Letter to our Shareholders

Letter to Shareholders

Fiscal 2011 was one of the most transformative years we have seen at Cisco. We prioritized, simplified, and took action to drive Cisco's continued market leadership. We aggressively changed the way we do business to become a faster and more agile partner, with the goal continuing to be to increase our ability to deliver unique value to our shareholders, customers, partners, and employees.

Throughout our transformation, we continued to execute as we grew fiscal year revenue to over $43 billion. More importantly, we laid the groundwork needed to position Cisco for the next stage of growth and profitability.

We believe the network will continue to grow in importance and could become our customers' most strategic information technology (IT) asset. We will continue to develop technologies, services, and software platforms that enable our customers to leverage the network to solve their greatest business challenges, which in turn will drive, in our view, greater customer and shareholder value for Cisco and also solidify our leadership position in an ever-evolving network centric world.

In this current environment, we are fortunate to be a company built on a number of tremendous strengths. From a technology standpoint, innovation and customer support have remained Cisco hallmarks, and we have built the most trusted brand in networking, as evident by our continuing market leadership. Moreover, our business fundamentals remain solid: we generated robust cash flow from operations, maintained a healthy balance sheet, have strong customer and partner relationships, and hold leadership positions in many growing markets driving the future of the intelligent network.

Our more than 52,000 partners globally continue to endorse our offerings with enthusiasm and are vocal in telling us why: our industry leading products and services; our people and relationships; our innovation and thought leadership; our ability to deliver architectures to solve business problems; our ability to reduce risk, complexity, and cost; and our commitment to their success.

As we enter fiscal 2012, we are operating as the "Next Cisco" – less complex, more agile, and focused on our five foundational priorities: leadership in our core business (routing, switching, and associated services), which includes comprehensive security and mobility solutions; collaboration, including telepresence; data center virtualization and cloud; video; and architectures for business transformation, where we address our customers' biggest technology and business imperatives through a complete solution offering.

We believe we are well positioned to capitalize on these initiatives, in part because of the significant changes we made over the past year. These changes were implemented as a result of our own internal assessments, led by our new Chief Operating Officer, Cisco 10-year veteran Gary Moore, and also as a result of customer feedback.

First, we aligned our cost structure and expect to reduce our fiscal 2012 operating expenses by $1 billion on an annualized basis. As part of this effort, we are reducing our global headcount and other costs to optimize our operating model.

Second, we took decisive action to optimize our portfolio. We made the decision to either exit or materially lower our investments in several areas of our product and solutions portfolio. These efforts allowed for the redeployment of more than $200 million in investment in all areas that support the company's five foundational priorities, discussed above.

Third, we reorganized our sales, engineering, services, and operations organization, providing clear line of- sight accountability toward the goals of accelerating the speed of decisions, driving toward major improvements in productivity, and driving innovation at a faster pace.

Fourth, we took steps to deliver more value to our shareholders by initiating a quarterly cash dividend, and we continued to be aggressive in our stock repurchase program. In fiscal 2011, we returned over $7 billion to our shareholders through these actions.

While the foundation has been laid for a simpler Cisco with much of the heavy lifting behind us, we believe now is the time to accelerate our transition. The Next Cisco recognizes that we need to stay disciplined and responsive. In the past our goal has been to help our customers increase their competitive advantage and profitability through their networks. Today, as a lean, agile, and more aggressive Cisco, we are upping the ante in furtherance of this goal.

Our goal is to create intelligent networks that become our customers' most strategic communications, IT, and business asset, helping solve their most important technology and business issues. This is what we are striving for, and we believe that if we deliver intelligent networks and technology architectures built on integrated differentiated products, services, and software platforms, we will achieve this goal and win the next technological transition.

Financial Highlights

If you look at our momentum, we're clearly responding well to market challenges–picking up new business and winning versus our competition. In our view, our architectural approach, scale advantages, and Cisco Systems, Inc. broad portfolio are key reasons for our success. While we hit some bumps in the road in fiscal 2011, overall market dynamics and changing customer buying habits aligned to our portfolio are reasons why we believe we can sustain a long-term competitive edge.

In fiscal 2011, Cisco reported net sales of over $43 billion, an increase of 8% compared to a year ago. Fiscal 2011 product sales were $34.5 billion, up 6% year over year. We continued to develop the strategic nature of our customer relationships as evidenced by our service revenue growth of 14% year over year to $8.7 billion, representing approximately 20% of our total revenue. Sales across all of our geographic theaters were well balanced, with each theater growing revenue when compared to fiscal 2010. As we strive for faster decision making with greater accountability and alignment to better support our emerging countries and our five foundational priorities as discussed above, beginning in fiscal 2012, we have organized into the following three geographic regions: the Americas; Europe, Middle East, and Africa ("EMEA"); and Asia Pacific, Japan, and China ("APJC").

From a product technology perspective, we saw improvement in most of our product categories in fiscal 2011. However, switching revenue was flat compared with fiscal 2010, due to the combined effect of continuing transitions taking place in our product portfolio, lower public sector spending, and the impact of increased competitive pressures.

Routing revenue was up approximately 6% from a year ago, driven by an 8%, or $334 million, increase in sales of our high-end routers. Within high-end router products, the increase was driven by higher sales of Cisco Aggregation Services Routers (ASR) 5000 products from our December 2009 acquisition of Starent and by higher sales of the Cisco ASR 1000 and Cisco ASR 9000 products.

Our New Products revenue grew by 14% to $13.0 billion. Within this portfolio, our collaboration sales increased by 31%, or $972 million, due in part to the inclusion of Tandberg sales within our Cisco TelePresence systems product line. In addition, our data center product sales were also strong, increasing by 44%, or $491 million, due primarily to the robust growth of our Cisco Unified Computing System products.

In fiscal 2011, net income was $6.5 billion. Earnings per share on a fully diluted basis were $1.17. Going forward, our goal is to drive earnings faster than revenue to deliver maximum value to shareholders.

We view our strong balance sheet as a competitive advantage. Total assets were $87.1 billion at the end of fiscal 2011, including approximately $44.6 billion in cash, cash equivalents, and investments held globally. Cash generated from operations in fiscal 2011 was $10.1 billion, a significant portion of which was used to repurchase 351 million shares of our common stock and for payment of our first quarterly cash dividends.

Well Positioned for the Future

We remain optimistic about our company's future. You have our commitment that the Next Cisco will be faster; more focused; and, in our view, even more innovative. We'll continue to drive accountability on many levels–from revenue, gross margins, and market share to profitability and strategic direction to ensure Cisco's future success.

Moving forward, we believe that we remain well positioned to capture market and technology transitions through the depth and breadth of our market-leading portfolio. I have the utmost confidence in our leadership team, increased discipline, and strategic roadmap to successfully drive these transitions with an architectural approach.

In closing, Cisco is firmly committed to delivering long-term value to our shareholders while driving profitable growth and staying focused on the success of our customers and partners. We appreciate your continued trust, and we thank you for being a valued shareholder.

John T. Chambers
Chairman & CEO
September 2011