently mixed. Cisco is in a good position to capture a larger percentage of their IP network spend.

$4.8 billion backlog.

66,129 employees at end of quarter, up 900 sequentially.

Q&A:

Does expanding into adjacent markets mean acquisitions? Home, small business, medium sized businesses, enterprise, and service providers are all markets for expansion. Internal development and partnerships, primarily big to big. Acquisitions of any size. Ideal is a company with 100 engineers with a really hot product about to come to market.

Customers are telling us, outside U.S., that their own growth is pretty solid. Emerging markets are balanced, the best we have ever seen. Even U.K. growth was solid. But the United States is mixed, with some customers doing very well and others cautious. Most of our global customers see a positive turn in early 2009.

Several quarters ago enterprise was slow, now service provider. Is there still risk on enterprise side? Our service provider relationships have never been better. Loads on networks are beginning to take off due to video. Service provider spending will return to double digit growth in the long run. It is too early to call a trend in enterprise market in U.S.

Assumptions behind weak guidance? Ended fiscal 2008 with a strong backlog and defered revenue, which bodes well. Even taking that into consideration, there are tough year-to-year compares, especially in service provider segment.

Where does improved Q4 over Q3 guidance come from? While a competitor sometimes gains market share in a particular area for a while, we think we are gaining in collaboration and video. Also, Q4 is a bit easier of a y/y comparison. There are a lot of moving parts, the ones we can control seem to be going the right way.

Competitors are growing faster in router market? First, we have gained market share in high-end routers. Even at our size orders can be lumpy. Third, I would challenge you on sustainable gain by our competitors. I am real comfortable with our product range, from the core to the edge. We do have to do a little bit more on the edge, and some other product areas. I do want to congratulate Juniper, they had a very good quarter. But any advantage of a competitor will be temporary.

You have been below your long term growth rate for a while, and guiding to below going forward? Currency effects will reverse at some point, as will other factors like the economy and service provider spend.

Lower operating cash flow guidance? Over the last 2 quarters we tried to be cautious on spending. We are now making investments for the long term. We see a number of opportunities. To deliver on the 12 to 17% long term goal, we need to make investments in the next two quarters, which will bring down margins and cash flow. If anything we should be more aggressive on expenses to enhance long term profitability from adjacent technologies.

Unified communications color? Order rate was over $2.5 billion annually. People will spend on IP telephony. With telepresence the ramp up is slower in an uncertain economy. But we are moving from pilots to implementation on a broad front.

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