May 8, 2007 Cisco announced third quarter fiscal year 2007 financial results. John Chambers, chairman and CEO, and Dennis Powell, CFO, had the following to say regarding the company's results and business outlook. How would you characterize this quarter? John Chambers: This quarter was once again another very strong and record quarter from a revenue, non-GAAP net income and non-GAAP earnings per share perspective. We achieved record revenue of approximately $8.9B, a 21% year-over-year increase. The Cisco standalone revenue increase was approximately 17%. This continues to be one of the fastest standalone year-over-year revenue growth rates we have seen in several years. We are obviously pleased with both the growth on the top and bottom lines, as well as the market share gains. Order growth continued to be very solid with product book to bill of greater than one. Product orders growth from a Cisco standalone perspective, not including Scientific Atlanta, grew in the mid teens. Order growth from Scientific Atlanta was approximately 30% year-over-year aligned to conform to Cisco's fiscal quarters. GAAP net income was $1.9B representing a 34% increase year-over-year, and non-GAAP net income was $2.1B, an increase year-over-year of approximately 16%. GAAP earnings per share were $.30 and non-GAAP EPS were a record $.34, which were increases of 36% and 17% respectively year-over-year. Cash generated from operations was $2.4B. We repurchased $1.5B of common stock. And we exited the quarter with $22.3B in cash, cash equivalents, and investments which increased $1.7B over Q2. What were some of the highlights from the quarter? John Chambers: One of the key takeaways of the quarter is clearly the expanding role in our service provider customers. Our technology and business architecture strategy is moving Cisco from a tactical or strategic technology partner for our service providers to a strategic business partner relationship in many of our accounts. Routing revenue grew year-over-year by 16%, switching revenue grew year-over-year by 15%, and advanced technologies' revenue grew year-over-year by approximately 24%, not including Scientific Atlanta. Scientific Atlanta's revenue grew approximately 30% year-over-year. All but one of the first waves of advanced technologies grew year-over-year in double digits, led by storage, unified communications, security and wireless. From a Cisco standalone geographic perspective, momentum was strong from an orders perspective and balance was good across our large theaters during the third quarter. We saw very strong order growth from the Emerging Markets theater of approximately 40% year-over-year, with Eastern Europe leading the way with growth above 50% followed by the Middle East and Africa operations with growth in the mid 40s. Europe year-over-year order growth continued in the low teens. In the U.S., orders grew year-over-year in the mid teens. Asia Pacific achieved solid order growth of approximately 20%. Japan was slightly down in terms of year-over-year growth. From a Cisco standalone customer segment perspective we saw continued strength in the commercial market, with product order growth continuing with approximately 20% year-over-year. The service provider business remained very strong. Standalone orders grew, over a very strong Q3 of fiscal year 2006, by approximately 17% year-over-year. Video continues to drive network demand and is potentially "the killer application for loading and bringing value to the network." Our high end CRS-1 routers remained on a tear with orders of almost $250 million in the quarter. That is an annualized run rate of approximately $1B. This is especially powerful when you compare to prior quarters which have averaged a yearly run rate of approximately $400 million. The global enterprise business, including the public sector, was solid with growth of approximately 14% up from Q2's growth rate of approximately 12%. U.S. enterprise orders remained at the same pace as Q2 with growth in the mid single digits. Many technology companies are experiencing challenges. How is Cisco different and to what do you attribute the positive results? John Chambers: We have now had 13 quarters in a row of order growth in the 12-19% growth range year-over-year on a standalone basis. It is this balance across products, services, geographies, and customer segments in our business that is resulting in the consistent results. For example, this quarter, very similar to Q2, the product balance was very strong across all areas. And revenue balance was once again very good across our core routing, switching, and advanced technologies. In Q3 we had 14 product families/technologies that had a product annualized order run rate of approximately $1B or above. Our Customer Advocacy Services revenue now represents approximately 16% of our total revenue. With the expanding services model and our movement of our Chief Globalization Officer, Wim Elfrink, to India, we fully intend to dramatically differentiate Cisco both in customer satisfaction, as well as services revenue and profit growth. From a Cisco standalone geographic perspective, momentum was strong from an orders perspective and balance was good across our large theaters during Q3. And from a Cisco standalone customer segment perspective, the commercial customer segment achieved the best balance across our four largest theaters with order growth again as we experienced in Q2, with each large theater growing comfortably in double digits. As businesses evolve, we are seeing an increasing need for collaboration. How is Cisco positioned for this transition? John Chambers: In our view, we are in the midst of a unique market transition, where all of the action is going to the network and our vision for the network as a platform for all forms of communications and IT has become a reality. While we are very pleased with our continued growth, our communications and collaboration technologies are enabling the second phase of the Internet, or Web 2.0, which is redefining how people, companies and countries collaborate in ways never before realized. We have spent the last six years preparing for this next wave of collaboration enabled by Web 2.0. In our terms, Web 2.0 is simply the technologies that enable user collaboration. These technologies include web services, unified communications, TelePresence, blogs, wikis, peer-to-peer networks, podcasts, mash-ups, etc. We believe that this second phase of the Internet will drive the industry for the next decade from an innovation, productivity, personalization and process change perspective.

More Information Press Release Cisco Systems Reports Q3 FY07 Financial Results Related Information Q3 FY07 Technology & Customer Highlights Q3 FY07 Financial Results Prepared Remarks (PDF 102KB) Podcast Q3 FY07 Financial Results Conference Call Q&A: Dennis Powell on Cisco's Q3 Fiscal Year 2007 Financial Position How would you characterize the financial position of Q3 fiscal year 2007? Dennis Powell: We are very pleased with our performance for the third quarter of the fiscal year. The consistency of Cisco's performance can be attributed to our balanced approach across geographies, products and customer segments. Total revenue for the third quarter was $8.9B, an increase of 21% year-over-year. Product revenue totaled $7.5B. Total service revenue was $1.4B, up approximately 19% year-over-year on a combined basis. GAAP net income for the third quarter was $1.9B, as compared to $1.4B in the third quarter of fiscal year 2006, representing a 34% increase year over year. Non-GAAP net income for the third quarter of fiscal 2007 was $2.1B, compared to $1.8B in the third quarter of fiscal year 2006, representing a 16% increase year over year. GAAP earnings per share on a fully diluted basis for the third quarter were $0.30, up from $0.22 in the same quarter of fiscal year 2006, representing a 36% increase year-over-year. Non-GAAP earnings per share on a fully diluted basis for the third quarter were $0.34, up from $0.29 in the third quarter of fiscal year 2006, representing a 17% increase year-over-year. The total of cash and cash-equivalents, and investments at the end of Q3 was $22.3B, up from $20.7B last quarter. During Q3 we generated $2.4B in cash flow from operations and $940M in proceeds from stock option exercises. We used $1.5B to repurchase 56M shares of our stock at an average price of $26.85. Scientific Atlanta exceeded expectations for the quarter. To what do you attribute Scientific Atlanta's growth for the quarter? Dennis Powell: Scientific Atlanta Q3 revenue was $752M, or 32% growth year-over-year for the comparable period, aligned to conform to Cisco's fiscal quarters. Record revenue for Scientific Atlanta was driven by several factors including the impact of regulation 707, a shift in the installed base to HD set top boxes, network upgrades and international expansion.

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RECONCILIATION OF GAAP TO NON-GAAP NET INCOME

	Three Months Ended		Nine Months Ended
	April 28, 2007	April 29, 2006	April 28, 2007	April 29, 2006
GAAP net income	$ 1,874	$ 1,400	$ 5,403	$ 4,036
Employee share-based compensation expense	237	261	709	839
Impact to cost of sales from purchase accounting adjustments to inventory	-	22	-	22
Payroll tax on stock option exercises	9	8	26	13
Compensation expense related to acquisitions and investments	16	32	64	102
In-process research and development	1	88	7	90
Amortization of purchased intangible assets	133	123	406	238
Total adjustments to GAAP income before provision for income taxes	396	534	1,212	1,304
Income tax effect (1)	(159)	(121)	(449)	(326)
Effect of retroactive tax legislation (2)	-	-	(60)	-
Total adjustments to GAAP provision for income taxes	(159)	(121)	(509)	(326)
Non-GAAP net income	$ 2,111	$ 1,813	$ 6,106	$ 5,014
Diluted net income per share:
GAAP	$ 0.30	$ 0.22	$ 0.86	$ 0.64
Non-GAAP	$ 0.34	$ 0.29	$ 0.98	$ 0.80
Shares used in diluted net income per share calculation:
GAAP	6,244	6,289	6,255	6,300
Non-GAAP	6,233	6,291	6,241	6,287

(1) The income tax effect for the adjustments relating to GAAP income before provision for income taxes was 37.0% for the first nine months of fiscal 2007 and has been determined using the applicable tax rates in jurisdictions to which these adjustments relate.

(2) In the second quarter of fiscal 2007, the Tax Relief and Health Care Act of 2006 reinstated the U.S. federal R&D tax credit, retroactive to January 1, 2006. GAAP net income for the first nine months of fiscal 2007 included a benefit of $60 million related to fiscal 2006 R&D expenses, while non-GAAP net income for the first nine months of fiscal 2007 excluded this benefit.

Additional reconciliations between GAAP and non-GAAP financial measures are provided in the tables that follow on page 10.

RECONCILIATION OF SHARES USED IN THE GAAP AND NON-GAAP DILUTED NET INCOME PER SHARE CALCULATION

	Three Months Ended		Nine Months Ended
	April 28, 2007	April 29, 2006	April 28, 2007	April 29, 2006
Shares used in diluted net income per share calculation - GAAP	6,244	6,289	6,255	6,300
Effect of SFAS 123(R)	(11)	2	(14)	(13)
Shares used in diluted net income per share calculation - Non-GAAP	6,233	6,291	6,241	6,287

This executive question and answer may be deemed to contain forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events (such as the development of our markets, the future of networking, Cisco's strategy and positioning, and our ability to foresee market transitions) 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 and other customer markets; the timing of orders and manufacturing and customer 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, including risks relating to our continued transition to a new manufacturing model; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters; natural catastrophic events; a pandemic or epidemic; achievement of the benefits anticipated from our investments in sales and engineering activities; 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 and Form 10-Q. The financial information contained in this executive question and answer 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 nine months ended April 28, 2007 are not necessarily indicative of Cisco's operating results for any future periods. Any projections in this executive question and answer are based on limited information currently available to Cisco, which is subject to change. Although any 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 executive question and answer.

This executive question and answer includes non-GAAP net income, non-GAAP net income per share data, and shares used in non-GAAP net income per share calculation.

These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Cisco believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Cisco's results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate Cisco's results of operations in conjunction with the corresponding GAAP measures.

Cisco believes that the presentation of non-GAAP net income, non-GAAP net income per share data and shares used in non-GAAP net income per share calculation, when shown in conjunction with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to its financial condition and results of operations.

For its internal budgeting process, Cisco's management uses financial statements that do not include employee share-based compensation expense, impact to cost of sales from purchase accounting adjustments to inventory, payroll tax on stock option exercises, compensation expense related to acquisitions and investments, in-process research and development, amortization of purchased intangible assets, significant gains and losses on publicly traded equity securities, the income tax effects of the foregoing, and significant effects of retroactive tax legislation, such as Cisco's U.S. federal research and development (R&D) tax credit relating to fiscal year 2006 R&D expenses. Cisco's management also uses the foregoing non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the financial results of Cisco.

For additional information on the items excluded by Cisco from one or more of its non-GAAP financial measures we refer you to the Form 8-K regarding this executive question and answer furnished today with the Securities and Exchange Commission.

Copyright © 2007 Cisco Systems, Inc. All rights reserved. Cisco, the Cisco logo, and Cisco Systems are registered trademarks or trademarks of Cisco Systems, Inc. and/or its affiliates in the United States 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. This document is Cisco Public Information.