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

| About: Cisco Systems, (CSCO)

Cisco Systems, Inc. (NASDAQ:CSCO)

F1Q08 Earnings Call

November 7, 2007 4:30 pm ET


Blair Christie - IR

John Chambers – Chairman, CEO

Dennis Powell - CFO

Rick Justice - EVP, Worldwide Operations and BusinessDevelopment

Charlie Giancarlo –CDO

Ned Hooper – SVP, Business Development

Frank Calderoni – SVP, Customer Solutions, Finance

Jim McDonnell – CEO, Scientific-Atlanta


Brant Thompson - Goldman Sachs

Mark Sue - RBC Capital Markets

Nikos Theodosopoulos - UBS

Ehud Gelblum - JP Morgan

Tal Liani - Merrill Lynch

Inder Singh - Lehman Brothers

John Marchetti - Morgan Stanley

Bill Choi - Jefferies

Paul Silverstein - Credit Suisse

Jason Ader - Thomas Weisel Partners


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

Blair Christie

Thank you, Kim andgood afternoon, everyone. Welcome to our 71st quarterly conference call. I amBlair Christie, and I'm joined by John Chambers, our Chairman and CEO; DennisPowell, Chief Financial Officer; Rick Justice, Executive Vice President ofWorldwide Operations and Business Development; Charlie Giancarlo, ChiefDevelopment Officer; Ned Hooper, Senior Vice President of Business Development;Frank Calderoni, Senior Vice President of Customer Solutions Finance and JimMcDonnell, Chief Executive Officer of Scientific-Atlanta.

The Q1 fiscal 2008 press release is on full national MarketWire and European Financial and Technology Wire, as well as on the Cisco website at A corresponding webcast with slides and downloadableinformation regarding Cisco's financial statements can be found on our websitein the Investor Relations section. Additionally, a replay of this call will beavailable via telephone at 866.357.4205 or 203.369.0122 for internationalcallers, and is also available from November 7 through January 18th on Cisco'sInvestor Relations website.

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

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

The matters we will be discussing today includeforward-looking statements and as such are subject to the risks anduncertainties that we discuss in detail in our documents filed with the SEC,specifically the most recent annual report on Form 10-K and any applicableamendments which identify important risk factors that could cause actualresults to differ materially from those contained in the forward-lookingstatements.

Unauthorized recording of this conference call is not permittedand I would now like to turn it over to John for his commentary on the quarter.

John Chambers

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

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

Now onto the discussion of Q1. This quarter was another verystrong record quarter with very solid balanced results from a product,geographic, and customer segment perspective. Again, it was also another recordquarter from a revenue, cash generated from operations, GAAP and non-GAAP netincome and earnings per share perspective. To put these record results inproper perspective, I will summarize the quarterly highlights, first from a keyfinancial perspective, second from a product and services perspective, thirdfrom a geographic point of view, and fourth, by customer segment.

The key financial highlights for Q1 include the following:

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

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

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

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

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

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

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

To add additional information regarding the balance of ourrevenues across our product lines and potential future momentum, 14 of our top20 product families had year-over-year revenue growth for Q1 of 15% or better.Although competition remains robust, we believe we are gaining market shareversus almost all of our major competitors in most product categories. But wealso believe we are getting a larger share of our customers' total spend oncommunications and IT.

As we've discussed in prior conference calls, our servicesare not a standalone product area, but rather they are the delivery vehiclethrough which we earn our customers' trust and satisfaction by enabling theirtechnology and business goals. Our service revenue now represents approximately16% of our total revenue.

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

The geographic and customer segment discussion will beprimarily in orders, as this is how we run our business. From a geographicperspective, order momentum was strong and balance was good across our fourlarge theaters during Q1 with year-over-year order growth rates from 13% tomid-30%.

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

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

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

From an enterprise and commercial perspective, we expectthat global video implementations such as IP TV, TelePresence, UnifiedCommunications, business security and other video applications will providefuture network loads, and therefore, will also require upgrades to existingnetworks.

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

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

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

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

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

As a reminder, we make our decisions on what we believewould be the right decisions for the company for the long run, and try not tofocus on short-term issues for the next quarter or even the next year or two inimplementing our vision and differentiated strategy.

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

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

Cisco will always be affected by major economic changes,capital spending patterns, new and existing competitors and our ability toexecute or not on our strategy. As we said in the Q4 conference call, ourguidance for fiscal year 2008 interms of year-over-year growth is the middle of our long-term growth target of12% to 17%. Our guidance for fiscal year FY08 at 13% to 16% year over year wasright in the middle of this range. We believe we are on target to achieve thisgrowth for the fiscal year. However, given the results for Q1 of 17% revenuegrowth, we clearly operate at the high end of this guidance.

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

In summary, we believe that we are very well positioned inthe industry from a vision, differentiated strategy, and execution perspective.As I stated earlier, we believe we are entering the next phase of the Internetas growth and productivity will center on collaboration enabled by network Web2.0 technologies. We will do our best to provide the product architectures andexpertise to help in the implementation of these collaborative capabilitiesfrom a technology and business perspective, as well as share with our customershow we've done this internally.

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

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

Dennis Powell

Thank you, John. Wewere very pleased with Cisco's record financial results this quarter includingrevenue, operating income, net income and earnings per share. Total revenue forthe first quarter was $9.6 billion, an increase of 17% year over year. Routingrevenue totaled $1.9 billion, up 18% year over year, due primarily to continuedgrowth in our high end router portfolio of 28% year over year, with particularstrength in the CRS-1, 7600 and the GSR product families.

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

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

Other product revenue totaled $492 million, an increase of8% year over year.

Total service revenue was $1.5 billion, up approximately 24%year over year, as a result of solid growth across our four largestgeographies. We are particularly pleased with growth in Advanced Services of34%.

Q1 total non-GAAP gross margin was 65.6%, up from 65.2% lastquarter. For product only, non-GAAP gross margin for the first quarter was65.7%, up from 65.2% last quarter. The quarter-over-quarter favorability wasdriven primarily by continued cost savings.

Our non-GAAP service margins for the first quarter were65.2%, up slightly from 65.1% last quarter. As expected, non-GAAP operatingexpenses as a percentage of revenue were 36% in Q1 FY08, up slightly from 35.6%in Q1 FY07.

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

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

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

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

Nowmoving onto the balance sheet, the total of cash, cash equivalents andinvestments at the end of Q1 was $24.7 billion, up $2.4 billion from Q4. DuringQ1, we generated a record $3.1 billion in cash flow from operations, as well as$1.5 billion in proceeds from stock options exercises. We repurchased $3billion of common stock or 96 million shares of our stock at an average priceof $31.28 per share. In addition, unrealized gains on our public equityportfolio increased by approximately $900 million from Q4.

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

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

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

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

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

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

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

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

John, I'll turn it back to you.

John Chambers

Dennis, thank you very much.

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

First, we will provide additional detail from a geographicand a customer segment point of view. There were a number of positives from ourfour largest theaters and customer segments. Our European operation had strongorder growth in Q1, with approximately 20% year over year. Seven of the nineoperations in Europe achieved growth in the range of lowteens to over 50%.

We were obviously pleased with the strength across the sevenoperations, but if I were to comment on two of the operations, it would be Germanyand our targeted top service providers. Germanycontinues to gain momentum with growth of approximately 30% year over year. Ourtargeted European service providers had a very strong Q1 with year-over-yeargrowth above 50%. Balance across our three large customer segments was alsovery good in Europe in Q1 with order growth in the mid-teensto approximately 30% year over year. I want to congratulate our European teamon just a superb job.

The Asia Pacific theater continued to be very solidmomentum-wise with year-over-year growth in the high teens. Having just lastweek visited India and China, I would like to comment in some detail on both ourQ1 results relative to those countries and our expectation for the twocountries going forward.

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

Our growth in Chinagenerally has been very solid over the last several quarters and we have madethe decision as a company to dramatically expand our commitment and ourexpectations in Chinaover the next five years. We believe we are very well-positioned from bothbusiness and government leaders to create major win-win scenarios acrossmultiple segments in their economy.

Again, this feedback from both the business and governmentleaders in Chinaand in Indiawas that their economic growth will continue to be very strong.

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

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

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

Products, as we discussed earlier, our products business wasvery well balanced. We will attempt to give you more details regarding thisbalance in the following discussion, which we cover in terms of revenue andwill include our acquisitions. Occasionally, we may use orders to addadditional color or to illustrate momentum trends.

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

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

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

Our second wave of Advanced Technologies that includes videosystems and application networkingsystems is now approaching a $2.5 billion run rate and grew in the mid-30s yearover year from a revenue perspective. From a product perspective, we're notaware of any other company in the IT and communications industry that is evenclose to these type of growth numbers and market share gains across such abroad array of products.

In summary, our vision of how the industry is going toevolve appears to be playing out very much as we expected. We believe ourdifferentiated strategy is also achieving the benefits to both Cisco and ourcustomers that we thought were possible.

Finally, our execution is on target in terms of results asmeasured by a customer partnership perspective, market share, and share of ourcustomers' total communications and IT expenditures, as the network becomes theplatform for delivering these capabilities.

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

Dennis Powell

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

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

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

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

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

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

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

For our Q2 FY08 GAAP earnings, we anticipate that Q2 GAAPEPS will be $0.04 to $0.06 per share lower than non-GAAP EPS, primarily due toacquisition-related charges and stock option expense. Please see the slidesthat accompany this webcast for more detail.

Other than those items noted above, there are no significantdifferences between GAAP and our non-GAAP guidance. This GAAP assumes noadditional acquisitions, asset impairments, restructuring, or other eventswhich may or may not be significant.

I'll turn the call back over to John.

John Chambers

Dennis, thank you very much. The following is a summary ofmy view of Cisco's momentum and opportunities entering the second quarter offiscal 2008. Inareas that Cisco can control or influence, our momentum continues to be evenstronger than it was a year ago. Balance continues to be very good across ourgeographies, products, services and customer segments.

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

We clearly see the same things that each of you see in termsof opportunities and concerns in the However, we can't help but believe that our revenue and earnings growthrates, combined with record cash generation and market share leadership, placesus in a unique position in the industry right now. This position is well beyond the traditionalnetworking hardware space and into the realm of leadership across the entire ITand communications space.

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

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

As we have discussed in prior conference calls, thestrategic relevance of Cisco is increasing to our service provider customersand has the potential to evolve in the same way that our enterprise leadershipevolved over the last 15 years, with the associated benefits to both Cisco andour service provider customers. We are beginning to see evidence of this froman increasing number of our service provider customers and partners on a globalbasis.

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

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

This type of collaboration enabled by the network will allowCisco, instead of doing one or two major priorities a year that the seniormanagement team aggressively leads, to target 20 for this fiscal year. Althoughit is still early in its implementation, this process is working even betterthan I expected and we will probably expand by an additional two to five incremental priorities over the next severalquarters.

Our architectural strategy in the emerging markets isworking extremely well. Barring some major economic or political surprisesacross many of these emerging countries, I would expect this theater to havethe potential to grow more than twice the average growth rate of the othertheaters if we execute effectively.

Our balanced product momentum across our core technologies inAdvanced Technologies continues to be strong. But again, it is the loosely andthen tightly coupled product strategies for these technologies thatdramatically differentiates Cisco from our peers.

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

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

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

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

As always, I want to thank our shareholders, customers,employees and partners for their support and continued confidence in ourability to execute during rapid industry consolidation, market transitions andchallenging economic times.

Now Blair, I'd like to turn it back over to you.

Blair Christie

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



Your first question comes from Brant Thompson - GoldmanSachs.

Brant Thompson - Goldman Sachs

John, I was wondering if you could expand a little bit moreon the U.S.enterprise market, in particular in terms of what verticals you are seeinglumpiness in? How does that compare versus what you had seen in the last twoquarters? Thanks.

John Chambers

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


Your next question comes from Mark Sue - RBC CapitalMarkets.

Mark Sue - RBC Capital Markets

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

John Chambers

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

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

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

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

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

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

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

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


Your next question comes from Nikos Theodosopoulos - UBS.

Nikos Theodosopoulos - UBS

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

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

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

John Chambers

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

When I just returned from the market in Indiaand China, wesee the emerging markets doing extremely well and those are two countries thathave not been included in it. Their confidence is good and while they aredependent upon the U.S.for part of their economy, their internal consumption in other parts of theworld is a dramatically different picture than you would have seen three tofive years ago.

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

I think if you look at the U.S. market and what's beencarrying the U.S. enterprise as an example is it's been the exports andglobalization which has contributed dramatically to this, where even in theU.S. enterprise -- we don't include it in those numbers -- it's probably movedfrom 45% of the enterprise of our technology going outside the U.S. to probably60% in our top accounts. So while no one can say for sure how this evolves,what we see from the countries, what our customers are telling us and momentumfeels pretty good on a global basis.

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

Rick Justice

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

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

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

John Chambers

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

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

Thanks, Nikos.


Your next question comes from Ehud Gelblum - JP Morgan.

Ehud Gelblum - JP Morgan

I actually like that last comment you said that you wouldn'tbe surprised to see U.S.come back at some point. I calculate, you said that U.S.order growth in enterprise was down year over year. How correlated is that torevenue growth? Because if we assume that U.S.revenue growth follows U.S.order growth that means that your non-U.S. business was up around 20% thisquarter. And if U.S.improves a little bit into even single-digits where it was a couple of quartersago, you are back to above your guidance.

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

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

John Chambers

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

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

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

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


Your next question comes from Tal Liani - Merrill Lynch.

Tal Liani - Merrill Lynch

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

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

John Chambers

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

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

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

Charlie, maybe take it to the next step?

Charlie Giancarlo

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

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


Your next question comes from Inder Singh - Lehman Brothers.

Inder Singh - Lehman Brothers

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

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

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

John Chambers

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

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

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

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

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

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

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

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

Then we went across all the major government agencies, the Ministryof Education that we've known for 10 years. We've expanded our networkacademies there, more than doubling them, going into vocational schools in thecentral and eastern countries to bring jobs there. We are looking literallyacross the board with all the agencies ranging from commerce to something thatwas very unique; the first time ever that we did a strategic relationship witha Chinadevelopment bank. We are the only company that's ever done that, and they werenot after our investment of $100 million, they were after our expertise onstartups and developing companies, et cetera.

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

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

Ned Hooper

Certainly. Thank you, John. So we have taken what we believeis a very unique approach in using our business development tools as part ofglobal expansion. In China,where we've been present as an investor in venture and private equity now fornearly a decade, we have been a close partner with many companies who aredeveloping what we see as unique business models that have applicability on aglobal basis.

So taking advantage of those trends and creatingpartnerships such as we have with Alibaba and WebEx as well as our investmentlast year with China Communication Services extending our reach into serviceprovider, we believe that the market is at an inflection point and not only isthere great opportunity within China, but we have the opportunity to take thelessons learned and the new business models being created in China and exportthem globally.

John Chambers

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


Your next question comes from John Marchetti - MorganStanley.

John Marchetti - Morgan Stanley

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

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

John Chambers

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

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

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

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

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

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


Your next question comes from Bill Choi - Jefferies.

Bill Choi - Jefferies

Just a quickclarification from Dennis. Was there any impact due to currency on revenue andgross margins?

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

John Chambers

Dennis, on theclarification?

Dennis Powell

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

John Chambers

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

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

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

Maybe just spend a minute on that, Charlie, in terms of ourphilosophy about wireless and tying it to wired and a little bit of yourthoughts.

Charlie Giancarlo

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

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

John Chambers

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


Your next question comes from Paul Silverstein - CreditSuisse.

Paul Silverstein - Credit Suisse

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

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

John Chambers

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

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

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

Paul Silverstein - Credit Suisse

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

John Chambers

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

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


Your next question comes from Jason Ader - Thomas WeiselPartners.

Jason Ader - Thomas Weisel Partners

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

I think your point is well taken that the global economy isnot as dependent on the U.S.anymore, but is it fair to say that maybe you're incrementally a little morecautious on the overall business because of what's happening in what I wouldcall a pretty strategic area of U.S.enterprise?

John Chambers

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

More to the entertainment spending, which all of usunderstand, continues to stay strong, especially home entertainment within thebusiness segment. If we get the video loads like we're talking about beingdriven by enterprise, and I believe that we will over time with applications suchas TelePresence, business security, more of this collaboration enabled by Web2.0, that's when you see the service provider CEOs' eyes light up a little bit.I think they clearly get it, whether you're the leader at Verizon or AT&Tor Time Warner or Comcast, they understand that opportunity as well.

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

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

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

The second is that even in the U.S.,you will hit a point where CEOs have to innovate. To really be competitive inthe U.S. or Western Europe versus very effective business models and cost of laborpositions -- and candidly a society thatis beginning to use technology more aggressive than exists in the U.S.or Western Europe -- we're going to have to move ascompanies. Make no mistake about it. I'm moving extremely rapidly in terms ofbacking an unlimited IT budget. I just steal it from somebody else's budget. Rebecca, if you are listening, I trust you notto misuse that!

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

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

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

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

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

Blair Christie

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

Again, I would like to remind you that in light ofregulation Fair Disclosure, Cisco plans to retain its long-standing policy tonot comment on its financial guidance during the quarter unless it is donethrough a public disclosure. Please feel free to call the Investor Relationsgroup with any follow-up questions from this call and thank you for yourongoing participation and continued support. This concludes our call.

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