FOOL CONFERENCE CALL SYNOPSIS*
By Greg Markus (TMF Boring)

Cisco Systems Inc.
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170 W. Tasman Dr.
San Jose, CA 95134
(408) 526-4000
http://www.cisco.com

ANN ARBOR, Mich. (Nov. 6, 1997) /FOOLWIRE/ -- On Nov. 4, 1997, Cisco Systems Inc. reported its fiscal first quarter results for the period ending Oct. 25, 1997. Net sales were $1,869 million, compared with $1,435 million for the same period last year, an increase of 30%. Pro forma net income excluding the write-off of purchased in-process R&D (discussed below) was $416 million or $0.59 per share compared with pro forma net income of $321 million or $0.47 per share for the first quarter of 1997, increases of 30% and 26% respectively.

DAGAZ TECHNOLOGIES PURCHASE. During the quarter, Cisco completed its purchase of DAGAZ Technologies Inc. and its xDSL technology and took a one-time charge of $127 million, or $0.12 per share (after tax), as a write-off of in-process R&D.

OPERATIONS. Gross margins were 65.1%, flat with the preceding quarter and up slightly from the year-ago 65.0%. Continued good execution from value engineering activities helped to offset negative product mix variances and aggressive pricing from some competitors. Component pricing remains stable and follows normal learning curves. Total operating expenses excluding the DAGAZ purchase increased slightly to 32.9% of sales as compared with last quarter's 32.4%. In line with earlier guidance, Cisco focused hiring in the quarter on engineering and sales personnel. R&D expenses increased to 12.0% from 11.4%. Sales and marketing expenses were constant with last quarter at 17.8% of sales, although hiring of sales personnel was less than anticipated. General and administrative expense was down slightly from last quarter. Pro-forma net income increased to 22.2% of sales from 21.7% last quarter.

BALANCE SHEET. Cash and equivalents increased by $685 million to $3.6 billion. Cisco is currently generating in excess of $150 million in positive cash flow per month from operations, on average. Accounts receivable decreased from last quarter to $1.15 billion and to 56 days sales outstanding versus 60 days. Inventories declined by $14 million to $241 million, and the inventory turn ratio improved from 10.1 to 10.5.

HEADCOUNT. The company increased its employee base by 551 people during the quarter, bringing the total to 11,279 employees.

STOCK SPLIT. Cisco's board of directors authorized a three-for-two stock split to be effective on Dec. 16, 1997.

GEOGRAPHIC BREAKDOWN. On a geographic basis, the U.S. market accounted for 56% of total company bookings, and the market there continues to be strong. Overall sequential order growth was very good in the Americas, with the Service Provider market showing increased activity levels and orders. Asia was 12% of the company's total business (versus the usual 12% to 16%) and continues to be challenging, with sequential bookings increasing in the low single digits. China, Hong Kong, and Taiwan represented 23% of bookings in Asia, and Cisco feels they are well positioned in those markets. Japan and Korea represented 59% and 6% of Asia bookings, respectively, and are in a state of economic slowdown. Excluding Japan, Hong Kong, Taiwan and China, the rest of Asia represents less than 3% of Cisco's total business. Europe showed signs of improving, with good activity in most countries. The company did well in the U.K. and Nordic countries, and saw improving trends in Central and Eastern European countries. France, Germany and Italy continue to be the biggest challenge.

SERVICE PROVIDER MARKET. The service provider market continues to show signs of improvement. Orders increased in excess of 10% sequentially, and the company had key wins at USWest, CompuServe and Ameritech. Cisco indicated that service providers were focusing their spending on the business market rather than the consumer market, which should work to Cisco's advantage. In the Internet backbone, Cisco began shipping the Cisco 12000 gigabit switch-router, which has been operational in the Internet for more than a quarter. Cisco is very pleased with the initial acceptance of this product. The "Cisco Powered Network" branding program is beginning to have a positive impact.

NEW PRODUCTS. The Gigabit Switch Router 12000 is being well accepted, with key wins at UUNET, Sprint and GTE. Cisco is not seeing any significant competition from products being offered by start-ups, such as Juniper. In the dial market, Cisco introduced three carrier-class dial solutions for service providers: the Cisco AS5300 universal access server and two integrated AccessPath dial access systems. The AS5300 is exceeding Cisco's expectations. Access concentrator bookings increased by over 25% sequentially, and the company gained market share in access concentrator and access server market. Next-generation token ring solutions orders increased more than 30% sequentially. Key announcements in the quarter included four new high-density, high-performance 10/100 fast ethernet modules for the Catalyst 5000 series and the launch of a new Token Ring module for the Catalyst 5000 and the Catalyst 3900 switch. Catalyst 5000 and 5500 LAN switching experienced double digit order growth this quarter.

GIGABIT ETHERNET. The company has initiated a three-phased plan for delivering a complete set of Gigabit Ethernet products across its entire product line. Industry sources estimate the size of this market to be $200 million in 1998, $500-800 million in 1999, and $1.0-1.5 billion in 2000. Cisco announced the first phase of a data/voice/video integration strategy that will ultimately encompass all of its markets. Adding to Cisco's current voice-over-ATM and voice-over-frame relay offerings, new products include voice-over-IP modules for the Cisco 3600 series and Asynchronous Transfer Mode (ATM) circuit emulation capabilities for the Catalyst 5500. Circuit emulation allows voice traffic from legacy systems to be transported over packet or cell infrastructures.

END-TO-END. Cisco saw continued acceptance of end-to-end networking solutions in all of its markets. Cisco is #1 or #2 in 12 of the 15 product areas in which it competes. The three areas where it was not #1 or #2 were dial access, token ring, and network management; and the company has taken significant steps in each of those areas.

ORDERS. The book-to-bill ratio was slightly above 1.0, whereas in the past few quarters the ratio was 1.0. Order placement during the quarter was linear. On a sequential basis, order booking growth by major product sector was as follows: WAN switching, low-double digits; LAN switching, double digits; routing (low- and high-end), low single digits; access concentrators (AS5200 and AS5300), greater than 25%. As routing and switching become integrated into a single chassis, the distinction between the two product lines will become increasingly difficult to make.

CISCO CONNECTION. Cisco is currently booking more than 39% of its orders through its Cisco Connection Website. The current network bookings run rate is over $3 billion. This application resulted in a 60% productivity increase for Cisco in this area and approximately a 20% productivity increase for customers.

GUIDANCE. Cisco intends to continue its focus on hiring in R&D and field sales personnel in the current (second) fiscal quarter, expecting to add over 600 new hires in the quarter. Operating expenses may thus increase slightly faster than sales for the quarter. The tax rate for Q1 was 35% and that rate should continue through the balance of 1998; that is two percentage points below the tax rate in Q4 of fiscal 1997. Inventories should be expected to increase slightly as customer lead times decrease. Cisco sees no change in the basic drivers of the industry. Industry experts continue to project 30% to 50% annual revenue growth industry-wide, and Cisco's goal is to grow at or above the industry rate, although that becomes increasingly challenging given Cisco's market share. Two variables are largely outside of the company's control; those are economic conditions in specific countries and service provider spending. The share count for Q2 will probably increase by 5-7 million shares, not accounting for the 3-for-2 split.

NEXT REPORT. The Q2 report and conference call will be on Feb. 3, 1998, at 4:45pm Eastern time.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.