Annual Report 2009

Fiscal 2009 was an extraordinary year by any measure. Worldwide economic turmoil affected countries, companies, and households. At Cisco, we were not immune to the challenges, nor were our customers. Yet in spite of the global reduction in capital spending, we knew this was our time. The network—with its ability to provide information, efficiency, and control—would be crucial to solving some of the most complex problems our customers had ever faced. We pride ourselves on always being close to our customers. In fiscal 2009, we made it a priority to become even closer in order to understand their challenges, their pain, and their opportunities. This was the time to emphasize the relevancy of our product and solution capabilities, and to stand with our customers to face the uncertain economic future together. In our opinion, the power of the human network would never be more important.

Vision: The Network as the Platform for Life's Experiences

Throughout the world, our customers faced significant, strategic decisions in fiscal 2009. Cisco was no different. We moved quickly and decisively at the beginning of 2009 to align our business with the most compelling market opportunities. We prioritized five business objectives: 1) building a next-generation company capable of forging next-generation customer relationships; 2) focusing on collaboration and Web 2.0 tools, both internally and externally, to maximize productivity and speed decision making; 3) enabling data center virtualization to reach levels of scale and efficiency that were previously unheard of; 4) readying all of our products and solutions for the escalating use of video; and 5) expanding our reach through the globalization of our enterprise.

The networking and information technology market was clearly in transition, but capturing market transitions is what Cisco does best. We believe the network as a strategic asset has never been more relevant. Cisco products and solutions enable business and government transformation, healthcare connections, improved education, and a richer consumer experience. The Internet is everywhere. Providing products and solutions to enable more robust video delivery is key to Cisco's differentiation. It may have seemed a lofty statement years ago when we said that the network will change the way people work, live, play, and learn. Now more than ever, our vision is becoming reality.

Strategy: Reaching Market Adjacencies Through a New Management Model

The next phase of the Internet and its potential applications are fascinating. Our company is addressing no fewer than 30 market adjacencies, mostly in areas where networking technology and protocols have not seen widespread adoption. Industries such as healthcare, sports, entertainment, and utilities, as well as emerging geographic markets like China and India, provide significant opportunity to provide growth for Cisco and value to customers and shareholders.

Capturing these opportunities requires that Cisco move with speed, internal alignment, and thought leadership. To accomplish this, we are pioneering a new management model based on Councils and Boards. Councils and Boards collaborate to set long-term direction for Cisco business strategies. They champion investments and prioritize market adjacencies based on go-to-market opportunities. Council and Board members represent diverse functions within the company, and are empowered to make decisions at the organizational level to help ensure that initiatives and goals are aligned throughout the company.

Involving leaders across the organization is designed to produce balanced results across product lines and customer segments. In fiscal 2009, routing accounted for approximately 17% of total revenue, switching was approximately 33%, advanced technologies totaled 26%, and other revenue was approximately 5%. Service revenue grew to approximately 19% of total revenue in fiscal 2009. In terms of customer segments, Enterprise represents approximately 40% of our business, Service Provider is approximately 30%, Commercial provides approximately 25%, and Consumer provides approximately 5%. Balance across product lines and customer segments has historically allowed Cisco's overall financial performance to better withstand downturns in any one particular business segment.

Execution: Operational Efficiency that Drives Innovation

Cisco recorded near record quarterly revenue of $10.3 billion in the first quarter of fiscal year 2009, yet the remainder of the year was affected by monumental global recession. We are pleased with our overall performance in fiscal 2009 given the global recession. Revenue in fiscal 2009 was $36.1 billion, a decrease of 9% year over year from our highest annual revenue ever. In the fourth quarter of fiscal 2009, we experienced our only quarterly sequential increase in revenue during fiscal 2009. While the stabilization of fourth quarter results was encouraging, we are unable to determine whether or not this possible improvement in the global macroeconomic environment is sustainable.

In fiscal 2009, product revenue declined by approximately 12% due in large part to reduced enterprise and service provider spending across our geographic theaters. The Public Sector performed better than other customer markets in fiscal 2009. Service revenue grew in each of the four quarters of fiscal 2009 to reach total annual revenue of $7 billion, an increase of approximately 8% over fiscal 2008. We continue to believe in the strategic value of our products, services, and customer relationships.

History has taught us that you don't change long-term strategy based upon (what we hope will be) a relatively short-term economic downturn. However, we believed that we needed to work differently in order to execute our strategy of moving into multiple market adjacencies during such a tenuous time in the global economy. We forged ahead by reallocating over $1 billion in resources into market adjacencies in an effort to fuel growth over the long term. From an operational standpoint, we pursued a relentless focus on organizational efficiency and expense management to enable these investments. We clearly exceeded even our stretch goal for reduced operating expenses. Earnings per share on a fully diluted basis for fiscal 2009 were $1.05.

Clearly our ability to reduce expenses in this environment met a financial priority. We viewed it as prioritizing our investments in innovation as well. By drawing hard lines to reduce discretionary expenses, including travel and meeting costs, we avoided the need for expense reductions in other areas, specifically companywide headcount reductions that would have affected product development and other efforts. Cisco invested $5.2 billion in research and development during fiscal 2009. We announced significant, industry-changing solutions, including the expansion of our line of Aggregation Services Routers and the Unified Computing System, our first entry into the server market. Our unified computing platform is being hailed by customers and analysts as technology capable of completely transforming enterprise data centers.

We view our balance sheet as a source of strength and competitive advantage, especially during economic downturns. We believe inventory and accounts receivable levels are appropriate and well managed. Total assets surpassed $68 billion at the end of fiscal 2009, including $35 billion in cash and investments held on a global basis. Cash generated from operations was $9.9 billion in fiscal 2009, a portion of which was used to repurchase 202 million shares of our common stock.

In fiscal 2009, we completed several acquisitions that underscore our commitment to build a comprehensive collaboration portfolio. Fiscal 2009 acquisitions included Post Path, Inc., a leader in email and calendaring software; Jabber, Inc., a principal provider of presence and messaging software; and Pure Digital Technologies, Inc., creator of the Flip Video family of cameras and a pioneer in developing consumer-friendly video solutions. Cisco also acquired Tidal Software, Inc., a developer of intelligent application management and automation solutions designed to advance our data center strategy.

We believe that technology can have a positive effect on the environment. Through the use of our own TelePresence technology alone, we saved thousands of hours of employee and customer travel, resulting in a dramatically reduced carbon footprint. As part of a larger ecosystem of customers and suppliers, we are proud of our ability to influence an even broader carbon footprint reduction on a global basis.

Closing Thoughts: 25 Years and Counting

When I reflect on the multitude of companies and competitors that Cisco has encountered in its 25-year history, I am proud of our company's history of growth and constant innovation. Cisco leads the world in development of networking technology, and has expanded its relevance in the communications and IT industry over time. From the first rudimentary routers to today's virtual machines, striving for product leadership has been the foundation of each chapter in Cisco's history. Listening to customers to help solve their most challenging problems will always be part of our Cisco DNA.

Cisco is in the midst of one of the greatest market transitions that our industry has ever seen. Customers are realizing the potential that collaborative business models and network-enabled Web 2.0 technologies can have on their businesses and in their lives. We are thrilled to pioneer those applications with our customers and our employees as we strive to make Cisco a company that is "best in the world and best for the world." The 65,000 faces of Cisco inspire me every day. I look forward to sharing the next chapter of this journey with you.

John T. Chambers, Chairman & CEO
September 2009