Analyst Conference Summary

conference date: August 5, 2009 @ 1:30 PM Pacific Time
for quarter ending: July 25, 2009 (4th quarter fiscal 2009)

Forward-looking statements

Overview: The slump continues, but still remarkably profitable.

Basic data (GAAP) :

Revenues were $8.54 billion, up 4% sequentially from $8.2 billion, but down 18% from $10.36 billion in the year-earlier quarter.

Net income was $1.08 billion, down 17% sequentially from $1.3 billion and down 46% from $2.01 billion year-earlier.

EPS (earnings per share) were $0.19, down 17% sequentially from $0.23 and down 42% from $0.33 year-earlier.

Guidance:

For Q1 of fiscal year 2010, revenue down 15% to 17% on a year/year basis. Non-GAAP gross margin about 64%. Interest and other income about $25 million. Tax rate 22%. Share count up 50 million. Cash flow from operations $1.2 to $1.5 billion.

Conference Highlights:

Non-GAAP net income was $1.8 billion or $0.31 per share, down 23% y/y. Non-GAAP gross margin was 65.3%, up 0.2% sequentially.

For full fiscal 2009, EPS was $1.05 GAAP, $1.35 non-GAAP.

"We saw a number of positive signs this quarter in the economy and in our business." Product book to bill ratio was "comfortably above 1." There was normal sequential order seasonality for the first time in the fiscal year. Fiscal Q1's are historically seasonally down in the low single digits. Not yet comfortable saying normal business momentum has returned. However, the entire orientation of the company is now towards growth.

Cash flow from operations was $2.0 billion, flat sequentially. Cash and equivalents ended the quarter at $35.0 billion, up $1.4 billion in the quarter. Deferred revenue rose to $9.4 billion. $800 million was used to repurchase stock.

In the quarter the acquisitions of Pure Digital Technologies and Tidal Software were completed. Flip Video is doing well with both consumers and businesses.

Product sales revenues were $6.73 billion. Services revenue $1.81 billion. Cost of sales was $3.07 billion. Operating expenses of $4.00 billion included $1.28 billion for R&D; $2.01 billion for sales and marketing; $0.49 billion for general and administrative; $164 million for amortization; and $60 million for in-process R&D. Operating income was $1.46 billion. Net other income was $73 million. Income tax provision was $452 million.

Headcount ended at 65,545, down from 66,129 year-earlier.

Orders by segment: Public Sector orders were down 3% y/y. Enterprise orders were down 30% y/y. Service Provider down "upper 20s" y/y. Commercial down mid 20s y/y. Consumer orders up low single digits y/y.

By geography: sequentially all orders were higher except Europe. But year/year U.S. orders down 20%; emerging markets down 30%; Asia Pacific down low 20s%; Europe orders down high 20s; Japan down low single digits.

By product: routing down 27% y/y; switching down 20% y/y; advanced technologies down 19% y/y. However, TelePresense grew 97% y/y. But there was growth in many products from Q3.

Revenue mix was routing 17%, switching 33%; advanced tech 24%; services 21%; other 5%.

Q&A:

Underlying business trends, and gross margin guidance? Q1 revenue patterned to flat. We have more trouble predicting the mix than the total numbers. Margin is actually at high end of normal, though down from Q4.

In normal times our quarters are remarkably predictable. This year Q1 through Q3 were well below normal seasonal growth. But Q4 fit back into the usual pattern. We hope this shows we are at a tipping point and headed for the upside. Europe is the most problematic region for coming out of the recession.

Source of pricing pressure? They were normal pricing pressures given the economy. Most of our competitors come at us with aggressive pricing. Service providers tend to be most price sensitive.

HP ProCurve competition for layer 2, 3 switching? I am very comfortable with where we are in both switching and routing. Our position in the industry is tied closely to our product architecture. We are doing especially well with switching in the data center.

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