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. (Aug. 4, 1998) /FOOLWIRE/ -- Cisco Systems today reported its fourth quarter and annual results for the period that ended on July 25, 1998.

Fiscal Year Results. Net sales for fiscal 1998 were $8,459 million, compared with $6,440 million last year, an increase of 31%. Pro forma net income was $1,879 million or $1.75 per share, compared with pro forma net income of $1,414 million or $1.37 per share during fiscal 1997, increases of 33% and 28% respectively.

Fourth Quarter Results. Net sales for the fourth quarter were $2,390 million, compared with $1,765 million for the same period last year, an increase of 35%. Pro forma net income, which excludes the write-off of purchased in-process R&D associated with the acquisition of CLASS Data Systems, was $523 million or $0.48 per share, compared with pro forma net income of $383 million or $0.37 per share for the fourth quarter of 1997, increases of 36% and 30% respectively. Actual net income for the fourth quarter, including the write-off, was $492 million or $0.45 per share, compared with $151 million or $0.14 per share in the same period last year.

CLASS Data Acquisition. During the quarter, Cisco completed the acquisition of CLASS Data Systems for approximately $51 million and took a one-time charge of $48 million, or $0.03 per share on an after-tax basis, as a write-off of purchased in-process R&D.

Stock Split. The company's board of directors authorized the splitting of Cisco's common stock on a three-for-two basis for shareholders of record on August 14, 1998. Shares resulting from the split are expected to be distributed by the transfer agent on September 15, 1998. This action will be the seventh time that Cisco's common stock has been split since the company's initial public offering in February 1990. Two-for-one stock splits occurred in 1991, 1992, 1993, 1994, and 1996; and a three-for-two split occurred in 1997.

Introductory Comments. President and CEO John Chambers said, "We are pleased to report our 34th consecutive quarter of revenue and earnings growth. We were especially pleased, considering the challenges in the Asian market, with our 31% increase in revenue over the last fiscal year. This year we gained more market share and momentum, compared with our traditional competitors, than in any previous year in the company's history. We continue to achieve the #1 or #2 market-share position in almost all product areas where we compete."

Chambers continued, "Over the past 12 months, we have seen a dramatic shift in how the Internet is viewed. Once seen as a tool used primarily by technologists, the Internet is now the catalyst driving change in the new economy. The Internet is being recognized among business, government and individuals worldwide as the strategic element for competitive advantage. Cisco is well positioned to play a key role in the new Internet Economy."

Income Statement Highlights. Revenues increased 9% sequentially (meaning, from the last quarter). Gross margin in the quarter was unchanged sequentially at 65.7%. Total operating expense increased to 34.6% as compared to 34.0% in Q3. Research and development expense was 12.3% of sales, up from 12.0%; sales and marketing expense increased to 19.1% from 18.9%. General and administrative expense increased slightly to 3.2% of sales, from 3.1% in Q3, due primarily to increased goodwill expense. Cisco's tax provision was unchanged at 35%. Pro forma net income was 21.9% of sales in Q4 versus 22.1% in Q3 and 21.7% a year ago.

Balance Sheet Highlights. Cash, short-term, long-term, and restricted investments increased by $850 million in the quarter, to $5.7 billion. Orders and shipments showed good linearity across the quarter. As a result, days sales outstanding (DSO) declined sequentially from 53 days to 50 days. Net inventory increased by $54 million sequentially to $362 million due to requirements to meet customer ordering patterns, product mix shifts, new product ramps, and continued growth in the company's two-tiered distribution system, in which Cisco does not recognize revenue until point-of-sale. Quarterly inventory turns decreased to 9.8 from 10.4 at the end of last quarter.

Hiring. Cisco added a net 1,270 employees during the quarter, with total head count at 14,623. The plan is to add approximately the same number the current quarter. Hiring is focused on engineering and field sales.

Key Product Markets. Cisco continues to advance its end-to-end Internet solutions for each of its key markets -- enterprise, small/medium business and service provider -- through internal development, strategic alliances, minority investments and acquisitions. In the past year, Cisco launched 31 new products, with the Catalyst 5500 achieving over $1 billion in revenues within its first year of shipping. Other key new platforms include the AS 5300, AS 5800, and the Cisco 12000. In the last 12 months, Cisco has introduced a completely new line of carrier-class products. CEO Chambers said he was more comfortable with the new product pipeline than he has ever been since joining Cisco.

The product line coming from Cisco's acquisition of StrataCom enjoyed year-over-year revenue growth in excess of 50%. Switching now represents approximately 40% of Cisco's total business, routing is another 40%, service, support and maintenance is about 6%, and the remaining 14% is in new areas, such as the cable and dial marketplaces.

Enterprise Market. Cisco continues to gain both market share leadership and acceptance of its end-to-end Internet solutions. Highlights of the quarter include the introduction of the company's next generation of multiservice routers, the Catalyst 8500 family. The Catalyst 8510 and Catalyst 8540 will help customers manage data, voice and video applications over a single network. At the same time, the Catalyst 5500 high-end switch surpassed the $1 billion revenue milestone within one year of its initial shipment.

Small/Medium Business Market. Cisco introduced an alliance with IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> to deliver electronic commerce solutions to small businesses. The pact will help small and growing businesses improve their internal networks and deliver faster access to the Internet. With more than $1 billion in channel revenue, Cisco also became the market leader in two-tier distribution of network systems.

Service Provider Market. Cisco continues to see increasing market acceptance that public voice networks will convert into data networks in the future. Sprint's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> decision to align with Cisco to build out its future data, voice and video networks signaled a key shift away from Old World, circuit-based networks toward a packet-based infrastructure. Other milestones in the quarter include Cisco's delivery of New World technologies such as broadband access to the home in the form of comprehensive xDSL solutions, cable, voice-over-IP switching, carrier-class provisioning systems and new, open standards-based network management solutions. Continued consolidation in this segment and the lumpy nature of orders will continue to provide a degree of unpredictability, however.

Consolidation among technology providers is expected to continue, although Cisco expects that the majority of large acquisitions and an even higher proportion of partnerships will not succeed. Cisco believes that its ability to acquire and partner successfully remains a key competitive advantage.

Cisco said that the company achieved market-share leadership in the dial access market, with orders growing 18% in Q4 over Q3, and growth for the fiscal year up more than 90%. With the strength of the AS 5300 and AS 5800, the company expects momentum to continue this year. In voice-over-IP, Cisco's strategy focuses on voice quality, voice services, and scalability. With the acquired LightSpeed and Summa Four teams, Cisco will be able to build FDDI-class central office products this fiscal year.

In the ATM space, Cisco is pleased with the acceptance of its new multi-service platforms and expects that its introduction of key new products later this calendar year and in 1999 will enhance the company's position, especially in the core of ATM networks.

Broadband access represents a new $1 billion market in the next two to three years. Cisco has emerged with product leadership in both cable and xDSL, and initial design wins are very exciting in both markets. Cisco has announced alliances or begun deployment activities with six of the major cable firms. Cisco has also established a partnership with Bosch in the area of emerging broadband wireless for the "last mile."

Ultimately, the service provider segment could provide 40% of Cisco's total business. The global market is estimated at $250 billion to $350 billion currently. The share of that market that Cisco currently serves is perhaps 10% of that, and even that served market could grow as much as 100% year-over-year.

Geographic Markets. Bookings in the Americas and Europe continued to show good strength in Q4, with orders up more than 40% year-over-year in both regions. Asian bookings -- and especially Japan -- were "challenging." U.S. order bookings were 57% of total bookings in Q4, versus 54% in Q3. Bookings from Canada and Latin America increased to 7% from 6%. EMEA (Europe, Middle East, Africa and Australia) bookings were steady at 29% of the total. Asian bookings (including Japan) declined from 11% in Q3 to 7% in Q4. Japan accounted for 4% of bookings versus 6% in Q3.

Management believes that conditions in Asia will likely get worse before they get better. Consequently, Cisco is not modeling Asia to place a major role in its growth strategy for the next few years and expects the region's share of total bookings to be in the mid- to high single-digits. China remains a significant exception to the trend in Asia, with year-over-year growth in excess of 80%.

Guidance. Book-to-bill in Q4 was above 1.0. Cisco has strong order momentum in each of its business segments (enterprise, service provider, and small/medium business) and in most of its key geographies. Going forward, management remains cautiously optimistic about the future of the industry as a whole and, in the short- to mid-term, does not see any limit to the opportunities. The company continues to target revenue growth at or above that of the overall industry average, which it says that analysts estimate to be 30-50% annually in countries with reasonably good economies.

That said, within each geographical market, Cisco's growth rate depends upon economic conditions, service provider spending, and the effectiveness of the company's competition. In light of those and other facts, such as Year 2000 issues and government regulation of the Internet, the company remains cautious over the next 12 to 18 months, and consistent growth depends on continued strength in the Americas and Europe.

Cisco continues to expect its gross margin to decline over time. Operating expenses are being modeled in the 35% range. Going forward, the company expects its tax rate to decline to 33.5%.

Next Conference Call. The Q1 1999 earnings report and conference call will occur on Wednesday, November 4, after the close of the market.

(Cisco Systems is a holding in the Motley Fool's real-money Boring Portfolio and Cash-King Portfolio.)

* 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.