John T. Chambers - Executive Chairman, Chief Executive Officer and Member of Acquisition Committee Gary B. Moore - Chief Operating Officer, Head of the Services Organization and Executive Vice President Frank A. Calderoni - Chief Financial Officer and Executive Vice President Melissa Selcher -

Brian J. White - Ticonderoga Securities LLC, Research Division Simona Jankowski - Goldman Sachs Group Inc., Research Division John Slack - Citigroup Inc, Research Division Nikos Theodosopoulos - UBS Investment Bank, Research Division Simon M. Leopold - Morgan Keegan & Company, Inc., Research Division Ehud Gelblum - Morgan Stanley, Research Division Ittai Kidron - Oppenheimer & Co. Inc., Research Division Shaw Wu - Sterne Agee & Leach Inc., Research Division Brian T. Modoff - Deutsche Bank AG, Research Division Rod B. Hall - JP Morgan Chase & Co, Research Division Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division Tal Liani - BofA Merrill Lynch, Research Division Jeffrey T. Kvaal - Barclays Capital, Research Division Mark Sue - RBC Capital Markets, LLC, Research Division

Welcome to Cisco System's First Quarter and Fiscal Year 2012 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 Melissa Selcher, Director of Corporate Communications and Investor Relations. Ma'am, you may begin.

Thank you. Good afternoon, everyone, and welcome to our 87th quarterly conference call. This is Melissa and I'm joined by John Chambers, our Chairman and Chief Executive Officer; Frank Calderoni, Executive Vice President and Chief Financial Officer; and Gary Moore, Executive Vice President and Chief Operating Officer. The Q1 fiscal year 2012 press release is on U.S. high tech market wire and on the Cisco website at newsroom.cisco.com. I'd like to remind you that we have corresponding webcast with slides. In those slides, you will find financial information that we cover during this conference call, as well as additional financial metrics and analysis that you may find helpful. Additionally, downloadable Q1 financial statements will be available following the call in the Investor Relations section of our website, including revenue by geographic segments, as well as product category. Income statements, full GAAP to non-GAAP reconciliation information, balance sheet and cash flow statements can also be found on our website in the Investor Relations section. Click on the Financial Reporting section of the website to access the webcast slides in these documents. A replay of this call will be available via telephone from November 9 through November 20, at (866)493-8039 or (203)369-1749 for international callers. A webcast replay is available from November 9 through January 20, on Cisco's Investor Relations website at investor.cisco.com. Throughout this conference call, we'll be referencing both GAAP and non-GAAP 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 discussed in detail in our documents filed with the SEC. Specifically, the most recent annual report on Form 10-K, and in applicable amendments which identify important risk factors that could cause actual results to differ materially…

Well, thank you very much. Since last quarter's conference call, we continue to make major progress on our comprehensive action plan to position ourselves for the next stage of growth and profitability. In this conference call, we will reduce the amount of detail covered in the formal part of the call, focusing more on the highlights and our interpretation of the results, while providing a lot of the detail we've traditionally covered in the script, through the accompanying slides. This will allow more time for questions, we welcome your feedback on this approach. First, in my part of the call, I will do a high-level financial review, then cover in reasonable detail, our progress and results as it relates to executing on our 3-year plan, that we believe will drive the future of Cisco and our intelligent networks; second, we will give you an update on our Q1 progress with regards to our 5 foundational priorities; third, we will cover the order momentum in each of our 3 geographic regions; fourth, we will cover order momentum in our 4 customer segments: enterprise, public sector, commercial and service provider; and finally, I will provide a quick summary, and then Q2 FY '12 revenue guidance. In the second part of the conference call, Frank will go into more detail from a financial perspective, as well as expand on our Q2 FY '12 guidance. I will then make some summary comments regarding the perspective on Q2, and our momentum going into the remainder of fiscal year '12. First, we made very solid progress in Q1, both in terms of our results and execution in the first quarter of our 3-year plan. Our performance in Q1 FY '12 exceeded the guidance we provided last quarter, for both revenue and earnings per share. We had…

Thank you, John. We had solid results for Q1 FY '12, which underscores our commitment to our 3-year financial strategy that we outlined at the Financial Analyst Conference in September. Total revenue for the first quarter was $11.3 billion, an increase of approximately 5% year-over-year, above our expectations of 1% to 4% growth. Total services revenue was $2.3 billion, up approximately 12% year-over-year. Total product revenue was $9 billion, up approximately 3% year-over-year. Switching revenue was $3.7 billion, that was flat year-over-year. Next-generation networking or NGN routing was $2.1 billion, down 3% year-over-year. We experienced an increase in total revenue across all geographic regions on a year-over-year basis. Our year-over-year revenue increase was 4% for Americas, 2% for EMEA and 11% for APJC. Total product book-to-bill in Q1 was approximately 1. Our Q1 FY '12, total non-GAAP gross margin was 62.4%, that's down 0.3 percentage points quarter-over-quarter, and down 1.9 percentage points year-over-year and better than our expectations. For product only, non-GAAP gross margin for the first quarter was 61.3%, a slight increase of 1/10 of a percentage point quarter-over-quarter. This quarter's performance was driven by cost savings, which includes positive impacts from our value engineering efforts in key product areas such as switching, and higher volume, partially offset by discounts and rebates. On a year-over-year basis, non-GAAP product gross margin was down 2.7 percentage points. Our non-GAAP service margin for the first quarter was 66.8%, that's down from 68.6% last quarter and up from 65.7% in Q1 FY '11. Total gross margins by geographic region was 63.1% for the Americas, 61.7% for EMEA and 60.8% for APJC. Non-GAAP operating expenses were approximately $4.1 billion in Q1 FY '12, down approximately $120 million when compared to Q4 FY '11. We continue to execute well on our planned $1 billion reduction…

Thank you, Frank and nice job. Moving forward, we would like to provide some perspective on Q2 and our momentum going into the rest of fiscal year '12. We believe our vision strategy and financial strength, broad architectural portfolio, as well as our culture that accepts change, position us well for growth. We have always used these market transitions to make bold and decisive decisions, and then to execute in a way that further extends our leadership versus our peers. To have your order growth accelerate in Q4, and then again in Q1, with the global economic challenges we've all seen, while simultaneously making all the internal organizations of each function in Cisco and priority changes, points to pretty solid execution. Rob, I wanted to congratulate you, Rob Lloyd, especially on the sales and the momentum, and Gary, just an excellent job on the operational changes and the improvements.

Thanks, John.

Very welcome, nice job. In every major market transition, we have historically emerged even stronger, with more market share and intense targeted focus. In our opinion, we are well on our way to doing this once again. You will continue to see us move very aggressively, to pull away from our competitors, as they adjust to these market challenges. Having already made these changes, both in cost, as well as organization changes lining how our customers buy, this is also, in our opinion, a major competitive advantage. Our challenges last year caused us to make some needed changes. But as you would expect from Cisco, we will not stop here. We will be aggressively continuing to change and transform and stimulate our Cisco entrepreneurial spirit, through the combination of innovation and operational excellence. At the same time, we will maintain our laser focus on creating value for our shareholders, customers, partners and employees. You will continue to see us very focused, agile, aggressive and a lean Cisco moving forward. Our goal over the past 2, 3 quarters was to simplify our operation model and focus on our organization. Our customers had validated that we have done just that. They understand the values that Cisco's franchise delivers to them. This is a key point, and perhaps, the second key takeaway from the call in terms of the transition going on. Information technology is clearly moving to business technology. We are seeing that across all industries and geographies. At the heart of this transition, our intelligent networks, which drive new businesses, revenues and consumption models, enable new customer and employee experiences and drive efficiencies. Cisco's leadership and networking, video, collaboration and the cloud, all put together in an integrated architectural approach, uniquely position Cisco as our customer's strategic business partner. I want to thank our employees, our Cisco family for the speed and willingness to change that has positioned us to move with our customers and drive value for our shareholders. I know it has not been easy, but you have executed and adapted to these changes and opportunities extremely well, and that more than anything, embodies the Cisco franchise. Our ability to emerge quickly, stronger and more driven, as we have in the past, and as our Q1 results certainly reflect our improvement at this time. Make no mistake about it, all of these efforts are putting in place our focus on driving shareholder value, while continuing to stay focused on the success of our customers, employees and partners. I want to thank our shareholders, employees, customers and partners, as we transition to reinvigorated Cisco, the aggressive, the focused, the simplified Cisco you have come to expect over the years. Mel, let me turn it over to you.

Thank you, John. We will now open the floor to Q&A. We still request that sell-side analysts, please ask only one question. Operator, please open the floor to questions.

Your first question comes from Nikos Theodosopoulos with UBS.

My question, John, if you can talk a little bit about the order linearity month-by-month in the quarter, compare it to what you were expecting in the normal seasonal pattern there? And then, any of the macro uncertainty in Europe kind of disrupts, even temporarily during the quarter?

It's a key question. I thought that might be one of the couple, because I think it's a very indicative of a key takeaway. Our quarter linearity, month-by-month, was almost identical to what we would see every month in prior Q1s. And without getting too specific, if you kind of think of it, the first month, 22% to 24%; the second month 28% to 30% of your business; the third month, let's say 46% to 48%, we're right in the middle of that across-the-board. So linearity was extremely good, and it occurred almost every week, Frank. As we watched the numbers, Rob's linearity, his accuracy was really good. Gary, the same thing with the services numbers.

And Nikos, you can also see that if you look at our DSO at 35 days, I think that was a good reflection of the improvement on DSO, because of the balance throughout the quarter.

And your next question comes from Simona Jankowski with Goldman Sachs.

I just have some questions on your gross margins. Just wanted to find out, John, what drove the upside, relative to your expectations? And I also found your comment very interesting that you're switching margins are now back to the levels of a year ago. Yet obviously, the overall margin is about 2 points lower, so I was just curious, how much of that is just due to the mix shift to UCS? And is there any other component of that 2 points of margin compression that you still expect to reverse?

Sure. So it was, I think, a major accomplishment in terms of our switching margins being back to where they were a year ago. And candidly, our order momentum and revenues back to double-digit in terms of the orders this quarter for switching. The progress, we still have room for improvement especially on the high end of our 7000. But as we said on the other segments of the Nexus and with the Cat 2 and Cat 3 switching products, very, very good. And we'll continue to stay focused on those. We saw progress in the UCS segment combined with the Nexus 2000 to 5000 of about 2 to 3 points, although the UCS clearly is at a dramatically-lower gross margins than our core traditional business. The elements that you're talking about, it'd be easy to say it's mix, but we need to do a better job, Gary, I think in the routing margins, I think Penn College is on board on that. And the routing margins, in part because of the orders in China, which will be spread over Q1 and Q2, very aggressive as you can imagine with our key competitor there. I think we need to continuously focus on that. And that's what we're really talking about with operational excellence, and not just making a transaction stop. It's continuing along that line, and making this part of our DNA Gary in consistency, in terms of the direction. The other issue is everyone in the company is now focused on gross margins. Our sales people get paid for the first time, you can probably say, we should've done it earlier, on total profit contribution of their regions. And so you see Chuck, and you see Chris, and you see Edzard focusing on their gross margins, as well as their bookings revenues, and really focus on the discounts. We see very good involvement in terms of -- we're getting much faster on being easier to do business with. But in our contract negotiations, you see the same thing. So it's a combination, Simona. I'd say, good job in a couple areas, several areas, we have to do better, then we've got to build on our basic DNA, because there's always been mix changes.

John, just really emphasizing the emphasis that we put on gross margin. Especially, with a focus on cost. As I mentioned, seeing the improvements in the first quarter, I know it's still early as far as FY '12, but seeing the improvements on the value engineering. And then also Simona, I think a much more stable markets across-the-board as it relates to the pricing environment, was helpful as well.

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

My question is really about the macro. You grew revenues sequentially in the quarter that is supposed to be down. Normally, so normal seasonality. And I look also at the sequential trends in the individual sector, segments. You had one slide that you showed it for a second, but it looks like things are slightly better almost in every important place. And the question is, whether you can speak about a better environment in certain areas, not only on a year-over-year basis, because the year-over-year may be a function of weak environment last year, rather than improvement over the last few months. So I'm wondering if you can relate to strong areas where -- areas where you were surprised with some recovery, if we can call it in orders, on a sequential basis, whether it's product areas or geographic areas.

So let me kind of start in sequence. Obviously, the best execution of any of our countries on a global basis was Japan, and that environment provides on the growth of 43%. Edzard's involvement there on the theater basis, eventually a home run. So I think that was a surprise, even though we had some good business in the pipeline, that looks good. And actually, we think Japan, well not at these levels, but at a very good level, will grow for us this year, healthily. And I think that speaks to customer relationships and the Cisco franchise I alluded to. The other surprise for me was clearly, government. While the U.S. government turned positive in total, it was very mixed. To your point, Tal, in areas like state and local government, they were the first ones to see the downturn, and when we saw this first in part, because most of our orders are new in the quarter, we usually see these transitions 2 to 4 quarters ahead of our peers, unfortunately, as we did this time. So you had a lower base in state government to balance it on. The defense [indiscernible] in Intel was solid within it. Higher education, especially private, higher education was very good. You begin to get to areas that were surprising in government on a lower side. The education spending, the civil part was a little bit tougher. To the geographic areas, and Frank, you'll probably kick me underneath the table. But I think, given especially what we said on the day, I'm going to take a little bit of risk, with all the appropriate caveats we all understand to be in place. Europe was stronger than we would have anticipated. Remember, Europe isn't just Europe. It's Middle East, it's Eastern Europe, it's…

Expected.

Next question comes from Ittai Kidron with Oppenheimer. Ittai Kidron - Oppenheimer & Co. Inc., Research Division: I had a couple of questions. John, can you talk about your revenue guidance range? As you were speaking, I had to go back all the way to 2008 and I couldn't find a quarter where you gave a range of just $100 million on the revenue. So has anything changed in your ability to predict your business? Or should we take that to mean that your guidance is one of your more-conservative estimate, such that you feel very comfortable about giving such a narrow range? And the second question, Frank, relating to the gross margin and following on Simona's question earlier, I understand that China headwind this quarter in mix, but is there a timeframe where that headwind gets stripped out? Should we think about the second half of your fiscal year having a little bit more tailwind to it rather than a headwind?

So I'll take the first one and Ittai, since you give such nice compliment, you get to be the one that gets 2 questions. So we'll try to hold it to one for the others. In terms of the range, I think your observation is right, in terms of we have more data than we traditionally do going into the second quarter. If you watch, we closed Q4 with very solid momentum in terms of order growth at 11%, and you all know that the inventory buildup in Q4 got us back to the inventory we wanted, going into a normal Q1. Q1 book-to-bill, we were at the very high end of the range of what you previously see in Q1. So our weeks of backlog are in pretty good shape on that, even from Frank's perspective. And the third element is, that our field, we really spent a lot of time on getting the execution down with tools like salesforce.com and others. And what Rob has done with each of his 3 regional leads, and each of the 3 regional leads have gone into really in-depth weekly, monthly, quarterly anticipation of their numbers. And so we know our pipeline down to a much more detailed level, and literally, every week, Rob and I bet a bottle of wine, on how accurate will the forecast be for the week. And we're usually above his team, and how it would be for the month in the quarter, and he's been right on his number. So we're assuming the forecast accuracy will continue, which gives you a good feeling inside about being accurate. We've got a good backlog going into it. We factored in some of the challenges, including the Thai flooding a little bit and India a little bit softer and Europe a little bit softer. And so that's why you see our range a little bit tighter. Frank, from your side on the gross margin question?

Ittai, as far as you asked about China and gross margin. So when we talked about going into Q1, we had certain transactions in China that were affecting the margins for Q1. Those transactions actually end up splitting between shipping in the Q1, as well as Q2, so there's a little bit more of a balance, rather than as much of the full amount impacting us in the first quarter. That was factored into what we announced as far as Q1 and also factored into the guidance I gave for Q2. As far as going forward, I mean, we always are going to be looking at being competitive in China, and making sure that we see that as one of our areas of growth and we'll continue to watch go through that. The transactions that we've been talking about are more on the routing side, as John alluded to in the earlier question from the standpoint of even putting much more focus as we look at our routing portfolio, and dealing with some of the more balance of the business around the world, knowing that in China and other parts of the world, we have a different margin profile, from routing standpoint. But how we balance that and get some are efforts underway, to help improve the cost structure, similarly to what we've experienced over this past year on the switching site.

And also Frank, as we saw on switching, again off of that, as with the ASR 9000 and the 5000, as you begin to get more volume, it begins to get improvements in margins as well. So Colette]s leading our effort here, and I think we've got Gary pretty consistent focus on it, although still lots of rooms for improvement. Would you make any comments there? Ittai Kidron - Oppenheimer & Co. Inc., Research Division: And the facts are, I mean, value engineering has helped somewhat here but remember, the payback is really longer term. So we have a lot of things that we continue to do there from an investment point of view. But I think you guys covered it actually pretty detailed.

The next question comes from Rod Hall with JPMorgan. Rod B. Hall - JP Morgan Chase & Co, Research Division: I just wanted to clarify one thing you said and then I've got a question on the deferred revenues. So my deferred revenue question is just -- whether you can give us any color on what's driving that increase in deferred revenues. Is it just China or are there other products that are driving that? And I wondered, you made a comment about the Thailand's, impacting you're adjusting for that. Can you guys give us any idea what exactly is exposed in Thailand? Or just any more color you can give us on what the exposure looks like there?

Sure. I think as all of our peers were evaluating this, and it's a moving target on that, our exposure is in the disk drives for our set-top boxes and in some of the optical work. We've sized that for this quarter, built it into our forecast and for others. Unfortunately, Rod, I think it's going to be more than a one quarter phenomenon for that. As you look at Japan, you have to go down through each tier, the effect on that and the balance within it. And so as you would expect from the minute the flooding started, we've had our crisis center in action just like we did for the Japan earthquake, 24 hours a day, 7 days a week. Frank, in terms of the issue on deferred revenue?

Revenue. So Rod, the deferred revenue, as you know was up on a year-to-year basis, 16% in total. Product was up 14% and services was up 16%. On the services, a majority of that was related to multiyear transactions that we have. We normally see multi-year transactions at the end of our Q4 and the end of our Q2. Good news is, we had quite a few, Gary, in the first quarter, which is unusual that we've seen very strong. So that added to the deferred on the services side. And on the product side, a combination of -- we continue to see a good progress from certain transactions that become as a service. And as a service transactions are more annuity product transactions, that get amortized over a period of time so that was up in the quarter. And then the other thing is, as we look at larger transactions, larger transactions sometimes have acceptance criteria, and with the acceptance criteria, of course, that ends up having to be deferred. So we had a larger amount of those large transactions in the quarter, which drove the overall growth. I think that's a good indicator of having a good quarter from a revenue standpoint and then, also seeing a large amount of deferred, just bodes well for the future.

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

If we take your improved product order growth and your linearity, is there something we should extrapolate going forward? Or underneath the data, is there a little bit of catch-up from previously weak protocols, implying some temporary impact? Just wondering how you feel about the dynamic. It does sound perhaps, you're now at a revenue base, which you can build upon.

Yes. The answer to the very last part of revenue base in which we can build upon. When you look for book-to-bill of 1, and normally, our experience has been revenues grow about 1% less than our booking growth does, because last year's Q1, product revenue grew at 21% and product orders grew at 10%. You had that 10 to 11-point delta talked about before, which calls the skew of a 3% product revenue growth for this quarter and a 13% product order growth. So it is almost mathematically right on the number. And you're right as you move into Q2 and Q3 and Q4, you've got much more of a normal correlation on it. And you've got your backlog and inventory where you want it to be, as you go into these in terms of momentum and predictability, Mark.

Our next question comes from Ehud Gelblum with Morgan Stanley.

So a couple of things. First of all, the turnaround in Japan is amazing. I must admit, I probably did focus more in Europe and the U.S. than in Japan lately, so I may have missed if there was a big turnaround from a country perspective, aside from your business. But if you can talk a little bit about what maybe has happened in Japan, when it started turning around, and it is something we should be tracking going forward, we use to break it out now, you stop breaking it out, I guess a year, 2 years ago, when it stopped being something good to talk about, and then it was continually bad. So I just want to understand a little bit more about that, what's going on there? And then on the gross margin side, we were supposed to see, obviously, lower gross margin from those routing deals in China. You've talked a little bit about it, but can you quantify, it sounds like they're spread some this quarter and some next quarter, can you quantify a little bit as to how much those China routing deals did impact gross margin this quarter? Was it the 30 basis points we saw or was it maybe like 60, 70 and you need some offsetting measures in cost reductions and improvements that may have gone the other way to bring us back to the smaller gross margin delta that we're all looking for, and just flow to the next quarter will be awesome.

Okay. So on Japan, we're not making any comment about the economic environment over there, nor a signal that in our opinion, is getting better or worse. I think Japan is just an example where our leadership team has executed extremely well, and we've got our very tight relationships with our customers, especially, the service provider in large enterprise customers very, very tight. Edzard Overbeek went to manage Japan, he came from Europe, he learned the language, he invested in the country, he built a great leadership team, Arizon [ph] came up from the team, and he's got a very strong team as well. They handled the terrible crisis of the Japanese earthquake, both in how we treated our employees and customers extremely well. Customers remember how you treat them through that. And then they built their relationship with service providers not selling them routers and switches, but saying, "How do we achieve your business goals in Japan and outside of Japan, with players like NTT, et cetera on that?" And it really speaks to moving where your customers are buying, and moving what you're selling, not routers and switches, if you will, but moving how you combine video consumerization of IT, social networking, collaboration, data center virtualization and how that accomplishes their goals in service providers to hit their key revenue generation spots. Revenue generation, as you know, from our service provider today, they're almost identical around the world. First is its mobility, the second area that they're really focused on is video, first, entertainment video and boy, that's why we did not leave that set-top box. I think for anybody that thought we'd leave the set-top boxes, they just didn't understand service providers. They are looking at how you do this from the cloud, how you charge from…

Ehud, on the China transactions, as I alluded to earlier, so we factored them into the guidance for the full amount of the transaction, the 2 transactions in Q1. We did have some of them ship in Q1. More of it is going to be shipped in Q2. If I look at the balance, there's more in Q2 than in Q1, there was an impact, a negative impact to the margin in Q1 for that, which did ship. And to answer your question, we did make up for that delta with some of the other cost improvements that I mentioned earlier, as far as some of the value engineering and more specifically, as it relates to some of the switching-margin improvement that we saw in the quarter. In the second quarter again, factoring in how much is expected right now to ship in the second quarter, as far as the negative impact on margin, and then also, balancing some of the other cost benefits that we started to see in Q1 and some of that continuing to Q2.

Our next question comes from Brian Modoff with Deutsche Bank.

Question. What are your thoughts on enterprise and carrier IT spending environment in the first half and the second half of calendar year '12? I know it's a little early, but what are your top-tier customers telling you in terms of budget, product, used case priorities?

Yes. It's one that I ask in every single meeting. With many of our large companies, their budgets going to be up a little bit more than I anticipate. I was thinking it's going to be flat to down. With the average enterprise customer, when I do the polling, it's going to be probably flat to slightly down. Commercial, their business is good and they see their payback, they're going to spend within it. Service providers will probably spend a ratio, maybe of 2x to 3x what they are going to spend in terms of their actual own revenue growth type of opportunities. And I think most CEOs are going to do exactly what we're going to do here, like Gary and I and Frank will do, which is we'll start with a conservative budget, and then we'll see how the year develops in terms of the balance. So therefore, if we're going to grow to the indirect part of your question, Brian, this is where you've got to move in to really meeting their business needs. For those that really talk about cost control, we're able to go in and say, "Here's what you can do on cost of ownership, and a data center built by Cisco with UCS and the Nexus to partner with EMC and our VCE correlation there. You can really take cost of ownership as they do these consolidations, down by as much as 50%, 60%, 70%. You can combine networks and architectures for those customers that are in the productivity. We can talk about how collaboration really enables productivity and completely change the business models. For video, you can talk about where you're going in terms of that approach, and maybe a good example of that to kind of bring it to life for…

Our next question comes from Simon Leopold with Morgan Keegan. Simon M. Leopold - Morgan Keegan & Company, Inc., Research Division: I was hoping we could drill down a little bit on routers and service provider. I think this quarter, this is probably the biggest router sales we've seen since 2001. And given what your closest competitors have reported, it sounds like that market's weak for them, not for you. And everything we've been hearing about service provider, whether it's the markets in North America or Europe, they don't sound all that impressive, yet you put up a great number. So I'm trying to figure out a little bit about how much of this is lumpiness? How much is regional exposure? Couldn't you help us understand both the October quarter, as well as your thoughts of what's happening over let's say the next 1 or 2 quarters in routing?

Sure. I think starting with your basic assumption that service providers will spend money if you can help them do any of the 4 goals that I mentioned. And the fifth goal was to cut their operating costs. We're in a sweet spot to be able to do all 5 of those with service providers. So the conversation in most of the service providers, it doesn't matter if it's NTT or KT or Telstra or AT&T or Verizon or Deutsche Telekom, it isn't about an RFP on the router capability, it is about how do you help them achieve their goals, in terms of new revenues, in terms of better productivity, in terms of entertainment, in terms of achieving the mobility. How do you help them charge for the over-the-top type of capabilities? How do you help them cut their support costs down? We're in those discussions across-the-board with most all of the players. And there are only 2 real players that can bring entertainment video in a major way to us, and we got very lucky that Motorola got purchased by Google. So all of a sudden, you have major service providers saying, "Cisco, we see you now even more important in terms of the partnership and the direction on it." The third element is candidly, we're just beating our competition. We are more aggressive on the competition, we are going to be tough on our competitors, whether they are Juniper or HP and Huawei and Avaya, and it's something that I think, we were a little bit to general on in the past. We are seeing some pretty aggressive measures, including companies offering networks for free to our customers, and we're handling that pretty well as Gary and Frank alluded to, in terms of the commonality of the…

Yes, I think, first off, Surya and his team are running routing. He's got an intensity to win, too , and he knows how to build great products, and he's got a fabulous team. And they partner extremely well with the services team. And I think some of our people, really are starting to see the value of services listing to their customers about how do we -- it's not about the technology, it's about how do I get that business result? And the services that we've built, not just the ones around smart services, where there's a lot of automation, but the services we built, to include the work that we've done to enable our partners in and a lot of our accounts, it's really getting close to the customer and helping them implement the technology to solve their business problems. And doing that broader set of consulting. So we do that better in service provider than anywhere else, because our service provider customers push us to that. So we've built a heck of a team under Sameer Padhye in the services organization, and they execute extremely well.

Also, the growth numbers, as you alluded to, in the service provider environment are very strong, both with the CRES in terms of the high end. As we talked about it, growth was literally, I think in revenues were over 30%, but we saw very good progress and we're starting to get our portfolio place going after long palette situations on the mobile edge with the ASR 5000 and on a fixed edge with the ASR 9000. They grew respectively in terms of bookings at 17% and 75% level. Our challenge in enterprise routing at the low end, where low-end routing is actually folding into many other different ways of accomplishing the same goal. I think this is one of the challenges we have. We have a good team on it, Gary and we're talking about how we put more functionality in. That when you look for the growth, the actual growth and service provider is dramatically higher than the number we used, it's being pulled down by enterprise access routing, and that's more not of a product-to-product comparison, more of an architecture decision, that I think we need to focus on a little bit more.

Our next question comes from Shaw Wu with Sterne Agee. Shaw Wu - Sterne Agee & Leach Inc., Research Division: First, great quarter, guys. I just wanted to just a little bit deeper dive in terms of your switching business. You talked about how some of the refreshes there helped out, in terms of the Cat 2000, 3000 and the Nexus. What about the Cat 6500, where you have a new strategy there with line cards as supposed to full systems. Any color there could help.

Sure. If you look, the Cat 6500, as we said before, has literally, great gross margins. And it has been probably, the best utility product we've had, maybe ever at Cisco in terms of its staying power. And with the new line cards, what we did with our customers very effectively is, we said, "You can take what you have and just upgrade to additional functionality and capacity." So we gave our customers that capability and flexibility where they didn't have to move to the next generation of switches if they didn't want to, or they can move them to different places in the networks in terms of direction. In terms of what we're seeing with that, it is very solid, I'm looking at the numbers right now in terms of gross margins, good improvements in each category that the Cats 2000 and 3000 were already there. I still -- we still have a way to go with the 7000 in terms of margins, although I mentioned, it was a good improvement capability. And the Cat 6000, I think it speaks to an architectural advantage. That probably took some wind out of some of our competitors' sales. The other issue that you all know, as we made it really hard on a good but a new startup that we intend to beat, in low latency, and we've got very competitive product leadership back and taking those accounts back. So you're seeing us very focused, even on companies that might only be generating $20 million a quarter, we're going to have product leadership in switching across-the-board. We are going to lead in the switching market. We're going to be tough there.

Our next question comes from Jeff Kvaal with Barclays Capital.

I was wondering, gentlemen, if you wouldn't mind telling us -- talking a little bit through the pricing dynamic. I think a lot of us have gotten some indication that pricing is tough in these markets. You have a bit of extra gross margin to play with. And are there areas where you feel like you are able to be a little bit more aggressive than you've been in the past? I think particularly, we have some emphasis on the campus or the Catalyst which is we market. Where a lot of the conversations seems to be tougher perhaps, on the higher end stuff.

Okay. So in several categories, first, as you already know, I don't believe in giving anything away, and we don't lead with price. We lead with the value, we lead with architectures, we lead with the capabilities. So the first way we address the pricing pressure is if you're able to help a customer dramatically reduce their cost, focus on collaboration, which is the biggest productivity tool in the CEOs of large financial institutions, as an example know that, you're finding financial institutions just standardized on us. And when you look at us in terms of our collaboration capability, guess what, it's all switching through and routing for in a big way. You begin to put video on top of that, and every one of our major routers and switches now is capable of Medianet, and as customers think about how does video play out, they see where that occurs. Then we move straight past talking about selling switches or routers in this "competitive situation," we talk about how we can help achieve your productivity goals or how we can help in terms of achieve your education goals, or your new revenue generation goals. And if you can save a point off of productivity, or if you can take their savings by several hundred million dollars down, they're not going to argue about a couple of extra points. That's also a way we've learned to do a very good job, depending on our competitors that just good enough is not just good enough, it just doesn't hunt. And the ability to forward this in, in terms of where the architecture is going, and we're going after HP, very aggressive on that, and we've learned how to compete with that, I think and in a very effective way. We have to…

The next question comes from John Slack with Citigroup.

My question is regarding the guide is, it's now off of a solid quarter. It's actually flat to down slightly sequentially. Usually, you see acceleration as you move throughout the fiscal year. I mean, how should we think about kind of, is it conservatism as we look into Q2? And then how should we think a little further out about how -- kind of the sequential progression of the year goes?

Well if you think, and then you about our guiding, when we just said at the financial conference our long-term goal of 5% to 7%, to be forecasted in 7% to 8% year-over-year growth, with the economic challenges we see with Europe, with public sectors spending down India, that's pretty aggressive, giving guidance. And I think if you would look in terms of sequence-wise, if we continue to get the numbers, then we're talking about year-over-year, it does play out very much in terms of the quarter-by-quarter scenario you talked about. I'd be careful about going that out too far in Q3 and Q4 in terms of the direction. But if you watch the numbers, 7% to 8% in Q2, we continue to do well as we look out in the future, then I think you will see the normal sequential numbers for those single digit type of growth numbers. And I'm not forecasting what we're going to do the second half of the year, I'm clearly talking about trend. Nice way of saying, John, I think that this forecast is pretty aggressive and we are looking at book-to-bill kind of in the 1 range if we do it right.

John, I just, as I said before in the prepared comments, we're taking this one quarter at a time. We're pleased with the performance in Q1, of course, good guidance for Q2. But with the backdrop of the macro environment, especially for the back half of the year, it's challenging at this point to kind of get too aggressive as far as expectations from that standpoint.

Our next question comes from Jayson Noland with Robert Baird. Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division: I wanted to follow up on the competitive question and ask about Huawei, John, specifically. They launched the formal channel program in the U.S. enterprise recently, and we would expect this to be an uphill battle for them, but we've been surprised how many resellers said that they would at least consider Huawei, or take a meeting with them. What kind of progress do you expect Huawei to show here in enterprise over the next year or 2?

We're going to make it hard on them in the U.S. and we're going to be very tough. We do have as you know, the #1 relationship with our channels. We're usually the most profitable or very high profits in each of our channel partners. We are a channel-driven company "period" in terms of our direction. And we've learned to, with our partners, be able to articulate the advantages in terms of the importance of intellectual property, the importance of integrity in terms of how we do deals and the partnership that we've had for many years. When you see the growth numbers in the enterprise and the commercial, like you saw this last quarter and the quarter before, it means we're doing extremely well here. But repeating the same thing. They're going to be a tough competitor. We're just going to try to make it as tough as we can on them, and we plan to beat them. But they'll be around 4 or 5 years from now.

Next question comes from Brian Marshall with ISI Group.

I had a question on security. If you look at it last year, I think we've done about 9% from a fiscal perspective. Can you talk a little bit about what kind of progress or success you had with the new SecureX architecture? And specifically, do you think this is going to be geared more towards maintaining or protecting? I should say, the margins in the switching and routing side? Or is this going to be looking at a little bit more stand-alone security product lines going forward?

Sure. Brian, if we do our job right, it will help protect our traditional margins, but in a different way than you said, and I would never think of it as standalone. If it's standalone, we don't bring our competitive advantages. What I've asked the team to do is to put security into every ASICS, every product, every software capability, to bring that together in a way that no one else can. Because we have the nodes across the network, the background of the Internet, the capability to do this and the trust by many groups, and we get to see what is occurring. Security to me should be the best architectural play that we can differentiate ourselves on. SecureX is a good step, but it's got a long way to go. The security numbers this quarter weren't bad. They were up a little bit and you probably saw it in one of your slides in terms of the improvement. But I think we have a long ways to go here. Chris Young, our new addition to leading this, is world-class in security and we were very fortunate to get him, and our partner was kind enough to let us get him in terms of that, and I think you will see he will put his mark on this organization very quickly, and at a different level of intensity. So very important, not standalone. When you provide the best security and you can provide the best video strategy with a video capabilities already built into your product such as Medianet, and you can provide the best wireless strategy, and you can tie that to the cloud and the best architectures in the virtual data center, and you combine that with being able to bring these to any devices in your customer's networks, and then you say, "Here's how this architecture solves the business problem. And by the way, you're betting your future on this, it better be secure."We have huge advantages, we'll begin to do that. But we've got to get much more of an integrated product. Our products are still architecturally headed the right way, but still a 2-piece meal in terms of its delivery today. And I'm counting on Chris in a big way to take that next step.

The next question comes from Brian White with Ticonderoga.

John, could you talk a little bit about, maybe what you're seeing in the financial vertical? And how that differs, if you take a look at the U.S., Europe and also over in Asia?

Got you. So this will be the last question, Mel has informed me. I get to be the CEO sometimes, but not on time. The financial vertical is one that you're very much aware of, is under tremendous regulatory pressure and candidly, profit pressure. In terms of the balance around the world, it is one that does move up and down pretty dramatically. What we saw this last quarter in our large financials, especially here in the U.S. was actually a very good quarter. We think this next quarter is going to be a little bit tougher on it, because of the capital spend issues that you're probably very much aware of, Brian. In terms of what we're trying to do, and I won't refer to the name of the company, but a very, very large financial institution in the U.S., we're aligning at the hip in terms of how we do collaboration together and how we change their relationship with both their financial advisors to their customers, the relationships in the branch, how they get the productivity on collaboration, et cetera. And so what you're going to see us, is try to talk about share wallet spend, and align with their business goals in terms of how they create new revenues, how they make up for lost profits, because of regulatory issues, et cetera, within it. The financial institutions over in Asia are obviously stronger in terms of the purchasing capability. And in Europe, it's tight as you would expect. But you begin to get into the Middle East, and you begin to get into Russia and Africa, it's a good vertical for us. And often, very much a leading edge indicator. We're probably doing a better job of getting closer to our financial institutions over the last year,…

Okay, thanks, John, and Frank and Gary. Cisco's next quarterly conference call which, will reflect our second quarter fiscal 2012 results, will be on Wednesday, February 8, 2012 at 1:30 Pacific time, 4:30 Eastern time. Additionally, downloadable Q1 FY '12 financial statements will be available following the call, including revenue by geography and product categories. Income statements, full GAAP to non-GAAP reconciliation information, balance sheets 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. Again, I would 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's done through an explicit public disclosure. Please call the Investor Relations department with any follow-up questions for this call. Thank you for your participation and continued support. This concludes our call.

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