Analyst Conference Summary

conference date: February 4, 2009 @ 1:30 PM Pacific Time
for quarter ending: January 26, 2009 (2nd quarter fiscal 2009)

Forward-looking statements

Overview: Revenues were down 7.5% from year-earlier, at mid-range of prior guidance. Even Cisco is being hurt by the disfunctional economy. It is still very, very profitable. The presentation by management was exceptionally long.

Basic data (GAAP) :

Revenues were $9.1 billion, down 12% sequentially from $10.3 billion and down 7.5% from $9.8 billion the year-earlier quarter.

Net income was $1.5 billion, down 32% sequentially from $2.2 billion and down 27% from $2.1 billion year-earlier.

EPS (earnings per share) were $0.26, down % sequentially from $0.37 and down 21% from $0.33 year-earlier.

Guidance:

Very difficult to make a forecast; numbers could be up or down from guidance. Revenue for fiscal Q3 2009 will be 15% to 20% down compared to year-earlier. Gross margin about 63%. Operating expense at 40 to 42% of revenue. Tax rate about 22%. Cash flow from operations between $1.5 and $2.1 billion if revenue guidance is correct.

Conference Highlights:

A solid quarter. Despite a challenging economy, generated $3.2 billion in cash flows from operations. Cash and equivalents ended at $29.5 billion.

Can return to long term planned growth rates if global economy returns to growth. Are aggressively managing expenses; non-cash operating expense decreased 5% sequentially. Hiring has been paused.

Product revenue was $7.35 billion, service revenue $1.74 billion.

Deferred revenue ended at $9.3 billion, up sequentially.

Stock repurchases used $600 million of cash. $6.8 billion remains authorized for repurchases.

Employee based stock compentation was $267 million. Also excluded from non-GAAP net income was $249 million in acquisition related expense. Added back in are $162 million income tax. Making non-GAAP net income $1.87 billion, or $0.32 per share, down from $0.38 per share year-earlier.

Acquisition of Jabber was completed, and equity in VMware was increased.

Cost of sales was $3.37 billion. Gross margin was $5.72 billion. Operating expenses of $3.95 billion include: $1.28 billion for R&D, $2.16 billion for sales and marketing, $380 million for general and administrative, and $136 million for amortization of intangibles. Leaving operating income of $1.77 billion. Interest income was $159 million. Other income was negative 64 million. Income tax provision was $364 million.

65 new telepresense accounts. Going to see revenue growth driven by new technologies in future. Video will load up current networks, requiring further equipment upgrades. Since U.S. will be first economy to recover, investments in market adjacencies will be focussed there. But in long run economic growth will come from developing countries, so investing there is important.

Total year over year order growth continued to deteriorate throughout the quarter, with total product orders decreasing 14% from year-earlier, with a 20% drop from year-earlier in January. Book to bill was slightly below 1.

Revenue by geography: U.S. and Canada $4.7 billion, down 9% y/y; Europe $2.0 billion, up 1% y/y; emerging markets $1.1 billion, down 11% y/y; Asia Pacific $0.9 billion, down 12% y/y; Japan $0.3 billion, up 1% y/y. But orders were down more than revenue, with the worst being U.S. orders down 18% y/y and emerging markets down 23%. Germany was an exceptional growth point. U.S. service provider orders were down about 30%, enterprise down in high teens, commercial sector down in low teens.

By product, switching revenues declined 11% y/y, routing down 23%, services up 10%, advanced technology grew 1%. A bright spot within advanced technology was video systems, up 18%.

64.0% non-GAAP gross margin, down 1.6% sequentially.

We continue to provide financing to customers and so far have not seen any deterioration in payments.

Five priorities for resource reallignment are virtualizatio, collaboration, video, globalization, and Cisco 3.0.

If things get worse, layoffs might become necessary. But not considering one at this point in time. Some realignment we reduce headcount by 1500 to 2000 employees.

Q&A:

Competitive environment and pricing? In slowdown it is no different in pricing pressure from what we saw in prior slowdowns. Discounting pressures are not out of line. Mix and volume were responsible for deteriorating margins.

IT budgets of customers? Varies by customer segment. Service provider budgets are going to be driven by new loads despite current hesitation about spending. Enterprise IT budgets will be set conservatively, but change is more likely on the upside than on the downside.

Our customers don't know their own demand futures. Seasonality will still be there in 2009, but the background growth rate is not very predictable.

Believes stimilus and getting credit markets going again will mean the recession will not be as long as some expect. President Obama is off to a great start. So we will focus on new opportunities in market adjacencies. We try to catch market transitions driven by customers, like the shift to the media enabled home.

Prices for acquisitions have become very reasonable. We like a company with a product that is about to come to market and has about 100 revenues.

What would a recovery look like, in terms of product? Routers tend to tie closely to loads on network, not so much on the economy. Advanced technologies are likely to lead a recovery, in particular collaboration 2.0.

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