CEO John Chambers and CFO Dennis Powell Discuss Cisco's Q1 Fiscal Year 2006 Performance

November 9, 2005

Cisco announced its first quarter of fiscal year 2006 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: Q1 was a solid quarter for Cisco. Our balanced approach to the market in terms of our four customer segments, core and advanced technologies, and five key geographic theaters continues to work very well, with solid results in the majority of these categories. We are especially pleased with the improving business momentum in the U.S., Asia Pacific, and the strength of our product categories and the accelerated growth of the commerical marketplace, which has become our fastest growing customer segment.

Revenue growth year over year was approximately 10% and flat relative to Q4. Product orders grew year over year in the 12-13% range. We continue to believe we have uniquely positioned Cisco as networked IT continues to gain momentum.

What were some of the highlights of this quarter?

John Chambers: I am pleased with 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 there were two major highlights. First is the continued strength and balance in the U.S. across all three major market segments. The growth in orders above 15% was better than we saw in any quarter in FY05. The second major highlight was the growth and balance from our Asia Pacific operations, which grew approximately 30% year over year. India and China were particularly strong, with approximately 70% year over year growth in India and growth in the high 20s year over year in China, which represents the best quarter in China we have had in two years in terms of total orders. And, our new Emerging Market theater is off to a strong start with order growth of approximately 30% year over year.

The commercial market segment produced the best results, which grew year over year in the mid 20s. And as we said last quarter, the commercial marketplace, while representing approximately 25% of our total product business, is delivering on our vision of being the fastest growing large market segment over the next five years.

There was also very good balance in terms of our product families. This quarter our core switching product orders grew in the low double digits year over year, while our core routing business grew approximately 10% year over year. Advanced technologies orders grew in the mid teens, led by storage, with growth of approximately 70%, security and the networked home in the low 20s, wireless in the mid teens, optical with a decrease of approximately 40% year over year, and enterprise IP communications growth increased in the mid 30s. Revenues for advanced technologies in total grew approximately 25% year over year.

What is Cisco's strategy for identifying new technologies and growth opportunities?

John Chambers: Going into fiscal 2006, we are focusing additional resources and management time on five key areas for additional growth and differentiation within our overall corporate strategy. The five areas include the commercial marketplace, additional sales coverage, advanced and emerging technologies, evolving support model, and the Emerging Market theater.

As Charlie Giancarlo outlined on our call today, our strategy for identifying new technologies is to categorize opportunities as either an advanced technology or an emerging technology. An advanced technology is defined as an oportunity that is adjacent to our other businesses, can generate Cisco revenue of $1B or more, where Cisco can secure #1 or #2 market share position, has clear and sustainable differentiation over time and fits into our long-term architectural technology vision. Cisco has identified six advanced technologies that represent examples of taking advantage of market transitions ahead of competitors and executing against the opportunity to drive growth. These include: security, wireless, enterprise IP communications, storage, optical and home networking. We intend to announce two new advanced technologies before the end of this calendar year.

In addition to new advanced technologies, we will from time-to-time introduce new "emerging technologies" in the early phases of a new market, when it is too early to predict the eventual size of the overall market or the eventual size of Cisco's business. An emerging technology is defined as a new area which Cisco believes is promising and could mature into formal advanced technologies, but still have a degree of market risk that does not allow us to target a full $1B or greater run rate for Cisco. Emerging technologies are a mechanism to incubate new ideas, products, business models and markets based on customer interest, and our estimation of early potential market opportunity with limited resources, primarily from engineering.

In the last 6 months, Cisco publicly announced its first two emerging technologies, Application Oriented Networking (AON) enabling application interoperability; and our IP Interoperability and Collaboration System (IPICS) enabling radio interoperability. We've received positive initial customer interest in both these technologies.

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

John Chambers: Cisco's long-term product architecture strategy is gaining momentum. More and more of our large customers especially in the enterprise, are committing to an architectural approach where routing, switching, security, wireless, IP telephony, the home, data center products are at first loosely and then tightly coupled together. This architectural approach is designed to allow customers to more effectively scale their IT operations. Going forward, we will continue to foster a culture of innovation, incorporating internal development, acquisitions and partnerships to anticipate the evolving needs of customers and extend our core competitive advantage.

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.

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.