CEO John Chambers and CFO Dennis Powell Discuss Cisco's Q4 and Fiscal Year 2005 Performance

August 9, 2005

Cisco announced its fourth quarter and Fiscal Year 2005 financial results. John Chambers, president and CEO, and Dennis Powell, CFO and senior vice president, had the following to say regarding the company's results and business outlook.

How would you characterize this quarter?

John Chambers: Q4 was a record quarter for Cisco in terms of both net income and earnings per share from both a GAAP and pro forma perspective. I was pleased with our sequential revenue growth of 6.4% and year over year Q4 revenue growth of 11.1%. For fiscal year 2005 our year over year revenue growth was 12.5%. Product orders continued to grow faster than revenues from both the sequential and year over year perspectives.

This marks our thirteenth consecutive quarter of having pro forma net income exceed $1B and our pro forma profits exceed 20% of revenue. Cisco's business momentum is strong and I believe we have the right strategy in place for profitable growth. We continue to see return on the investments we've made in key customer segments, technologies and geographies and I believe we are uniquely positioned for continued market momentum moving forward.

What were some of the highlights of this quarter?

John Chambers: The home run for the quarter was the continued balance that we've been able to achieve in our geographies, market segments, architectural evolutions, and product families. From a geographic point of view, balance was very good with the US, Americas International, Europe, and Asia Pac growing well both sequentially and year over year. The commercial and enterprise market segments produced the best results, which both grew sequentially in the mid teens.

There was also equally good balance in terms of our product families. This quarter our switching business saw the largest sequential growth of the three core product areas, which includes switching, routing and advanced technologies. To put this balance in perspective, switching has led three times, routing three times, and advanced technologies four times in terms of sequential growth over the last nine quarters, with obviously one tie. Our commitment to innovation and technology excellence is paying off, and for example, with our highest-end routing system, CRS-1, customer response has been very strong, with over 150% sequential growth this quarter and customers continuing to expand.

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

John Chambers: Our advanced technologies continue to provide order growth, with year-over-year growth in the low 30s and sequentially up in the high single digits. In Q4, the advanced technology with the largest sequential growth was enterprise IP communications, followed by security, and then by wireless. From a Q4 year-over-year perspective, five of the six advanced technologies areas grew in the 25-50% range, while our optical technology group grew in the high teens.

I am especially pleased with our performance in enterprise IP communications, which grew approximately 50% year over year. By comparison, our top competitors that we track in this market grew their combined legacy and IP revenues in the 5-20% range. We also shipped our 6 millionth IP telephone during the quarter.

How would you describe Cisco's position versus the competition?

John Chambers: I believe we are not only well positioned to compete, but also well positioned to lead in the future. We believe Cisco's successful integration of emerging networking technologies like voice, security, and storage, is a competitive advantage that puts us several years ahead of any other company in our industry. While we face a very large number of bigger and very effective small companies, we believe that the industry will consolidate and that the consolidation will be along both technology and business architecture lines. We believe the technology architecture will be one where layers 1-7 of the OSI stack are first, loosely then tightly coupled, and that is exactly where you see us taking our core and advanced technologies product architectures.

Many of our current and future competitors, especially from Asia, will come at our markets with a single product or a product loosely coupling one or two technologies. I believe that there will be a close coupling between the technologies, and this integrated architecture has to be designed into the product from the initial product requirements phase, not as an after thought. We believe this is a competitive advantage versus our current peers and future competitors from Asia. Cisco's strategy-and competitive advantage-for this wave of competition lies in product design, focusing on an evolution from products to systems, to solutions.

Innovation will continue to be through internal development, acquisitions, and partnerships. For companies to lead they must be able to "do all three." Perhaps most importantly, companies also have to gain the confidence of their customers from a vision/strategy perspective, a product architecture leadership perspective, and a service and support perspective. We think we are very uniquely positioned to continue to win the hearts, minds, and capital investments of our customers.

More Information

News Release

Cisco Systems Reports Four Quarter Fiscal Year 2005 Earnings

Related Link

Customer Highlights and Technology Innovations Fact Sheet:

Four Quarter

Fiscal Year 2005

Q&A: Dennis Powell on Cisco's Q4 and Fiscal Year 2005 Performance

You have provided long term revenue growth expectations of 10-15% on an annual basis; how will you sustain this given economic concerns?

Dennis Powell: We feel very good about our ability to provide both short-term and long-term growth and value to shareholders. We believe the networking market is in the midst of transition, with a dynamic future ahead. We remain focused on the long term opportunity, with annual revenue growth in the 10-15% range. For fiscal year 2005, our year-over-year revenue growth was 12.5%. Product orders continued to grow faster than revenues from both the sequential and year-over-year perspectives. As we have discussed in a number of financial conferences we are getting more aggressive in expanding sales coverage, committing resources to current advanced technologies, and focusing resources on a second wave of new advanced technologies.

Next quarter will be the first quarter you have to expense stock options. Are you still planning to issue employees stock options moving forward?

Dennis Powell: Our compensation strategy will continue to focus on long-term performance as we believe in aligning the interests of our customers, shareholders and employees. Cisco will continue to offer competitive total compensation packages that are tied to company performance and we'll continue to use all available reward vehicles including salary, bonus and benefits & stock.



Cisco Systems, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
(Unaudited)
Three Months Ended Twelve Months Ended
July 30,
2005
July 31,
2004
July 30,
2005
 July 31,
2004
NET SALES:
Product $ 5,525 $ 5,007 $ 20,853 $ 18,550
Service 1,056 919 3,948 3,495
Total net sales 6,581 5,926 24,801 22,045
COST OF SALES:
Product 1,746 1,573 6,758 5,766
Service 367 298 1,372 1,153
Total cost of sales 2,113 1,871 8,130 6,919
GROSS MARGIN 4,468 4,055 16,671 15,126
OPERATING EXPENSES:
Research and development 858 785 3,220 3,080
Sales and marketing 1,257 1,150 4,671 4,445
General and administrative 250 199 934 804
Payroll tax on stock option exercises 5 4 12 16
Stock-based compensation related to acquisitions and investments 39 56 165 244
Amortization of purchased intangible assets 56 60 227 242
In-process research and development 6 - 26 3
Total operating expenses 2,471 2,254 9,255 8,834
OPERATING INCOME 1,997 1,801 7,416 6,292
Interest income 153 124 552 512
Other income, net 3 11 68 188
Interest and other income, net 156 135 620 700
INCOME BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 2,153 1,936 8,036 6,992
Provision for income taxes 613 556 2,295 2,024
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 1,540 1,380 5,741 4,968
Cumulative effect of accounting change, net of tax - - - (567)
NET INCOME $ 1,540 $ 1,380 $ 5,741 $ 4,401
Income per share before cumulative effect of accounting change:
Basic $ 0.24 $ 0.20 $ 0.88 $ 0.73
Diluted $ 0.24 $ 0.20 $ 0.87 $ 0.70
Net income per share:
Basic $ 0.24 $ 0.20 $ 0.88 $ 0.64
Diluted $ 0.24 $ 0.20 $ 0.87 $ 0.62
Shares used in per-share calculation:
Basic 6,366 6,736 6,487 6,840
Diluted 6,480 6,935 6,612 7,057

Cisco Systems, Inc.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
(Unaudited)
Three Months Ended Twelve Months Ended
July 30,
2005		 July 31,
2004		 July 30,
2005		 July 31,
2004
NET SALES:
Product $ 5,525 $ 5,007 $ 20,853 $ 18,550
Service 1,056 919 3,948 3,495
Total net sales 6,581 5,926 24,801 22,045
COST OF SALES:
Product 1,746 1,573 6,758 5,766
Service 367 298 1,372 1,153
Total cost of sales 2,113 1,871 8,130 6,919
GROSS MARGIN 4,468 4,055 16,671 15,126
OPERATING EXPENSES:
Research and development 858 785 3,220 3,080
Sales and marketing 1,257 1,150 4,671 4,445
General and administrative 250 199 934 804
Total operating expenses (a) (b) (c) (d) 2,365 2,134 8,825 8,329
OPERATING INCOME (a) (b) (c) (d) 2,103 1,921 7,846 6,797
Interest income 153 124 552 512
Other income, net (e) 3 11 15 103
Interest and other income, net (e) 156 135 567 615
INCOME BEFORE PROVISION FOR INCOME TAXES (a) (b) (c) (d) (e) 2,259 2,056 8,413 7,412
Provision for income taxes (f) 633 576 2,356 2,075
NET INCOME $ 1,626 $ 1,480 $ 6,057 $ 5,337
Net income per share:
Basic $ 0.26 $ 0.22 $ 0.93 $ 0.78
Diluted $ 0.25 $ 0.21 $ 0.92 $ 0.76
Shares used in per-share calculation:
Basic 6,366 6,736 6,487 6,840
Diluted 6,480 6,935 6,612 7,057
A reconciliation between net income on a GAAP basis and pro forma net income is as follows:
GAAP net income $ 1,540 $ 1,380 $ 5,741 $ 4,401
(a) In-process research and development 6 - 26 3
(b) Payroll tax on stock option exercises 5 4 12 16
(c) Stock-based compensation related to acquisitions and investments 39 56 165 244
(d) Amortization of purchased intangible assets 56 60 227 242
(e) (Gain) loss on publicly traded equity securities - - (53) (85)
(f) Income tax effect (20) (20) (61) (51)
(g) Cumulative effect of accounting change, net of tax - - - 567
Pro forma net income $ 1,626 $ 1,480 $ 6,057 $ 5,337
For the three month period ended April 30, 2005, pro forma net income and pro forma net income per share excluded the following items: in-process research and development of $6 million; payroll tax on stock option exercises of $3 million; stock-based compensation related to acquisitions and investments of $47 million; amortization of purchased intangible assets of $54 million and income tax effect of ($19) million.

Cisco Systems, Inc.
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
July 30,
2005		 July 31, 2004
ASSETS
Current assets:
Cash and cash equivalents $ 4,742 $ 3,722
Short-term investments 2,227 4,947
Accounts receivable, net of allowance for doubtful accounts of $162 at July 30, 2005 and $179 at July 31, 2004 2,216 1,825
Inventories 1,297 1,207
Deferred tax assets 1,582 1,827
Prepaid expenses and other current assets 967 815
Total current assets 13,031 14,343
Investments 9,086 10,598
Property and equipment, net 3,320 3,290
Goodwill 5,295 4,198
Purchased intangible assets, net 549 325
Other assets 2,602 2,840
TOTAL ASSETS $ 33,883 $ 35,594

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 735 $ 657
Income taxes payable 1,511 963
Accrued compensation 1,317 1,466
Deferred revenue 3,854 3,527
Other accrued liabilities 2,094 2,090
Total current liabilities 9,511 8,703
Deferred revenue 1,188 975
Total liabilities 10,699 9,678
Minority interest 10 90
Shareholders' equity 23,174 25,826
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 33,883 $ 35,594

Cisco Systems, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Twelve Months Ended
July 30,
2005 		July 31, 2004
Cash flows from operating activities:
Net income $ 5,741 $ 4,401
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accounting change, net of tax - 567
Depreciation and amortization 1,009 1,199
Stock-based compensation related to acquisitions and investments 165 244
Provision for doubtful accounts - 19
Provision for inventory 221 205
Deferred income taxes 55 552
Tax benefits from employee stock option plans 35 537
In-process research and development 26 3
Net (gains) losses and impairment charges on investments (95) (155)
Change in operating assets and liabilities:
Accounts receivable (373) (488)
Inventories (305) (538)
Prepaid expenses and other current assets (58) (42)
Lease receivables, net (163) (159)
Accounts payable 62 54
Income taxes payable 947 260
Accrued compensation (154) (7)
Deferred revenue 541 688
Other accrued liabilities (86) (378)
Net cash provided by operating activities 7,568 6,962
Cash flows from investing activities:
Purchases of short-term investments (5,483) (12,206)
Proceeds from sales and maturities of short-term investments 10,465 13,570
Purchases of investments (14,831) (20,848)
Proceeds from sales and maturities of investments 14,165 20,757
Acquisition of property and equipment (692) (613)
Acquisition of businesses, net of cash and cash equivalents (911) (104)
Change of investments in privately held companies (171) (13)
Purchase of minority interest of Cisco Systems, K.K. (Japan) (34) (71)
Other 106 153
Net cash provided by investing activities 2,614 625
Cash flows from financing activities:
Issuance of common stock 1,087 1,257
Repurchase of common stock (10,235) (9,080)
Other (14) 33
Net cash used in financing activities (9,162) (7,790)
Net increase (decrease) in cash and cash equivalents 1,020 (203)
Cash and cash equivalents, beginning of fiscal year 3,722 3,925
Cash and cash equivalents, end of fiscal year $ 4,742 $ 3,722

Note: Certain reclassifications have been made to prior period balances in order to conform to the current period's presentation.

Cisco Systems, Inc.
ADDITIONAL FINANCIAL INFORMATION
(In millions)
(Unaudited)
July 30,
2005 		July 31, 2004
CASH AND CASH EQUIVALENTS AND TOTAL INVESTMENTS
Cash and cash equivalents $ 4,742 $ 3,722
Fixed income securities 10,372 14,411
Publicly traded equity securities 941 1,134
Total $ 16,055 $ 19,267
INVENTORIES
Raw materials $ 82 $ 58
Work in process 431 416
Finished goods:
Distributor inventory and deferred cost of sales
 385 316
Manufacturing finished goods
 184 206
Total finished goods 569 522
Service-related spares 180 177
Demonstration systems 35 34
Total $ 1,297 $ 1,207
PROPERTY AND EQUIPMENT, NET
Land, buildings, and leasehold improvements $ 3,492 $ 3,429
Computer equipment and related software 1,244 1,120
Production, engineering, and other equipment 3,095 2,643
Operating lease assets 136 94
Furniture and fixtures 355 356
8,322 7,642
Less, accumulated depreciation and amortization (5,002) (4,352)
Total $ 3,320 $ 3,290
LEASE RECEIVABLES, NET (a)
Current $ 248 $ 215
Noncurrent 353 231
Total $ 601 $ 446
OTHER ASSETS
Deferred tax assets $ 1,201 $ 1,130
Investments in privately held companies 421 354
Income tax receivable 277 690
Lease receivables, net 353 231
Other 350 435
Total $ 2,602 $ 2,840
DEFERRED REVENUE
Service $ 3,618 $ 3,047
Product 1,424 1,455
Total $ 5,042 $ 4,502
Reported as:
Current $ 3,854 $ 3,527
Noncurrent 1,188 975
Total $ 5,042 $ 4,502
Note: Certain reclassifications have been made to prior period balances in order to conform to the current period's presentation.

(a) The current portion of lease receivables, net, is recorded in prepaid expenses and other current assets and the noncurrent portion is recorded in other assets in the Consolidated Balance Sheets.

This Q&A may be deemed to contain forward-looking statements, which are subject to the safe harbor provisions of the Private Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events and the future financial performance of Cisco that involve risks and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including: business and economic conditions and growth trends in the networking industry and in various geographic regions; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; the growth of the Internet and levels of capital spending on Internet-based systems; variations in customer demand for products and services, including sales to the service provider market; the timing of orders and manufacturing lead times; changes in customer order patterns or customer mix; insufficient, excess or obsolete inventory; variability of component costs; variations in sales channels, product costs or mix of products sold; our ability to successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses and technologies; increased competition in the networking industry; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; manufacturing and sourcing risks; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters; our ability to recruit and retain key personnel; our ability to manage financial risk; currency fluctuations and other international factors; potential volatility in operating results and other factors listed in Cisco's most recent reports on Form 10-K, 10-Q and 8-K. The financial information contained in this Q&A should be read in conjunction with the consolidated financial statements and notes thereto included in Cisco's most recent reports on Form 10-K and Form 10-Q, each as it may be amended from time to time. Cisco's results of operations for the three and twelve months ended July 30, 2005 are not necessarily indicative of Cisco's operating results for any future periods. Any projections in this Q&A are based on limited information currently available to Cisco, which is subject to change. Although such projections and the factors influencing them will likely change, Cisco will not necessarily update the information, since Cisco will only provide guidance at certain points during the year. Such information speaks only as of the date of this Q&A.

Cisco provides pro forma net income and pro forma net income per share data as additional information to help investors better understand its operating results. These measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from pro forma measures used by other companies. Cisco believes that this presentation of pro forma net income and pro forma net income per share provides useful information to management and investors regarding certain additional financial and business trends relating to its financial condition and results of operations. Cisco believes when GAAP net income and GAAP net income per share are viewed in conjunction with pro forma net income and pro forma net income per share, investors are provided with a more meaningful understanding of Cisco's ongoing operating performance. In addition, Cisco's management uses these measures for reviewing the financial results of Cisco.

Copyright © 2005 Cisco Systems, Inc. All rights reserved. Cisco, Cisco System and the Cisco Systems logo are registered trademarks or trademarks of Cisco Systems, Inc. and/or its affiliates in the U.S. and certain other countries. All other trademarks mentioned in this document are the property of their respective owners. The use of the word partner does not imply a partnership relationship between Cisco and any other company.

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