Cisco Systems, Inc. (CSCO) Q4 2011 Earnings Report, Transcript and Summary

Welcome to Cisco Systems Fourth Quarter and Fiscal Year 2011 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 would like to introduce Terry Anderson, Vice President, Corporate Communications and Investor Relations. Thank you. You may begin.

Thank you. Good afternoon, everyone, and welcome to our 86th quarterly conference call. This is Terry Anderson and I'm joined today by John Chambers, our Chairman and CEO; Gary Moore, Executive Vice President and Chief Operating Officer; and Frank Calderoni, Executive Vice President and Chief Financial Officer. The Q4 fiscal year 2011 press release is on U.S. high tech market wire and on the Cisco website at www.newsroom.cisco.com. I'd like to remind you that we have a corresponding webcast with slides. In those slides, you will find financial information we cover during this conference call as well as additional financial metrics and analysis that you may find helpful. Additionally, downloadable Q4 and full fiscal year 2011 financial statements will be available following the call, including revenue by product and geography. Income statements, full GAAP to non-GAAP reconciliation information, balance sheet and cash flow statements can be found on our website 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 available via telephone from August 10 through August 17 at (866) 357-4205 or (203) 369-0122 for international callers. A replay will also be available from August 10 through October 21 on Cisco's Investor Relations website at www.investor.cisco.com. Throughout this conference call, we'll be referencing both GAAP and non-GAAP financial results. Our commentary today will be providing information on both our Q4 and full fiscal 2011 financial results. The financial results in the press release are unaudited. The matters we'll be discussing today include forward-looking statements and, as such, are subject to the risks and uncertainties that we will discuss in detail in our 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. I'll now turn the call over to John for his commentary on the quarter.

Terry, thank you very much. Since the last quarter's conference call, we've made solid progress on our comprehensive action plan to position ourselves for the next stage of growth and profitability, what we will call the next Cisco, which I will review at a high level in just a moment. In terms of Q4 FY '11 overall guidance, we accomplished what we outlined in our Q3 conference call, achieving a little bit more in revenue growth and earnings per share than consensus expectations. Revenue growth for the quarter was approximately 3% year-over-year versus our guidance of 0% to 2%, and non-GAAP earnings per share were $0.40, slightly above expectations. Total non-GAAP gross margins were 62.7%, with non-GAAP product gross margins at 61.2% and non-GAAP service margins -- gross margins at 68.6%. Overall book-to-bill was comfortably above 1, with total product orders in Q4 growing year-over-year by 11%. We also saw book-to-bill comfortably above 1 in all of our major product areas. In terms of Q4 orders, there was very good balance from a geography, customer segment and most key product families. From a geographic point of view in Q4, our 4 theaters achieved year-over-year order growth ranging from 9% to 19%. Our enterprise, service provider and customer orders grew year-over-year between 15% and 19%. However, public sector spending continues to be a challenge, decreasing on a global basis year-over-year by approximately 4%. From a key products perspective, routing orders grew 17% year-over-year, switching orders 6% and new products grew 11% year-over-year. The results in Q4 echoed our comments in the Q3 conference call. We are a very strong company with a very strong balance sheet, solid customer relationships, leading in many healthy markets. However, we need to address a few areas with the entire focus of the company. As with…

Thank you, John. Good afternoon, everyone. During our Q3 earnings call, we talked through our plans to address 3 key areas of work, and I'm pleased with our progress to date. We have met the milestones we have set for ourselves while executing effectively against an aggressive schedule. So we agreed to: one, establish a simplified focus and more efficient organization and operating model; two, reduce and align our cost structure; and three, optimize our portfolio. Our guiding principles behind this work are to consolidate and align our portfolio in support of the company's top 5 priorities, enable faster innovation cycles to match customer and market demand, establish clear lines of leadership and accountability, empower the business to better serve the customer and improve the ease of doing business with us. I would like to share our initial progress in each of these areas and address the work we still have ahead. First, we have taken swift actions designed to simplify the operating models of the company within each organization. Sales, Services, Engineering, Operations, Marketing and Finance. These moves will allow us to better align our people, processes and investments around our top priorities, increase our speed of innovation and focus more of our field and services sales force directly on our customers and partners. As we highlighted last time, we have sharply reduced our boards and councils and appointed clear and accountable leadership to steer those. This includes our engineering organization where we went from 7 individual engineering leads to 2 coleaders that are now accountable and empowered to make decisions on the portfolio holistically. With this aligned structure, we are now able to readily adjust and execute on the evolving needs of our customers, and we believe quickly capture opportunities in the market. Our organizational changes have resulted…

And we had higher win rate as well.

That's correct. We have also done considerable work to improve our ordering process to speed booking times. Because of the improved process for reconciling the quote to order, we eliminate unnecessary delays in our booking process. Secondly, as we said last quarter, we have a goal to reduce our annual expenses by $1 billion using Q4 as our baseline. To achieve this, we looked across the business for areas where we could lower costs and improve operating margins. As it relates to our workforce, we are reducing our regular full-time workforce by approximately 6,500 employees. As part of this process, we have now reduced our VP and above population by approximately 17%. Consistent with our manufacturing strategy, we are also -- we also announced the planned sale of our set-top box manufacturing facility in Juarez, Mexico. With this reduced -- with this -- we will reduce the workforce by approximately 5,000 people. We saw solid growth in the set-top box business, and to be clear, we remain committed to this segment of the portfolio. We will also be reducing our contract workforce by approximately 1,200 people in Q1. As we complete this process, we are focused on retaining and attracting talent. Our people, along with our technology, remains core tenants of our success. Through this period, we have continued to attract industry-leading talent in engineering and sales. Moving forward, we plan to reinvest in our people. As such, we have begun to increase our focus on employee retention and development. This includes total compensation and enhanced professional development programs that we'll be starting this quarter. From a gross margin perspective, we're continuing to drive improvements through product simplification, aggressive value engineering, maximizing commodity pricing opportunities and enhancing our supply chains. We expect to see ongoing value improvement in component as…

Thanks, Gary, and good afternoon, everyone. For today's call, I will first comment on our Q4 fiscal year 2011 financial results, and then I'll provide some additional detail on our full year fiscal 2011 results. During the quarter, we increased total revenues to $11.2 billion, which is up approximately 3% from the prior year. Total product revenue in the fourth quarter was $8.9 billion, and that grew 1% year-over-year and 3% quarter-over-quarter. Our switching revenue was $3.4 billion, representing a decline of 4% year-over-year and a 4% growth from last quarter. Routing revenue is down 2% year-over-year to $1.7 billion and down 7% quarter-over-quarter. High-end routing experienced a revenue decline of 3% year-over-year. Orders for both switching and routing were very strong toward the end of the quarter, contributing to our strong book-to-bill for Q4. New products revenue totaled $3.5 billion, an increase of 7% year-over-year and 6% quarter-over-quarter. Total service revenue was up -- was $2.3 billion, and that was up approximately 12% from the prior year. We experienced strong year-over-year growth of 11% in technical support services and approximately 17% in advanced services. Looking at our results by geographic segment, total revenue increased across all geographic segments on a year-over-year basis, ranging from up 1% in both the U.S. and Canada and European markets to up 17% in our Asia-Pacific markets, with emerging markets up 3%. Beginning in the first quarter of fiscal 2012, we will report based on the 3 new geographic segments as announced in our press release on May 5. That's namely the Americas, EMEA, Asia Pacific, Japan and China. Geography will continue to be the primary way we run the business. Our total product book-to-bill for Q4 was comfortably above 1. Our Q4 FY '11 non-GAAP total gross margin was 62.7%, and that's consistent…

Frank, thank you very much. Summary comments from my end and then to the Q&A session. Moving forward, we would like to give you some perspective on Q1 and our momentum going into fiscal year '12. We believe our broad portfolio positions us well for growth in fiscal year '12. Our networking peers have recently found themselves in similarly challenging transitions. We have always used these market conditions to make bold and tough decisions and then execute it in a way that further extended our lead versus our peers. Our clear goal is to do this once again. We have already made and implemented many of the decisions to achieve our next phase of growth in the next 3 to 5 years, and the creation of value for our shareholders. You will now see us move aggressively to pull away from more competitors as they adjust to these market challenges. Having already made these changes well ahead of our competition, this is also a competitive advantage for us. While it'd be easy to say that this is a broad industry challenge and, therefore, only make the changes we have outlined so far, that is clearly not what we will do. We will achieve a better balance of our entrepreneurial and operational capabilities. We'll also move aggressively to create value for our shareholders, customers, partners and employees. In simple terms, you will find us to be a very focused, agile, lean and aggressive company this next year. We do not underestimate the transitions in front of us or the importance to rapidly simplify our organization to deal with the many challenges facing us, especially in switching public sector and now the global financial concerns. As we have shown by our tough and bold decisions last quarter, we are committed to a…

Thank you, John. So yes, we'll now open the floor to Q&A. As a reminder, we do request that sell-side analysts please ask only one question. With that, operator, please open the floor to questions.

[Operator Instructions] Our first question comes from Simona Jankowski with Goldman Sachs.

John, I think you gave a number of statistics on the quarter including orders up 11% and backlog up 5% and deferred revenue up 10% year-on-year. You're obviously guiding a lot below that, at about 2.5% of the midpoint, which assumes a significant slowdown in your orders in the October quarter. So can you just be a bit more explicit about what you are assuming about the October quarter, both in terms of your own business such as the distractions you talked about with the reorganizations and also in terms of the macro focusing in particular on some of the new concerns from the last couple of weeks?

Okay, a couple of thoughts. First is Q1 is a real tough comparative quarter because in Q1 of last year, our product orders were already up 10%, and our product revenues were up 20% and total revenues up 19%. So when you look year-over-year on that, it's very tough, Simona, to balance the 2. So I would not infer at all that we're signaling a disproportionate change in order rates. We do think that you will see a slowdown due to the changes we made and we've put that into our model. Our sales team, and I want to congratulate Rob, has been remarkably accurate over the last 120 days on both as a team and in total on their projections. So we're modeling in a little bit of conservativeness on the macro issue but actually, I think many of the things that you actually said in your notes, you were remarkably accurate on in terms of our plans and thoughts. Nice way of saying -- No. I think we would expect orders to grow faster than revenues in Q1, just as we said in Q4.

Our next question comes from Nikos Theodosopoulos with UBS.

I wanted to ask about orders as well. You mentioned -- well, given the backlog numbers you gave for the year end, it looked like orders grew about 7% to 8% for the entire fiscal year. Can you give some color on that? And what would have that been without public sector for the year if you have that? And if you can elaborate also, John, on orders. You mentioned in your commentary that orders picked up late in the quarter, and I'm trying to understand what led to that given the macro issues? Did you have some sales force incentives? Or was that just the sign the market is stronger than the stock market's reading?

Okay. In the sequence that you talked about, in terms of year-over-year product bookings, it was about 8% year-over-year in fiscal year '11, 11% in the fourth quarter. In terms of the quarter orders, it wasn't me but one of our team absolutely did say that we had a good July and we did. But the orders were pretty consistent throughout the 3 months following into our normal order pattern. May was a little bit strong. June was okay, and July was a little bit strong. So each of the quarters had good year-over-year growth but we finished with a very strong July. We always have sales in cities [ph] on Q4 because people making their goals are looking at how they come in to extra money by getting the orders in, et cetera, and this quarter was no different from that perspective. In terms of the public sector effect, I don't have that number. I might be able to kind of look at it as we work through this but I might have to, Nikos, answer that question another time.

We can follow up.

Our next question comes from John Slack with Citigroup.

I was wondering if you could talk about what's going on in routing, maybe down 3% on the high end, entire routing was down 2%. Maybe if you could kind of dive into your view on service provider CapEx, I know some of your competitors have commented that, "We're having a more linear CapEx environment this year." Any sort of color you can give us around that will be appreciated.

Sure. We saw our strongest quarter by far and away in service providers this last quarter. We saw the growth consistent in almost all major geographies, total growth 19% on new orders, growth in the U.S. to 15% in terms of the orders. Routing was, in terms of booking, very, very strong. Areas like our CRS had the strongest growth that we've seen in a long time, 65% year-over-year. Movement into areas such as the ASR 9000, and since we got some of the features that we needed for certain parts of the world, saw 156% increase in terms of orders. The 1000 saw a 40% increase in terms of the orders. And no, we saw service provider spending in this most recent quarter very, very solid. Now the second part of your question. Many of the service providers have different goals in terms of their revenue growth with the capital expense growth. If you're in areas where they're growing; i.e. mobile; i.e. video, especially entertainment; i.e. cloud where they're providing services and capabilities to the customers; and if you're a company that can help bring customers to their service providers, you're getting a lot of the opportunity that some of our peers may not be experiencing. So I think our win rate was up dramatically versus our peers, and you saw us take on some of our toughest Asia competitors right in their home countries. And as you expect, there's going to be a little bit of discounting to win those deals. But we're doing very well in every major geography. And service provider trends on CapEx, I think, like AT&T said this in the last month or so is they actually increased their expenditures for the second half of the year. So we did not see that nor did we see any major effect in service providers even in countries like Japan where we saw 13% growth year-over-year.

Next question comes from Tal Liani with Bank of America Merrill Lynch.

First, congrats. Finally, we see some stabilization. I wanted to ask you about public spending and try to dig deeper into public spending. One angle is if you can discuss the components of public spending. You have federal and state and Europe, but there is also a bigger part or big part which is none of the above, and if you can discuss the components and maybe a little bit the trends. And second related to that is, this is still the end of the fiscal year. June was the end of the fiscal state year, and September is the end of the September year and these are still budgeted projects, which means the real weakness can only start next year so -- or the following year. How do you bake into your estimates or your expectations what could happen in public over the next few quarters?

Okay. First the good news is the year-over-year comparison start to get more favorable in a couple of quarters. Secondly, for whatever reason, Tal, as you know, we tend to see changes 2 to 4 quarters ahead of our peers. I used to say I'm not sure if that's good or bad, I don't like it. It's clearly a challenge for us, but it does allow you to change once you see it. We saw the -- to answer your question in a little bit more detail, the state and local government, as an example, in the U.S. We began to see the weaknesses as we've said during Q2, first in state and local government and connected the dots, and we thought it was going to increase in terms of the challenges in state and local government, which it did, and then it would logically flow on to the federal side of the house. If you look at how those orders have occurred in the last 2 quarters, as we said this quarter, federal was down 18% in Q3, a quarter ago, it was down 21%. In terms of state and local, it was down 2% this quarter, down 8% in terms of the quarter before that. The programs actually -- many of them are getting cut. And you're seeing people make very tough decisions in terms of the budget and direction. Even e-rates, you're seeing questions about do the schools, do you spend money on networking, which is clearly your capability to wire your schools differently and get almost a 4:1 assist from the federal government? Or do you put that 20% -- 28% into teacher salaries? And so there are trade-offs going. You're seeing this pressure on a global basis, every major country's going through it. Unfortunately, the minute, using the state and local as an example starts to come back a little bit, we see other aspects in federal or we see other aspects and other governments around the world. I think we're going to be in a couple more quarters in terms of the direction. We do not have the large projects that many of our peers have that are locked in and have to continue so they probably will feel the effects of it further out in future quarters in terms of the direction.

Your next question comes from Mark Sue with RBC Capital Markets.

John, when does all this restructuring end and what does the baseline financial model look like when you're finished? Can you also ensure us that kind of gross margins, for example, won't fall below 60%? And then maybe just separately, what else do you need to get comfortable with the before increasing the dividend, assuming what it looks like no tax relief from the government?

Mark, just a reminder, we're going to stick to one question each. Maybe perhaps try the first one, John?

So in terms of the gross margins overall, as you would expect us, we've done a lot of heavy lifting on value engineering. We are paying both our engineering leads and our sales leads on total profit, including gross margin goals. Clear ownership of each gross margin in each product category, and we're coming at it in all aspects from supply chain, as Gary said earlier, to regular in-depth reviews with a great deal of focus in terms of the direction. In terms of the challenges, the better we do with UCS, it was about 1% decrease in gross margins this quarter. It does put pressure on the gross margins. What we're looking at and what Frank alluded to very directly is, we're using Q1 as kind of a baseline that we don't see dramatic changes on for the short-term future in terms of the direction. Our gross margins on our larger products might go up or down in any given quarter but they're often balanced in terms of our new products improving on their gross margins in terms of directions overall. So I know that didn't answer all 4 of your questions. I went to the one that you are probably most interested in which is the gross margins, our focus on that and our ability to -- if I would've told you a year ago, switching was only going to be down 1.4% over the year, you'd probably said unlikely. Yet we've made a great deal of progress in all of our switching products in terms of improving gross margins. We'll do the same thing in routing and we'll do the same thing in terms of our data center products as we move forward, Mark.

And Mark, as I had mentioned earlier, we'll be talking more about our longer-term gross margin profile at the Financial Analyst Conference coming up in September and also address a little bit more about the question you had about the financial profile.

Our next question comes from Brian Modoff with Deutsche Bank.

John, so do you see the gross margin starting to stabilize? I think it's been trending down for the last several quarters. And if not, where do you see that stabilization occurring? And do you -- have you seen any effect from as you sit [ph] the terabit upgrade to your 6k Switch platform in terms of helping maintain share in that installed base? And what are the effects of that recent upgrade?

Yes. If you think about it Brian, this is probably the hardest one to forecast transition. It makes forecasting revenues look easy because as you've got a bunch of mixes going on and pressure occurring. I'm going to piggyback a little bit on the answer that I gave, I think it was Mark earlier, that if you use switching as an example, when we were first hit by the competition in switching, we were playing defense and learning how to teach respond to a just good-enough-type of approach. As you've seen, we've done, what I would call, pretty good job over the last 2 quarters both on stabilizing margins in the switching group, focused on the group as a whole and done this without any meaningful loss the last couple of quarters in port share or revenue, in fact, actually might be gaining in port share in terms of the direction. It's a hard one to forecast out 1 to 2 years but to answer your indirect part of your question, we do not see a major falling off the cliff type scenario on margins. Most of our margins will go up and down on the quarter. For example, next quarter you will see a little bit of pressure on routing margins because we got some pretty big deals in China. But overall, if you look at our total contribution, we're very comfortable with the growth there and keeping the margins within a reasonable pace on direction. Do you have anything else to add, Frank?

John, what I would -- I mention this earlier in the prepared remarks but if you look at excluding the benefits, some of the nonrecurring items that we had in the third quarter, the non-GAAP product gross margins have ranged in the last 3 quarters in that 61% to 62%. So although we've always had a lot of variations or mix dynamics within, they've been pretty much in that range, which I think is good as it relates to how we're carrying that forward.

Make no mistake about it. Everyone in the company is focused on margins and with specific responsibility for the areas of responsibility that they control.

Our next question comes from Rod Hall with JP Morgan. Rod Hall - JP Morgan Chase & Co: I just wanted to know on the enterprise and commercial growth rates you gave in orders, they actually accelerated, for both of them, in this quarter over last quarter. I wonder if you could comment in a little bit more detail on what drove that? I mean, were there particular incentive programs you put in place? Are there particular products that are doing exceptionally well? Just give us some idea what's driving that growth. And then I just wanted to clarify your comments on public sector spending, and ask if there are any areas where the public sector's actually spending more on technology to save money? So those are my questions.

Okay, I'll combine them both and Terry won't let me do it again in terms of the growth. What we're learning to do in the enterprise and commercial is do a much better job of selling the whole solution. We start with the business fundamentals the customer is trying to solve on their -- it doesn't matter how they interface to their customers or how they bring their expertise to innovate faster or productivity. And then we often lead with the new products, i.e. video or collaboration or the data center, to achieve those goals. And it does pull along usually well in excess of 2x the core routing and switching with it. So that's one of the fundamental changes. When we've done this in scale, and I would say, Brian and Allison have done it in the U.S. enterprise and commercial market, there weren't any abnormal incentives on that but they did it very effectively with discipline across all of their sales reps, and you saw a ramp-up and a win rate that was very high. We clearly intend to take those type of processes globally in terms of the touch in direction and to feed the engine that's growing most rapidly. I would watch the enterprise and commercial growth. We think, it will grow, be the most predictable and grow very well in terms of during normal economic times. And if we were to see surprises there, moving from double digits as an example or midteens as an example, then that would be an indication in capital spending that would cause us alarm. But no, you were absolutely right that in enterprise and commercial, especially in the U.S., where we have a little bit more focused discipline on this and we're going to take it globally, the growth was very sustainable, and our value to the customers, they often view us as if they're #1 IT partner. In terms of growth in public sector, there is a lot of opportunity on cloud. We're seeing our cloud opportunities double almost every month in terms of opportunities within the government but especially here in the U.S. You're seeing a lot of emphasis in terms of how do you save on travel, so you see areas like the video playing a key role and we're clearly going to focus on that in terms of direction. And so we'll move where they'll be spending their money, but those will be 2 of the areas that come to mind, Rod.

Our next question comes from Ehud Gelblum with Morgan Stanley.

The question has to do on gross margin on the products versus the services business, John. Your product revenues were up sequentially. Gross profit dollars, I think, were down and services was up but gross profit dollars were up higher because your gross margin there went up higher. So I just wanted to probe a little bit deeper into the dynamics going on between the gross margin on the product side. And is that based mostly on mix and should we see that come back up again? Or why was the discrepancy that you seem to be making much more profitability in the services right now than on the product? And related to that, last quarter, you gave some comments on whether the Nexus 7000 gross margins were relative to your 6500 and said it was about an 18% difference. Can you give us an update on, is that closing the gap? Is it getting up into the high 60s where your 6500 is or higher? And is that having to do with the gross margin product?

Why don't, Gary, you or Frank take the first part of the question, and then I'll weave the second part into one of the other questions. And let Frank...

So let me -- just starting back, just give you a little bit of color on the gross margins for Q4. I assume you're asking Q3 to Q4. So I'll start with the product gross margins and then kind of go into talk about the services, which is part of your question. So from a product gross margin standpoint, we did see the margins come down about 2 points quarter-on-quarter. Now as you recall, and I mentioned this earlier, we did have some nonrecurring benefits that we had in Q3, specifically as it relates to some warranty and the legal settlements that benefited the margin last quarter that does not reoccur this quarter. So one of those points of decline related to that. The second part of the other point was a combination of some mix as far as looking at some of our lower-margin products like UCS and some of our set-top box that had strong quarters, that had a negative impact on the margin. And then we also had some manufacturing-related costs. One of the key things which I wanted to stress which I mentioned earlier, when you look at anything I said here or even the comparison to Q3 to Q4, is our pricing was pretty flat quarter-on-quarter when you start looking at pricing and rebates. So I think that was a major trend that we just kind of saw from one quarter. So that's kind of positioning where we are on the product side. On the services side, clearly, we had improvements. In margin, we went from 67% to 68.6% quarter-on-quarter or an improvement of 1.6%, which then had a positive impact overall for the company. As I mentioned, we have -- this is the end of the fiscal year, it's one of the quarters where we have a lot of services activity and renewals that go on, that does tend to help our margin profile in the quarter, some of which is recurring, some of which is not that we take into consideration when we set the guidance for next quarter. But overall, I would say very good profile within our services business. So when you look at both on the technical side, which is where we tend to have the best margins. But even on the advisory services, there was some good results there as well.

A lot more volume, a lot more volume on the advisory.

Real quick answer on the side of the 7k, we're improving by about 1 point, 1.5 points per quarter. We need to do better in that.

Our next question comes from Simon Leopold with Morgan Keegan. Simon Leopold - Morgan Keegan & Company, Inc.: One quick clarification and then a question. Clarification, I think I missed if Frank had any commentary on the expected share count. And then in terms of question, I wanted to get a better understanding of operating expenses, particularly looking at this fourth quarter, we're using this as the baseline for cost cutting so it's an important number. And it was a bit higher and certainly up sequentially from the trend that you had in April and January and year-over-year. So I'd like to try to understand what were the elements increasing July operating expenses versus the April quarter? And how we should think about that in terms of as we build out the quarters in 2012?

Of course, so let me take that on the OpEx side first. So you had the headcount actually increasing that we've been working throughout the year, and that has actually, when you look at the ramp of where the headcount had been coming on in Q3, we had some additions that came on in Q3 which then increased the overall cost or the expense in Q4, that was the driver. Of course, now that's changing. As we move into FY '12, I'll come back to that. We had several other unique items that tend to be more seasonal toward the end of the year. We had some engineering projects that we're closing in on Q4, and we had certain events on the marketing side with our Cisco Live and various efforts like that, that drove higher costs. We had some other value engineering projects that we worked through this quarter, I'm just giving you kind of some deltas quarter-on-quarter. Of course, that's going to provide some benefit as we look at margins. We talked about that already going forward with some of the efforts that we have underway. And then we also have some other currency that was a factor from a quarter-on-quarter standpoint, and we look at our expenses from a dollar standpoint, and as the dollar, if you look at it, actually weakened quarter-on-quarter that drove an item there. So all those variances were pretty well established in the quarter, driving that growth on a year-on-year basis. Yes, that is the baseline that we had talked about going forward. I mentioned in the guidance for Q1 that we expect to take that down $150 million as it relates to Q1, and then we'll continue to see a reduction on that expense going forward in Q2 and Q3 as we continue to see some of the other reductions from a resource standpoint taking place in our non-U.S. geographies. So we talked about $1 billion, we'll have $600 million on a run rate basis after Q1, and then we'll have further improvement in Q2 and Q3. We expect, right now, based on the modeling that we're doing, that we'll get to the run rate in that Q3, early Q4 timeframe and we'll continue to make that progress. But we feel fairly comfortable that we're well underway from that standpoint.

We're actually a little bit ahead of schedule. On the share count, we might handle that a little bit later.

Our next question comes from Jason Ader with William Blair. Jason Ader - William Blair & Company L.L.C.: I just wanted -- I wondered if I missed that you mentioned the wireless security and video connected home and the new products? That was just a quick clarification. And then John, a question for you. If we're entering a period of macro weakness and I'm not saying we are, but if we are, why are you more confident that you'll come out of this current period stronger than you did the last one?

Got you. So questions in terms of key product areas. I'm trying to see where wireless was. I know it had a good quarter. I'm trying to find out where it was in terms of the direction. I'm going to shoot from the hip if I don't see the number. It was up 26% in terms of bookings and about 33% in terms of revenue. In terms of the connected home, you are seeing us largely move out from that scenario. We'll continue to stay focused with Linksys in terms of key product area. We'll improve the gross margins on Linksys and the growth rates, and I think Martin will do a good job on that. Let me also answer your indirect question. A couple of areas that people had questions on about are we going to stay involved in? Let me say very explicitly. Areas like WebEx. Collaboration will be an architectural sale. It will combine Quad, WebEx, TelePresence, any device to any content over any combination of the networks, and that's why it was so important to have Medianet now go across all of our enterprise customers in terms of the direction. WebEx, we left it a part too long. We brought it in at the beginning of this last fiscal year, and you saw it move from negative growth to mid-20s in Q2 and Q3 and Q4 actually grew at 60%. In terms of set-top boxes, we are very much committed to this marketplace. You will see us move, however, from traditional set-top boxes to IP set-top boxes to Videoscape. Receptivity, so far, has been very, very good in terms of that direction, and you actually saw our Scientific Atlanta group grow about 10% in orders and 11% in terms of revenues this year. In terms of Smart Grid, it's a market that we think has tremendous opportunities. You're seeing growth year-over-year in the hundreds of percent, and we've won a large number of the jump balls around the world from Russia to Australia to Canada to here in the U.S. It's a market that we think plays right into our sweet spot, and we're doing it with open standards, have very good confidence in that direction. In terms of what gives me confidence on it, I might close with that question once we get 2 more questions, so I would do that in terms. Terry, if you could give me a couple more questions then I'll close with that last scenario.

Great, okay. Actually, we'll queue the last question here, and you can perhaps wrap with that, John. Last question please.

Brian Marshall with Gleacher & Company. Brian Marshall - Gleacher & Company, Inc.: When I calculate the pro forma OpEx savings as well as the reduction in COGS from the fab transfer and when I do that, I get well over $1 billion. So I guess the question becomes, is that math accurate? And are we getting the benefits of that incremental number above $1 billion basically in the form of reinvestment in the 5 core focus areas? And if that's so, can you give us a little bit of details on that?

The answer is you have -- absolutely have that read right. We've clearly cut deeper. So we get back, reinvest. We reinvest in engineering by a couple of hundred million as an example. You also saw us cut deeper because we're watching currency issues, and we clearly have to cut deeper because, next year, assuming that we hit our plan and we are going to do that, we have to pay bonuses to our employees, which we didn't have as much of this year. So those had to be covered in terms of our cutting into the fabric. So let me answer the prior question. It's a good one to wrap it up with. What makes us confident? If you watch what is occurring, we position, I think, ourselves very well to lead as the role of the network and intelligent networks plays a much more strategic role in service providers, enterprise commercial customers and even in the public sector. In terms of why we're confident, the more we put focus on our customers, the faster we have grown. And candidly, we've taken it to our competitors pretty good this last quarter, even with all the media being brutal on us. We clearly won the majority of jump balls, and you can see us continue to do that, both with our traditional router competitors, which we will pick up a lot of share on this next quarter but also with some of the large data center players, who are into the switching segment, they clearly have not taken hardly any market share from us in the last year, if at all. And we're taking an awful lot of share in terms of the data centers. So we're going to be aggressive in terms of the competition and aggressive on recruiting…

Great. Thank you. So in closing, Cisco's next quarterly conference call, which will reflect our full or excuse me, our first fiscal quarter 2012 results, will be on Wednesday, November 9, 2011, at 1:30 p.m. Pacific Time, 4:30 p.m. Eastern Time. Cisco will be hosting our annual Financial Analyst Conference on Tuesday, September 13, 2011, in San Jose, and we'll also be providing a live webcast. Additionally, downloadable Q4 and FY '11 financial statements will be available following the call, including revenue segments by product and geography. Income statements, full GAAP to non-GAAP reconciliation information, balance sheets and cash flow statements can be found at our website in the Investor Relations section. Click on the Financial Reporting section of the website to access the webcast live and these documents. Again, I'd like to remind you that in light of Regulation FD, Cisco plans to retain its long-standing 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 with any follow-up questions from this call. Thank you for your participation and your continued support, and this concludes our call.

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