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Cisco Systems Reports Second Quarter Earnings


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* Q2 Net Sales: $6.6 billion (9.3% increase year over year)
* Q2 Net Income: $1.4 billion GAAP (includes stock-based compensation expense of $188 million, net of tax) compared with $1.1 billion for Q2 FY’05, including pro forma stock-based compensation expense; $1.6 billion non-GAAP (pro forma) compared with $1.5 billion for Q2 FY’05
* Q2 Earnings Per Share: $0.22 GAAP (includes stock-based compensation expense of $0.03) compared with $0.17 for Q2 FY’05, including pro forma stock-based compensation expense; $0.26 non-GAAP (pro forma) compared with $0.22 for Q2 FY’05

SAN JOSE, Calif., February 7, 2006 - Cisco Systems, Inc., the worldwide leader in networking for the Internet, today reported its second quarter results for the period ended January 28, 2006.

Net sales for the second quarter of fiscal 2006 were $6.6 billion, compared with $6.1 billion for the second quarter of fiscal 2005, an increase of 9.3 percent, and compared with $6.5 billion for the first quarter of fiscal 2006, an increase of 1.2 percent.

Net income for the second quarter of fiscal 2006, on a generally accepted accounting principles (GAAP) basis, was $1.4 billion or $0.22 per share, which includes stock-based compensation expense related to employee stock options and employee stock purchases of $188 million, net of tax, or $0.03 per share. Net income prior to fiscal 2006 did not include stock-based compensation expense related to employee stock options and employee stock purchases. Including the pro forma stock-based compensation expense previously disclosed in Cisco’s financial statements footnotes, net income for the second quarter of fiscal 2005 was $1.1 billion or $0.17 per share. Net income for the first quarter of fiscal 2006, on a GAAP basis, was $1.3 billion or $0.20 per share, which includes stock-based compensation expense related to employee stock options and employee stock purchases of $228 million, net of tax, or $0.04 per share. Please refer to the table on page 7 for a comparison of net income, including the effect of stock-based compensation expense. Net income on a GAAP basis, which does not include the effect of stock-based compensation expense, for the second quarter of fiscal 2005 was $1.4 billion or $0.21 per share.

Non-GAAP (pro forma) net income for the second quarter of fiscal 2006 was $1.6 billion or $0.26 per share, compared with $1.5 billion or $0.22 per share for the second quarter of fiscal 2005, and compared with $1.6 billion or $0.25 per share for the first quarter of fiscal 2006. A reconciliation between net income on a GAAP basis and non-GAAP (pro forma) net income is provided in a table on page 7.

Net sales for the first six months of fiscal 2006 were $13.2 billion, compared with $12.0 billion for the first six months of fiscal 2005, an increase of 9.5 percent.

Net income for the first six months of fiscal 2006, on a GAAP basis, was $2.6 billion or $0.42 per share, which includes stock-based compensation related to employee stock options and employee stock purchases of $416 million, net of tax, or $0.07 per share. Including the pro forma stock-based compensation expense previously disclosed in Cisco’s financial statements footnotes, net income for the first six months of fiscal 2005 was $2.3 billion or $0.34 per share. Net income on a GAAP basis, which does not include the effect of stock-based compensation expense, for the first six months of fiscal 2005 was $2.8 billion or $0.42 per share.

Non-GAAP (pro forma) net income for the first six months of fiscal 2006 was $3.2 billion or $0.51 per share, compared with $2.9 billion or $0.44 per share for the first six months of fiscal 2005.

During the second quarter of fiscal 2006, Cisco completed the purchase of Cybertrust’s Intellishield Alert Manager and the purchase of selected assets of Digital Fairway Corporation.

“We’re pleased with the solid revenue and earnings per share results Cisco delivered during its second quarter, but also especially pleased with our strong order momentum,” said John Chambers, Cisco president and CEO. “This proves our strategy is working in terms of the convergence of voice, video and data along with our balanced approach to our customer segments, core and advanced technologies, business and technology architecture and key geographic theaters.”

“The network is enabling the next generation of IT,” Chambers continued. “As all forms of communications are migrating into the network, it is transforming the way our customers create business models and design new forms of communication-based services for their customers, employees and citizens. Cisco anticipated the need for intelligence throughout the network five years ago, and today, those dividends are beginning to pay off.”

Cisco will discuss second quarter 2006 results and business outlook on a conference call and Webcast at 1:30 p.m. Pacific Time today. Call information and related charts are available at http://investor.cisco.com.

Financial Highlights

Cash flows from operations were $1.9 billion for the second quarter of fiscal 2006, compared with $1.8 billion for the second quarter of fiscal 2005, and compared with $1.4 billion for the first quarter of fiscal 2006.

Cash and cash equivalents and investments were $15.0 billion at the end of the second quarter of fiscal 2006, compared with $16.1 billion at the end of the fourth quarter of fiscal 2005, and compared with $13.5 billion at the end of the first quarter of fiscal 2006.

During the second quarter of fiscal 2006, Cisco repurchased 42 million shares of common stock at an average price of $17.87 per share for an aggregate purchase price of $748 million. As of January 28, 2006, Cisco had repurchased and retired 1.7 billion shares of Cisco common stock at an average price of $18.13 per share for an aggregate purchase price of approximately $31.4 billion since the inception of the stock repurchase program.

Days sales outstanding (DSO) in accounts receivable at the end of the second quarter of fiscal 2006 were 35 days, compared with 31 days at the end of the fourth quarter of fiscal 2005, and compared with 33 days at the end of the first quarter of fiscal 2006.

Inventory turns on a GAAP basis were 6.5 in the second quarter of fiscal 2006, compared with 6.6 in the fourth quarter of fiscal 2005, and compared with 6.5 in the first quarter of fiscal 2006. Non-GAAP (pro-forma) inventory turns were 6.4 in the second quarter of fiscal 2006, compared with 6.4 in the first quarter of fiscal 2006.

“Our second quarter results demonstrate solid financial execution and profitable growth,” said Dennis Powell, Cisco chief financial officer. “As we manage the business for the long term, we have seen strength in many aspects of our business, particularly cash flow from operations of $1.9 billion, non-GAAP (pro forma) net income of $1.6 billion and an 18 percent year-over-year increase in non-GAAP (pro forma) earnings per share to $0.26.”

Business Highlights

Cisco announced a definitive agreement to acquire Scientific-Atlanta, Inc.
Comcast selected the Cisco CRS-1 Carrier Routing System for its integrated national delivery platform for broadband, communications, video entertainment and future cross-platform services.
Shanghai Telecom is expected to become the first telecommunications carrier in China to deploy the Cisco CRS-1 as part of its Cisco Internet Protocol Next-Generation Network (IP NGN).
Telstra, one of Australia’s principal telecommunications companies, selected the Cisco CRS-1 to provide a carrier-class foundation for a converged “triple play” network.
Both Virgin Entertainment Group and Hannaford Bros. Co. selected the Cisco Intelligent Retail Network to increase store-level productivity and simplify operations.
The U.S. Department of Health and Human Services selected Cisco to work with other technology firms to develop prototypes for a Nationwide Health Information Network (NHIN) architecture.
Northrop Grumman Corporation teamed with Cisco to provide IP-based rich-media communications to the U.S. Department of Defense through the Defense Information Systems Agency (DISA).
During the second quarter, Cisco announced three planned additions to the advanced technology portfolio: 1) hosted small business systems, or Linksys One; 2) application networking services for enterprise customers; and 3) digital video, representing a significant amount of the company’s planned acquisition of Scientific Atlanta for the consumer and service provider market segments. The first two are included in Cisco’s Advanced Technologies revenue category this quarter.
Editor’s Note:

Q2 FY’06 conference call to discuss Cisco’s results along with its business outlook to be held at 1:30 p.m. Pacific Time, Tuesday, February 7, 2006. Conference call number is 888-848-6507 (United States); 212-519-0847 (international).

Conference call replay will be available from 4:30 p.m. Pacific Time, February 7, 2006 to 4:30 p.m. Pacific Time, February 14, 2006 at 866-357-4205 (United States); 203-369-0122 (international). The replay is also available from February 7, 2006 through April 21, 2006 on the Cisco Investor Relations Website at http://www.cisco.com/go/investors.

Additional information regarding Cisco’s financials as well as a Webcast of the conference call with visuals designed to guide participants through the call will be available at 1:30 p.m. Pacific Time, February 7, 2006. Text of the conference call’s prepared remarks will be available within 24 hours of completion of the call. The Webcast will include both the prepared remarks and the question-and-answer session. This information, along with GAAP reconciliation information, will be available on the Cisco Investor Relations Website at http://www.cisco.com/go/investors.

A Q&A with Cisco’s CEO and CFO on Q2 FY’06 results will be available at http://newsroom.cisco.com.

About Cisco Systems
Cisco Systems, Inc. (NASDAQ: CSCO) is the worldwide leader in networking for the Internet. Information about Cisco can be found at http://www.cisco.com. For ongoing news, visit http://newsroom.cisco.com.

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This release may be deemed to contain forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events and the future financial performance of Cisco that involve risks and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including: business and economic conditions and growth trends in the networking industry and in various geographic regions; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; the growth of the Internet and levels of capital spending on Internet-based systems; variations in customer demand for products and services, including sales to the service provider market; the timing of orders and manufacturing and customer lead times; changes in customer order patterns or customer mix; insufficient, excess or obsolete inventory; variability of component costs; variations in sales channels, product costs or mix of products sold; our ability to successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses and technologies including the businesses and technologies of Scientific-Atlanta, Inc.; increased competition in the networking industry; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; manufacturing and sourcing risks, including risks relating to our transition to a new manufacturing model; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters; natural catastrophic events; achievement of the benefits anticipated from our investments in sales and engineering activities; our ability to recruit and retain key personnel; our ability to manage financial risk; currency fluctuations and other international factors; potential volatility in operating results and other factors listed in Cisco’s most recent reports on Form 10-K, 10-Q and 8-K. The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes thereto included in Cisco’s most recent reports on Form 10-K and Form 10-Q, each as it may be amended from time to time. Cisco’s results of operations for the three and six months ended January 28, 2006 are not necessarily indicative of Cisco’s operating results for any future periods. Any projections in this release are based on limited information currently available to Cisco, which is subject to change. Although any such projections and the factors influencing them will likely change, Cisco will not necessarily update the information, since Cisco will only provide guidance at certain points during the year. Such information speaks only as of the date of this release.

This release includes non-GAAP (pro forma) net income, non-GAAP (pro forma) net income per share data, non-GAAP (pro forma) shares used in net income per share calculation, non-GAAP (pro forma) inventory turns, non-GAAP (pro forma) gross margin, and other non-GAAP line items from the Consolidated Statements of Operations, including cost of sales information, gross margin, operating expenses (including research and development, sales and marketing, and general and administrative expenses), other income (loss), net, and provision for income taxes. These measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP (pro forma) measures used by other companies. Cisco believes that the presentation of non-GAAP (pro forma) net income, non-GAAP (pro forma) net income per share data, non-GAAP (pro forma) shares used in net income per share calculation, non-GAAP (pro forma) inventory turns and non-GAAP (pro forma) gross margin, when shown in conjunction with the corresponding GAAP measures, provides useful information to management and investors regarding financial and business trends relating to its financial condition and results of operations. Cisco further believes that where the adjustments used in calculating non-GAAP (pro forma) net income and non-GAAP (pro forma) net income per share are based on specific, identified charges that impact different line items in the statements of operations (including cost of sales, research and development, sales and marketing, and general and administrative expense), that it is useful to investors to know how these specific line items in the statements of operations are affected by these adjustments. In particular, as Cisco begins to apply SFAS 123(R), it believes that it is useful to investors to understand how the expenses associated with the application of SFAS 123(R) are reflected on its statements of operations. For its internal budgets, Cisco’s management uses financial statements that do not include stock-based compensation expense related to employee stock options and employee stock purchases, payroll tax on stock option exercises, in-process research and development, compensation expense related to acquisitions and investments, amortization of purchased intangible assets, gain (loss) on publicly traded equity securities and the income tax effects of the foregoing on cost of sales, research and development, sales and marketing and general and administrative expenses, as applicable. Cisco’s management also uses the foregoing non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the financial results of Cisco.

Copyright© 2006 Cisco Systems, Inc. All rights reserved. Cisco, Cisco Systems, the Cisco Systems logo, and Linksys are registered trademarks or trademarks of Cisco Systems, Inc. and/or its affiliates in the U.S. and certain other countries. All other trademarks mentioned in this document are the property of their respective owners. The use of the word partner does not imply a partnership relationship between Cisco and any other company.



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