Analyst Conference Call Summary

conference date: February 9, 2011 @ 1:30 PM Pacific Time
for quarter ending: January 29, 2011 (2nd quarter fiscal 2011)

(at the time this was written)
Forward-looking statements

Overview: Slow revenue growth shows Cisco is not where the new internet revolution growth is being generated.

Basic data (GAAP) :

Revenues were $10.41 billion, down 3% sequentially from $10.75 billion, but up 6% from $9.81 billion in the year-earlier quarter.

Net income was $1.52 billion, down 21% sequentially from $1.93 billion, also down 18% from $1.85 billion year-earlier.

EPS (earnings per share) were $0.27, down 21% sequentially from $0.34, down 16% from $0.32 year-earlier.

Guidance:

Q3 revenue growth 4 to 6% y/y. Non-GAAP operating margin 23% to 24%. Non-GAAP EPS $0.35 to $0.38. GAAP EPS 8 to 10 cents per share below non-GAAP.

For Q4 8 to 11% y/y revenue growth.

Conference Highlights:

"Going through a period of transition ... with our architectural strategy."

Non-GAAP results: Net income $2.1 billion, down 11% y/y. EPS $0.37, down 7% y/y. Gross margin 62.4%, Operating margin 24.5%.

GAAP gross margin was 60.2%, operating margin was 16.2%.

Cash flow from operations was $2.6 billion. Cash and equivalents balance ended At $440.2 billion. $1.8 billion was spent repurchasing stock.

On the positive side, new product revenue was up 15% y/y. Data Center segment was up 59%, collaboration 37% and wireless up 34% y/y.

Product sales accounted for $8.24 billion of revenue, services for $2.17 billion.

Intends to acquire Pari Networks for network configuration and change management solutions. Completed acquisition of LineSider Technologies and its network management software. Announced an alliance with BMC Software. Introduced Videoscape, a TV platform for service providers. Also a few new switch and other network products.

Y/Y order growth was concentrated in the Emerging Markets at 27%. European markets lagged at 2% y/y growth. By customer orders, enterprise was up 10% y/y, public sector 7%, service provider 9%, commercial 11%, while consumer was down 15%, led down by setboxes. Overall orders were up 8% y/y.

Headcount ended at 11,807, up by over 1000 in the quarter.

Q&A:

Can switching and routing recover in the coming quarters? Switching orders were above revenues, so we increased our backlog. A 7000 can handle twice what a 6000 did, so you have to sell twice as many for the same revenue. We are not going to give up market share. Routing portfolio is strong, though we do have competition. CRS 3 sales are still ramping.

12 to 17% growth target, is that too ambitious, leading to too much expense? I would expect our expenses to be in line with orders. We will focus on results and tell you what they are.

In enterprise and commercial businesses, global CEOs are becoming more confident, and we are beginning to see that in our order rates. We are moving into areas where we were not major players before, like datacenters, so we are gaining market share. Public sector spending is our only worry right now.

In quarter, each month showed improved orders over the prior month. Added 300 sales reps. Emerging markets will be a growth engine for us. Routing and switching are now just 46% of our business.

Gross margins flat sequentially in guidance when consumer part of mix is dropping? Consumer seasonality does help, but other factors offset.

The surprising thing was the ramp up of the switching line. It was across a wide range of products. So innovation engine is on fire. But products always start at low gross margins, then ramp up. So introducing all at once hit margins. In datacenters we have an architecture that is selling, is winning. But foundation has lower margins than the equipment it is replacing. Again, we will improve margins over time for those products. You do have large front end costs when you introduce high-ticket enterprise products.

Dividend update? It is on track. Question is will it be one or two percent; will be announced before the end of the fiscal year.

The U.S. tax rate on repatriated profits is out of line (way higher) than the rest of the world. Balance in the U.S. for cash is just $3.1 billion. Rest of cash is held overseas.

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