Cisco Systems Analyst Q&A Session With Chambers (CSCO)

Q&A SESSION for Cisco Systems (NASDAQ:CSCO) (once again contextual rather than verbatim):

• Our earnings summary is here.
• If you want Chambers conference call notes before Q&A they are here.

GOLDMAN SACHS (Brant Thompson?)... Expand on US verticals markets?

• CHAMBERS: "Was solid, but did see some softness, and dramatic decreases year over year from major financial services and retail."

RBC Capital Markets...is it becoming more cumbersome because of law of large numbers?

• CHAMBERS: "Depends on how customers purchase but we think is easier now... doing extremely well in commercial market place where job growth is occurring.  Routing & Switching is lumpy but we've seen very solid growth.  We'll be more right than conventional wisdom.  In terms of ability to move into markets.... actually as an architectural play and web 2.0 migration very comfortable with 12-17% projections."

UBS AG:  Back on enterprise market and look on global basis, when in 2005 the major inflections took a year to take off. Should we look at weakness in US Enterprise market and say it is likely to rebound to double digit in a year or will it create a slowdown in rest of world?

• CHAMBERS: "The dependency on the U.S. is not what it was before and emerging China-India are doing well.  Internal consumption is much greater than prior US-dependent cycles.  EU area forecast just got raised.  Maybe 60% in top accounts is now going outside U.S.  Not hearing from customers a major concern.
• RICK: "reinforcing that we don't see any reversal in outside U.S. markets and not seeing any major impact in rest of world...the cold isn't spreading."
• CHAMBERS: "US enterprises have squeezed spending, and he'd be surprised if US enterprise doesn't come back."

J.P.MORGAN: If rest of business is growing, sounds like you'd be above guidance if US enterprise customers come back?

• CHAMBERS: "Your concept is interesting and he wouldn't disagree with it.... assume we are being conservative.  The prior guidance was also conservative.  US Enterprise is now only 41% of US business now. "

MERRILL LYNCH: On switching...was about 34% of global revenues and more than enterprise....can you explain sharp deceleration in switching and what you assume there in the guidance? What can be done to improve?

• CHAMBERS: "whatever number we give individually we are likely to be off slightly on an individual component basis..... assume switching will have ebbs and flows and wouldn't weigh one quarter too much..."

LEHMAN BROS: Beyond quarter and looking at emerging markets...investing in India... Talk about what has changed on philosophy in China? Acceleration of Business and if so how quickly?

• Chambers: moved 20 executives there to India couple years ago. China is similar but different. Back in 1994 to 1995 his first CEO big decision was to invest heavily in China.  See very positive build out there in provinces.  Also see an emerging software industry there and they've made $500 million investments in Chinese software (including Alibaba)...... Did strategic relationship with China Development Bank and view of Cisco has expanded compared to three years ago."
• NED: on partnerships and business development.." we have been a close partner with many companies... believe market is at an inflection point and they can export Chinese business models globally."

MORGAN STANLEY: At risk of beating dead horse... On US enterprise and seeing Q3 down again, felt better etc..... "How does that cross look now?"

• CHAMBERS: "Based on customer feedback, strength in overall US market was indicative of commercial.  On enterprise, the fact that so many were so negative he actually changed some of his own models.  Many will wait to see what the economy is.  With a 30-50% chance of recession... that is a thing we all face..... economy to most customers feels like more of a soft landing but won't know for 6 months. August was about where it was expected, US saw a somewhat soft in September but normal in October....."

JEFFERIES: Clarification, was there a gross margin impact on currencies? On wireless growth and impact?

• DENNIS: "currency had negligible impact."
• CHAMBERS: "wireless... always lumpy, don't read too far into any quarter..... doing wireless architecture across the board in 2008."
• CHARLIE: "wireless has been lumpy quarter to quarter, John is right as strategy is to drive wire to wireless. Up until now have been separate infrastructures.  Want to unify.... should be transparent to end user."
• CHAMBERS: "You are talking about a 41.7 Billion run rate and lumpiness was on 24% growth....don't multiply that by 4 though."CREDIT SUISSE: 2 clarifications.... on switching should the be a snap-back? To what extent was US weakness tied to financial and auto?

• CHAMBERS: "as far as modular it does have an effect, but it is tied to enterprise spending.  As far as finance, that was hardest hit. Then the top 25 were hardest hit, and 8 are financial and two auto out of that top 25 accounts."

THOMAS WEISEL: global economy not as dependent on US but are you more cautious?

• CHAMBERS: "US service provider is not as dependent upon... race is in early stages to build out broadband to accommodate video.... not tied as tightly to economy as a whole. Leaders there understand the opportunity, but would watch the US commercial market and make sure two of three hold."  "None of us have seen the diminished importance and role the US is at now....feel good about global despite US weakness. Global economy may help the US out of a hole."  "We can handle two or three of our 20 operations missing.  CEO's will reach a point here that they have to innovate.... Have to evaluate trends for 2 to 5 years out rather than quarter to quarter."

Chambers ended the call and said thank you etc........................FEB 6, 2008 is next quarter conference call.

24/7 WALL ST. TAKE: If you want any conjecture here from someone who is neutral or at least unbiased here, it sure seems like the trading community just doesn't believe Chambers or that the community thinks the impending slowdown is worse than Chambers thinks it is going to be.  There is some obvious concern about Cisco's growth and the industry growth being sustainable, but it sure seems like traders are going with their own gut decisions and opinions rather than what Chambers was telling them on the call. Wall Street has now flopped on its prior excitement literally in one trading session....  Congratulations are in order for the Cowen & Co. analyst that gave this a neutral rating with competition heating and demand slowing.

Jon C. Ogg
November 7, 2007