August 10, 2004

Cisco has announced its Q4 and Fiscal Year 2004 financial results. John Chambers, president and CEO, and Dennis Powell, senior vice president and CFO, had the following to say regarding the company's results and business outlook.

How would you characterize this quarter?

More Information News Release Cisco Systems Reports Fourth Quarter and Fiscal Year 2004 Earnings Related Links Customer Highlights and Technology Innovations Fact Sheets: Fourth Quarter Fiscal Year 2004 Q&A: Dennis Powell On Cisco's Q4 and Fiscal Year 2004 Financial Position Over the past quarter, several companies including Microsoft have changed their position and programs surrounding dividends. Can investors expect the same from Cisco? What are Cisco's plans for its cash reserves? Dennis Powell: We believe our share repurchase program, combined with ongoing strategic investments in our business and maintaining a strong cash balance, remain in the best interest of our shareholders. A strong cash position enables us to take advantage of future business opportunities quickly as they arise, and helps to instill customer confidence. However, our board has and will continue to evaluate if, when and in what amount a dividend will be paid. Why did the compensation committee decide to reinstate Chambers' salary this quarter? Dennis Powell: The compensation committee has decided to reinstate John Chambers' salary at $350,000.00, the same as April 2001, effective August 1 of this year. In April 2001, John requested that his salary be reduced to $1.00 annually until recognition of a recovery in company performance. The compensation committee agreed to his request, and John has taken a dollar in annual salary and no bonus since May of 2001. Compared to that time, Cisco's quarterly revenue has increased approximately 25 percent and we have reached record profitability levels, as reported this quarter. We are also returning to approximately $700 thousand in annualized revenue per employee this quarter. We are very pleased with the company's execution during this difficult period, and we feel strongly that Cisco is uniquely positioned for future growth.

John Chambers: Q4 was a very good quarter for Cisco from a financial, product leadership, geographic, market segment and Advance Technology perspective. We generated the highest GAAP and pro forma net income and earnings per share in the company's history. At $5.9 billion in revenue in Q4, we achieved an approximate 5 percent sequential and 26 percent year-over-year increase, and our ninth consecutive quarter of having pro forma net income exceed $1 billion and our pro forma profits exceed 20 percent of revenue. We also continue to see technology innovation and major market share gains in most of our product areas. Additionally, we are using our own technology and process change to drive productivity up approximately 27 percent in this fiscal year to $690 thousand annualized revenue per employee.

What were some of the highlights of the past year?

John Chambers: Fiscal year 2004 has truly been a breakaway year for Cisco. The investments we've made in emerging markets around the world, coupled with continued innovation in our core business and advanced technologies are generating record results.

From a technology point of view, we achieved clear momentum in multiple product categories and our Advanced Technology markets. This year, Cisco announced a new class of routing system, the Cisco Carrier Routing System (CRS-1), which was recognized in the Guinness Book of World Records as the world's highest capacity Internet router, capable of scaling to 92 terabits of bandwidth.

This year in LAN switching, Cisco announced new products and capabilities for its Catalyst Intelligent Switching portfolio as well as significant product additions and enhancements to its metro Ethernet switching portfolio, aimed at helping service providers deliver scaleable, profitable and differentiated metro Ethernet services to their enterprise business customers. Also, in Q4, I was pleased to see the Catalyst 6500 system cross the billion dollars per-quarter order run rate and the GSR achieve a quarter-over-quarter revenue growth rate in excess of 40 percent. We continued to focus on adjusting our breakaway strategy and industry consolidation strategy for the industry downturn experienced over the past several years, and to position Cisco as the upturn continues.

What kind of momentum did you see during this quarter in your Advanced Technology markets?

John Chambers: Advanced Technology momentum continued to be solid both from an order and revenue perspective in the fourth quarter. IP Telephony revenues were up approximately 15 percent sequentially and orders increased at an even faster pace, approximately 20 percent. We shipped approximately 470 thousand phones in Q4 and had orders of over 500 thousand phones. Our current run rate in this new Advanced Technology is now approximately equal to our nearest large incumbent PBX competitors' total PBX product revenues, both circuit and IP. In short, we have done something that no other company has done in the last several decades-we have built a PBX business equal in size to those of the major telecom incumbents. This is something that we hope to replicate in other Advanced Technology areas.

Wireless revenues continued at a very solid pace, up 15 percent sequentially and 45 percent year-over-year. Storage was up 41 percent sequentially and approximately 180 percent year-over-year. Optical was up 8 percent sequentially and 16 percent year-over-year, in what we all understand to be a very challenging market. Security, following three quarters in a row of very solid growth, averaging 14 percent per quarter, was down 2 percent sequentially and up 45 percent over Q4 of the prior year. We saw a very similar performance in fiscal year 2003 with the first three quarters having growth and Q4 being down sequentially.

In terms of the Networked Home, we saw normal seasonality. Our Q1 and Q2 tend to be our strongest quarters, due to back to school and the year end holiday season, while Q3 and Q4 tend to be our seasonally weaker quarters. In Q4 of this year our revenues were down approximately 5 percent sequentially and compared to last year, keeping in mind that we acquired Linksys in the middle of the quarter, our best estimate is that this business grew approximately 60 percent year-over-year.

We encourage our stakeholders to think about these Advanced Technologies as an architectural network evolution with each technology being linked to the others. CEOs and CIOs are asking for networks that converge their corporate LANs, wireless LANs, mobile networks, the Internet, the service provider and cable networks. This "hyper-integration" of open, IP-based networks with business processes and applications is the basis of the next generation of intelligent networks and what we see as driving demand for IP telephony, wireless LANs, security and storage over the next 3-5 years.

Was Cisco's business balanced among the theaters this quarter?

John Chambers: We saw very solid balance across all five of our geographic theaters, adjusted for normal seasonality. Our decisions to focus on new major countries such as China, India and Russia are paying solid dividends, with all three countries up over 40 percent year-over-year in terms of orders. The Q4 year-over-year order growth of each of the theaters varied between approximately 20 percent and 35 percent with the US and Asia Pacific at the upper end of this range.

In the U.S., Q4 was the second quarter in a row where US enterprise and commercial orders were up in the mid teens quarter-over-quarter. We also saw the best quarter from U.S. Service Providers, in terms of growth, in over three years with orders increasing in the high teens sequentially. The Federal area experienced growth in the high teens sequentially.

In EMEA, we saw sequential order growth in the mid single digits. The UK and Northern Europe, lead the way in terms of growth with approximately 30 percent year-over-year growth and the remaining major geographic operations were up in the low double digits. For the first time, the UK moved into the second largest country in terms of bookings and from an order perspective, ahead of Japan. Russia grew year-over-year by approximately 40 percent.

In Asia Pacific, China showed solid order growth sequentially in the low double digits. Australia had an outstanding quarter, even above its normal strong, seasonally adjusted quarter, with sequential order growth slightly above 40 percent. Korea, after a very challenging year, had a very solid Q4 growing 46 percent sequentially. India grew approximately 100 percent year-over-year. We also saw very good sequential order growth in most of the remaining parts of Asia.

In Americas International, year-over-year growth for Q4 was approximately 30 percent and we saw normal seasonality in Q4 with total orders down in the mid single digits sequentially. In Japan, orders were down in the mid single digits sequentially, as expected, following a very solid Q3 which as discussed in the prior conference call had some very large service provider orders, which tend to be lumpy in nature. We saw Q4 year-over-year growth of approximately 20 percent.