ALEXANDRIA, Va., August 18, 1996/FOOLWIRE/ --- CISCO SYSTEMS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CSCO)") else Response.Write("(NASDAQ:CSCO)") end if %>, the leading global supplier of internetworking solutions, today reported its fourth quarter and annual results for the period ending July 28, 1996. Actual reported financial results include StrataCom, Inc. and associated StrataCom merger costs of $15.5 million.

Net consolidated sales for the fourth quarter were $1,292.1 million, compared to $701.2 million for the same period last year, an increase of 84%. Net consolidated income was $276.6 million, or $.41 per share, versus $155.3 million or $.24 per share during the fourth quarter last year, increases of 78% and 71% respectively.

Net consolidated sales for the 1996 fiscal year were $4,096.0 million, compared to $2,232.7 million for the 1995 fiscal year, an increase of 83%. Net consolidated income was $913.3 million, or $1.37 per share, versus $456.5 million or $.72 per share for fiscal year 1995, increases of 100% and 90% respectively.

Pro forma Cisco financial results, excluding StrataCom, Inc. and associated merger costs were: pro forma fourth quarter net sales were $1,176.4 million, compared to $621.2 million for the same period last year, an increase of 89%. Pro forma net income was $266.9 million, or $.45 per share, versus $143.7 million, or $.26 per share during the fourth quarter of last year, increases of 86% and 73% respectively.

Pro forma net sales for the 1996 fiscal year were $3,698.2 million, compared to $1,978.9 million for the 1995 fiscal year, an increase of 87%. Pro forma net income was $861.6 million, or $1.47 per share, versus $421.0 million, or $.76 per share for fiscal year 1995, increases of 105% and 93% respectively.

The fiscal 1995 consolidated and pro forma results include a one-time pre-tax charge of $95.8 million, or $.11 per share on a post-tax, pro forma basis incurred by the company upon the acquisition of the net assets of LightStream Corporation in the second quarter.

On July 31, 1996, Cisco's Board of Directors approved an increase to the stock repurchase program authorizing an additional 10.0 million shares of Cisco common stock to be used to meet several of the Company's common stock requirements, primarily its employee stock plans. When added to the remaining shares authorized under the initial repurchase program approved by the Board in August 1994, Cisco is now authorized to repurchase up to 16.8 million shares of Cisco common stock.

YEAR IN REVIEW

Overall, they are very pleased with the fourth quarter results in terms of bookings, revenues and profits. They continue to grow faster than their competitors, gaining market share in many key markets. Sequential revenue growth was 19% for Cisco on a pro forma before the merger with Stratacom. Industry pundits concluded the industry as a whole grew by 35% over the year and Cisco grew at more than 80%, well above the market average.

The book-to-bill ratio at Cisco was above 1.0, but they were trimming it as they continued to improve lead times on various products. About 49% of orders came from outside the U.S., meaning Cisco is the worldwide leader in market share. The company experienced consistent double digit quarter-over-growth in many geographical markets. They have not experienced the problems that others have seen in the European theater. While they always expect periodic fluctuations, they are pleased with the balanced contribution across all four geographical theaters. They are very pleased with double-digit growth in all of their market segments by product as well.

Their growth exceeded even their most optimistic goals, particularly given how hard it is for the largest company in a market to grow faster than the market itself. They have expanded from routers to branch and dial access to LAN switching to WAN switching with the goal being to offer complete end-to-end network solutions tied together with the IOS software. Both the intranet and Internet are creating growth opportunities. Last year they organized into technology focused business units, with the expectation that this would allow them to deliver best of class products and establish market leadership. It is this that has continued to allow them to maintain leadership in a market that has been traditionally lead by smaller, more nimble players.

During the quarter, Cisco won more than 20 product awards from various industry publications. They are gaining share in most target markets and recently shipped their millionth platform. The field organization has seen the creation of three new worldwide organizations focused on specific channels. Cisco made six acquisitions in 1996, announced the intention to make two more in the last quarter. The integration with Stratacom is exceeding their own high expectations. They warned, however, that it takes at least a quarter for consolidated operations to truly measure the success of any acquisition.

They are very close to reaching their goal of one to three weeks delivery on all of their key products. Shorter lead times will also lead to more quarterly volatility, however. This point will be examined in greater depth in the section on Forward Guidance.

SINGLE VENDOR PREFERENCE

In the last several quarters, they began to see more of their leading edge customers become comfortable with the idea of partnering with a single vendor for their network needs. Top managers are realizing more and more that the ability to use a network is crucial to competition and survival. Simplifying network management, centralizing maintenance functions for the network and getting the best-of-breed products, global customer support and the consistent fabric of hardware and software resources throughout the network that Cisco can provide has become a priority for many corporate managers of information technology.

Leading edge customers are finding they cannot continue to devote their best employee resources to network management. They need these people developing and delivering leading edge products and services in their core business to create sustainable market advantages, not futzing around with the network. Combine this with the fact that from a support perspective, service at Cisco was rated number one by a leading industry periodical and that they offer the number one or two product in each market segment tied together with the Cisco IOS software and you have what could be called a winning hand.

BALANCE SHEET AND PROFIT & LOSS STATEMENT

Looking at the balance sheet, cash and equivalents is up to $2.1 billion, including $200 million that came from Stratacom's bank accounts. Receivables have decreased to where there are 43 days of days sales outstanding (DSO) as opposed to 49 DSO last quarter. Inventories decreased and the company has been successfully rebalancing the inventory because of greater availability of components. They have improving turnover here is an important goal.

On the profit and loss statement, some highlights are revenue from training and support of $75 million.

Gross margins for the quarter fell to 65.1% from 65.5% because of changes in the product mix and some inventory cost issues. (Last quarter, Cisco talked about its LAN switching business and said that the growth here would impact gross margins because gross margins in this market segment are lower than on other products.) Consolidated gross margins with Stratacom were down to 65.0% versus 65.3% on a restated basis. Cisco warned investors to expect gross margins to continue to decline into the future. The focus is on balancing market share with EPS growth, which creates a careful balance between a number of elements. When growing a lower gross margin product like LAN switching becomes important for the overall growth of the company, they are willing to take a hit on gross margins.

This quarter, they are including in sales, general and administrative (SGA) a $5.1 million one-time charge. SGA was 29.8% of sales after all one-time elements are removed, which was flat versus last year. Research and development went up from 8.3% to 8.9% . The tax rate was stable at 37.6%. Net profit margin was 23.0% versus 23.3% last quarter and 23.1% last year. Total headcount for the quarter was 8,259, which includes 1,226 from Stratacom and 961 new hires at Cisco. They want to hire the top 10-15% of the people in the industry and will continue to employ new people. On the management side, the company added 33 new VPs, 50% from internal promotions.

FORWARD GUIDANCE

The company is pleased with its current momentum. However, in five of the past six years there has always been one slow quarter. While this did not happen in 1996, continuing to shorten lead times gives them less visibility. In the past, high backlogs have been a buffer. Shortened lead times are reducing this buffer, however. As a result, there will be some quarters that close above expectations and some that come below This will be a normal part of their business going forward.

Investors should expect gross margins to decline over time, primarily as a result of product mix changes that were detailed earlier in this synopsis. Operating expenses should be 30% of revenues. Research and development (R&D) is especially important to the company. This has increased from $44 million in 1993 to $330 million in 1996. They gave guidance that R&D spending would be between 9% to 10% going forward. The overall industry growth rate of 30-50% on the revenues side and it is their goal is to beat this. Going forward, the company will now report results on the second Tuesday following the close of the quarter.

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