Cisco Systems Inc. Q1 FY 03 Conference Call November 6, 2002 2002, Cisco Systems, Inc. All rights reserved. 1
Cisco Forward-Looking Statements This presentation may contain projections or other forward-looking statements regarding future events or the future financial performance of the Company. These projections or statements are only predictions. Actual events or results may differ materially from those in the projections or other forward-looking statements. Please see the Company s Annual Report to Shareholders and its filings with the SEC, including its recent filings on Forms 10-K and 10-Q, for a discussion of important risk factors that could cause actual events or results to differ materially from those in the projections or forwardlooking statements. 2002, Cisco Systems, Inc. All rights reserved. 2
Q1 03 Summary Solid quarter for Cisco exceeded overall market performance with operational excellence in a challenging business environment Continued execution on stated plan achieving profit after tax margins above 20% Strong balance sheet with over $21 B in cash and investments, healthy inventory turns and DSO Strong cash flow from operations Increased market leadership with continued investment in R&D Continued enhancing product price performance 2002, Cisco Systems, Inc. All rights reserved. 3
Enhancing Price Performance Cisco Is Dedicated to Driving Price Performance Significant price performance improvements and/or price reductions to nine of our top ten products over past 12 months Combining price performance enhancements with operational excellence 2002, Cisco Systems, Inc. All rights reserved. 4
Profits Profitable Market Share Gains Q1 FY 03 Operational Excellence in Four Focus Areas Cash Flow Productivity 2002, Cisco Systems, Inc. All rights reserved. 5
Q1 03 Financial Highlights Cisco Continued to Exceed Business Model Targets with Profits of 21.4% of Revenue in Q1 03 Pro-forma net income $1.0 B Pro-forma EPS $.14 Cash flow from operations $ 1.1B Annualized Revenue per Employee $547K 25% 20% 15% 10% 5% 0% Pro-Forma Net Profit after Tax as a Percentage of Sales Q1 02 Q2 02 Q3 02 Q4 02 Q1 03 2002, Cisco Systems, Inc. All rights reserved. 6
Agenda Financial Overview Business Overview What Went Well and Areas of Concern Industry Update Macro/Cisco Guidance 2002, Cisco Systems, Inc. All rights reserved. 7
Q1 03 Net Sales Net sales of $4.8 B Product sales approx. $4.0B Service sales approx. $832M Revenue Categories: Category Q1 FY 02 Q4 FY 02 Q1 FY 03 Routers 30% 27% 27% Switches 39% 42% 42% Access 6% 5% 5% Other 7% 9% 9% Services 18% 17% 17% 2002, Cisco Systems, Inc. All rights reserved. 8
Q1 03 Gross Margins Continued Improvement in Gross Margins Increasing to 69.3% in Q1 from 67.7% in Q4 Pro-Forma Gross Margin 70% 65% 60% 55% 50% Q1 02 Q2 02 Q3 02 Q4 '02 Q1 '03 2002, Cisco Systems, Inc. All rights reserved. 9
Q1 03 Pro-Forma Income Statement Cisco s Pro-Forma Net Income Continued to Improve as Margins Increased and Operating Expenses Remained Steady $M Q1 02 Q4 02 Q1 03 Net Sales 4,448 4,829 4,845 Gross Margins 54.0% 67.7% 69.3% Operating Expenses 2,111 1,977 2,033 Operating Income 291 1,293 1,325 Operating Margins 6.5% 26.8% 27.3% Net Income 332 1,039 1,038 Pro-forma (Diluted).04.14.14 2002, Cisco Systems, Inc. All rights reserved. 10
Reconciliation of GAAP to Pro Forma EPS Q1 02 Q4 02 Q1 03 GAAP EPS $(0.04) $0.10 $0.08 Reconciling items: Amortization of Purchased Intangibles $0.01 $0.03 $0.01 Restructuring Excess inventory (Benefit) In Process R&D $(0.03) $0.01 Loss on Public Equity Investments $0.08 $0.04 Other * $0.01 $0.01 $0.01 Pro Forma EPS $0.04 $0.14 $0.14 *payroll taxes on stock options & deferred compensation 2002, Cisco Systems, Inc. All rights reserved. 11
Q1 03 Cash Flow from Operations Cisco Has $21.2B in Cash and Investments Cash flow from operations of $1.1B in Q1 after: Tax payment of approximately $350m Annual bonus payment of $400m Uses of cash may include: Stock buyback approx. $5B remaining in authorization Strategic minority investments Potential acquisitions Funding financing activity in Cisco Capital Note: Cash flow statement available via press release and website 2002, Cisco Systems, Inc. All rights reserved. 12
Stock Buyback Program Q1 FY 02 Buyback program announced Amount Purchased Q2 FY 02 Amount Purchased Q3 FY 02 Amount Purchased Q4 FY 02 Buyback Program Increased Amount Purchased Q1 FY 03 Amount Purchased Remaining Buyback Program Total Amount purchased since inception Buyback Program ($ Millions) $3,000 ($350) $2,650 ($251) $2,399 ($351) $2,048 $5,000 ($902) $6,146 ($1,077) $5,069 ($2,931) 2002, Cisco Systems, Inc. All rights reserved. 13
Q1 03 Balance Sheet Cisco s Strong Balance Sheet Performance, with 57% of its Assets in Cash and Investments $M Q1 02 Q4 02 Q1 03 Assets: Cash and Investments Accounts Receivable Inventory Property and Equipment Other 19,080 1,181 1,301 2,585 11393 21,456 1,105 880 4,102 10,252 21,188 1,109 828 3,921 10,152 Total Assets 35,540 37,795 Liabilities and Equity: 37,198 Liabilities 4,535 5,232 4,891 Deferred Revenue Minority Interest Shareholders Equity Total Liabilities and Equity 3,535 20 27,450 35,540 3,892 15 28,656 37,795 3,751 10 28,546 37,198 2002, Cisco Systems, Inc. All rights reserved. 14
Q1 03 Key Ratios Q1 Q2 FY 02 Q3 Q4 FY 03 Q1 Cash and Investments ($M) 19,080 21,008 21,061 21,456 21,188 Accounts Receivable ($M) Days Sales Outstanding 1,181 24 1,150 22 990 19 1,105 21 1,109 21 Net Inventory ($M) Inventory Turns 1,301 5.5 1,023 7.0 869 7.5 880 7.1 828 7.0 Revenue ($M) Sequential Growth % 4,448 3% 4,816 8% 4,822 0% 4,829 0% 4,845 0% Deferred Revenue ($M) 3,535 3,837 3,833 3,892 3,751 Headcount Sequential Growth % 37,546 (1%) 36,786 (2%) 35,935 (2%) 35,566 (1%) 35,278 (1%) 2002, Cisco Systems, Inc. All rights reserved. 15
Agenda Financial Overview Business Overview What Went Well and Areas of Concern Industry Update Macro/Cisco Guidance 2002, Cisco Systems, Inc. All rights reserved. 16
Q1 03 Geographic Bookings EMEA 28% U.S. 50% Asia/ Pacific 11% Japan 7% Americas Int l 4% 2002, Cisco Systems, Inc. All rights reserved. 17
Agenda Financial Overview Business Overview What Went Well and Areas of Concern Industry Update Macro/Cisco Guidance 2002, Cisco Systems, Inc. All rights reserved. 18
Agenda Financial Overview Business Overview What Went Well and Areas of Concern Industry Update Macro/Cisco Guidance 2002, Cisco Systems, Inc. All rights reserved. 19
Industry Update Q1 03 Customer Priorities Return on Investment and Productivity Increases Leadership in Core Technologies Investment in Future Growth Markets Serving the Service Provider Market through Investment and Partnership Trusted Business Partner Offering Clear Upgrade Path 2002, Cisco Systems, Inc. All rights reserved. 20
Agenda Financial Overview Business Overview What Went Well and Areas of Concern Industry Update Macro/Cisco Guidance 2002, Cisco Systems, Inc. All rights reserved. 21
Macro Guidance Positioned for an Industry Upturn Decision-making for the future Focusing on the controllable operational excellence Investing in new markets 2002, Cisco Systems, Inc. All rights reserved. 22
Guidance Revenue Gross Margins Operating Expenses Other Income & Expense Tax Rate Share Count 2002, Cisco Systems, Inc. All rights reserved. 23
Q1 03 Summary Solid quarter for Cisco exceeded overall market performance with operational excellence in a challenging business environment Continued execution on stated plan achieving profit after tax margins above 20% Strong balance sheet with over $21B in cash and investments, healthy inventory turns and DSO Strong cash flow from operations Increased market leadership with continued investment in R&D Continued enhancing product price performance 2002, Cisco Systems, Inc. All rights reserved. 24
2002, Cisco Systems, Inc. All rights reserved. 25