Letter to our Shareholders

Annual Report 2013

Fiscal 2013 was another strong year for Cisco, and we were pleased to have delivered record results despite a challenging and inconsistent global macroeconomic environment. Our results underscored the effectiveness of our vision and strategy and our strong execution. We consistently delivered on the commitments we made – to our customers, partners, employees, and you, our shareholders.

By utilizing decades of networking investments, coupled with the breadth of our portfolio, we are providing our customers with an integrated architectural approach that solves their critical business requirements. This unique approach brings together application-specific integrated circuits (ASICs), software, hardware, and services, which we believe are key to our customers' success now and into the future. In our view, we are the only company in the industry that can deliver on this integrated architectural approach.

Our momentum reflects the fundamental role the network is playing in the key technology transitions in the market, including software, silicon, cloud, mobility, bring your own device (BYOD), security, and the Internet of Everything (IoE). We believe we are well positioned as the pace of these transitions increases, because we have accelerated our own speed of innovation to stay ahead of these transitions and help our customers capitalize on them to meet their business goals.

An example of this is our continued success in the data center, where, more than seven years ago, we recognized the effect developments in data center technology and the role of cloud computing would have on networking, and the opportunity to bring innovation to this category. We have been successful in driving the transition to a converged architecture, and consequently our Data Center product category has grown to $2 billion in revenue over the past five years and increased 60% compared with fiscal 2012. Another example is in mobility, where we are leading the transition to a unified access architecture and cloud, and where our Wireless product category grew 31% in revenue from the prior year.

Fiscal 2013 was marked by a challenging and inconsistent global economy, the emergence of new technologies and business models, and industry consolidation. These factors yielded both headwinds and tailwinds for Cisco's business, and we believe our ability to consistently navigate through dynamic environments has continued to make us uniquely positioned in the industry. We remain focused on prioritizing and simplifying our business operations to both drive Cisco's continued market leadership and accelerate through these industry changes rapidly and with optimal flexibility. We realize that we must rebalance our resources to invest in new opportunities as we remain focused on profitable growth. By managing our overall business as a portfolio – across geographic regions, customer markets, and technologies – we continue, in our view, to increase our strategic position in the market and deliver on our commitments to shareholders.

As we turn our attention to the future, we see opportunities to continue to drive profitable growth. These include cloud and the unified data center, the mobility market transition, and next-generation video. We are investing for growth in services, security, emerging markets, and software offerings. And we will continue to move into new markets that provide recurring revenue streams. Longer term, we intend to focus on IoE. We believe that by bringing "everything" online, IoE will create significant opportunities for organizations, communities, and countries to obtain greater value from networked connections.

Financial Highlights

For the full fiscal 2013 and for each quarter of the year, we grew profits faster than revenue. We effectively managed our business with strong operational execution and delivered profitable growth and return for our shareholders. This disciplined financial approach resulted in record results from a revenue, net income, earnings per share (EPS), and operating cash flow perspective. More broadly speaking, in fiscal 2013 we outperformed the majority of our technology peers, especially the large IT players, from a revenue growth perspective.

For fiscal 2013, revenue was $48.6 billion, an increase of 6% compared with fiscal 2012. Product revenue in fiscal 2013 was $38.0 billion, an increase of 5% from the prior fiscal year. Net income was $10.0 billion, up 24% from fiscal 2012, while earnings per share on a fully diluted basis were $1.86, representing an increase of 25% compared with the previous fiscal year.

Moving on to the balance sheet, in fiscal 2013 total assets were $101.2 billion, representing a 10% increase from fiscal 2012. Cash, cash equivalents, and investments were $50.6 billion, and cash from operations increased 12% to $12.9 billion.

We remain highly focused on driving superior shareholder value through rigorous expense management and strong cash return to our shareholders. At the beginning of fiscal 2013, we announced our intent to return a minimum of 50% of our free cash flow annually to shareholders through dividends and share repurchases. We are pleased to have met this goal by returning $6.1 billion to shareholders during the fiscal year. Our total shareholder return for fiscal 2013 was in the top quartile of our technology peer group, and our commitment to our shareholders with our capital allocation strategy remains one of our top priorities. In addition, we invested $6.8 billion in acquisitions during fiscal 2013. The aggregate cash used for dividends, share repurchases, and acquisitions in fiscal 2013 was over $12.8 billion.

With respect to Cisco's fiscal 2013 revenue performance by geography, as compared with the prior fiscal year, the Americas region grew 8%; Europe, Middle East, and Africa (EMEA) grew 1%; and Asia Pacific, Japan, and China (APJC) grew 4%. From a country perspective, we saw notable growth during the year in the United States, India, and Mexico. Although we were encouraged by some early signs of economic stability in Europe—including our own continued improvement in the northern portion of Europe and the UK—conditions still vary by region. Challenges also remain in certain emerging market countries and in Asia Pacific. In our opinion, this landscape reflects a global economic recovery that has been slow and inconsistent.

From a technology perspective, on a year-over-year basis, we saw particular strength in Data Center and Wireless revenue growth. Data Center was up 60%, with Cisco Unified Computing System (Cisco UCS) growing 63%. Wireless grew 31%, bolstered by the strength of our broad portfolio, including the successful integration of our Meraki acquisition. Additionally, Service Provider Video revenue increased 26%, largely driven by the NDS acquisition.

We maintain a sharp focus on driving innovation in our core networking platforms. Switching was up 1% in revenue compared with fiscal 2012, driven by the recently introduced Cisco Catalyst 3850 Series Switch, the industry's first converged wired and wireless switch, and the Cisco Nexus switching family of products, which grew 20% in revenue from the prior year. Although Next-Generation Network (NGN) Routing was down 2% in revenue, we believe we are very well positioned in this category based on the alignment of our portfolio with our customers' key priorities.

Security revenue was flat in fiscal 2013 compared with fiscal 2012, but with our recently announced intent to acquire Sourcefire, we believe we are taking a major step toward becoming our customers' leading security partner. We expect this acquisition will enable us to provide continuous and pervasive advanced threat protection across the entire attack continuum and from any device to any cloud. Despite a 6% decline in Collaboration revenue, we remain focused on our collaboration execution. And Services revenue grew 9% in fiscal 2013 as we have continued to transition to selling solutions, not just products. Together with our partners, we continue to win large multi-year services deals as customers look to us to help meet their business goals.

We intend to continue to deliver the next wave of innovation in the industry, from the cloud to the campus. For example, at Cisco Live, our largest customer event in June, we previewed our application-centric infrastructure (ACI) strategy with Insieme. ACI is an innovative architecture that provides a common management framework for network, application, security, and IT operations teams, helping make IT more agile while reducing application development time. Another example is Cisco Open Network Environment (ONE), which in our view is the most comprehensive framework for network programmability and software-defined networking (SDN). Since the introduction of Cisco ONE a year ago, we have more than doubled the number of beta customers, to over 120, who are utilizing Cisco ONE to program, orchestrate, and manage their networks.

We are successful when we are squarely focused on the key transitions in the marketplace and highly aligned with our customers' priorities. This focus drives our innovation strategy, the pillars of which are build, buy, partner, and integrate. This strategy, combined with our architectural approach, continues to be extremely effective in terms of solving customers' business needs. During the fiscal year, we closed 13 strategic acquisitions, which spanned across our top growth priorities.

Looking Ahead

We never convince ourselves the market will evolve a certain way because it is convenient to our current business. Rather, we align closely with our customers to transform to meet the long-term market needs. We prioritize and invest for where the market is going. Every technology company should move with this agility. Many do not, and those that do not get left behind.

As we head into the new fiscal year, I am both excited about our innovation strategy and confident about our ability to move with unparalleled speed and agility. I am extremely pleased with our first-class leadership team, operational strength, fiscal discipline, and the value we continue to provide to our customers, partners, employees, and shareholders. We have a proven track record of success, and we believe we are well positioned to capitalize on the growth opportunities in front of us. I am energized by the opportunity ahead as we look to become the number-one IT company. We remain committed to you, our shareholders, and thank you for your continued confidence and support.

John T. Chambers
Chairman & CEO, Cisco
September 10, 2013

2013 Letter to Shareholders
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