Operator: Welcome to Cisco Systems' Fourth Quarter and Fiscal Year 2010 Financial Results Conference Call. At the request of Cisco Systems, today's conference is being recorded. If you have any objections, you may disconnect.
Now, I'd like to introduce Ms. Laura Graves, Senior Director of Global Investor Relations for Cisco Systems. Ma'am, you may begin.
Laura Graves - Director, Global IR: Thank you, operator, and good afternoon, everyone and welcome to our 82nd quarterly conference call. This is Laura Graves of Investor Relations, and I am joined today by John Chambers, our Chairman and CEO; Frank Calderoni, Executive Vice President and Chief Financial Officer; Rob Lloyd, Executive Vice President of Worldwide Operations; Ned Hooper, Chief Strategy Officer and Senior Vice President of our Consumer Business; Padmasree Warrior, Chief Technology Officer and Senior Vice President; and Blair Christie, Senior Vice President of Global Corporate Communications.
The Q4 fiscal year 2010 press release is on the U.S. High Tech Marketwire and on the Cisco Web at newsroom.cisco.com. I would like to remind you that we have a corresponding webcast with slides. In those slides, you will find the financial information that we cover during this call as well as additional financial metrics and analysis that you may find helpful.
Additionally, downloadable Q4 financial statements will be made available following the call, including revenue by product and geography, income statements, full GAAP to non-GAAP reconciliation information, balance sheets and cash flow statements can be found on our website also in the Investor Relations section. Click on the Financial Reporting section of the website to access the webcast slides and these documents.
A replay of this call will be made available via telephone from August 11 through August 18 at 866-357-4205 or 203-369-0122 for international callers. A replay will also be available from August 11 through October 22 on Cisco's Investor Relations website, at investor.cisco.com.
Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results. Our commentary today will be providing information on both our Q4 and our full fiscal year 2010 financial results. The financial results in the press release are unaudited.
The matters we will be discussing today include forward-looking statements, and as such, are subject to the risks and uncertainties that we discuss in our detailed documents filed with the SEC, specifically the most recent annual report on Form 10-K, quarterly report on Form 10-Q and any applicable amendments, which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. Unauthorized recording of this conference call is not permitted.
With that, I'd like to now turn it over to John for his commentary on the quarter.
John T. Chambers - Chairman and CEO: Thank you, Laura. Based in part on the feedback from a number of you, we are going to try a new format for this quarter's conference call, the objective being to share more information in a tighter format, while leaving more time for Q&A at the end of the call. Please do not hesitate to give us your feedback in terms of the effectiveness of this new format.
We will break the call into four sections. In the first section, I will provide a high level financial review of the quarter, followed by a discussion primarily in financial terms on geographies, customer segments and products. I will then briefly describe our progress on our long-term strategy, first in terms of progress on that strategy from a technology and a business architectural perspective, and then on how our new business models and dynamic organization structures are enabling speed, scale, flexibility and growth in new markets. Finally, we will provide our guidance for Q1 FY '11 with all the appropriate caveats.
During the second section, Frank will provide a review of fiscal year 2010 and provide additional details on Q4 as well as expand on our Q1 fiscal year '11 guidance and resource investments.
In the third section of the call we will focus on business momentum in terms of what we can control and influence, our expanding business and (market) position with our customers, with focus on key issues on their mind, including what they are saying in terms of the economy, job creation and momentum in the relationship with Cisco. In this section each quarter we will cover our progress in several new market adjacencies. Some of the adjacencies growth opportunities may be tied to the economy and others may be new markets for us and at times new for the entire industry.
In the fourth section, we will wrap up with Q&A.
Now, beginning with the opening section. From a high level perspective, there are a number of key takeaways from the results in Q1 FY '10 and our momentum going into Q1 FY'11. First, this was a very strong quarter for Cisco and we closed FY '10 in a tremendous position of strength. We have a compelling financial position, a well-tuned innovation engine and it's showing solid execution on our growth strategy. It is a real pleasure to return to our desired operating position in the markets to once again announce a number of record financial results achieved this quarter.
In Q4 we had a record revenue of $10.8 billion, a 27% year-over-year increase, which was at the higher end of our guidance provided last quarter of 25% to 28%, record non-GAAP operating income of $3.1 billion was a year-over-year increase of 39%, non-GAAP net income was $2.5 billion, a 36% year-over-year increase, and non-GAAP earnings per share of $0.43, a year-over-year increase of 39%. All of these were also records.
Other Q4 financials that were also very strong included GAAP earnings per share of $0.33, an increase of 74% year-over-year. Expense management continued to be very tight with operating expenses at 35.4% of revenue on a non-GAAP basis. Non-GAAP operating expenses increased 15% year-over-year versus a 27% increase for revenues. Therefore, as you would expect, productivity remained very strong at $622,000 per person in Q4, representing a year-over-year increase of approximately 20% from Q4 fiscal year '09 $517,000 per employee.
In my opinion, these results are extremely positive proof in terms of the effectiveness of our organization structure, business models, innovation and execution capabilities, while focusing on over 30 major new market adjacencies at the same time. Product book-to-bill was slightly above 1. Cash generated from operations was a very strong $3.2 billion, bringing our total cash including investments to $39.9 billion.
We repurchased $2.3 billion of stock during the quarter or 99 million shares at an average price of $23.33 per share. The remaining authorized repurchase amount under the stock repurchase program was approximately $7 billion at the end of the quarter.
We also delivered on our hiring projections with an incremental increase of approximately 2,000 additions to the Cisco team in Q4 FY '10, not including acquisitions. This follows on our last quarter's new hires, again, not including acquisitions, of over 1,000 people in Q3 fiscal year '10. It is our intent to continue to hire in proportion to our global business assuming support from government decisions on private job creation in the U.S. This quarter we added over 70% of the additions in the U.S. and over 600 of those in California.
In summary, from a financial perspective, we exit Q4 FY '10 in a tremendous position of strength from a financial, execution, innovation and a growth strategy perspective.
The second area I would like to now cover is a higher level of geographic overview, which is the primarily way we run our business and one which we felt would be a key area of interest given some of the uncertainties from a global perspective. The discussion for this section would be on product orders in terms of year-over-year growth. From a global perspective, Q4 product orders grew 23% from a year-over-year perspective.
Now on to the individual geographies. In Q4 FY '10, our four largest theaters had extremely good balanced order growth between 20% and 35% from a year-over-year perspective. Emerging markets led the way with 35% growth year-over-year. Europe was second with very solid growth in the mid 20s year-over-year, while Asia Pacific and the U.S. and Canada theaters came in with growth of approximately 20% year-over-year. Japan, which accounts for only 3.5% of our product orders, were flat in Q4 from a year-over-year perspective.
The key takeaway from a country perspective was once again the balance across our top 15 countries. In Q4, 13 of the top 15 countries orders grew in double digits year-over-year. Two of our top 15 countries, India and Switzerland grew over 50% in Q4 from a year-over-year perspective. Three countries grew in the 40s, including Canada, Brazil and Mexico. Three others, including Australia, France and Russia, grew approximately 30% or better, while China, the U.S., U.K. and the Netherlands grew approximately 20% or better. Italy and Germany grew in high single digits year-over-year.
Now on to the customer segments. Again, in Q4, total product orders grew about 23% year-over-year. The balance across our customer segments from an order perspective was very solid, ranging from growth in the high teens in service providers to high 20s in the commercial marketplace. The public sector and enterprise segments grew approximately 23% to 25% year-over-year, while the consumer was flat year-over-year. Across our four major theaters, balance was fairly similar by customer segment.
Moving on to products, which we traditionally discuss in terms of revenue, our advanced technologies grew in Q4 year-over-year at approximately 27%. Switching also grew at 27%, and routing, after a very strong Q3, grew at 15% year-over-year. Of particular interest within key product families, the CRS product family grew revenue approximately 20% year-over-year and is now at an annualized run rate of approximately $1.2 billion. The ASR family grew 150% year-over-year and it's now an annualized run rate of approximately $1 billion. The Nexus family with an annualized run rate of over $2 billion grew approximately 325% year-over-year. The UCS product family continue with an awesome performance with the number of new customers growing approximately 90% from Q3 to Q4 to now over 1,700 total customers.
From an advanced technology perspective, security revenues grew over 50% in Q4, Unified Communications revenues grew over 20%, wireless grew over 30% and storage grew approximately 20%. The network home was down a little over 10%. Our video systems grew in the high 30s year-over-year. Again, as we said in last quarter's conference call we are gaining market share in many of these categories.
As we're all aware, the industry has experienced supply chain constraints over the past year. While the situation is improving, as expected, we continue to see challenging procurement of components this quarter. I mentioned on the Q3 conference call that we'll be aggressive to help meet customer expectations. It was the right thing to for our customers and our business. Supplier lead times now appear to have stabilize, but are still longer than we would like. However, we made significant progress, and product lead times to customers are now within the normal range for the vast majority of our products and we expect to continue to make improvements.
As we also discussed in a fair amount of detail in the last conference call, we could not be more pleased with how our new organization structure build around dynamic network organization combined with new business models around vision, differentiated strategy and execution are enabling an extremely competitive structure in terms of speed, scale, flexibility and replication. We will periodically expand on these very strategic differentiation capabilities for Cisco in future conference calls.
Our success in both the individual market adjacencies and the interdependency between adjacencies have been even stronger than we anticipated. These large opportunities include key emerging countries, data center virtualization, cloud, video, consumer and collaboration, all of which had been an extension of current area of focus. At the same time, there are a number of other areas that are almost completely new market for us such as smart grid, virtual healthcare, media solutions, sports and entertainment, Smart+Connected Communities where we have very limited installed base, and therefore, growth will be entirely new to Cisco.
Our business in Q4 continued to grow at a very strong rate and mathematically would indicate very solid growth over the upcoming quarter. We feel very good about those areas that we can control our influence. However, balancing this strong optimism, there are some challenges that are contributing to an unusual amount of conservatism and even caution.
In short, we see the same opportunities and challenges that you are reading about in regards to the market. Those challenges ranging from GDP growth and future GDP projections, continuing to slow in the U.S., job creation challenges and concerns coming out of Europe, just to mention a few. We are seeing a large number of mixed signals in both the market and from our customer's expectations, and we think the words unusual and uncertainty are an accurate description of what is occurring.
The Federal Reserve's comments yesterday that the pace and output of the recovery had slowed in recent months and that the recovery is likely to be more modest in the near-term than has been anticipated just a few months ago are comments that most of our large customers that I've talked with recently would agree with. Also, the same customers would agree, with few exceptions, that they still expect a very gradual return to more normal economic conditions.
In summary, on those areas that we can control or influence, from an innovation point of view or an operational or execution point of view, we feel we are extremely well positioned. Almost all of our product families are in the early stages of their lifecycle and gaining solid momentum as we discussed earlier. Balance across geographies and customer's segments remains very good.
Even at the four sequential quarters of growth, our Q4 results versus Q4 a year ago were above our long-term goals of 12% to 17%, and given reasonable economic growth and execution, that continues to be an appropriately long-term goal for Cisco's trajectory.
So as many of you would expect, we're going to focus on what we can control and influence as we have done in each of the periods of uncertainty and we're going to be very aggressive in terms of investing resources in the new market adjacencies where we are also gaining very good momentum both from an innovation thought leadership perspective as well as the business perspective. This is where the strength of our financial model and our ability to generate cash and profits comes into play. You will see us continue to invest aggressively in R&D, sales and marketing and our talents.
As we have said in conference calls over many years, Cisco will always be affected by major economic changes, capital spending patterns, new and existing competitors, potential issues affecting our suppliers and our ability to execute or not on our strategies and other factors such as discussed in our SEC filings. For purpose of our long-range goals as well as our quarterly guidance, we are also assuming that our vision of how the industry and the market will evolve will be accurate and we will effectively execute on that vision. We are confident in our strategy.
With this discussion in mind, our revenue guidance for Q1 FY '11, including our usual caveats as discussed earlier and in our financial reports, is for revenue growth to increase 18% to 20% year-over-year. Frank will continue with detailed guidance in the next session.
Now, I'd like turn it over to you Frank.
Frank Calderoni - EVP and CFO: Thank you, John. For today's call, I will first comment on our full fiscal year 2010 results and then provide some additional detail on our fourth quarter results. From a financial perspective, this was an outstanding fiscal 2010 and a very strong quarter for Cisco. With an extremely robust financial model, we continue to grow non-GAAP operating and net income faster than revenue even with increased investments and an expanding portfolio of products and services.
Let me start with our full fiscal year performance. Total revenue for fiscal year 2010 was a record $40 billion, an increase over FY '09 revenue of $36.1 billion. Switching revenue ended the year at $13.6 billion, up 12% year-over-year. Routing revenue was $6.6 billion, an increase of 4% over the last fiscal year. Advanced Technologies revenue was up 6% year-over-year to $9.6 billion. Total services revenue was approximately $7.6 billion, growth of 9% in fiscal year 2010.
Total non-GAAP gross margin for fiscal year 2010 was 65.2%, up two-tenth of a percentage point year-over-year. For product-only, non-GAAP gross margin of 65.1% was up two-tenth of a percentage point compared with FY '09, primarily due to cost savings in volume, partially offset by pricing and discounts. Non-GAAP services gross margin were unchanged year-over-year.
Non-GAAP operating expenses were $14.4 billion in FY '10, up from $13.7 billion in FY '09. As a percentage of revenue, our non-GAAP operating expenses were consistent with our stated goals to invest in FY '10 as well as the changing mix in our business.
Non-GAAP net income fiscal year for 2010 was $9.4 billion, up approximately 19% from fiscal year 2009's non-GAAP net income of $8 billion. Non-GAAP earnings per share on a fully diluted basis for fiscal year 2010 were $1.61, up from $1.35 in fiscal year 2009, representing a 19% increase year-over-year.
GAAP net income for fiscal year 2010 was $7.8 billion or $1.33 per share on a fully diluted basis compared to $6.1 billion or $1.05 per share on a fully diluted basis in fiscal 2009. This represents year-over-year increases of 27% for both measures.
Now for the review of our Q4 results. Total revenue for the quarter was $10.8 billion and our total product revenue of $8.8 billion was up 31% year-over-year. Switching revenue was $3.6 billion, an increase of 27% year-over-year. Our modular switching revenue was up approximately 36% year-over-year and our fixed switching revenue increased 20% year-over-year. Routing revenue was $1.7 billion, up 15% year-over-year and we saw increases of 22% in high end, 11% in low end and a decrease of 6% in midrange year-over-year
Advanced technologies had revenue totaling $2.6 billion, representing an increase of 27% year-over-year. Other product revenue totaled $924 million, an increase of approximately 139% year-over-year. The year-over-year growth was due to the inclusion of sales from TANDBERG, acquired in April of 2010, which performed during the quarter as expected, a full quarter of revenue from Flip Video compared to Q4 FY '09 and strong growth in Unified Computing system.
Total services revenues was approximately $2 billion, up approximately 12% year-over-year, driven by strength in both advanced and technical support services. Total revenue across all geographic segments increased on a year-over-year basis ranging from an increase of approximately 7% in Japan to 57% in the emerging market theater. Q4 FY '10 total non-GAAP gross margin was 64.1%, down 1.1 points quarter-over-quarter and down 1.2 points year-over-year.
For product-only, non-GAAP gross margin for the fourth quarter was 63.6%, down 1.7 points quarter-over-quarter. We saw an approximate 1 percentage point impact on margins as a result of higher manufacturing-related cost due primarily to the constraints in our supply chain and its impact on our linearity, which was incremental to our typical variances.
We also saw an unfavorable mix impact driven by numerous recent product introductions. Consistent with historical experience, we expect to see positive benefit from ongoing cost savings from component cost and value engineering over time. The remainder of the decrease in product margins was driven by pricing and higher discounts, partially offset by cost savings and higher volumes.
On a year-over-year basis, non-GAAP product gross margin was down 1.1 percentage point. This was primarily driven by higher manufacturing related cost associated with supply chain constrains, unfavorable mix, pricing and higher discounts, partially offset by the cost savings and higher volume.
Our non-GAAP services gross margin for the fourth quarter was 65.9%, up 1.1 percentage points over last quarter and down 1.6 points year-over-year.
Services margin typically experiences’ variability over time due to various factors such as the changes in mix between technical support and advanced services, as well as the timing of contract initiations in our renewals.
Total gross margin by theater range from approximately 59% for Asia-Pacific to approximately 72% in Japan. Total gross margin for Asia-Pacific decreased quarter-over-quarter due to a product mix as well as a pre-acquisition adjustment related to TANDBERG.
The emerging market's increase was driven by higher volume and improved services gross margin partially offset by product mix.
Non-GAAP operating expenses were approximately $3.8 billion in Q4, up approximately 2% quarter-over-quarter, driven primarily by the inclusion of expenses from TANDBERG and increased investments. Non-GAAP operating expenses were up approximately 15% year-over-year, driven be investments in sales, marketing and R&D, as well as the inclusion of TANDBERG and Starent expenses.
During the quarter, we also recognized a pre-tax charge to GAAP operating expenses of $120 million due to real estate impairments and charges related to excess facility.
Non-GAAP interest and other income was $91 million for Q4, while GAAP interest and other income was $93 million for the fourth quarter of FY '10. Our Q4 FY'10 non-GAAP tax provision rate was 21.5%. Non-GAAP net income for the fourth quarter was $2.5 billion, representing an increase of 36% year-over-year. As a percentage of revenue, non-GAAP net income was 23.1%, up 1.6 percentage points from Q4 FY '09.
Non-GAAP earnings per share on a fully diluted basis for the fourth quarter was $0.43 per share versus $0.31 in the fourth quarter of fiscal year 2009, a 39% increase year-over-year.
GAAP net income for the fourth quarter was $1.9 billion as compared to $1.1 billion in the fourth quarter of fiscal year 2009. GAAP earnings per share on a fully diluted basis for the fourth quarter was $0.33 versus $0.19 in the same quarter of fiscal year 2009.
Now moving on to the balance sheet; our balance sheet continues to be very strong providing us with significant financial flexibility. The total of cash, cash equivalents and investments for the quarter was $39.9 billion, up $755 million from the last quarter.
On to AR, accounts receivable; our receivables balance was $4.9 billion at the end of Q4, up from $4.1 billion at the end of Q3 FY '10. Days sales outstanding or DSO was 41 days, up from 39 days at the end of Q3 and up from 34 days at the end of Q4 FY '09. As compared to Q3, DSO reflects an increase of two days as a result of timing of shipments partially offset by very strong collection.
Total inventory at the end of Q4 was $1.3 billion, up approximately 6% quarter-over-quarter. Non-GAAP inventory turns were 12.1 this quarter, up 1 point from last quarter and up eight tenth of a point from Q4 of last year. As mentioned last quarter, we have been aggressive in ensuring we could procure components to meet customer’s delivery date.
Inventory purchase commitments at the end of Q4 were $4.3 billion, an increase of approximately 7% from the end of Q3. While we are pleased that the product lead times to our customers have improved, challenges at some of our component suppliers continue. Our best estimate is that these challenges could continue throughout the reminder of calendar 2010.
Deferred revenue was $11.1 billion at the end of Q4, up approximately 8% quarter-over-quarter and an increase of approximately 18% compared with Q4 FY '09. Deferred product revenue was $3.7 billion and deferred services revenue was approximately $7.4 billion, increases of approximately 26% and 14% year-over-year respectively. Product backlog at the end of fiscal year 2010 was $4.1 billion as compared to $3.9 billion at the end of fiscal 2009. At the end of Q4 our headcount totaled 70,714 a net increase of approximately 2100 from last quarter.
As we move to the portion of the call that includes detailed guidance, let me remind you again that our comments include forward-looking statements. You should review our recent SEC filings that identify important risk factors and understand that actual results could materially defer from those contained in the forward-looking statements. In light of regulation FD, Cisco will not comment on its financial guidance during the quarter unless it is done to an explicit public disclosure. It has been outstanding practice for some time, we are continuing to provide detailed quarterly guidance one quarter at a time.
In light of the unusual uncertainty in the macro environment including the comments we heard from the Federal Reserve yesterday, we encourage you to continue to model conservatively especially in the short-term. It is important that expectations do not get ahead of where the market is today. We do intend to budget in two halves for our fiscal year and we'll obviously be conservative, and we would suggest you to do the same.
The guidance we are providing is on a non-GAAP basis with reconciliation to GAAP. For Q1 FY '11, we anticipate total revenue to be up approximately 18% to 20% year-over-year. As we have said in the past, forecasting gross margin has always been challenging due to various factors such as volume, product mix, variable component cost, customer and channel mix as well as competitive pricing pressure. That being said, we believe total gross margin in Q1 will be approximately 64% reflecting the revenue guidance I just shared with you.
We expect to see a margin profile in Q1 similar to what we saw in Q4, especially in light of the supply environment. As we continue to see improvement in the supply chain, we expect total gross margins to be in the 64% to 65% range. We believe Q1 operating expenses will be approximately 37% to 38% of revenue. We also expect interest and other income to be approximately $10 million in the first quarter. Our tax provision rate for Q1 is expected to be approximately 22%.
We are modeling share count to be down approximately 40 million shares quarter-over-quarter in weighted average shares outstanding for EPS purposes. In this estimate of share count, we are not taking into consideration any further change in stock price that could occur in the first quarter of fiscal year '11. While we expect to continue our share repurchase program, it is difficult to predict the exact weighted average shares outstanding.
As a point of reference, a $1 movement in our averaged stock price would change the calculated shares outstanding for purposes of determining earnings per share by approximately $17 million.
Regarding cash flow from operations, we expect to generate $1.2 billion to $1.5 billion during the first quarter. For our Q1 FY'11 GAAP earnings, we anticipate that GAAP EPS will be $0.08 to $0.10 per share lower than non-GAAP EPS primarily due to stock compensation expense and acquisition related charges. Please see the slides that accompany this webcast for further detail.
Other than those items noted above, there are no other significant differences between GAAP and our non-GAAP guidance. This guidance assumed no additional acquisitions, asset impairments, restructurings and tax or other events which may or may not be significant.
In summary, the quality of our earnings is exceptional as demonstrated by the strong operating cash flow generated during the quarter and are almost $40 billion in cash and investment. During the fiscal year 2010 we generated over $10 billion in operating cash and saw a growth in our deferred revenue, working capital, backlog and cash and investments.
We intend to continue to use this strong financial position to expand our portfolio and deliver a compelling value proposition for our investors, partners, customers and our employees.
I'll now turn the call back to you John.
John T. Chambers - Chairman and CEO: Thank you very much Frank. Now moving on the third chapter, which is refocused on positioning Cisco for next fiscal year and beyond this Q1 FY'11.
We try to make all of our major decisions not on the next quarter or even the next year but where we want to be three to five years from now. This is where we start internal discussions, where the topic is on direction of the industry, company, new product opportunities or other specific issues. Our business model is focused on a vision on how the topic plays out thinking five years plus, the potential over differentiated strategy two to four years and only then a discussion of where we're going to do and what we're going to do for the next year, that is our execution plan.
While there are many factors that we cannot control or influence such as the economy, compensation, some of the supply chain challenges, impact of government regulations et cetera, but majority of the future is under our own control and we've an unusually strong balance in our business and customer deliverables which becomes even stronger in times of uncertainty.
In many of our customer's opinion, that U.S. is not only being safe and secure during periods of rapid change, but also a very innovative technology and business partner that can help them achieve their goals and increasing numbers they have recognized the value of our ability not just to move into new market adjacencies with a network driving innovation and with our dynamic organization structure, but also architecturally combine these adjacency in a way that we believe will be the future for the entire industry.
We obviously have a large hit start of many of our peers and we fully intend to apply additional resources to expand this lead. In many of these new market adjacencies, Cisco has very little install base to protect and are often new markets themselves such as Cloud, Smart Grid, Fortune entertainment, media solutions, Virtual Healthcare, Virtual Education in key new emerging countries.
The common underlying theme here is that the network is transforming each of these industries.
Over the years, we have continuously demonstrated a track record to lead in product, market, share as well as innovation and in my opinion our innovation engine is accelerating even faster driven by new business models, new organization structure and the power of a dynamic network organization.
As we discussed earlier, we believe that we have the ability to lead in almost every one of our established product categories, in terms of product innovation leadership, market share gains and share of total customer IT communication spend is a core Cisco strength.
While market share may fluctuate based on shipments supply chain challenges and our unique quarterly in-date, our year-over-year growth numbers for routing and switching and advanced technology are very strong.
Now, I'd like to provide a brief update in terms of our new market opportunities.
First, virtualization. As the power of the network, server, storage and software comes together we have uniquely positioned Cisco with our new Nexus product family, UCS and our partnership with EMC, VMware and Intel. We are leading this architectural approach and gaining rapid customer acceptance.
Barring no major surprise with all the appropriate caveats, we expect you to see some key large wins in this area during the next year. This has put an expanding pressure on industry peers to make similar architectural moves. As you would expect, these wins often play out in terms of revenue over three to five years. As you see a number of our peers adjust to our successes, we believe that you will see them form similar partnerships and move in acquisitions. My view on acquisitions has not changed. Even though Cisco is usually very successful in this area, vast majority of acquisitions have been and will continue to be unsuccessful.
Innovation, as defined through internal development, internal startups, acquisitions and partnerships remains one of Cisco's strongest sustainable differentiations versus our industry peers. For example, the TANDBERG acquisition combined with our TelePresence had a very strong quarter with year-over-year Q4 growth of approximately 40%, with total products and service orders of approximately $370 million.
Another example of moving into new markets or rapidly expanding existing markets would be the Starent acquisition. The Starent acquisition is continuing to have very strong momentum with growth of approximately 20% in terms of year-over-year from a quarter perspective.
As we said in last quarter's conference call, with all of our normal caveats, both of these areas have markets that could support growth with good execution in the mid 20s this next year.
Our continued expansion into new emerging technologies, through internal startups, acquisitions and partnership is being led by Marthin De Beer, and his team continues to execute extremely well in this very challenging area.
While TelePresence is part of the Emerging Technologies Group had a very strong quarter, so did many other areas of the Emerging Technology Group such as Digital Media System and business security, with year-over-year orders of growth of approximately 50% or higher. Again, these are relatively small numbers, and it will be several years before they will be as material as we hope, but it is this philosophy of continuously doing new startups and then managing the portfolio to become material in the five-year range and therefore fueling our future growth just as we've done in the past.
Our investments in what we call targeted emerging countries, of which they are four today, have been very successful as well. These countries are achieving both our growth and business partnership objectives. These investments are way beyond just a sales force or a sales focus. They usually include business development, manufacturing, engineering, services, strategic partnerships, corporate social responsibility, government affairs and other key functions of Cisco deliver on our strategy in these countries, two of the four, our recent additions, Mexico and Russia, and have gotten off to a great start with year-over-year order growth of over 40% and 30%, respectively, in Q4, and very strong partnerships with key enterprise and public sector customers.
There are a number of other market adjacencies that are in internal developments; that is, if successful, are several years away from being material from the financial perspective. Due to the potential to develop into very strong markets for us, these include smart grid, Smart+Connected Communities, virtual healthcare, media solution and sports and entertainment.
Using smart grid as an example, we built an internal team of over 100 people and have attracted some of the top industry experts to the leadership team. Many potential customers view us as the top thought leader and innovation leader in this area, and at the end of Q4, with the launch of our new smart grid products we began receiving our first orders.
I could go on and talk about another 10 to 12 areas and probably will over the course of future calls. However, the key takeaway is our ability to be an innovation and execution engine is truly unique across our industry. We are just starting to see the benefits as customers begin to understand there are not 30-plus separate areas, but are tied together architecturally and very applicable in combination in the organization.
As you would expect, each of these requires resources well in advance of revenues becoming material to the bottom line. Again, we believe this will be very difficult for our peers to implement without an organization structure and business models that we talked about earlier.
From a customers' perspective, we continue to gain momentum with both the CIOs and CEOs. In today's environment, Cisco's ability to make a difference in achieving the top priorities of the CEO and the CIO has never been greater. Most CEOs top priorities are remarkably simple. First, cut cost and drive productivity in a rapidly changing and uncertain environment, and at the same time, they understand they can cut cost away through cutting expenses. To achieve the long-term profits, they must also innovate and begin to grow. That's their second objective, which is developing new and expanding their existing revenue opportunities.
The CIOs top priorities are relatively simple as well; first, to have IT really be relevant to the top priorities of their Company; and second, to enable the business goals of their CEOs. We have had more of these high level relationships with CEOs and CIOs develop at a very detailed level in the last year and a half than we have in the entire prior decade in terms of their relationships with Cisco. Again, this speaks to the rapidly changing role of Cisco in our customer accounts.
Each quarter many of you asked me in different ways the following question. 'Your results indicate your strategy is working. What are the areas that you have the most concern about?' The answer for me this quarter is I'm concerned about what my customers are concerned about. Most of these customer concerns are centered on what they view as mixed signals in their business environment, therefore, their strategy in the short term in terms of investments and projections for their businesses.
As an example, the economy continues to be on the wildcard in many customers' mind. We are all aware of GDP growth in the U.S. slowing from 5% to 3.7% to 2.4% over the last three quarters. Many of the customers we talk with are anticipating growth of only 2% or so in the second half of the calendar year. Yet, at the same time, many of these same customers are seeing steadily improving results in their own companies. But when you press them on their comfort level to predict either of these trends over the next year, many of them are not comfortable at all.
This is just one of the many examples of today's uncertainty and environment that is sending such mixed signals to us and others about the customers' capital spending and job creation intention over the next year.
Another example of mixed signals would be our own product order pattern for Q4. On first review, the 23% year-over-year growth in product orders was obviously very strong, and the monthly results, which we tend to follow in terms of linearity, were well within our normal expectations in each of the three months in Q4, in fact, actually, almost exactly on as a percentage of what we would have expected in each month.
However, some of our customers shared with me that they saw a softening in their business in the second half of June and early July. On review, we saw a similar pattern of approximately four to five weeks from mid June to mid July where the normal order growth rates were all over 10 points versus our quarter's 23% average. Normally I would not have paid much attention to this, except this is the exact time period were we saw the challenges in Europe and the corresponding challenges in global stock markets. Then, just as the quarter had started in May, the end of July was very strong, well above average for the quarter in terms of year-over-year growth rates from an order prospective.
Operating in an uncertain environment can obviously be difficult, but if you watch our track record over the last two decades. I believe this is one of the Cisco's core strength and we have always used these periods of uncertainty to move into new markets and to expand our share of existing markets. We are at the best position we have ever been in terms of timing, new organization structures, new business models and 30-plus market adjacencies, all enabled by the expanding role of network as the platform with all forms of communications and IT, which is at the heart of our core competency here at Cisco.
So, while we are very much aware of the challenges, and hopefully, we've done a reasonable job of sharing those challenges that we're seeing with you today, I don't think there are any big surprises here. Our opportunities and successes in so many of these new markets are almost unprecedented in our industry. We feel very good about our ability to rapidly move into these markets and lead in many of them.
Will we make some mistakes along the way? Of course, we will. Otherwise we are not taking enough good business risk. In simple terms, we believe that this is an opportunity of a lifetime for us, and candidly, we're going to go for it. We are planning on adding over 3,000 people in the next several quarters. Again, this is a very direct message about our comfort level and our strategy and our ability to move into new market adjacencies.
As we say that, we will follow Cisco's normal conservatism in terms of our business decisions, financial models with a healthy paranoia. We are attempting to be conservative on our guidance in terms of revenue growth as you would expect, given the mixed signals in the market. We will, at the same time, make the investments at this crucial juncture in many of our market adjacencies and opportunities. In summary, in terms of what we can control and influence, we feel really good.
At this time, I would like to thank the entire Cisco family for their dedication, loyalty and scarifies during these challenging economic times. I could not be more pleased with how we are positioned for the future. As always, I also want to thank our shareholders, customers and partners for their support and continued confidence in our ability to execute during rapid industry consolidation, market transition and challenging economic times.
Now, Laura, let me turn it back over to you.
Laura Graves - Director, Global IR: Thank you, John. Operator, we are about ready to open for questions. Ladies and gentlemen, we recognize that our sell-side coverage has expanded in the last year or so quite significantly. As such, we respectfully ask one question to be asked by each of our analysts in order to be able to hear from more of you.
Operator, you may go ahead.
Operator: Tal Liani, Bank of America Merrill Lynch
Tal Liani - Bank of America - Merrill Lynch: If I look through your numbers your routers and switches where you have new products are down this quarter, and then gross margin disappointed, the operating margin declined second quarter in a row and the guidance was weak below our expectations. So if we combine all these data points the question is, what we are seeing is it something which is specific to Cisco, timing or mix or is it more the economy and signs that we're entering into another dip IT spending?
John T. Chambers - Chairman and CEO: Let me break into several pieces, Tal, because the question that are on many people's minds, I disagree with some of your statements on the facts, but let me cover the generalities. We are very comfortable with our growth for a $40 billion Company over the longer term with the goals of 12% to 17%. I have said many times that isn't my opinion a big job. I do believe we started into this economic upturn probably several quarters earlier than our peers and including this most recent quarter, its five quarters in a row where we’ve had very solid sequential order growth versus what you normally see sequentially, which is a nice way of saying we're not moving into normal comparisons. We are comfortable that with normal comparisons being up 18% to 20% year-over-year is again above the guidance, the goals that we've set for the long-term and something that we believe will position us very well within the industry. In terms of routing, switching I respectfully disagree on the switching numbers; you watched us both in modular and fixed, both this quarter and last quarter, you're talking about growth last quarter of 40% and I think 27% this quarter, those numbers are really good and you add up total switching. That’s hard for anybody to keep up with and yet we have the largest position in the market. In terms of routing our product line is really solid, really good. You might categorize some of the products differently based upon the IGS and the new categories within the IGS. But in terms of high end routing last quarter, the CRS being up 75%, this quarter 20%, you add those numbers together we're doing very well. We don't lose much of the edge any more, which is where Tal you might have be critical obviously year ago at the edge with the ASR, the growth from the ASR numbers I shared with you, which I think were 150% year-over-year. Those products are hot and we're winning the majority of new edge jump (hauls) very well positioned and again at the access level we've by far and away the largest position, we're doing some category changes within that. So I feel very, very good on that. So if you look at where we're going, I hope I am here in front of you many times apologizing for growth only being 27%, growth next quarter 18% to 20%, above our long-term goals of 12% to 17%. In terms of the caution that you're hearing; in summary in terms of Cisco's specific we feel really good. We're competing, we're winning, we're moving new market adjacencies, organization structure is working, my confidence has never been higher and candidly when you talk to customers you hear the exact same thing, be they service providers, enterprise et cetera. In terms of economy, it's mixed signals. And Tal what I have always done is being very candid with you all. We share with you the way you see it. We tend to be a cautious company. Hopefully, we are again being cautious this quarter, the cautious growth, next quarter of 18% to 20% is not bad at all. So that would be how I'd your question and not that we are making a call on the economy, the majority of my customers believe the economy, is just going to continue slowly growing up, but very slow and not what they would have said even in three or four months ago in terms of their expectations and if I'd have told them, I'd say probably the average comes in about at 2% growth for second half of the year. It doesn't mean those customers are right, but it does mean that's what's on their mind in terms of their spending pattern. Did I answer your questions? We're not making a call on the economy going down, I think that probability is on double-dip or whatever you want to call it are relatively low. We're not making a call in Cisco, other than we think we're very bullish on Cisco and very comfortable with where we are positioned. We are calling it like we see it Tal and we've always done that for the last 20 years and we'll do it for the future as well.
Operator: Brian Modoff, Deutsche Bank Securities.
Brian Modoff - Deutsche Bank Securities: Question around -- comments you made earlier around seeing softening in your business mid-June to mid-July, and then seeing an improvement late in July, were those across the same customers? Specifically can you discuss what you're seeing in trends with enterprise spending domestically and with operators in Europe and their CapEx spending?
John T. Chambers - Chairman and CEO: Sure. So Brian, if you look at it, this is again the mixed signals. As I said in the script, if you look at this purely mathematically, the trends feel really good. Our long-term growth expectations, assuming reasonable accounting to 12% or 17%, and you'd have to put the mathematic odds on that happening at much higher than it was just a year ago. In terms of the mathematical trends, one of the most consistent has been U.S. enterprise, the U.S. commercial marketplace, U.S. service providers, they've been remarkably solid, and Rob Lloyd across the board on that, and forecasts are good going into next quarter in these areas. Europe was perhaps the biggest surprise. We expected emerging markets to come back and that's another positive. You are seeing them with 35% growth year-over-year. Within the European operations, it did not have as tough a quarter as we thought that it might, and remember in last quarter's conference call when everybody was very concerned, we thought that Europe had a reasonable shot of growing close to 20%, give or take a couple of points, and it actually grew at 25%. Balance across Europe was pretty good. Even in Southern Europe, I think, Rob, Southern Europe is probably an example of really good execution by our leadership team. We had Italy actually grow at 9% or 10% and Spain grow at 20%. But for Europe to grow at 25% overall, that was probably the strongest piece. In terms of the mix on it, Europe from a commercial perspective was very solid, enterprise perspective was solid, public sector was good. Service providers started to come up a little bit better, Rob, but probably in the 12% range if I remember the numbers right. Well, I don't think Europe will continue to be our number two out of the top four theaters. It is executing remarkably well, and thanks to the U.S., feels good from the number's perspective. So this is where you get mixed signals. Our numbers feel good. You look at the mathematical trends, you'd say, we're on our way up and out of this at a faster pace. You listen to the customers, you watch mixed signals, Fed's comments, et cetera, you say, ooh, this feels a little bit tougher and I'm having probably more trouble reading it than I ever had before. I usually have really strong opinions which way something is going to grow. At this time it is mixed signals and hopefully another quarter, we'll be able to give you a better feel for that, Brian, and that's why we'll budget in two sections during the year, the first half and then the second half. I hope that answer the question, okay, Brian?
Operator: Mark Sue, RBC Capital Markets.
Mark Sue - RBC Capital Markets: So, John, if we look at the component of your conservative guidance, what part of it is related to changes in order patterns, or is the larger adjustment related to your closure rates due to the macro environment, are you in essence giving Cisco some more breathing room? In analyzing the mixed signals, does it feel as we're at the beginning stages of another down cycle? Should we think about a possible down sequential January quarter following a passable down sequential October quarter?
John T. Chambers - Chairman and CEO: Mark, we're not making a call on the economy, we're just sharing with you what we see. I know you are asking me or leading that question to get more detail out. I feel very comfortable with our ability to compete in every product category. We have the best product lineup we've ever had. I think it's real important that the market – all of us agree, if you look at the stock price and you got to say the market isn't buying that we can go to 12% to 17% consistently, and yet we are defending going above that range when you are comparing two year-over-year comparisons in a tough economic time, which I think is pretty darn good performance. So, in terms of the direction on things we can control and influence, I am really comfortable. We'll get our market share gains. We got good balance. We aren't seeing any unusual pricing issues. Our gross margin issues were due almost entirely to the problems we had on supply chain and a mix issue. I do want to repeat; if I am here for the next several years each of these quarter calls apologizing that we were at the high end of the 12% to 17% or over 17% growth, then I will do so. So what we're signaling is, again, we aren't calling the economy, you all can call that and make your assumptions within it. We are certainly going to be conservative on it. But in terms of our own numbers, the mathematics, they feel very good. Are we conservative? Absolutely. Do we see mixed signals in the economy? Absolutely.
Operator: Jeff Evenson, Sanford Bernstein.
Jeff Evenson - Sanford Bernstein: To what extent did you guys use marketing programs or other incentives to drive the recovery and order rate that you saw in mid July and do you expect to continue those, if any, into the next quarter?
John T. Chambers - Chairman and CEO: I think most of the market incentives and things of that type have an effect over much longer time period. In fact, my marketing team would probably say I squeezed their butts in pretty hard in the July time period and the direction. This is just normal orders. I wouldn't have even looked at this hard if I hadn't heard from customers they saw things in the latter half of June, early July because you had to look at five weeks, you had to readjust for the July 4 weekend, you put the balance into that, and then, at the end, I mean, Rob, you are forecasting accuracy for the quarter was remarkably, I think, right on the money in terms of the approach. Started real strong first five or six weeks, we saw the middle bumps, and then very, very strongest ending. In fact, our last two weeks were strong and they were off of a very strong Q4 of last year. I think those of you who follow us probably remember Q4 last year from Q3 we grew sequentially in terms of orders 17%. So, by Q4 of last year, we were already well into the turnaround. We had signaled back to you almost a quarter before that. So now this Q1 of next year is our sixth consecutive quarter in a row, and that's why it's real important when we talk about 18% to 20% growth that in my opinion is really good. Perhaps we let market expectations get ahead because we only talk a quarter at a time perhaps, but in terms of the growth rate, I couldn't be more pleased with where we are and our ability to gain market share in each category, Jeff.
Operator: Simona Jankowski, Goldman Sachs.
Simona Jankowski - Goldman Sachs: John and Frank, I just wanted to ask you for a little bit more color on the gross margin. In particular, I heard you say that most of that was due to the component shortages, but that's something that you've been dealing with for a couple of quarters now, and if anything, with your purchase commitments going up significantly for a few quarters and your inventory going up, I would have thought that this would have become less of an issue this quarter, not more of an issue. Just related to that on the mix, I just wanted to clarify if you are referring to some of your new switching products introductions in the 2000 and 3000 family. Then lastly, on mix, considering that consumers seem to have lagged some of the more infrastructure-oriented products, I would have thought that'd be a positive from a mix perspective not a negative?
John T. Chambers - Chairman and CEO: Kind of in the sequence that you raised them, Simona, if you watch when you enter a market – let me do the 1,000 foot level first. If you look at the decrease in product gross margins, approximately 1 point of that was due purely to expedites in terms of chasing parts. We chased, if you could imagine, beginning of the quarter 550 parts that were on critical components. We ended the quarter at 300. That normally runs below 100. Of those, those that are called revenue impacting or customer satisfaction impacting, began the quarter at 150, ended the quarter at 50 on that. That a lot of moving parts, and absolutely, that is costly and very expensive, and air freighting stuff to customers and customers satisfaction sales cycles, everything along that line. Though that will continue a little bit in the next quarter, I do not want to have our radar out on lead times at this time and I don't want to have any customer satisfaction issues. So the first time in a year we're getting very close to having most all of our products back with normal lead times within that and it makes it much easier in terms of Rob's teams focusing on growth as opposed to responding to customer elements within it. Mix, when we introduce new products, every time we've done this, there are always some exceptions, especially when its software. In terms of hardware, we always start with lower gross margins on the new products. I'm going to take you back a little bit in history. When we started on the switching (indiscernible), the team said John you are never going to get better than low 50% gross margins out of switching. It was at high 40s when we started on it, and we all know today its way, way above the average. When you introduce new products, and by definition of Moore's law effect, your price for it and your early component cost, et cetera, are not at the same gross margins normally as you see with an established product that you've really been fine tuning over the years, et cetera, and that's normal. You almost get penalized for rapid pay cuts because then they have more of an impact on gross margins to go with that. So, when you have price performance improvement, which we do, when you gain market share, which we are gaining market share, and they are up to the $1 billion and $2 billion run rates, remarkably quick with year-over-year growth that are off the charts, this is the fastest player and most well balanced I can remember its been in terms of new product introduction, and that does have an impact as well. But no, that's going to be with us for a little while until you do your typical Texas two step in terms of price performance improvement, costing on components, et cetera. So, Simona, this has been fairly normal in terms of the direction. Frank, you want to add anything to that?
Frank Calderoni - EVP and CFO: No, John. I think you covered all the key points. The pricing piece, which I mentioned in the script, was pretty typical for a (non-accrual) quarter. We didn't see anything unusual.
John T. Chambers - Chairman and CEO: We're doing well versus our competitors. I'm very comfortable with where we are.
Operator: Brent Bracelin, Pacific Crest.
Brent Bracelin - Pacific Crest: John, can I add a follow-up question on the customer concern, mixed signals you are seeing? Specifically, did you see any large deal delays in June or July or is your sense that large deals will face increasing CFO scrutiny in the second half of the year? Really trying to justify how much of the cautious outlook is tied to your own healthy paranoia versus what you are actually hearing from customers?
John T. Chambers - Chairman and CEO: I think what we're hearing and seeing from customers that surprised us just for a short time period there, how quickly people took their foot off a gas pedal and then put it right back down. The second thing we're hearing is the large orders are getting a second and third look periodically. Pipeline looks very good, Rob, in terms of direction, and maybe I'll ask you to comment here in terms of talking in generality about your feel across the theaters and pipeline as a whole on it. I don't think we're seeing a huge amount of checks and double checks yet from the financial officers, a lot depends on candidly how the next several months ago in terms of people beginning to check or not. Again I think our most likely next several months is just good solid improvement but not at the level that many people would have built into their business plans just three or four months ago. Rob your thoughts overall in terms of what you're seeing on deals in the overall theatre confidence and their view about the future.
Robert Lloyd - EVP, Worldwide Operations: Sure, I think John. The pipeline trends have been very, very strong especially in collaboration where the TANDBERG acquisition come together with TelePresence, the progress we've made in market share gains in Unified Communications and the pipeline going forward. It's a very relevant technology for today and we feel strong about the pipeline. I think we talked a lot today about our data center portfolio and Padma and I agree we're very well positioned with this portfolio to handle some of the trends that are occurring to deliver Cloud like infrastructure, private clouds to begin with and obviously the relationship we built with VMware and EMC and Intel has helped accelerate our differentiation there. So, going forward we feel very good about the pipeline, the forecast are consistent as we enter into Q1 and I think we're just going to have to deliver.
John T. Chambers - Chairman and CEO: Yeah. If you look at it, and let me answer the question a little bit differently, when Rob commented there. If you really want to see what's going on in technology, you want to look to the areas that are hot, and area such as data center virtualization and cloud it's on fire. We're doing very well there. You saw it in our Nexus numbers and you also saw it in UCS and you saw me do something unusual, which is (indiscernible) you're going to see some large wins following just price of the appropriate caveat, that you wouldn't traditionally think of Cisco winning over this next year in those areas. But they usually start small and then become very big. Collaboration back on top and 20% growth on that, balance is good around the world in collaboration, better than we've seen in quite a while and this is a potentially $30 billion market, video was back in good shape again. Now video was comparing to a tough number in Q1 of this next year where set-up boxes etcetera had a slow fiscal year before that and then we had a good Q1, but video this quarter was up in the high 30s in terms of direction. That scenario again that is $30 billion plus market opportunity and our advanced technologies which I got constructively beat up a little bit last quarter which is fair when we go into 15% and people say what that means is you're losing share, you aren't being affective there. I want to remind everybody, market shares bump up and down in the quarter and our order rates will as well, but the advanced technologies grew 27% this quarter and remarkably good balance in terms of the direction. So that's kind of how we see it on a global basis. The deals are bigger, pipelines probably the best I have seen in terms of big deals, Rob quite a while.
Robert Lloyd - EVP, Worldwide Operations: Absolutely. Just have to bring it home.
John T. Chambers - Chairman and CEO: Same thing a smart connector can use. That's going to cross the chasm very quickly here, go from being something we've put a lot of resource and with very little return which is always the case when you start investing at the beginning of these and do so for several years then as across the chasm you're certainly dealing with $200 million, $500 million type of deals, but it takes you probably two years to land most of these in terms of direction. Next question please.
Operator: Ehud Gelblum, Morgan Stanley.
Ehud Gelblum - Morgan Stanley: First some clarification quickly on something you've said about TANDBERG and TelePresence together that they were only $370 million. Is there any way Frank you can parse that out for us and give us a sense to, last quarter I think the TelePresence alone to $44 million, so just give a sense to what that did versus how TANDBERG did? But then John, when you look at how you're describing both Europe and how its impacting what you're seeing going forward as well as the pattern that you saw during the quarter of weakness in late June, early July and then a pick up again in late June. Which of those characteristics are coloring your guidance? Is it the slowdown in late June that's coloring the guidance and making it conservative, or is it the pickup in late July that's actually bringing to where it is? Which of those are kind of the hop-off points? Again, if you can kind of put Europe in a box in a sense that, was it weak, was it strong, because you said 25% but you mentioned it was weak. Just trying to understand how that really fits in when we are looking at it?
John T. Chambers - Chairman and CEO: So, on the clarification or the follow-up we said that in this quarter the two combined TANDBERG and TelePresence had products and service orders of approximately $370 million, I want my team to check this number. That was a 40% growth in total. I think TelePresence this quarter had a 50% year-over-year growth, so it actually grew faster than TANDBERG. Again, this is an area that we didn't talk about next generation, not video conferencing but virtual communications. It is clearly a growth area, and with all the appropriate caveats, it does not surprise me seeing this growing and the 20% next year is even in a moderate economy in terms of direction. In terms of what's coloring the guidance, its customers. My customers began to share views of 2% GDP growth in the U.S., they're concerned about Europe. When the stock markets hits some bumps, and then all of a sudden people take their foot off the gas pedal. It shows you a very unusual pattern or mixed signal pattern that we haven't seen before, and when the customers get nervous I get nervous. So, I wouldn't have even noticed that pattern late June or early July no more, except my customers, who saw it. The end of July was obviously a number run rate that's well above our long-term guidance and you can do it mathematically, it was in the high 20s. So, what's coloring it is purely what we're hearing from customers and what people are seeing in the economies and what they think are the most likely outcome of that. Again, very few people projecting a doom and gloom or a double-dip which is saying it's just very sluggish growth, and it's very mixed signals in terms of what they are seeing in their own business. Many of them say exactly what I did. Their own business feels good, but they are very cautious from the others, and they are hesitant therefore about hiring. They are hesitant about capital spending. So that's what we're calling as our customer's view, Ehud.
Operator: Brian White, Ticonderaga.
Brian White - Ticonderaga: Could you talk a little bit about what you are seeing in kind of the government public sector? This big fiscal austerity programs around the world and I'm curious what you are seeing there?
John T. Chambers - Chairman and CEO: Yeah, it's interesting. Rob and I had a chance to corner Bruce Klein who is our Head of Public Sector on a global basis and when we nudged him today a little bit, his answers were pretty solid. Public sector is about the same size as enterprise for us. Public sector in the U.S. was very solid for us, both in the federal and the state and local, although which states ordered, bounced around and public sector in Europe actually held up pretty well, but again it bounced around by country and in emerging countries it did pretty well. So, I think, when you look at what Bruce is expecting or seeing, he was pretty optimistic about next year. There will be some deals that all of a sudden will be taken off as an opportunity (estimates) some others put on. Rob, additional color?
Robert Lloyd - EVP, Worldwide Operations: Just John, that I think the U.S. federal business was very strong for us as part of that overall public sector. We go into Q1 with our big sequential quarter and we feel very confident, very strong about the forecast and the pipeline of opportunities. Across the world, I think public sectors customers are looking for change and I think we have a number of technologies that are helping them become more efficient and meet some of their transformation requirements. So, I think we're going to benefit in many ways as the public sectors tighten the belts and we've got a lot of technologies, lot of solutions that help them do that.
John T. Chambers - Chairman and CEO: So, Bryan the real takeaway on the confidence issue and our positioning, on things we can control or influence, we feel really good. That's why you see us increasing our investments. That's why you see us adding 3,000 people over the next several quarters. That's why you see us moving in each of these category areas and that's why you us being pretty candid, that's why there might be again a quarter or two versus one competitor and another where you lose a little bit of market share. Most of the time we're gaining versus everyone, and the architecture is winning. It's winning in the cloud, its winning in the data center, its winning in collaboration. Our products tying together a routing in switching and security and wired and wireless, enterprise and service provider down to the consumer, that's winning. So again, I don't understand any mixed messages and things we control and influence, we feel very good, and we are making appropriate commitments in headcount and everything else because of that good feeling.
Operator: Paul Silverstein, Credit Suisse.
Paul Silverstein - Credit Suisse: John, relative to your commentary about the mid June to mid July, can you tell us what the first 11 days of August look like?
John T. Chambers - Chairman and CEO: Paul, you know I can't do that and it would be inappropriate to signal it on so you get a second question, but I never mind you testing me to see if I'm saying 2 to 4 even under a little bit of pressure.
Paul Silverstein - Credit Suisse: Sorry, I apologize, why can't you tell us the first 10 days of August?
John T. Chambers - Chairman and CEO: I think it doesn't help, to discuss each week as you move through each week in terms of direction and audit. Something we don't update during the quarter. I won't start at the beginning of the quarter conference call or otherwise on it. I am seeing nothing unusual in terms of overall global business momentum one way or the other.
Paul Silverstein - Credit Suisse: Okay. All right. So my question then, in terms of supply constraints which resided for a percentage point impact in gross margin, did those have any impact on growth?
John T. Chambers - Chairman and CEO: You know, it's almost impossible to quantify Paul. In two tier and in small business, you've either got the product on the shelf or you don't. They probably have as much impact in the enterprise and service provider just on straining relationships and burning up sales cycles as they do. It's an almost impossible one to quantify. If one of you all would ask that question and we don't know any way to get our arm around it, I'd would say it's more lost productivity that choose the cycles, but at the low end you either have the product on the shelf or you don't or your lead times are so long your competitor takes advantage of that and gets into an account that you would normally let him in to, but almost impossible to qualify.
Operator: Simon Leopold, Morgan Keegan.
Simon Leopold - Morgan Keegan: I wanted to talk a little bit about the staffing. You mentioned adding 2,100 heads in the quarter. Maybe a little bit of color as to how many of those were above and beyond the TANDBERG acquisition and what those folks are doing? Then you also talked about hiring 3,000 people. I want to make sure I got that correct. Is that 3,000 in addition or is this part of the plan you talked about at the beginning of this year getting this 2,100 up to 3,000?
John T. Chambers - Chairman and CEO: So, in clarification – and thank you for asking that, I might have been a little bit confusing on the numbers. So, at the beginning of this calendar year, which is going into Q3 and Q4, we set our intent to hire 3,000 people incrementally over the next several quarters. That would be above the acquisitions, but not including acquisitions. One quarter ago we added 1,000. This last quarter we added 2,000. Our projections on hiring for the next several quarters is once again 3,000. In terms of the approach it would be balanced in terms of our business on a global basis. The 2,000 people that were hired this last quarter, more than half, actually in excess of 70% were in the U.S. in terms of the direction – in terms of the addition. So, if you look at the balance, that's how it's playing out. In terms of a little bit of color, it will be divided across new market adjacencies, it will be focused on the new architectures, which we are always driving across this theaters. We did add almost 500 sales reps incrementally above what our headcount was during the last quarter, and I think, Rob, we got to the end of August to fulfill that commitment – that's in good shape.
Robert Lloyd - EVP, Worldwide Operations: We'll have 500 new account teams balanced across the world on board by the end of August.
John T. Chambers - Chairman and CEO: So classic approach, you add your sales people first, then you add your new market adjacencies, et cetera, but many of these areas we're putting resources, you won't see revenue from for two to three years. Having said that, some of those that we made investments in two to three years ago, Smart+Connected Communities, the data center, the cloud, you are seeing major rapid ramp ups, and again, this is a portfolio play. We've got to continue to (run) the engine. So think of us almost like a venture capital company in certain areas, starting new startups, investing in, some medium-sized business is getting bigger and then large business is doing well. The balance at the present time looks good and we will be adding 3,000 people to that balance over the next several quarter.
Robert Lloyd - EVP, Worldwide Operations: John, just as a clarification I think the question that Simon was asking also about TANDBERG. Simon, TANDBERG, the acquisition closed in Q3, so that incremental headcount was in last quarter and separate from that the 1,000 in Q3 that John mentioned were over and above TANDBERG. That was actually growth. In Q4, the 2,000 that John mentioned was fully growth; had nothing to do with the acquisition of TANDBERG.
John T. Chambers - Chairman and CEO: We only added about 190 people in from the acquisition in Q4.
Operator: Jayson Noland, Robert W. Baird.
Jayson Noland - Robert W. Baird: John, a question we get a lot on Cisco versus HP, I guess, broadly, do you see yourself long term competing with HP on price, technology or vision and how much of a risk is HP to Cisco's gross margin long term?
John T. Chambers - Chairman and CEO: HP is a wonderful company and so, so important to, I think, the strengths of the valley and they are a very good competitor and tough competitor. Having said that, it's nice taking on one of the biggest players in the industry which hopefully we'll do with (high ask). In terms of, when a large company focuses on you, that is much larger than you, we have a healthy paranoia. In terms of our ability to compete on our architectural play, products add together, innovation, acquisition, be in a great place to work, culture, we do very well. And so HP will be a good competitor. They are very large and we're doing extremely well versus HP whether it's data center strategy, our relationship for their customers and the direction. So, a good competitor, hopefully we can take a lot of market share from them and we're off to a good start but we'll do it with class. Thanks Jason.
Operator: Matt Robison, Wunderlich Securities.
Matthew Robison - Wunderlich Securities: I was wondering if you could talk a little bit about India and how you guys are been working through the whole security issue there with the public networks. If say, your position with enterprise in that part of the world has unable to grow significantly better than some of your larger tiers on the public side?
John T. Chambers - Chairman and CEO: I just got an update from our government affairs group, and this how we use government affairs in emerging countries as well as corporate social responsibility very aggressively. We are pretty good on regulation, pretty good on security issues, pretty good about developing trusts with governments around the world, and the give and take on it. Our growth in India this quarter, I think was over 40%, if I remember right, over 50% thank you Rob, and a very solid. I don't have the breakout by sectors within India, but if Rob and I were discussing, we'll probably say we do very well in enterprise, very well in commercial, very well in public sector; we can do a little bit better in service providers and I think that's an architecture price point that we need to re-think of more in the 1 billion poor people and how do you get to the average consumer of which 800 million or 900 million make less than $3 a day in terms of direction. So, that would be the way that I would look at it in terms of India, in terms of our progress there, on the security side. I think we are okay in terms of positioning long-term, but this is one that the government very often in any country, and that maybe beyond India, when they start talking about security it sounds like a simple way to approach problems, but in fact it becomes very complex. So we tend to say how do we exchange and how do we keep in line with both what you would expect from an American company and at the same time be able to say how do you accomplish your goals in terms of build out accessibility, open standards, directions not developing different standards in different areas and not passing out security source code to a country to where if you pass your security source code you are not going to have secure systems anymore. So, it is a good give and take, we got along extremely well with the government of India and I think this is just one where all sides involved, they are kind of educating each other. But I think you will see the American Company there is a whole pretty united in terms of striking out balance and comprise that.
Operator: (John Slack), Citigroup
John Slack - Citigroup: On your inventory purchase commitments, you said $4.3 billion this quarter and you said up 6% sequentially. My notes, I think 'Q' headed is 4.3 last quarter. So if you provide a little clarification on that. Then as you go to the customer concern and I heard you once talking about the order deceleration and reacceleration. Can you talk about maybe what segments are you hearing that most from. Is it the enterprise service provider, it sounded like government was doing okay as a commercial? Any more color you can give on that would be great?
Laura Graves - Director, Global IR: I'm going to jump in and then we'll turn it over to Frank for a discussion of purchase commitments in prior periods including any potential adjustments, and then we'll refer you to the slides on the webcast that accompany this call.
Frank Calderoni - EVP and CFO: John, as I mentioned during the script, so we did $4.3 billion and that was up slightly 7%. As we talked about in the last call, we saw the significant increase going from Q2 to Q3. These are commitments that our suppliers and our contract manufacturers make on our behalf. Just being more proactive with a very tight industry from a supply perspective, we took the major decisions several months ago to make sure that we extend those purchase commitments, and we're so far in this quarter. As we go forward, this is an indication of having the ability to continue to expand, because these purchase commitments are not necessarily for one quarter, they are for multiple quarters and actually the purchase commits of 4.3 actually is spread about four or five quarters. In terms of the balance during that time period, it was pretty uniform around the world and the same thing (indiscernible) pick-up the last two to three weeks was very – remarkably good balance around the world with the last couple of weeks everybody begin their forecast and with growth as I said in the high 20s. But if there is one key take away from this call that I'd like for you all to think about, our strategy and vision is absolutely working. We are gaining market share. We're gaining product leadership. We're gaining architecture. Our relationships with our customers is moving from being a box player, a router, a switcher to a team to really a key business partner, trusted technical advisor. We will win more than our fair share jump within all areas, and it's unusual a Company can say that with that type of confidence. We are clearly applying in terms of our growth projections for the future, very comfortable and becoming more comfortable with our long range 12% to 17%. So I think it's important when you think out in several years out to all the 17%, most of the shareholders would be very comfortable with. We're saying when you start comparing quarters where we've had very good growth, the quarters where we had good growth. We are very pleased that we're at the high end of that or above that. So that's perhaps my one key takeaway. Things we control or influence in great shape, our growth in terms of our long-term aspirations looks very good and we're playing actually with the high end or above on that, and our concerns are no more cautious concerns which you would expect us to do and to share with you, which Cisco always has. So with Laura let me turn it back over to you, and again, key takeaway message to 3000 people, we’re optimistic about the future depths and our ability on terms of what we can control and influence.
Laura Graves - Director, Global IR: Ladies and gentlemen, Cisco's next quarterly conference call, which will reflect our first quarter fiscal 2011 results, will be held on Wednesday, November 10, 2010 at 1.30 PM Pacific Time, 4.30 PM Eastern Time. We invite you to tune into Cisco's annual financial conference on Tuesday, September 14, which will be webcast from our website. Downloadable Q4 and fiscal year 2010 financial statements will be available following this call, including revenue segments by product and geography, income statements, full GAAP to non-GAAP reconciliation information, balance sheets and cash flow statements can also be found on the website. Again, I would like to remind you that in light of Regulation FD, Cisco plans to retain its longstanding policy to not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. Please call the Investor Relations department if there are any follow-up questions from this call. We thank you for your participation and your continued support. This concludes our call.
Operator: Thank you for participating on today's conference call. If you would like to listen to the call in its entirety, you may call 866-357-4205. For participants dialing from outside the U.S., please dial 203-369-0122. This concludes today's call. You may disconnect at this time. Thank you.