Cisco Systems Inc. (NASDAQ:CSCO)
F4Q08 (Qtr End 7/26/08) Earnings Call
August 5, 2008 4:30 pm ET
Blair Christie - SVP of Corporate Communications
John Chambers - Chairman and CEO
Frank Calderoni - CFO
Ned Hooper - SVP of Corporate Development and Consumer Group
Pankaj Patel - SVP and General Manager of Service Provider Group
Tal Liani - Merrill Lynch
Paul Mansky - Citigroup
Nikos Theodosopoulos - UBS
Simona Jankowski - Goldman Sachs
Jeff Evenson - Sanford Bernstein
Scott Coleman - Morgan Stanley
Mark Sue - RBC Capital Markets
Paul Silverstein - Credit Suisse
Tim Long - Banc of America Securities
Thank you for holding, and welcome to Cisco Systems Fourth 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.
Thank you, Ken. Good afternoon everyone, welcome to our 74th quarterly conference call. I'm Blair Christie and I'm 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 Pankaj Patel, Senior Vice President and General Manager of our Service Provider Group; Ned Hooper, Senior Vice President of Corporate Development and Consumer Group; and Jim McDonald, Chief Executive of our Service Provider Video Group.
The Q4 fiscal year 2008 press release is on Full National Marketwire and the European Financial and Technology Wire, as well as on the Cisco website at www.cisco.com. I would like to remind you that we have a corresponding webcast with slides. In those slides you will find the financial information we cover during the call, as well as additional financial metrics and analysis that you might find helpful.
Downloadable Q4 financial statements will be available following the conference call, including revenue segments by product and geography, income statements, full GAAP to non-GAAP reconciliation information, balance sheets and cash flow statements can also be found on our website in the Investor Relations section. Just click on the financial section of the website to access the slides and these documents.
A replay of this call will be available via telephone from August 5 through August 12 at 866-357-4205 or 203-369-0122 for international callers. It's also available from August 5 through to October 17 on Cisco's Investor Relations website.
Throughout this conference call, we'll be referencing both GAAP and non-GAAP financial results. Our commentary today will be providing information on both our Q4 financial results as well as our fiscal year 2008 financial results and the results in the press release are unaudited.
As always 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 reports on Form 10-Q and 10-K and any applicable amendment, 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.
I'll now turn it over to John for his commentary on the quarter John?
Thank you very much. During the opening comments for the conference call, I will focus on what I view to be the key takeaways for Q4 and fiscal year 2008. An update on why we continue to be comfortable with our long-term growth projections of 12% to 17% and our revenue guidance going forward with the appropriate caveats. Frank will follow these opening comments with additional detail on Q4 and on the fiscal year 2008. The third section of the call will focus on business momentum and strategy from a geographic, product, and customer segment basis. Frank will then follow with additional financial parameters around our guidance, I will then wrap it up with some comments in terms of Cisco's momentum going into Q1 and finally our Q&A session.
In this conference call, we are going to move to a more abbreviated format. For new areas or areas that have evolved, we will provide additional detail in this call and in future calls. We encourage your feedback on these changes. We will cover fiscal year 2008 at this time and then cover Q4.
First, from a fiscal year point of view and a financial perspective, we're very pleased with the following very solid financial results in fiscal year 2008. Revenue was a record $39.5 billion a 13% year-over-year increase. Cash generated from operations was $12.1 billion a 20% year-over-year increase. Non-GAAP earnings per share were $1.56 a 16% year-over-year increase and GAAP earnings per share were $1.31 a 12% year-over-year increase.
Second year-over-year order growth was also very solid for fiscal year 2008; product order growth was approximately 12%, service order growth was approximately 25%. Product book-to-bill was above one.
Third, in a year were there were a number of challenges we were pleased with both our geographic balance and year-over-year order growth for fiscal year 2008. Our emerging countries focus continued with solid momentum; China order growth was approximately 30%, India order growth was 32%, Mexico had order growth of 32%, and Russia grew 23% and Brazil grew 48%. Emerging countries in Asia in total grew approximately 28%. That is our Asia-Pacific operations not counting Korea, Australia and New Zealand.
Our emerging market theater, which consists of Eastern Europe, Latin America, the Middle East and Africa, and Russia and CIS grew in total approximately 19%. Asia-Pacific in total grew approximately 20%, European markets grew approximately 13%, while the US and Canada order growth was at 9% and Japan grew 5%.
Fourth, from a fiscal year 2008 year-over-year product revenue growth perspective; Routing revenues grew 14% year-over-year, again led by hand routing with a CRS growth of approximately 119%, Switching grew 7% year-over-year. Our Advanced Technologies grew 21% year-over-year, led by Unified Communications with growth of approximately 51% and application networking services with growth of approximately 36%.
From a customer segment perspective for fiscal year 2008, enterprise public sector order growth was approximately 10% year-over-year, commercial continued strong at 20% growth year-over-year, service providers grew approximately 10% year-over-year.
Now moving on to Q4 fiscal year 2008. Q4 was a very solid quarter for Cisco, especially given some challenges that we're all seeing occur in the global marketplace. In terms of those areas that we can control or influence, we continue to feel very comfortable with both our progress in the quarter and our long-term differentiated strategy as we move into new market adjacencies.
Again, let me review it first from a financial point of view, where we were pleased with the following results in Q4. Revenue was a record $10.4 billion approximately a 10% year-over-year increase and it was our first $10 billion quarter from a revenue perspective. Cash generated from operations with $3.5 billion. Non-GAAP earnings per share were $0.40 and 11% year-over-year increase and GAAP earnings per share were $0.33 a 6% year-over-year increase. Non-GAAP gross margins were very solid at 65.2%, non-GAAP operating expenses as a percentage of revenue for Q4 was 35.7%.
Second, in terms of year-over-year order growth in Q4 balance was good. Product order growth was approximately 10%, service order growth was approximately 20%, product book to billed was comfortably above one.
Third, from a geographic year-over-year order growth perspective there were a number of positives in Q4 and a couple of challenges. Our emerging countries focus where orders tend to be variable, that is lumpy in my terms, continued its solid momentum and we achieved better balanced results across the majority of the emerging countries than we had seen in recent quarters.
China order growth again was over 30%, India growth was approximately 20%, Mexico and Russia both had order growth above 40% and Brazil grew approximately 30%. Emerging countries in the Asia-Pacific theater again not counting Korea and Australia and New Zealand in the total number, in total grew approximately 23%.
Our emerging market theater, which does not include Asia grew in total approximately 10%. Asia-Pacific in total grew 19% in Q4, Japan after a very strong Q3 grew year-over-year at 10%, European markets grew approximately 11%, while the US and Canada orders grew approximately 7%.
Fourth from a Q4 year-over-year product revenue growth perspective; Routing revenues grew 8% year-over-year, again led by hand routing with the CRS-1 growth of approximately 85%, Switching grew 5% year-over-year. Our Advanced Technologies grew 15% year-over-year, led by Unified Communications with growth of approximately 29% and application networking services with growth of approximately 30%.
This is an update of our early stage internal startups, what we call emerging technologies. Our strategy is to develop by reasonable percentage of these emerging technologies into what we categorize as Advanced Technologies, with the realistic possibility of becoming one billion plus in sales and the number one market position in the respective product categories if we execute properly.
Overall, progress was extremely strong in Q4, while these numbers are not significant at this point in time, we believe that with proper execution they can become very significant to our growth ranges in the long run. Q4 was a very strong quarter for emerging technologies group and in total grew approximately 300% year-over-year.
We will focus on year-over-year growth rates with the following breakouts within the emerging technologies group. TelePresence grew approximately 500% year-over-year, Digital media systems grew approximately 200% year-over-year and physical security grew approximately 250% year-over-year. Again those are from order perspective on the emerging technologies.
Sixth, from a global customer segment perspective; enterprise public sector orders' growth in Q4 was approximately 10% year-over-year, with the enterprise area growing approximately 13% on a global basis and the public sector growing 4% year-over-year. Commercial orders continued strong at 17% growth year-over-year and service provider grew approximately 5%. Anticipating your questions about the US enterprise order growth, Q4 grew year-over-year at 13% versus what Q3 enterprise US growth rate was at 6%. We will provide additional details on each of the above areas later on in the conference call.
On the very positive side we are seeing network-enabled collaborative business process changes and productivity increases begin to gain traction on a global basis. Discussion with many of our customers are moving from a conceptual what is collaboration of Web 2.0 and how will it conceptually enable competitive advantage and productivity increases. Now through our leading-edge customers having a discussion about how they could implement collaborative network-enabled Web 2.0 productivity tools often with Cisco as their strategic and trusted business partner.
In summary, in terms of areas that we can control or influence we continue to be pleased with our progress. Again our confidence in the 12% to 17% long-term growth range remains very strong. While at the risk of stating the obvious and as we said repeatedly in prior conference calls and we'll continue to say in our future conference calls, there may be times when our revenues grow above our expectations and there will definitely be times when they grow below.
From a challenger's perspective first; we all see the same mixed signals in the market from both a US perspective and other parts of the world in terms of economic momentum, stock market behavior, energy costs and confidence changes. Second, from a service provider perspective which now represents approximately one-third of our total product business; [CapEx] expenditures signals are mixed both by companies and geographies.
With the shift to IP networks firmly having taken hold, we believe we're strongly positioned with the global service providers more than we have ever been before both from a technology and a business partner perspective. In simple terms our service provider customers are often in one or three phases. At first phase are those that over the last several years have built out very large IP networks and are in the process of loading those networks and adding services. Second, are those at the start of either their first next-generation IP buildout or even their second next-generation IP buildout And third, those that are slowing CapEx until they achieve more top line growth. Regardless of which state these companies are in, we think we're in a very good position to capture a larger percentage of the total spends.
Now moving on to a discussion of revenue guidance. As we said before, 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 and other factors as discussed in our SEC reports. For purpose of our long-range guidance as well, as well as our quarterly guidance, we're also seeing that our vision of how the industry and the market will evolve will be accurate and we will effectively execute on that vision.
As a reminder during each of the economic slowdown in the last 15 years, Cisco has always navigated through them very effectively. We did this in 1993, 1997, 2001, 2003, and in each scenario we gained both wallet share and in my opinion profit share, and as a result we were better positioned coming out of the transitions versus our peers. We will continue to be aggressive in our investments during the slowdown. Despite the uncertain macro economic environment and the impact it is having on many of our customers particularly in the US, we believe that our strategy and the critical role the network plays in enabling all forms of communication and IT is right on target.
Secondly, with all the appropriate caveats, our best estimate is this is a relatively short challenge going forward. Cisco will use this time as an opportunity to expand our share of customers spend and to be aggressive about moving into new market adjacencies.
While it is very difficult to predict when we may see a stronger spending environment by our customers and return to our 12% to 17% long-term growth objectives, our best estimate with the appropriate caveats mentioned earlier is that the current economic challenges remain with us for the next few quarters. It is for this reason that we will provide guidance for the first half of fiscal year 2009 rather the entire fiscal year, until we become more comfortable with the predictability of when we believe our revenue growth will accelerate back towards our long-term guidance.
With this discussion in mind, our revenue guidance for Q1 fiscal year 2009 including our usual caveats as discussed earlier and in our financial reports is for revenue growth in the range of 8% year-over-year. As for guidance in Q2 fiscal year 2009, again with all the appropriate caveats is for revenue growth in the 8.5% range year-over-year.
In summary we believe that we are very well-positioned in the industry from a vision, differentiated strategy, and an execution perspective. 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 the expertise to help our customers in the implementation of these collaborative capabilities both from a technology and a business perspective.
We will also share with our customers how we have done this internally. In short we're going to attempt to execute our strategy over the next decade, that is very similar to what we did in the early '90s and as we've said before it powered Cisco's growth for an entire decade. Except for the obvious differences this time of being a company that is now at a run rate of approximately $40 billion with over 66,000 employees focused on this opportunity.
Let me now turn it over to Frank for some additional comments
Thanks John. We're pleased with Cisco's very solid results this quarter as we closed out our fiscal year Starting with our Q4 results, total revenue for the fourth quarter was $10.4 billion, an increase of approximately 10% year-over-year at the high end of our guidance of 9% to 10%. Cisco's first $10 billion revenue quarter.
Routing revenue was $2 billion dollars up 8% year-over-year due primarily to continued growth in our high-end router portfolio at 12% year-over-year with particular strength in CRS-1 growth of approximately 85% year-over-year.
Switching revenue was $3.5 billion an increase of 5% year-over-year driven by growth in our fixed switching portfolio. Advanced Technologies revenue totaled $2.6 billion representing an increase of 15% year-over-year led by strong performance in Unified Communications of 29% year-over-year growth and application networking services growth of approximately 30% year-over-year Other product revenue totaled $551 million an increase of 9% year-over-year.
Total service revenue was $1.7 billion up approximately 16% year-over-year with solid growth across all geographies We are particularly pleased with growth in advanced services of approximately 23%. Total revenue growth by geography was in the range of 5% year-over-year in the US and Canada to a high of 42% in emerging markets.
Emerging markets revenue growth for the quarter was higher than the order growth rate that John reported, due to the increased shipments and recognition of previously deferred revenues. Q4 totaled non-GAAP gross margin was 65.2% down slightly quarter-over-quarter and flat on a year-to-year basis. For product only, non-GAAP gross margin for the fourth quarter was 65.3% down six tenths of a point quarter-over-quarter and up slightly year-over-year.
Our non-GAAP service margin for the fourth quarter was 64.7% up from 62.7% last quarter. Service margin will typically experience some variability overtime 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 initiations and renewals.
Total gross margin by geography ranged from 62.6% for emerging markets to 70.9% in Japan. Across the geographies the margins have remained relatively stable over the last few quarters. Non-GAAP operating expenses as a percentage of revenue were approximately 35.7% in Q4 fiscal year '08 up from 35.5% in Q4 fiscal year '07.
Foreign exchange impact for the quarter was $82 million when compared to the same period last year, which added approximately eight tenth of a point to the ratio. Excluding foreign exchange, non-GAAP operating expenses for Q4 grew at 8% year-over-year. Going forward we will continue to invest in areas that we believe will drive future growth in innovations while remaining focused on prudently managing our discretionary spending.
Interest and other income was $157 million for Q4 versus $228 million for Q4 fiscal year '07. The decline year-over-year was due to market conditions, which resulted in lower gains from the sale of public equity investments and lower interest rates. We remain pleased with the high quality and the conservative risk profile of our investment portfolio.
Our Q4 fiscal year '08 non-GAAP tax provision rate was 25.6% reflecting realignment of foreign subsidiaries. For the full year our non-GAAP tax rate was 23.1% reflecting the benefit we reported in Q1 related to a tax audit settlement. Excluding this settlement our full year non-GAAP tax rate would be approximately 24%.
Non-GAAP net income for the fourth quarter of fiscal 2008 was $2.4 billion compared to $2.3 billion in the fourth quarter of fiscal year 2007, representing a 6% increase on a year-to-year basis. Non-GAAP earnings per share on a fully diluted basis for the fourth quarter were $0.40 up from $0.36 in the fourth quarter of fiscal year 2007 an 11% increase year-over-year. GAAP net income for the fourth quarter was $2 billion as compared to $1.9 billion in the fourth quarter of fiscal year 2007. GAAP earnings per share on a fully diluted basis for the fourth quarter were $0.33 up from $0.31 in the same quarter of fiscal year 2007.
Now switching to our full fiscal year performance: Total revenue for fiscal year 2008 was $39.5 billion, an increase of approximately 13% over fiscal year 2007 revenue of $34.9 billion. Routing revenue ended the year at $7.9 billion up 14% year-over-year with strong growth in CRS-1 revenue up approximately 119% year-over-year. Switching revenue was $13.3 billion, an increase of 7% over fiscal year 2007 and Advanced Technologies revenue grew 21% year-over-year to $9.7 billion. Total services revenue was $6.4 billion growth of approximately 18% in fiscal year 2008.
Total non-GAAP gross margin for fiscal year 2008 was 65.4% up six tenth of one point year-over-year. For products only non-GAAP gross margin was up eight tenths year-over-year, due to higher cost savings and shipment volumes, partially offset by discounts in pricing. Non-GAAP operating expenses as a percentage of revenue were approximately 35.9% in fiscal year '08 up from 35.2% in fiscal year '07.
Foreign exchange impact for the full fiscal year was approximately $332 million when compared to the same period last year, which added approximately eight tenth of a point to the ratio. Non-GAAP net income for fiscal year 2008 was $9.6 billion up approximately 14% from fiscal year 2007 non-GAAP net income of $8.4 billion.
Non-GAAP earnings per share on a fully diluted basis for fiscal year '08 were $1.56 up from $1.34 in fiscal year 2007 representing a 16% increase year-over-year. GAAP net income for fiscal year 2008 was $8.1 billion or $1.31 per share on a fully diluted basis compared to $7.3 billion or $1.17 per share on a fully diluted basis in fiscal 2007. This represents 10% and 12% increases year-over-year respectively. Product backlog at the end of fiscal year 2008 was $4.8 billion compared with $3.9 billion at the end of fiscal year 2007.
Moving on to the balance sheet, the total of cash, cash equivalents and investments at the end of Q4 was $26.2 billion up $1.8 billion from Third quarter. During Q4, we generated $3.5 billion in cash flow from operations as well as $616 million in proceeds from our stock option exercises and employee stock purchases. For the full fiscal year 2008, we generated $12.1 billion of cash from operations. For the quarter we repurchased $1.35 billion of common stock or 54 million shares of our stock at an average price of $25.11 per share. For the full fiscal year we repurchased $10.4 billion of common stock or 372 million shares of stock at an average price of $27.80. We ended the quarter with approximately $8.4 billion remaining in the current stock repurchase authorization.
Moving on to accounts receivable, we ended the quarter at $3.8 billion down 9% from Q3. At the end of Q4 day sales outstanding or DSO was 34 days compared to 39 days in Q3. Total inventory at the end of Q4 was $1.2 billion down 3% from Q3 FY '08, non-GAAP inventory turns improved from 10.7 last quarter to a record 11.5 turns this quarter. Our inventory purchase commitments at the end of Q4 were 2.7 billion relatively flat from the end of Q3.
Deferred revenue was $8.9 billion at the end of Q4 an increase of $270 million from Q3 and $1.8 billion from Q4 FY '07 representing growth of 26% from Q4 FY '07 Deferred product revenue was $2.7 billion down $165 million from last quarter and deferred service revenue was $6.1 billion up $435 million from last quarter. At the end of Q4 our headcount totaled 66,129 a net increase of approximately $900 from Q3 FY '08, our headcount increases were primarily the result of Cisco hires in engineering, sales and services.
In conclusion, I'm very pleased with our performance for the fourth quarter of the fiscal year enabled by our balanced portfolio management approach to innovation, a broad and growing global footprint and a team dedicated to outstanding execution. I'm also pleased with our performance for the entire fiscal year led by strong topline growth in the first half and excellent balance sheet management in the second half. Our ability to deliver solid financial results with excellent cash flow and a strong book-to-bill during a fiscal year that included somewhat uncertain macroeconomic conditions in our largest geographies illustrates the power of our business model.
Finally, as John indicated we do plan to continue investment in our diversified technology portfolio, while maintaining our proven focus on profitability in order to take advantage of market transitions and drive towards our long-term growth target of 12% to 17% over the next three to five years.
I'll now turn the call over to John.
Thank you very much. I this section of the call we will cover our geographies, customer segments, and products for Q4 in more detail. The product 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 in terms of Q4 year-over-year order growth, there were a number of positives from our five theaters and customer segments.
Discussing Asia-Pacific first, order growth in the Asia-Pacific in Q4 was very solid at approximately 19% year-over-year. As we said earlier, growth in China was about 30% and India was approximately 20%. Korea was flat. Australia and New Zealand grew approximately 15% year-over-year. The rest of Asia grew approximately 17%. From a customer segment perspective, balance was again good with enterprise growing in the high teens in Asia-Pacific; public sector growing 20%, service provider growing at 10% and commercial at approximately 30%.
Japan continued their solid momentum in Q4 with growth of approximately 10% following a strong Q3 where they experienced growth above 20%. Leading the way was service provider with growth about 25%, which represents approximately half of our total business in Japan. Enterprise, public sector and commercial were relatively flat. Overall, we feel good about our momentum in the Japanese market.
Europe; Europe had a very solid Q4 with growth of approximately 11% despite a more challenging economic environment. Balance was relatively good by customer segments within some of the key countries. Commercial growth was 16%. Enterprise growth in Europe was 12%. Public sector was 7% and service provider growth was 9% year-over-year. Germany led the way with growth in the upper 20s. The UK and the Netherlands had growth in the low teens. Spain had growth of approximately 20%, and Italy was down slightly. For the US, order growth in Q4 was approximately 7% year-over-year.
From a customer segment perspective, enterprise growth not including public sector was approximately 13%. Commercial was approximately 14% and service provider which had very tough comparisons from Q4 a year ago was flat. Public sector year-over-year order growth in the US was down approximately 6%.
As we said earlier, the enterprise segment grew approximately 13%. Balance was good across the six US enterprise areas, with five of the six growing from the high single-digits to approximately 23% year-over-year. Emerging markets, we were very pleased with the balance across all of our emerging market countries. The emerging market theater grew approximately 10% year-over-year. As a reminder, the emerging market theater does not include emerging countries in Asia, such as China which grew approximately 30% year-over-year and India which grew approximately 20% year-over-year as we said earlier.
In the emerging market theaters, three of the four geographies had year-over-year growth in the high teens to mid-20s in Q4. These included Eastern Europe, Latin America, and Russia/CIS. As we have shared in prior conference calls, growth can be variable in terms of the countries or segments in the emerging markets. Middle East and Africa growth was down approximately 5% year-over-year in Q4.
Products, as a reminder, products are discussed in terms of revenue growth year-over-year. Routers in total grew approximately 8% in Q4 led by high-end router growth of 12% and midrange router growth of approximately 10%. Low-end router growth was relatively flat. Switching grew approximately 5% with modular switches flat and fixed switches growing at approximately 10% year-over-year. Advanced Technologies growth was solid. Security grew approximately 10%. Network home grew in the mid-20s. Unified Communication grew 29%. Wireless grew 13% and storage was down approximately 14%.
Application Networking Services grew approximately 30% and video systems grew approximately 7%. Again, the total for all Advanced Technologies is 15% year-over-year growth in Q4. As we discussed in the last quarter's conference call, we were very pleased with our product pipeline and innovation leadership across almost all of our product areas.
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 customer partnership perspective, market share, and share of our customers' total communications and IT expenditures as the network becomes a platform for delivering these capabilities.
Now I will turn it back over to you Frank for additional detail on financial guidance and other financial highlights.
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.
As John indicated, at this time, we will provide revenue guidance for the first half of fiscal year 2009 rather than for the entire fiscal year until we become more comfortable with the predictability of when we believe our revenue growth rates will accelerate back toward our long-range guidance of 12% to 17%. Therefore, we anticipate total revenue growth for the first quarter to be 8% plus or minus 1% year-over-year. Revenue growth for the second quarter is expected to be 8.5% plus or minus 1% year-over-year.
At this point, let me remind you that in light of Regulation FD, Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure.
Now let me give you some additional details on Q1 financial guidance. As we have said in the past, forecasting gross margins has always been challenging due to 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 Q1 will be approximately 65%. We believe Q1 operating expenses will be approximately 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 $175 million in the first quarter and our tax provision rate for Q1 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 down approximately 50 million in weighted average shares outstanding for EPS purposes. In this estimated share count, we are not taking into consideration any further change in stock price that could occur in the first quarter of fiscal year '09.
As a point of reference, a $1 increase in our average stock price would increase the calculated shares outstanding for purposes of determining earnings per share by approximately $16 million. Regarding cash flow from operations, we would expect to generate $600 million to $800 million per month. For our Q1 FY '09 GAAP earnings, we anticipate that Q1 GAAP EPS will be $0.04 to $0.06 per share lower than non-GAAP EPS, primarily due to the acquisition-related charges and stock compensation expense. Please see the slides that accompany this webcast for more 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 events which may or may not be significant.
Let me now turn the call back to John. John?
Frank, thank you once again. The following is a summary of my view of Cisco's momentum and opportunities entering Q1 of fiscal year 2009. In areas that we can control or influence, our momentum continues to be strong, especially in the areas of product leadership, innovation, and thought leadership. Balance given the global challenges continues to be good across our geographies, products, services, and customer segments. As we said before, even if the market slows, we don't see this changing our long-term growth targets, if we execute the way we have in prior slowdowns.
As we head into the next fiscal year, we plan to be aggressively and investing in new and adjacent markets for the longer-term, regardless of how long it takes for the macroeconomic environment to rebound. We would not be investing aggressively if we had thought this current slowdown was going to be longer in duration and that we didn't have a high probability of achieving our 12% to 17% long-term growth objectives.
In terms of major areas where momentum appear to be solid and the ease in possibly gaining momentum would be in the following areas: Emerging markets including both our emerging market theater and emerging countries in Asia-Pacific, such as China and India, Japan and service providers. Next generation network buildouts. Collaboration and network enabled Web 2.0 acceptance and Cisco's leadership in our customers' minds and their beginning the implementations views. Product pipeline and innovation leadership, and advanced technologies and emerging technologies.
While there are many more positive areas than there are areas of concern, the areas that we continue to monitor closely are the US market and the possibility of these challenges in the US spreading to other geographies and service providers' long-term growth rates for capital expenditures.
On a global and US basis, we see the same challenges and uncertainties from an economic, political, and capital spending perspective that many of you continue to witness. While it is too early to indicate it as a trend, we are seeing progress in the US enterprise market. Total overall enterprise growth is possibly stabilizing. While growth still varies dramatically by industry, the large multinationals and financial institutions, which were the first ones to decline almost a year ago, in terms of their spending with us, now are doing dramatically better.
Just to share the data with you, in five of the last six quarters, these accounts, which used to be called our Statement One accounts had negative growth or best case mid single-digit positive growth. In Q3 and now again in Q4, we saw the year-over-year growth rates comfortably in double-digits. Time would tell if this is a trend and if it continues and evolves through the other industries within our enterprise segments.
The second area that we are watching closely is service provider CapEx spending. One way to analyze CapEx growth is in capital expenditures as a percentage of total sales. The rate of growth in this area appears to be moderating; although, it varies dramatically from company to company and by geography.
While our technology and business partnership relationships and most of the service providers are continuing to get even stronger, there are clearly some very tough comparisons, when you think about year-over-year growth to fiscal year 2007 Q4 and fiscal year 2008 Q1 and Q2 which had very strong year-over-year growth rates.
As an additional data point regarding the challenging comparisons, worldwide service provider orders have been growing for three years in a row at a very rapid rate. Fiscal year 2007, as an example grew approximately 40% year-over-year. Again, if the market does continue to slow, we believe that this will not dramatically change our long-term opportunities and our vision of how the industry will evolve with our differentiated strategy. In fact, it is our intent to expand our share of customer spend during these 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 a data center to the home market and from the service provider to the small business and consumer. Therefore, you will continue to see us aggressively invest where appropriate while maintaining our focus on our financial models.
Once again, with our usual caveat, as discussed earlier and in our financial reports, our Q1 fiscal year 2009 guidance is for year-over-year revenue growth in the 8% range and for Q2 fiscal year 2009 guidance is for year-over-year revenue growth in the 8.5% range. We believe our long-term growth opportunities remain in the 12% to 17% range, again assuming our usual caveats. 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 consolidations, product transitions, market adjacency opportunities or economic.
In summary, for those areas that we can control or influence 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 [that], during rapidly and changing industry consolidation, market transitions, and challenging economic times.
Now, Blair, I would like to turn it over to you.
Okay, thanks John. Now at this point, we are going to open up the call to Q&A, and I will request that sell-side analysts please ask only one question.
So, Kim, if you could go ahead and open up the lines, we will start with the first question.
Thank you. Our first question comes from Tal Liani with Merrill Lynch.
Tal Liani - Merrill Lynch
Hi guys, I have so many questions. First, I want to thank you for the level of disclosure. It is just unbelievable and I hope that other companies will do the same. I want to ask a general question about one sentence you put in the press release. You said that you have intentions to expand into adjacent markets in this kind of environment. You want to take the opportunity. Would you mind of elaborate on this. First, do you have an appetite for a big acquisition or a series of small acquisitions? And second, what kind of areas are you interested in?
Okay. So breaking the information into three pieces. First, thank you very much for your feedback, and Tal you and others have been very candid with us about giving you more details. So we're attempting to do that and we appreciate very much you appreciating the value of it.
Secondly in terms of areas we're going to expand into, Ned I'm going to ask you comment in just a little bit of moment on our concepts. We are going to expand into areas and market adjacencies in every major customer segment. In the home, in the small business, in the medium sized commercial business, in the enterprise, and in the service provider, and we will go as we said in the comments really from the data center to the home devices.
In terms of our strategy, innovation will continue to be defined as done internally in terms of expanding our existing products and evolving into market adjacencies. Internally in terms of startups where the emerging technology groups are knocking the cover off the ball. Those numbers were fantastic and the three new emerging technologies that are growing in total over 300%.
Also in terms of partnerships, and you'll see us partner primarily big-to-big, you'll see us acquire a primarily big to small to medium. I would not rule out all four areas of growth in each of our customer segment groups. If you think about what we're going to do, we usually acquire as when we move into new markets that we do not have the expertise for the product segments in. We tend to partner big-to-big.
So think of us partnering with companies like an IBM, Microsoft, Intel and EMC and Accenture, Infosys, Wipro, Tata companies of that type. Think us as acquiring more in the Jim, Scientific-Atlanta type of range, the WebEx or ideal ones as Ned and I've have also discussed is, a 100 engineers with a really hot product. It's just about to come to market. So, if some of our best customers say go buy, and we will buy a lot of them. Ned, may be you're taken it to the next step?
Sure, John. Thanks very much. So we expect to continue to be very aggressive in using acquisitions as part of our build, buy and partner strategy to expand our presence in the markets. You've seen it continuing through the slowdown most recently with our acquisition of Pure Networks in the consumer market, which positions us in the network home, both through retail and through the service provider delivered, to provide the simplest, easiest to use and best customer experience.
A great example, John, the small acquisition where we're able to bring in strong innovative engineering team to expand our additional markets. We will also as you know with Scientific-Atlanta, WebEx and others continue to use platform acquisitions to position ourselves in new markets going forward.
Tal, thank you very much, and I hope that answered your two questions?
Tal Liani - Merrill Lynch
Okay, next question please?
Your next question comes from Paul Mansky with Citigroup.
Paul Mansky - Citigroup
Great, thank you for the question. Obviously, John, and congratulations. You did call the macro turned down I would argue probably first certainly out of the tech group.
You were simply wrong on that, Paul.
Paul Mansky - Citigroup
I prefer you have been very, very wrong on that actually. But, it looks as though you called it right. And yet, as we've got two quarters underneath our belt here, obviously you've fallen off your target rate of growth, although not as dramatically as some might have anticipated, while at the same time recognizing currency benefits impact different companies at different paces. Very largely if I look at large cap tech and then I also look at your smaller direct competitors, companies certainly haven't been lowering numbers.
So I was hoping just to get your perspective relative to what it is that Cisco may or may not be seeing that's a unique and then just any color you could potentially provide around that. Because obviously I'm sure you pay pretty close attention to what your competitors both direct and indirect are doing.
Okay. So let me kind of take the overall geography question and kind of bring it down to the specific questions at hand. The overall geography is, what we are hearing when we look at an economic perspective, we mainly listen to what our customers are telling us, and what are customers are telling us outside the US is largely that their GDP growth and the growth of their own businesses is pretty solid. That's doesn't mean that some of the things going on in the US won't effect them, but if China grows from 13% growth to 11% or 11% to 9.5%, we and others are still going to do very well there.
As we said earlier, it's the best balance we have seen in our emerging markets and that emerging markets doesn't matter where it is in the world, in Asia, in Latin America, Eastern Europe, Russia, CIS, and I would be very surprised if you didn't see the Middle-East and Africa bounce back very strongly this next year. So good balance there.
It's actually been a pleasant surprise to us in areas like the UK where clearly they have some of the same challenges the US did, their growth in the last quarter was very solid. Areas like Germany, you really see the country investing for the future and looks very solid there, and we experience growth in the high 20s in Germany. In the US it's really a mix. We have a certain number of our customers who actually say, if it weren't for what they were hearing in the press, their business is very solid, and even their shareholders don't believe them when they say that, but they say John it really is.
You have others sort of little bit more cautious and I'll always understand that by industry segments et cetera. We do have some tough comps which ought to be taken into consideration when you look at our Q1 and Q2 growth. Especially true in service provider where you went through three years in a row where the average quarter year-over-year growth was about 30% and clearly you have to absorb that capacity.
What percentage of CapEx they spend as a percentage of sales will vary a little bit on investments that you are seeing service provider network loads grow very, very rapidly. So, actually our US enterprise was stronger than we expected this quarter, our US service provider was a little bit weaker. But if I look at the total global scenario, its probably going to be a little bit longer then we would have said six months ago. But still most of my customers see it, turning early next year and that's what we're listening from our customers and we are budgeting in that way. We don't want to project that in terms of our yearly growth numbers until we see it occurring and most likely even if we were we would miss what that number would be.
Paul Mansky - Citigroup
Completely understandable. Thank you.
Thank you very much.
Thank you Paul. All right next question please.
Your next question comes from Nikos Theodosopoulos with UBS.
Nikos Theodosopoulos - UBS
Yes, thank you. My question John is, several quarters ago when you mentioned that things were slowing a bit it was more enterprise focused and it seems like that part of your business now has stabilized and maybe bottomed and it's the service provider part of the business that gives you some caution. Is it safe to say in your discussion with your customers globally that, the worst is behind us in enterprise and we just need to now get through the service provider capital spending uncertainties or is there still some risk you think on the enterprise side? Thank you.
Okay. Let met start in reverse order, from the service provider perspective our relationship has never been better and we are working with most, all of the large service providers around the world not just in providing a technology product but beginning to evolve the technology architectures and considering going all the way from the home to their datacenters and combining data voice video and the loads on their networks are starting to approach levels that many of them have said, John, you all probably call that one right even four or five years ago when you said the loads on networks wouldn't be 50% or 100%, the multiples of 100s of percent as video really begins to take off.
The major challenge they face is how did they bring the economics to the loads on their networks and so when you build out with the capacity that people said before, it takes a while to absorb that and it also takes a while for their service providers to transition from charging purely for individual voice connections or for bandwidth speed to the services they put on top. But you are seeing most service providers begin to do that. That's a nice way of saying, we would not anticipate service provider spending over the long run not returning into double digits, time would tell if that's right or wrong.
In terms of the enterprise market, it really varies. Around the world, they've held up remarkably strong and they may be lumpy by an individual country at a given point of time, but pretty solid around the world. Again, our relationship with the CIOs around the world, we would get ranked usually number one of almost all IT and communication companies in any large surveys done in terms of everything from vision to customer stat, so we're positioned well.
In the US, I think it's a little bit too early to call the trend. I think we want to share with you and when you see US enterprise going from 6% to 13%, that's very positive. These things not forecasting those types of numbers are yet for the future. And so, we'd like to watch at least another quarter before I would call it a trend. But if you do believe and we try to follow everything that moves, the organizations that led us into this slowdown which were financial and the large multinationals who went through as I said earlier over a year of very sluggish growth to negative growth would be kind words, we've seen them upturn as a group. And we saw good balance across our enterprise markets in five of the six theaters going from 8% to mid-20s%. So it's a nice way of saying we would like to say yes to your question. But no, I think it's going to take a little bit longer to play it out.
In summary, what we control the influence, we are pretty good. What we're pretty good at is predicting the overall additions of all of our balance of markets, although we often miss by customer segments or individual products. I hope that Nikos, it helps explains a little bit. I wish a quarter from now I can give you a more definitive answer on the enterprise.
Nikos Theodosopoulos - UBS
That was perfect. Thank you.
Great, thanks. Next question please.
Our next question comes from Simona Jankowski with Goldman Sachs.
Simona Jankowski - Goldman Sachs
Hi, thank you so much. John, I just wanted to understand a little bit the assumptions behind your guidance. When I look at some of the metrics in your business last quarter, your orders by geography actually improved in a couple of other regions like the United States and Asia. Also your deferred revenues improved, advance services were up nicely, your book-to-bill was above one. Clearly, there are areas of deceleration as well. But I was just curious, how putting all those things together, how that comes out to a further deceleration into business?
Frank, you want to take a crack at that?
Yes, Simona, thank you. So as you pointed out Simona, as we ended fiscal year 2008 for Q4 we do have while we're going into the Q1 with a stronger position as we look at our backlog and also on deferred revenue that we have been able to build. I mentioned this quarter that we had deferred revenue growing at 26%. We had a comparable amount last quarter. So that really bodes well as we look into the future in building that kind of a base. We've taken that in consideration, although that's a good start point, as we go into the quarter. But as John mentioned, we really have to call it as we see it and take all that into consideration. But we did have some great growth and strength in the quarter.
We also are looking at these tough compares, especially on the service provider that we are taking into consideration as we look at Q1 and Q2 and that is a factor that affects our growth rate. So in balance, we feel fairly confident with what we see right now that we've with the 8% plus or minus one and the 8.5% for the second quarter plus or minus one. It kind of gives us the right balance of the good, the positive as well as some of the areas where we have a little bit more challenge.
Simona Jankowski - Goldman Sachs
Maybe just to clarify that, was there anything about the linearity of the quarter, judging by the decline in your accounts receivable or the DSO's that also suggested that you should come out with this kind of guidance, despite some of the metrics improving?
Simona, I am going to ask that we catch up with you after the call, because we have a lot of questions here.
Simona Jankowski - Goldman Sachs
Sure, thank you.
Thanks so much. Okay next question please.
Simona, if you go ahead and ask it, I will answer it once the call is over.
Our next question comes from Jeff Evenson with Sanford Bernstein.
Jeff Evenson - Sanford Bernstein
Related to that, your DSO's were lower, implying maybe there was a little bit lower sales towards the end of the quarter. Yet you seem pretty confident in guiding that the second quarter will have about 3.3% sequential growth using the mid point of your numbers, plus a higher year-over-year growth rate. Given that you're unlikely to be seeing anything macroeconomic that makes you much more confident about the fourth quarter. Are you doing something internally, like new products or organizational issues that give you confidence to guide for the acceleration towards the end of the year?
A series of questions, first it does feed into Simona's question as well. The DSO's were very solid but our order growth rate actually was very strong in July. So it was probably a point or two above the normal percentage of business that comes in the third month of the quarter, especially in Q4.
In terms of what gives us comfortablity in terms of the direction? While there might be an occasional competitor that gains a little bit of market share in a category temporarily and by the way that's healthy for the business, because if the market isn't growing well, we aren't getting good competitors, we got a bigger issue. We actually feel very comfortable with where we're positioned in all of the markets.
And we do see collaboration of Web 2.0 starting to take hold. I personally believe that's going to be the biggest driver of our direction as a company, over the next five to 10 years and you know for the first time that I can remember as a CEO, you talk to other CEOs and they can actually give an advertisement for me on collaboration and TelePresence, in terms of saying this is changing the way I do business, this is the direction that we're going et cetera.
Video is clearly the killer out here and when you think about the loads currently going on networks, these are largely downloads that are occurring today or one person to one person. If you begin to take concepts like TelePresence, where you have 10 different locations into a single meeting, which I do pretty regularly now, as an example and you begin to think about that occurring not only in the area of business, but also to the home, where you watch sporting events together from your home, across multiple sites and do reruns et cetera, you begin to see our view of at least what we believe will be in loads on the networks. Still we'll actually accelerate even though there are often too many of our accounts starting to hit the 200%, 250% range.
The third element is you begin to see balance and a lot of our strategies we're putting in place are occurring. Fourth element is that you are seeing easier comps. We have some very tough comps coming off of the service providers in Q1 and Q2. They're are a little bit more adjustable in Q3 and Q4. Although Pankaj make no mistake about it, I want to get service providers back sustainably into the growth in the double-digits. And if we execute right, I expect us to.
It's a nice way of saying Jeff a lot of moving parts in my opinion, all of them that we can control or influence almost without exception is going in the right way. It doesn't mean for Cisco people who are listening on the phone we can't do better. But I think on what we can control, the influence it looks good. And our customers are also and saying this is the most likely scenario for them in terms of what they see occurring on the macroenvironment.
Jeff Evenson - Sanford Bernstein
And just as a point of clarification that you mentioned about the DSO. So we were very pleased with the DSO of 34 days in the quarter. We did report 39 days last quarter but we also noted that last quarter we had some large service deals that impacted that. So we've had some comparable DSO in that 34 day range right now for a couple of quarters.
I would agree and just for people on the phone, as long it's in the 30 to 40 day range, I don't even ask Frank about it. If it were to go on either side of that, I'd say are we doing something unusual and we want really think it through. So Frank, congratulations to your whole team and the manufacturing team on that measurement.
Thanks Jeff. Okay next question please.
Our next question comes from Scott Coleman with Morgan Stanley
Scott Coleman - Morgan Stanley
Thanks. I am wondering if can focus on the router market for a minute. Growth of 8% year-over-year, when you look at your competitors in this market, they are growing at much faster rate. I am wondering if you have a reason behind that. Is it that that they are more focused on the EDGE part of the market? Do you need to do something with the existing product portfolio over the next couple of quarters to drive that growth rate back higher, but I am just curious, why the numbers are so divergent from your competitors?
We'll break into probably three or four segments of it. First is, if you watch our growth using high-end routers an example, Pankaj, that the last five to six quarters we've gained market share on everyone. And if you look at high-end, multi-chassis routers, our market share there is huge and in going into the large-scale deployment almost as fast as we can build them within it.
Secondly, even at our size, orders can be a little bit lumpy. So, let's use an example that's very real. We have a medium-size service provider who's a great Cisco partner that we're not losing market share in. But they did gain in a comparable quarter $125 million and this quarter they'll probably do less than $20 million. So that's $100 million on our numbers. But if you look across the board, that's probably a 7% or 8% negative change in terms of the scenario on it.
Third is that I would probably challenge you a little bit in terms of sustainable gain by the majority of our router peers in the industry. We actually have been very effective on our peers and I'm real comfortable with the product range from the core to the EDGE. I do think we have to do a little bit more, Pankaj into certain segments of the EDGE. So the ASR-1000 I think has been very solid. We probably have a little bit of work to do in some of the other product areas, and I wouldn't be mentioning that if I didn't expect us to close that gap as well.
I do however want to congratulate Juniper to your indirect part of your question. I mean, they had a very good quarter. They clearly would not, with the new CEO coming in, project growth to be actually accelerating at these levels and beyond and redo their guidance if they didn't feel comfortable with it. We do have to make it a little bit tougher for them in a couple of the service provider commercial accounts. We understand where those are, and we'll do a little bit better job competing in those. Pankaj, anything you want to add to that?
Yes, John I think you quoted very well. I think, our innovations and R&D investment, especially in the high end like CRS-1 for number of years now is paying off pretty handsomely. We have a pretty strong position in that, and especially with the offering that multi-chassis, we excel pretty well. So I think what your pointed out earlier, which is, when it comes to the architectural part leadership systems and end-to-end solutions, that's gaining both the mind share and the market share. I don't think we have been in a better position than ever than we have been in this market.
John just to add one more point from a data point of view, not only the mid-size service provider that you referenced, but a very, very large service provider who gave us a record business in the first quarter of last year, who'll do very well this year, still the comps are extraordinary in that situation.
Yeah, if you do the numbers, and you add three years in a row of 30% year-over-year growth, you realize there's lot of capacity. Scott, let me be very direct and bold here. I think we're going to lead in our architecture and routing across the board. I think there might be very short gaps where somebody might have a feature or temporary advantage. I think overtime you'll see us continue to be the clear leader in routing in all categories and our customers who we have disclosed our current and future plans too would probably agree with that.
Having said that, there is always a little bit of room yet for a couple of accounts that we know that one or two of our competitors did very well in, and if $100 million can swing us by 7% on our growth numbers, imagine want an incremental $50 million can do for one of our smaller peers to kind of put it in perspective.
Nice way of saying, congratulations to those peers that had a quarter. We will try to give them a little bit better run over this next year, and we have traditionally given them a very good run over the last couple.
Scott Coleman - Morgan Stanley
Thanks for the details.
Okay, great. Next question please.
Our next question comes from Mark Sue with RBC Capital Markets.
Mark Sue - RBC Capital Markets
Thank you. John, there's a big difference between 8 and 12 and a bigger difference between 8 and 17. If 12 to 17 just glass is half full optimism? And why do you still feel the current revenue contraction will be short-lived? And I ask, since we're looking at four potential quarters of revenue growth below your long-term growth guidance, and the short-term is starting to feel pretty long.
First, Mark, I realize that in many markets, and especially in some of the markets that our shareholders who make these decisions are measured in, you are often measured by the quarter or by the year. I make no decisions by the quarter and very few by the year. I make all my decisions, 3, 5, 7 years out. And, if you watch what we've been able to do, our growth projections over 17 years have been remarkably accurate. And, there are periods of time more often than not where we actually exceed our growth projections versus those where we are operating a little bit underneath them.
If you can grow in the 8% to 10% range, just for purpose of the discussion, when your market that represents a third of your business is growing at mid-single digits and the US which represents 50% of your business is growing at about 7%. I would challenge the reverse way. I would say, Mark, and I know you are challenging me on this in a very positive way, the 12% to 15% might be a little bit low in terms of what the opportunities are. So, I've see nothing that has changed my view on the 12% to 17% range. In fact, if you view what's occurring on a geography basis, it's a little bit like that game that you used to play in the carnival with Whack-A-Mole where now it's automated. No sooner do we put one of those challenges or opportunities down than another one pops up. But eventually, we will get them in sequence.
And so, if you can grow in the 8% to 10% range without currency effects, and if you have your expenses being hampered by, Frank, I think it's about 2.5% a quarter, you hit negatively on the expenses because of currency. As currency begins to balance out, as the economy in the US comes around, and it will and we might have active discussion, is it one quarter to two quarters or is it three quarters or four quarters out. Then I would actually say Mark, those numbers look pretty to very reasonable in terms of the expectation.
I can tell you now however if you try to add up each one of the variables, it's very difficult to say exactly what the growth will be. We're pretty good at portfolio management, not as good as signaling each one of the individual variables. So, in summary, if you were to look at 2005, 2006, 2007, 2008, the vast majority of the time, the numbers have actually run ahead of our guidance, and at the upper end of the range.
Mark Sue - RBC Capital Markets
Thanks mark. Okay, next question please.
Our next question comes from Ehud Gelblum with JPMorgan.
Hi, It's Eddie.
Good. A couple of things. If you look at the cash flow guidance that Frank gave of $600 million to $800 million a month, usually saying $700 million to $900 million a month, and I'm assuming that's correlated with the guidance that Frank gave for next quarter on the gross margin. And the OpEx that points to an operating margin of 28%, a little bit below the 29.5% sort of range that you had before. My guess is that those are two sides of the same coin? Can you give us a sense as to where the extra expense is going and why. You gave guidance like this two quarters ago, and it turned out that you didn't do it. Turned out you actually did your 29.5% operating margin and not the 28%. Do you expect that your OpEx and can you give us a little sense as to where that will be stepped up and because it sounds like it's costing roughly $300 million a quarter to $100 million per month and why you feel that the right thing to do is to spend more money in what areas during these times of slower revenue growth? That'll be helpful, I'll appreciate it.
All right, Frank I'm going to give you that easy question and have you do it and each of the members sitting around the team from engineering to sales are saying would like to have more as well. So kind of take it within the parameters then I might kind of sum it up after you do.
So John, clearly over the last two quarters, just being conservative.
A little of both, but over the last two quarters with the uncertainty in the macroeconomic environment we try to be extra cautious as far as looking at and focused on spending across the board. So as we continue to make investments we were more prudent as far as selecting those investments. We have those two quarters behind us and as we've mentioned on the call today, both John and I talked about this and going into the new fiscal year. We're making investments for our innovation for long term. There are so many different opportunities that we are looking at in our portfolio. We spend a tremendous amount of time especially over the last six months while we were managing our expense looking at the opportunity and what's the payback was going to be over longer term.
It really goes back to the question that John just answered about the 12% to 17%. We feel very confident in that 12% to 17% and in order for us to deliver on that 12% to 17%, we need to make investments in driving the innovation to go after that. We've got our portfolio in place, we're into a new fiscal year, we've got that all proportioned out as far as where we are going to be making those investments, many of which John talked about on the call, especially in Advanced Technology, emerging technologies, solutions opportunities, specialty services is where we growing on a global basis. So there are many opportunities, the right thing that we have to keep in control as we move forward is making the right trade off in that portfolio and we're ready to do that.
If you really think about it from a mathematical point of view, we've talked about it before in terms of our collaborative approach towards market opportunities instead of doing one or two cross functional a year, we're going to do almost two dozen. Out of those two dozen, I have to look at it mathematically but I'd say at least half have no material effect on our topline for at least two years out. So if you look at the investments we're making and we're making them on a larger front than ever before and we're actually accelerating the market adjacencies and they were moving into and as well as the new market opportunities and I would argue with the tremendous success rate.
Just use TelePresence as an example. What Martin and team have been spending in TelePresence for a two year development cycle and then the best we've ever had a billion dollar product come to market is five years later in a new market area. They are very likely to beat that with all the appropriate caveats in terms of the run rate. So we're investing and we're investing in a portfolio play, we're investing very broad and it goes back to, I think it was Mark who was in a constructive way exercising me about my comfort level which is going to 17%. If I were just doing routers and switches in a little bit of advanced technologies I would stay fair challenge. But look at where we're moving in our success rate of not only moving there and becoming rapid growth with a great profitability but also becoming the number one player in doing what we said, its been really good.
So if I were a shareholder and I was really saying, you run it like it was a private company and look where the stock is, two, three years out. I would actually probably be more aggressive on the expenses and that's where I think both Frank and I and the rest of the team are a little bit conservative. But you will see us spend the money, we're going to be aggressive, you'll also see us if we execute versus our path with a pretty good hit rate, in fact at the current hit year rate nets a little bit higher than I'd like, I'd like to take a little more risk, because so far we have been remarkably accurate.
So, we should assume that when revenue growth grows above 10% operating margin goes back to 29.5?
I am not going to tie it down. We will give you ranges as we go through it, but we could bring operating profits down to again up to whatever level we wanted very quickly. We've always balanced our opportunities versus our long-term growth objectives et cetera. I have no problem with growth opportunities. My problem is reverse, how do we spend across the whole company not just in R&D as we move into new area, because Rick has to spend on got-to-market, service has to spend on it, manufacturing has spend, each of our groups have to invest into it. So as you move in these many markets, it takes a little bit more time to be effective on it.
Great thanks, Eddie. Okay next question please.
Our next question comes from Paul Silverstein with Credit Suisse.
Paul Silverstein - Credit Suisse
John, I thought I just heard you say that TelePresence could be a $1 billion market in less than five years which hasn't happened before. The question is, I'm hoping you give us a little more insight in terms of the base of business today on this new growth drivers TelePresence, Nexus, which I know you just started shipping, I suspect the numbers are extremely small in application network services. And can you also give us some insight relative to your comment about TelePresence, what type of impact do you think these products could have over the next couple of years, as well as that longer five year timeframe?
Okay again, its very difficult to do by individual products, but our ability to add up the total gets pretty dramatic, so I would say, in many ways, Paul, its like when we first moved into advanced technology several years ago and you saw how successful we were across the board, each of us would have probably got those big technology growth rate wrong. But in total they were remarkably sustainable and for five out of six, they actually exceeded our expectations and continue to grow extremely well. I'll use one example and then may be on future calls we can expand further.
If I would look at the three emerging technology groups as an example, they grew 300% year-over-year in terms of orders. They have a run rate of about $200 million now. And using TelePresence as an example it's at a run rate of 500% year-over-year growth. The total of the three are actually the 300% year-over-year growth. So it gets kind of confusing if I were to throw more variables in that, but that's kind of a sampling Paul, how we approach it, and a pretty good track record on doing it. The IP phones is an example, I don't know if one of you have the data in front you but if you look at Unified Communications for us at the present time, its run rate I think its about $2 billion type of run rate and it was a market that we didn't even really address aggressively five or six years ago.
So we have shown an ability to go into that pretty quickly. Frank is in the meantime paging through his book frantically to make sure I've got the number right and if we didn't we'll correct it a little bit later.
Paul Silverstein - Credit Suisse
John, I'm not trying to put words in your mouth, but did you say that you thought TelePresence could be a $1 billion product in the next five years? And if you did say that, is that direct revenues and the indirect impact on your switching and routing business or is that just direct?
That's just direct revenues. And I think I've got to add all the caveats that we're all very much aware of that if there's one product that really captures people's imagination, it's TelePresence. And it speaks to the role of video and communications. 60% of the way you communicate is nonverbal. It's about video and that loads the heck out of networks and you're just beginning to see what's capable with TelePresence. And so today, while you see the typical ones that probably each of you have seen, you have not seen our movement into the home which we're clearly going to do. Probably a couple of you have seen it on YouTube with [Lurdy] doing a virtual hologram, being able to virtually appear onstage together with people that are either in other parts of the world or actually time shifted into those roles.
So while it's not a sure thing and obviously I expect very good execution and there's always a portfolio play here, the one product I feel with the highest probability of hitting that $1 billion run rate in a new area that we haven't been before is probably TelePresence. The other products, Paul, it's early in the cycle. So when you think about data center, there's always a slow uptake when you bring in brand-new products into the data center. Our feedback on the customers and you've seen the awards we won, the Nexus 5000, Nexus 7000 look really good.
Paul Silverstein - Credit Suisse
We have time for one more question.
Thank you. Our final question comes from Tim Long with Banc of America.
Tim Long - Banc of America Securities
Thank you. If I could just follow back on the Unified Communication comments, obviously continues to be strong there. Can you just give us a little color, John where you think we are in the cycle and how the economy is going to maybe influence some of those upgrades and also you get this question in every quarter. If you could just talk through the pull through of switching that you are seeing on the Unified Communications side that would be great. Thank you.
Yes. The run rate on Unified Communications is actually the number for the year was about $2.5 billion on the order rates and so the run rates you've have seen over a period of time, it varies. Some of the areas like the IP Telephony is a given and people will spend on that during good times and during bumps, maybe not quite as much during the bumps as the good times. But that is a role that I think it's pretty much a given that the phones of the future will be IP and they won't describe them as phones. They will probably describe them as a combination of data, voice, video, wired and wireless flexibility within that. The second part of the question I missed.
Was around the broader market and how the impact --
So, for new technologies and let's use TelePresence as an example, during stronger economic times, it's a lot easier for people to put in a pilot group of 20 systems and then take them to 100. During a little bit of tougher economic times until they experience it beginning to get their base, it's a little bit longer ramp-up in terms of what might occur. So that's the nice way of saying in areas that have a very quick ROI that the customer feels pretty comfortable with, they spend either way. During areas that are a little bit more based on productivity and collaboration, I think we've got a little bit more work to go.
But, that's a very appropriate one to end on Tim, because what has changed most of all in the last six months is the conversations on collaboration of Web 2.0. It moved from theoretical or pilot base more towards our leading-EDGE customers saying help me implement it. Which sequence do we go in? How do I get there? That's true, both in the enterprise and in the service provider environment.
So, I want to thank everyone and Blair maybe turn it over to you for final closing. Please give us feedback on what you thought of the new format. We tried to be a little bit more [net] and leave a little bit more time for a healthy give and take in the Q&As. Don't hesitate to share with us what areas you want to see us improve on. But in summary again what we can control or influence I feel very good about. And our growth opportunities I think is more a prioritization on execution than having opportunities to go at. And I think that's really unique in the industry as a whole.
So Blair, back to you.
Thanks John. Okay, Cisco's next quarterly conference call, which will reflect our first quarter fiscal year 2009 results will be on Wednesday, November 5, 2008 at 1:30 PM Pacific, 4:30 PM Eastern Time.
Additionally, downloadable Q4 financial statements as I said before will be available following this call, including revenue segments by product and geography, income statements, full GAAP to non-GAAP reconciliation information, balance sheets, and cash flow statements can be found on our website in the Investor Relations section. Just click on the financial section of the website to access those.
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 an explicit public disclosure. Please call the Investor Relations Department with any follow up questions from this call and thank you for your participation and continued support. This does conclude our call.
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