Forward-Looking Statements

This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," "continues," "endeavors," "strives," "may," variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under "Part II, Item 1A. Risk Factors," and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

Overview

A summary of our results is as follows, for further details see our Results of
Operations on page 49 (in millions, except percentages and per-share amounts):



                                                         Three Months Ended                                    Nine Months Ended
                                             April 28,        April 30,                            April 28,        April 30,
                                               2012             2011           Variance              2012             2011          Variance
Net sales                                   $    11,588      $    10,866            6.6  %        $    34,371      $    32,023           7.3  %
Gross margin percentage                            61.9 %           61.3 %          0.6  pts.            61.5 %           61.4 %          0.1  pts.
Research and development                    $     1,358      $     1,430            (5.0 ) %      $     4,072            4,339           (6.2 ) %
Sales and marketing                         $     2,383      $     2,446            (2.6 ) %      $     7,230            7,292           (0.9 ) %
General and administrative                  $       562      $       466           20.6  %        $     1,611            1,376          17.1  %
Total R&D, sales and marketing, general
and administrative                          $     4,303      $     4,342            (0.9 ) %      $    12,913           13,007           (0.7 ) %
Total as a percentage of revenue                   37.1 %           40.0 %          (2.9 ) pts.          37.6 %           40.6 %         (3.0 ) pts.
Amortization of purchased intangible
assets                                      $        96      $       103            (6.8 ) %      $       292              419          (30.3 ) %
Restructuring and other charges             $        20      $        31           (35.5 ) %      $       225      $        31         625.8  %
Operating margin percentage                        23.7 %           20.1 %          3.6  pts.            22.4 %           19.4 %          3.0  pts.
Income tax percentage                              22.1 %           18.0 %           4.1  pts.           21.2 %           17.3 %          3.9  pts.
Net income                                  $     2,165      $     1,807           19.8  %        $     6,124      $     5,258          16.5  %
Net income as a percentage of revenue              18.7 %           16.6 %           2.1  pts.           17.8 %           16.4 %          1.4  pts.
Earnings per share-diluted                  $      0.40      $      0.33           21.2  %        $      1.13      $      0.94          20.2  %

Three Months Ended April 28, 2012 Compared with Three Months Ended April 30, 2011

Net sales increased 7%, with net product sales increasing by 5% and service revenue increasing by 13%. Total gross margin increased by 0.6 percentage points reflecting the continued positive effect of lower overall manufacturing costs, including benefits from value engineering. Our gross margin also benefited in the current period relative to the comparable fiscal 2011 period from the absence of significant restructuring charges related to our consumer business. As a percentage of revenue, research and development, sales and marketing, and general and administrative expenses collectively declined by 2.9 percentage points, and were down slightly in dollar terms due to the expense reductions we announced in fiscal 2011. Operating margin increased by 3.6 percentage points primarily as a result of our sales performance, improved gross margin, and expense management. Diluted earnings per share increased by 21% from the prior year period, primarily as a result of a 20% increase in net income and also, to a lesser degree, from a decline in our diluted share count.

We experienced another quarter of solid execution in the third quarter of fiscal 2012, as demonstrated by the 7% growth in net sales and 21% increase in earnings per share compared with the third quarter of fiscal 2011. Consistent with our goals, including growing profits faster than revenue, our third quarter of fiscal 2012 operating income, net income, and earnings per share each increased by a greater percentage than our net sales, as compared to the prior year period.

Our results reflect revenue growth across each of our geographic segments and customer markets. In particular, our APJC segment performed well, with year-over-year revenue growth of 24%, reflecting strength in both product and service revenue. From a customer market standpoint, this growth was led by strong service provider revenue, partially due to the completion of several large, multiyear projects in the region.

Most of our key areas experienced positive net sales growth on a year-over-year basis. Specifically, revenue grew in Switching, Services, Data Center, Service Provider Video, Wireless and Security. We believe this growth reflects the success we are experiencing with our technology architectures. Revenue was flat in both the NGN Routing and Collaboration product groups on a year over year basis. The flat sales of NGN Routing products reflected lower industrywide sales for routing products during the quarter and lower sales of our optical networking products. We believe the relative weakness for Collaboration is attributable to a number of factors, including market driven factors, pressure with regard to reduced spending from enterprise and public sector customers driven by the difficult macroeconomic environment, and our need to execute more effectively as we transition our sales strategy in this area.

We experienced solid performance in terms of both product and service gross margin. We are continuing to see relative stability in our product gross margin in particular due to continued benefits from value engineering and other cost savings. From a geographic segment perspective, gross margin improvement in our APJC segment offset lower gross margins in the Americas and EMEA segments. In our APJC segment, gross margin increased on a year-over-year basis due to lower discounts, product mix, lower overall manufacturing costs and volume. The gross margin performance in the segment was also partially due to the completion of the aforementioned large, multiyear projects. From a company-wide perspective, our core product areas of Switching and NGN Routing on a combined basis reflected continued gross margin stability.

We continue to monitor a variety of previously-disclosed business challenges, the negative impacts from a challenging global macroeconomic environment, including, specifically, continued challenges in the European economy, continued weakness in the public sector market, and conservative IT-related capital spending by our customers. While we achieved solid growth in the third quarter of fiscal 2012, we are seeing a hesitant global IT spending environment. In particular, the challenges we outlined in the second quarter of fiscal 2012 related to conservative IT-related capital spending and developments in Europe continued to impact our business momentum during the third quarter of fiscal 2012.

Nine Months Ended April 28, 2012 Compared with Nine Months Ended April 30, 2011

Net sales increased 7%, with net product sales increasing 6% and service revenue increasing 12%. Total gross margin increased by 0.1 percentage points primarily as a result of lower manufacturing costs, higher volume, lower restructuring charges, and lower amortization and impairment charges from purchased intangible assets, partially offset by higher sales discounts and unfavorable product pricing as well as product mix shifts. As a percentage of revenue, research and development, sales and marketing, and general and administrative expenses collectively declined by 3.0 percentage points due to the expense reductions we announced in fiscal 2011. Operating margin increased by 3.0 percentage points primarily as a result of our sales performance, improved gross margin and expense management. Diluted earnings per share increased by 20% from the prior year period, a result of both a 16% increase in net income and due to a decline in our diluted share count of 178 million shares.

Strategy and Focus Areas

We announced a plan in May 2011, which we began implementing in fiscal 2011 and expect to complete in fiscal 2012, to realign our sales, service and engineering organizations in order to simplify our operating model and focus on our five foundational priorities:

• Leadership in our core business (routing, switching, and associated services) which includes comprehensive security and mobility solutions

• Collaboration

• Data center virtualization and cloud

• Video

• Architectures for business transformation

We believe that focusing on these priorities will best position us to continue to expand our share of our customers' information technology spending.

We are currently undergoing product transitions in our core business including the introduction of next-generation products with higher price performance and architectural advantages compared with both our prior generation of products and the product offerings of our competitors. We believe that many of these product transitions are gaining momentum based on the strong year-over-year product revenue growth across these next-generation product families. We believe that our strategy and our ability to innovate and execute may enable us to improve our relative competitive position in many of our product areas even in uncertain or difficult business conditions and, therefore, may continue to provide us with long-term growth opportunities. However, we believe that these newly introduced products may continue to negatively impact product gross margins, which we are currently striving to address through various initiatives including value engineering, effective supply chain management, and delivering greater customer value through offers that include hardware, software, and services.

We continue to seek to capitalize on market transitions. Market transitions on which we are primarily focused include those related to the increased role of virtualization/the cloud, video, collaboration, networked mobility technologies and the transition from Internet Protocol Version 4 to Internet Protocol Version
6. For example, a market in which a significant market transition is underway is the enterprise data center market, where a transition to virtualization/the cloud is rapidly evolving. There is a continued growing awareness that intelligent networks are becoming the platform for productivity improvement and global competitiveness. We believe that disruption in the enterprise data center market is accelerating, due to changing technology trends such as the increasing adoption of virtualization, the rise in scalable processing, and the advent of cloud computing and cloud-based IT resource deployments and business models. These key terms are defined as follows:

Virtualization: refers to the process of aggregating the current siloed data center resources into unified, shared resource pools that can be dynamically delivered to applications on demand thus enabling the ability to move content and applications between devices and the network.

The cloud: refers to an information technology hosting and delivery system in which resources, such as servers or software applications, are no longer tethered to a user's physical infrastructure but instead are delivered to and consumed by the user "on demand" as an Internet-based service, whether singularly or with multiple other users simultaneously.

This virtualization and cloud-driven market transition in the enterprise data center market is being brought about through the convergence of networking, computing, storage, and software technologies. We are seeking to take advantage of this market transition through, among other things, our Cisco Unified Computing System platform and Cisco Nexus product families, which are designed to integrate the previously siloed technologies in the enterprise data center with a unified architecture. We are also seeking to capitalize on this market transition through the development of other cloud-based product and service offerings through which we intend to enable customers to develop and deploy their own cloud-based IT solutions, including software-as-a-service (SaaS) and other-as-a-service (XaaS) solutions.

The competitive landscape in the enterprise data center market is changing. Very large, well-financed, and aggressive competitors are each bringing their own new class of products to address this new market. We expect this competitive market trend to continue. With respect to this market, we believe the network will be the intersection of innovation through open systems and standards. We expect to see acquisitions, further industry consolidation, and new alliances among companies as they seek to serve the enterprise data center market. As we enter this next market phase, we expect that we will strengthen certain strategic alliances, compete more with certain strategic alliances and partners, and perhaps also encounter new competitors in our attempt to deliver the best solutions for our customers.

Other market transitions on which we are focusing particular attention include those related to the increased role of video, collaboration, and networked mobility technologies. The key market transitions relative to the convergence of video, collaboration, and networked mobility technologies, which we believe will drive productivity and growth in network loads, appear to be evolving even more quickly and more significantly than we had previously anticipated. Cisco TelePresence systems are one example of product offerings that have incorporated video, collaboration, and networked mobility technologies, as customers evolve their communications and business models. We are focused on simplifying and expanding the creation, distribution, and use of end-to-end video solutions for businesses and consumers.

We believe that the architectural approach that has served us well in the past in addressing market opportunities in the communications and IT industry will be adaptable to other markets. An example of a market where we aim to apply this approach is mobility, where growth of IP traffic on handheld devices is driving the need for more robust architectures, equipment and services in order to accommodate not only an increasing number of worldwide mobile device users, but also increased user demand for broadband-quality business network and consumer web applications to be delivered on such devices.

Three Months Ended April 28, 2012 Compared with Three Months Ended April 30, 2011

Net Sales

Net sales increased by 7%. Within the total sales growth, net product sales increased by 5% and service revenue increased by 13%. With regard to our geographic segment performance, on a year-over-year basis, net sales increased 3% in the Americas segment, 5% in our EMEA segment, and 24% in our APJC segment.

Customer market net product sales performance reflected increases across all markets. The service provider customer market experienced the largest percentage increase followed by the commercial, enterprise, and public sector markets.

From a product perspective, we experienced a 5% increase in net product sales with specific increases in certain product categories as follows: 5% in Switching, 68% in Data Center, 12% in Service Provider Video, 20% in Wireless, and 9% in Security. In contrast, net product sales for NGN Routing and Collaboration were each flat year over year. The growth in Service revenues was experienced across both the technical support services category and advanced services category, with revenue increases of 10% and 23%, respectively.

Gross Margin

Our gross margin percentage increased by approximately 0.6 percentage points. Within this total gross margin change, product gross margin increased by 0.5 percentage points, while service gross margin increased by 0.5 percentage points. Our product gross margin benefited from the absence in the current period of significant restructuring charges related to our consumer business which occurred in the prior year period. After adjusting for this item, our individual product gross margins have reflected relative stability on a year-over-year basis.

Operating Expenses

Total operating expenses decreased by 1%. Research and development expenses decreased by 5%, sales and marketing expenses decreased by 3% and general and administrative expenses increased by approximately 21%. Operating expense as a percentage of revenue decreased by 3.1 percentage points, primarily as a result of our expense reduction efforts. Additionally, lower share-based compensation expense, and slightly lower restructuring charges and amortization of purchased intangibles assets contributed to the operating expense decline.

Other Key Financial Measures

The following is a summary of our other key financial measures for the third quarter of fiscal 2012:

• We generated cash flows from operations of $3.0 billion and $8.4 billion during the third quarter and first nine months of fiscal 2012, respectively. Our cash and cash equivalents, together with our investments, were $48.4 billion at the end of the third quarter of fiscal 2012, compared with $44.6 billion at the end of fiscal 2011.

• Our total deferred revenue at the end of the third quarter of fiscal 2012 was $12.6 billion, compared with $12.2 billion at the end of fiscal 2011.

• We repurchased approximately 27 million shares of our common stock at an average price of $20.28 per share for an aggregate purchase price of $550 million during the third quarter of fiscal 2012. As of the end of the third quarter of fiscal 2012, the remaining authorized repurchase amount under the stock repurchase program was $7.7 billion with no termination date. We paid a cash dividend of $0.08 per share, or $432 million, and $0.20 per share, or $1.1 billion, for the third quarter and first nine months of fiscal 2012, respectively.

• Days sales outstanding in accounts receivable (DSO) at the end of the third quarter of fiscal 2012 was 31 days, compared with 38 days at the end of fiscal 2011.

• Our inventory balance was $1.5 billion at the end of each the third quarter of fiscal 2012 and the end of fiscal 2011. Annualized inventory turns were 11.5 in the third quarter of fiscal 2012 and were 11.8 in the fourth quarter of fiscal 2011.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 30, 2011, as updated as applicable in Note 2 herein, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The accounting policies described below are significantly affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements, and actual results could differ materially from the amounts reported based on these policies.

Revenue Recognition

Revenue is recognized when all of the following criteria have been met:

• Persuasive evidence of an arrangement exists. Contracts, Internet commerce agreements, and customer purchase orders are generally used to determine the existence of an arrangement.

• Delivery has occurred. Shipping documents and customer acceptance, when applicable, are used to verify delivery.

• The fee is fixed or determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

• Collectibility is reasonably assured. We assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history.

In instances where final acceptance of the product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met. When a sale involves multiple deliverables, such as sales of products that include services, the multiple deliverables are evaluated to determine the unit of accounting, and the entire fee from the arrangement is allocated to each unit of accounting based on the relative selling price. Revenue is recognized when the revenue recognition criteria for each unit of accounting are met.

The amount of product and service revenue recognized in a given period is affected by our judgment as to whether an arrangement includes multiple deliverables and, if so, our valuation of the units of accounting for multiple deliverables. According to the accounting guidance prescribed in Accounting Standards Codification (ASC) 605, Revenue Recognition, we use vendor-specific objective evidence of selling price (VSOE) for each of those units, when available. We determine VSOE based on our normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range, generally evidenced by approximately 80% of such historical standalone transactions falling within plus or minus 15% of the median selling price. VSOE exists across most of our product and service offerings. In certain limited circumstances when VSOE does not exist, we apply the selling price hierarchy to applicable multiple-deliverable arrangements. Under the selling price hierarchy, third-party evidence of selling price (TPE) will be considered if VSOE does not exist, and estimated selling price (ESP) will be used if neither VSOE nor TPE is available. Generally, we are not able to determine TPE because our go-to-market strategy differs from that of others in our markets, and the extent of customization varies among comparable products or services from our peers. In determining ESP, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. We typically arrive at an ESP for a product or service that is not sold separately by considering company-specific factors such as geographies, competitive landscape, internal costs, gross margin objectives, pricing practices used to establish bundled pricing, and existing portfolio pricing and discounting.

Some of our sales arrangements have multiple deliverables containing software and related software support components. Such sale arrangements are subject to the accounting guidance in ASC 985-605, Software-Revenue Recognition.

As our business and offerings evolve over time, our pricing practices may be required to be modified accordingly, which could result in changes in selling prices, including both VSOE and ESP in subsequent periods. There were no material impacts during the quarter nor do we currently expect a material impact in the next twelve months on our revenue recognition due to any changes in our VSOE, TPE, or ESP.

Revenue deferrals relate to the timing of revenue recognition for specific transactions based on financing arrangements, service, support, and other factors. Financing arrangements may include sales-type, direct-financing, and operating leases, loans, and guarantees of third-party financing. Our deferred revenue for products was $3.9 billion and $3.7 billion as of April 28, 2012 and July 30, 2011, respectively. Technical support services revenue is deferred and recognized ratably over the period during which the services are to be performed, which typically is from one to three years. Advanced services revenue is recognized upon delivery or completion of performance. Our deferred revenue for Service was $8.8 billion as of April 28, 2012 and $8.5 billion as of July 30, 2011.

We make sales to distributors and retail partners and generally recognize revenue based on a sell-through method using information provided by them. Our distributors and retail partners participate in various cooperative marketing and other programs, and we maintain estimated accruals and allowances for these programs. If actual credits received by our distributors and retail partners under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue could be adversely affected.

Allowances for Receivables and Sales Returns

The allowances for receivables were as follows (in millions, except
percentages):



                                                      April 28,      July 30,
                                                        2012           2011
       Allowance for doubtful accounts               $       216     $     204
       Percentage of gross accounts receivable               5.1 %         4.2 %
       Allowance for credit loss-lease receivables   $       252     $     237
       Percentage of gross lease receivables                 7.4 %         7.6 %
       Allowance for credit loss-loan receivables    $       118     $     103
       Percentage of gross loan receivables                  6.5 %         7.0 %

The allowance for doubtful accounts is based on our assessment of the collectibility of customer accounts. We regularly review the adequacy of these allowances by considering internal factors such as historical experience, credit quality and age of the receivable balances as well as external factors such as economic conditions that may affect a customer's ability to pay and expected default frequency rates, which are published by major third-party credit-rating . . .