Annual Report 2007

To Our Shareholders

Video: To Our Shareholders - 2007

John Chambers message to shareholders, Annual Report 2007. (16:38 min)

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Fiscal 2007 was an exceptional year for Cisco. Our unique breadth and balance across more than two dozen product areas, four customer segments, and major developed and emerging countries helped Cisco to deliver another year of record financial results. We believe our balance across our business not only enabled accelerated revenue growth during the fiscal year, but is also a strategic differentiator for Cisco and critical to our ability to deliver strong performance for our shareholders.

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Our success demonstrates that our vision for the industry’s evolution appears to be playing out as all forms of communications and IT capabilities are being enabled by the network. Our differentiated strategy and ability to execute are evident in our continued market leadership and the increased share of our customers’ total communications and IT expenditures as they take full advantage of the network to drive business transformation.

Vision: Driving Innovation to Change the Nature of Work and the Way We Live

More than a decade ago, we focused on migrating the world to an IP-based infrastructure where the network was initially positioned to become the platform to enable transactions, such as entering orders online, conducting Internet-based searches, and e-mail. Today, with the convergence of data, voice, video, and mobility, the network is capable of optimizing and enriching a user’s experience. We believe we are now entering what we see as the second major phase of the Internet’s impact on the nature of business and life’s experiences and that this will result in dramatic innovation and productivity increases enabled by collaboration and Web 2.0 technologies such as unified communications and TelePresence.

In fiscal 2007, we invested $4.5 billion in research and development. Listening to our customers and investing to capture market transitions give us a competitive advantage that helps us to develop innovative solutions that meet customer needs and drive our growth. Cisco TelePresence exemplifies this kind of innovation. In demonstrations, customers immediately experience the impact of TelePresence and understand its value for their businesses. The result has been rapidly accelerating growth in recent quarters in only its first year in the market. TelePresence is perhaps our greatest example of how the network is transforming the way we do business and how we interact, collaborate, and entertain.

Our innovation model is built around internal development, acquisitions, and partnerships. For example, since the acquisition of Scientific Atlanta in fiscal 2006, we have transformed our video capabilities and extended our leadership in this important market. Now, the acquisition of WebEx in fiscal 2007 brings collaboration expertise to our customers and partners. Continued innovation in our core routing and switching products is complemented by the further development of our advanced technologies, including security, storage, unified communications, and wireless. We believe our technology architecture approach, which is based on intelligence in the network and tightly coupled products, is enabling gains in market share, sustainable competitive advantage, and a greater share of customers’ IT budgets.

Strategy: Sustained Differentiation Across Customer Segments and Geographies

The foundation of Cisco’s strategy is made up of four pillars. First, identifying, investing, and positioning Cisco to capture customer-driven market transitions. Second, constant innovation enabled through building, buying, or collaborating with our partners. Third, a differentiated market approach with the ability to tie together both technology and business architectures. Fourth, our cross-functional teamwork and prioritization of initiatives that drive execution across products, value-added services, customer segments, and geographic theaters.

All aspects of Cisco’s differentiated strategy have evolved based on customer requirements to create sustainable differentiation in the industry and better serve the needs of all our customers. In fiscal 2007, we saw continued momentum and achieved balanced growth across our product families, our customer segments (enterprise, service provider, commercial, and consumer), and our key geographic theaters.

From a customer segment perspective, the commercial market remained very solid and well balanced globally. We are continuing to expand our product offerings, services, and distribution capabilities to this strategic market. These customers, which are typically small and medium-sized businesses, are increasingly embracing networking technology as they scale and realize efficiencies from their investments. With the addition of WebEx, we will begin to explore new ways to work with small and medium-sized businesses as a trusted partner, and in turn help them grow and enhance their businesses.

Our strategic value to our global service provider customers is increasing from both a technology and a business architecture perspective. The proliferation of video and accelerating deployment of HDTV and IPTV are influencing service providers to seek out innovative architectures that provide network capacity to deliver rich, personalized user experiences. Cisco’s architectural approach is designed to enable higher network capacity, intelligence, and resiliency to deliver video and integrate video/IPTV in a range of consumer and business services to offer compelling customer experiences. Our technologies transform service providers into “experience providers” to enable the “Connected Life”—providing value throughout a consumer’s daily life at home, at work, or on the move.

From a geographic perspective, we were pleased with the strong, balanced performance achieved in our four largest theaters. These include the United States and Canada, European Markets, Emerging Markets, and Asia Pacific. Perhaps our greatest geographic success of fiscal 2007 was the Emerging Markets theater, where our revenue grew approximately 39 percent on a year-over-year basis. We believe that our business process and collaborative approach to our Emerging Markets theater contributed to this growth.

We believe that our unique go-to-market approach, in which Cisco serves as a key adviser to governments around the world, is helping to drive country transformation by outlining process change, building networks, and then providing the application services and expertise that support key services for citizens, such as education, healthcare, public safety, economic development, and national security. Relationships with government leaders worldwide, supported by our extensive sales coverage, are key to our execution in these markets.

Execution: Measures of Success

For Cisco, successful execution is measured by product, customer segment, and geographic market leadership on a global basis. As we position ourselves for the second phase of the Internet’s innovation and productivity, people are turning to the network as the platform that enables all forms of communications and IT. We are quickly adopting and helping our customers to adopt Web 2.0 technologies, such as unified communications and TelePresence.

In fiscal 2007, Cisco delivered strong results with accelerated revenue growth. Total revenue for fiscal 2007 was a record $34.9 billion, an increase of approximately 23 percent over fiscal 2006 revenue of $28.5 billion. Of the total revenue in fiscal 2007, $29.5 billion was related to product revenue and $5.5 billion was related to service revenue.

We achieved strong revenue growth across our key geographic, customer, and product portfolios, which demonstrates the power of our diversification. We believe our performance is evidence of the underlying strength in our balanced product portfolio. Our reward is market leadership in almost all product categories.

In the first full fiscal year following the acquisition of Scientific Atlanta, the results of the acquisition exceeded our expectations with greater market penetration, faster growth, and greater scale for Scientific Atlanta products in international markets, and a stronger position for Cisco with service providers worldwide.

We added approximately 11,600 employees on a net basis throughout the year. These additions drove sales in video, Emerging Markets, and market expansion in the commercial customer segment. Even with these headcount investments, net income grew approximately 31 percent on a year-over-year basis to $7.3 billion in fiscal 2007, which made Cisco one of the most profitable companies in the technology sector. Earnings per share on a fully diluted basis for fiscal 2007 were $1.17. Cisco generated $10.1 billion of cash from operations.

We continued to reduce our outstanding shares in fiscal 2007 by repurchasing 297 million shares of common stock. From the inception of the repurchase program in fiscal 2002 through the end of fiscal 2007, Cisco has repurchased 2.2 billion shares for an aggregate purchase price of $43.2 billion.

Our pursuit of operational excellence drives us to continually seek ways to improve and streamline our business processes across our global operations. Fiscal 2007 marked the year in which we realized greater operating efficiencies as a result of completing our implementation of a new manufacturing model: lean manufacturing. As a result of this initiative, Cisco achieved annualized inventory turns of slightly above 10 in the fourth quarter of fiscal 2007. This is a significant accomplishment given the size and breadth of our product lines.

Our track record of revenue and earnings growth, strong cash-generating capability, and healthy balance sheet enable us to reinvest in our business when we are presented with market or customer opportunities. We believe this helps us to drive ongoing innovation and supports our growth initiatives.

Corporate Citizenship and Social Responsibility

While we’re proud of the financial results we delivered in 2007, we are also very proud of our people, our culture, and the way Cisco operates as a company. The fundamental value of our products rests on our ability to seamlessly collaborate as an organization as well as provide access to information and opportunities that help people improve the way they work, live, play, and learn. Our long-standing commitment to corporate social responsibility extends from transforming global education to building healthier, more productive communities, including our Green Initiative and commitments to global sustainability.

We remain dedicated to education through the creation of innovative global learning initiatives. In fact, this year marked the tenth anniversary of the Cisco Networking Academy,® a pioneering e-learning program operating in approximately 165 countries worldwide with approximately 500,000 students. Students acquire technical skills to enable their participation in a world that is increasingly driven by technological initiatives, and in turn helps energize local economies. Through public and private sector partnerships, our $40 million investment and involvement in the 21st Century Schools Initiative is redefining the 21st century educational approach, and is rebuilding and improving entire communities.

We believe that solid business results and dedication to the environment go hand in hand. This past year, Cisco established an EcoBoard to set an environmental strategy and oversee companywide environmental programs. Cisco is committed to environmental responsibility in our business operations, products, and network architecture design. We believe that through the power of the network, people are empowered to work, live, play, and learn in an environmentally sustainable way. This can be accomplished through reduction in transportation-related emissions via collaborative technologies such as unified communications and TelePresence, and also through improvements in workspace utilization and energy consumption.

One Final Note

Over the past five years, our management team has evolved and so has our business leadership. One of the core competencies of Cisco is our ability to evolve our organization and leadership teams while still maintaining focus on implementation of our strategy. Over the years, Cisco has successfully transitioned through many generations of key leaders in every functional leadership role in the company.

Dennis Powell became our Chief Financial Officer in 2003 and went on to lead the company with an unwavering sense of integrity and fiduciary responsibility through some of the most challenging economic times our industry has experienced. Under Dennis’ financial and operational leadership, we achieved extraordinary growth in net income, cash from operations, market capitalization, and market share gains versus our peers.

Following the second quarter of fiscal 2008, Dennis will retire from his role as Chief Financial Officer. We thank him for his leadership and contributions to Cisco, especially his commitment to transparency and integrity in financial reporting. Frank Calderoni, Senior Vice President of Customer Solutions Finance, has been asked to succeed Dennis upon his retirement as Chief Financial Officer. Frank’s experience directing global sales finance at Cisco is complemented by his prior background as CFO at two public companies within the technology industry.

Our accomplishments and successes are built upon foundational relationships with our customers, our worldwide partners, and our entire Cisco family. We wish to thank our customers, partners, employees, and shareholders for their ongoing trust, confidence, and support as we become positioned to execute on the next wave of the Internet. Working together, we believe Cisco technology will change the nature of work and the way we live. We hope you will join us.

John T. Chambers
Chairman and CEO, Cisco

September 2007