Financial: Cisco Systems Q1 Earnings - Company Financial Information

Edge: Work-Group Computing Report, Nov 9, 1998

Cisco Systems, Inc., the worldwide leader in networking for the Internet, Wednesday reported its first quarter results for the period ending October 24, 1998.

Net sales for the first quarter were $2.59 billion, compared with $1.87 billion for the same period last year, an increase of 38%. Pro forma net income, which excludes the write-off of purchased in-process R&D discussed below, was $559 million or $0.34 per share, compared with pro forma net income of $416 million or $0.26 per share for the first quarter of 1998, increases of 34% and 31% respectively.

On September 30, 1998, Cisco completed its purchase of American Internet Corporation ("AIC"), a developer of high-performance Internet infrastructure software, for approximately $56 million and took a one-time charge of $41 million, or approximately $0.03 per share on an after-tax basis as a write-off of purchased in-process R&D.

Actual net income for the first quarter, including the above-mentioned write-off of purchased in-process R&D, was $518 million or $0.31 per share, compared with $337 million or $0.21 per share for the first quarter of 1998.

The net income per share and number of shares used in the per-share calculation for all periods presented reflect the three-for-two stock split that was effective September 15, 1998.

"We are pleased to report the 35th consecutive quarter of revenue and earnings growth," said John Chambers, president and CEO of Cisco Systems. "We have seen a dramatic increase in the awareness of the Internet's strategic value from business and government leaders worldwide. More and more, the Internet is being accepted as a key economic driver that will level the playing field for businesses, countries, and individuals in the Internet Economy."

Cisco continues to advance its end-to-end Internet solutions for each of its key markets.

In the service provider marketplace, there is strong acceptance that traditional voice networks will convert into New World, packet-based data networks. Leading customers across all service provider categories are beginning to deploy these integrated networks. Hewlett-Packard and Bellcore announced plans to team with Cisco to deliver these end-to-end, packet-based networks. This move is indicative of the role that strategic alliances will play in delivering New World, open, standards-based infrastructures.

Cisco also continues to expand its New World technology offerings with solutions in broadband access and network management through the acquisitions of Clarity Systems (which closed in the second quarter of fiscal 1999) and AIC respectively. In the area of optical networking, Sprint announced plans to deploy their Internet backbone based on the Cisco 12000 series router with optical interfaces.

In the small and medium-sized business space, Cisco continues to expand its lead in the two-tier distribution of network systems. Extending its market presence, Cisco announced a key alliance with AT&T to distribute integrated, end-to-end Internet solutions to small businesses. Other highlights include the expansion of the Cisco 1700 family of access routers that enable secure business transactions over the Internet.

In the enterprise marketplace, Cisco continued to gain market leadership in local area network (LAN) switching and acceptance of its end-to-end Internet solutions. Cisco strengthened its integrated data, voice, and video offerings by introducing the IGX 8400 series of wide-area network (WAN) switches. Other milestones in the quarter include the launch of the fourth phase of Cisco's five-phase data, voice, and video strategy. Phase four builds, in part, on the technology from the pending acquisition of Selsius Systems, which is intended to accelerate the transition from circuit-switched to network-based PBX systems.

"The Internet will have a similar impact on the global economy as the industrial revolution did. As leading customers deploy integrated, New World communications infrastructures, Cisco and its partners are well positioned to provide end-to-end networking solutions for the Internet generation," concluded Chambers.

Cisco Systems, Inc. is the worldwide leader in networking for the Internet. News and information are available at http://www.cisco.com.

                          Cisco Systems, Inc.
                  Pro Forma Statements of Operations
               Excluding Purchased R&D and Realized Gain
                (In millions, except per-share amounts)

                                          Quarters Ended
                                  October 24,         October 25,
                                      1998                1997
                                            (Unaudited)

Net sales                            $2,588              $1,869
Cost of sales                           894                 652
                                     ------              ------
   Gross margin                       1,694               1,217
Operating expenses:
   Research and development             327                 224
   Sales and marketing                  514                 334
   General and administrative            84                  56
                                     ------              ------
       Total operating expenses         925                 614
                                     ------              ------

Operating income                        769                 603

Interest and other income, net           65                  37
                                     ------              ------
Income before provision
  for income taxes                      834                 640
Provision for income taxes              275                 224
                                     ------              ------
Net income                         $    559            $    416
                                     ======              ======
Net income per share -- basic      $    .36            $    .27
                                     ======              ======
Net income per share -- diluted    $    .34            $    .26
                                     ======              ======
Shares used in per-share
 calculation -- basic                 1,569               1,514
                                     ======              ======

Shares used in per-share
  calculation -- diluted              1,652               1,585
                                     ======              ======