SOURCE: Cisco

Cisco

November 04, 2009 16:05 ET

Cisco Reports First Quarter Earnings

Announces $10 Billion Increase in Stock Repurchase Program

SAN JOSE, CA--(Marketwire - November 4, 2009) -  Cisco (NASDAQ: CSCO)

  • Q1 Net Sales: $9.0 billion (decrease of 13% year over year)
  • Q1 Net Income: $1.8 billion GAAP; $2.1 billion non-GAAP
  • Q1 Earnings per Share: $0.30 GAAP (decrease of 19% year over year); $0.36 non-GAAP (decrease of 14% year over year)
  • Total Cash, Cash Equivalents and Investments: $35.4 billion

Cisco (NASDAQ: CSCO), the worldwide leader in networking that transforms how people connect, communicate and collaborate, today reported its first quarter results for the period ended October 24, 2009. Cisco reported first quarter net sales of $9.0 billion, net income on a generally accepted accounting principles (GAAP) basis of $1.8 billion or $0.30 per share, and non-GAAP net income of $2.1 billion or $0.36 per share. 

Commenting on the quarter, Chairman and Chief Executive Officer John Chambers noted, "Building off what we saw as a clear tipping point in Q4, our Q1 results continued to reflect strong sequential growth trends that meet or exceed expectations during normal economic times. We view the improving economic outlook, combined with solid execution on our growth strategy, as creating unparalleled opportunity to drive more value into the core of the network. Simply said, we believe that key market transitions across collaboration, virtualization and video will drive productivity and growth in network loads for the next decade, and are evolving even faster than expected."

Chambers continued, "Our ability to launch four proposed acquisitions, the ecosystem-shifting coalition with EMC/VMware, and five new products and industry solutions into the Cisco pipeline in the past few months alone underscore this momentum. Our build -- buy -- partner innovation engine is clearly running on all cylinders, while our operational machine is pulling costs out of the business even as we scale new models for growth. Execution and results over time will demonstrate the long-term impact of this vision and strategy -- but a new model of productivity based on collaboration is clearly emerging and we believe this may be the most profound opportunity for businesses in our 25 years as a company."

GAAP Results
  Q1 2010 Q1 2009 Vs. Q1 2009
Net Sales $9.0 billion $10.3 billion -12.7%
Net Income $1.8 billion $2.2 billion -18.8%
Earnings per Share $0.30 $0.37 -18.9%
Non-GAAP Results
  Q1 2010 Q1 2009 Vs. Q1 2009
Net Income $2.1 billion $2.5 billion -15.3%
Earnings per Share $0.36 $0.42 -14.3%

In October 2009, the Financial Accounting Standards Board issued new accounting guidance related to revenue recognition. Cisco elected to adopt this accounting guidance early on a prospective basis for transactions originating or materially modified in the first quarter of fiscal 2010. Net sales for the first quarter of fiscal 2010 were approximately $50 million higher than the net sales that would have been recorded under the previous accounting guidance.

A reconciliation between net income on a GAAP basis and non-GAAP net income is provided in the table on page 6.

Cisco will discuss first quarter 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://www.cisco.com/go/investors. A Q&A session with Cisco's Chairman and CEO John Chambers and CFO Frank Calderoni will also be available at http://newsroom.cisco.com. To view a video of Cisco's CFO discussing first quarter results, visit http://blogs.cisco.com.

Stock Repurchase Program Expanded

Cisco also announced that on November 4, 2009 its board of directors authorized up to $10 billion in additional repurchases of its common stock. Cisco's board had previously authorized up to $62 billion in stock repurchases. There is no fixed termination date for the repurchase program. The remaining authorized amount for stock repurchases under this program, including the additional authorization, is approximately $13.1 billion.

Other Financial Highlights

  • Cash flows from operations were $1.5 billion for the first quarter of fiscal 2010, compared with $2.7 billion for the first quarter of fiscal 2009, and compared with $2.0 billion for the fourth quarter of fiscal 2009.
  • Cash and cash equivalents and investments were $35.4 billion at the end of the first quarter of fiscal 2010, compared with $35.0 billion at the end of fiscal 2009.
  • During the first quarter of fiscal 2010, Cisco repurchased 76 million shares of common stock under the stock repurchase program at an average price of $22.99 per share for an aggregate purchase price of $1.8 billion. As of October 24, 2009, Cisco had repurchased and retired 2.9 billion shares of Cisco common stock at an average price of $20.47 per share for an aggregate purchase price of approximately $58.9 billion since the inception of the stock repurchase program.
  • Days sales outstanding in accounts receivable (DSO) at the end of the first quarter of fiscal 2010 were 32 days, compared with 34 days at the end of the fourth quarter of fiscal 2009, and compared with 29 days at the end of the first quarter of fiscal 2009.
  • Inventory turns on a GAAP basis were 11.6 in the first quarter of fiscal 2010, compared with 11.7 in the fourth quarter of fiscal 2009, and compared with 11.9 in the first quarter of fiscal 2009. Non-GAAP inventory turns were 11.3 in the first quarter of fiscal 2010, compared with 11.3 in the fourth quarter of fiscal 2009, and compared with 11.6 in the first quarter of fiscal 2009.

"Cisco's strong first quarter results represent two quarters of sequentially positive revenue growth and demonstrate our ability to execute on our innovation and operational excellence priorities," said Frank Calderoni, Cisco chief financial officer. "We delivered earnings per share on a GAAP basis of $0.30 and non-GAAP of $0.36, which were above our expectations, driven by balance across a broad portfolio and intense focus on execution. Our results validate our strategy and portfolio approach of balancing disciplined expense management with strategic investment, to drive continued profitability through varying economic environments."

Cisco Innovation

  • Cisco expanded its Cisco TelePresence™ portfolio with the single-screen, single-camera Cisco TelePresence System 1100 for multipurpose rooms. Service providers AT&T, BT, Orange, NTT, Tata Communications, Telefonica, Telstra and Telmex have announced commercial intercompany Cisco TelePresence service offerings.
  • Cisco announced its Borderless Networks Architecture strategy, together with announcing its new Integrated Services Router Generation 2 (ISR G2), which helps businesses and service providers simplify and scale delivery of on-demand, networked business services such as video and collaborative applications.
  • Cisco launched Cisco IronPort™ Web Usage Controls, a product designed to provide real-time content categorization to accurately identify up to 90 percent of "dark web" sites in the most egregious content categories.
  • Cisco and salesforce.com announced the Customer Interaction Cloud, a combined solution that uses a connector to integrate salesforce.com's Service Cloud 2 with Cisco® Unified Contact Center's functionality, empowering small and medium-sized companies to run their customer service function completely in the cloud.
  • Cisco announced the creation of a Smart Grid Ecosystem, with more than 25 initial partners, to facilitate the adoption of Internet Protocol (IP)-based communications standards for smart grids designed to benefit the energy industry as well as business and residential customers. Cisco also created a Smart Grid Technical Advisory Board made up of leading innovative utility and energy companies from around the world.

Select Customer Announcements

  • Tutor Perini Corporation, a leading civil and building construction company, is consolidating five data centers into one new facility which utilizes the Cisco Unified Computing System™ as its computing platform.
  • The Miami Dolphins National Football League franchise announced the deployment of Cisco TelePresence and Cisco StadiumVision™ systems to help fans "Live the Game" at Miami's Land Shark Stadium. 
  • Kenya's Ministry of Information and Communications Technology launched the first network-enabled Pilot Pasha Centre in Kangundo with the aim of enhancing the livelihoods of local citizens and encouraging new micro-enterprises.
  • Cisco and Gale International expanded their relationship on Smart + Connected Communities under development in Korea's Songdo International Business District, with the aim of creating a repeatable model for smart, sustainable cities of the future.
  • German electricity company Yello Strom launched an energy-saving smart grid pilot to create an intelligent energy system that communicates over an IP network.

Select Acquisitions and Investments

  • Cisco announced a definitive agreement to acquire Starent Networks Corp., a leading supplier of IP-based mobile infrastructure solutions targeting mobile and converged carriers.
  • Cisco announced a definitive agreement for Cisco to launch a recommended voluntary cash offer to acquire TANDBERG ASA, a global leader in video communications.

Editor's Note:

  • Q1 FY 2010 conference call to discuss Cisco's results along with its business outlook will be held at 1:30 p.m. Pacific Time, Wednesday, November 4, 2009. Conference call number is 888-848-6507 (United States) or 212-519-0847 (international).
  • Conference call replay will be available from 4:00 p.m. Pacific Time, November 4, 2009 to 4:00 p.m. Pacific Time, November 11, 2009 at 866-357-4205 (United States) or 203-369-0122 (international). The replay also will be available via webcast from November 4, 2009 through January 15, 2010 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, November 4, 2009. 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 session with Cisco's Chairman and CEO John Chambers and CFO Frank Calderoni about Q1 FY 2010 results will be available at http://newsroom.cisco.com.
  • To view a video of Cisco's CFO discussing Q1 FY 2010 results, visit Cisco's blog site, The Platform, at http://blogs.cisco.com.

About Cisco

Cisco (NASDAQ: CSCO) is the worldwide leader in networking that transforms how people connect, communicate and collaborate. Information about Cisco can be found at http://www.cisco.com. For ongoing news, visit http://newsroom.cisco.com.

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 (such as the improving economic outlook and related opportunity, market transitions across collaboration, virtualization and video driving productivity and growth in network loads for the next decade, and the emergence of a new model of productivity based on collaboration and related business opportunity) 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, our customer markets and various geographic regions; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; the growth and evolution 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 and other customer markets; the return on our investments in certain market adjacencies and geographical locations during the current economic downturn; 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; increased competition in our product and service markets, including the data center; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; manufacturing and sourcing risks; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters, and governmental investigations; natural catastrophic events; a pandemic or epidemic; our ability to achieve 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, and to manage expenses during the current economic downturn; risks related to the global nature of our operations, including our operations in emerging markets; currency fluctuations and other international factors; changes in provision for income taxes, including changes in tax laws and regulations or adverse outcomes resulting from examinations of our income tax returns; potential volatility in operating results; and other factors listed in Cisco's most recent report on Form 10-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 report on Form 10-K filed on September 11, 2009, as it may be amended from time to time. Cisco's results of operations for the three months ended October 24, 2009 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 net income, non-GAAP net income per share data, shares used in non-GAAP net income per share calculation, and non-GAAP inventory turns.

These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Cisco believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Cisco's results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate Cisco's results of operations in conjunction with the corresponding GAAP measures.

Cisco believes that the presentation of non-GAAP net income, non-GAAP net income per share data and shares used in non-GAAP net income per share calculation, when shown in conjunction with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to its financial condition and results of operations. In addition, Cisco believes that the presentation of non-GAAP inventory turns provides useful information to investors and management regarding financial and business trends relating to inventory management based on the operating activities of the period presented.

For its internal budgeting process, Cisco's management uses financial statements that do not include, when applicable, share-based compensation expense, amortization of acquisition-related intangible assets, other acquisition-related costs, enhanced early retirement benefits, the income tax effects of the foregoing, significant effects of retroactive tax legislation, and significant transfer pricing adjustments related to share-based compensation. Cisco's management also uses the foregoing non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the financial results of Cisco. In prior periods, Cisco has excluded other items that it no longer excludes for purposes of its non-GAAP financial measures; for example, effective in the third quarter of fiscal 2009, Cisco no longer excludes payroll tax on stock option exercises and effective beginning in fiscal 2010, Cisco no longer excludes in-process research and development as it is no longer expensed as a result of new accounting guidance. From time to time in the future, there may be other items that Cisco may exclude for purposes of its internal budgeting process and in reviewing its financial results.

For additional information on the items excluded by Cisco from one or more of its non-GAAP financial measures, refer to the Form 8-K regarding this release furnished today to the Securities and Exchange Commission.

Copyright ©2009 Cisco Systems, Inc. All rights reserved. Cisco, the Cisco logo, Cisco Systems, Cisco IronPort, Cisco StadiumVision, Cisco TelePresence, Cisco Unified Computing System, and IronPort are registered trademarks or trademarks of Cisco Systems, Inc. and/or its affiliates in the United States 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. This document is Cisco Public Information. 

CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
(Unaudited)

  Three Months Ended  
  October 24,    2009   October 25,    2008  
NET SALES:            
Product $ 7,200   $ 8,635  
Service   1,821     1,696  
             
Total net sales   9,021     10,331  
             
COST OF SALES:            
Product   2,486     2,981  
Service   647     669  
             
Total cost of sales   3,133     3,650  
             
GROSS MARGIN   5,888     6,681  
             
OPERATING EXPENSES:            
Research and development   1,224     1,406  
Sales and marketing   1,995     2,283  
General and administrative  440     395  
Amortization of purchased intangible assets   105     112  
In-process research and development   ---     3  
             
Total operating expenses   3,764     4,199  
             
OPERATING INCOME   2,124     2,482  
             
Interest income, net   54     195  
Other income (loss), net   61     (72 )
             
Interest and other income , net   115     123  
             
INCOME BEFORE PROVISION FOR INCOME TAXES   2,239     2,605  
Provision for income taxes   452     404  
             
NET INCOME $ 1,787   $ 2,201  
             
Net income per share:            
Basic $ 0.31   $ 0.37  
            
Diluted $ 0.30   $ 0.37  
             
Shares used in per-share calculation:            
Basic   5,767     5,881  
           
Diluted   5,871     5,972  

RECONCILIATION OF GAAP TO NON-GAAP NET INCOME
(In millions, except per-share amounts)

  Three Months Ended  
  October 24,
2009
    October 25,
2008
 

GAAP net income
$ 1,787     $ 2,201  
               
               
    Share-based compensation expense(1)   321       304  
    Payroll tax on stock option exercises(2)   ---       1  
    In-process research and development(3)   ---       3  
    Amortization of acquisition-related intangible assets   149       166  
    Other acquisition-related costs(4)   4       122  
              
    Total adjustments to GAAP income before provision for income taxes   474       596  
               
    Income tax effect   (145 )     (194 )
    Effect of retroactive tax legislation(5)   ---       (106 )
               
    Total adjustments to GAAP provision for income taxes   (145 )     (300 )
               
Non-GAAP net income $ 2,116     $ 2,497  
               
Diluted net income per share:              
GAAP $ 0.30     $ 0.37  
               
Non-GAAP $ 0.36     $ 0.42  
               
Shares used in diluted net income per share calculation:              
GAAP  5,871       5,972  
               
Non-GAAP   5,880       5,979  
             
(1) Share-based compensation expense for the first quarter of fiscal 2010 and fiscal 2009 includes $28 million and $22 million, respectively, of share-based compensation related to acquisitions.
(2) Effective in the third quarter of fiscal 2009, Cisco no longer excludes payroll tax on stock option exercises for purposes of its non-GAAP financial measures.
(3) Effective beginning in fiscal 2010, Cisco no longer excludes in-process research and development for purposes of its non-GAAP financial measures as it is no longer expensed as a result of new accounting guidance. 
(4) Other acquisition-related costs for the first quarter of fiscal 2010 includes a $42 million mark-to-market impact related to transactions to hedge a portion of the foreign currency consideration of an announced, pending business combination.
(5) In the first quarter of fiscal 2009, the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 reinstated the U.S. federal R&D tax credit, retroactive to January 1, 2008.  GAAP net income for the first quarter 2009 included a $106 million tax benefit related to fiscal 2008 R&D expenses.  Non-GAAP net income for the first quarter of fiscal 2009 excluded the $106 million tax benefit related to fiscal 2008 R&D expenses.

Certain reclassifications have been made to prior period amounts to conform to the current period's presentation.

Additional reconciliations between GAAP and non-GAAP financial measures are provided in the tables that follow on page 10.

CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)

  October 24,
2009
  July 25,
2009
ASSETS          
Current assets:          
    Cash and cash equivalents $ 4,774   $ 5,718
    Investments   30,591     29,283
    Accounts receivable, net of allowance for doubtful accounts of $216 at October 24, 2009 and July 25, 2009   3,159     3,177
    Inventories   1,089     1,074
    Deferred tax assets   2,205     2,320
    Other current assets   2,879     2,605
           
    Total current assets   44,697     44,177
           
Property and equipment, net   3,976     4,043
Goodwill   12,942     12,925
Purchased intangible assets, net   1,552     1,702
Other assets   5,513     5,281
           
TOTAL ASSETS $ 68,680   $ 68,128
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Current liabilities:          
    Accounts payable $ 729   $ 675
    Income taxes payable   97     166
    Accrued compensation   2,263     2,535
    Deferred revenue   6,397     6,438
    Other current liabilities   3,676     3,841
           
  Total current liabilities   13,162     13,655
           
Long-term debt   10,273     10,295
Income taxes payable   1,755     2,007
Deferred revenue   2,874     2,955
Other long-term liabilities   590     539
          
Total liabilities   28,654     29,451
           
           
Shareholders' equity   40,026     38,677
           
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 68,680   $ 68,128
           

Certain reclassifications have been made to prior period amounts to conform to the current period's presentation.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

    Three Months Ended  
    October 24,
2009
    October 25,
2008
 
Cash flows from operating activities:                
  Net income   $ 1,787     $ 2,201  
Adjustments to reconcile net income to net cash provided by operating activities:                
  Depreciation, amortization, and other noncash items     429       393  
  Share-based compensation expense     321       304  
  Provision for doubtful accounts     4       17  
  Deferred income taxes     93       26  
  Excess tax benefits from share-based compensation     (21 )     (17)
  In-process research and development     ---       3  
  Net (gains) losses on investments     (47 )     70  
  Change in operating assets and liabilities, net of effects of acquisitions:                
    Accounts receivable     38       453  
    Inventories     (8 )     8  
    Lease receivables, net     (100 )     (65 )
    Accounts payable     52       (35 )
    Income taxes payable     (291 )     (83 )
    Accrued compensation     (313 )     (197 )
    Deferred revenue     (160 )     (2 )
    Other assets     (186 )     (405 )
    Other liabilities     (110 )     47  
                 
Net cash provided by operating activities     1,488       2,718  
                
Cash flows from investing activities:                
  Purchases of investments     (9,537 )     (12,461 )
  Proceeds from sales of investments     2,769       6,833  
  Proceeds from maturities of investments     5,664       3,509  
  Acquisition of property and equipment     (160 )     (361 )
  Acquisition of businesses, net of cash and cash equivalents acquired     ---       (288 )
  Change in investments in privately held companies     (32 )     (11 )
  Other     43       (60 )
                 
Net cash used in investing activities     (1,253 )     (2,839 )
                 
Cash flows from financing activities:                
  Issuance of common stock     634       224  
  Repurchase of common stock     (1,869 )     (1,002 )
  Excess tax benefits from share-based compensation     21      17  
  Other     35       (112 )
                 
Net cash used in financing activities     (1,179 )     (873 )
                 
Net decrease in cash and cash equivalents     (944 )     (994 )
Cash and cash equivalents, beginning of period     5,718       5,191  
                 
Cash and cash equivalents, end of period   $ 4,774     $ 4,197  
                 

Certain reclassifications have been made to prior period amounts to conform to the current period's presentation.

ADDITIONAL FINANCIAL INFORMATION
(In millions)
(Unaudited)

    October 24,
2009
    July 25,
2009
 
CASH AND CASH EQUIVALENTS AND INVESTMENTS                
Cash and cash equivalents   $ 4,774     $ 5,718  
Fixed income securities     29,548       28,355  
Publicly traded equity securities     1,043       928  
                
Total   $ 35,365     $ 35,001  
                 
INVENTORIES                
Raw materials   $ 167     $ 165  
Work in process     33       33  
Finished goods:                
  Distributor inventory and deferred cost of sales     403       382  
  Manufactured finished goods     307       310  
                 
Total finished goods     710       692  
Service-related spares     147       151  
Demonstration systems     32       33  
                 
Total   $ 1,089     $ 1,074  
                 
PROPERTY AND EQUIPMENT, NET               
Land, buildings, building improvements, and leasehold improvements   $ 4,501     $ 4,618  
Computer equipment and related software     1,569       1,823  
Production, engineering, and other equipment     5,273       5,075  
Operating lease assets     242       227  
Furniture and fixtures     471       465  
                 
      12,056       12,208  
Less accumulated depreciation and amortization     (8,080)       (8,165 )
                 
Total   $ 3,976     $ 4,043  
                 
OTHER ASSETS                
Deferred tax assets   $ 2,112     $ 2,122  
Investments in privately held companies     728       709  
Lease receivables, net (1)     1,043       966  
Financed service contracts (2)    648       676  
Loan receivables(3)     712       537  
Other     270       271  
                 
Total   $ 5,513     $ 5,281  
                 
DEFERRED REVENUE                
Service   $ 6,194     $ 6,496  
Product                
  Unrecognized revenue on product shipments and other deferred revenue     2,551       2,490  
  Cash receipts related to unrecognized revenue from two-tier distributors     526       407  
                 
Total product deferred revenue     3,077       2,897  
                 
Total   $ 9,271     $ 9,393  
                 
Reported as:                
Current   $ 6,397     $ 6,438  
Noncurrent     2,874       2,955  
                 
Total   $ 9,271     $ 9,393  
                 

Note:

(1) The current portion of lease receivables, net, which was $689 million and $626 million as of October 24, 2009 and July 25, 2009, respectively, is recorded in other current assets.  
(2) The current portion of financed service contracts, which was $1.0 billion and $940 million as of October 24, 2009 and July 25, 2009, respectively, is recorded in other current assets. These financed service contracts primarily relate to technical support services, and the associated revenue is deferred and recognized ratably over the period during which the services are to be performed, which is typically from one to three years.
(3) The current portion of loan receivables, net, which was $328 million and $236 million as of October 24, 2009 and July 25, 2009, respectively, is recorded in other current assets.  

SUMMARY OF SHARE-BASED COMPENSATION EXPENSE
(In millions)

    Three Months Ended  
    October 24,
2009
    October 25,
2008
 
Cost of sales - product   $ 12     $ 11  
Cost of sales - service     33       31  
                 
Share-based compensation expense in cost of sales     45       42  
                 
Research and development     97       94  
Sales and marketing    113       113  
General and administrative     66       55  
                 
Share-based compensation expense in operating expenses     276       262  
                 
Total share-based compensation expense   $ 321     $ 304  
                 

The income tax benefit for share-based compensation expense was $85 million and $82 million for the first quarter of fiscal 2010 and fiscal 2009, respectively.

RECONCILIATION OF SHARES USED IN THE GAAP AND NON-GAAP
DILUTED NET INCOME PER SHARE CALCULATION
(In millions)

    Three Months Ended  
    October 24,
2009
    October 25,
2008
 
Shares used in diluted net income per share calculation - GAAP     5,871       5,972  
Effect of share-based compensation expense     9       7  
                 
Shares used in diluted net income per share calculation - Non-GAAP     5,880       5,979  
                 

RECONCILIATION OF GAAP TO NON-GAAP COST OF SALES
USED IN INVENTORY TURNS
(In millions)

  Three Months Ended  
  October 24,
2009
  July 25,
2009
    October 25,
2008
 
GAAP cost of sales $ 3,133   $ 3,074     $ 3,650  
  Share-based compensation expense   (45 )   (47 )     (42 )
  Amortization of  acquisition-related intangible assets   (44 )   (39 )     (54 )
  Enhanced early retirement benefits   ---     (28 )     ---  
               
Non-GAAP cost of sales $ 3,044   $ 2,960     $ 3,554  
                     

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