Cisco Systems, Inc. F3Q08 (Qtr End 4/26/08) Earnings Call Transcript

| About: Cisco Systems, (CSCO)

Cisco Systems Inc (NASDAQ:CSCO)

F3Q08 (Qtr End 3/30/08) Earnings Call

May 6, 2008 4:30 pm ET


Blair Christie - SVP of Corporate Communications

John Chambers - Chairman and CEO

Frank Calderoni - CFO

Rick Justice - EVP of Worldwide Operations and Business Development

Don Proctor - SVP of Software Group

Ned Hooper - SVP of Corporate Development and Consumer and Small Business Group

Jim McDonald - Chief Executive of Service Providers Video Technology Group.


Inder Singh - Lehman Brothers

Jason Ader - Thomas Weisel Partners

Ehud Gelblum - JPMorgan

Scott Coleman - Morgan Stanley

Dawood - UBS

Mark Sue - RBC Capital Markets

Tal Liani - Merrill Lynch

Aaron Rakers - Wachovia

Ittai Kidron - Oppenheimer & Company

Paul Mansky - Citigroup

Simona Jankowski - Goldman Sachs


Welcome to Cisco Systems third 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, Senior Vice President of Corporate Communications for Cisco Systems. Ma'am, you may begin.

Blair Christie

Thank you Kim and good afternoon everyone. Welcome to our 73rd quarterly conference call. I am Blair Christie and I am joined by John Chambers, our Chairman and CEO; Frank Calderoni, Chief Financial Officer; Rick Justice, Executive Vice President of Worldwide Operations and business development as well as Don Proctor, Senior Vice President of our Software Group; Ned Hooper Senior Vice President of Corporate Development and Consumer and Small Business Group, and Jim McDonald, Chief Executive of our Service Providers Video Technology Group.

The Q3 fiscal year 2008 press release is on FuelNation Marketwire and a European Financial and Technology Wire as well as on the Cisco website at

I would like to remind you that we have a corresponding webcast with slides. In those slides, you'll find the financial information we cover during the conference call as well as additional financial metrics and analysis that you might find helpful. Additionally, downloadable Q3 financial statements will be available following the call including revenue segments by product and geography. Income statements for GAAP to non-GAAP reconciliation information, balance sheet and cash flow statements can be found on our website in the Investor Relation section. Just click on the financial section of website to access the slides and these documents.

A replay of this call will be available via telephone at 866-357-4205, or 203-369-0122 for international callers and is available from May 6th through July 18th on Cisco's investor relations website, again at

Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results. Financial results in the press release are unaudited and the matters we will be discussing today include forward-looking statements, and as such are subject to the risks and uncertainties that we discuss in detailed documents filed with the SEC, specifically the most recent annual reports on Forms 10-K and 10-Q and any applicable amendments which identify important risk factors that could cause actual results to differ from those that are contained in the forward-looking statements. Unauthorized recording of this conference call is not permitted, and at this time I would now like to turn it over to John for his commentary on the quarter. John?

John Chambers

Thank you, Blair. During the opening comments of the conference call, I will focus on what I view to be the key take ways for Q3 and update on why we continue to be comfortable with our long-term growth projections of 12% to 17%, and our revenue guidance for the next quarter with the appropriate caveat.

The opening comments will also include discussions on what we believe is driving our current growth as well as what we think will be the key factors that we expect should allow us to continue to maintain solid long-term growth rates over the next three to five years. And those areas that we can control our influence, we feel very comfortable with our continued progress during the quarter. Our vision differentiated strategy and our execution is developing the way we anticipated. I'm particularly pleased with our innovation engine from our product, architectural and top leadership perspective. We are better positioned with our enterprise and source of other customers from a customer satisfaction, technology and business architecture perspectives then we've ever been. We will be providing an additional discussion points on the progress of this innovation leadership later in the call.

Frank will follow these opening comments with additional detail of Q3 and Frank, it is nice to have you with us. Congratulations again.

Frank Calderoni

Thank you, John.

John Chambers

The third section of the call will focus on an expanded discussion of business momentum and strategy on a geographic product and customer segment basis. We will then introduce a fourth section around our innovation strategy and leadership. Frank will follow with additional financial parameters around our guidance for Q4. I will then wrap it up with some comments in terms of Cisco's momentum going into Q4 and finally our Q&A session.

Now on to the discussion of Q3. This quarter was another solid quarter given the challenges we are all witnessing in the market with reasonable balance from the product, geographic and customer segment perspective. To put these results in perspective, I will summarize the quarterly highlights first from a key financial perspective, second from products and services, third from a geographic point of view and fourth by customer segment.

The key financial highlights for Q3 include the following, total revenue of approximately $9.8 billion, a 10.4% year-over-year increase, which was above the mid point of our guidance of approximately 10% provided in the Q2 conference call. We are reasonably comfortable with the growth of the top line and pleased with the growth on the bottom line and earnings per share.

Order growth was reasonable and within our expectations. Product book-to-bill was greater than 1. Non-GAAP net income was $2.3 billion, an increase year-over-year of approximately 9%. GAAP net income was $1.8 billion representing a decrease of 5% as a result of a charge of $246 million or $0.04 per share recorded during the quarter relating to the intent to purchase, remaining interest in Nuova Systems. That was excluded from our non-GAAP net income.

Non-GAAP earnings per share were $0.38 and GAAP earnings per share were $0.29 which were increases of 12% and a decrease of 3% respectively year-over-year. Cash generated from operations was $3 billion. We repurchased $2 billion of common stock and we exited the quarter with $24.4 billion in cash, cash equivalents and investments as compared to Q2 FY'08 number of $22.7 billion.

However, if there are four key takeaways from our Q3 result the first would be the continued unique balance in terms of our business models. This balance is illustrated across 20 major product families, 4 key customer segments and 5 geographies. As an additional point of interest, Japan has a very strong quarter for the first time in a number of years. The reason for this is very simple. In Japan, we are beginning to see the second phase of next generation network build outs from our source of other customers and the new momentum being created from our organization changes there.

The second takeaway from the quarter is built around market transitions, which is a core competency for Cisco. Our ability to develop our vision, of how the market transition play out for the industry and position Cisco in terms of our sustainable differentiation industry leadership.

The third key takeaway which is just beginning and in my opinion would drive our growth and differentiate us from our peers over the next five plus years will be phase II of the internet. We expect the second phase will be driven by collaboration enabled by networked Web 2.0 technologies. In the past several quarters, we believe we have achieved the number one position from both a soft leadership and an implementation perspective, and we intend to expand their position. This collaboration enabled by network Web 2.0 technologies in our opinion transformed the business models with the speed we have not seen in over a decade. Whether it's a service provider's mission to increase network flows driven by Web 2.0 technologies, or the commercial or enterprise customers who see the next wave of productivity occurring.

We are continuing to see an increased acceptance of Cisco's business and technology architectural strategies and differentiation versus our industry peers. While we are still at the very beginning of the second phase of the internet, in my opinion we saw the most evidence in Q3 of our customer's commitment to our partnership with Cisco build around collaboration and network Web 2.0 technology. And these customers include country service providers and enterprise customers. Our customers understand the co-relation of collaborative applications with any device to any content and any mode, any time, anywhere combined with intelligence moving from both the application and services layers into the intelligent network.

These are complicated concepts, but our customers are starting to recognize what this means to them. And therefore Cisco can be both our communications and IT partner in a way that we believe, no other company can. In Q3, I had the chance to witness again and again this market transition in regards to Cisco's role in the customer's future, in key customer meetings and conferences of many countries around the world.

Just to give a feel for the areas where our experiences activity in the first half of the calendar year, included extensive travel throughout the US, trips to China, Spain, Switzerland, Saudi Arabia, Dubai, Abu Dhabi, Qatar, Israel, Palestine, France and two trips to Germany. In addition, this includes over three dozen around the WorldTel present meetings. From the country perspective, whether it’s the topic of job creation opportunities, healthcare, new economic cities or Cisco's role as their infrastructure structure partner, advisor on green initiatives or the role Cisco plays in assisting in the global competitiveness, our vision strategy and execution appears to be playing out as we envision. And as we become the trusted advisor and implementation engine for the business and government leaders, we can also get the growth for our businesses that accomplishes their company's this leadership position. As proved point, Q3 year-over-year growth in India was in the mid teen and China was in the high 30's. In India that follows a Q2 with 50% growth. Fourth is a topic centered on our innovation leadership. In this call and in future conference calls, I will share with you our progress in innovation and on product architectures, process change and thought leadership.

We believe Cisco is truly an innovation machine, a topic that we will summarize later in the call. Being very candid until recently, some shareholders might have viewed Cisco's innovation in just a few product areas in our own acquisition capabilities. However, this quarter was truly an exemplary quarter in terms of the breadth and depth of our innovation leadership across all aspects of our business.

Revenue growth from our key products including services was good with reasonable balance across categories. In terms of our 3 broad product categories, Routing revenue in Q3 grew year-over-year by 14% led by high end Routing products which grew in the mid 20's year-over-year. Switching revenue grew year-over-year by 3% and the total of all of our advanced technology revenues grew year-over-year by approximately 17%.

Again in considering our ability to move into new markets to achieve both growth and profitability, our total advanced technology revenue was approximately 20% greater than our revenue from the Routing products. This speaks to Cisco's balanced product portfolio and our constant evolution of moving into new markets and product adjacency.

About 1 year ago, we signaled our focus on services as a major product. We felt this would be both a rapid growth opportunity with very good gross margins and the key to our customer's successful implementation of both our technology and business architectures. While product orders will fluctuate up and down based upon many factors, services revenues tend to be more consistent and have a more predictable pipeline over a longer period of time. Service revenues for this quarter grew in the mid-teen and given our efforts to expand the scope of our service offerings, with proper execution, there is no fundamental reason, why revenues and services in the future would not grow in the 20% plus range from a year-over-year perspective. The service revenues are beginning to approach one-fifth of our total business.

Although we would discuss growth in a number of products in more detail later in the call, I want to provide a quick snapshot from the revenue perspective of eight of our product highlights from Q3 from the year-over-year perspective. The CRS-1 grew approximately 150%. Unified communications including contribution from WebEx grew approximately 45%.

Fixed Switching grew at 11%, WebEx, Den congratulations to you, Doug and the team, grew approximately 20%. Security including narrowing port grew in the low double-digits, high-end routers in total grew approximately 25%, application networking grew approximately 30% and TelePresence orders grew over 1000% granted of a relatively small base.

This product leadership is also gained the recognition in terms of industry awards as well. As an example, just last week, Interop warded Cisco the 2008 “Best of Interop” awards for two major product categories. The Cisco Nexus 7000 series was the recipient of the Interop 2008 product of the year of the award, in the IT infrastructure category and Cisco Wide Area Application Engine and the Cisco Wide Area Application Services software were awarded for application optimization.

We continue to achieve reasonable product balance both in terms of breadth and depth of our portfolio. We now have 11 products family, with order run rates about $1 billion and many of them continue to gain share in the respective product categories. Although competition remains robust, we believe we are maintaining leadership versus many of our major competitors in many product families. And we also believe we are getting a larger share of our customer’s total spend on communications and IT

The next section focusing on geographic and customer segments will be discussed primarily in terms of orders, as this is how we run our business. From the geographic theatre perspective, our order momentum was mixed in Q3 with year-over-year order rate from mid single-digits to mid 20s year-over-year.

Asia Pacific, which includes India and China, continued to be very solid. Congratulations on and grew in the high-teens. Japan was very strong as mentioned earlier and grew in the mid 20s. Europe, who approximately 14% in Q3, up from 8% in Q2, the US did experience the challenges we expressed during our Q3 guidance. US growth was in the mid single-digits in Q3.

Emerging market sales, as we shared in many prior calls tend to be very lumpy. As a reminder we did not include in the emerging market theatres China, India or other Asian countries. The revenues for our emerging market theatre for this quarter grew over 40% year-over-year, but orders grew approximately 10%.

In anticipation of your questions on order growth, service order growth was above 30% year-over-year and product order growth was in the 9% range year-over-year. From a customer segment perspective, we saw global commercial orders growth in the 18% range, enterprise growth in the 9% range, service provider growth in the 6% range, and consumer Linksys segment growth in the 13% range year-over-year.

I can not over emphasize the importance of leading the market transitions, whether it’s a basic as moving from products to solutions or its complex as evolving from plumbing to the network enabling all forms of IT and communications. Well, at the same time translating what these transitions mean to Cisco in terms of our growth and in true leadership. This ability to understand market transitions, whether they are technology or business model base has been one of the key contributing factors to our success.

Over the last two decades, we have routinely seen dramatic growth from our investments and market transitions, whether it’s in our advance technology starting five years ago, emerging countries two years ago, our globalization center in India over a year-and-half ago and expanding to our commitments to the China market over the last two quarter.

At the beginning of this fiscal year, we shared with you our aggressive implementation of new technology and new business models based on collaboration enabled by network Web 2.0 technologies.

Instead of doing one or two cross functional priorities a year as we did very successfully in our traditional command and control approach, we can now focus on 22 priorities with a with a collaborative structure and replicatable business process driven by our councils and boards. The smaller social/business networking teams are moving faster than we could in the command and control structure and are enabling our ability to move into new market adjacencies with the speed and effectiveness that we would not have been able to do before.

When you think about our long-term growth opportunities there is no more important market transition than this revolutionary business model and as we have been pleased with the progress and results through the first two quarters of the fiscal year. This is one of the key reasons then in spite of what happens to the macroeconomic or other issues in the short-term. We remain comfortable with our long-term growth projections.

Cisco will also be affected by major economic changes, capital spending patterns, new and existing competitors and our ability to execute or not on our strategy and other factors, as we discussed in our financial reports. For purposes of our long range guidance as well as our quarterly guidance, we are also assuming that our vision of how is the industry in the market will evolve will be accurate and we will effectively execute on that vision.

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 the risk is taking the obviousness, we have said repeatedly in prior conference calls and we continue to say in future conference calls, there maybe times when our revenues grow above this range and that definitely there will be times when our revenue grows below this range. While we continue to be extremely comfortable with our vision and differentiate strategy and the value that intelligence networks will bring across all our customers segments and geographies.

We also see the economic challenges in the US that is experiencing. Our customers in many of the emerging countries such as India, China and the Middle East remain very optimistic about business momentum. However, we are continuing to see our US and some European customers remain cautious in their views about their economies. Therefore our revenue guidance for Q4 fiscal 2008 including our usual caveats, as discussed earlier and in our financial reports, is for revenue growth of approximately 9% to 10% year-over-year

As a reminder, during each of the economic slowdowns in the past 15 years, Cisco has always navigated through them very smoothly as we did repeatedly in 1993, 1997, 2001, 2003 and in each scenario we gained both market share and in my opinion profit share. And as a result we were better position coming out of the transition versus our peers. We will continue to be aggressive in our investments during the slowdown.

In terms of the economic transition that maybe going on, we believe that our strategy and the critical role that network plays in enabling all forms of communication and IT, is right on target. Secondly, with all the appropriate caveats, our best estimate is that this is a relatively short-term challenge going forward. Cisco will use these bumps as a chance to expand our share, our customers spin and to be aggressive about moving into market adjacencies, whether we will return to our longer term growth targets of 12% to 17% in several quarters or a little longer is yet to be determined.

For those series that we can control our influence, as I said earlier I am very optimistic of our ability to achieve the desired business results both in the short-term and in the long-term, for areas outside of our control or influence including the broader macroeconomic impairment. We will share with you what we are seeing to the best of our ability just as we have done in the past during our quarter conference calls.

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

In short, we are going to attempt to execute the strategy over the next decade that is very similar to what we did in the early 90s. And as we said before it power growth for Cisco and for productivity for the next decade. Except with the obvious difference of this time been a company that is now approaching 40 billion in sales and over 65,250 employees focused on this opportunity.

At this time I would like to turn over to Frank for the discussion of Q3 financial highlights. Frank?

Frank Calderoni

Thanks, John. We are pleased with Ciscos’ solid results this quarter. Total revenue for the third quarter was $9.8 billion, an increase of 10.4% year-over-year above the mid point of our guidance. Routing revenue continue to be strong at $2 billion, up 14% year-over-year due primarily to continued growth in our high end router portfolio at 26% year-over-year with particular strength in CRS-1 and the 7600 product families.

Switching revenue was $3.2 billion, an increase of 3% year-over-year driven by growth in our 6 switching portfolio. Advanced Technologies revenue totaled $2.4 billion representing an increase of 17% year-over-year led by strong performance in Unified Communication and Video Systems.

Other product revenue totaled $569 million, an increase of 3% year-over-year. Total service revenue was $1.6 billion, up approximately 15% year-over-year as a result of solid growth across all geography. We are particularly pleased with growth in advanced services, which was 35%. Total revenue growth by geography grew in the range of 5% year-over-year in the US and Canada to a high of 44% in emerging markets.

Emerging markets revenue growth was higher than the order growth that John reported due to increased shipment and revenue recognition of previously deferred revenue. Q3 total non-GAAP gross margin was 65.4%, approximately flat quarter-over-quarter and up nine tenth of a point year-over-year.

Our product only non-GAAP gross margin for the third quarter was 65.9%, flat from last quarter and our non-GAAP service margins for the third quarter was 62.7%, down from 63.5% last quarter. Service margin will typically experience some variability over time due to various factors such as the changes in mix between technical support services and advanced services as well as the timing of support contract initiation and renewals. Total gross margin by geography ranged from 64% for emerging markets to 70% in Japan.

Non-GAAP operating expenses as a percent of revenue were approximately 36% in Q3 fiscal year '08, up form 35.2% in Q3 '07. Foreign exchange impact for the quarter was $88 million, which added approximately nine-tenth of a point to the ratio. Excluding foreign exchange, non-GAAP operating expenses for Q3 grew at 10% year-over-year balanced with revenue growth. Interest in other income was $168 million for Q3, lower than our guidance of $200 million. This was due to macroeconomic conditions, which resulted in lower gains from the sale of fixed income and public equity investment.

We remain pleased with the high quality and conservative risk profile of our investment portfolio. Our Q3 FY'08 non-GAAP tax provision rate was 24%. Non-GAAP net income for the third quarter of fiscal 2008 was $2.3 billion compared to $2.1 billion in the third quarter of fiscal year 2007 representing a 9.4% increase year-over-year. Non-GAAP earnings per share on a fully diluted basis for the third quarter was $0.38, up from $0.34 in the third quarter of fiscal year 2007 or 12% increase year-over-year. GAAP net income for the third quarter was $1.8 billion as compared to $1.9 billion in the third quarter of fiscal year 2007.

GAAP earnings per share on a fully diluted basis for the third quarter were $0.29 down from $0.30 in the same quarter of fiscal year 2007. Consistent with previous disclosures in our SEC filings, a charge of $246 million or $0.04 per share was recorded during the quarter relating to our tend to purchase the remaining interest in Nuova Systems, which was excluded from our non-GAAP net income. Moving on to the balance sheet, the total cash, cash equivalence and investments at the end of Q3 was $24.4 billion, up $1.7 billion from Q2.

During Q3, we generated $3 billion in cash flow from operations as well as $336 million in proceeds from stock option exercises. We repurchased $2 billion of common stock, or 83 million shares of our stock at an average price of $24.4 per share.

Moving on to accounts receivable, we ended the quarter at $4.2 billion which was flat from Q2. At the end of Q3, day sales outstanding or DSO was 39 days the same as was in Q2. Both Q2 and Q3 include the effect of several large multi-year service agreements, which has increased the DSO in each quarter by three to four days. Total inventory at the end of Q3 was $1.3 billion. Approximately, the same level as in Q2. Non-GAAP inventory returns improved from 10.5 last quarter to 10.7 this quarter.

Our inventory purchase commitments at the end of Q3 were $2.7 billion relatively flat from the end of Q2. Deferred revenue with $8.6 billion in Q3, an increase of $607 million from Q2 and $2.3 billion from Q3 FY '07. Deferred product revenue was $2.9 billion, up $201 million from last quarter and deferred service revenue was $5.7 billion, up $406 million from last quarter due to the addition of several large multi year service contracts. At the end of Q3 our head count totaled 65,225, a net increase of approximately 1,100 from Q2 FY '08. Our head count increases were primarily the result of Cisco hires in engineering, sales and in services.

In conclusion, I am pleased with our performance for the third quarter of the fiscal year enabled by our portfolio management approach to innovation, a broad and growing global footprint, and a team dedicated to outstanding execution. Our ability to deliver solid financial results with excellent cash flow and a strong book-to-bill during the quarter of somewhat uncertain macro economic conditions illustrates the power of our business model.

We will continue to invest in our diversified technology portfolio while maintaining our proven focus on profitability. In order to take advantage of market transitions and drive toward our long term growth target of 12% to 17% over the next 3 to 5 years. I'll now turn the call back over to John.

John Chambers

Thank you very much Frank. In this section of the call, we will cover our geographies, customer segments and products review for Q3 in more details. Products review will be in revenue growth terms, while the geographic and customer segments will be discussed in terms of orders unless otherwise indicated.

First from a geographic and customer segment point of view, there were a number of paucities from our five theaters and customer segment. The Asia pacific theaters continues very solid momentum in Q3 with year-over-year growth in the high-teen. The Asia-Pacific organization had the best balance across each of the customer segments with the enterprise not including public sector, service provider, commercial and consumer markets all growing from high-teens to approximately 30% year-over-year. The public sector, which tends to have large orders and to be lumpy in terms of when the orders occur, decreased year-over-year. India and China, the two largest countries in the theater continue to lead the way from great perspective.

As we discussed in prior calls, our globalization centre in India led by Wim Elfrink is achieving at the high end of our expectations as it relates to both growth in India and throughout their emerging markets. We are now rated as the number 5 best place to work in India, when only two years ago we were not even on the list. After an extremely strong Q2 in India with growth of approximately 50% year-over-year, we were pleased with the growth in the mid-teens in Q3 year-over-year. And our momentum in India continues to be very strong.

We were very pleased with the growth year-over-year in the high-30s in China in Q3. Just last month, I spent a week in China and had the opportunity to meet with large number of business, government and academic leaders from throughout the country. My key takeaway was that these investments will likely achieve our desired goals and opportunities in China.

Our growth in China generally has been strong over the last two quarters as we made the decision to dramatically expand our commitment and our goals in China over the next five years. We believe we are uniquely positioned with business and government leaders as well as the citizens to create major win-win scenarios across multiple segments of their economy. The emerging countries in our Asia Pacific operation, which we do not include in our emerging market theatres, as I said earlier has a potential to achieve growth similar to the emerging market theatres, if we execute effectively.

Moving on to Japan. I want to congratulate our Japanese team on their very solid Q3 results with growth in mid 20s. This is the first time in 15 quarters we have gone above 20% year-over-year. We think there are two major factors contributing to this. The first is the longer weighted build out, the next generation networks and remember the Japanese were the ones they led on the global basis with first generation of next generation networks.

And the second is the evolution of leadership team under Edzard Overbeek, which is really starting to show the results across all customer segments. Edzard nice job.

Moving on to Europe. Our European operate had order growth rate in the mid-teams in Q3 year-over-year. The enterprise markets not including public sector had a strong quarter with growth in the mid-teen. The commercial market continued to be solid with growth in the mid-20s. The consumer segment of a small base grew by approximately 30% year-over-year.

The service provider segment continued, which is modest growth in the mid single-digits. As we discussed in the last quarters call, I was particularly optimistic about the opportunities in Germany and I would like to congratulate the German team for their strong quarter with growth in the mid-20s year-over-year.

For the US order growth was approximately 5% year-over-year, balance across to our customer segments were mixed. The commercial market grew in the low-teens. The enterprise grew in the mid single-digits not including our federal business. The federal group had a very strong growth of approximately 20%. The consumer grew approximately 6%.

However we did see some challenges in the service providers’ customers segment, which are growing 12 quarters in a row at over 20%. While orders and service providers do tend to be relatively large and sporadic. We had some major successes in Q3 from companies such as our partner AT&T and emerging service providers.

Our growth from our cable customers and other US based major wire and LAN players combined was actually down approximately 3%. From US geographic enterprise discussion, our orders grew in the mid single-digits, in other words across all the geographic enterprise areas balance was good across these six enterprise areas with growth ranging from 4% to 10% in Q3 year-over-year. Commercial growth was also reasonably balanced.

Emerging market orders where both orders and revenues tend to be lumpy in Q3. In Q3 revenue growth in the emerging markets was 44%. However product order growth was approximately 10% year-over-year. Growth was reasonable in the service provider, commercial and consumer segment ranging from the mid-teens to mid-20s from year-over-year perspective. The enterprise sector was down in the low-teens year-over-year. Latin America was a standout of the four areas. It had very strong growth, about 25% year-over-year.

As discussed earlier our product business was balanced. We will attempt to give you more details regarding this balance in the following discussion, which will be covered in terms of revenue and will include our acquisitions.

Total revenue growth in Routers was 14% year-over-year with majority of the strength occurring in the high end, where growth was in the mid 20's. The CRS-1 again led the field with growth of over approximately 150%.

Switching revenues were mixed with Fixed Switching product groups growing in the low double-digits year-over-year. Modular Switching was slightly negative, doing part to the hesitation, when new products are introduced such as the Nexus 5000 and Nexus 7000.

Balance was good, although we would like to add more in our Advanced Technology groups. Security grew approximately 11% year-over-year and security includes products from our IronPort acquisition. Unified Communication including products from our WebEx acquisition grew approximately 46%. [Virus] grew approximately 7%, storage grew at 5% and network terms grew at 4%. The second wave of Advanced Technology groups year-over-year grew approximately 12%, with application networking services grown approximately 30% and the EO Systems grown approximately 9% year-over-year.

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 achieved in the benefit of Cisco and our customers that we thought were possible. And finally our execution is on target in terms of the result as to make sure by customer partnership perspective, market share and share of our customer's total communications and IT expenditure, as the network truly becomes the platform for delivering its capabilities.

In this next section, I would like to share with you something new really focus on innovation and I want to start with take a few moment by sharing with you, why I believe Cisco is a key innovation leader and this is also very important for driving our long-term growth.

Innovation is at the forefront of corporations and governments global focus to drive, job growth, to drive growth of their economics and standard living of their citizens and other countries. We believe the core ability to deliver innovation will be enabled by intelligent networks, as the network because the platform could delivering all forms of communication in IT, to enable these new and rapidly evolving business models.

In the section of the call, I will focus on how Cisco innovates and how we are positioned in my opinion to lead the high-tech industry in innovation. I will break the discussion into the following eight areas of innovation. First product innovation, this is the traditional way to many people look at technology companies. Second business models and I am really talk about new business models, which I believe will be the future of how technology should be viewed as enabling innovation for our customers.

Market transitions will be the third and we believe that innovation should be based upon timing of these market transitions and then leading in the transitions. As opposed to the traditional definition of innovation being viewed as what’s you did compare to your competitors.

Technology architectures, which we believe will be the way, that the industry evolved will be moving from boxes and software operating systems, ASICs and services been independent thesis to the future of technology architecture, where literally the network becomes the platform for all of IT and communications. Business architectures are where we begin to focus a total architectural solution to achieve the top business priorities of our customers.

The intelligent network enables these solutions. As an example of how Cisco innovates in terms of our business top priorities, is how we use collaboration and network Web 2.0 technologies to implement our strategies across 22 cross functional priorities. Another example would be how we partner with countries to build their economic cities of the future.

Productivity innovation is the sixth area. In many ways Cisco lead Phase I of the Internet in internal utilization with resulting productivity increases for both our sales and our customers. We expect the business models enabled by collaboration network Web 2.0 will be drive very similar almost an instant replay in Phase II of the internet. It is this type of productivity opportunities that recalls in our opinion the investments in our industry to increase over the next three to five years.

Entertainment innovation will be based upon visual networking and will change everything from the way we interface between our family and friends to how we watch sporting events with our community, with a common interest to creating our own entertainment with different social networks. We are now moving rapidly in these market areas and may every time focus with our partners on how this would change business models including advertising.

And finally eight; organization revolution, perhaps the most fundamental form of innovation in this market is what Cisco is leading and moving from the traditional hierarchy of command and control approach to a collaborative and teamwork approach enabled by network technologies.

At this time of the call, I would like to focus on two areas of leadership and innovation. First the product innovation and second the new business models. From a product innovation perspective, we delivered the following new product innovations in Q3. I think it is safe to say the Cisco's innovation machine is never operated as faster or more effective pace, although there is always room for improvement. Supporting this position would be the major product family and capability innovations that I am about to cover.

In Q3, the ASR 1000, it really is leading edge product in terms of hardware, software, ASICs and revenue generation for our service provider, customers at the edge. It's the most powerful compact router ever to address the edge and to put in perspective 160 times more processing power in many ways than its predecessor.

Instant service delivery means activating with the keyboard, not a truck roll something that we all understand the importance of the service provider environment. It also contains the most complex ASIC design in history for network product. Nearly 800 million transistors on the chip and for a point of comparison the CRS was the prior leader with over 180 million transistors on its key architecture.

Operating cost and environmental impact of approximately one-third at the parable comparable system. The Nexus 7000, and when you think about the Nexus 7000 think of it as the first in the new generation of unified fabric data centre switches that enabled migration from 10 to 40 to 100 Gig with a simple I/O upgrade with four redundant hardware, where there is never a single point of failure. We also introduced the Nexus 5000, the industry's first open standards-based access-layer switch to support I/O consolidation at the rake level.

It represents over 3 years of collaboration with Nuova systems, illustrating the power of our built pie or partner innovation model. It has the highest density top of rake switch available and uses the same operating system as the Nexus 7000 which broadens our data center leadership. The applications extension platform on the ISR is a mouthful. The product really is a programmable feature for our ISR router with third party developers can create applications on the ISR. This builds on the momentum of this important platform, which has by the way shipped its four millionth ISO router this quarter.

The fifth major product deliverable this quarter is the business-to-business TelePresence. New business-to-business TelePresence capabilities are just being delivered and it really opens up the market opportunities for our customers. In addition to receiving the 500,000 TelePresence during the quarter, we have developed strategic relationships with premier global service providers to begin offering intercompany telepresence. These are done with AT&T in the US and BT in Europe. We have now deployed internally over 200 TelePresence systems around the world and conducted over a 100,000 meetings.

WebEx launched its new version of WebEx products for the Mac users and along this line the upcoming software version 2 for the iPhone incorporates Cisco's VPN Technology. Our collaborative solution that integrates the WebEx product with our Unified Communication suite including the UC manager, IP Phone, TelePresence and MeetingPlace began shipping.

The final stage of data for the next generation platform of WebEx, which will include a next generation collaboration work space as well as enabled business measures. Don seems to be executing very well, congratulations. In the area of collaboration in network enabled Web 2.0, our product innovation is centered where the market is going, not where it is today.

For example, many people think of Web 2.0 as data services, but in fact what we believe will enable Web 2.0 to achieve its potential is the evolution data services in the voice services and then they combined the next evolution in to video services. We would call this combination of voice, video and data in terms of Web 2.0 services, visual networking. So, when you think about Cisco's approach, think about this enabling a large part of the collaborative applications are sales with our partners, bringing the combined capabilities of video, voice and data together to any device over any combination of networks and our customer segment, evolving from the area of personalization to one of communities, information and people. Instead of viewing collaboration as just unified communication, it's really about visual networking, unified communications, WebEx capability, IP telephony, TelePresence, and other technologies that together enable collaboration.

New business model innovation at Cisco. We are the first to implementing in entirely new business models in each functional organization enabled by collaboration of loop network enabled Web 2.0. As an example would be our services delivery model that we started under Wim Elfrink’s leadership in our Bangalore site delivers services virtually around the world.

Second, would be the cross functional business and social networking communities and the processes, vocabulary and best practices that go behind, just to allow our company to go from one or two major cross functional priorities to today's 22 and doing this in nearly a one year cycle. And then, to use this productivity benefits enabled by new business models to either bring the results to the bottom line or to you use these resulting assets to enter new market adjacency.

In summary, while in this conference call and future conference calls, we often discuss each product or customer segment, I would argue that real innovation is about how you combine all of these very complex but manageable approaches. Where each form of innovation is at first loosely and then overtime tightly coupled to the other.

Again at the risk at being aggressive in our positioning, I think Cisco is the only company that is addressing the market on this broad front with a history and a track record of leading each category when we move into market adjacencies. It is this overall innovation machine that we are building at Cisco, which will not only differentiate ourselves versus our peers, but which we will believe will allow us, with the appropriate capital as to achieve our 12% to 17% long-term growth objective. I would encourage you to give us your feedback on innovation being part and area of interest, for additional discussion on future calls.

Now Frank, I would like to turn in to back over to you for additional guidance on Q4.

Frank Calderoni

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

Total revenue growth for the fourth quarter is expected to be in the range of 9% to 10% year-over-year. We encourage you to model on the conservative side due to the continued uncertainty in the macro economic environment in the near term. As we have said in the past, forecasting gross margin has always been challenging due to various factors such as volume, product mix, variable compounding cost, customer and channel mix and competitive pricing pressure.

That being said, we believe that total gross margin in Q4 will be approximately 65%. We believe Q4 operating expenses will be in the range of 36% to 37% of revenue. This includes the impact of foreign exchange, which continues to have a negative impact on our overall expense. We expect interest and other income to be approximately $140 million in the fourth quarter. Our tax provision rate for Q4 is expected to be approximately 24%.

While we expect to continue our share repurchase program, it is difficult to predict the exact weighted average shares outstanding. We are modeling share accounts to be flat to down approximately 50 million shares in weighted average share outstanding for EPS purposes.

In this estimate of share account, we are not taking into consideration any future change in the stock price that could occur in the fourth quarter of fiscal year '08. As a point of reference, $1 increase in our average stock price would increase the calculated shares outstanding for purposes of determining earnings per share by approximately 50 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 Q4 of '08 GAAP earnings, we anticipate that Q4, GAAP EPS will be $0.04 to $0.06 per share lower than our non-GAAP EPS primarily due to acquisition related charges and stock option expense. Please see the slides that accompany this webcast for further details. Other than those items noted above, there are no other significant differences between GAAP and our non-GAAP guidance. This guidance assumes no additional acquisitions, asset impairments, restructuring and tax or other event, which may or may not be significant. I will now turn the call back over to John.

John Chambers

Frank, thank you. At this time I would like to kind of summarize our comments and then following the summary open it up for Q&A. The following is my view of Cisco’s momentum and opportunities during the fourth quarter of fiscal 2008. In areas that Cisco continues to influence, our momentum continues to be strong especially in the areas of product leadership, innovation and top leadership. Balance continues to be reasonably good across geographies, products, services and customer segments.

We clearly continue to see the same things that each of you do in terms of opportunities and concerns in the US market and the concerns about it expanding to other geographies. If the market does continue to slow, we believe this will not dramatically change our long-term opportunities. With our vision of how the industry will evolve in our differentiated strategy. In fact, it is our intent to expand our share of customer spin during the corrections, as we have done in the past.

We also believe that our opportunities to expand in our current markets and market adjacencies are actually increasing. This is true from the data center to the home market, from the service of order to the small to medium business and to consumer. Therefore you will continue to see us invest aggressively where it's appropriate or I'll maintain our focus on our financial models.

From the geographic perspective, we continue to be optimistic about the majority of the global economies outside the US. Based upon what we are hearing from our customers and our balance strength in these countries across customer segments and product families. We will continue to monitor closely in each spread of the US challenges to other geographies. Well, we are even more optimistic about our opportunities in India and China and emerging markets in Asia. We will carefully track our momentum and some of the other emerging markets.

Japan appears to be in growth mode again and that's really great. I think that has done amazing job there. From the US perspective, the market did soften as we indicated that possibility out in the last quarter conference call. When our largest market is growing in the mid single-digit is difficult to grow our total market at much above the 10% range. In our opinion there were many things that are exciting about the second Phase of internet technology as enables collaboration, social networking into Web 2.0, but at the top of this list is both the speed and the effectiveness with which these changes can be implemented across customer segments. Again 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.

Our balanced product momentum across our core technologies and dense technology continues to be solid, but again it is the loosely and then tightly-coupled product strategy, where these technologies that dramatically differentiate Cisco from our peers. Our pipeline of new core routing and switching products that continues to look very good as evidenced by the major product announcements during the quarter and both the switching and routing product areas of ASR 1000, Nexus 7000 and Nexus 5000.

Our continued evolution of our first wave of events technologies and the emergence of a second wave of events technologies it is evolving as expected. At the time, we are beginning to plant a potential third way with our next generation early stage technologies.

In summary, our product pipeline is in excellent shape and really looks exciting. Having said that, obviously the proof continues to be in the results. On a global and U.S. basis, we have seen the same challenges and uncertainties from an economic, political and capital view that we've seen -- you are continuing to witness.

Once again with our usual caveats as discussed earlier in our financial reports, our Q4 fiscal year 2008 guidance is for Q4 revenue in the 9% to 10% range from a year-over-year perspective. Our long-term growth opportunities remained in the 12% to 17% range, again, assuming our caveats.

We will continue to 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 transition, market adjacency opportunities or economic.

In summary, for those areas that we can control, we believe that our vision, strategy and execution are in great shape and producing results.

As always, I want to thank our shareholders, customers, employees and partners for their support and continued confidence in our ability to execute during rapid industry consolidation, market transitions and challenging economic times. Blair, let me now turn it back over to you.

Blair Christie

Okay. Thank you, John. At this point, we'd like to open up the call for Q&A, and we do request still that analyst please ask only one question.

So, Kim, we're ready for our first question.

Question-and-Answer Session


Thank you. Our first question comes from Inder Singh with Lehman Brothers.

Inder Singh - Lehman Brothers

Yeah. Thanks very much. I wanted to ask you about the business. I think you touched on it a little bit already, John.

John Chambers


Inder Singh - Lehman Brothers

But two quarters ago, you talked about sort of a U.S. slowdown. I think that was good leading indicator of what we saw happen a quarter ago, you talked about some Europeans spillage perhaps, from what you have just reported for April and what you've just guided from July, it's only looks like you had a fairly solid sense of results here.

Is it fair to say that you are seeing from your standpoint stabilized, your diversification geographically and product wise? Is that helping you feel a little more confident about the way you are executing relative to the market? And then, also, how are you managing your expense line in light of, sort of the environment that you are seeing now to which, as you said could continue for a few more quarter?

John Chambers

Okay. A series of questions. I'll try to wrap them into one answer, Inder.

Inder Singh - Lehman Brothers

Thank you.

John Chambers

First, if you look at the market evolving. The U.S. did evolve pretty much as we thought. And we're gaining a lot of mind share and candidly innovation leadership with our enterprise customers. They are beginning to start down the path on collaboration Web 2.0 in the leading technologies areas.

And that is very important to us. Same thing in search providers, we have a better relationship with the largest service providers, traditional wireline players, the cable companies than we've ever had. And this is from the top all the way down to the technical side. And the areas that we can't control and influence, we actually I think positioned ourselves very well as the economy picks backup.

In terms of Europe, that actually went from 8% growth to 14% growth. So, it's balancing out in terms of its execution. Germany is a little bit stronger than France. Within that we see some mixed results out of Eastern Europe, but I'm cautiously optimistic there.

If you look across the area, I guess the one key takeaway is that, Asia-Pacific got stronger. It's a good balance not just in China and India, but [what I want to do] across the other countries. And then it's nice to have Japan back. It's been a non-factor for a couple of years, the growth there. So, I guess that's into a nice way of saying, the balance looks good, and at the present time, it's playing out pretty much as we expected.

In terms of our expense model, we're going to aggressive in expenses. And as Frank said, remember, our growth on expenses, we get no benefit from currency in terms of our top line, the revenue growth. When many of our peers have got as much as 6%, or7% or 8% of their growth out of a currency, we did not. But we did unfortunately get about 3% of our growth, Frank, on the expense side from the currencies where we pay our salaries in local currency.

We are going to however continue to be aggressive while staying with our financial models, the 36% to 37% and staying within our gross margin, guidance that Frank gave you. So that's nice we're seeing. Overall, we fell pretty good. No one knows for sure but it plays out much as you question was asked.

Inder Singh - Lehman Brothers

Thank you.

Blair Christie

Okay. Next question, please?


And your next question comes from Jason Ader with Thomas Weisel Partners.

Jason Ader - Thomas Weisel Partners

Thank you. John, last quarter you talked about the month of January as being very weak and I think we're all very anxious to hear about your comments on the month of April, given that a lot of your competitors closed their books at the end of March, and March was a tough month for a lot of your competitors. Could you give any color on the month of April? How the quarter closed and basically what your level of confidence is that things are starting to get a little bit better?

John Chambers

Okay. So if I look at the flow throughout the quarter and remember it varies every quarter based on seasonality by a month. If we were to look at probably the last or at least three to four years in Q3, the first month of the quarter was about 25% of the quarter plus amount is a point or two, the second month was 30% plus amount as a point or two, and the third month was 45% plus amount as a point or two. This quarter followed exactly that same model, so nothing dramatic in it.

In the interest of just being very transparent, we started off pretty good and good solid momentum. We are seeing some orders slide out that's what occurs during a little bit more challenging economic time. But overall, I wouldn't say yet that there is a turn. I would say it feels pretty steady in terms of the business momentum whatever.

Blair Christie

Thank you, Jason. Next question, please?


Thank you. Our next question comes from Ehud Gelblum with JPMorgan.

Ehud Gelblum - JPMorgan

Hi. Thank you, Blair. Thank you, John. Question, I wanted to just take a little deeper and do some of the numbers that you're giving. I think I got them all. In the main growth area that we've been looking at, emerging markets have been growing really nicely for a bunch of a quarters instead of decelerating. They have now gone from 24% on the order side to 10% this quarter.

Advanced technologies is a revenue number, that was 17% growth but there were some acquisitions in there. I calculated, it was about 8% when you take out the IronPort and WebEx acquisitions. And then service rider which is, something that we all think is very strong and a lot of dependent there, the orders grew 6%. So we're looking at numbers that all seem to be pretty low.

I'm trying to put that together and trying to understand were these numbers are 10%, 8%, 6%. How do you get back into the 12% to 17% range and why do you confidence that you'll be able to get there? And I understand emerging market is lumpy but can you give us some color as to, it seems like its lumping down for the last four quarter and how do you get back up from there, what do you see that gives you confidence?

John Chambers

Okay. I'm going to answer one general -- but I'll answer generally but if there is one segment, is that four questions you ask, is there one particularly you'd like for me to focusing on?

Ehud Gelblum - JPMorgan

I think they are all part of the same question, which is where we're seeing deceleration in the mean growth areas.

John Chambers


Ehud Gelblum - JPMorgan

Sp how do we reaccelerate those growth areas?

John Chambers

So, if you look in terms of the main growth areas, for each one, that you said on a caution, and I'm not doing the math quick enough in my head to substantiate or to disagree with the math that you did. But if you look at the areas of acceleration, clearly, Asia-Pacific is accelerating. We are seeing that and we're very pleased with that.

And so the investments that we're making in certain emerging countries in Asia-Pacific were very solid and we saw that results for Asia-Pacific is back growing comfortably about the rest operations we had, real solid in China and India. Those were direct results of the investments that we made over the last two years in directions. Japan is back and we'll see if it will continue to grow at the momentum, but if I were making good estimates, I think you'll see Japan start to be real factor in our growth as we move forward.

In terms of the emerging markets, they are always going to be lumpy, it drives you crazy. But, if you watch, remember it was just two quarters ago, if I remember very frank, where we were concerned about the revenues in the emerging markets and as you can see, if we just gave you the revenues in emerging market of 44%, you would have an entirely different picture. So, emerging markets will be lumpy, that's both recognition reorganization issues, etcetera within that and I think the emerging markets overtime, will continue to grow at twice the growth rate of our core markets if you will.

Now that won't be exact science, but I think that's how we'll play out. If you look in terms of the growth on the network, the video growth how seriously other are going to evolve etcetera, you will have to spin in those areas. And, so I think there maybe cycles when they spin heavy or a little bit slower, and just to use an enterprise as an example, while the enterprise numbers are starting to backup and you are seeing that in terms of the filling like it's reaching a support level and starting to slowly go backup.

The two areas that let us into the slowdown, which were the financial services and the manufacturing sector actually had their best growth in mid teens. And, now you're seeing in the area such as transportation and hospitality as no surprise, slow a little bit more. So, I think you're just going to normal cycles and it really comes back to do you believe and I clearly do the role that IT will play in productivity and the next growth in productivity. Do you believe that video will grow not at 50% or 100% in local networks but well beyond the 200% where most people are based today? And do you believe you're in cycles on that? So, to me I feel very comfortable with the 12% to 17% growth range and when you think about it, if you can grow at 10% when you're largest country that represents about 47% of your business grew mid single-digits, that's not a bad quarter. And so I think, you are seeing a base formed here against pretty tough comparables from last year and that's why if you look out over the next couple of quarters, no one can project as it starts to come back up or probably toward the end of the calendar year, you will see it start to pick our growth from the moment back up

A pretty broad answer to a series of fairly, very fair but very broad questions.

Blair Christie

We, will just, we will call that one question. Okay next question?

John Chambers

Blair, is going to become the policemen for me or on me to make sure I detain someone.

Blair Christie

Okay next question please.


I think our next question comes from Scott Coleman with Morgan Stanley.

Scott Coleman - Morgan Stanley

Thanks guys. John last quarter you talked about order slipping, but your pipeline staying very strong. You answered a question previously about a little bit of slippage in terms of orders, but I am wondering if you could help us understand what the pipeline looks like going into fiscal Q4?

Frank Calderoni

Yeah I think the pipeline looks very solid. The key is your close rate, just is as good as normal where it is going to takes you a little bit longer to get the closest. But if you will watch the pipeline activity and you talk to our field sales people. They feel good about their long-term growth and their momentum. Their winning share of market and share amount and you can sense that in enterprise and you absolutely can sense it in the service provider segment and our relevancy to these customers is changing. Also to answer one of the question that was asked earlier in little bit more detail, what's the announcement we just made? Look where our peers now at the industry are getting the growth, they are getting the growth in services. They are getting the growth in data center consolidation.

They are getting the growth into new technologies. So we just made a series of initial product announcements in the data center. And doing that in partnership with some of our large players in the data center as well, and stay tuned in terms of how that is a successful course over the next 12 to 18 months.

But where we share that with customers, it looks really good. You also talk about growth areas remember just two years ago, I wouldn't have said services as a product. When your services, revenues and I made a pretty good statement there that my most likely scenario and guaranteed with the appropriate caveat is 20% plus growth over the next foreseeable future. That’s a pretty strong indication to the market too in terms of our balance and direction.

So that's kind of how I'd put all together if you put together the various pieces in terms of our growth opportunities, some of the trade-offs and what we are seeing him.

Scott Coleman - Morgan Stanley

One follow-up there, if Blair would allow it. You talked about service provider and the confidence there, I think obviously the lowest growth rate we have seen I think you said in 12 quarters, should we assume then that you get a nice bounce back in Q4 in terms of order growth and service provider, given the confidence that you are talking about?

Frank Calderoni

Let me see if somebody else asks that question. If it doesn’t get asked I'll answer it for you. But remember the number that you said was US service providers. It was not service providers in total. Service providers in Asia-Pacific, service providers in the emerging markets, and service providers in Japan drew, I want to be careful in this math in my head, drew 20, I am sorry, 17%, 26%, and 50% year-over-year. So, it's very much based upon theatres and individual account scenarios and very much a cycle of it. If somebody else will ask me about it I will expand it on.

Scott Coleman - Morgan Stanley

Fair enough. Thanks

Blair Christie

Great. We will try to spread the wealth here. Next question please


Your Next question comes from Nikos Theodosopoulos with UBS.

Dawood - UBS

Thank you. This is [Dawood] on behalf of Nikos. So, my question is regarding your commercial business, your SMB business. It's roughly 20-25% of your total revenue, and that's been coming down in terms of growth rate over the last three quarters. Can you just John talk a little bit on the commercial side?

John Chambers

Sure. So, if I really look at the commercial business as a whole, I am looking for some of data here, so I'll make sure I'll stay with the numbers in the right way. It was 18% on a total global basis, and I would give it pretty good marks in terms of establishing it, moving it from below 20% of our total business through the mid-20s as you said over the last 3-5 years. What we're also doing is breaking the commercial business into two segments what we call medium, commercial and small commercial. So, you will see us beginning next quarter to focus on small as a separate market than regular commercial and we're clearly making that one of our $10 billion type of opportunities in terms of our accounts show on that but we are starting from the low base with low market share.

Commercial tends to be a market if your customers business is good, they spend, and if their business isn't as good they don’t spend. So it will react different into the various theatres based on where you were. So, for example in Asia Pacific commercial grew at 30% no surprise their economies are doing well and at the emerging markets grew at approximately 20%, no surprise the economies are doing well.

And commercial and European markets it grew in the about 27% and again you see good balance. It was challenging in the US in terms of the commercial business only growing 13%, and so I think it just speaks to primarily a challenge in the US at this time in terms of our commercial market. But, it does mean that we've got to continue to be active and to continue to be both effective in bringing new products to market, developing new channels especially in the small market and continuing to be acquisitive in this market as well.

Blair Christie

Great. Next question, please.


Thank you. Our next question comes from Mark Sue with RBC Capital Market.

Mark Sue - RBC Capital Markets

Thank you. Can you give us your thoughts on the duration of the spending costs in the US, and if you think the situation still looks short lived and contained? I asked since the weakness seems to be spilling over from the enterprise to the service provider and also in our commercial and the coupling between the multiple segments seems to help during the good times, but also seems to hurt in the bad times?

John Chambers

Let me break it that Mark into just a very candid discussion. I'm going to base it on what I am seeing from our customers, and what we are assuming from our own financial planning perspective. Our views have not changed dramatically since early February when we shared with you, we thought that the US would see some bumps here that would last two to three quarters the most likely scenario and by the end of the calendar year most likely scenario was that it will be turning back up.

If you watch the action as I said and other central banks around the world, you don't know what the implications are going to be on their investments on their decisions with these bond financial instruments for probably 6 month to 12 months later. When I talk to my customers most of them are modeling that by the end of the calendar year, they see it picking back up, but most of them are sayings its going to be a little bit tougher for the next quarter. And I think that's what you’re seeing in our modeling, in our advice, in terms of the overall approach. It shouldn't surprises though that if an economy slows down enterprise first and commercial second on it.

Service providers will have to spend and when I get that question later, I will expand on it. Even though I think for a quarter or two that might be a little bit challenging because it's really tough comps to last year Jim, both in Scientific-Atlanta and very tough comps for our traditional service providers spend in the US. But that all I would covered, now I want to say on the front-end, I talked most of all the key economist. I talked most of the business leaders, most of the government leaders they were all expressed their views on various levels of this with tremendous confidence and then at the end they say I'm not really sure.

And so we are a little bit in unchartered waters. I'm giving you my best cut. I think it's going to be relatively short and come back up, if I had to put -- had to bet on the odds. And that's what we are going to better the company. We will adjust appropriately if we are wrong on that, but that is the most likely scenario. I would also point to an issue that both service providers and enterprise customers in my opinion can only hold up on technology spending as it relates to network for so long. Then they start to fall behind either the capacity or the productivity models just as other things are starting to move, when we did see that as an early indicator in the financial services and manufacturing market.

Blair Christie

Thanks Mark. Okay. Next question please.


The next question comes from Tal Liani with Merrill Lynch.

Tal Liani - Merrill Lynch

Here you go, can you hear me now?

John Chambers

Yes, we can, Tal.

Tal Liani - Merrill Lynch

I want to go back to an answer you gave to a prior question, which I think is important and then ask you to clarify. Your commentary is positive, but on the other hand, the order numbers are showing that the weakness is extending outside of North America. If I look at order growth outside of Japan, everything is accelerating. U.S., Europe, half of the growth we've seen before et cetera, et cetera. So we don’t need to report the numbers.

Can you -- and then maybe I'm analyzing too much, but in the last quarter you said things like that the slowdown could be measured in months and this time you said quarter. So again that’s maybe your analysis, but do you feel better or worse about the situation global kind of known for the products. So this is only a term. But do you feel better or worse than you felt after the last quarter? And have you received any information, for example, the quarterly order growth, have you seen any deterioration towards the end of the quarter, et cetera, to support a better environment or a worse environment? Thanks.

John Chambers

If you look overall, what we saw in January is exactly what continued. We saw growth in about 9%, 10% or 11% range. And so that’s what we set for this quarter and that’s what we're saying for next quarter. And it does move around from either customer segments or geographies within the U.S. and we did indicate to you.

We're starting to see some balance in the U.S., which if you are an optimist, do not tend to be based on the fact on what my customers are saying indicates that you're getting a flow or at least at this period of time using the enterprise balance as an example within that. And by the way the enterprise the counts were deteriorating at a much faster pace two to three quarters ago.

And so if you look at the actual large, what we call segment one accounts, they actually had a pretty good quarter this quarter, both in quarter-over-quarter growth and year-over-year type of growth. So, we’ll see how that plays out. I’d say the market is about -- what we said in the last quarter. And we used both quarters going forward and months in terms of the discussion. We said, we still think, and it's what I said at that time, the most likely scenario short-term.

Some of the things looks better than we expected, some of the things do not. But in terms of growth areas, we’ll point out, and it did come out pretty accurate, I said, 9% growth. And I will reiterate the services segment, not only how important they are to growth of our markets, but the services themselves, what whims they are doing there is world class and again, that 16% plus for our business had over 20% growth rate.

So that's how I'd handle it, Tal. I don’t think it's been a dramatic change from what I said in the last quarter played out, hearing good news and challenging news pretty much as we expected. And we said a similar forecast for this next quarter.

Blair Christie

Great. Thanks, Tal. Next question, please?


Thank you. Our next question comes from Aaron Rakers with Wachovia.

Aaron Rakers - Wachovia

Yeah. Thanks. Most of my questions have been answered, but I wanted to get into the commentary on the switch business. We’ve seen growth slowdown quite a bit and I believe, John, in your commentary you had mentioned a little bit of hesitation with regard to the Nexus product line coming out.

Maybe you can help us understand there, as you focused on data center consolidation, what the timeframe looks like, in terms of how that product will ramp? And may be help us understand how much of that is more macro related relative to basically that Nexus product being evaluated into the market? That would be helpful.

John Chambers

Sure. Well, if you look at the fixed switching capabilities, it did grow at 11%. The high end switching, the modular segment such as, say, 6000, the new Nexus 7000 were where our challenges were within the switching group. And it isn't an issue with the data center consolidation. That actually is going pretty rapidly.

And for the products that we currently have, we defined in that area. But if you at the Nexus 5000, 7000 and you begin to share our plans with our partners such as EMC and IBM in the data center, then you begin to get pretty exited about what this could mean three to four quarters down.

But it will take a while just like the CRS took a while for the customers to look at it's capability before you put it in the middle of your network. For the Nexus 7,000 it will take a while and some additional features before the customers put it in the middle of their data centers. So those will be in pilots.

The Nexus 5,000, which we don't start taking orders on for another month or two, I think is pretty exiting in terms of what it could mean in terms of data center as well. And so if you were to say, one of the areas that's personally most exiting to me is our play in the data center what we’re doing there with ourselves and with partners. And I think you'll see results of those products toward the calendar year in first quarter and the year after. So I think it will be a little while on the data center before you see our volumes pick if I would have summarized that.

Aaron Rakers - Wachovia

Thank you.

Blair Christie

Okay. Next question, please?


Thank you. Our next question comes from Ittai Kidron with Oppenheimer & Company.

Ittai Kidron - Oppenheimer & Company

Thank you very much, I guess I was daunted with the task of asking you about the service provider.

John Chambers


Ittai Kidron - Oppenheimer & Company

If you could…

John Chambers

I was having trouble avoiding that -- I want to get it.

Ittai Kidron - Oppenheimer & Company

Well, I'm not going to let you off that easily I guess.

John Chambers

No I don't want to get off. Just Blair, would kick me if I did a third question.

Ittai Kidron - Oppenheimer & Company

Very good. If you could, first of all, give us a little bit more color about the revenue and your order growth rate for service provider as a whole without necessarily a geographic distinction and how do you see the growth shaping up going forward? And second competitor across the street seems to be doing extremely well on that front. How concerned are you with regard its growth rate relative to yours?

John Chambers

Okay. So I think I am going to take it from the big picture first, and then bring it down to what you are asking me, which is a long-term growth rate in service providers. So, from a big picture perspective, the fundamentals have not changed. IP is one. It's not going to be conversed data-voice video, fixed and mobile together.

Video is going to drive the next load of networks. And it is going to grow way over what everybody said five to six years ago except Cisco, where we said it's going to grow 200% to 300% will be given and 300% to 500% growth on networks is very likely. With Japan often leading the way as they are at this time again.

Right after video the next load wave will be driven by collaboration Web 2.0, which is in the early stages of that. And you will see Cisco and candidly service providers as they actually right move from plumbers where it's about transport to solutions.

So the big picture fundamentals have not changed. Activity in any quarter is going to vary by geography. It's going to be very dependent on where you are in core versus edge build out cycles. It's going to be vary about product announcements. It's going to be vary about capital spendings, by each service provider themselves and the pressure and the availability of capital to each service provider.

From a geographic point of view as we said earlier, Asia-Pacific and emerging grew respectively 17% and 26%. Japan grew in service provider at 50% growth rate. Europe grew in single digits much like it did the prior quarter. U.S. was about minus 3.

When you think about the markets they occur pretty predictability by service provider and various service providers within a country as around the world will be in different cycles. So when you think about the service provider cycles, the first segment that you see built out is the core segment.

And core occurs first then you give it to the edge. Then as the edge restarts to build it out, you start to load the networks happily for the above-mentioned reasons that I covered, then you have to go back and redo the core and then go back and redo the edge.

We think we're set up cycle wise very well for that to occur in terms of our products. So, I'll take again a great deal of comfort in terms of your high-end CRS routers growing at a 150% year-over-year, I'm not aware any of our large peers who have numbers like that with their key flagship products.

And secondly, with our high end routers in total growing at 26% year-over-year in terms of it positioning. That's a very nice way of saying that our relationship with our service providers and where they see Cisco's relevance is improving almost without exception and that's really a strong statement versus two years ago, almost without exception in terms of global service provider be they fixed, be they mobile, moving from a tactical box product to an architectural play to a business partner.

It doesn't mean they don't think we need to do better but who would have said just two years ago that an AT&T and a Verizon, and a BT would all say Cisco, you had the potential to be my best business partner as well as best technology partner, not just on one or two product areas but all fronts.

So, I know that you deliberately ask the question because you want me to answer very crisply. And so, with that what I'm really saying is that you're probably going through a cycle here due to a number of factors that will last in one to two quarters. And I think that if you look out over next fiscal year and beyond you'll see growth in the mid teens or above as the mostly likely scenario with all the appropriate caveats.

Jim you have some the tough comparable, to Scientific-Atlanta is an example maybe you'll spend a moment on that.

Jim McDonald

Well, I think if you'd look at 707 last year, which was really the unbundled security, we started to see the orders rolling in Q2 but last year in Q3 of '07 as our orders speak. So for us, this by far was going to be the most difficult comparable year, year-over-year. So, obviously we pull the number down quite a bit in this thing as we go through it, but as you look at it, what we saw after Q3 as we saw a drop off in our orders and Q4 getting much back more to normal. So we would anticipate that clearly this was by far the most difficult quarter for us to compare against on an order basis.

Frank Calderoni

And next quarter will be the most difficult from revenues.

Jim McDonald

And next quarter will be the most difficult from revenues standpoint as this bubble moves through the systems, which is actually delayed behind the bookings by about one quarter.

Ittai Kidron - Oppenheimer & Company

Very good.

Rick Justice

And we can add another thing or two when you just look at the service provider broadly after twelve quarters in terms of booking growth in U.S. of over 20%. Nationally we are running in this some of those tough comps now. And so that ball plays out overtime and John's message about over the long-term given the relationship we have in place, as we go up against those tough comps, its natural that those numbers come up about the same time as the EDGE Technology hits the market. So there is a lot too be optimistic about as you look longer term.

John Chambers

I will make no decisions on this month this quarter or even this year. I feel very-very comfortable with where are as service providers looking at over the next two, three, five years. And thank you very much.

Blair Christie

Thanks. Okay next question please.


I think our next question comes from Paul Mansky with Citigroup.

Paul Mansky - Citigroup

Actually most of mine have been asked and answered. However, just kind of following up on that last question, may be just to provide some additional context, do you have off hand what your order growth would have looked like in North America service provider ex Scientific Atlanta?

John Chambers

No, I would probably would have to sort it out because remember service providers in North America, this quarter last year grew if I probably remember the number right 33% in terms of orders. So it was a crunching quarter, in terms of direction. Scientific Atlanta orders grew?

Jim McDonald

This quarter versus previous quarter we were slightly negative.

Paul Mansky - Citigroup

Slightly negative?

Jim McDonald

On a year-over-year basis. So you can look at that as a mechanism to try to judge us as you know about what ours are running

John Chambers

But the comps on both sides Paul, were really tough , really good last year in service provider in terms of the balance.

Paul Mansky - Citigroup

Certainly. Great, thank you.

Blair Christie

Thanks. Next question please.


I think our next question comes from Simona Jankowski with Goldman Sachs.

Simona Jankowski - Goldman Sachs

Yes. Thank you. John, I just wanted to ask you, as a follow up to some of the comments you made in your prepared remarks about taking advantage of downturns and moving to market adjacencies. Can you adjust expand on that as far as your organic interest and also what you might be thinking about in terms of acquisitions. Just, why does this present an opportunity and where do you see yourself going strategically?

John Chambers

Yeah, one of the reasons, and thank you for the question, that we are going to continue to remain very aggressive in terms of our expenses, we could obviously cut back anytime and improve the bottom line pretty quickly. We are moving into many new markets in each of the customer segments, and by the way, in most of key geographies at the same time, as well as going into market adjacencies. And, you don’t see the results; especially in terms of the engineering investments were often three to five years after that.

We have the internal start up engine really cranking, and in fairness, this might be the first hi-tech company that's been able to do that on more than just a product or two in terms of from scratch to internal start ups, Don we are seeing that in your area. We are seeing in that in Martin De Beer's area. We are seeing it pretty much globally.

We will, if you were to say, all right, now where you are going to be aggressive? We are going to be aggressive in the datacenter, no surprises there. The datacenter virtualization will start first and it will go all the way to the home. We are going to be aggressive in the consumer side of the house. And by that doing that, he doesn't have a blank check, but he has a pretty good open pocket broken and, if you watch what the consumer did, it was a good first step. We brought out a new generation of products. You saw us capture a larger share of available spend from our customers with that product, and you did it at the same margins. So, we are beginning to -- not take small steps to versus where we need we need to go overall.

But I'm hard pressed to say, that as you begin to play through this scenario, that we aren't stronger in both our acquisition opportunities, our internal start ups, our expansion of existing markets, breaking commercial, in the small business, focus on small where we have not really done before in terms of our channels of product capability, movements in to new areas such as sports and entertainment and you are at the very front end of the wave on this next productivity through a dual collaboration Web 2.0

And then just think about the videos loads. That's what will give service providers the scale. As you begin to put in the edge routers and those networks to build out huge core networks, you begin to load the core back up, then you go through another cycle again and by the way this is edge opportunities come up just as we have our products coming to market, which looks solid and then you begin to think about the additional loads in terms of other categories we are going to move into, which is nice way of saying I feel very comfortable there with 12% to 17% long-term growth loads. We will be very transparent with the group that in facts we control or influence. I think things look very good.

Blair Christie

Okay great. Thank you John and thank you, Simona. We have come to the end of our call. So I'd like to thank you for your questions. Cisco's next quarterly conference call which would reflect our fourth quarter fiscal year 2008 results will be on Tuesday August 5th 2008 at 1:30 p.m. Pacific time 4:30 p.m. Eastern time.

Additionally downloadable Q3 financial statements will be available following this call including revenue segment by product and geography. They can be found on our website in the investor relations section. Again just click on the financial section of the website to access both the slides and these financial statements.

I would like to remind that you 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 call the investors relations departments with any follow-up questions from the call.

Thank you for your participation and continued support and this concludes our call.

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