Analyst Conference Summary

conference date: November 5, 2008 @ 1:30 PM Pacific Time
for quarter ending: October 26, 2008 (1st quarter fiscal 2009)

Forward-looking statements

Overview: Now we are beginning to see an impact from the economic slowdown, but for Q1 it was not too bad.

Basic data (GAAP) :

Revenues were $10.3 billion, down sequentially 1% from $10.4 billion, but up 8% from $9.6 billion year-earlier.

Net income was $2.2 billion, up 10% sequentially from $2.0 billion, but flat against $2.2 billion year-earlier.

EPS (earnings per share) were $0.37, up 12% sequentially from $0.33, and up 6% from $0.35 year-earlier.

Guidance:

Fiscal Q2 (ending in January) revenues 5% to 10% down y/y. Non-GAAP gross margin 64%. Operating expenses at 39% to 41% of revenue. Other income about $130 million. Tax rate 22%. Share count down 50 to 100 million. Cash from from operations $1.5 billion to $2.1 billion.

Conference Highlights:

Believes their revenue and earnings were "solid" considering the "very challenging global economy." Met guidance. But October was bad and guidance assumes this will continue into fiscal Q2.

Non-GAAP numbers: Net income of $2.5 billion was flat from year earlier, but EPS of $0.42 was up 5% from $0.40 year-earlier. 65.6% gross margin, up 0.1% sequentially.

A tax benefit of $162 million was included in both GAAP and non-GAAP for the prior fiscal year, so excluding that the percentage growth y/y would have been better.

Cash flows from operations decreased to $2.7 billion. Cash and equivalent investments ended at $26.8 billion, up about $0.5 billion sequentially. In the quarter share repurchases required $1.0 billion in cash. Inventory decreased to $1.21 billion.

Intends to acquire Jabber for its messaging software. Acquired PostPath for its email and calendar software. Acquired Pure Networks for its home network management software.

Product sales were $8.6 billion.

Service sales were $1.7 billion.

Cost of sales was $3.65 billion. Gross margin was $6.68 billion. Total operating expenses were $4.20 billion, consisting of: R&D $1.41 billion, sales and marketing $2.28 billion, general and administrative $395 million, amortization $112 million. Leaving operating income of $2.48 billion. Interest income was $195 million. Other loss was $72 million. Income tax provision $404 million.

Switching revenues of $3.6 billion grew 8% y/y

Routing revenue of $1.9 billion grew 1% y/y.

Services grew 10% y/y.

First Wave Advanced Technologies grew 15%. Second phase grew 22%, with video systems up 21% and application networking services up 25%. $2.7 billion total advanced technologies revenue.

U.S., U.K., and Italy saw negative order growth y/y, but high growth in Russia and China, with 41% y/y revenue growth in emerging markets overall.

Now using their "playbook for economic downturns." Total y/y product order growth varied dramatically from August (7% up) to October (9% down). Book to bill was below 1. Challenges have spread to entire globe, especially in October.

Believes will come out of the downturn even stronger compared to peers.

67,647 employees at end of quarter. Paused hiring in mid-October.

Investments average AA and have seen little impact from finance crisis. Cisco Capital provides financing to customers and channel partners, which is a competitive edge in this environment. But are conservative in extending credit.

Orders were much weaker than revenues in the quarter.

Q&A:

Margins stable so far, but what if revenues continue to decline next year? Very few comparisons to 2001, which was a high-tech driven crisis. Our PE was 100 back then! Now our customers are mostly financially healthy. Network loads continue to grow. We are not facing any abnormal margin pressure, just normal pressure from our peers. We'll even see some declines in component prices, which will help margins. Supply chain management is very good at this point.

Loads on networks increasing during downturn? Yes, our own are growing about 400% per year. October was very slow for orders. Our guidance extrapolates October out going forward, but it would not be surprise if October was the bottom for us. It is possible things could get worse.

What would it take to make you more aggressive on expense cutting? We have been through several downturns. We know how to handle it. But we see this situation as a chance to break away from our peers.

Any affect from weaker oil prices in emerging markets that depend on oil revenue? They will make less money, but I don't think you will see major changes in capital spending. Russia might be different because of credit issues.

Do you expect switching and routing, relative to each other, to continue this trend? Routing will swing up and down with service provider build-out and willingness to make capital expenditures. We did well selling them video products. New product launches have gone well.

U.S. cash versus cash in general? We had $2.5 billion cash in the U.S. at the end of the quarter. We are within our target range. We do expect to continue stock buy back, which can be funded by cash generation in the U.S.

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