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Executives

David McCulloch – Director-Corporate Communications

Robert Soderbery – Senior Vice President

Hilton Romanski – Head-Business Development

Rob Salvango – Vice President-Business Development

Analysts

Rod B. Hall – JPMorgan Chase & Co.

Jayson Noland – Robert W. Baird &Co. Inc.

Subu Subrahmanyan – The Juda Group

Cisco Systems, Inc. (CSCO) Intent to Acquire Meraki Conference Call November 19, 2012 9:00 AM ET

David McCulloch

Good morning, everyone, and welcome to this conference call announcing Cisco’s Intent to Acquire San Francisco-based Meraki, a leader in cloud networking. Meraki products and technology offer midmarket customers easy to deploy on-premise networking solutions that can be centrally manage from the cloud.

This is David McCulloch I am Director of Corporate Communications of Cisco. And I am joined today by Robert Soderbery, the Senior Vice President of Cisco’s Enterprise networking group, by Hilton Romanski Head of Business Development for Cisco, and by Rob Salvango, Vice President of Business Development at Cisco.

A press release with information on today’s announcement can be found on the website of both companies at www.cisco.com and at meraki.com. A replay of this Cisco WebEx conference call will be available later today on the Cisco Investor Relations website at investor.cisco.com. And at the conclusion of today’s prepared remarks, we will be answering questions from participants who have registered online via the URL included in the press release. (Operator Instructions)

This presentation and the matters that both companies will be discussing today include forward-looking statements which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including the expected completion of the acquisition and the timeframe in which this will occur, the expected benefits to Cisco, its product platforms and its customers from completing the acquisition, plans regarding Meraki personnel, and statements regarding our strategy to accelerate the adoption of software-based business models, our value proposition with customers, our competitive performance and new market opportunities.

You 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, among other things, the potential impact on the business of Meraki due to the uncertainty about the acquisition, the retention of employees of Meraki and the ability of Cisco to successfully integrate Meraki and to achieve expected benefits, business and economic conditions and growth trends in the networking industry, customer markets in various geographic regions, global economic conditions and the uncertainties in the geopolitical environment and other risk factors set forth in Cisco’s most recent reports on Form 10-K and Form 10-Q.

Any forward-looking statements in this release and on this conference call are based on limited information currently available to Cisco, which is subject to change, and Cisco will not necessarily update the information. Unauthorized recording of this conference call is not permitted.

And at this point, I’d like to turn the call over to Rob Soderbery, Senior Vice President of Cisco’s Enterprise Networking Group. Good morning Rob.

Robert Soderbery

Thank you, Dave and good morning, And good morning to everyone on the call, thanks for joining us today. I’m very excited to have the opportunity to discuss our intent to acquire Meraki. Meraki provides us a new way to serve our customers in the mid market. These customers have the same IT needs as large organizations, but don’t have the same IT resources.

They struggled to deal with mobility, security, BYOD and the Cloud. Meraki provides a simple, secured and networking solution that reduces TCO while providing a comprehensive features that including wired, wireless, security, mobile device management and a rich set of L4-7 services. At Cisco, we’re focused on solving our customers business challenges by delivering intelligent architectures built on integrated products, services, and software platforms.

It’s for that reason that Meraki is a perfect strategic fit as they have pursued a similar vision to both developing an innovative, integrated software platform including a cloud-enabled OS for the devices and the hosted management solutions. This platform is designed from the ground up for the multi-tenant scale and reliable operation from the cloud. We’ve coupled this platform to the subscription-based model and a very attractive financial proposition for their clients.

You have heard us share our five foundational priorities. Meraki advances our strategic agenda in multiple dimensions. It extends our leadership in the core of our business and moves us further towards the software and cloud-based business model and advances our interest in the $5 billion midmarket. The midmarket is growing faster than large enterprises and Cisco is a relatively lower share. Thus a compelling solution in the midmarket accelerates our growth rates and further opens a large attractive market with an optimized product offer.

Additionally, the margin and growth economic on the Meraki business and the mix of product and services fit well into the Cisco financial model. Importantly when Meraki started as a pure play wireless provider, they have broadened their portfolio to provide a complete set of access solutions. After deep diligence, we became convinced that the Meraki solution was a compelling offer. We intend to position the Meraki cloud platform as a primary networking solution for our midmarket customers.

Now, let me talk a little bit about the deal itself. This was not an opportunistic deal. It was driven by our strategic intent and a shared vision we were able to develop in a very short amount of time with the Meraki senior team: Sanjit, John and Hans. We believe that offers material time to market advantages over what Cisco could achieve on its own and material differentiation over our competitors.

For Meraki enabled their technology to achieve global scale reach and impact much faster than it would on a standalone basis. And it enabled their team to have a huge impact on the market leader in networking. Cisco Enterprise products offer deep rich set of features well suited the highest scale and complex needs of larger enterprises. This product portfolio is market leading and preferred by customers across the globe.

As demonstrated in our most recent quarter by Wi-Fi growth of 38%, SP Wi-Fi growth of 100%, and five straight quarters of Wi-Fi share gain, but this portfolio is very much focused on larger enterprises. By contrast, Meraki has focused the core capabilities required for mid-sized and smaller enterprises. Thus together, the Cisco and Meraki portfolios provide a complete offer to the market.

In the mobile and cloud era, I believe that Cisco and Meraki together will transform how midmarket organizations such as retailers, school districts, healthcare and other vertical, build and consume network technology and leverage that technology for business advantage. So this is not just a product technology or talent acquisition, we’re bringing Meraki in as the new platform within Cisco for cloud advantage networks. And we’re asking the Meraki team to lead this platform for Cisco. We’re also excited about the innovation, development and go-to-market model that Meraki brings to Cisco.

Meraki’s cloud-based model enables a high velocity innovation cycle that allows it to rapidly and seamlessly release new features to customers. The development methodology is coupled to a tightly linked inside sales and channel model. Meraki shares Cisco’s partner centered business model and we believe this will be welcomed by our channels and our channel partners.

We intended to invest in and build on the Meraki cloud platform to further extend its capabilities, as well as provide the geographic reach across the globe. Additionally, Meraki was headquartered in San Francisco was founded by the members of the MIT Laboratory for Computer Science. It’s a great story of entrepreneurial success by three MIT guys.

In fact John Hennessy from Stanford is on our Board reminds me that there is a bit of Stanford in one of them. I could be more pleased to welcome Sanjit his co-founders and the four Meraki team to Cisco. We’re going to share the transition at details in a few minute, but first I’d like to turn the call over to Rob Salvagno. Rob drove this deal for us in the Cisco side, deep into the due diligence, can share a little more about the company and some of its customers. Rob?

Robert Salvagno

Thank you, Rob. With this acquisition, Meraki is bringing together its technology, its business and really a passion for developing great software and technology with Cisco’s market-leading network portfolio, sales channel and global reach. We’re very excited to welcome the Meraki team to Cisco. So let me share a little bit with you about Meraki itself.

So Meraki has built a very fast-growing software centric business, which provides strong gross margins, as well as recurring revenue. The company itself offers networking solutions via cloud managed access points, routers and switches. Meraki is a private company today. They have more than 20,000 customer networks deployed in over a 143 countries.

They’re headquartered here in San Francisco with offices in New York, London and Mexico. The company is growing very quickly and today has more than 330 employees. I’ll share a little bit about Meraki’s customers as well. Their rich feature set and intuitive management that Meraki has to offer have compelled 1000s of customers to deploy Meraki. Many of these midmarket customers are not currently Cisco customers today.

With Meraki, customers such as a retailer can replace their cash registers with tablets and smartphones while maintaining PCI compliance, even in stores without on-site IT. School districts can realize the learning efficiencies of tablets in classrooms without adding IT staff and enterprises can empower employees to bring their own devices without increasing management complexity or compromising security.

What I’d like to do now is share one example of a customer that has deployed Meraki products. One great example of a Meraki customer today is Applebee’s, the restaurant chain. Today, Applebee’s network expands 100s of 1000s of restaurants across the U.S. which are all managed via the Meraki cloud by a centralized IT staff. Meraki devices are installed by a restaurant managers without the need to send IT on-site.

This allows Applebee’s to provide guest Wi-Fi access for diners while controlling content filtering, application firewall and bandwidth controls. This enables Applebee's to deliver targeted promotions via customized splash pages. Today, Meraki has become the standard for all Applebee’s restaurants.

With that, I’d like to now hand things over to Hilton Romanski, Vice President of Cisco’s Corporate Development Group to share a more about the transaction and why we believe Cisco and Meraki is a winning combination for Cisco’s customers, Meraki customers today and into the future.

Hilton Romanski

Great, thanks Rob and a great job driving this transaction and this relationship with Meraki moving forward within Cisco. I’ll cover some of the additional details of the transaction now. Under the terms of the agreements, Cisco will pay approximately $1.2 billion in cash and retention-based incentives to acquire the entire business and operations of Meraki. We ended the last quarter was $45 billion in cash and cash equivalents, which we will use to fund the cost of the acquisition. The acquisition has been fully approved by Cisco’s and Meraki’s respective Boards of Directors and is not subject to further shareholder approval.

In determining value, we considered a number of factors and approaches. First, Meraki’s differentiation as a business was built from their ground up around the cloud. Second, Meraki’s financial profile and performance, Meraki is on a $100 million annual bookings run rate and is growing in triple digits and has attractive gross margins, which are accretive to Cisco immediately.

Third, the value we expect to create by scaling the Meraki business within Cisco. And finally, the comparison of this deal as other high growth software based comparable companies and transactions in the marketplace. We expect that close of the transaction in Q2 FY’13; the transaction is subject to regulatory approvals. Once the acquisition is complete, Meraki will form the new cloud networking group within Cisco under Sujai Hajela, VP, GM of the Wireless Networking Group. Sanjit will continue to lead the Meraki team reporting to Sujai. The Meraki team will remain in San Francisco.

Now, I’d like to talk a little bit more about the business and technology benefits for Cisco and our customers. Meraki helps to accelerate and expand Cisco’s cloud offerings in several ways. We’ll start with technology. Meraki’s technology differentiation is built from the ground up around cloud. Meraki’s ability to rapidly introduce new features to customers and deliver benefits such as ease of use and deployment enabled by its foundational technology as a scalable cloud based platform.

Customer focus, because Meraki’s cloud networking solutions are so easy to deploy and manage and are ideally suited for midmarket customers with lean IT organizations, it has very positive market traction. Financial model. Meraki is a fast growing business with attractive margins and recurring revenue.

Operational model. The Meraki business combines a high velocity development methodology with a tightly linked inside sales and channel model. And finally, last but not least talent, Meraki has assembled a strong team of expertise in software development and cloud based business models. We are very excited about how Meraki has built its team and its business model. Cisco will find ways to extend the unique aspects of Meraki’s development and sales approach to other areas within the company.

I would like to now talk a little bit about how each of our companies brings unique capabilities to the table that help our customers. I’ll start with Cisco. We deliver market leading solutions around networking such as routing, switching and wireless. We deliver intelligent secure solutions across the network, data center and collaboration. We have the widest networking portfolio and certainly the most services rich. We have strength in global markets, particularly in developed but increasingly in emerging.

Now a Meraki. A leader in Cloud Networking. Architecture built from the ground up around cloud. Solutions that are easy to deploy and manage. Strength in the midmarket. High growth software based model. Now Cisco plus Meraki. Networking solutions across important customer segments, customer choice and flexibility on-premise and in the cloud. Capabilities to address large and fast-growing markets. Strong global presence and reach. And differentiated customer value any-to-any connectivity. You can see how bringing together Cisco and Meraki will deliver more value to the midmarket businesses while enhancing Cisco’s enterprise network offerings.

Now, I’ll pass it back to Rob Soderbery to wrap things up.

Rob Soderbery

It was nice job Hilton and team and my congratulations again go out to Sanjit and the entire Meraki team for the tremendous value you’ve built, it’s a real entrepreneurial success story. In this mobile and cloud era, we know from our customers that their IT and network requirements are increasingly impacted by these new trends we’ve been talking about today, BYOD, explosion of mobile, rapid adoption of cloud. These IT transformations are impacting our clients large and small and the midmarket is sweet spot where Meraki’s technology is highly strategic and dramatically expands Cisco’s offering. Absolutely are buying this for it’s strategic merit and a strategic fit within the Cisco portfolio.

As I said earlier, I believe that Cisco and Meraki portfolios together will transform how these organizations solve the networking challenges, address business enablement, and reduce their operating costs. I’m really pleased to welcome all the Meraki employees to the Cisco family. David?

David McCulloch

Perfect. Thank you, Rob. Thank you, Hilton. Thank you, Rob. We would like to turn to answering some of your questions now. We have approximately 500 callers and folks online with us today. And so let’s jump right into a few of those.

Question-and-Answer Session

David McCulloch

First question is about Cisco’s management technologies for the unified access market already, the Identity Services Engine specifically. Can you comment on whether there is any overlap between ISC and the Meraki, BYOD management software?

Robert Soderbery

Yeah. So the Identity Services Engine is our leading platform for policy and BYOD and the enterprise. The ISC is the one of the hottest part inside the Cisco is growing very rapidly. It’s part of our Unified Access Portfolio and how we assemble our wired, wireless VPN solutions with management and policy for our enterprise customers. Meraki’s solution is absolutely complementary to that really delivering the same value proposition in the midmarket focused on a different ease of use paradigm and a simpler type of environment while ISC is scaled for the millions of potential clients of the very largest organization and deep rich sophisticated features and the Meraki’s solution is scaled for their customer base.

David McCulloch

Okay, great, thank you. And another question about the midmarket and question of whether Cisco has addressed the midmarket in someway before, one color has reference to some of our Linux products in the past addressing that market. How is Meraki different in our strategic approach to the midmarket?

Robert Soderbery

Well the midmarket is an important market for Cisco today. And what our product have not been optimized for the unique needs of the midmarket. And so the Meraki coming in and really optimizing for that sort of features and capabilities that is in highest demand of the midmarket. And then putting that in a simple and easy-to-use form factor cloud delivered is really transformational for how technology has been delivered into this market in the past. We’re absolutely confident we’ll be able to drive this to success.

David McCulloch

Okay. The question with regards to the extent of any overlap between Meraki’s product and those within the Cisco product portfolio today already? Could you comment on that question?

Robert Soderbery

Yeah, so customer choice is always something that Cisco has provided. The Cisco enterprise products provide a complete solution with the deep rich capabilities that people know and love in IOS and across our portfolio. The Meraki provides completely different option for customers to deploy. And we believe customers will be able to reflect between two different approaches and make the right choice for themselves. From a field perspective, we will lead with our Cisco Enterprise offers the large enterprises believe that Meraki for midmarket enterprises. In aggregate, we expect to maximize our value out of the marketplace.

David McCulloch

Okay, great. Thank you. And Rob question about the term cloud networking and a question about how that is similar or different to this the software defined networking and OpenFlow supporting types of products that have been written about a lot recently. Can you just comment on the distinction between the cloud networking and the other terminologies?

Robert Soderbery

Absolutely, software defined networking is all about making the network simpler and more programmable. In that regard, it is the same thing that Meraki does. But they’ve been taken a very different approach than what has been talked about by the OpenFlow community or –in at the end today. Meraki provides complete management facility, hosted in the cloud that’s deeply integrated into their hardware platforms, that makes it simple and easy to use, easy to deploy. And gives you a complete set of capabilities built on top of their hardware. We’re very much provided the same kind of capabilities and easy to use, easy deployment and networking program ability. And we think for a midmarket customer who has really relative little interest in understanding, how network are build I just wants to easily compete with that network is an ideal solution.

David McCulloch

Perfect, thank you. Question a little of a return to the question around overlap difference looking at this time Meraki is known for its virtual Wi-Fi, controller architecture, did Cisco see this taking a larger role in Wi-Fi, deployments to have the higher end of our customer base, Fortune 500 for example?

Robert Soderbery

Absolutely not. I think it’s important what Meraki has been known in the past primarily for their wireless controller. One the things that really impressed us over the past couple of months that we have gotten very close to them, its degree to sort of expand of that portfolio offering significant share of the business today in the wired and switching, adding security portfolio and then a range of a4 to 7 software services including security, a4 to 7 application visibility RAM acceleration of course MDM versus much more just wireless. And second, as I have mentioned earlier our wireless portfolio is doing exceptionally well in the large enterprise, we’re really focused on the total deployability and insertability of the Meraki offer into a mid size customer with the key differentiator here.

David McCulloch

Excellent, thank you. Perhaps, this next one my big question for Hilton. Can you comment a little bit more on that revenue rate of Meraki obviously with regards to the valuation of the deal?

Hilton Romanski

Yeah, absolutely so as I noted before the revenue run rate of the company is roughly a $100 million in revenue moving forward. And again, that at accretive margin to Cisco immediately and believe that over time, we’ll will have converge margins at a very similar to Cisco’s operating margin as well. What makes us very attractive from a revenue based perspectives is the model the company has a combination of traditional thought revenues driven by hardware and a significant of the revenues as Rob I noted earlier coming from recurring and we believe that this is a very attracted combination of a very high margin, high growth, software business that allows to be able to have greater adjacency with the product portfolio approach to be currently have well partnered very obviously in the case to midmarket with a different business model. So it’s more than just revenue run rate that we find attractive the quality of that revenue in the nature of the business itself.

David McCulloch

Great thank you. And that we have few folks who like to ask questions in the line come to in just one moment. And one of the question was asked about the virtual Wi-Fi control but Meraki offers technologies and solutions from securities WAN optimization, well perhaps you can talk a little bit out broader portfolio and they have feel of that…

Hilton Romanski

Absolutely very good, the feel for us at Cisco’s to reach which Meraki’s build and brought together all of the components to the portfolio. In fact I will encourage each of you to attend the Meraki website and learn about the product offer and naturally go ahead and get a demo kit download and deploy it and you will be stunned by how easy it is for you to set up a network in your own environment. There’s ease-of-use expenses not just to go wired, wireless components or wired components which are the advanced capabilities such as mobile device management and security. Is bringing together the complete portfolio with a single experience is really the magic that Meraki has provided here.

David McCulloch

Okay. Thank you. Let’s started a few of calling join us. We’re going to start with the question from Rod Hall with JPMorgan.

Robert Soderbery

Good morning, Rod.

Rod B. Hall – JPMorgan Chase & Co.

Yeah, good morning guys. Just a question on the bidding process, I wonder, the valuation seems pretty high I guess it that’s suggestive of a competitive bid, can you guys comment on whether what the competitive processing and what kinds other kinds of companies are interested is it networking companies, or does the Meraki kind of other appeal but other types of companies outside of the networking industry. And then I also wanted to just ask a little bit more about the layer 4-7 comment that you made. Can you talk maybe a little bit more about the kinds of the outside of security is it mostly security stuff or other things that they’re doing in layer 4-7 that are interesting and innovated for that midmarket sort of customers. Thanks.

Hilton Romanski

Sure. This is Hilton, I will take a crack at, at least the first part of question I will turn it to Rob to answer the second. And before I answer you just want to correct one term adjustment from my previous answer its $100 million in bookings not revenues I apologize for that.

With respect to valuation and the process, this was a process that we drove very proactively and deliberately from our side. We’ve had ongoing engagement in Meraki and the knowledge of Meraki for some time. And really this was a process where we had an exclusive dialog with Meraki beginning in the September timeframe and really drove this to conclusion on the basis. So it was the process that was not competitive from that point of view although obviously there are many players in the marketplace that I suspect would like to be able to have this capability in their portfolio and they and we are proud that we came out on top in that process of where a little bit ahead of the market in terms of moving on this one.

And I think with respect to valuation, as I said before, and looking at the trajectory of the business currently both in terms of the bookings run rate, the margin profile of the business, the scaling capabilities that we think are profitable and the potential to be able to be unlock additional value within Cisco’s broader portfolio and reach, as well as the fact that Meraki itself is a high growth software based company that in many ways is well within the range of comparables that we’ve seen in the trading space of the public market as well as in transactions that we’ve seen recently. So we’re very comfortable with the approach we’ve taken here and that had again an exclusive dialogue with Meraki to reach this point of this announcement today.

So with that I’ll turn over to Rob to answer the question layer four to seven.

Robert Soderbery

Yeah, Rod, I’m happy to answer that. So from L four to seven perspective today Meraki offers land acceleration, they offer security and they offer application visibility and control. Increasingly clients are seeing that they need more control over their applications to the granular level in important force policies in areas like BYOD and enforce them with optimization whether to be on the wireless links or the RAN links. Underpinning Meraki’s architecture is a deep packet capability on L four to seven allowing them to implement these services on top of their architecture. Additionally, we believe the Meraki platform is a very extensible platform and well architected platform and will be able to continue to offer new services and capabilities, again all focused at this midmarket opportunity. Okay.

David McCulloch

Thanks your question Rod, and we're going to go to Jayson Noland has a question from Robert W. Baird. Your all lines should be open now Jayson.

Jayson Noland – Robert W. Baird &Co. Inc.

Great, thank you. I wanted to ask if Cisco competed with Meraki in the past, we understand Meraki was viewed as a cheaper solution both on the CapEx and OpEx side. And then scalability other limitations to how much the cloud-based controller can scale up?

Robert Soderbery

Yeah, Jayson, happy to answer those, well on the competition, we definitely saw Meraki in the marketplace, and while it wasn’t the breadth of our competitive energies, we did see them enough that they registered as an interesting potential target for us as an opportunity. I will take some uncertain commentary of your question regarding price competition.

The Meraki solution is very much of value priced offer, it’s priced similar to the entry level of the Cisco portfolio product that the Catalyst 2k product like our entry level access point. Meraki is attending to get more than one of those products when they do a deal, so from a deal size perspective there is upside to us. So we believe that this will be largely neutral to Cisco and situations in which the Meraki solution is in lieu of the Cisco offer.

In addition, it will be substantial accretive and solutions where the customer purchases is the entire portfolio is that a one or two products for repurchasing a competitive products. Into that note, as we look at the Meraki competitive wins there is a huge amount of competitive displacement for the companies outside of Cisco in their portfolio. So those all made us feel confident regarding the acquisitions. Does that help?

Jayson Noland – Robert W. Baird &Co. Inc.

Thank you and then scalability of a cloud-based controller?

Robert Soderbery

Yeah, so that the scale you can think of scale in two dimensions, one is the scale required to support multi-tenancy and tens of thousands going to hundreds of thousands of clients. We’re extremely confident at Meraki’s ability to scale for horizontally to support the large numbers of clients, large numbers of sites within global reach. The current 20,000 clients run on sort of 100 servers today, so there is a great scale of property in terms of the cloud operation and we’ve done deep diligence in the architecture of that backend.

In terms of scale up, at a certain point of specification and complexity of customers can have a strong preference for Cisco Enterprise projects? Anybody with the complex LAN configuration, anybody with large site, large corporate site, anybody with sophisticated policy needs and enterprise IT integration is going to prefer a Cisco enterprise solution. So while the product does do well, the features and the overall value proposition in the enterprise market are better suited towards the Cisco enterprise author.

Jayson Noland - Robert W. Baird &Co. Inc.

Thank you.

David McCulloch

Thanks for your question Jayson. We have another question on the phone from Subu Subrahmanyan with The Juda Group. Good morning Subu.

Subu Subrahmanyan – The Juda Group

Good morning. My question is on Meraki’s current split of products, if you could also talk about, if you could use the Meraki management model for some Cisco’s existing products where you do sell into the mid-tier of the market?

Robert Soderbery

Please repeat.

David McCulloch

I apologize, you may have heard some background noise, could you just repeat the last half of your question. Sorry about that.

Subu Subrahmanyan – The Juda Group

The question was on the split between product and service from Meraki currently and if they can use the cloud based management services?

David McCulloch

Cisco does currently sell into the mid-tier enterprise.

Robert Soderbery

Our strategy would be to move forward with the Meraki platform is really optimize platform for the mid market, move forward with the Cisco Enterprise platform as an optimized platform for the larger enterprise.

At the same time we see tremendous technology synergy between these two assets both from the ability to provide more sophisticated network services and leveraging the Cisco portfolio as well as from building more rapidly provide cloud optimized solutions for our large enterprise customers, you’re going to see two product platforms for us but quite a bit of intermingling and synergy and leverage between the technology stack.

Subu Subrahmanyan – The Juda Group

And the Meraki split between product and service currently for revenue?

Robert Soderbery

We don’t breakout the product split and in fact we will be reporting this within our product category.

Subu Subrahmanyan – The Juda Group

All right. Thank you.

David McCulloch

I apologize we have a little construction it appears in the room next floor or above us in this building, I’m sorry for the noise. We have a couple of more questions online, one is about the scale of the addressable market is SME segment that we believe at Meraki helps to address. Can you talk about Ron.

Robert Soderbery

Yeah we folded that scale of that market as a $5 billion TAM that market in 1000 to 10000 customers, 1000, 10000 feet size or employee size is really the bridge between the midmarket moving into large enterprise and what we see is that’s quite a fuzzy boundary between those midmarket and large enterprise customers. So to be large enterprise is relatively unsophisticated IT needs that are minimal to Meraki’s solution along with small customers like sophisticated needs that will approve the Cisco Enterprise solution. So $5 billion TAM we believe this represented an asset allows to go after than PAM and then we’ll see, we’ll be able to use that two product portfolios to really to optimize for customers on the medium?

Subu Subrahmanyan – The Juda Group

Okay, thank you Rob. And related question on go-to market, what is the purchase model for midmarket customers, you want to buy from Meraki?

Robert Soderbery

So, Meraki is a hybrid model with subscriptions as well as product sales. Your initial hardware purchase is a product purchase and then you subscribed to Meraki cloud based service in exchange for that subscription, you get the ongoing management facility on the Meraki cloud as well as the updated features and capabilities that they rollout in that cloud offer.

Subu Subrahmanyan – The Juda Group

All right, another question online we’ve highlighted in today’s announcement that Meraki has businesses here in the U.S., in London, in Mexico. How do we plan to scale Meraki’s business moves forward into the many markets in which Cisco does business today?

Robert Soderbery

So, Meraki has demonstrated to build itself globally although global bookings at this time are quite small. We believe the technology will scale and that we will provide one of the contributions that Cisco will provide will be ability to rapidly drive this into the global markets.

Subu Subrahmanyan – The Juda Group

Okay, thank you very much. Just a clarifying question about where Meraki will fit within the Cisco organization, I think we covered that on the call, maybe if you could just reiterate that.

Robert Soderbery

Yeah, so within Cisco we have organized around five business groups, I believe the Enterprise Networking Group, just nearly $20 billion core enterprise business, Meraki will rollup into my organization and report to Sujai Hajela.

Subu Subrahmanyan – The Juda Group

Great, thank you. And a follow up question on the valuation of the market in terms of who we’ve regard as the major vendor competitors in this midmarket segment?

Robert Soderbery

Many of the clients in this segment are indeed for enterprise customers and that they have complex enterprise needs and they typically will buy from enterprise vendors, so that the Cisco or one of the well known competitors to us in this space. What Meraki has done is uniquely focused on this class of midmarket customers and provided optimal solution. The customers in this class typically would not go down market and they would not go to a SME or a prosumer type networking hardware, so typically want to be in an enterprise portfolio because they do have more challenging needs. From that regard Meraki has done excellent job of really focusing and targeting a specific set of customers here. And we think it as a very unique value proposition for those clients as demonstrated by their revenue and growth trajectory.

Subu Subrahmanyan – The Juda Group

Okay, we’re almost to the end of our time. We just have a couple more questions to takes your, that one is for you Hilton. Could you provide some further commentary on the retention based incentives used on set of part of this deal as well as the cash?

Hilton Romanski

Absolutely. So as I said before the transaction is going to be paid in roughly $1.2 billion of cash consideration. We have obviously a very, very strong desire to continue to hold and to nurture and develop and to drive leadership from the team that is coming in from Meraki, it’s a key tenant of how we think about talent and all acquisitions. And Rob I think very well articulated a lot of the driver here is around being on top of a platform of that Cisco that allows Meraki to scale even further and to be able to develop and realize the vision that’s been set out by the company over the last few years, since it’s founding.

In addition as part of the transaction, we are putting in place retention mechanisms along the lines of not just the cash consideration for ownership of the current management team and the employees but also looking at additional detention in the form of stock, which as a shareholder in Cisco we all are very proud to be driving value in combination with our broader shareholder base. So the Meraki management team and their broader leadership team as well as employees will enjoy those benefits as well.

Subu Subrahmanyan – The Juda Group

Question for you Rob Soderbery. This is an important segment, important go-to market and customer segment for Cisco. We envision the Meraki offerings being delivered by service providers as managed services?

Robert Soderbery

No, that the key aspect of our go-to-market model, it’s actually already in place within Meraki as a go-to-market model Meraki itself. And so we would expect to continue that and expand that. And particularly as we think about global expansion that will be a key driver of the business model.

Subu Subrahmanyan – The Juda Group

Okay. And perhaps just in closing couple of more questions on the financial lines. Can you comment on the percentage of Meraki revenues that are recurring versus new at any given times?

Robert Soderbery

We’re not breaking that out at this time.

Subu Subrahmanyan – The Juda Group

Okay, all right. Thank you for that. And lastly perhaps then the clarification of the target customer what’s really the sweet spot customer for Meraki in terms of the employee side versus Cisco’s focus of perhaps the upper end of that range?

Robert Soderbery

Well the sweet spot for Meraki offer is the 1,000% company. That tends to be the company that has those sophisticated IT needs, lots of employees, lots of customers, lots of mobile devices, need for security, need for services, an IT department that might just have a handful of people. Well, the customers that are significantly larger than thousand heads, they have those same challenges and problems. As well as some customers that are sort of neither thousand heads that have much more sophisticated challenges. With that 1,000 heads shop is really the sweet spot with Meraki offer.

David McCulloch

Perfect, well thank you Rob. Thank you also to Hilton and Rob Salvango for joining this morning. As a reminder, a recording of today’s call will be available lately today at investor.cisco.com, that is our Investor Relations website. Thank you all for joining us this morning and thank you for your questions.

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