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Cisco Systems, Inc. (NASDAQ:CSCO)

F1Q08 Earnings Call

November 7, 2007 4:30 pm ET

Executives

Blair Christie - IR

John Chambers – Chairman, CEO

Dennis Powell - CFO

Rick Justice - EVP, Worldwide Operations and Business Development

Charlie Giancarlo –CDO

Ned Hooper – SVP, Business Development

Frank Calderoni – SVP, Customer Solutions, Finance

Jim McDonnell – CEO, Scientific-Atlanta

Analysts

Brant Thompson - Goldman Sachs

Mark Sue - RBC Capital Markets

Nikos Theodosopoulos - UBS

Ehud Gelblum - JP Morgan

Tal Liani - Merrill Lynch

Inder Singh - Lehman Brothers

John Marchetti - Morgan Stanley

Bill Choi - Jefferies

Paul Silverstein - Credit Suisse

Jason Ader - Thomas Weisel Partners

Operator

Welcome to Cisco Systems first quarter fiscal year 2008 financial results conference call. At the request of Cisco Systems, today's conference is being recorded. If you have any objections, you may disconnect. Now I would like to introduce Ms. Blair Christie, VP of Corporate Communications for Cisco Systems. Ma'am, you may begin.

Blair Christie

Thank you, Kim and good afternoon, everyone. Welcome to our 71st quarterly conference call. I am Blair Christie, and I'm joined by John Chambers, our Chairman and CEO; Dennis Powell, Chief Financial Officer; Rick Justice, Executive Vice President of Worldwide Operations and Business Development; Charlie Giancarlo, Chief Development Officer; Ned Hooper, Senior Vice President of Business Development; Frank Calderoni, Senior Vice President of Customer Solutions Finance and Jim McDonnell, Chief Executive Officer of Scientific-Atlanta.

The Q1 fiscal 2008 press release is on full national Market Wire and European Financial and Technology Wire, as well as on the Cisco web site at www.Cisco.com. 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, and is also available from November 7 through January 18th on Cisco's Investor Relations website.

Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results. We've posted full GAAP to non-GAAP reconciliation information, along with all of our financial statements on our website. Please go to the financial section in the Investor Relations website for further details.

The financial results in this press release are unaudited; and as stated in our last quarterly conference call for Q1 FY08 we will resume reporting total consolidated financials and will continue to do so until a point in time where our business is impacted by a material event or acquisition.

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 annual report on Form 10-K and any applicable amendments which identify important risk factors that could cause actual results to differ materially from those 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.

John Chambers

Blair, thank you very much. During the opening comments of the conference call, I will focus on what I view to be the key takeaways for Q1, as well as the revenue guidance for the next quarter and an update on what we think our long-term growth projections could be if we execute well with the appropriate caveats.

The opening comments will also include discussion on what we believe is driving our current growth to these record levels as well as what we think will be the key factors that we expect should allow us to continue to maintain a strong growth rate. Dennis will follow with additional detail on Q1. The third section of the call will focus on a more detailed discussion of business momentum and strategy on a geographic, product and customer segment basis. Dennis will then provide additional financial parameters around our guidance for Q2. I will wrap it up with some comments in terms of Cisco's momentum going into Q2; and finally, our Q&A session.

Now onto the discussion of Q1. This quarter was another very strong record quarter with very solid balanced results from a product, geographic, and customer segment perspective. Again, it was also another record quarter from a revenue, cash generated from operations, GAAP and non-GAAP net income and earnings per share perspective. To put these record results in proper perspective, I will summarize the quarterly highlights, first from a key financial perspective, second from a product and services perspective, third from a geographic point of view, and fourth, by customer segment.

The key financial highlights for Q1 include the following:

  • Total record revenue of approximately $9.6 billion, a 17% year-over-year increase which was comfortably above our guidance of 16% provided in the Q4 conference call. We are obviously pleased with both the growth on the top and bottom line as well as the market share gains.
  • Order growth was solid with product book to billed at approximately 1, which is typical or even at the higher end of our Q1s from the prior six fiscal years. Product orders grew approximately 16%.
  • Non-GAAP net income was a record $2.5 billion, an increase year over year of 31%.
  • GAAP net income was $2.2 billion, representing a 37% increase year over year.
  • Non-GAAP earnings per share were a record $0.40 and GAAP earnings per share were $0.35, which represented increases of 29% and 35% respectively year over year.
  • Cash generated from operations was $3.1 billion, our highest level in history.
  • We repurchased $3 billion of common stock and we exited the quarter with $24.7 billion in cash, cash equivalents and investments as compared to Q4 FY07 of $22.3 billion.

However, if there are two key takeaways from our Q1 results, the first would be again the unique balance in terms of our business models from both a technology and a business architecture perspective. This balance is illustrated across 20 major product families, four key customer segments and four major theater geographies. This balance enabled 17 consecutive quarters in terms of average order growth rate in the mid-teens or better.

The second takeaway which is just beginning, and in my opinion will dramatically drive our growth in differentiation versus our peers over the next five years, will be phase II of the Internet. We expect this second phase will be driven by a collaboration enabled by network Web 2.0 technologies. In the last several quarters, we believe we have achieved a clear #1 position both from a thought leadership and an implementation perspective, and we clearly intend to expand that position.

Revenue and order growth rates from our key products including services were strong across almost all categories. First in terms of our three broad product categories:

  • Routing revenues grew year over year by 18%.
  • Switching revenues grew year over year by 8%
  • The total of all of our Advanced Technologies revenues grew year over year by approximately 27%.

Again, in considering our ability to move into new markets and to achieve both growth and profitability, our Advanced Technologies revenues contribution to the top line is now greater than 20% larger than our revenue contributed from our routing products. This again speaks to Cisco's balanced product portfolio and to our constant evolution of moving into new markets and product adjacencies.

We continue to achieve very unique product balance, both in terms of breadth and depth of our product portfolio. We now have ten product families with order and revenue run rates above $1 billion, and almost all of them continue to gain market share in their respective product categories.

To add additional information regarding the balance of our revenues across our product lines and potential future momentum, 14 of our top 20 product families had year-over-year revenue growth for Q1 of 15% or better. Although competition remains robust, we believe we are gaining market share versus almost all of our major competitors in most product categories. But we also believe we are getting a larger share of our customers' total spend on communications and IT.

As we've discussed in prior conference calls, our services are not a standalone product area, but rather they are the delivery vehicle through which we earn our customers' trust and satisfaction by enabling their technology and business goals. Our service revenue now represents approximately 16% of our total revenue.

In Q1, our revenues for services grew year over year by approximately 24%. This is obviously a very strong revenue growth rate for a $6 billion run rate business, with non-GAAP gross margins of approximately 65%.

The geographic and customer segment discussion will be primarily in orders, as this is how we run our business. From a geographic perspective, order momentum was strong and balance was good across our four large theaters during Q1 with year-over-year order growth rates from 13% to mid-30%.

Europe continued to be very strong for Cisco, with growth accelerating year over year to approximately 20% in Q1. Emerging markets, which tends to be lumpy, grew in the mid- 30%. Asia Pacific continued to be very solid and grew in the high-teens followed by the U.S. with growth of approximately 13%.

From a customer segment perspective, we again saw a very solid balance across our commercial markets, service provider and enterprise segments. The global commercial markets segment remained our most steady and predictable segment, with growth of approximately 25% year over year in Q1.

The global service provider business remained very strong. Orders from a service provider perspective grew in the high teens. Video continues to drive service provider network demand and is potentially the killer application for loading and bringing value to the network. We continue to be very pleased with the accelerating momentum from video applications. Consumer video and broadband build outs are driving much of the service provider investment.

From an enterprise and commercial perspective, we expect that global video implementations such as IP TV, TelePresence, Unified Communications, business security and other video applications will provide future network loads, and therefore, will also require upgrades to existing networks.

Using Cisco as an aggressive example, as we begin to implement Unified Communications, TelePresence, and other video applications across our entire company, our expectation for our network load is actually increasing from what we just set as last quarter's projection of 200% to 300% year-over-year growth is now expected to be closer to 400% over the next several years.

One of the best indications of an industry's anticipated load on networks is our order growth rate in high end routers. While we had very strong order growth rate in high end routers during the first three quarters of last fiscal year 2007, which averaged approximately 20% year over year, we experienced very solid growth in Q4 of approximately 30% year over year. Now in Q1 fiscal year ‘08, order growth was in the mid-30%.

The global enterprise business, which includes public sector, was solid. Our enterprise customer segment on a global basis grew in the low double-digits. In last quarter's conference call, we outlined eight reasons why we believe Cisco is uniquely positioned as the network becomes the platform for all forms of communication and IT. Therefore, if we are right on these views, we believe that the growth opportunity for Cisco should be well above the industry average growth rates. We continue to believe that these eight reasons will most likely evolve as discussed in the Q4 conference call.

However, there is one area in particular I would like to draw your attention to as being very important for the industry as well as Cisco's future growth. We believe that as the network truly becomes the platform and we approach this from both a business and technology architecture perspective, that the next frontier for growth will be built around collaboration enabled by network tools often defined as Web 2.0.

Over the last two to three quarters, Cisco has moved into a position of thought leadership and we think we have become the example in business for what is possible when an organization adopts a collaborative approach enabled by network Web 2.0 technologies. In our opinion, this will drive the next wave of productivity around the world, as well as an entirely new generation of business and government and entertainment models. I cannot overemphasize the importance of leading this market transition from products to processes, to internal adoption and utilization, and what we believe this leadership means for Cisco's future.

As a reminder, we make our decisions on what we believe would be the right decisions for the company for the long run, and try not to focus on short-term issues for the next quarter or even the next year or two in implementing our vision and differentiated strategy.

Over the last 17 quarters, our growth in terms of orders at Cisco has averaged in the mid-teens and our earnings in terms of average year-over-year growth for each quarter have been even stronger. This quarter continues that momentum. Therefore, we continue to believe, with the appropriate caveats, our long-term guidance should be in the 12% to 17% range year over year.

While at the risk of stating the obvious, and as we said last quarter and will continue to say during future quarterly conference calls, there will be times that we may grow above this range and there definitely will be times that we will grow below this range. We are also assuming this long-term guidance, as well as our quarterly and yearly guidance, that our vision of how the industry will evolve will be accurate and we will execute on that vision.

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. As we said in the Q4 conference call, our guidance for fiscal year 2008 in terms of year-over-year growth is the middle of our long-term growth target of 12% to 17%. Our guidance for fiscal year FY08 at 13% to 16% year over year was right in the middle of this range. We believe we are on target to achieve this growth for the fiscal year. However, given the results for Q1 of 17% revenue growth, we clearly operate at the high end of this guidance.

Revenue guidance for Q2 fiscal year 2008, including our usual caveats as discussed in prior conference calls and financial reports, is for revenue growth of approximately 16% year over year.

In summary, we believe that we are very well positioned in the industry from a vision, differentiated strategy, and execution perspective. As I stated earlier, we believe we are entering the next phase of the Internet as growth and productivity will center on collaboration enabled by network Web 2.0 technologies. We will do our best to provide the product architectures and expertise to help in the implementation of these collaborative capabilities from a technology and business perspective, as well as share with our customers how we've done this internally.

In short, we are going to attempt to execute a very similar strategy over the next decade similar to what we did in the early 1990’s. As we said before, it powered growth for the next decade; except with the obvious difference of being a company that now is approaching $40 billion in sales with over 63,000 employees focused on this opportunity.

At this time, I would like to turn it over to Dennis for a further discussion of the Q1 financial highlights.

Dennis Powell

Thank you, John. We were very pleased with Cisco's record financial results this quarter including revenue, operating income, net income and earnings per share. Total revenue for the first quarter was $9.6 billion, an increase of 17% year over year. Routing revenue totaled $1.9 billion, up 18% year over year, due primarily to continued growth in our high end router portfolio of 28% year over year, with particular strength in the CRS-1, 7600 and the GSR product families.

Switching revenue was $3.3 billion, an increase of 8% year over year.

Advanced Technologies revenue totaled $2.4 billion, representing an increase of 27% year over year with strong performance in Unified Communications, video systems and storage.

Other product revenue totaled $492 million, an increase of 8% year over year.

Total service revenue was $1.5 billion, up approximately 24% year over year, as a result of solid growth across our four largest geographies. We are particularly pleased with growth in Advanced Services of 34%.

Q1 total non-GAAP gross margin was 65.6%, up from 65.2% last quarter. For product only, non-GAAP gross margin for the first quarter was 65.7%, up from 65.2% last quarter. The quarter-over-quarter favorability was driven primarily by continued cost savings.

Our non-GAAP service margins for the first quarter were 65.2%, up slightly from 65.1% last quarter. As expected, non-GAAP operating expenses as a percentage of revenue were 36% in Q1 FY08, up slightly from 35.6% in Q1 FY07.

Our Q1 FY08 non-GAAP tax provision was 18.7%, which included an income tax benefit of $162 million, or $0.026 per share, related to a settlement with the U.S. Internal Revenue Service.

Non-GAAP net income for the first quarter of fiscal 2008 was $2.5 billion compared to $1.9 billion in the first quarter of fiscal year 2007, representing a 31% increase year over year.

Non-GAAP earnings per share on a fully diluted basis for the first quarter were $0.40, up from $0.31 in the first quarter of fiscal year 2007, a 29% increase year over year. GAAP net income for the first quarter was $2.2 billion, as compared to $1.6 billion in the first quarter of fiscal year 2007, representing a 37% increase year over year. GAAP earnings per share on a fully diluted basis for the first quarter were $0.35, up from $0.26 in the same quarter of fiscal year 2007, a 35% increase year over year.

Again, both GAAP and non-GAAP earnings per share reflect a $0.026 benefit from the IRS tax settlement.

Now moving onto the balance sheet, the total of cash, cash equivalents and investments at the end of Q1 was $24.7 billion, up $2.4 billion from Q4. During Q1, we generated a record $3.1 billion in cash flow from operations, as well as $1.5 billion in proceeds from stock options exercises. We repurchased $3 billion of common stock or 96 million shares of our stock at an average price of $31.28 per share. In addition, unrealized gains on our public equity portfolio increased by approximately $900 million from Q4.

Moving on to accounts receivable, we ended the quarter at $3.4 billion, down from $4 billion at the end of Q4. At the end of Q1 FY08, days sales outstanding, or DSO, was 33 days, down from 38 days in Q4. The decrease was driven primarily by improvement in linearity of shipments and strong collections.

Total inventory for Q1 was $1.3 billion, and non-GAAP inventory turns were 10, both approximately at the same level as Q4 FY07. Our inventory purchase commitments at the end of Q1 were $2.5 billion, down slightly from the end of Q4.

During the quarter, we adopted FIN 48, a new accounting standard related to income taxes. As a result, we recorded an increase to shareholders' equity of $450 million of which $202 million increased retained earnings and $249 million increased additional paid-in capital. In addition, we reclassified $682 million of income tax payable from short-term to long-term liabilities on the balance sheet.

Deferred revenue was $7.1 billion in Q1 FY08, an increase of $70 million from Q4 '07 and an increase of $1.3 billion from Q1 FY07. Deferred product revenue was $2.5 billion, up $260 million from last quarter and deferred service revenue was $4.7 billion, down $190 million from last quarter, due to the amortization of our maintenance contracts.

At the end of Q1, our headcount totaled 63,050 an increase of approximately 1,500 from Q4 FY07. Our headcount increases were primarily the result of Cisco hires in sales, services, and engineering.

In conclusion, we are very pleased with our performance for the first quarter of the fiscal year. We achieved seven consecutive quarters of record revenue and non-GAAP net income. This consistency in both top and bottom line performance can be attributed to our balanced revenue growth across geographies, products and customer segments while at the same time maintaining our non-GAAP gross margins above 65%.

We also set a new all-time record for cash generated from operations of $3.1 billion on $2.2 billion of GAAP net income in Q1 FY08, which speaks to the quality of our earnings and the effective utilization of our balance sheet.

Finally, I continue to be optimistic on our ability to achieve our long-term growth target of 12% to 17% as our diversified technology portfolio strategy continues to drive growth for the future while at the same time, delivering strong financial results to date.

John, I'll turn it back to you.

John Chambers

Dennis, thank you very much.

In this section of the call, we will cover our geographies, customer segments and products review for Q1 in more detail. The products review will be in revenue growth terms, while the geographic and customer segments will be discussed in terms of orders, unless indicated otherwise.

First, we will provide additional detail from a geographic and a customer segment point of view. There were a number of positives from our four largest theaters and customer segments. Our European operation had strong order growth in Q1, with approximately 20% year over year. Seven of the nine operations in Europe achieved growth in the range of low teens to over 50%.

We were obviously pleased with the strength across the seven operations, but if I were to comment on two of the operations, it would be Germany and our targeted top service providers. Germany continues to gain momentum with growth of approximately 30% year over year. Our targeted European service providers had a very strong Q1 with year-over-year growth above 50%. Balance across our three large customer segments was also very good in Europe in Q1 with order growth in the mid-teens to approximately 30% year over year. I want to congratulate our European team on just a superb job.

The Asia Pacific theater continued to be very solid momentum-wise with year-over-year growth in the high teens. Having just last week visited India and China, I would like to comment in some detail on both our Q1 results relative to those countries and our expectation for the two countries going forward.

In terms of Q1 results, China grew in the high teens and India grew approximately 50% year over year. Our strategy and focus on our globalization center led by Will Elfrink’s team, based in India, is working extremely well. Our momentum in India, I believe, will continue to be solid for the foreseeable future and their economy, according to all the customers and government officials with whom I met, was labeled as very strong. Our globalization center concept and partnership with the India-based large consulting groups is working at the high end of our expectations both in India and the emerging markets.

Our growth in China generally has been very solid over the last several quarters and we have made the decision as a company to dramatically expand our commitment and our expectations in China over the next five years. We believe we are very well-positioned from both business and government leaders to create major win-win scenarios across multiple segments in their economy.

Again, this feedback from both the business and government leaders in China and in India was that their economic growth will continue to be very strong.

Emerging markets, order growth in Q1 was approximately 35% year over year. While this business by definition will be lumpy and based in part upon large orders, we have been pleased with the consistent performance. This model appears to have legs for the next decade. Balance was good across our four emerging market operations, ranging from low double-digits to approximately 50%.

From a U.S. perspective, order growth was approximately 13% year over year. The service provider market segment continued to lead the way with order growth in the U.S. remaining very strong in the low 20s. I would again like to congratulate our U.S. service provider team for their very strong Q1 and their 11th quarter in a row of approximately 20% order growth year over year.

The commercial market continued its solid growth of approximately 20%. Our enterprise business, which includes public sector and federal, grew in the mid single-digits. Our federal business had a very strong quarter with growth of approximately 17% year over year, while the rest of the U.S. enterprise growth was down slightly from a year-over-year perspective. As a reminder, as we said in last quarter's conference call, we expect the U.S. enterprise business to be lumpy and continue to be lumpy.

Products, as we discussed earlier, our products business was very well balanced. We will attempt to give you more details regarding this balance in the following discussion, which we cover in terms of revenue and will include our acquisitions. Occasionally, we may use orders to add additional color or to illustrate momentum trends.

Total revenue balance was once again good across our routing, switching, and Advanced Technologies. Our first wave of five Advanced Technologies in Q1 had year-over-year revenue growth of approximately 24% and in total is now approaching a $7 billion run rate in terms of revenue. That's just the first wave of Advanced Technologies.

Unified Communications, including the addition of WebEx, continued to lead the way with revenue growth above 70%. Just for a data point, Unified Communications growth without WebEx was above 40% year over year in terms of revenue.

Storage was up 20%. Wireless and Networked Home growth were both relatively flat and security growth was in the mid-teens year over year.

Our second wave of Advanced Technologies that includes video systems and application networking systems is now approaching a $2.5 billion run rate and grew in the mid-30s year over year from a revenue perspective. From a product perspective, we're not aware of any other company in the IT and communications industry that is even close to these type of growth numbers and market share gains across such a broad array of products.

In summary, our vision of how the industry is going to evolve appears to be playing out very much as we expected. We believe our differentiated 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 a customer partnership perspective, market share, and share of our customers' total communications and IT expenditures, as the network becomes the platform for delivering these capabilities.

It is my pleasure now, Dennis, to turn it back over to you.

Dennis Powell

Thanks, John. Let me remind you again that our comments include forward-looking statements. You should review our recent SEC filings that identify important risk factors and understand that actual results could materially differ from those contained in the forward-looking statements.

The guidance that we are providing is on a non-GAAP basis with a reconciliation to GAAP.

We anticipate total revenue for the second quarter to increase approximately 16% year over year. As we've said in the past, forecasting gross margin has always been challenging due to the various factors such as volume, product mix, variable component costs, customer and channel mix and competitive pricing pressures. That being said, we believe total gross margin in Q2 will remain at approximately 65.5%.

Consistent with last quarter, we believe Q2 operating expenses will be in the range of 36% of revenue.

We expect interest and other income to be approximately $225 million in the second quarter and our tax provision rate for Q2 is expected to be approximately 24%. While we expect to continue our share repurchase program, it's difficult to predict the exact weighted average shares outstanding. We are modeling share count to be flat to up 50 million shares in weighted shares outstanding for EPS purposes.

In this estimate of share count, we are not taking into consideration any further change in our stock price that could affect the second quarter of FY08. As a point of reference, a $1.00 increase in our average stock price would increase the calculated shares outstanding for purposes of determining earnings per share by approximately 15 million shares.

Regarding cash flow from operations, we would expect to generate $700 million to $900 million per month at these revenue levels.

For our Q2 FY08 GAAP earnings, we anticipate that Q2 GAAP EPS will be $0.04 to $0.06 per share lower than non-GAAP EPS, 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 significant differences between GAAP and our non-GAAP guidance. This GAAP assumes no additional acquisitions, asset impairments, restructuring, or other events which may or may not be significant.

I'll turn the call back over to John.

John Chambers

Dennis, thank you very much. The following is a summary of my view of Cisco's momentum and opportunities entering the second quarter of fiscal 2008. In areas that Cisco can control or influence, our momentum continues to be even stronger than it was a year ago. Balance continues to be very good across our geographies, products, services and customer segments.

It is the consistency of our results from both an orders perspective and a profits perspective over the last 17 quarters with orders again growing in the mid-teens and profits per share growth of over 20% on average per quarter from a year-over-year perspective that is truly the scorecard for our ability to execute on our vision and differentiated strategy.

We clearly see the same things that each of you see in terms of opportunities and concerns in the U.S. market. However, we can't help but believe that our revenue and earnings growth rates, combined with record cash generation and market share leadership, places us in a unique position in the industry right now. This position is well beyond the traditional networking hardware space and into the realm of leadership across the entire IT and communications space.

From a geographic perspective, we continue to be very optimistic about the majority of our global economies outside the U.S. based upon what our customers are telling us and our balanced strength in these countries across customer segments, product families and value-added services.

From a U.S. perspective, the service provider and commercial market segments continue to be strong. The U.S. enterprise, probably as a surprise to no one, is experiencing some softness. As a reminder, as we said in last quarter's conference call, we expect and continue to expect U.S. enterprise growth to be very lumpy both by U.S. areas and industries moving forward.

As we have discussed in prior conference calls, the strategic relevance of Cisco is increasing to our service provider customers and has the potential to evolve in the same way that our enterprise leadership evolved over the last 15 years, with the associated benefits to both Cisco and our service provider customers. We are beginning to see evidence of this from an increasing number of our service provider customers and partners on a global basis.

The commercial market remains very solid and very well-balanced on a global basis. We are continuing to expand our product, services and distribution capabilities to this very important strategic market.

The exciting thing about phase 2 of the Internet, enabling collaboration through network Web 2.0 technologies will, in our opinion, evolve and develop across all of our customer segments with potential speed and effectiveness. If we are right about the value it brings to both business and individuals, this is the top of the first inning of a nine-inning game in terms of its broad business acceptance and associated benefits. We clearly intend to lead all companies in our implementation, organizational evolution and associated productivity of these new collaborative technologies with the competitive advantage of how we ourselves will become the best example for what this means to a company's future.

This type of collaboration enabled by the network will allow Cisco, instead of doing one or two major priorities a year that the senior management team aggressively leads, to target 20 for this fiscal year. Although it is still early in its implementation, this process is working even better than I expected and we will probably expand by an additional two to five incremental priorities over the next several quarters.

Our architectural strategy in the emerging markets 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 more than twice the average growth rate of the other theaters if we execute effectively.

Our balanced product momentum across our core technologies in Advanced Technologies continues to be strong. But again, it is the loosely and then tightly coupled product strategies for these technologies that dramatically differentiates Cisco from our peers.

Our pipeline of potential new core routing and switching products looks very good. Our continued evolution of our first wave of Advanced Technologies and the emergence of a second wave of Advanced Technologies is evolving as expected. At the same time, we are beginning to plan a potential third wave with our next generation of early stage emerging technologies.

In summary, our product pipeline is in excellent shape and looks really exciting. Having said that, obviously the proof continues to be in the results. On a global and U.S. basis, we see the same challenges and uncertainties from an economic, political, and capital spending concern that many of you continue to witness. Again, at the risk of stating the obvious, Cisco will be affected by major economic changes, capital spending patterns, new and existing competitors and our ability to execute or not on the strategy. However, for over four straight years, our average growth per quarter has been in the mid-teens for orders and over 20% for earnings per share.

Once again, with the usual caveats, our Q2 fiscal year 2008 guidance is for Q2 revenue of approximately 16% year-over-year growth, which is at the upper end of our long-range goal for growth of 12% to 17%. This aggressive guidance obviously indicates a solid degree of confidence in our vision, strategy and execution capabilities as well as business momentum; once again with the usual caveats regarding microeconomic conditions, capital spending trends and our own execution, et cetera.

We will focus on what we can control and influence and attempt to position Cisco to gain momentum in market transitions, whether they are industry consolidation, product transitions, market adjacency opportunities or economic. In summary, for those areas that we can control, we believe our vision, strategy, and execution are in great shape in producing the results.

As always, I want to thank our shareholders, customers, employees and 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'd like to turn it back over to you.

Blair Christie

Thank you, John. We'll now open the floor back for our Q&A session. We do still request that sell-side analysts please ask only one question. Kim, let's go ahead and open the floor to questions.

Question-and-Answer Session

Operator

Your first question comes from Brant Thompson - Goldman Sachs.

Brant Thompson - Goldman Sachs

John, I was wondering if you could expand a little bit more on the U.S. enterprise market, in particular in terms of what verticals you are seeing lumpiness in? How does that compare versus what you had seen in the last two quarters? Thanks.

John Chambers

Brant, in terms of the overall markets just to put it in perspective, our enterprise, which includes public sector, on a global basis was very solid. In the U.S. and the enterprise not counting public sector, we did see some softness. In the financial categories that were most affected by that, financial services and especially the large financial institutions, we did see pretty dramatic year-over-year decreases in orders. The same was true in areas such as automotive. Retail was, candidly, a mix in terms of the approach, so we saw some very mixed results from the retail segment. But those would probably be the three industry categories that were most affected, Brant.

Operator

Your next question comes from Mark Sue - RBC Capital Markets.

Mark Sue - RBC Capital Markets

A question on your ability and agility to proactively seek balance across multiple geographies and customers. Is it becoming more cumbersome due to the law of large numbers? Does balance and diversification subsequently revert the growth rate back to the mean of 15%?

John Chambers

Mark, I think I've got the question. Let me repeat it because it broke up a little bit coming in. Is the law of big numbers working for us in this market or working against us, and is it more cumbersome as it gets bigger?

That depends really on how your customers purchase. We believe that it is actually easier to generate growth when customers look at vendors as an architectural play, which is clearly where I think the market is going. We have experienced that in enterprise, but as we said in the call, it actually is expanding to service providers. We are doing extremely well in the commercial marketplace, which is where the majority of job growth and candidly in my opinion, a lot of the IT purchases in the private sector will occur.

Then we've got to decide how much we want to invest in the consumer side of the house. But if you look at it and you look at the balance of our ability, routing and switching, which many people five years ago or even as recently as a year-and-a-half or two years ago would say will be in the mid single-digits or high single-digits, we've seen the reverse. We see lumpiness in both but we've actually seen very solid growth.

If you look at the network loads while the jury is still out, my view is -- and many of our customers are coming more to this view -- that we're probably going to be much more right on our projections of network loads than what conventional wisdom indicated. I'm talking 200% plus growth type potential per year.

In terms of our ability to move into market adjacencies, rapidly scale those and generate growth, the Advanced Technologies the three waves really I think says it all on those. Our ability to move into those and to move where we are already in the first wave of Advanced Technologies bigger than routing, but we are also bigger in the first wave than we are in modular switching as well.

So if the market continues to evolve the way we think it will, which is an architectural play; and if collaboration even comes anywhere near as close to what we think it is capable of with Web 2.0 enabled technologies, that's why we are still very comfortable with our long-term growth projections of the 12% to 17%.

That's a long-winded answer to your question of saying actually in our market we do not have the same, perhaps, inhibitors to growth that companies that have a single product or a single customer segment type of approach. It is that balance that is unique to Cisco.

When there is one area like U.S. enterprise that is down, it's picked up by U.S. service providers or global enterprise. If one of the markets is a little bit softer it's picked up by somebody else; or switching one quarter is a little bit soft, it is picked up by routing. That would be the way I would answer it, Mark, and I actually think it is playing out very much as we anticipated.

Operator

Your next question comes from Nikos Theodosopoulos - UBS.

Nikos Theodosopoulos - UBS

I wanted to go back on the enterprise market and look at it on a global basis. If you go back a few years ago, I think it was the October '05 quarter where the U.S. enterprise had a positive inflection point and really took off, and it took about a year or so before Europe and some of the other markets regained strength as well.

Should we look at the weakness now in the U.S. enterprise that's been below 10% except for one quarter in the last four quarters, should we look at that and say it's likely to rebound in the next year back to double-digit? Or is it more likely that it's going to lead to a slowdown in other regions in the world, given that in the past it was the first region to come back in terms of strength?

What do you think is more likely, John? That U.S. enterprise comes back to good growth or that Europe follows the weakness and slows over the next year?

John Chambers

Fair question, Nikos -- and I want to say at the beginning and I think everyone knows this -- I will always share with you what I'm seeing from customers from my own view. We've been pretty accurate on that over time and obviously occasionally we will be wrong, as my wife periodically reminds me as well. But if you look at the market overall, the dependency on the U.S. is not near what it was before. It used to be the U.S. caught a cold and everybody else caught pneumonia.

When I just returned from the market in India and China, we see the emerging markets doing extremely well and those are two countries that have not been included in it. Their confidence is good and while they are dependent upon the U.S. for part of their economy, their internal consumption in other parts of the world is a dramatically different picture than you would have seen three to five years ago.

Our European team -- and Rick, I don't want to extend this too far and anybody drawing correlations -- actually Chris's confidence in Europe is going up over the last several quarters. He actually raised his forecast versus what he had in as recently as a month ago. So I'm comfortable with what we see at this time.

I think if you look at the U.S. market and what's been carrying the U.S. enterprise as an example is it's been the exports and globalization which has contributed dramatically to this, where even in the U.S. enterprise -- we don't include it in those numbers -- it's probably moved from 45% of the enterprise of our technology going outside the U.S. to probably 60% in our top accounts. So while no one can say for sure how this evolves, what we see from the countries, what our customers are telling us and momentum feels pretty good on a global basis.

Now, again, we're not dependent upon enterprise or commercial or service providers or any one theater. As long as there are just a couple bumps along the way, our total growth will be good. But I'm not hearing, Nikos, from our customer set or are we seeing in our forecast anything in issues of concern here.

Rick Justice

Just reinforcing that global component of even the large global U.S. accounts, so much more going outside to the other countries, we don't see any reversal in that direction whatsoever.

Just to comment specifically, if you look at the financial market which has clearly been hit hard here, other than areas like the UK or London, where we are a very tightly connected banking community, we're not seeing any impact anywhere else in the world in our markets, John.

I think the growth is fairly independent and as you said, the cold isn't spreading from our perspective.

John Chambers

Nikos, one thing -- and we won't answer most of the questions this long, but I would be interested offline on several of you to input back to me with your usual candor -- we actually think U.S. enterprise has really squeezed their IT departments and they really cut back on the spending.

As a CEO, there comes a point in time where you've got to say I've squeezed it pretty tight and if I want innovation for the future, and if we are right about the network enabling these business models, whether it's in two quarters or six quarters -- and I wish I could tell you with a high probability which one it will be -- I would be surprised if you don't see U.S. enterprise start back up. But we will see if that projection is right or wrong with all the appropriate caveats.

Thanks, Nikos.

Operator

Your next question comes from Ehud Gelblum - JP Morgan.

Ehud Gelblum - JP Morgan

I actually like that last comment you said that you wouldn't be surprised to see U.S. come back at some point. I calculate, you said that U.S. order growth in enterprise was down year over year. How correlated is that to revenue growth? Because if we assume that U.S. revenue growth follows U.S. order growth that means that your non-U.S. business was up around 20% this quarter. And if U.S. improves a little bit into even single-digits where it was a couple of quarters ago, you are back to above your guidance.

So it sounds like the rest of the business is going faster than you would have thought and just the U.S. enterprise right now -- maybe temporarily, maybe permanently, who knows -- may be down a little bit.

What I'm asking is, when you looked at your quarter next quarter and you give your guidance of 16%, what are you assuming the U.S. enterprise does in there? Is it safe to assume that you are assuming U.S. enterprise is down and the rest of it is 20% plus?

John Chambers

Your concepts I think are interesting and I wouldn't disagree with the overall concept. As Rick has found out in his forecast and Charlie, you have in the products as well, we're pretty good at the overall number except when there's an unusual inflection point up or down in the market, in which case our salesforce or engineering don’t forecast it. But it is the balanced approach.

I think however, it would be very appropriate to assume that we would be conservative on the U.S. enterprise in our projection for next quarter. In fact, I think when we outlined 13% to 16% growth just one quarter ago for the year, if we would have told you that you would have seen some of the concerns that some people have about the U.S. economy occur in the September/October time period and we would have told you 16% growth for Q2, most people would have felt very good about that.

So I'm comfortable on the balance overall. It doesn't mean that we aren't subject to surprises. We absolutely are. But even in the U.S., let me reemphasize, from Cisco's business perspective understand U.S. enterprise is only about 41% of our business in the U.S. now. Service providers, commercial markets are growing very rapidly and back to the question that I think Brant asked earlier, even within the U.S. market the financial sector is about 8% of that 41%. So it is that balance that is unique and while we grew 13% in the U.S. even though the U.S. enterprise was a little bit more challenging.

Would I disagree with your overall concepts? I think your assumptions are probably reasonably close that we would be conservative on the U.S. enterprise this next quarter and arriving at the 16% projected growth rate.

Operator

Your next question comes from Tal Liani - Merrill Lynch.

Tal Liani - Merrill Lynch

Switching was about 34.5% of total revenues and the year-over-year growth rate decelerated substantially. Total switching is way more than just U.S. enterprise, so it has to be a global phenomenon. I'm wondering if you can explain the sharp deceleration in switching?

In your guidance, if I work back, I am trying to guess what you are baking in for switching growth. Next year it looks like it's more or less the same, slightly higher. I'm wondering again what can you do in order to improve the growth there? Thanks.

John Chambers

All right, Tal, a couple of things for you. First is, whatever assumption we were going to make on routing and switching, it probably will not be exactly right on each number. It is amazing how between routing and switching and Advanced Technologies they do tend to swing lumpiness within the group.

Let me give you a data point and challenge a little bit your thought process -- and I know you are challenging me to share more data, which I'm going to do part way -- our switching business in the low end switching or the fixed switching actually was very solid. Its growth was well into the teens in terms of the business. Our issue was on the modular side of switching, which does tie to enterprise and especially to U.S. enterprise. Part of that, Charlie, was a little bit we just introduced a new generation of the 4000, et cetera so I'm gong to ask Charlie to walk through a little bit of what we're doing on product generations.

So if you want to break it down finer, Tal, without going into so much detail to bore everyone, I think you would assume that switching will have ebbs and flows just like routing did. I wouldn't read too much into a single quarter. If you want to break it down finely within switching, absolutely. Switching ties to enterprise and the commercial marketplace; routing tends to tie tighter to the service providers so it shouldn't surprise you when our service provider business is real strong globally and in the U.S. routing was very good. And it shouldn't surprise you that if our commercial business was good, that fixed switching was reasonably good. That if enterprise was soft, especially in the U.S. which is a lot of our global enterprise, that the modular segment was there.

Charlie, maybe take it to the next step?

Charlie Giancarlo

I think that's right, John. So if you look at it, the fixed switching grew in the mid-teens, the modular switching was flat. There was some expectation of that from two reasons: one is the weakness in U.S. enterprise, especially financials that have unusually larger proportions of our high-end modular range. But secondly -- and this was the reason for our expectations -- just yesterday we announced major upgrades for both the 4000 line and the 6000 line; as well as we have some additional future upgrades and transitions that are taking place.

Now, even before we announce -- of course our top customers know this generally many, many months ahead of time -- and we expect to see some slowdown because of those transitions that are taking place. So it's hard to say exactly how much, but some portion will be because of the weakness in enterprise, but this is self-reinforcing in both directions. Some of it is because of the product transitions that will be taking place.

Operator

Your next question comes from Inder Singh - Lehman Brothers.

Inder Singh - Lehman Brothers

Thanks very much. I just wanted to look a little bit beyond the quarter and talk a little bit about the growth that you are seeing outside the U.S. Emerging markets obviously has been growing quite solidly. India, you've made a fairly sizable investment there, physically as well. Most recently I think you have started to go aggressively into China, as we saw with some of your announcements.

Could you talk a little bit about what has changed in terms of your philosophy on China? In the past perhaps you were following [M&Ps] into China in terms of pursuing spending there. Are the conditions there right to see an acceleration of business? Do you see this shaping up as something equally compelling in terms of growth in emerging markets? And if so, how quickly?

Lastly, in terms of gross margin structure, how do you see that?

John Chambers

I'm going to hold gross margin structure to a future question. If we don't get it by the end on that, Inder, I will answer it.

In terms of India, obviously, to draw a parallel to China, we made the decisions five years ago to begin to invest in India to align in terms of bringing our technology across the industries, to do tight partnerships with the major consultancy companies, to begin to look at build out throughout that country. We then about two years ago made the major commitment on the globalization center, moving 20 of our executives there. While it obviously will not go 50% each quarter, what you are seeing is just major, very good momentum. And not just in India, but using that consultancy and service and globalization center to provide capabilities throughout all the emerging markets and then very quickly to developed markets.

China is a similar play in some ways, different in others. Three years ago in China, our growth was going okay. For those of you who have been following us for very long, the first decision I made as CEO was to invest in China aggressively back in ‘94 and early ‘95. That clearly worked for us for a decade. What we are very good at is catching market transitions.

When I was in China this last week and we made the decision at the end of the visit, what we saw across all segments of China was very positive. A build out into the central and western part of China, remembering that you've got 3 billion people around the world below $2.00 a day and you have a chance by using the Internet not only to bring health care to them but job creation opportunities; addressing part of China's challenge about income differences between the cities in the east of China throughout the country.

We also see an emerging software industry that, Ned, you are doing very well in. Without putting you on the spot, I think we made probably $0.5 million in the investments in China in the software industry, including Alibaba the other day.

We also saw in the software industry a willingness to tightly couple with Cisco in terms of product capabilities and build off of our capabilities so with companies like Alibaba, the WebEx capability and implementing into that as they go to small and medium business and the consumer gets extremely exciting.

You're looking at how these software companies go global and there is a tremendous interest in partnering with companies as well as continued investments. Ned, I'll ask you to comment in just a second.

In terms of the business community, I probably talk to quite a few of the very large CEOs of the major companies. Interestingly enough, unlike perhaps in the U.S., not only are the CEOs there aggressive, they're going to use technology so that it isn't a labor arbitrage on the advantage they bring but literally a technology delivery capability. So we see their interest in consumption of technology being very high.

Then we went across all the major government agencies, the Ministry of Education that we've known for 10 years. We've expanded our network academies there, more than doubling them, going into vocational schools in the central and eastern countries to bring jobs there. We are looking literally across the board with all the agencies ranging from commerce to something that was very unique; the first time ever that we did a strategic relationship with a China development bank. We are the only company that's ever done that, and they were not after our investment of $100 million, they were after our expertise on startups and developing companies, et cetera.

So it's a very nice way of saying both at the business, government and at the individual citizens on the street, the view of Cisco is dramatically expanded versus three years ago. We think now is the right market transition to help change a country, to level the income issues, to bring education and job creation, to enable their businesses; their software industry is alive and thriving. That's a very nice way of saying, to say that I'm excited about it would be an understatement.

Ned, without giving away our moves, tell me a little bit about what you are seeing in terms of investments and partnerships.

Ned Hooper

Certainly. Thank you, John. So we have taken what we believe is a very unique approach in using our business development tools as part of global expansion. In China, where we've been present as an investor in venture and private equity now for nearly a decade, we have been a close partner with many companies who are developing what we see as unique business models that have applicability on a global basis.

So taking advantage of those trends and creating partnerships such as we have with Alibaba and WebEx as well as our investment last year with China Communication Services extending our reach into service provider, we believe that the market is at an inflection point and not only is there great opportunity within China, but we have the opportunity to take the lessons learned and the new business models being created in China and export them globally.

John Chambers

What you are seeing overall, Inder, is what we said before. Our issues are not of growth. It's to determine which market adjacencies we go into, which market transitions do we catch, how much do we bet now versus later and then how will we execute? You are going to see us be very aggressive in terms of our investments and market adjacencies we're going to go into.

Operator

Your next question comes from John Marchetti - Morgan Stanley.

John Marchetti - Morgan Stanley

At the risk of beating a dead horse here, if we can go back to the U.S. enterprise for a second. When we go back to Q2 of last year and things got noticeably worse in that market; and then we had Q3 where they were down again. You talked in Q3 about how you felt marginally better, mainly because you had at least seen it stabilize.

I'm just wondering as you are looking out into that U.S. marketplace now on the enterprise side how does that same read-across look to you now? Does it feel like it was still slipping as you were going into the end of the quarter? Does there still seem to be a lot of uncertainty in that this is something we should expect at least to carry through until some of these other issues in the broader economy work themselves out?

John Chambers

John I'm going to take my best cut based on customer feedback. I realize that I will get second-guessed no matter what my answer is on this, but that's part of a CEO's role. I think the strength in the overall U.S. market was indicative of commercial. The commercial customers, if their business is good, they spend. If their business isn't good they don't spend. Where in the enterprise customers, it's like myself. I have a favorite TV show in the morning that I run with. I exercise on my exercise machine, but they were so pessimistic in terms of their guess in the number of economists that were predicting economic slowdown that I actually had to start running outside in order to stay in shape.

I've got to admit it affected how much I invested. Rick and I delayed by almost 45 days 300 sales reps that we wouldn't have even blinked at normally. Charlie, we waited a quarter to make two major investments for later this year, one of which in the WiMAX area, Ned, that we did go through and we just announced a couple of weeks ago, one of which we will do a little bit later.

That's a very nice way of saying the enterprise CEOs tend to be gun shy and for very good reason, given that you are occasionally constructively second-guessed. So I think many people are going to wait until they see what the economy is.

Now, put yourself again in the enterprise CEO’s position. Throughout the quarter your top economists said GDP growth was maybe 2% to 2.5% and that there was a high probability – 30% to 50% of recession -- and GDP growth was 3.9%. So Rick, if your team missed that forecast by 70% to 100% we would have not you, but we would have one or two new people reporting to you. This is part of the problem we all face as CEOs. The global economy is very solid in most all of my counterparts’ minds, that a lot of our growth is coming out of those categories. But the U.S. economy to most of my customers felt like we are coming in to a soft landing. Most of them feel the Fed has done a remarkably good job, and you never know for sure until six months later. But if you watch, there is this era of conservatism, which is possibly right, but that absolutely is affecting the purchasing area.

Now I normally don't comment on the quarter but I think it's a fair question in terms of linearity and issues. August was about where we expected in the U.S.; not globally, but in the U.S. September was a little bit more moderate to soft, and October was solid. So we did see a different order rate in the U.S. than we typically see in a given quarter. But reminding everyone, that our total for the quarter and our book to billed ratios was actually at the high end of what we traditionally see over the last six years in Q1.

So that again, John, I don't want to get you used to that much detail because I really don't like to cut it that finely normally, but I think it's a fair question given the uncertainties many of us are seeing.

Operator

Your next question comes from Bill Choi - Jefferies.

Bill Choi - Jefferies

Just a quick clarification from Dennis. Was there any impact due to currency on revenue and gross margins?

On the wireless business being flat, this was a source of big growth for you guys just thinking this through, not much enterprise exposure on the wireless business necessarily. Can you talk about why that part of the growth engine might have slowed in the quarter? Thanks.

John Chambers

Dennis, on the clarification?

Dennis Powell

Bill, as far as impact on FX for revenue and gross margin, it was minimal. Remember we bill in U.S. dollars. We also procure most of our manufacturing in U.S. dollars as well, so it had a very negligible impact on our operation.

John Chambers

I was asking Dennis to give me a second while I looked up some data to make sure what I'm about to say was right, so that was a subtlety. I think what you are seeing in the wireless business is two thoughts. A large part of that wireless does go into enterprise customers, both attached to the switching and otherwise.

Secondly, it's always lumpy. Charlie, we're both losing hair at a faster pace than we want. But I would not read too much into the quarter uniquely on that. I would watch it for a couple quarters in a row. It's like security. You went through a slow time period there and then it bounced back.

However, we are going to take advantage of this opportunity in terms of going with one of our top 25 priorities for this next year, Charlie, is not to do architecture on a product, but wireless architecture across the board. How that ties, Ned, into not just the WiMAX moves, but how we tied into a wired and wireless world.

Maybe just spend a minute on that, Charlie, in terms of our philosophy about wireless and tying it to wired and a little bit of your thoughts.

Charlie Giancarlo

As John mentioned, it actually historically has been very lumpy quarter by quarter. We tend to see more linearity on a semi-annual basis than we see on a quarterly basis in that business. Part of that is that it is nearly all a channel business.

But John is absolutely right. I mean, part of our strategy as you know, is to drive really an integrated architecture overall from wired to wireless. After all, they are just two different ways of creating access for a computer to attach to a network. Up until now, they have been largely separate infrastructures and from our point of view as we go forward, from the standpoint of a unified client as well as a unified access methodology, unified security across all of these, whether one ties into the network through wireless LAN, through a LAN or actually through a wide area network in a VPN and broadband wireless in the future, that should all be transparent to the end user and the IT manager and that's certainly the direction we're moving.

John Chambers

The exciting part is you're talking about a $1.7 billion type of quarterly run rate on revenues for just the first wave of ATs and they are lumpy within it with 24% growth. So I think about it almost like we do a portfolio. There will be some that do extremely well, don't multiply that by four; and there are some that have bumps along the way. Don't multiply that by four in terms of expectations. But it is the combination of portfolio that I would measure us on.

Operator

Your next question comes from Paul Silverstein - Credit Suisse.

Paul Silverstein - Credit Suisse

John, if I could ask two clarifications. First off, on your switching comment in terms of the piece related to the new modular introductions in the 4000 and the 6000, should the implication of that be that at some point and to some extent, you should see a snapback as customers deploy the new models? Then I've got a clarification question on U.S. financials in terms of to what extent was the weakness in U.S. specific to U.S. financials in automotive and to what extent was it much broader than that?

I know you had quantified it as 8% of U.S. enterprise, but can you give us some insight in terms of how much of the weakness was particular to those sectors?

John Chambers

First on the broader sense again, the fixed were as Charlie commented about orders and I commented about revenues, it was very solid and that is more of a commercial market type of trend.

In terms of the modular within that, it does have an effect in terms of next generation products or the evolving of the current generation. I don't want to mislead you; it is tied to enterprise spending and so part of the factor will be in product introduction cycles. But as you look at enterprise spending especially U.S. enterprise spending at the high end, which clearly these modular switches are, that until enterprise comes back at a stronger rate, then you're not going to see the acceleration within that as a whole.

The verticals, the finance one was the one the hardest hit. But it really comes down to our top 25 companies is where we really saw the challenge, the biggest of the U.S. The next layer of enterprise overall wasn't great, but it wasn't bad. So it's the top 25 companies are most hit. Now out of the top 25, eight of them are financial, to kind of give you a perspective. Two of them are automotive. So that's really what we saw occurring.

Paul Silverstein - Credit Suisse

John, can you give some sense for what those top 25 represent?

John Chambers

I think that's finer than we want to break it down because I'm going to get into a level of detail that I will have to follow up on each time. Secondly, to be very open with you, I haven't got it by industry segment.

So I think we answered two questions there Paul, so you owe me one.

Operator

Your next question comes from Jason Ader - Thomas Weisel Partners.

Jason Ader - Thomas Weisel Partners

Thank you. I think what everyone is trying to figure out here is if we assume the U.S. enterprise continues to stay soft, what do you think the trickledown effect might be on things like service provider spending in the U.S., which has been incredibly strong?

I think your point is well taken that the global economy is not as dependent on the U.S. anymore, but is it fair to say that maybe you're incrementally a little more cautious on the overall business because of what's happening in what I would call a pretty strategic area of U.S. enterprise?

John Chambers

Your question is right on the U.S. service provider and it's the right clarification. We do not see that near as dependent upon the issue of U.S. economy. It doesn't mean they are completely apart in terms of CapEx spending, but there clearly is a race that is in the early stages of building out both broadband wired and wireless over time to do video. That is at the early stages in terms of its implementation and while we are really pleased with 11 quarters by Nick's group of 20% plus growth in the U.S., we see that not as tied near as tightly to the economy as a whole.

More to the entertainment spending, which all of us understand, continues to stay strong, especially home entertainment within the business segment. If we get the video loads like we're talking about being driven by enterprise, and I believe that we will over time with applications such as TelePresence, business security, more of this collaboration enabled by Web 2.0, that's when you see the service provider CEOs' eyes light up a little bit. I think they clearly get it, whether you're the leader at Verizon or AT&T or Time Warner or Comcast, they understand that opportunity as well.

But to answer the indirect part of your question, the market I would watch would be the U.S. commercial. That would be the market that as long as it holds up well, barring a surprise, service provider feels good and we have no reason to think that's going to change, we could always be surprised. So the U.S. will be okay as long as those two of the three hold, and this again speaks to the balance.

To the second part of the question, none of us have ever seen the combination of factors nor the diminished role the U.S. has in the global economy versus what it is before. So it's very difficult to play out this strategy in terms of the next quarter or two. However, if you were to ask very directly what are we seeing around the world? Again, I realize I might get challenged on this, but when I talk to my customers, they feel good on a global basis. The confidence is at a different level. And it isn't the concern they used to have that if the U.S. catches cold, they're going to be in real trouble. They are dependent upon the U.S. for part of their growth, but it's much more balanced within it, and this is where the global economy may help the U.S. out on it.

Now, as a summary point and really to wrap up the call today because it's nice to be done early for a change, is that if you look overall, our balance is it feels good and we can handle two or three out of our 20 areas of focus being off and they will be offset by others. I don't know any other company in the world that has that type of balance and yet the effect, and I don't know if it was Nikos or Tal or who asked me the question earlier, the law of large numbers may actually work to our favor if this market evolves the way that we think it will.

The second is that even in the U.S., you will hit a point where CEOs have to innovate. To really be competitive in the U.S. or Western Europe versus very effective business models and cost of labor positions -- and candidly a society that is beginning to use technology more aggressive than exists in the U.S. or Western Europe -- we're going to have to move as companies. Make no mistake about it. I'm moving extremely rapidly in terms of backing an unlimited IT budget. I just steal it from somebody else's budget. Rebecca, if you are listening, I trust you not to misuse that!

But we feel very good about the future and we make all of our decisions not on this next quarter or this next year. If you are doing that as a CEO in my industry and if you are a competitor, I've got you. It's more thinking two and five years out and evaluating our strategy. Have we got the trends right? Is it going to be an integrated play on the technology? I think it absolutely will, all the way up the OSI stack. Is it going to be a network of networks play across service provider and commercial and enterprise to the consumer that will be brought together, both wired and wireless? We absolutely believe in that.

Is it the second phase of the Internet or not? I believe that it is. It's the top of the inning and we're going to move with tremendous speed ourselves to do this, different business models and entertainment models.

While we are very aware of seeing the same concerns that other people say and see, we respect that and we're modeling in some areas like U.S. enterprise a little bit conservative in the short run but not in the long run, and that's why growth projections are 16% for the next quarter.

Dennis, I didn't have to push Dennis at all. he actually pushed me and we are both in agreement on those type of numbers.

So with that, Blair, I want to thank all of our shareholders and customers and partners for their focus on Cisco and their constructive feedback and turn it over to you to close the call.

Blair Christie

Thanks, John. Well it is 2:45 our time so we will close on time today. As a reminder, our next quarterly conference call which will reflect our second quarter fiscal 2008 results will be on Wednesday, February 6, 2008 at 1:30 pm Pacific, 4:30 pm Eastern. Please note that this is instead of Tuesday February 5th, due to a number of primary elections occurring in several states that day.

Again, I would like to remind you that in light of regulation Fair Disclosure, 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 feel free to call the Investor Relations group with any follow-up questions from this call and thank you for your ongoing participation and continued support. This concludes our call.

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Source: Cisco Systems F1Q08 (Qtr End 10/27/07) Earnings Call Transcript
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