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Here’s the entire text of the Q&A from Cisco’s (ticker: CSCO) Q1 2006 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

Question by Paul Silverstein, Credit Suisse First Boston.

Q - Paul Silverstein

Dennis, when you gave us gross margin guidance last quarter, did that include the impact of FAS 123? I think, if I recall, you said 67% give or take. You had some one-time items that created great strength in gross margins last quarter. Again, was that included in the guidance? And the question going forward is when you talk about 67%, same question, is that taking into account the impact of 123? And if the guidance was in fact not taking that into account, what changed, why was it better than what you were expecting?

A - Dennis Powell

Sure. Paul, the number that we gave was on a pro forma basis. It was not taking into account the potential effect of the stock option expense. And we were very pleased with the great progress that we saw in both the manufacturing and the engineering to keep our costs at a, in fact, improve on our costs over the previous quarter. And the second thing that was a good thing for us this quarter is the lower discounts than what we've had in the previous quarter. So, both of those were positive, and that's the reason that we saw it stay at the same level as it was from the previous quarter.

A - John Chambers

Thank you, Paul. And by the way, congratulations to your team and Randy and Angel's team as well. Real nice focus.

Operator

Question by Brant Thompson, Goldman Sachs.

Q - Brant Thompson

I was wondering if you could give us a little color on the product basis when we think about the revenue trend into the next quarter. Advanced technologies clearly should continue to show good growth. How does switching and routing fare out in terms of the trends we should see? Thanks very much.

A - John Chambers

Sure. Brant, what we saw was a good balance in Q1 about those routing and switching, and that's why I watched the bookings. The revenues tend to go to up and down, the lead times and when the orders come in, etc. So, routing and switching was both at the lower end of double digits, so in the 10 to 12% type of numbers from a booking perspective. Advanced technologies were solid across most of the advanced technologies, and Charlie, feel free to jump into it. Q1 is usually a little bit slower for us than other quarters in terms of the advanced technologies, and they were weighted pretty heavily by optical, where we're going to stay focused on certain areas of optical, but refocus on our margins there. So I would expect advanced technologies in Q2 to grow at a higher rate than we saw in Q1 from an overall perspective. So, good balance there. The routers, as you know, tie a lot to our service provider business. The switching ties more to our commercial and enterprise type of business if you are trying to draw the correlations, Brant.

Q - Brant Thompson

Thank you.

Operator

Question by Jiong Shao, Lehman Brothers.

Q - Jiong Shao

Thank you very much I have a question on OpEx guidance. I think from the guidance, it implies that it's going to be around 37% of revenue again, sort of flattish in absolute dollars going forward. I was wondering, what kind of a headcount addition, if any, you have baked into the Q2 guidance?

A - Dennis Powell

This is Dennis. I believe that we're going to see, as I mentioned, a slight increase over Q1 in terms of percentage and in absolute dollars, as we continue to add additional resources, and particularly in the sales area, focusing on our emerging markets and in the commercial sector. So it's the areas where we see tremendous growth opportunities.

A - John Chambers

Chiang, what I said in my part was I said headcount very similar to being up slightly versus just like we saw in the last quarter, where there was roughly 850 people added. I think the categories will be largely sales reps, which I think all of us on this call understand, either producer or not, in three to four quarters, and that's a very self-correcting type of group. And secondly, we are going to invest in both advanced technologies, a wider range of advanced technologies, and emerging technologies. Those will not have the same type of relatively quick payback. Those are usually two to four years out in terms of the payback, Jiong. Thank you.

Operator

Question by John Marchetti, Morgan Stanley.

Q - John Marchetti

Hi thank you. Just a quick question on sort of your guidance looking forward here. It looks like you had a pretty good growth rate in every geography, with the exception of Japan and Europe. Japan certainly wasn't a surprise. So how much of the sort of guidance looking forward is some nervousness still about what is going on in the European theater?

A - John Chambers

I think it is the balance of that, John. The U.S. is, as I alluded to, two of the key takeaways from this quarter was U.S. performing better than we expected, and I think with the appropriate caveats, we feel good about the momentum on that, better than perhaps we would've anticipated before. Asia-Pacific is kicking, and they are hitting it in all areas, and while I don't expect as good a balance as we saw this year in each of the categories, that feels very good as well. However, Europe is, normally runs about from 23 to 26% of our business. And so we are concerned on that one, and it's too early to see, to call this, whether it's a bump in the road or not. But you would expect us to build in a little bit of caution, given what we saw in Q1 in Europe. To answer the indirect part of the question, the forecast from the field is roughly 10 to 15% year-over-year growth for Europe, which if you were to ask us just four months ago, we would have probably had that in the mid to upper teens.

Q - John Marchetti

And how does that 10 to 15 compare just historically?

A - Rick Justice

You know, historically, we see Europe always moving up significantly from Q2. And the Q2 growth that we're forecasting is in line with some of the things we would see in the past, a little less, based on some of the caution that John mentioned. But, oftentimes, you come into this New Year with the summer holidays and the first quarter is a concern. We're just very much aware of the overall macro conditions and paying more attention to that and being a little bit cautious until we see what, how Q2 unfolds.

A - John Chambers

Thank you, John. Just in summary, though, Rick, we've got a real seasoned team in Europe we have a lot of confidence in.

A - Rick Justice

Absolutely.

A - John Chambers

So our issue there is they will get what business is there, and we, time will tell if it was a short-term blip or a little bit longer challenge.

A - Rick Justice

Europe has been leading the way for us for the last three years. A lot of good experience. So, we are confident there.

Operator

Question by Mark Sue, RBC Capital Markets.

Q - Mark Sue

John, we went from 10 to 15 to 10 to 12, and now potentially 8 to 9. What's the likelihood that this trend continues? Do you feel you're adding enough new markets to offset the decline in some of your mature markets or mature regions? If you could just help us understand the longer-term trends?

A - John Chambers

Sure, Mark. If you look at it overall, our guidance for the year did not change, with the appropriate caveats. That stayed at 10 to 12%, in spite of challenges in Europe, which three or four months ago, we would not have anticipated. And if you were to look at it the reverse way, from a positive perspective, if Europe had been where we would expect it to be, it would have been one heck of a quarter. And so, it does speak to that balance, both in terms of strategy, but also the ability to either grow together or to handle some of the bumps that do occur, Mark. So, our overall guidance did not change. In terms of this quarter, where we still have some book-to-bill challenges versus the year before, bookings by definition would have to grow just like it did this last quarter above revenues, if it plays out the way that we think it does. But, again, repeating the common theme, on bookings we said for this next quarter we would anticipate 10 to 14%. That's just down slightly versus what I would've forecast you three or four months ago. And in terms of our overall revenue guidance for the year, it did not change, in the 10 to 12%, once again with the appropriate caveats, Mark. So thank you.

Operator

Question by Aaron Rakers, A.G. Edwards.

Q - Aaron Rakers

Hi guys, thanks. Just curious on the gross margin commentary, your guidance of 61% in the current quarter. If I look at products gross margin, obviously that was very strong, and what you guys alluded to was some lower-than-expected sales discounts. Is there a reason why I should think that gross margins on your products should come down, and is there other areas that were a driver, i.e., component costs in the quarter that helped gross margins on the product side?

A - Dennis Powell

There's a number of different factors that can impact the gross margins. So let me take just a couple of them in the interest of time, and I will be fairly brief on this. But I think on the cost side, for this next quarter, we will see some continued improvement. I think that our manufacturing team and our engineering team are working very well together to not only come up with new reengineering that drives costs out, but also working in each one of our areas of commodities to continue to see reductions in costs. On the other side, we are also impacted by things that happen such as mix, and those are difficult to predict, mix in terms of geographies, mix in terms of the nature of the products, that can also impact margins. So I think 67% plus or minus on that is the appropriate guidance to give for this next quarter.

Operator

Question by Tim Long, Banc of America Securities.

Q - Tim Long

Thank you. Just a question on the commercial business. Obviously, the investment there is starting to pay off a little bit. Could you give us a little color on the product side? Is this something that you think will drive the core business more initially, or will the advanced technologies lead the way there? If you could just give us a color on what you would expect on the product side and, as a consequence of that, maybe the impact of margin as commercial grows to a bigger piece of the business. Thanks.

A - John Chambers

I'm going to take the first part, and Charlie, ask you to talk a little bit about how you see the products evolving. So, Tim, what we used to do is develop our enterprise products, and as an afterthought, sell them in the commercial market, and it literally was that way looking back seven or eight years ago. Charlie led the original focus on the commercial marketplace, pulling together the teams and focused on it. And what you're seeing, Tim, is now we're starting to develop products specifically for the commercial marketplace, as well as realizing that this network of networks that we talked about for years is happening. So, in the commercial marketplace, we will come at the commercial marketplace both from a commercial marketplace strategy perspective, how does it tie into our service provider strategy and how does it tie from the home up. So you will see us begin to think about what we do with the Linksys brand moving in this, the low end of small to medium business in the commercial marketplace, and you'll see us continue to expand the product breadth and depth that we drive in the commercial marketplace. And then as a setup to Charlie, something that's been a little bit of a surprise to us is the top 10% of our commercial customers actually are more aggressive in terms of technology adaptation, both in terms of percentage of revenue, but also new technologies than actually our enterprise accounts are. So, with that, Charlie, talk about a little bit about, without preannouncing products, how you see this playing out, because I know our product portfolio looks very solid over the next 12 to 24 months in terms of what's in the pipeline.

A - Charlie Giancarlo

Absolutely. I really would break it down into three things. One is that the marketplace itself, the commercial marketplace continues to grow at a faster pace than the enterprise for products like ours. Second is that marketplace grows both for what I would call our forms of our standard products, and we're making modifications to those standard products. But third, to repeat a little bit of what John said is that the commercial market actually is a tremendous market for some of our advanced technologies, and they really are early adopters of some of the advanced technologies, especially in what we call the mid-market case, 500 to 1000 employees. And if I could just add one or two more things there, what we do see is we see new opportunities for ourselves with some new advanced technologies in that area to really address the smaller side of the SMB market, and we're going to be very aggressive there. And our experience has really been that the returns, both gross margin and operational returns that we get from focusing on this market, are very similar and very much in line with the rest of our overall opportunity, even in the service provider and enterprise. So, we've not seen, often, the SMB market is talked about as a lower-margin market. We've not seen that.

A - Rick Justice

I think one other quick thing, we have a very successful channel partner program. It's received a number of awards in the industry, and as we build out for the commercial market, that's a tremendous multiplier effect for us and really impacts our growth.

A - Dennis Powell

When you think about it, Tim, and if you look at the potential market share gains, we're, while we are in the number one position in the commercial market overall in most product categories in total, we're probably, Charlie, in the 35% range. So this offers both the fastest growth that Charlie and Rick alluded to, but also the potential for market share gains to be executed properly, Tim.

Operator

Question by Nikos Theodosopoulos, UBS.

Q - Nikos Theodosopoulos

I want to go back to the guidance. I know some other people asked the question, but if you look at this quarter, there was a lot of negativity on the street going into this quarter. The book-to-bill wasn't that bad, just slightly below 1. You actually did the high end of your guidance and the gross margin beat plan. Yet the guidance for the next quarter of only 8 to 9% doesn't seem to reflect all the positive stuff that was mentioned on the call. So, I'm trying to understand why do you think you'll only grow 8 to 9%, and if that's the case, in the second half of the year, you're going to need a big, big ramp to hit the 10 to 12% guidance. So, can you just elaborate why the conservative guidance, and if you think that's the case, why does it get better in the second half?

A - John Chambers

Sure, Nikos. Thank you for the question, because I know it's on lots of people's minds. From my perspective, you begin to see the second half of the year book-to-bill actually work in our favor and get more run rate of what your orders are versus what your revenues are. And so we're struggling through that for the first two quarters, as we articulated before and used examples of, and even in this challenging quarter, it was clearly 12 to 13% in terms of orders. And so, when we look at going forward at the current knowledge that we have, we are saying we expect orders for the quarter of Q2 to be in the 10 to 14% range, but we haven't changed the year of 10 to 15%, as I said in my guidance overall. And so, the second half of the year begins to work in our favor, where booking growth should be very, very close to revenue growth or revenue growth actually ahead, and then going into the future years. And this is why I focused on orders. And I realize there are people on the call that go the other way and focus purely on revenues. But I want to articulate very crisply two things. First is I do not run this Company on a quarter-by-quarter basis or even year-by-year. Most market trends take you three to five years to catch and really get the leverage out of, whether it's new advanced technologies, the commercial market, the emerging technology areas, etc. And to the second part of it is we have not had a quarter, and I've lost track, Dennis, I'm just thinking back 10 quarters, I'm not referring to quarter 11, but for 10 quarters that hasn't been in the 12 to 20% range. And so the revenues tend to jump up and down, as they did this quarter and as they will next quarter, but our order growth rate, Nikos, has been remarkably direct on that in terms of 12%-plus. And so either the markets see something we don't see, which is very possible and with appropriate caveats could be accurate, or you will see the revenues align with what the booking growth is as we begin to keep our lead times short and tight and going forward. So that would be the way I would answer your question. Time would tell if we are right on that and there's always the possibility we would not be. We feel pretty comfortable in our projections and our ability, as we did this last quarter, to handle surprises along the way.

Operator

Question by Christin Armacost, SG Cowen.

Q - Christin Armacost

I'm going to pile on this. By my calculation, I think I've listened to 80% of your quarterly conference calls. And if you add up some of the positive comments that you've said during this call, it doesn't add up to flat to up slightly. You said in the last quarter that what would hurt you in terms of seasonality in October would help you in January, in the January quarter. You have service provider, which was 25% of your revenue, that reflects even a weak Japan, that should grow in the fourth, in the calendar fourth quarter because of budget flush. Consumer should grow. The U.S. is positive. Advanced technologies are positive. That covers about 75% mostly of your business. So, when historically you've grown in the mid-single-digit range, I'm not sure how you can get the business to be flat, even with Europe being down from you at this level, when it should pick up at least a little bit next quarter.

A - John Chambers

Okay, Christin, good, fair, tough questions. But let's stay with that approach. Giving you the math, you are right on the math. In terms of Japan and Europe, that adds up normally to a 25 to 28% to 30% range. So let's say 25 to 30. So 70% of our business is going well and our product balance is good. Secondly, you're right that in Q2, Europe is seasonally stronger. So, you can do the math. Let's assume just for the purposes of discussion that Europe is up sequentially 20 to 40% over Q1. You need almost 20% of that increase to balance what normally occurs in federal. So federal has a very good Q1, which we finally saw with year-over-year increases of 30%, I want to get my sequence numbers for year-over-year balance. So, Europe tends to have a couple of hundred million extra to balance what occurs on the federal. And then Europe usually is very strong in Q2. So I predict which one of your peers asked the question earlier is a little bit of the caution in Q2 in part to just watching how Europe plays out, the answer would be yes, because we do need a solid Q2 in Europe, at least in the 10 to 15% range. And normally, we would've been expecting probably in the 15%-plus type of range. So that's where it balances out, Christin. You are right that it does turn not in the January quarter, in the Q3, where our book-to-bill comes working the reverse way, where our book-to-bill was above 1 in Q3 and Q4 of last fiscal year, and therefore, revenues should grow at or most likely above bookings if we execute as we expected. So, that's where you see the guidance overall in terms of the approach.

Q - Christin Armacost

Thank you.

A - John Chambers

Sure. And Christin, if we didn't get it right on that, don't hesitate to challenge Dennis and me later.

Q - Christin Armacost

Ha.

A - John Chambers

As I know that you will. Next question, please.

Operator

Question by Alex Henderson, Citigroup.

Q - Alex Henderson

Thanks for getting me on here. I have a question about the upcoming guidance as well, and just a comment on the last piece. Doesn't also the U.S. see a nice sequential increase in enterprise, which you don't seem to have factored into that calculus. So that should be up sequentially on a budget-wise. But my question is on the guidance you're giving for the January quarter, are you assuming, then, that you are narrowing the book-to-bill back toward the 1 in the January quarter? And shouldn't the book-to-bill in the January quarter generally be at or above 1 in order to buffer the seasonality that normally shows up in the seasonally weaker April quarter? How do we think about that narrowing of the book-to-bill? Do we need a book-to-bill above 1 in order to have visibility that you're going to grow in the 10 to 15% range on revenues going forward? Can you address that?

A - John Chambers

Sure. Again, overall concept, as I understand that everyone wants to focus on just the next quarter or two, and that's a lot of the challenges that we all face in the market. We don't lose track of where we want to be one, two, three, four years out, and that's how we make all of our decisions. In terms of the Q2, last Q2 of last fiscal year, again, we had book-to-bill below 1. So, this Q2, I would be disappointed if bookings do not grow faster than revenues, and by definition, therefore, would be reflected in the book-to-bill type of number. Within that, you are right that Q3 looking back perhaps three, four, five years ago has traditionally been our challenging quarter, and when surprises, if they do occur in the market, often have occurred there. However, as we said last Q3, what appears to be a trend, and it's actually the service provider market appearing to balance this, is that we've seen the quarters and the growth in terms of bookings and revenues stair-step up each quarter throughout the year into a seasonally strong Q4. So, as we said, I think in the last conference call, I'd have to go back and look at notes on it, but we said that you would normally start with the Q1 that follows a strong Q4, seasonably weaker in Europe, stronger in the U.S., and the federal business would then build throughout the year, as well as the sales reps gaining new experience in the territories from the changes that occur. So, that's what I need to explain a little bit better. If it plays out the way that we think it will, each quarter should build on the next. But we do have, again, the exact same issues on book-to-bill and a year-over-year comparison for revenues that would not match, and we'd be extremely disappointed if the bookings match the revenues for this next quarter in terms of year-over-year growth, Alex.

Q - Alex Henderson

But just so I get it straight, that would imply that the book-to-bill number would improve enough that we would not be looking at the same issue in the January quarter next year of having to further improve the book-to-bill, i.e., orders growing faster than revenues?

A - John Chambers

If we do our job right, Alex, and we keep the lead times small and we don't have a problem with issues in terms of Rick's teams forecasting accurately and manufacturing having the component issues that we ran into looking back 12 to 24 months ago, where actually we exceeded forecast again and again and we couldn't respond quick enough, we want our book-to-bill to be pretty close to 1 as we go forth when we can, and the surprises hopefully will be mainly positive surprises in terms of anything there. Our lead times, to the indirect part of your question, Alex, are where we want them to be. So, there's no reason to improve on that at all. They are exactly where we want them overall, although there will always be some variance on individual products.

Operator

Question by Wojtek Uzdelewicz, Bear Stearns.

Q - Wojtek Uzdelewicz

Just one maybe just suggestion, John, you've mentioned a lot and often on the calls on the orders and bookings, and I think it would be great if we want to focus on that for us to look at absolute numbers, because that's a teaser for the investors to gauge and it's been always a big topic that you as a company guys talk about. So, if we could, just a suggestion, if we could get these absolute numbers, it would be much easier for us to kind of keep ourselves gauged of performance. But, the real question actually I was curious, you mentioned that Germany and France were also a little weak. To what extent do you see all this competitive environment changing there? We saw a few quarters ago Siemens signing a distribution deal with Huawei as well as 3Com, and I know they were pretty big resellers for you guys and they're a pretty big force in Europe. Is that changing, or do you think the economy is slowing or a combination of both? How should we think about that?

A - John Chambers

I would think about it, having been through Germany and France already this year and a pretty good feel for what our competitors are doing, we're being very successful in our architectural approach, and this is gaining very strong traction in most all of our markets. The way our competitors, since they chose going back three and five and seven years ago to compete, was individual products and to combine those products from a system integration function. So, you are right in terms of your assumption that people who view us as the competitors and who are also systems integrators will tie up with many of our other peers within the marketplace in terms of their approach. As I alluded to earlier, I've got a real seasoned team across Europe. I mean, Rick and I are really comfortable with them and we haven't changed that team. So this is the exact same team that led us globally with the exception of just moving Rob over here to the U.S. for the last two years. So, I think they will execute well. You may have some differentiation on when we get something versus somebody else, based upon some of the big bids, which you are well aware of, across Europe, and that is a factor as we move forward. But I think our strategy and our architectural is working. Our peers are therefore balancing it the other way, coming together in terms of trying to present a loose architecture with a systems integration type of approach. To me, it's obvious which one wins over the long run, if we execute right. But we may not. So, Wojtek, I hope that answers your question.

Operator

Question by Tim Daubenspeck, Pacific Crest Securities.

Q - Tim Daubenspeck

Just to kind of go into the European thing a little bit more, you talk about I believe you said carrier service provider orders in Europe were down year-over-year. But if you look at the CapEx trends, they are pretty solid there. Is there an issue in terms of losing share there either in edge routing, core routing or optical? Or do you feel this is just a larger market issue? Thank you.

A - John Chambers

Time will tell, Tim, in terms of the approach, and Dennis is giving me a signal. There are a number of you still on the questions, so I'll make my answers a little bit tighter. But if you watch in terms of our European service provider business, I'm just looking at the numbers now to make sure I've got the data to back it up in a constructive way, we usually do very well there, and our business has historically done very well across the key carriers in Europe. To the best of our knowledge, whether you are talking in generalities across Telecom Italia, the Telefonicas, the Deutsche Telecoms, the BTs of the world, we are doing well. And in terms of the other secondary carriers, we think we're doing well overall, Tim. So, while orders and service providers especially are lumpy, as we've said many times before, whenever a service provider has a great quarter for us one quarter, the next quarter you can bet they are not going to. That does tend to substantiate that type of behavior. So my view is probably not on market share over a sustainable period of time, but on a given quarter, we will probably pick up in certain categories versus our broad range of competitors, from the Alcatels to the Siemens to our traditional individual products competitors. But, to the best of my knowledge, I do not see a trend here that is headed the other way. However, it might vary dramatically by quarter based upon whether you get large orders or you do not. I'll be more than glad to address it again in the next quarter conference call, and we will take a note to put a specific follow-up and give you the detail on it, Tim.

Operator

Question by Ehud Gelblum, J.P. Morgan.

Q - Ehud Gelblum

John, it sounds like certainly a lot of your growth that you're looking to come from is coming one, from commercial, and two, from international, it sounds like both Europe and certain parts of Asia-Pac certainly seems to be promising. When a lot of your competitors go into Asia-Pac in various places, you said specifically India and China seems to be strong, there always seems to be some sort of a margin hit that they have to take. I've never quite understood it, but it seems as though the markets seems to be more competitive over in Asia. The growth that you're looking to get in places like India and even Australia and New Zealand and China and places like that, how are you seeing the margin structure and the competitive environment? I know that it is slightly different, but do you think you can maintain the margin structure that you have, both in the U.S. and Europe, as you get larger in Asia?

A - John Chambers

I think once you get past a certain base, Ehud, it actually works in your favor in terms of that. When you first start penetrating into a country and you've got to cover resources and you haven't earned your trust factor with your key partners, and I'm using India as an example, the calls on the top service providers, the calls on the top players from the Reliances of the world, the Tapis of the world, they have calls on the key banks, etc. We're earning that trust and business relationship. So, I think overall, our margin focus is not dramatically different there and is sustainably over the long term. However, there will be deals and we will not walk away from them where our competitors lead entirely with price, and we will not let them get away with that to take a key market from us. So, as appropriate, we will be aggressive on a transactional level, but most of our customers focus on cost of ownership and what business we can bring to them. That does vary by country, however, in terms of that competitiveness, Ehud. Thank you.

Operator

Question by William Becklean, Oppenheimer.

Q - William Becklean

John, you mentioned one of your concerns was low-priced competition from the Asian suppliers. How soon do you expect that to become an impact on the business, and what can you do now, what are you doing now to counter that?

A - John Chambers

Bill, I just want to correct one thing on one of the prior questions. Our U.S. market was actually one of the very positive things out of this quarter. And I want to make sure everybody understood that. So actually, the U.S. is going very well versus internationally. It's very positive, especially when U.S. and Canada is 53% of your business. To the second part, Bill, we've seen this coming for a decade. I've been doing business in China for 22 years, always very profitably, almost always from the number one position. Secondly, we knew they would come at us on price on individual products. We're going to come at it on architecture, cost of ownership, the ability to pull the customers' projects to have a higher success rate, and for them to lower the risk in terms of flexibility as they move forward. We believe it will be a tightly integrated approach. They are coming at it with individual pinpoint products. We believe architecturally that we can form a tighter relationship with customers to help them achieve their goals and therefore focus on our gross margins, which was why we put in the new support evolving model. And it's why we brought down price performance at a faster pace than Moore's Law. Charlie, you've seen it again and again mathematically. So, no surprises here, Bill. We're actually doing pretty well in terms of it, either where we need to compete on price we will, but mainly, it's a total cost of ownership basis and I think we've seen it coming if our architecture is right, and that's the key issue. If the products are loosely and then tightly tied together and routing and switching and wireless and security does blur the way we think, we think we're positioned very well versus the players who come at us purely on price. But, the next wave of competitors will come out of Asia. There's no surprise there, Bill.

Operator

Question by Subu Subrahmanyan, Sanders Morris Harris.

Q - Subu Subrahmanyan

Thank you. I just have--

A - John Chambers

Subu, you got the last question, buddy. Not to put any pressure on you.

Q - Subu Subrahmanyan

Okay. I will make it really long, then. This question really has to do with guidance, but also seasonality. Seasonality, is it becoming less of a factor for you, John? I mean obviously, coming into the October quarter, that was one of the issues you thought would be more of a factor, and in December, it probably does not seem to be as much. And I understand managing orders versus revenue, but going into April and July, you need to have some fairly big sequential increases to make even the low end of the 10 to 12% range. So, I'm just wondering if seasonal factors are just becoming less of an effect on your business?

A - John Chambers

Yes, the answer is the seasonal factors are becoming less of a factor on our business. I want to give you a caveat and then summarize it from that perspective as well. What we're seeing is that Q2 is usually balanced from seasonality. Q1 Europe is usually weak, Q2 is usually very strong. That's a little bit of a caution that you're seeing in this quarter. Q3 has suddenly become more predictable to us. That assumes good service provider orders in Q3, which we have seen in the last two years and we would anticipate seeing again this year. And then it ends with a very solid Q4. And I want to say here that after a good Q4, Q1, as we said in the last call and should've probably said before that, will always be sequentially down in terms of orders because of Q4 runs, people ending the fiscal year, driving hard, it would drop off a little bit off of that. If you look at where we are, part of the seasonality also issue balancing out is commercial does not appear to be near as seasonal as our enterprise business. And the consumer segment that we play in, while it has its ups and downs, or actually cycles that are back to school, etc. And as you get more balanced across the geographies around the world, different countries have different year ends, they have different holiday seasons, Chinese New Year, etc. And so the balance is good. And that really is I think what we're attempting to do as a company, is to get our balance across those five theaters, across the four customer segments, across a broad range of products that balance each other. Now, when you get surprised like we do on Europe, you've got to take into a little bit in consideration and balance that. But it is what we think will be the future. So to answer your question, Subu, we do think it is going to be more of a steady step throughout the fiscal year, a slight adjustment in Q1, steady step going forward, unless one of our theaters or product areas get a surprise. So in summary, we were very comfortable with this quarter. We did get surprised. We think we positioned ourselves well going forward versus our competition in this market. And we actually think that over time, much of our IT direction will come to the network. The network will become not only intelligent throughout, but I believe the platform. We think we're positioned well on how the market transitions will occur. Time will tell if that position is right. And we will always make our decisions from what we think is one, two and three years out as opposed to just next the next quarter and do abnormal things from a quarter-by-quarter basis which are not in our shareholders' or our customers' or our employees' or partners' best interests in the long run.

So I want to thank you all for the healthy give-and-take, and it's fun; it's where we learn. And Dennis, let me turn it back over to you for closing comments.

Dennis Powell, Chief Financial Officer

Okay. As a reminder, our next quarterly conference call, which will reflect our second quarter of fiscal 2006 results, will be on Tuesday, February 7, 2006, at 1:30 PM Pacific Time, 4:30 p.m. Eastern Time. Please call an Investor Relations representative with any follow-up questions that you have from this call. Thank you for your participation and continued support, and this concludes our call.

Operator

Thank you, participants, for your participation on today's conference call. If you would like to listen to the call in its entirety, you may call 866-357-4205. For participants dialing from outside the U.S., please dial 203-369-0122. Again, thank you and have a good day.

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