Welcome to Cisco Systems first quarter fiscal year 2007 financial results conference call. At the request of Cisco Systems, today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to introduce Ms. Blair Christie, Vice President of Corporate Communications for Cisco Systems. Ma'am, you may begin when ready.
Great. Thank you and good afternoon everyone. Welcome to our 67th quarterly conference call. This is Blair Christie, Vice President of Corporate Communications and I'm joined by John Chambers, our President and CEO; Dennis Powell, Chief Financial Officer; Rick Justice, Senior Vice President of Worldwide Field Operations; Charlie Giancarlo, Chief Development Officer.
The Q1 fiscal year 2007 press release is available on First Call, National Business Wire, the European Business and Technical Wire and on the Cisco web site at www.Cisco.com. If you would like a fax of the press release, please call 408-526-8890 and follow the instructions. A corresponding webcast with slides and downloadable information regarding Cisco's financial statements can be found on our website in the Investor Relations section. Additionally, a replay of this call will be available via telephone at 866-357-4205, or 203-369-0122 for international callers.
Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results. Please note, we have provided a reconciliation of GAAP to non-GAAP information in the slides accompanying this webcast, as well as on our web site in the Investor Relations section.
Throughout our call today, we will provide both Cisco and Scientific-Atlanta financial information in order to illustrate the impact of this acquisition on our overall Q1 Fiscal Year 2007 results. Where we refer to Cisco standalone, the financial information represents Cisco's performance excluding the results of this acquisition.
The financial results in this press release are unaudited and the matters we will be discussing today include forward-looking statements, and as such are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on Forms 10-K and 10-Q and any applicable amendments which identify important risk factors that could cause actual results to differ materially from those that are contained in the forward-looking statements.
Unauthorized recording of this conference call is not permitted, and I would now like to turn it over to John for his commentary on the quarter.
Blair, thank you very much. In this quarter’s conference call, we will implement the changes that we talked about in last quarter's conference call based upon requests and feedback from many of you. The first goal will remain to cut the time for the total narrative part of the conference call down.
Second, to present the key takeaways for the quarter as well as the revenue guidance for the next quarter in the opening comments. The opening comments will be followed by a detailed yet abbreviated discussion versus prior conference calls of the financials by Dennis.
The third section of the call will focus on general business momentum and strategy on a geographic product and customer segment basis. Dennis will then provide additional financial parameters around our guidance for Q2 and then I will wrap it up with some general comment in terms of Cisco's momentum going into Q2 of fiscal 2007. And finally, our Q&A session.
This briefer format will be supplemented with more detailed information in the slides accompanying this webcast. This should leave room for more questions and answers at the end and still result in the calls becoming shorter with the goal to reduce the time of the call 15 to 30 minutes. We would appreciate your view and constructive feedback to Blair and her team on this new approach.
Now on to the discussion of Q1.This quarter was once again another very strong and record quarter from a revenue, GAAP and non-GAAP net income and earnings per share perspective. To put these record results in perspective, I will summarize the quarterly highlights first from a key financial perspective, second from a geographic perspective, third by customer segment, and fourth by products.
In this discussion and in future conference calls we will discuss product growth and other financials, primarily from a revenue perspective, and use order growth rates to add color and momentum to the discussion. The geographic and customer segment discussion will be primarily in order growth numbers as this is how we run our business.
The key financial highlights for Q1 include the following: record revenue of approximately $8.2 billion, a 25% year-over-year increase and Cisco's standalone increase of approximately 16% which was above our standalone guidance of 11% to 13%. This is the fastest standalone year-over-year revenue growth rate we have seen in several years.
Order growth continued to be very strong with product book to bill of approximately one. As we discussed in prior conference calls, Q1 is subject to normal seasonality, starting off the new fiscal year, and as such normally has a book to bill below one. The key takeaway here is that orders actually grew a little faster in terms of year-over-year growth than even our record revenues.
Non-GAAP net income was $1.9 billion, an increased year over year of approximately 21%. Non-GAAP earnings per share were a record $0.31 and GAAP earnings per share were a record $0.26. Cash generated from operations was $2.3 billion. We repurchased 1.5 billion of common stock and we exited the quarter with $19.5 billion in cash, cash equivalents and investments.
From a Cisco standalone geographic perspective, momentum was drawn from an orders perspective and balance was very good across the five theaters during Q1. Despite the slower GDP growth that occurred in the U.S. and the slower growth from many of our technology peers in the most recent quarter, our business remained strong.
In the U.S., orders continued to grow in the upper teens year over year. As anticipated we saw very strong order growth in the emerging markets theater of over 40% year over year. The improvement that we saw in Q4 in our European operations continued in Q1 with very solid year over year growth, comfortably in double-digits.
From a Cisco standalone perspective, the balance was extremely good across routing, switching and Advanced Technologies. Routing revenue grew year over year by 13%, switching revenue grew year over year by 15% and Advanced Technologies revenue grew year over year by approximately 23%. Of the Advanced Technologies wireless, networked home and unified communications -- formally known as enterprise IP telephony -- led the way. We believe we are gaining market share versus almost all of our competitors; but we also believe we are getting a larger share of our customers' total spend on communications and IT.
From a Cisco standalone customer segment perspective, we saw continued strength in the commercial market with product order growth continuing of approximately 20% year over year. The service provider business remained very strong with standalone orders growing approximately 23%. Scientific-Atlanta was above the high end of our guidance with approximately 20% year-over-year growth.
From a momentum perspective, of particular interest in the service provider market was the continued very strong order growth rate of our CRS 1 of approximately 150 million for the quarter. The year-over-year growth rate for our flagship product was well over 500%.The U.S. service provider segment continued to have an extremely strong growth pace of approximately 30% year over year.
The global enterprise business was very solid with growth in the mid-teens. Our U.S. enterprise orders grew approximately 20% year over year, not counting the federal business.
From a commentary perspective, we executed as outlined in our Q4 and Q1 calls. We will always try to share with our shareholders in a very transparent way both our reasons for optimism and occasional caution. Going into Q4 we did share some cautions and this concern appeared to be appropriate, at least on a macro and general technology spending level. Going into Q1, we were a little more optimistic than some of the prevailing views in early August and it appears that these balance views in Q4 and Q1 were accurate, using this quarter's results as a proof point.
From a Cisco perspective, the key takeaway on Q1 from both a global and a U.S. perspective, is that momentum remains strong following our strong record Q4. The record results for Q1 continue to be due to the momentum being created by the successful implementation of our strategy. We laid the cornerstones of this strategy three, five and seven years ago. Many of the market transitions we anticipated are converging today as more and more communications and IT capabilities are moving into the network. Our architectural approach, based on intelligence in the network and tightly coupled products, is gaining both market share results and share of total customer spend.
You could characterize Cisco's position this way: we believe that the network is becoming the platform for all forms of communications and IT; the role of the network built on an end to end and architectural base differentiation, that we have been investing in for many years.
In terms of revenue guidance for Q2 fiscal 2007, including our usual caveat as discussed in prior calls, is for year-over-year revenue growth of approximately 24% to 25% and Cisco standalone year-over-year revenue growth of 14% to 15%.
At this time, I would like to turn it over to Dennis for further discussion of financial highlights.
Thanks John. Now for some comments on our P&L. We were very pleased the financial results for both Cisco standalone and Scientific-Atlanta exceeded our expectations this quarter for revenue, operating income and earnings per share. The business was strong across substantially all geographies, product categories, and customer segments.
Total revenue for the first quarter was $8.2 billion, an increase of 25% year over year. Cisco Q1 standalone revenue was $7.6 billion, or 16% year-over-year growth. Scientific-Atlanta Q1 revenue was $584 million, up 21% year over year for the comparable period, aligned to conform to Cisco's fiscal quarters. Routing revenue totaled $1.6 billion, up 13% year over year. Switching revenue was $3 billion, an increase of 15% year over year.
Advanced Technologies revenue totaled $1.9 billion, including $467 million of Scientific-Atlanta sales, representing an increase of 64% year over year on a combined basis. Advanced Technologies revenue, not including Scientific-Atlanta, grew 23% year over year. Other product revenue totaled $455 million, an increase of 53% year over year on a combined basis, and an increase of 23% year over year not including Scientific-Atlanta.
As we have previously stated, optical is no longer included in our Advanced Technologies product category and is included in other product revenue. Prior period amounts have been reclassified to reflect this change and in order to provide comparability.
Total service revenue was $1.24 billion, up approximately 17% year over year.Q1 total non-GAAP gross margin was 64.8%, down from 65.3% last quarter and for product only, non-GAAP gross margin for the first quarter was 64.7%, down from 65.1% last quarter. The decrease in product gross margin was due primarily to mix and discounts, partially offset by cost savings and volume. Our service margins on a non-GAAP basis for the first quarter were 65.6%, down from 66.3% last quarter.
Non GAAP operating expenses as a percentage of revenue were approximately 36% in Q1 FY '07 down from approximately 37% in Q1 FY '06. Our Q1 FY '07 tax provision rate for the non-GAAP and GAAP results was approximately 26%, down from approximately 28% in Q1 FY '06.
Non-GAAP net income for the first quarter of fiscal year 2007 was $1.9 billion, compared to $1.6 billion in the first quarter of fiscal 2006, representing a 21% increase year-over-year. Non-GAAP earnings per share on a fully diluted basis for Q1 were $0.31 up from $0.25 in the same quarter of fiscal year 2006, representing a 24% increase year over year.
GAAP net income for the first quarter was $1.6 billion as compared to $1.3 billion in the first quarter of fiscal year 2006, representing a 28% increase year over year. GAAP earnings per share on a fully diluted basis for the first quarter were $0.26, up from $0.20 in the same quarter of fiscal year 2006 representing a 30% increase year over year.
Now moving on to the balance sheet. The total of cash and cash equivalents and investments at the end of Q1 was $19.5 billion, compared to $17.8 billion last quarter. During Q1, we generated approximately $2.3 billion in cash flow from operations and used $1.5 billion to repurchase 66 million shares of our stock at an average price of $22.85.
Moving on to accounts receivable, we ended up the quarter at $3.1 billion, down from approximately $3.3 billion the previous quarter. At the end of Q1 FY '07 DSO was 34 days compared with 38 days at the end of Q4.Total inventory for Q1 was $1.5 billion, up from $1.4 billion last quarter. Non-GAAP inventory turns were 8.1 times, down slightly from 8.3 times last quarter. Our inventory purchase commitments for Q1 were $2.3 billion as compared to $2 billion for Q4. The sequential rise in purchase commitments is due to increased volume as well as longer lead times of certain components for targeted, high demand products.
Our total Q1 FY '07 reported headcount ended at 51,840 a net increase of 1,914 from Q4.
In conclusion, we were very pleased with our performance for the first quarter of fiscal year. EPS increased 24% from Q1 last year on a non-GAAP basis and 30% on a GAAP basis. We have been consistently setting new records for revenue, net income and earnings per share. Finally our three to five-year investments are paying off, resulting in year-over-year revenue growth of 25% including Scientific-Atlanta, and revenue growth of 16% on a Cisco standalone basis.
I will now turn it back to John.
Thanks, Dennis. Congratulations, nice job. In this section of the call, we will cover our geographies, customer segments and product review for Q1. Unless specifically indicated, all comments in this section are for Cisco standalone only. In this section, we are going to attempt to condense these areas versus what we have done in prior calls and again, we welcome your feedback.
It would be a safe assumption in almost all of the areas of the discussion that orders grew slightly faster than revenues. From a geographic point of view, there were positives from all five of our theaters. The U.S. maintained its strong momentum led by service provider order growth of approximately 30% and commercial order growth of approximately 20% year over year. Enterprise was solid, with order growth of over 20% not including federal. Federal grew approximately 10% year over year.
Emerging markets continued their strong momentum with orders continuing to grow over 40% year over year. Asia-Pacific grew in the low teens year over year. European momentum continued to improve with order growth comfortably in double-digits. The three large countries -- United Kingdom, Germany and France -- all grew in the mid-teens or better. Japan continued to show slight year-over-year improvement with growth in the low single-digits.
Now moving on to the customer segment discussion. To put the following into proper perspective and as we reviewed in prior quarters, a rough rule of thumb is that enterprise represents approximately 45% of our product business, commercial and service provider slightly above 25%, and consumer 4%.
As we said earlier, the commercial market segment continued its solid momentum with year-over-year order growth of approximately 20%. However, for the first time in six quarters it was actually the service provider segment that achieved the highest growth with orders growth in the low 20%.Growth in the service provider segment was the most consistent across all five theaters, with very solid growth in each of these theaters.
The enterprise order growth was very good year over year in the three largest theaters, those being U.S., European markets and emerging markets, with order growth in Asia Pacific and Japan being relatively flat for the enterprise segment.
Commercial order growth was also solid across our theaters. Our commercial strategy, which was one of the areas where we made major investments across all functions over the last several years, is continuing to achieve the results that we thought were possible with good execution.
We also continued to gain market share versus almost all of our peers in the service provider market segment. Of particular interest in our execution to the service provider market was the expanding growth of our high end router products. As we mentioned, the CRS-1 had very strong growth. Revenues were approximately $110 million, increasing from Q4's run rate of approximately $80 million. As we mentioned earlier, order momentum was even stronger with approximately $150 million of orders for the CRS in this quarter versus Q4 of approximately $120 million. Once again our overall order growth rate for our service provider customer segment in total was in the low 20s from a year-over-year perspective.
Scientific-Atlanta is another cornerstone of our architectural success for the service provider market. In positioning our acquisition decision of Scientific-Atlanta, we shared that their growth at the time of the acquisition was in the 10% to 12% range and that if the acquisition and synergies were effective, that the growth potential was in the 12% to 14% range. The Scientific-Atlanta year-over-year growth rate was almost identical to our total service provider year-over-year growth rate, both of which were in the low 20s.
Of particular interest in Q1 was the shipment of 1.3 million digital set-top boxes, an 18% increase in units shipped versus Q1 of the last fiscal year. Perhaps even more important is the role that Scientific-Atlanta’s video expertise played in our service provider accounts from a strategic business partner perspective.
In summary, from a service provider perspective, our technology and business architecture strategy is moving Cisco from a tactical or strategic technology partner for our service provider customers to a strategic business partner relationship in many of our accounts. As we discussed in the last conference call, while it is too early to say for sure, I would parallel this progress to a very similar evolution that Cisco has achieved in the enterprise market in the mid 1990s. All of us understand the business results and strategic positioning in the enterprise customers that Cisco has achieved since that period.
Now moving on to product discussions. As a reminder, in this discussion and in future quarterly conference calls, product discussions will cover the products primarily from a revenue perspective and use orders to add color or to illustrate momentum trends. Revenue balance was once again very good across core routing, switching and Advanced Technologies; and for purposes of understanding our momentum, order growth was slightly greater in each of these areas than revenue growth.
Revenues for routers grew 13% and switching grew 15% year over year. Advanced Technologies, in total, from a revenue perspective group by approximately 23% standalone. That is not including the Scientific-Atlanta products. Wireless led the way in Advanced Technologies with revenue growing over 40% year over year followed by unified communications growing approximately 30% year over year and the networked home growing in the low 30%. Storage, after a very strong Q4, grew in the mid-teens and security grew in the high single-digits.
As we said several quarters ago, our optical business, while still remaining important to Cisco, would no longer be included in our Advanced Technologies group. However, just as a transition data point, the optical business grew in the mid 20s year over year. We also achieved the number one market share position in metro DWDM. Nice job to the optical team.
It is very difficult to single out unique products in Q1 because, candidly, all of our top products did remarkably well. We do not expect this type of balance to occur very often, even in very good and strong quarters. Eight of our top ten products had order growth rates in excess of 20%; and those are top ten products as measured by revenue contribution. With these very solid, very good numbers the market share gains are obvious.
Our technology architecture play with the convergence of layers 1 through 7 at the OSI stack continues to gain traction and mind share. For example, customers understand leadership, total cost of ownership, flexibility and investment protection advantages they receive when they install a Cisco switch, which allows them to easily and cost-effectively add market leading voice, data, security, wireless, video and other capabilities to their existing products. This is a very powerful competitive differentiator versus our competition who are usually present in only one or two product categories and often do not loosely -- much less tightly -- integrate their products from an architectural perspective.
In summary, our vision of how the industry was going to evolve appears to be playing out very much as we expected. Our strategy is also achieving the benefits to both Cisco and our customers that we thought were possible. Finally, our execution is on target in terms of results as measured by customer partnerships perspective, market share gain. and share of our customers' total communications and IT expenditures as the network truly becomes a platform for delivering these capabilities.
It is my pleasure now to turn the call back over to Dennis for a detailed discussion of the financials regarding Q2 fiscal year 2007 guidance. Dennis, back to you.
Thanks, John. Let me remind you again that our comments include forward-looking statements and you should review our recent SEC filings that identify important risk factors and actual results could materially differ from those contained in forward-looking statements. As a reminder, we are providing guidance on a non-GAAP basis with a reconciliation to GAAP.
I will be providing guidance for Cisco on a combined basis including the effect of Scientific-Atlanta. You'll also find the details of this discussion in the slides accompanying this webcast. Our guidance for the full fiscal year on our last earnings call was for revenue to increase 15% to 20%, representing Cisco on a standalone growth of 10% to 15%. While we are not changing our annual guidance range after just one quarter of performance, we would expect that assuming Q3 and Q4 continues the strong growth realized in Q1 and expected for Q2, models would be at the higher end of that range.
We anticipate total revenue growth for the second quarter to be in the range of 24% to 25% year over year which reflects Cisco's standalone growth of 14% to 15% year over year.
Regarding gross margin, forecasting gross margin has always been challenging due to various factors such as volume, product mix, variable component costs, customer and channel mix and competitive pricing pressures. We believe total gross margins will be slightly above or below 65%. This assumes the consistency of core Cisco and Scientific Atlanta gross margins.
We will continue to be aggressive in our investment in our sales and engineering organizations that John discussed in previous conference calls. Therefore, we believe Q2 operating expenses will be in the range of 36% of revenue. We expect interest and other income to be approximately $195 million in the second quarter and our tax provision rate is expected to be approximately 26%.
While we expect to continue our repurchase program it is difficult to predict the exact weighted average shares outstanding. We are modeling share count to be flat to up 50 million in weighted average shares outstanding for EPS purposes, due to the full impact of the increase in the stock price in Q1. In this estimate of share count, we are not taking into consideration any further change in stock price that could occur in the second quarter of FY '07.
Regarding cash flow from operations, we would expect to generate $500 million to $700 million per month at these revenue levels. For our Q2 FY '07 GAAP earnings, we anticipate that Q2 GAAP EPS will be $0.04 to $0.06 per share lower than our non-GAAP earnings per share, primarily due to acquisition-related charges and stock option expense. Please see the slides that accompany this webcast for more detail.
Other than those items noted above, there are no other significant differences between GAAP and our non-GAAP guidance and this guidance assumes no additional acquisitions, asset impairments, restructuring or other events which may or may not be significant.
John, back to you.
Thank you, Dennis. The following is a summary of my view of Cisco's momentum and opportunities entering the second quarter of fiscal 2007. In areas that Cisco can control or influence, our momentum continues to be even stronger than it was a year ago. Balance was unusually good, even for a strong quarter, across our geographies, products and customer segments.
In the U.S., our strategic value to our service provider customers is increasing, both from a technology and a business architectural perspective. As we said last quarter, has the potential to continue to expand Cisco's added value to our service provider customers. The progress at Scientific-Atlanta is actually ahead of what we would have anticipated to be at this point in time. While success is still dependent upon solid execution, our role with Scientific-Atlanta and service providers has the potential to continue to expand throughout fiscal 2007.
The commercial market remains very solid. Following Q4 enterprise growth in the low double-digits, we were pleased to see enterprise growth in the mid-teens year over year. Our Cisco results continue to show improvement with Germany, France and the UK off to a good start. Given the mixed results of our peers in Europe, it is too early to say if this trend will definitely continue. Japan, for the second quarter in a row, following a year-and-a-half of challenges, appears to be slowly gaining momentum.
The primary areas that we will continue to focus on in the next one to two years will be the next generation service provider network build out which could start to occur with volume in the second half of fiscal year '07 or the first half of fiscal year '08.
Asia Pacific continues to remain solid. Our architectural strategy in the emerging market is working extremely well. Barring some major economic or political surprises across many of these emerging countries, I would expect this theater to have the potential to grow over twice the average growth rate of the other four theaters if we execute effectively.
Our balanced product momentum across our core technologies in Advanced Technologies is the best I have seen in a number of quarters. In fact it has been a number of years, I think. But again, it is a loosely and then tightly coupled product strategy for these technologies that dramatically differentiate Cisco from our peers.
Our pipeline of potential new core routing and switching products looks very good. Our continued evolution of our first phase, first wave of Advanced Technologies and emergence of a second wave of Advanced Technologies is evolving as expected. At the same time, we are beginning to plant a potential third wave with our early stage emerging technology. Charlie, just a great job by your entire team.
In summary, our product pipeline is in excellent shape and looks really exciting. Having said that, obviously, the proof is in the results. I was especially pleased with the market share gains across almost all of our product areas, given the challenges that many of our peers have experienced. The opportunity for continued market share gains looks reasonable.
We see the same challenges and uncertainties from an economic and capital spending concern that many of you continue to witness. At the risk of stating the obvious, Cisco will always be affected by major economic changes, capital spending patterns, new and existing competitors and our ability to execute or not on our strategy. Having said that, Q1 was an unusually strong quarter. Q2 guidance with the usual caveat of 14% to 15% year over year standalone revenue growth is obviously at the high end of our traditional 10% to 15% guidance and is the strongest that we have given in a number of years.
We will focus on what we control and influence and intend to position to Cisco to gain momentum in market transitions whether they are industry consolidations, product transitions or economics.
In summary, for those areas that we can control we believe that our vision, strategy and execution are in great shape and producing results. As always, I want to thank our shareholders, customers, employees and our partners for their support and continued confidence in our ability to execute during rapid industry consolidation, market transitions and challenging economic times.
Now, Blair, I would like to turn it back over to you.
Great. Thank you, John. We will now open the call to Q&A. We still request that sell side analysts please ask only one question. So, operator, please open up the call to questions.
(Operator Instructions) Your first question comes from Tim Long - Banc of America.
Tim Long - Banc of America
Very well done. Just a question, if I could, it sounded like a huge headcount addition number in the quarter, 1,900 people or so. Could you just give us a little color on where those additions were, how much were in sales particularly and if you could tie that into some of these statistics that Dennis talked about at the last analyst day in New York with regard to productivity? How was productivity, particularly on the new higher front within the first fiscal quarter? Thank you.
In terms of the 1,900 or so people I think that a fairly safe assumption rounding wise to say about 600 were in sales, about 330 in engineering. We had about 300, if I remember right, in customer advocacy. We added 400 people to our manufacturing operations at Scientific Atlanta to get the capacity to where we need it.
In terms of the sales productivity, we continued to add. We added about 300 individual sales reps and that's up 1,300 over the last six quarters, which is about a 35% increase and so the productivity is remarkably consistent across each of the theaters.
Yes; a couple of ways to look at it. First thing we do is we measure the people we hire going out the number of quarters they have been in the field and watch closely to see first how quickly they achieve standard levels of productivity and whether we are continuing to maintain that or even grow that.
We continue to find particularly in our major markets like U.S. enterprise very high levels of productivity being maintained as we look six, seven quarters out. So we are encouraged by that.
In terms of the numbers, productivity itself, actually, if you look at Q1 '07 in comparison to Q1 '06 despite the aggressive hiring that's continuing, we are actually flat to slightly up on overall productivity for the quarter; and we wouldn't expect that. As you are hiring aggressively it clearly takes people time to come up to standard productivity levels.
Thank you, Tim, on that one. It is amazing, I've never seen this in my career where you add sales reps and they come up to speed as fast as they have, which speaks a little bit about market opportunity and also the product breadth and depth that we handle.
Tim Long - Banc of America
Next question please.
Your next question comes from Brant Thompson - Goldman Sachs.
Brant Thompson - Goldman Sachs
John, I was wondering if you could talk a little bit about what you are seeing in terms of some of the customer decision-making in the carrier market. You have clearly seen lean order growth in this business. How much of this is building out for video, how much of this is just building out to handle current traffic on their network? Can you talk a little bit about what you are seeing in terms of their decision-making and where we are in some of those upgrades? Thank you.
If you look at and start with the most basic of all, the loads on the networks, we said I think it was almost four to five years ago that we thought Japan would be the model for loads on networks and that U.S. and Europe were kind of lagging a little bit in terms of the loads. At that time and using even a year ago as an example in the U.S. and Europe, the network load was probably 100% year-over-year growth numbers. Japan was running 200% to 300% regularly and often about 300%.
What you are seeing is many of the service providers today, as you start to add more and more data on to loads of networks and as you start to add mobility with data often coming through the mobility, the loads are coming up more in the 200% range. Then when you start to put video on top of it, and that combination of video for entertainment and YouTube type of activity, you begin to get very good growth loads occurring.
Some my view is that combination of that is actually driving growth on the network, which plays to exactly what we thought would happened and the reason we clearly didn't build a CRS to do a billion phone calls.
In terms of what we are seeing from the customer networks, the IPTV implementation on top of the existing data and voice fixed line is going to be the future and then we think most of them will also do what we think will be the ultimate, which will be quad play everywhere. So we see service providers in various stages of building that out. They are still early in their implementation of that. We obviously did extremely well in cable. We did extremely well in the traditional incumbents and we did well in the challengers on a global basis.
So we think we are gaining market share and we think we are moving, and I realize I am still the exception on viewing this will happen, where more and more service providers will go with a preferred vendor in doing the architecture. I do think it has many parallels to what we did in the enterprise market. Granted we will see if that prediction occurs or not.
Great. Thank you. Next question please.
Your next question comes from Ehud Gelblum - JP Morgan.
Ehud Gelblum - JP Morgan
First if I can seek a clarification there and then a question. Any information that you can give us on the breakdown of those 1.3 million set-top boxes would be very helpful. How many HDTV, how many DVRs? That would be very helpful, including perhaps voice modems.
John, if you could talk a little bit about what I'm actually interested in is seeing the growth geographically of your main cores in U.S. and Europe versus the growth that you're seeing in the emerging markets, especially after all those press releases that came out in September and all your commentary at the analyst day about emerging markets in the places that you are selling into now.
And following the headcount and where it is going, in your order break out you showed emerging markets up 40% in terms of orders and the U.S. without federal at 20%. Can you give us a sense as to on the revenue, is it too early to say that the emerging markets are becoming a larger percent of your revenue than it was? If I can get a sense as to one, two, three quarters down the road is emerging markets going to be a larger percentage? Is that really where the growth is coming from?
I guess I've been talking out loud. If you were to set the emerging markets to a more normal growth rate what would the growth rate of the entire company have been? Are we really seeing all the growth coming from there?
Okay. Ehud, you kind of snuck in several questions. So this time we will cover it a little bit, but bear with me, otherwise I won't be able to remember the questions that you asked. In terms of Scientific-Atlanta set-top boxes as you could tell from the revenue when you saw 1.3 million set-top boxes occur, that the very high-end DVR shipments were almost half of that, about 644,000 units. The HD shipments were 193,000 units and that would explain to you why in what is a traditionally slower quarter for them, why you saw the revenue growth be so solid in terms of the positioning.
In terms of the growth, it actually -- and this is probably the key takeaway from the whole call. The balance was amazingly good everywhere. All elements of our vision have evolved the way we thought. Our strategy is hitting on all cylinders and it was remarkable balance. It was not due to any geography or any product stats.
Starting with the question on geographies, our top four geographies grew between low teens all the way up to low 40s in the emerging market segment; with the U.S. and Europe as an example in the middle of that growth. A segment in Asia Pacific in the lower teens. If you look at the product ranges, I mean, it was balanced across the board. You talk about routing and switching at 13% and 15% respectively, Scientific-Atlanta at 20%. Even our services growth was at 16% in terms of positioning. Advanced Technologies were at 23%, not including Scientific-Atlanta. Even with the Advanced Technologies you are talking about product ranges from high single-digits to low 40s in terms of growth.
Emerging markets, just to give you the math, it moved into the third largest theater, but it is still 11% of our business. So bottom line, it was unbelievably good balance. A little bit of that is luck. But it's hitting on all cylinders in all theaters, in all product categories, in all customer segments in terms of the marketing end.
Thank you. Next question please.
Your next question comes from Nikos Theodosopoulos - UBS.
Nikos Theodosopoulos - UBS
I just wanted to clarify one point and then a question. The enterprise order growth for the whole company was mid-teens, if you could just confirm that.
That is correct. Order growth for the whole company mid-teens, for the U.S., approximately 20%.
Nikos Theodosopoulos - UBS
My question was on the gross margins. You mentioned in the dialogue that there were some product discounts that impacted a little bit this quarter, offset by volume and other factors. Can you comment, were the discounts just broadly based generally everywhere or were they focused on a few areas? Can you comment on that? Thank you.
Dennis why don't you take the first part of it and I will comment on the second.
Nikos, it was broad based. It was as we have seen in other quarters, nothing unusual about this quarter and about the same range. As we mentioned it also was impacted by mix, particularly we saw the Linksys business growing at a higher rate on the back-to-school program and so that impacted us a little bit as well. Then the normal cost savings that we see going the other way.
So if you look at it, it is a great problem to have when you have all your products doing well but you can do the math pretty quickly. Linksys grew in a very good year-over-year growth rate; so did our optical business, grew from the mid 20s and Scientific-Atlanta grew at 21%. All of those are, by definition, lower margin. We would like to have seen a little bit more in cost savings and we'll see if we can do that better in future quarters. But the discounting was very much as expected and very much what we have seen in prior quarters.
Next question, please.
Your next question comes from Jiong Shao - Lehman Brothers.
Jiong Shao - Lehman Brothers
John, you used to talk about things that you can control and there are things that you cannot and it correlates to your performance with GDP in the U.S. or globally. But over the last few quarters, you're booking growth seems to have accelerated, have decoupled from GDP. I was just wondering, could you maybe perhaps talk about some of the reasons for that? What is your outlook going forward on that relationship? Thanks.
Part of it will always be tied to GDP and economic growth. That relates to capital spending. It also relates to CEOs who are more willing to take risks in terms of looking out three to five years, which often the technology changes take that long to produce a difference in.
I think what you are seeing is part of our business does tie to GDP growth but a larger and larger part ties to other factors. So for example, the service provider business as much ties to the next generation IPNGN build out. It ties as much to what we do in new markets like with Scientific-Atlanta or security. You also look in other categories that we move into market adjacencies, we are starting off with almost no installed base. So when you move into new areas such as storage area networking or the telepresence -- my favorite new technology -- then you are off of a market that we have no base to do a comparison. Which means by definition, any growth you get contributes to that segment.
Then you have movement into new emerging markets, which does very well on a global basis and even our services group, which maintain very solid year-over-year revenue growth of about 16% or 17%, the advanced services group grew at almost 40%.
So what you are seeing is a combination that is tied to economic growth and therefore capital spending but a larger portion of our business, over time, tying more to service provider next generation build outs and new markets that we have not traditionally been in.
John just one quick point. Even if you look at service provider, IP service provider CapEx looks to be about 9% up, but if you look at IT service provider CapEx it is 19% up. So there are all those subsets of factors that come into play that right now seem to be pretty favorable.
Next question, please.
Your next question comes from John Marchetti - Morgan Stanley.
John Marchetti - Morgan Stanley
Thank you. A quick question if I can, John, around the service provider growth that you have been seeing. You have had a few nice quarters in a row now of service provider growth. I was just curious if you could delve into how much of it is really the router decision that you guys made years back? How much of the growth do you think comes from the synergistic nature of your relationship now with Scientific-Atlanta?
John, you know, it is hard to break it out segment-wise. I would make it even broader than that. If you are a service provider and you look at Cisco you used to look at us probably as a individual product category. A router and that router could be a core router, it could be a different one for edge; it to be a different one for access. You might look at us a little bit for optical. You might have looked at us, what we might do in the home with Linksys. You might, after we acquired Scientific-Atlanta, look at us for video.
I think what more and more people are realizing is that these products will be loosely and then very tightly coupled. It has huge implications in terms of investment protection, total cost of ownership, flexibility. We are one of the few players that can bring customers to service providers, our enterprise and commercial marketplace.
But there is no doubt however that video is the killer application here in terms of loads, both in service providers and in enterprise and in the home and that when we moved into areas with Scientific-Atlanta, projects on video surveillance and others, you begin to see us getting a different role in these environments.
So I would say it is actually the architectural play that is the key advantage we have. I think that shows with all segments that we sold into, service provider doing remarkably well this quarter. So I would say it was actually the balance, but if you really pressed me, John, video loads and Scientific-Atlanta's expertise here. It is an art not a science, to make video work well, as many people are finding out around the world and I think you are seeing more and more people look to Cisco to be their partner to make that happen.
Thank you, John. Next question please.
Your next question comes from Jeff Evanson - Sanford Bernstein.
Jeff Evanson - Sanford Bernstein
Thanks. Near the end of the last fiscal year, you introduced a series of products around application acceleration that could facilitate data center consolidation. I'm wondering what you are seeing for the early traction with those products and data center consolidation overall?
Charlie, maybe if you could talk about our total data center strategy a little bit.
Right. The application delivery platforms that we are producing as part of a total data center strategy, which I will expand on in a moment. In terms of the application delivery platforms, we are actually seeing very good uptake on that. We do believe that we are picking up a fair amount of momentum in that space as companies attempt more and more to really leverage the investments that they are making in web-based applications and then push it increasingly to the edge; and get better performance both for their employees at branch offices but also importantly for customers and for third party partners that are coming to their sites.
We're seeing very good momentum in that space and we see that as we continue to integrate it into our overall infrastructure that it just continues to add more and more value, both as a set of appliances but also more and more value to our basic infrastructure component such as access routers themselves, as well as some of the core products that we have in the data center.
It is part of the overall data center strategy that we have, which includes the ability to provide for greater levels of efficiency and operational efficiency inside the data center environment, as virtualization starts to take on a greater and greater focus area for our customers. We are finding that the things that we can do in the switching, in the networking infrastructure can really provide the backbone, if you will, for a lot of these virtualization as well as application acceleration initiatives.
So it is something that we feel fairly positively about. It is something we are investing more and more in and we are seeing pretty good momentum in the market.
Your next question comes from Aaron Rakers - AG Edwards.
Aaron Rakers - AG Edwards
Thanks for taking the question, and congratulations on the great quarter. My question is in regard to the Scientific-Atlanta business. I believe in your 10-K, you guys disclosed a breakdown by geographical basis in Scientific-Atlanta. I understand that you probably won't give that breakdown now, but I'm just trying to understand where we are at in terms of pushing Scientific-Atlanta into the international market? Is that upon us right now or is that still something that we as investors and the analyst community should look for over the next few quarters?
I think it is something that you ought to continuously look for. It will obviously will start off with a lower base. I think our issue with Scientific-Atlanta as we move on a global basis is more prioritizing which locations do we go to? This is obviously a long sell cycle as we have all been through. But if you look at the interest level, it is good around the world in terms of the opportunities. If you were to say, all right, John, where do you see the most uptake outside the U.S. and Canada? It would probably be in Europe and Eastern Europe. It might surprise you how much interest is going on in Asia and Latin America as well.
But if you pin it down to the numbers in rough estimates, probably 90% North America today to give you a feel for it, by definition growing faster globally, but off of a much, much smaller base.
We do have, in terms of our field headcount in Scientific-Atlanta, we have a fairly significant representation in Europe, which in numbers is up fairly significantly, what we have in the U.S., the accounts, obviously, are buying a lot more in the U.S. at this time.
This is where, depending on if we are successful, which I believe it will be, will telepresence, suddenly you can begin to support a number of customers all over the world with different languages, much more effectively, with your resources. We will see if we can really expand our support model, not just for Scientific-Atlanta, but in general, using our own technology there as collaboration plays a larger role.
Just to reinforce one point. The interest in IPTV is clearly around the world and the opportunity is clearly there.
Your next question comes from Bill Cusick – Bear Stearns.
Bill Cusick – Bear Stearns
Thanks for taking my call. I wonder, John, for the people who haven’t been around since the mid-90s, talk about, you mentioned the progression of becoming a strategic partner to the enterprise. How did that happen? Was it over a timeframe of years with the products and specific things that happened? I am really intrigued with how this is working with service providers. Thanks.
I think you have hit on one of the things that if it does develop, it is obviously a huge competitive advantage for Cisco, if it parallels the ramp in enterprise. Within the ’93, ’94 time period where customers starting to say Cisco, we are buying product individually from you, and if you would be more aggressive and give us some idea of some of the acquisitions, we would begin to buy more from you at a faster pace, and we would prefer to standardize.
My comment back to them, with the appropriate marketing positioning, was I thought you wanted Best In Class in each category? And they said, actually you are starting to develop Best In Class, what we are after is hosted ownership, total cost of ownership and network protection, architectural plays, and truly entered a business partnership. I thought maybe 10% of our customers might do that. Today, I would say in the enterprise customers, especially the Fortune 500 around the world, maybe more than half of them use Cisco as a strategic partner, and a huge number of them standardize on us architecturally.
I think the same opportunity exists with service providers. Service providers would purchase by individual products, and they would always have two or three vendors, to keep each vendor honestly. And, as competition becomes much more brutal, as that industry consolidates, as it is about providing new services at faster speed and implementation, my view is that will be implemented with strategic technical partners first, and then strategic architectural partners second; then, strategic preferred vendors third, and then business partners fourth.
We have about the same level of interest, maybe the top 10% to 20% of service providers like we did in enterprise, expressing the interest of heading that way. But we are seeing more and more view us differently in the market.
John, the one thing I would add to that is that what you generally do see with service providers is even the ones that have the capabilities to develop the networks all by themselves, and tend to be the ones to pick individual products, as they venture into brand new areas, VoIP or video in particular, are brand new areas. Even those companies that reach out to the vendors that can provide an end-to-end solution ask them to come in as a strategic vendor to be able to deliver that. I think we are in that position now with many of the service providers as they venture into that video and the everything over IP space.
I would agree. Larry just very nicely reminded me that we have got to pick up the pace on questions. I will try to keep my answers shorter.
Thank you, John. Next question please.
Your next question comes from Subu Subrahmanyan - Sanders Morris.
Subu Subrahmanyan - Sanders Morris
My question is on seasonality in the business and how you view that? If my math is right your guidance for the January quarter is for the Cisco standalone revenues to be relatively on the flat side and yet you've had a strong sequential growth quarter in which usually is a seasonally weaker quarter. So how should we think about seasonality and what is impacting what we would think of as normal seasonality?
I think for the reasons that we talked about earlier the only seasonality you will see is a slowdown from Q4 to Q1 in orders. We experienced that one again sequentially but not in terms of year-over-year numbers. Our Q3 is always dependent upon service providers having a very strong Q3 so that's the quarter where we see both opportunities and challenges.
But we are going to watch for another quarter before we really start to break down Q3 and Q4. As I said, Subu, the most aggressive numbers that I've given in many years were what we gave here for Q2 in terms of guidance at 14% to 15% in terms of standalone growth in terms of positioning.
Your next question comes from Samuel Wilson - JMP Securities.
Samuel Wilson - JMP Securities
Good afternoon, everyone. John, a question for you and this is on the enterprise side and specifically IT budgets. It is clear you are growing faster than your competition on the enterprise side and really faster than most people are projecting IT budgets are growing at. So I just wanted to get a sense from you what was going on inside the enterprise in is this about you moving into adjacent markets or them transitioning their budgets away from Sarbanes-Oxley costs more towards switches and routers, and projects that may have been delayed over the last few years? Just some color and commentary on what's going on there.
Sure. I think whenever you look at an enterprise customer segment, by definition the standard deviation is fairly wide in terms of both budget, the CEO’s commitment to IT and communications and how they view Cisco within that. But I think what you are seeing is really the larger share of their total spend, in my opinion, because the role of the network has changed. The network is beginning to enable many of the IT applications and communication productivity goals that they have, unified communications being an example.
The second thing that you are seeing, and we will see if this carries through or not, is that you are seeing productivity slow down in certain parts of the world. Productivity is slowing down in part, in my opinion, because they haven’t made the investment in the capital spending and the process changes to get the leverage. So I think you are seeing more and more companies realize that I am not going to be able to squeeze a whole lot more out of the expense side of the house. So when I look at really using new productivity enablers, whether it's in the area of collaboration or traditional IT data applications here is where I need to go.
Just using Cisco telepresence as an example, I will take a run rate of $140 million out of our travel budget in 15 months by implementing about a $40 million total investment. So I think you are seeing people view not just Cisco differently, because we provide both the network, but we now provide enabling a lot of the communications and the productivity that is going to be required, but we also help them on their business process change.
So I think Cisco is expanding in terms of not just mind share but also the ability to help them achieve their goals. We are in the part of the market that clearly is going to grow and has the adjacencies to that.
So I don't want to imply in any way that the budgets are dramatically changing. They are low single-digit growth but I think how they are spending the money is changing much as was true about service providers. More and more of their capital spending is going into areas where we are able to contribute, where before it went into areas we did not contribute in.
Next question please.
Your next question comes from Ittai Kidron - CIBC World Markets.
Ittai Kidron - CIBC World Markets
Thank you and congratulations. John, perhaps you can comment on Advanced Technologies if you go a little bit more into the details of that and clearly nice to see wireless doing very well there. But for the balance of the year which ones do you think will out perform, which ones do you think will under-perform? Perhaps you can give us a little bit more color on the first few weeks of telepresence, how's that shaping out? And how quickly do you think that's transforming from emerging technology into an advanced technology?
All of the Advanced Technologies, if I remember right, had an order growth rate a little bit better than booking growth rate; and even the slowest of the Advanced Technologies, security, which grew in high single-digits, actually had order growth rate in the mid teens.
If I were to say which ones consistently are going to continue to grow at the higher end I would probably say unified communications is extremely solid. I would bet a fair amount on wireless continuing to do well. Storage will do very well off of a smaller base and we're getting huge market share on that. Telepresence is my favorite, although also is zero-based.
Ittai Kidron - CIBC World Markets
So by definition it will have the highest growth next quarter.
It will. For several reasons it will. But if you really look at the opportunity on that, I think telepresence should be $1 billion market in three to five years. Remember we have never had $1 billion market in less than five. It has the appropriate caveat, so it really will probably be three quarters out or four quarters out before we know for sure if it is really going to play at the level that we expect. What I will watch this quarter, remember, and we just announced the products and we are just starting to take orders will be the number of customer commits we get. I will probably actually judge number of customers, what the pipeline looked like what is the success, what's the replication of it. So telepresence will probably be three to four quarters out before we know if it's as hot a product and more importantly as productive a product as I think it will be.
Charlie, anything to add?
I think those are the ones that we really think are going to be top over the next several years. We hope to add a few more.
Next question, please.
Your next question comes from Mark Sue - RBC Capital Markets.
Mark Sue - RBC Capital Markets
Thank you. Dennis, any thoughts on the dividend you promised? I think you were waiting for the stock to appreciate. Maybe you can share the timing of that and also what you mean by not a token dividend?
Mark that is an interesting question.
Dennis is turning a little bit red here. It is kind of fun to watch. I will buy you a little bit of time to think as I give the first part of the answer. Our PE ratio versus our growth rate actually has not changed. We are still at the lower end of our peers. And so from a personal perspective as a shareholder, while we will absolutely pay a dividend with the take rate, the current level versus our growth rate and what we think we are capable of doing, I continue to be optimistic on buying back the stock. Now let me not influence your answer, Dennis.
Our position has not changed and it is a question of when, not if. But as you have seen for the last several quarters, our business is very dynamic now and it has changed in terms of the investments that we need to make on a quarter-to-quarter basis. So you have seen the amount that we have returned to the shareholders in terms of the stock buyback range from as low as about $900 million to as high as about $3 billion. Right now we like that level of flexibility. We think it is better for ourselves and for our shareholders. So we will continue on the current path for the foreseeable future.
Mark Sue - RBC Capital Markets
Does that mean, Dennis, that your view is the stock is still undervalued?
Mark, that is your job not mine.
That was two questions. We are going to go on to the next question.
Your next question comes from Paul Silverstein - Credit Suisse.
Paul Silverstein - Credit Suisse
John, you put up some real nice numbers. Can you talk about your edge routing and service provider Ethernet switching product lines in terms of, you have been very vocal in saying that that has been the number one area that needed fixing in terms of the product portfolio. How much revenue do you feel you have left on the table? Can you give us any insight in terms of timing of developments there and what you expect going forward? Any insight in terms of what that contributed?
Paul, I would be happy to. It's a bunch of questions. Let me summarize it. If you watch what we've done both in our planned product releases, software and hardware, our enhancements on the 7600, 7200, and 7300 planned, we got back into very good stead in terms of the edge part of the marketplace. So we are taking market share we believe at the core, at the edge and even at the access although it's hard when you've got 90% plus market share at the access to hit higher numbers.
I am real comfortable with our architectural strategy here. So where I would have viewed it as an issue and service providers thinking about us as a player one to two years ago I think you're going to find a lot of the service providers buy very much into this and they should because they gave us the strategy, outlined the products and we drove a lot of it out of Japan actually.
Thank you. Next question, please.
Your next question comes from Todd Sadler - Deutsche Bank.
Todd Sadler - Deutsche Bank
I had a quick question on the federal business. Could you tell us roughly what percentage of North America enterprise is? I think you've given us a range in the past. How did it perform versus seasonal trends? What do you see for '07? Any indication of what the federal government budget or IT requests by Bush may look like for 2007? Thanks a lot.
Let me address the number on the percentage. If you look at the federal business, of course this is the busy season and we did have a good quarter in that regard. But even at the peak season, busy season it still represents maybe 16% of our U.S. business, 8% of the worldwide business at the busiest season. The busy season to the non busy season can be a dramatic difference.
So that's about the ratio. We did pick up some of that year end money. Department of Defense was certainly spending at the end. Intelligence was spending at the end and civilian went along fine. But even in the best of situations, we would say about 16% of U.S. including Linksys, or 16% without Linksys or 17% without Linksys is what that federal bit would be in the peak season.
Think about $500 million just to make the math easy on that.
Your next question comes from Jason Ader - Thomas Weisel Partners.
Jason Ader - Thomas Weisel Partners
I wanted to ask you about the impact of Microsoft entry into the VoIP market next year. Just trying to figure out how you guys are thinking about that. Do you think it will be a significant threat, given that they are going to be working together with Nortel, who has a very large installed base? Any color you can provide on that?
If you watch, Microsoft will be a partner for us at times, occasionally a competitor. It is in their interest and our interest because our customers want us to work together in the area of unified communications. There will be overlap and some good competition on that. But if you watch, we have got a three to five-year lead in this marketplace. We have products today and we are coming at it with an architectural capability that is really designed for intelligence throughout the network.
So if you look at many of our peers, they often come at it as devices or end user nodes. However, what it does speak to is as we move into market adjacencies, so will other players in the industry moved into those market adjacencies, and Charlie, it means that doing engineering, business development and our sales engine we are picking the right spots to go into because others see it as well.
So this market is going to be plenty big enough for multiple players. We will obviously try to lead with our network architecture but we will always do what our customers want us to in terms of interoperability within that category, Jason.
Your next question comes from Tim Daubenspeck - Pacific Crest Securities.
Tim Daubenspeck - Pacific Crest Securities
Thank you very much. I just want to ask about Japan specifically, just a point of clarification first. The timing around the NGN build, you talked about volumes second half fiscal '07, full year '08. Was that a change from any earlier expectations? Is the timing the same?
The second thing, the optimism about the full year numbers being kind of at the high end. How much of a rebound, this turnaround in Japan, is involved with that optimism in terms of second-half numbers? Thank you.
Well if you watch, Japan is playing out exactly the way we thought it would and the fact that they leveled out before we began to get meaningful orders for the next generation build out was very positive. This is what Cisco, I think, does very well. We think two, three, five years out. We don't make decisions on a quarterly or yearly basis and so we are positioned, we think, extremely well for the opportunities in Japan.
What we also do, Tim, is that there are always going to be a couple of surprises on the downside versus what we expect and a couple of surprises on the upside. What I think you are starting to see is Cisco gets a lot more balls up in the air in terms of upside potential. The upside potential in terms of the data center, the upside potential in terms of emerging markets, the upside potential in terms of commercial, the upside potential in NGN build out, the upside potential by geographies in areas like Japan where we invested for almost three years and what will not be known for sure, Charlie, for almost another 12 months.
But no that is not built dramatically one way or the other. We have to have a good Q3 service provider market by definition; but we have to get enough balls up in the air so that we can do with it or without it in each category.
Your next question comes from Ken Muth - Robert Baird.
Ken Muth - Robert Baird
On the service provider market, obviously seeing a lot of upticks there in your business from a lot of fronts I'm sure. But as the service providers move to more Ethernet-centric models, have you seen that benefit today in any of your products or your revenues? Are is that still yet to come?
I think we are saying that happen, the migration to IP also has the migration of Ethernet associated with it. So just the increase on the Metro Ethernet market of which we are a very high market share ownership of that and that's improving our business in that area. We are also seeing Ethernet becoming more and more the intra-office connectivity vehicle for more and more of their internal infrastructure. So we are seeing very good migration towards the Ethernet. We think that the migration towards the requirement for higher bandwidth, both for business and eventually even for consumers, is going to drive a lot more Metro Ethernet. In fact we think as telepresence rolls out, it is going to really help to stimulate the demand for Metro Ethernet services initially in large business, but then moving to midsize and even small businesses as well.
Your next question comes from Ari Bensinger - Standard & Poor's.
Ari Bensinger - Standard & Poor's
In relation to Scientific-Atlanta, certainly VoIP cable deployments is accelerating. What is Scientific-Atlanta's position in the cable modem market and given the superb industry growth currently being experienced in this segment, how much of a factor did that play in to Scientific-Atlanta coming in at the high end of your expectations over the past couple of quarters?
I'll take that one again. Especially between Scientific-Atlanta and Linksys we are clearly the largest market shareholder of total shipments of modems and EMTAs. Between the two organizations we have well over 50% market share in both of those areas. On stand-alone, Scientific-Atlanta is growing very well both in the modems and the EMTA area. I would say it is growing in line with the rest of the Scientific-Atlanta business. So it probably doesn't have a significant either acceleration or deceleration on the overall growth.
If you really look at it in that area when you look at their DVR shipments and you think about it being up year over year 40% and 640,000 units and you look at the high-definition shipments at the 194,000 that is where a lot of the revenue growth has come from. I think that is our last question.
I just want to thank you all for joining us today. Obviously, we were extremely pleased with a record quarter, a very strong quarter and our vision of how the industry is going to evolve with the role that networking is going to play in enabling all forms of communications in IT looks to be right on the money.
We think we have dramatically differentiated Cisco in our strategy whether it's capturing these market transitions or a technology architectural play across multiple customer segments. We are getting the results in terms of market share growth and position in our enterprise, search provider, commercial and consumer market.
Balance was unusually good. You never want to say never, but it is very unusual even during a very strong quarter to have this type of balance. So congratulations to the team and, Blair, let me turn it back over to you.
Thank you, John. As a reminder, our next quarterly conference call which will reflect our second quarter fiscal year 2007 results will be on Tuesday, February 6, 2007, at 1:30 pm Pacific time and 4:30 pm Eastern time.
Again I would like to remind you that in light of regulation FC, Cisco plans to retain its long-standing policy to not comment on its financial guidance during the quarter unless it is done through a public disclosure. Please call the Investor Relations department with any follow-up questions from this call. Thank you for your participation and continued support. This concludes our call.
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