Analyst Conference Call Summary

conference date: November 10, 2010 @ 1:30 PM Pacific Time
for quarter ending: October 30, 2010 (1st quarter fiscal 2011)

(at the time this was written)
Forward-looking statements

Overview: Okay, not a great quarter. Weak guidance for fiscal Q2.

Basic data (GAAP) :

Revenues were $10.75 billion, down 1% sequentially from $10.84 billion, but up 19% from $9.02 billion in the year-earlier quarter.

Net income was $1.93 billion, flat sequentially from $1.93 billion, but up 8% from $1.79 billion year-earlier.

EPS (earnings per share) were $0.34, up 3% sequentially from $0.33, and up 13% from $0.30 year-earlier.

Guidance:

Q2 fiscal 2011: revenue 3% to 5% y/y growth. Operating margin 23 to 25%. EPS $0.32 to $0.35 non-GAAP, with GAAP 8 to 10 cents per share lower.

Full fiscal 2011: revenue 9% to 12% y/y growth.

Conference Highlights:

The economic environment is still challenging, as some sectors have seen capital spending moderation. But results were generally in line with prior guidance; missed sales forecast.

Non-GAAP results: $3.0 billion operating income, net income $2.4 billion, up 14% y/y, EPS $0.42, up 17% y/y. Gross margin 64.3%.

Cash flow from operations was $1.7 billion. Cash and equivalents ended at $38.9 billion. In the quarter 113 million shares repurchased using $2.5 billion. $10.7 billion deferred revenue.

Inventory in terms of days sales outstanding continued to drop.

ExtendMedia and Arch Rock Corporation were acquired.

Umi telepresence for consumers was introduced. Application Velocity Network Service for cloud computing introduced, as well as many hardware products.

"Next generation products continued very solid customer acceptance." Collaboration, video and data center/cloud are the areas of economic opportunity in the coming year.

Products accounted for $8.70 billion in sales, services for $2.05 billion.

Cost of sales was $4.0 billion, leaving gross profit of $6.76 billion. Operating expenses of $4.40 billion included: Research and Development $1.43 billion; sales and marketing $2.40 billion; general and administration $0.46 billion, and amortization of purchased intangible assets, $113 million. Leaving operating income of $2.35 billion. Other income $74 million. Income tax provision $495 million.

Geographic revenues are now consolidated into: US.& Canada; Europe; emerging markets; and Asia Pacific. Japan is now included in Asia Pacific. Russia, India, Brazil, and China had strong growth, but U.S. grew revenues only 6% y/y. By product orders: U.S. 7% y/y; Europe 2% y/y; emerging 32% y/y; Asia Pacific 18% y/y.

Product categories changed too. Revenue by product:

Routers $1.80 billion, up 13% y/y.
Switches $3.55 billion, up 25% y/y.
New products $3.11 billion, up 22% y/y. Included video connect home up 11% y/y, collaboration up 45% y/y, security down 2%, wireless up 9%, and data center up 59% y/y.
Other $231 million, up 13% y/y.

1900 new hires in quarter. Expanded sales force by 15% in last two quarters. 72,600 ending head count.

Challenges in quarter included certain service provider products, public sector, and Europe. Believes public sector will continue to be difficult for a few quarters.

CRS3 routers began shipping to telecoms in the quarter. U.S. service provider orders were down 2% y/y, compared to 8% growth globally. Mainly it was U.S. cable service providers that were down, particularly set tops. But IT set top boxes are growing.

Book to bill was below 1, which is typical of Q1, by size of drop was unusual.

Growth is not projected to be as fast as we would like in the next few quarters. But return to 12% to 17% annual growth goals is possible in the not to distant future.

Made market share gains in wireless in calendar Q3.

Q&A:

You bought more shares back than you had guided. Just before stock went down. Timing implications? No, we intended to be aggressive in the marketplace, we don't even make decisions quarter by quarter for share buy backs.

Economic environment seems to be improving, isn't Q2 guidance a Cisco-specific issue? We were hit by public sector spending, which is 22% of overall revenue for us. Other areas were up in line with improving demand, except as explained above. Cable set top boxes were another special issue.

Fiscal Q2 can have lower gross margins because of the higher % of consumer product sales, which tend to have lower margins.

Annual guidance assumes very strong growth for Q3 and Q4, what is the basis? This new guidance is a disappointment to us. We hit a couple of air pockets, and are adjusting. End of year includes one extra week over 2010, and we see a well balanced pipeline for second half of year.

You said orders in quarter missed internal projections by $500 million. Timing of that? Quarter was within normal seasonality. But we did not understand what was happening in the public sector or cable group.

In last several quarters we had supply challenges, as did others in the industry. In Q1 we got to our lead time objectives. Inventory increase was mainly based on consumer slowdown and set top box slowdown. But on the whole our inventory is better aligned than a few quarters ago.

Are Juniper and HP taking routing business away? We did get suprised in the quarter. We will address the issues aggresively. I don't believe you are right about your market share gain statements. We gained market share according to independent sources. We did lose market share in two categories of nine.

Public sector varies by nation, state, even city. Many U.S. states have balanced budget clauses that have forced them to cut spending.

China appetite for smart and connected solutions? We could partner with cities, provinces, or the nation as a whole. There are a lot of cities in China who want to position themselves for the future. Same in Australia.

Bid win rates substantiate your view of competitiveness? It was harder getting orders with state and local governments. Education is slowed by lack of project funding, not a weakening win rate. No fundamental changes when going up against Juniper, HP, or IBM.

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