Analyst Conference Summary

conference date: February 3, 2010 @ 1:30 PM Pacific Time
for quarter ending: January 23, 2010 (2nd quarter fiscal 2010)

Forward-looking statements

Overview: Recovering.

Basic data (GAAP) :

Revenues were $9.81 billion, up 9% sequentially from $9.02 billion, and up 8% from $9.09 billion in the year-earlier quarter.

Net income was $1.85 billion, up 3% sequentially from $1.79 billion, and up 23% from $1.50 billion year-earlier.

EPS (earnings per share) were $0.32, up 7% sequentially from $0.30, and up 23% from $0.26 year-earlier.

Guidance:

Fiscal Q3 2010 revenues up 23% to 26% y/y. There is an extra week in the quarter. Non-GAAP gross margin of 64% to 65%. Operating expense at 36.5% to 37% of revenue. Tax rate 22%. Share count down 25 million sequentially. Cash flow from operations $2.0 to $2.5 billion. GAAP EPS $0.06 to $0.08 less than non-GAAP.

Conference Highlights:

Believes Q2 results "provide a clear indication that we are entering the second phase of the economic recovery." Saw "dramatic" improvement in most areas. Third straight quarter of positive growth.

Non-GAAP numbers: net income $2.3 billion or $0.40/share, up 25% y/y.

Cash flow from operations was $2.5 billion. Cash, equivalents and investments balance was $39.6 billion, up $4.2 billion sequentially. $1.5 billion of stock was repurchased.

ScanSafe acquisition was completed; provides web security solutions. Starent Networks acquisition targets mobile infrastructure. Starent to be slightly dilutive in Q3.

Product revenues were $7.98 billion, service revenues $1.84 billion.

Cost of sales was $3.48 billion, leaving gross margin of $6.33 billion. Operating expenses of $3.96 billion included R&D expense of $1.25 billion, sales and marketing expense of $2.11 billion, general and administrative expense $467 million, amortization of intangibles $138 million. Other income negative $15 million. Income tax provision $502 million.

Book to bill ratio near 1.

Revenue to type: routers $1.6 billion, switches $3.4 billion, advanced tech $2.4 billion, other $0.6 billion, services $1.8 billion.

Revenue by geography: U.S.+Canada $5.3 billion, Europe $1.9 billion, emerging $1.1 billion, Asia Pacific $1.1 billion, Japan $0.4 billion. All areas grew y/y except Europe, which was down 3%.

Headcount ended at 65,874, down from 67,318 year-earlier, but up sequentially due to acquisitions. Expects to hire several thousand new employees in 2010.

Deferred Revenue ended at $9.66 billion.

Q&A:

Confidence in trends? We see balanced demand across all market segments. Global government leaders gave a confident view of their economies in January. Our technologies are tying together and our customers get that.

Inventory? It has increased in the last few quarters to drive the upturn in revenues. It also has helped to reduce lead times, which makes the customers happy.

Routing flat sequentially, are you losing share? Service provider business was strong globally. Core routers were up 30% sequentially. We are the industry leader at the edge, which we were not before. Only about one-third of business with service providers is routers, one-fourth is switching, the rest is security and other services. Market share with service providers is improving.

Ramp of hiring the two to three thousand employees? We increased op ex 4% Q1 to Q2. Hiring is taking place, cost will start to come on this quarter. Could be about $70 million per quarter per thousand employees. We also are going to spend on ERP upgrades and Flip video. Also $125 million op ex just from the extra week in Q3.

Datacenter switching, Nexus? We should hit a billion dollar run-rate this year. We are starting to win the architectural battles. We are not interested in server stand alone technology. But there is intense competition.

Telepresence contribution? It is the tip of the iceberg for catching what collaboration means. Our momentum is good. Next quarter we will report on telepresence in more detail.

When we enter new markets, margins at first are not what we would like to see long term. Consumer items have lower margins. Pricing pressure from Chinese competitiors is coming in for systems. So it fluctuates from quarter to quarter.

UCS (Unified Computing System) is ramping quickly, we will talk more about it at a later date.

HP and IBM reactions to datacenter strategy change? We usually create the demand and fulfill it through partners. We are doing well with new business integrators and partners. It is just part of the normal evolutionary process.

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