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Cisco Systems (CSCO NASDAQ) $29.89
Note: All new or revised material since the last report is highlighted.

Reason for Report: Minor Model Revisions; Final Version Previous Edition: May 23, 2007
Recent News - Summary
On July 10, 2007, CSCO, EMC and MSF announced the formation of an alliance of technology vendors.
On June 27, 2007, CSCO unwired the Linux Symposium.
On June 14, 2007, CSCO and IBM announced an expansion of their alliance to centralize service
management for service providers.
On June 14, 2007, CSCO announced the completion of the BroadWare Technologies acquisition.
On May 29, 2007, CSCO announced the completion of the WebEx acquisition.
On May 22, 2007, CSCO announced the completion of tender offer of WEBX.
On May 21, 2007, CSCO agreed to acquire privately-held BroadWare Technologies.
On May 08, 2007, CSCO reported its 3Q07 results.
Key investment considerations as identified by analysts are as follows:
Key Positive Arguments Key Negative Arguments

Strong Market Leadership: Cisco dominates data
networking in the enterprise arena with end-to-end
solutions that offer total cost of ownership
advantages over competitors.

Enterprise Spending: Investment in new
technologies has paid off as new products are
growing rapidly.

Revenue Opportunity: Six key areas of growth
(Security, VoIP, Wireless LAN, Optical, Home
Networking, and Storage) have the potential to
generate billions in revenue per year.

SFA Acquisition: The acquisition of SFA is
expected to be accretive to FY07 earnings.

Saturating Markets: Growth in the enterprise data
networking market is slowing, attributable to market
saturation and overcapacity.

Impact of New Technology: Growth in new
technologies could have a smaller-than-expected
impact on large revenue base.

Increased Competition: Commoditization of some
products could hurt pricing, as competitors (e.g.
Dell) release low-end products.

Pricing Pressure: The Company is expected to
face increased pricing pressure as a number of
Asian vendors (especially from China) begin to enter
its global markets.

July 13, 2007
Zacks Digest of Brokerage Editor: Ian Madsen, CFA

Research Tel.: 1-800-767-3771, ext. 399

Email: 111 N. Canal Street, Suite 1101

Chicago, IL 60606

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Cisco Systems (CSCO or the Company), based in San Jose, California, is the leading provider of data
networking equipment to enterprise and government customers with end-to-end solutions and is the
fourth largest provider of equipment to telecommunications service providers. The Company s Internet
Protocol (IP) based networking solutions form the foundation for the Internet.
The Company also provides networking products for transporting data, voice, and video within
buildings and across campuses and offers routers that interconnect computer networks by moving data,
voice, and video from one network to another; and switching systems that are used to build local-area
networks (LAN), metropolitan-area networks, and wide-area networks. Technology products comprise
home networking products that enable users to share Internet access, printers, music, movies, and
games; Internet protocol telephony products for transmitting voice communications; optical networking
products, which provide a path for telecommunications carriers, as well as for carriers and enterprises;
and security products, which protect information systems from unauthorized use. It also offers storage
networking products that deliver connectivity between servers and storage systems. In addition, the
Company offers wireless LAN and outdoor wireless bridging products. For further information, please

Note: CSCOs fiscal year ends on July 31; fiscal references differ from the calendar year
Recent News
On July 10, 2007, CSCO, EMC and MSF announced the formation of an alliance of technology vendors
that will offer one of the most comprehensive, security-enhanced, commercial, multi-vendor, end-to-end
information-sharing technology architectures for helping protect and share sensitive government
On June 27, 2007, Cisco announced that the Cisco Unified Wireless Network and its outdoor wireless
network solutions will constitute the wireless access network of choice for Linux and open source
enthusiasts who attend the Linux Symposium in Ottawa this week.
On June 14, 2007 CSCO and IBM announced an expansion of their existing strategic alliance to deliver
new standards-based telecommunications service assurance and fault-management solutions.
On June 11, 2007 CSCO announced its completion of the acquisition of privately held BroadWare
Technologies, a leading provider of IP-based video surveillance software.
On May 29, 2007 CSCO announced the completion of its acquisition of WebEx Communications, Inc, a
market leader in on-demand collaboration applications.
On May 22, 2007, CSCO announced the completion of its tender offer for all outstanding shares of
WebEx Communications, Inc. (WEBX).
On May 21, 2007, CSCO announced a definitive agreement to acquire privately-held BroadWare
Technologies, a leading provider of IP-based video surveillance software. BroadWare's software enables
web-based monitoring, management, recording and storage of audio and video that can be accessed
anywhere by authorized users.
On May 08, 2007, CSCO reported 3Q07 results. Highlights are as follows:

Net Sales: $8.9 billion

Net Income: $1.9 billion GAAP; $2.1 billion non-GAAP

Earnings per Share: $0.30 GAAP; $0.34 non-GAAP
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Total Rev. ($ in m)
FY Ends July 31 2005A 2006A 1Q07A 2Q07A 3Q07A 4Q07E 2007E 2008E
Digest Average $24,801 $28,484 $8,184 $8,439 $8,866 $9,287



Digest High $24,801 $28,484 $8,185 $8,440 $8,866 $9,362



Digest Low $24,801 $28,480 $8,180 $8,439 $8,866 $9,221 $34,710 $38,650
Digest Average Y-o-Y Growth 14.8% 24.9% 27.3% 21.1% 16.3% 22.1%


Quarterly growth 2.5% 3.1% 5.1% 4.8%

3Q07 total revenue was $8.9 billion, up 5% sequentially and 21% y/y, marking the sixth consecutive
quarter of sequential growth and the fifteenth quarter of y/y growth. Revenue out performance was seen
as driven by the Advanced Technologies and Other segments, primarily based on stronger-than-
expected Scientific-Atlanta (SFA) sales. Scientific-Atlanta, Inc., acquired on February 24, 2006,
contributed net sales of $752 million during 3Q07, compared with $407 million during 3Q06. The Cisco
stand-alone revenue increase was approximately 17%, which continues to be one of the fastest stand-
alone y/y revenue growth rates seen in several years.
Upside in the quarter was seen as broad-based across each of Cisco's business segments. One firm
believes Cisco will continue to post strong results in the next one to two quarters as it benefits from
continued market share gains, healthy backlog, and improved visibility.
According to analysts, order growth continued to be very solid, with product book-to-bill of greater than 1.
Product order growth from a Cisco stand-alone perspective, that is not including Scientific Atlanta, grew
in the mid-teens. Revenue growth from Scientific Atlanta was approximately 30% y/y, aligned to conform
to Cisco's fiscal quarters.
Rev ($ in M)
FY Ends July 31 3Q07A
Q/Q %
Y/Y %
Change 4Q07E

2005A 2006A 2007E 2008E
Routers $1,763 5.2% 16.0% $1,901

$5,498 $6,005 $6,938


Switches $3,087 2.5% 14.8% $3,217

$10,104 $10,843 $12,343


Advanced Tech $2,082 8.1% 23.2% $2,239

$4,408 $6,032 $8,113


Other $551 14.2% 114.4% $529

$843 $914 $2,011

Product $7,481 5.4% 21.5% $7,760

$20,853 $23,918 $29,091


Services $1,385 3.3% 18.7% $1,410

$3,948 $4,567 $5,374


TOTAL REVENUE $8,866 5.1% 21.1% $9,287

$24,801 $28,484 $34,776


Routers (20% of 3Q07 Total Revenue): Router revenue of $1.8 billion was up 5% sequentially and
16% y/y, driven by strength in the high-end router portfolio consisting of the CRS-1, GRS, and 7600.
CRS-1 core router orders of $250 million demonstrated continued acceleration (revenue in 2Q07 was
$150 million, though order numbers were not given). According to Infonetics, Cisco increased its market
share of the core router market to 59% in 3Q07, up from 58% q/q and 53% y/y. Cisco's edge router
market share also increased to 52%, up from 51% q/q and 46% y/y.
Switches (35% of 3Q07 Total Revenue): Switches revenue stood at $3.1 billion, up 3% sequentially
and 15% y/y. Management mentioned the Catalyst 6k family of switches is Cisco's largest single product
family by revenue. Cisco s commentary surrounding U.S. enterprise was consistent with 2Q07, with
bookings showing mid-single digit growth amidst a somewhat "cautious" spending environment. The
Company highlighted positive growth in both its fixed and modular switching solutions during 3Q07;
though also highlighting the fact that forthcoming product refreshes could have tempered near-term
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Advanced Technology (23% of 3Q07 Total Revenue): Advanced Technology revenue of $2.1 billion
was up 8% sequentially and 23% y/y excluding Scientific-Atlanta's contribution to Advanced Technology
revenue of $589 million. Scientific-Atlanta revenue increased 32% y/y based on international expansion,
a shift to HD set-top boxes, network upgrades, and increased demand in anticipation of the July 1 FCC
Separable Security Deadline.
According to analysts, storage was again the fastest growing segment within Advanced Technologies,
posting y/y growth of 50%. SAN switching, Unified Communications (formerly Enterprise IP Telephony),
Security, and Wireless led the way. On a y/y basis, SAN switching order growth was 50%, followed by
Unified Communications at ~37%, Security in the ~25% range and Wireless about 16%. The only
underperformer was Networked Home (Linksys), which was roughly flat y/y.
Other (6% of 3Q07 Total Revenue): Other product revenue which includes access products, network
management software and miscellaneous parts, grew 13% q/q or 113% y/y to $546 million.
Product: 3Q07 product revenue increased 22% y/y to $7.5 billion from $6.2 billion in 3Q06. Sequentially,
revenue increased 5% from $7.1 billion in 2Q07.
Services (16% of 3Q07 Total Revenue): Services revenue of $1.4 billion was up 3% sequentially and
19% y/y. As Cisco continues to expand its overall total addressable market opportunities (i.e. layering
more and more intelligence into the IP-based network), the Company has also been focusing its attention
on expanding its advanced/professional services organization.
Geographically: In terms of geographies, according to analysts, emerging markets continue to lead the
way with order growth in the 40% range. Within emerging markets, Eastern Europe, the Middle East,
Russia and Latin America all delivered solid order growth. Emerging markets continue to be the third
largest theater behind the U.S. and Europe.
According to analysts, momentum in Europe continued with order growth in the low teens. Cisco
commented that seven of the nine major regions in Europe delivered growth in the double digits.
Overall U.S. order growth was in the mid-teens. U.S. order growth in the service provider segment was in
the high 20% range. According to analysts, momentum in the U.S. service provider segment remains
strong based on the upgrade of networks to accommodate video. The commercial segment in the U.S.
grew 20% y/y. The enterprise business was described as mixed and delivered mid-single digit growth,
the same as 2Q07. Cisco did not offer too many constructive comments regarding the U.S. enterprise
business, only suggesting that it has stabilized.
Asia-Pacific performance was described as solid, with order growth in the 20% range. All five regions in
Asia-Pacific did well with India delivering 50% year/year order growth.
Finally, Japan order growth, as expected, was down slightly based on the continued impact from the
service provider market.
Margins 3Q07A
Change 4Q07E 2005A 2006A 2007E 2008E
Gross 64.5% -0.2% -1.2% 64.5% 67.2% 66.7% 64.6%

Operating 29.3% -0.8% -0.6% 28.8%

31.6% 30.7% 28.9%


Pre Tax 31.8% -0.8% -0.3% 30.9%

33.9% 32.9% 31.1%


Net 23.8% -0.8% -0.9% 23.5%

24.4% 23.5% 23.7%


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3Q07 corporate gross margin of 64.5% (non-GAAP) was down 20 bps sequentially and 120 bps y/y due
primarily to increased Scientific-Atlanta sales and a decline in Services gross margin.
Product gross margin of 64.7% declined 10 bps sequentially based on the increased discounts and the
as-expected impacts of higher Scientific Atlanta revenue, offset by volume and cost savings.
Service gross margin of 63.2% declined 120 bps sequentially due primarily to investments in headcount
and advanced services making up a higher proportion of service revenue. Continued growth in advanced
services was attributed to momentum this year in service provider and emerging markets, as well as in
advanced technologies.
Headcount increased to 56,790, up from 54,563 last quarter and 48,296 a year ago. Management
expects to continue adding to headcount, particularly in emerging markets.
Operating expenses of $3.1 billion were up 7% sequentially and 9% y/y. Operating margin of 29.3%
decreased 80 bps sequentially based on a decline in gross margin and operating expenses rising faster
than revenue.
3Q07 non-GAAP tax provision was 25%. Non-GAAP net income for 3Q07 was $2.1 billion compared to
$1.8 billion in 3Q06, representing a 17% increase y/y.
Earnings per Share
3Q07 GAAP EPS was $0.30, up 37% y/y from $0.22 in 2Q06. Sequentially, GAAP EPS decreased 2%
from $0.31 in 2Q07.
3Q07 pro forma EPS was $0.34, up 16% from $0.29 in 3Q06. Sequentially, EPS increased 3% from
$0.33 in 2Q07. Operating EPS excludes $0.03 of stock-based compensation expense and $0.01 of
intangibles amortization.
FY Ends July 31 3Q06A 2Q07A 3Q07A 4Q07E 2005A 2006A 2007E 2008E
Zacks Consensus $0.32 $1.21

Zacks Digest Model Max. $0.29 $0.34 $0.34 $0.36

$0.92 $1.10 $1.34

Zacks Digest Model Min. $0.29 $0.30 $0.31 $0.31 $0.92 $0.95 $1.20

Zacks Digest Model Avg. $0.29 $0.33 $0.34 $0.35 $0.92 $1.08 $1.31


Company Guidance
The Company gave the following guidance for fiscal 4Q07 and FY2007. The guidance provided is on a
non-GAAP basis with reconciliation to GAAP and also includes the effect of Scientific Atlanta:
Management anticipates total revenue for 4Q07 to be in the range of $9.2 billion to $9.3 billion,
representing a 15 to 16% growth y/y.
Management stated that forecasting gross margin has always been challenging based on various factors
such as volume, product mix, variable component cost, customer and channel mix and competitive
pricing pressures. According to management, total gross margin will remain at approximately 64.5%,
based on the continuing strength in Scientific Atlanta's business, which has a lower gross margin than
Cisco's stand-alone portfolio of products.
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4Q07 operating expenses will be slightly below or above 35.5% of revenue. Interest and other income
are expected to be approximately $200 million in 4Q07. Operating margin is targeted at 29%-31% for
4Q07. Tax rate provision is expected to be approximately 25%.
The above guidance does not include the acquisitions of WebEx or IronPort. Assuming that these
acquisitions close halfway through the quarter, the incremental revenue would be approximately $50
million with no impact to non-GAAP earnings per share.
Management expects share count to end 4Q07 up 40 million shares q/q.
Cash flow from operations is expected to generate $500 to $700 million per month at these revenues.
For FY2007, total sales are expected to increase 15%-16% y/y (ex-SFA). Management reiterated its
long-term target of 10%-15% YoY growth.
Target Price/Valuation
Of the 28 analysts reporting, 20 gave positive ratings, 8 gave neutral ratings, while none gave negative
ratings. The Digest average price target of $32.39 ( from the previous Digest report, 8.36% upside from
the current price) range from the Digest high target price of $35.00 (17.10% upside from the current
price) and the Digest low target price of $26.50 (11.34% downside from the current price). Analysts have
used several methods to value the stock with the most common valuation method being P/E multiples.
Rating Distribution
Positive 71.4%

Neutral 28.6%

Negative 0.0%
Avg. Target Price $32.39

Digest High $35.00
Digest Low $26.50

Analysts with Target Price/Total 22 /28

Metrics detailing management effectiveness are as follows:
Metrics (TTM) Company Industry S&P 500
Return On Assets (ROA) 15.12% 12.11% 8.26%
Return on Investments (ROI) 19.99% 17.59% 12.22%
Return on Equity (ROE) 26.15% 22.56% 20.60%

ROA, ROE, and ROI of 15.12%, 26.15%, and 19.99% are higher than the averages (measured by the
S&P 500) of 8.26%, 20.60%, and 12.22%, respectively. This suggests the Company is utilizing assets to
earn well above its cost of capital.
Capital Structure/Solvency/Cash Flow/Governance/Other
Cash Flow
Cash flow from operations was $2.4 billion in 3Q07, compared with $2.3 billion in 3Q06 and $2.7 billion in
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Capital Structure
Cash and cash equivalents and investments were $22.3 billion at the end of 3Q07, compared with $17.8
billion at the end of 4Q06 and $20.7 billion at the end of 2Q07.
Inventory and Debtors
Days sales outstanding in accounts receivable (DSO) at the end of 3Q07 were 33 days, compared with
38 days at the end of 4Q06, and compared with 31 days at the end of 2Q07.
Inventory turns on a GAAP basis were 8.8 in 3Q07, compared with 8.5 in 4Q06, and compared with 7.8
in 2Q07. Non-GAAP inventory turns were 8.6 in 3Q07, compared with 8.3 in 4Q06, and compared with
7.6 in 2Q07.
Share Repurchases
During 3Q07, Cisco repurchased 56 million shares of common stock at an average price of $26.85 per
share for an aggregate purchase price of $1.5 billion. As of April 28, 2007, Cisco had repurchased and
retired 2.2 billion shares of Cisco common stock at an average price of $19.20 per share for an
aggregate purchase price of approximately $41.7 billion since the inception of the stock repurchase
Acquisitions and Investments
Cisco completed the acquisitions of Five Across, Inc., Reactivity, Inc., NeoPath Networks, Inc. and
SpansLogic, Inc. Cisco also announced that it completed the purchase of select assets of Utah Street
Networks, Inc., the operator of the social networking site
On May 29, 2007, Cisco announced the completion of its acquisition of WebEx Communications, Inc.
WebEx is a market leader in on-demand collaboration applications, and its network-based solution for
delivering business-to-business collaboration extends Cisco's vision for Unified Communications,
particularly within the small to medium business (SMB) segment. Longer-term, one firm believes there
are clear opportunities for revenue synergies between Webex and Cisco

such as integrating Webex
into Cisco s new telepresence solution

although it believes this could take several months for the
technologies to be fully integrated and for the channel to be up to speed on the new Webex products.
On June 11, 2007, Cisco announced it has completed the acquisition of privately held BroadWare
Technologies, a leading provider of IP-based video surveillance software. BroadWare's software enables
web-based monitoring, management, recording and storage of audio and video that can be accessed
anywhere by authorized users. With the close of this acquisition, Cisco will be able to help customers
easily gain access to live and recorded surveillance video for faster investigation response and event
resolution. According to analysts, the BroadWare acquisition complements Cisco's existing video
surveillance product offering, which provides a smooth migration path from analog surveillance video to a
digital network solution.
Analyst Day Highlights
Cisco management believes continued share gains from Avaya, Nortel, and Alcatel Lucent will help its
small to medium (SMB) sales growth rate to continue to exceed the 17% end-market growth rate. It
believes that its commercial SMB business will be less correlated to overall GDP growth than the
enterprise segments, which will likely help fuel private companies appetite for investments. Cisco
believes the portion of carrier spending it addresses is growing around 24%. This strong end-market
growth, coupled with continued share gains, in one of the brokerage firms view, will drive earnings
forecast higher over the next six months. It believes the Company s market share in all its core business
segments will continue to grow and lead to greater stabilization.
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Potentially Severe Problems
There are none other than those discussed in other sections of this report.
Long-Term Growth
The average long-term growth rate provided by brokerage firms is 14.9%, ranging from 10.0% to 20.0%.
According to analysts, Cisco s strategy of providing integrated solutions is growing more and more
compelling, particularly for security, VoIP, and wireless LAN deployments, according to analysts who also
believe that as these markets mature it will become more difficult for the best-of-breed vendors to deliver
substantial benefits over other competitors. Simultaneously, as deployments expand beyond initial trials,
it will become more important for enterprises to optimize the management of these technologies. One
firm believes recent market trends favor Cisco s architectural approach, and that as enterprises layer
more functionality (security, VoIP, WLAN) onto their networks, Cisco can be relied upon to deliver a high
level of integration with underlying networks (switches and routers).
Some firms remain enthusiastic about Cisco s positioning to capitalize on new growth markets and
believe it continues to execute well in the marketplace and should be one of the key beneficiaries from
improvements in the technology-spending environment. Cisco s core business continues to record
growth, and it also continues to gain market share with several growth initiatives including VOIP, home
networking, security, and storage, according to analysts. The Company combines operating discipline
and strategic product development to leverage its position as a premier technology provider and to
execute in a number of emerging technology markets. The Company believes its ability to integrate
products and subsequently reduce customer total cost of ownership will be keys to success.
Upcoming Events
On August 8, 2007, CSCO is expected to release its 4Q07 earnings.
This is not a research report. Readers of this report should not take investment action based on the contents of this report. This report represents
Zacks analysts understanding of the investment issues that professional investors consider when evaluating the investment attractiveness of the
subject company. This report is not a recommendation to buy, sell, or hold the stock of the subject company, nor is it a valuation of the stock of
the company nor is it a forecast of future earnings, sales or stock performance of the company. Zacks employees, affiliates, officers and directors
may have long or short positions in the stock of the subject company and may trade at any time in the stock or related derivatives without notice.
Copy Editor: Joyoti D.