CSCO: Cisco Systems Reports Fourth Quarter and Fiscal Year 2006 Earnings

Q4 Net Sales: $7.98 billion
Q4 Net Income: $1.5 billion GAAP; $1.9 billion non-GAAP
Q4 Earnings Per Share: $0.25 GAAP; $0.30 non-GAAP
FY'06 Net Sales: $28.5 billion
FY'06 Net Income: $5.6 billion GAAP; $6.9 billion non-GAAP
FY'06 Earnings Per Share: $0.89 GAAP; $1.10 non-GAAP

Cisco Systems, Inc., the worldwide leader in networking for the Internet, today reported its fourth quarter and fiscal year results for the periods ended July 29, 2006.

Net sales for the fourth quarter of fiscal 2006 were $7.98 billion, compared with $6.6 billion for the fourth quarter of fiscal 2005 and compared with $7.3 billion for the third quarter of fiscal 2006. Scientific-Atlanta, Inc., acquired during Cisco's third quarter of fiscal 2006 on February 24, 2006, contributed $582 million to net sales for the fourth quarter of fiscal 2006.

Net income for the fourth quarter of fiscal 2006, on a generally accepted accounting principles (GAAP) basis, was $1.5 billion or $0.25 per share, which includes stock-based compensation expense related to employee stock options and employee stock purchases of $152 million, net of tax, or $0.02 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 fourth quarter of fiscal 2005 was $1.3 billion or $0.20 per share. Net income for the third quarter of fiscal 2006, on a 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. Refer to the table on page 10 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 fourth quarter of fiscal 2005 was $1.5 billion or $0.24 per share.

Non-GAAP net income for the fourth quarter of fiscal 2006 was $1.9 billion or $0.30 per share, compared with $1.6 billion or $0.25 per share for the fourth quarter of fiscal 2005, and compared with $1.8 billion or $0.29 per share for the third quarter of fiscal 2006. A reconciliation between net income on a GAAP basis and non-GAAP net income is provided in a table on page 6.

Net sales for fiscal 2006 were $28.5 billion, compared with $24.8 billion for fiscal 2005. Scientific-Atlanta contributed $989 million to net sales for fiscal 2006.

Net income for fiscal 2006, on a GAAP basis, was $5.6 billion or $0.89 per share, which includes stock-based compensation expense related to employee stock options and employee stock purchases of $756 million, net of tax, or $0.12 per share. Including the pro forma stock-based compensation expense previously disclosed in Cisco's financial statements footnotes, net income for fiscal 2005 was $4.7 billion or $0.71 per share. Net income on a GAAP basis, which does not include the effect of stock-based compensation expense, for fiscal 2005 was $5.7 billion or $0.87 per share.

Non-GAAP net income for fiscal 2006 was $6.9 billion or $1.10 per share, compared with $6.1 billion or $0.92 per share for fiscal 2005.

During the fourth quarter of fiscal 2006, Cisco completed the acquisitions of Audium Corporation and Metreos Corporation, and purchased selected assets of OpGate, Ltd.

"Cisco delivered a record quarter across the board, ending a fiscal year that demonstrated our strong momentum and balance across geographies, products and customer segments," said John Chambers, president and CEO, Cisco Systems. "It's clear we are executing well and on target against our long-term strategy and our vision of the network enabling almost all forms of communications and IT.

Our vision and unique ability to innovate and capture market transitions are why we believe we are poised for continued growth.

Not only is the network becoming the primary driver of IT and communications, it is becoming the platform for life's experiences. Our ability to anticipate these changes and execute on our strategy is increasing our market share as well as our share of our customers' total IT spend."


Financial Highlights

Cash flows from operations were $2.3 billion for the fourth quarter of fiscal 2006, compared with $2.4 billion for the fourth quarter of fiscal 2005, and compared with $2.3 billion for the third quarter of fiscal 2006. Cash flows from operations were $7.9 billion for fiscal 2006, compared with $7.6 billion for fiscal 2005.

Cash and cash equivalents and investments were $17.8 billion at the end of fiscal 2006, compared with $16.1 billion at the end of fiscal 2005, and compared with $18.2 billion at the end of the third quarter of fiscal 2006.

During the fourth quarter of fiscal 2006, Cisco repurchased 139 million shares of common stock at an average price of $20.35 per share for an aggregate purchase price of $2.8 billion. During fiscal 2006, Cisco repurchased 435 million shares of common stock at an average price of $19.07 per share for an aggregate purchase price of $8.3 billion. As of July 29, 2006, Cisco had repurchased and retired 1.9 billion shares of Cisco common stock at an average price of $18.36 per share for an aggregate purchase price of approximately $35.4 billion since the inception of the stock repurchase program.

Days sales outstanding (DSO) in accounts receivable at the end of the fourth quarter of fiscal 2006 were 38 days, compared with 31 days at the end of the fourth quarter of fiscal 2005, and compared with 36 days at the end of the third quarter of fiscal 2006.

Inventory turns on a GAAP basis were 8.5 in the fourth quarter of fiscal 2006, compared with 6.6 in the fourth quarter of fiscal 2005, and compared with 7.7 in the third quarter of fiscal 2006. Non-GAAP inventory turns were 8.3 in the fourth quarter of fiscal 2006, compared with 7.4 in the third quarter of fiscal 2006.

"We are very pleased with our performance for the fourth quarter and fiscal year 2006," said Dennis Powell, chief financial officer, Cisco Systems. "Revenue for both Cisco stand-alone and Scientific Atlanta exceeded our expectations this quarter, highlighting the strength we saw across geographies, product categories and customer segments. Operational results also showed momentum, with solid growth in operating income stemming from enhanced financial leverage with strong gross margins and improved operating expense productivity."


Business Highlights

Cisco's core enterprise networking platform, the Cisco Catalyst 6500, surpassed $20 billion in sales.

Cisco Unified Communications adoption continued to accelerate with more than 8 million Cisco Unified IP Phones shipped worldwide, with the milestone phone purchased by Deutsche Bank.

More than 60 service providers have adopted the Cisco Carrier Routing System, or CRS-1, in the first two years since its introduction.

China Telecom selected the Cisco IP Next-Generation Network (IP NGN) architecture as the foundation of its 2006 ChinaNet network expansion and named Cisco as the primary equipment provider.

Cisco's enterprise customer installed base surpassed the 3 million wireless access points (APs) milestone.

University Hospitals Health System, which has more than 23,500 physicians, nurses and support staff at more than 150 locations in northeastern Ohio, selected Cisco to provide a converged IP communications system.

Linksys announced its first Wireless-G IP Phones designed to enable users to make low-cost VoIP calls through 802.11g wireless networks.

Rainbow Media Holdings LLC, a subsidiary of Cablevision Systems Corporation, selected multiple Scientific Atlanta PowerVuTM digital content distribution systems for the analog-to-digital migration of North American programming delivery to its affiliates.