February 6, 2002

Cisco has announced the financial results for its Q2, fiscal year 2002 quarter. John Chambers, Cisco CEO and president, and Larry Carter, Cisco CFO and senior vice president, discuss the quarterly results and Cisco's market position.

More Information Release: Cisco Systems Reports Second Quarter Earnings Release: Cisco Systems Releases Statement Regarding Second Quarter Earnings Q&A: Cisco Discusses Feb. 6 Statement Regarding Second Quarter Earnings Webcast: Cisco's Q2FY02 Conference Call Q&A: Larry Carter Discusses Cisco's Q2, FY 2002 Financial Position N@C: What is your visibility moving forward? Larry Carter: Because of the very limited visibility of our customers, we have limited ability to provide guidance beyond Q3FY02. Given the continued uncertainty surrounding the variables that could impact our industry and the overall global economic environment, we remain cautiously optimistic about the quarter. However our optimism in the long-term position of Cisco remains strong. N@C: How much cash flow from operations are you generating? Larry Carter: Our cash position continues to be a key strength in our company. This quarter, cash flow from operations was $2.1 billion, bringing our ending cash and investments to approximately $21 billion. We expect to generate $300-$400 million per month in cash flow from operations in Q3. In any economy, especially during the tough times, one of the key indicators of the health of a company is its ability to generate cash flow and maintain no debt. N@C: What is the difference between your Q2, FY 2002 pro forma and GAAP results? Why do you report both? Larry Carter: Our Q2FY02 pro forma net income was $664 million and $.09 earnings per share, and generally accepted accounting principles (GAAP) profits were $660 million and $.09 earnings per share. We believe that providing investors with GAAP and pro forma results along with a reconciliation to identify the differences provides valuable information to our investors. Our disclosure of pro forma results follows a best practice guidelines provided by Financial Executives International (FEI) and National Investor Relations Institute (NIRI). Cisco has always, and will continue to, have the highest regard for conservative financial reporting and full disclosure, and will continue to reflect that philosophy in our financial reports, in accordance with GAAP.

N@C: Did you see any operational improvements this past quarter?
John Chambers: We've managed our business and market opportunity to the breakaway strategy and six-point plan we announced last year. In almost every area of our business we've seen positive evidence of our strategy working, from market share gains and cash generation to inventory turns and gross margin improvements. In addition, we have over-achieved our goal of reducing expenses over the last four quarters and have now achieved the $2.25 billion mark on an annualized basis. Regarding our resource re-alignment - our sales, manufacturing, and service organizations were able to realign the fastest, and now we are making reasonable progress in our engineering and marketing resources. We also continue to leverage our own Internet applications to gain productivity and review our progress every 3-4 months.

N@C: What progress has Cisco made in terms of your stated productivity goal of $700,000 per employee?
John Chambers: During Q2FY02 we saw an approximate 10 percent sequential increase in revenue per employee from Q1FY02. Previously, we announced sequential productivity increase of six percent in Q1FY02. As these increases illustrate, we remain focused on consistently investing to improve our operational efficiencies. While we were pleased with the productivity increases, we still have a long way to go toward our initial stretch goal of $700,000 per employee.

N@C: What are you customers focused on?
John Chambers: When talking to our customers around the world, we consistently hear phrases like, "It's back to the basics." When we ask what this means, and how they can use Cisco's counsel and expertise in getting back to basics, their answers tend to align in three key areas: help us be more productive, help us improve our cash flow, and help us become more profitable. Our singular goal is to develop the technology solutions to help our customers solve these business priorities.

N@C: When do you see capital expenses spending turning around?
John Chambers: While we'd like to tell you we know what will happen economically over the next several quarters, in our opinion no one really knows. Most economists that we have talked with view the economy as starting to turn. Most CEOs view it as having reached a plateau. In these challenging economic times, customers are choosing Cisco because of our ability to deliver a return on their investment within 12-18 months. We attribute our market share gains to this value proposition and our unique strengths - product breadth, customer depth and the global balance of our business.