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CEO John Chambers and CFO Dennis Powell Discuss Cisco's Q2 Fiscal Year 2008 Performance

February 6, 2008

Cisco announced second quarter fiscal year 2008 financial results. John Chambers, chairman and CEO, and Dennis Powell, executive vice president and 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 another solid quarter with good balanced results from a product, geographic and customer segment perspective. We achieved total record revenue of approximately $9.8B, a 16.5% year-over-year increase. We are pleased with the growth on both the top and bottom lines.

Order growth was good with product book to bill of approximately 1. GAAP net income was $2.1B, representing a 7% increase year-over-year. Non-GAAP net income was $2.4B, an increase year-over-year of approximately 14%. GAAP earnings per share were $0.33 and non-GAAP earnings per share were $0.38.

From a customer segment perspective, we again saw very solid balance across our commercial market, service provider and enterprise segments. The global commercial market segment remained our most steady segment with order growth of approximately 20% year-over-year in Q2. With the exception of Europe, the core global service provider business remains strong. Orders from a service provider perspective excluding Scientific Atlanta grew approximately 20% year-over-year. The global enterprise business which includes public sector was solid. Our enterprise customer segment orders on a global basis grew approximately 11% year-over-year.

How do you see Cisco impacting business on a global basis?

John Chambers: Whether it is with the government leaders in developed and emerging markets or the service provider or enterprise decision makers, our thought leadership, technology architecture, and our ability to help them achieve their business and government goals is increasingly understood at all levels. We saw this in November during visits to India and China and most recently at the World Economic Forum where we met with almost a dozen heads of state or key government leaders. We also saw the unique opportunity Cisco can play during a recent trip throughout the Middle East Gulf States where order growth opportunities remain very strong.

One example of this architectural and thought leadership would be in Saudi Arabia, where two weeks ago I spent three days meeting with various business and government leaders. Whether it was on the topic of their new economic cities, Cisco's role as their infrastructure partner, or Cisco's role in assisting in their global competitiveness our vision, strategy and execution is playing out as we envisioned. And as we become the trusted advisor and implementation engine for the government and business leaders, we can also get the growth that accompanies this leadership position. Saudi Arabia as an example had over 70% order growth year-over-year in Q2.

What differentiates Cisco's business strategy in terms of collaboration and Web 2.0 technologies?

John Chambers: We clearly intend to lead all companies in our implementation, organizational evolution and associated productivity of these new collaboration technologies with a competitive advantage of how we ourselves will become the best example for what this means to a company's future. This type of collaboration enabled by the network will allow Cisco instead of doing one to two major priorities a year, to target 20 for this fiscal year. We will do our best to provide the product architectures and the expertise to help in the implementation of these collaborative capabilities from a technology and business perspective, as well as share with our customers how we have done this internally.

I cannot overemphasize the importance of leading in this market transition from products to processes, to internal adoption and utilization, and what we believe this leadership position means for Cisco's future. Our ability to understand market transitions, whether technology or business model-based, has been one of the key contributing factors to our success.

Every quarter over the last year, Cisco has expanded our position in terms of thought leadership and how we use these capabilities internally. We believe we are the example in business for what's possible when an organization adopts a collaborative approach enabled by networked Web 2.0 technologies. We consistently hear this from both our enterprise and service provider customers as well as from key industry analysts.

This is built around our view of how the industry will evolve both from intelligent networks' role as well as the next generation of productivity, business and government models built around networked technology capabilities.

How is Cisco progressing in the advanced technology arena, and where is the company headed from a business and technology standpoint?

John Chambers: Our first wave of five advanced technologies in Q2 had year-over-year revenue growth of approximately 22%. That in total is approximately a $7B run rate in terms of revenue-and that is just the first wave. Unified Communications, including the addition of WebEx, continued to lead the way with revenue growth of approximately 60%. And just for a data point, Unified Communications growth without WebEx was 30% year-over-year.

In considering our ability to move into new markets to achieve both growth and profitability, our total advanced technologies revenue was more than 20% greater than revenue from our routing products. This again speaks to Cisco's balanced product portfolio and to our constant evolution of moving into new markets and product adjacencies.

Our second wave of advanced technologies that includes video systems, application networking systems, etc., is now approaching a $2.7B run rate and grew 31% year-over-year from a revenue perspective.

At the same time we are beginning to plant a potential third wave with our next generation of early stage emerging technologies. In summary, our product pipeline is in excellent shape and looks really exciting.

Q2 FY 2008 GAAP Reconciliation
(In millions, except per-share amounts)
Three Months Ended Six Months Ended
January 26, 2008 January 27, 2007 January 26, 2008 January 27, 2007
GAAP net income $ 2,060 $ 1,921 $ 4,265 $ 3,529
Employee share-based compensation expense
273 247 499 472
Payroll tax on stock option exercises
8 11 19 17
Compensation expense related to acquisitions and investments
34 27 73 48
In-process research and development
- 2 3 6
Amortization of purchased intangible assets
177 132 355 273
Total adjustments to GAAP income before provision for income taxes 492 419 949 816
Income tax effect
(173) (189) (333) (290)
Effect of retroactive tax legislation (1)
- (60) - (60)
Total adjustments to GAAP provision for income taxes
(173) (249) (333) (350)
Non-GAAP net income $ 2,379 $ 2,091 $ 4,881 $ 3,995
Diluted net income per share:
GAAP $ 0.33 $ 0.31 $ 0.68 $ 0.56
Non-GAAP $ 0.38 $ 0.33 $ 0.78 $ 0.64
Shares used in diluted net income per share calculation:
GAAP 6,202 6,291 6,273 6,255
Non-GAAP 6,197 6,281 6,267 6,243

(1) In the second quarter of fiscal 2007, the Tax Relief and Health Care Act of 2006 reinstated the U.S. federal research and development (R&D) tax credit, retroactive to January 1, 2006. GAAP net income for the second quarter and the first six months of fiscal 2007 included a $120 million tax benefit relating to the reinstatement of the U.S. federal R&D tax credit, including $60 million related to fiscal 2006 R&D expenses. Non-GAAP net income for the second quarter and the first six months of fiscal 2007 excluded the $60 million tax benefit related to fiscal 2006 R&D expenses.

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

(In millions)
Three Months Ended Six Months Ended
January 26, 2008 January 27, 2007 January 26, 2008 January 27, 2007
Shares used in diluted net income per share calculation - GAAP 6,202 6,291 6,273 6,255
Effect of SFAS 123(R) (5) (10) (6) (12)
Shares used in diluted net income per share calculation - Non-GAAP 6,197 6,281 6,267 6,243

# # #

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 our vision, strategy and positioning, the development of our industry and our markets, execution against our long-term strategy, our ability to understand and act upon key market transitions, our product momentum and our ability to drive long-term shareholder value) 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, our customer markets and various geographic regions; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; the growth and evolution 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 our product and service markets; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; manufacturing and sourcing risks, including risks related to our lean manufacturing model; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters, and governmental investigations; 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; risks related to the global nature of our operations, including our operations in emerging markets; 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, as each may be amended from time to time. Cisco's results of operations for the three and six months ended January 26, 2008 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, tax effects of post-acquisition integration of purchased intangible assets from significant acquisitions, and significant effects of retroactive tax legislation. 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, refer to the Form 8-K regarding Cisco's earnings release furnished today with the Securities and Exchange Commission.

Copyright ©2008 Cisco Systems, Inc. All rights reserved. Cisco, the Cisco logo, Cisco Systems, Linksys and WebEx 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.

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