SOURCE: Cisco

February 06, 2007 16:05 ET

Cisco Reports Second Quarter Earnings

Q2 Net Sales: $8.4 Billion

Q2 Net Income: $1.9 Billion GAAP; $2.1 Billion Non-GAAP

Q2 Earnings per Share: $0.31 GAAP (Increase of 41% Year Over Year); $0.33 Non-GAAP (Increase of 27% Year Over Year)

SAN JOSE, CA -- (MARKET WIRE) -- February 6, 2007 -- Cisco® (NASDAQ: CSCO), the worldwide leader in networking that transforms how people connect, communicate and collaborate, today reported its second quarter results for the period ended January 27, 2007. Cisco reported second quarter net sales of $8.4 billion, net income on a generally accepted accounting principles (GAAP) basis of $1.9 billion or $0.31 per share, and non-GAAP net income of $2.1 billion or $0.33 per share. Scientific-Atlanta, Inc., acquired during the third quarter of fiscal 2006, contributed net sales of $639 million during the second quarter of fiscal 2007.

"Cisco achieved record results that were well balanced across our geographies, products, services, customer segments and new markets," said John Chambers, chairman and CEO, Cisco. "This illustrates our key competitive advantage of being able to develop a long-term vision, execute on our strategy and deliver consistent results.

"It is this unique ability to balance between strategy and innovation that has positioned Cisco to take advantage of key emerging business and IT trends such as the rise of video on the network," Chambers continued. "As the network becomes the platform, we are seeing more and more signs that all forms of IT and communication are moving into the network and increasing the total available market to Cisco."

GAAP Results
                         Q2 2007          Q2 2006       vs. Q2 2006
Net Sales             $8.4 billion     $6.6 billion       +27.3%
Net Income            $1.9 billion     $1.4 billion       +39.7%
Earnings per Share    $0.31            $0.22              +40.9%

Non-GAAP Results
                         Q2 2007          Q2 2006       vs. Q2 2006
Net Income            $2.1 billion     $1.6 billion       +28.1%
Earnings per Share    $0.33            $0.26              +26.9%
Net sales for the first six months of fiscal 2007 were $16.6 billion, compared with $13.2 billion for the first six months of fiscal 2006. Scientific-Atlanta, Inc. contributed $1.2 billion to net sales during the first six months of fiscal 2007. Net income for the first six months of fiscal 2007, on a GAAP basis, was $3.5 billion or $0.56 per share, compared with $2.6 billion or $0.42 per share for the first six months of fiscal 2006. Non-GAAP net income for the first six months of fiscal 2007 was $4.0 billion or $0.64 per share, compared with $3.2 billion or $0.51 per share for the first six months of fiscal 2006.

A reconciliation between net income on a GAAP basis and non-GAAP net income is provided in the table on page 6, which includes additional information regarding the effect of the December 2006 reinstatement (retroactive to January 1, 2006) of the U.S. federal research and development (R&D) tax credit.

Cisco will discuss second 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://investor.cisco.com.

Financial Highlights

-- Cash flows from operations were $2.7 billion for the second quarter
   of fiscal 2007, compared with $1.9 billion for the second quarter
   of fiscal 2006, and compared with $2.3 billion for the first quarter
   of fiscal 2007.

-- Cash and cash equivalents and investments were $20.7 billion at the
   end of the second quarter of fiscal 2007, compared with $17.8 billion
   at the end of the fourth quarter of fiscal 2006, and compared with
   $19.5 billion at the end of the first quarter of fiscal 2007.

-- During the second quarter of fiscal 2007, Cisco repurchased 121 million
   shares of common stock at an average price of $27.01 per share for an
   aggregate purchase price of $3.3 billion. As of January 27, 2007, Cisco
   had repurchased and retired 2.1 billion shares of Cisco common stock at
   an average price of $19.00 per share for an aggregate purchase price of
   approximately $40.2 billion since the inception of the stock repurchase
   program.

-- Days sales outstanding in accounts receivable (DSO) at the end of the
   second quarter of fiscal 2007 were 31 days, compared with 38 days at
   the end of the fourth quarter of fiscal 2006, and compared with 34 days
   at the end of the first quarter of fiscal 2007.

-- Inventory turns on a GAAP basis were 7.8 in the second quarter of fiscal
   2007, compared with 8.5 in the fourth quarter of fiscal 2006, and
   compared with 8.3 in the first quarter of fiscal 2007.  Non-GAAP
   inventory turns were 7.6 in the second quarter of fiscal 2007, compared
   with 8.3 in the fourth quarter of fiscal 2006, and compared with 8.1 in
   the first quarter of fiscal 2007.
"We are very pleased with our overall performance and balance for the second quarter of the fiscal year," said Dennis Powell, chief financial officer, Cisco. "Cisco demonstrated continued strength of both our Cisco standalone business, with 18 percent revenue growth year over year, and our Scientific Atlanta business, with 21 percent growth year over year, which exceeded our expectations for combined revenue, operating income and earnings per share."

Business Highlights

Acquisitions

-- Cisco announced a definitive agreement to acquire IronPort Systems,
   Inc., a leading provider of messaging security appliances, focusing
   on enterprise spam and spyware protection.

-- Cisco completed the acquisitions of Tivella, Inc., Orative Corporation,
   and Greenfield Networks Inc.
New Product Introductions
-- Cisco introduced two models to its iPhone® family of voice-over-IP
   products that marry the familiarity of the telephone with compelling
   Internet services, access to personal content, and integration with
   the home, designed to create complete solutions for the communication
   needs of consumers.

-- Cisco introduced Cisco Digital Signage, a solution for management,
   publishing and playback of digital media on networked digital signage
   displays. Cisco also announced collaboration with NEC Display Solutions
   of America, Inc., a large-screen commercial LCD display supplier, to
   deliver a function-rich digital signage solution.

-- Cisco introduced the Cisco MDS 9124 Multilayer Fabric Switch, designed
   to provide enterprise-class capabilities such as virtual storage area
   networks, advanced security, high availability and flexibility, all
   powered by the Cisco SAN operating system.

Major Customer Actions

-- Turner Broadcasting System, Inc. chose Scientific Atlanta's MPEG-4 D9034
   Encoder to provide MPEG-4 signals for telecommunications companies.

-- Bank of America, working with its integration partner EDS, deployed
   Cisco's IP phones as part of an ongoing project that is fueling
   next-generation retail banking service innovations.

-- FASTWEB, Italy's second-largest fixed telecommunications services
   provider, chose Cisco IP NGN architecture to deliver significant
   enhancements to its national network.

-- Cisco and Sitronics JSC, a leading technology company in Russia and the
   Commonwealth of Independent States (CIS), announced a regional alliance
   to address the rapidly expanding telecommunications market in Russia,
   CIS and other emerging markets.

-- Shui On Land Limited, a leading property developer in Mainland China,
   is planning to work with Cisco to build world-class digital communities
   in China.

-- Singapore Telecommunications Limited is planning to deploy a Wi-Fi mesh
   network from Cisco in the North Region of Singapore.
Key Milestones
-- Cisco announced that it plans to present two Cisco TelePresence systems
   each to the governments of five nations in the Emerging Markets as a
   means to improve communications and collaboration.

-- Cisco achieved numerous product milestones throughout the second
   quarter, having now sold more than 2 million Cisco integrated services
   routers, shipping its 10-millionth IP phone and deploying its 500th
   Cisco CRS-1 Carrier Routing System.
Editor's Note:
-- Q2 FY07 conference call to discuss Cisco's results along with its
   business outlook to be held at 1:30 p.m. Pacific Time, Tuesday,
   February 6, 2007. Conference call number is 888-848-6507 (United States)
   or 212-519-0847 (international).

-- Conference call replay will be available from 4:30 p.m. Pacific Time,
   February 6, 2007 to 4:30 p.m. Pacific Time, February 13, 2007 at
   866-357-4205 (United States) or 203-369-0122 (international). The replay
   is also available from February 6, 2007 through April 20, 2007 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
   6, 2007. 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 about Q2 FY'07 results will be available
   at http://newsroom.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 development of our markets, the future of networking, and Cisco's strategy and positioning) 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; a pandemic or epidemic; 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 and Form 10-Q. 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 27, 2007 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, non-GAAP inventory turns and effective tax rate used in arriving at non-GAAP net income.

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, shares used in non-GAAP net income per share calculation and effective tax rate used in arriving at non-GAAP net income, 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 employee share-based compensation expense, impact to cost of sales from purchase accounting adjustments to inventory, payroll tax on stock option exercises, compensation expense related to acquisitions and investments, in-process research and development, amortization of purchased intangible assets, significant gains and losses on publicly traded equity securities, the income tax effects of the foregoing, and significant effects of retroactive tax legislation, such as Cisco's U.S. federal R&D tax credit relating to fiscal year 2006 R&D expenses. Cisco's management also uses the foregoing non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the financial results of Cisco.

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

Copyright © 2007 Cisco Systems, Inc. All rights reserved. Cisco, the Cisco logo, Cisco Systems and iPhone 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       Six Months Ended
                           ----------------------- -----------------------
                           January 27, January 28, January 27, January 28,
                              2007        2006        2007        2006
                           ----------- ----------- ----------- -----------
NET SALES:
Product                    $     7,099 $     5,537 $    14,039 $    11,028
Service                          1,340       1,091       2,584       2,150
                           ----------- ----------- ----------- -----------
Total net sales                  8,439       6,628      16,623      13,178
                           ----------- ----------- ----------- -----------

COST OF SALES:
Product                          2,544       1,774       5,043       3,525
Service                            507         388         959         777
                           ----------- ----------- ----------- -----------
Total cost of sales              3,051       2,162       6,002       4,302
                           ----------- ----------- ----------- -----------
GROSS MARGIN                     5,388       4,466      10,621       8,876

OPERATING EXPENSES:
Research and development         1,094         966       2,177       1,962
Sales and marketing              1,726       1,431       3,412       2,884
General and administrative         340         282         704         560
Amortization of purchased
 intangible assets                  96          56         201         115
In-process research
 and development                     2           -           6           2
                           ----------- ----------- ----------- -----------
Total operating expenses         3,258       2,735       6,500       5,523
                           ----------- ----------- ----------- -----------
OPERATING INCOME                 2,130       1,731       4,121       3,353

Interest income, net               172         168         329         322
Other income, net                   33          17          61           -
                           ----------- ----------- ----------- -----------
Interest and other
 income, net                       205         185         390         322
                           ----------- ----------- ----------- -----------

INCOME BEFORE PROVISION
 FOR INCOME TAXES                2,335       1,916       4,511       3,675
Provision for income taxes         414         541         982       1,039
                           ----------- ----------- ----------- -----------
NET INCOME                 $     1,921 $     1,375 $     3,529 $     2,636
                           ----------- ----------- ----------- -----------

Net income per share:
Basic                      $      0.32 $      0.22 $      0.58 $      0.43
                           ----------- ----------- ----------- -----------
Diluted                    $      0.31 $      0.22 $      0.56 $      0.42
                           ----------- ----------- ----------- -----------

Shares used in per-share
 calculation:
Basic                            6,057       6,146       6,060       6,195
                           ----------- ----------- ----------- -----------
Diluted                          6,291       6,248       6,255       6,301
                           ----------- ----------- ----------- -----------


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

                           Three Months Ended         Six Months Ended
                        ------------------------  ------------------------
                        January 27,  January 28,  January 27,  January 28,
                           2007         2006         2007         2006
                        -----------  -----------  -----------  -----------
GAAP net income         $     1,921  $     1,375  $     3,529  $     2,636


  Employee share-based
   compensation expense         247          261          472          578
  Payroll tax on stock
   option exercises              11            3           17            5
  Compensation expense
   related to
   acquisitions and
   investments                   27           30           48           70
  In-process research
   and development                2            -            6            2
  Amortization of
   purchased
   intangible assets            132           56          273          115
                        -----------  -----------  -----------  -----------
Total adjustments to GAAP
 income before provision
 for income taxes               419          350          816          770

  Income tax effect (1)        (189)         (93)        (290)        (205)
  Effect of retroactive
   tax legislation (2)          (60)           -          (60)           -
                        -----------  -----------  -----------  -----------
  Total adjustments to
   GAAP provision for
   income taxes (3)            (249)         (93)        (350)        (205)

Non-GAAP net income     $     2,091  $     1,632  $     3,995  $     3,201
                        -----------  -----------  -----------  -----------

Diluted net income
 per share:
GAAP                    $      0.31  $      0.22  $      0.56  $      0.42
                        -----------  -----------  -----------  -----------
Non-GAAP                $      0.33  $      0.26  $      0.64  $      0.51
                        -----------  -----------  -----------  -----------

Shares used in diluted
 net income per
 share calculation:
GAAP                          6,291        6,248        6,255        6,301
                        -----------  -----------  -----------  -----------
Non-GAAP                      6,281        6,233        6,243        6,286
                        -----------  -----------  -----------  -----------


(1) The income tax effect for the adjustments relating to GAAP income
    before provision for income taxes was 35.5% for the first six months of
    fiscal 2007.  The income tax effect has been determined using the
    applicable tax rates in jurisdictions to which these adjustments relate
    and includes share-based compensation tax benefits resulting from the
    reinstatement of the U.S. federal R&D tax credit in the second quarter
    of fiscal 2007 (see note 2 below).

(2) In the second quarter of fiscal 2007, the Tax Relief and Health Care
    Act of 2006 reinstated the U.S. federal R&D tax credit, retroactive to
    January 1, 2006. GAAP net income for the second quarter and the first
    six months of fiscal 2007 included a $120 million tax benefit relating
    to the reinstatement of the U.S. federal R&D tax credit, including
    $60 million related to fiscal 2006 R&D expenses and $30 million related
    to the first quarter of fiscal 2007 R&D expenses. Non-GAAP net income
    for the second quarter and the first six months of fiscal 2007 excluded
    the $60 million tax benefit related to fiscal 2006 R&D expenses.

(3) The effective tax rate used in GAAP net income was 21.8% for the
    first six months of fiscal 2007, which includes a $60 million or 1.3%
    tax benefit from the reinstatement of the U.S. federal R&D credit
    related to fiscal 2006 R&D expenses. The effective tax rate used in
    non-GAAP net income was 25.0% for the first six months of fiscal 2007,
    which excludes the $60 million tax benefit from the reinstatement of
    the U.S. federal R&D credit related to fiscal 2006 R&D expenses.
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)


                                              January 27,    July 29,
                                                 2007         2006
                                              -----------  -----------
ASSETS
Current assets:
   Cash and cash equivalents                  $     2,434  $     3,297
   Investments                                     18,247       14,517
   Accounts receivable, net of allowance for
    doubtful accounts of $169 at January 27,
    2007 and $175 at July 29, 2006                  2,908        3,303
   Inventories                                      1,642        1,371
   Deferred tax assets                              1,673        1,604
   Prepaid expenses and other current assets        1,612        1,584
                                              -----------  -----------
    Total current assets                           28,516       25,676

Property and equipment, net                         3,539        3,440
Goodwill                                            9,318        9,227
Purchased intangible assets, net                    1,960        2,161
Other assets                                        2,921        2,811
                                              -----------  -----------
TOTAL ASSETS                                  $    46,254  $    43,315

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                           $       931  $       880
   Income taxes payable                             1,330        1,744
   Accrued compensation                             1,589        1,516
   Deferred revenue                                 4,718        4,408
   Other accrued liabilities                        2,923        2,765
                                              -----------  -----------
   Total current liabilities                       11,491       11,313

Long-term debt                                      6,416        6,332
Deferred revenue                                    1,343        1,241
Other long-term liabilities                           414          511
                                              -----------  -----------
Total liabilities                                  19,664       19,397
                                              -----------  -----------

Minority interest                                       8            6

Shareholders' equity                               26,582       23,912
                                              -----------  -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $    46,254  $    43,315
                                              -----------  -----------


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


                                                  Six Months Ended
                                              ------------------------
                                              January 27,    July 29,
                                                 2007         2006
                                              -----------  -----------
Cash flows from operating activities:
   Net income                                 $     3,529  $     2,636
Adjustments to reconcile net income to net
 cash provided by operating activities:
   Depreciation and amortization                      690          512
   Employee share-based compensation expense          472          578
   Share-based compensation expense related
    to acquisitions and investments                    19           52
   Provision for doubtful accounts                      -           10
   Provision for inventory                            116           70
   Deferred income taxes                              (66)           1
   Excess tax benefits from share-based
    compensation                                     (428)        (125)
   In-process research and development                  6            2
   Net gains and impairment charges on
    investments                                       (99)         (21)
   Change in operating assets and liabilities,
    net of effects of acquisitions:
      Accounts receivable                             395         (329)
      Inventories                                    (387)        (115)
      Prepaid expenses and other current assets       (39)         (47)
      Lease receivables, net                          (66)         (60)
      Accounts payable                                 51          (51)
      Income taxes payable                            104           63
      Accrued compensation                             73          (97)
      Deferred revenue                                412           59
      Other liabilities                               147          129
                                              -----------  -----------
Net cash provided by operating activities           4,929        3,267
                                              -----------  -----------

Cash flows from investing activities:
   Purchases of investments                       (11,184)     (10,467)
   Proceeds from sales and maturities of
    investments                                     7,762       11,886
   Acquisition of property and equipment             (548)        (394)
   Acquisition of businesses, net of cash and
    cash equivalents acquired                        (166)        (150)
   Change in investments in privately held
    companies                                         (76)         (90)
   Purchase of minority interest of
    Cisco Systems, K.K. (Japan)                         -          (25)
   Other                                              (27)         (84)
                                              -----------  -----------
Net cash (used in) provided by investing
 activities                                        (4,239)         676
                                              -----------  -----------

Cash flows from financing activities:
   Issuance of common stock                         2,779          563
   Repurchase of common stock                      (4,781)      (4,248)
   Excess tax benefits from share-based
    compensation                                      428          125
   Other                                               21           26
                                              -----------  -----------

Net cash used in financing activities              (1,553)      (3,534)
                                              -----------  -----------

Net (decrease) increase in cash and
 cash equivalents                                    (863)         409
Cash and cash equivalents,
 beginning of period                                3,297        4,742
                                              -----------  -----------

Cash and cash equivalents, end of period      $     2,434  $     5,151
                                              -----------  -----------


                    ADDITIONAL FINANCIAL INFORMATION
                             (In millions)
                              (Unaudited)

                                              January 27,    July 29,
                                                 2007         2006
                                              -----------  -----------
CASH AND CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents                     $     2,434  $     3,297
Fixed income securities                            17,194       13,805
Publicly traded equity securities                   1,053          712
                                              -----------  -----------
Total                                         $    20,681  $    17,814
                                              -----------  -----------
INVENTORIES
Raw materials                                 $       178  $       131
Work in process                                       440          377
Finished goods:
   Distributor inventory and deferred
    cost of sales                                     456          423
   Manufacturing finished goods                       339          236
                                              -----------  -----------

Total finished goods                                  795          659
Service-related spares                                193          170
Demonstration systems                                  36           34
                                              -----------  -----------
Total                                         $     1,642  $     1,371
                                              -----------  -----------
PROPERTY AND EQUIPMENT, NET
Land, buildings, and leasehold improvements   $     3,736  $     3,647
Computer equipment and related software             1,446        1,352
Production, engineering, and other equipment        3,995        3,678
Operating lease assets                                158          153
Furniture and fixtures                                370          363
                                              -----------  -----------
                                                    9,705        9,193
Less accumulated depreciation
 and amortization                                  (6,166)      (5,753)
                                              -----------  -----------
Total                                         $     3,539  $     3,440
                                              -----------  -----------
LEASE RECEIVABLES, NET (1)
Current                                       $       359  $       308
Noncurrent                                            479          464
                                              -----------  -----------
Total                                         $       838  $       772
                                              -----------  -----------
OTHER ASSETS
Deferred tax assets                           $       972  $       983
Investments in privately held companies               636          574
Income tax receivable                                 277          279
Lease receivables, net                                479          464
Other                                                 557          511
                                              -----------  -----------
Total                                         $     2,921  $     2,811
                                              -----------  -----------
DEFERRED REVENUE
Service                                       $     4,229  $     4,088
Product
   Unrecognized revenue on product shipments
    and other deferred revenue                      1,380        1,156
   Cash receipts related to unrecognized
    revenue from two-tier distributors                452          405
                                              -----------  -----------
Total product deferred revenue                      1,832        1,561
                                              -----------  -----------
Total                                         $     6,061  $     5,649
                                              -----------  -----------
Reported as:
Current                                       $     4,718  $     4,408
Noncurrent                                          1,343        1,241
                                              -----------  -----------
Total                                         $     6,061  $     5,649
                                              -----------  -----------

Note:
(1)  The current portion of lease receivables, net, is recorded in prepaid
     expenses and other current assets, and the noncurrent portion is
     recorded in other assets in the Consolidated Balance Sheets.


          SUMMARY OF EMPLOYEE SHARE-BASED COMPENSATION EXPENSE
                             (In millions)

                           Three Months Ended         Six Months Ended
                        ------------------------  ------------------------
                        January 27,  January 28,  January 27,  January 28,
                           2007         2006         2007         2006
                        -----------  -----------  -----------  -----------
Cost of sales--product  $        12  $        11  $        23  $        30
Cost of sales--service           30           28           54           62
                        -----------  -----------  -----------  -----------
Employee share-based
 compensation expense
 included in cost
 of sales                        42           39           77           92

Research and development         74           90          148          193
Sales and marketing              99          106          193          233
General and
 administrative                  32           26           54           60
                        -----------  -----------  -----------  -----------
Employee share-based
 compensation expense
 included in operating
 expenses                       205          222          395          486

Total employee
 share-based
 compensation expense           247          261          472          578
Tax benefit                    (105)         (73)        (163)        (162)
                        -----------  -----------  -----------  -----------

Employee share-based
 compensation expense,
 net of tax             $       142  $       188  $       309  $       416
                        -----------  -----------  -----------  -----------


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

                           Three Months Ended         Six Months Ended
                        ------------------------  ------------------------
                        January 27,  January 28,  January 27,  January 28,
                           2007         2006         2007         2006
                        -----------  -----------  -----------  -----------
Shares used in diluted
 net income per share
 calculation - GAAP           6,291        6,248        6,255        6,301
Effect of SFAS 123(R)           (10)         (15)         (12)         (15)
                        -----------  -----------  -----------  -----------

Shares used in diluted
 net income per share
 calculation - Non-GAAP       6,281        6,233        6,243        6,286
                        -----------  -----------  -----------  -----------



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

                                           Three Months Ended
                                  -------------------------------------
                                  January 27,  October 28,    July 29,
                                     2007         2006          2006
                                  -----------  -----------  -----------

GAAP cost of sales                $     3,051  $     2,951  $     2,839
   Employee share-based
    compensation expense                  (42)         (35)         (31)
   Impact to cost of sales from
    purchase accounting
    adjustments to inventory                -            -           (4)
   Amortization of purchased
    intangible assets                     (36)         (36)         (36)

                                  -----------  -----------  -----------

Non-GAAP cost of sales            $     2,973  $     2,880  $     2,768
                                  -----------  -----------  -----------

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