Melissa Selcher - Vice President, Corporate Communication and Investor Relations John Chambers - Chairman and Chief Executive Officer Kelly Kramer - Executive Vice President and Chief Financial Officer Rob Lloyd - President, Development and Sales Gary Moore - President and Chief Operating Officer

Amitabh Passi - UBS Brian Modoff - Deutsche Bank Simona Jankowski - Goldman Sachs James Faucette - Morgan Stanley Rod Hall - JPMorgan Mark Sue - RBC Capital Markets Itai Kidron - Oppenheimer Tal Liani - Bank of America Merrill Lynch Benjamin Reitzes - Barclays Capital Simon Leopold - Raymond James Paul Silverstein - Cowen & Company

Welcome to Cisco Systems’ Second Quarter and Fiscal Year 2015 Financial Results Conference Call. At the request of Cisco Systems, today’s call is being recorded. If you have any objections, you may disconnect. Now, I would like to introduce Melissa Selcher, Vice President of Corporate Communication and Investor Relations. Ma’am, you may begin.

Thank you. Good afternoon, everyone and welcome to our 100th quarterly conference call. This is Melissa Selcher, and I am joined by John Chambers, our Chairman and Chief Executive Officer; Kelly Kramer, Executive Vice President and Chief Financial Officer; Rob Lloyd, President of Development and Sales; and Gary Moore, President and Chief Operating Officer. I would like to remind you that we have a corresponding webcast with slides, including supplemental information that will be available on our website in the Investor Relations section following the call. Income statements full GAAP to non-GAAP reconciliation information, balance sheets, cash flow statements and other financial information can also be found on the Investor Relations website. Click on the Financial Reporting section of the website to access these documents. Throughout this conference call, we will be making references to both GAAP and non-GAAP financial results. The matters we will be discussing today include forward-looking statements and as such are subject to the risks and uncertainties that we discuss in detail in our documents filed with SEC, specifically the most recent reports on Form 10-K and 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. All comparisons through this call will be on a year-over-year basis unless stated otherwise. As we have said in the past, we will discuss product results in terms of revenue and geographic and customer segment results in terms of product orders unless specifically stated otherwise. I will now turn it over to John for his commentary on the quarter.

Mel, thank you very much. Our Q2 results reflect continued progress as we transformed Cisco to become the number one IT company. In the quarter, we grew revenue to $11.9 billion, up 7% and grew non-GAAP earnings per share to $0.53, up 13% year-over-year. We generated $2.9 billion in operating cash flow this quarter and returned $2.2 billion to our shareholders through share repurchases and dividends. We delivered the strong performance despite a volatile economic environment. Our strong momentum is the direct result of how well we have managed our company transformation over the last 3 plus years and our leadership position in the key technology transitions, such as cloud, mobility, big data, security, collaboration and the Internet of Everything. The four takeaways I have from this quarter are the following. First, we are executing well and growing at a healthy pace in a tough environment. Second, we saw very good balanced growth, the best balance in 12 quarters across the majority of our key geographies, product categories and customer segments. Third, our financials are very strong and we continue to deliver value for our shareholders with strong earnings, cash generation and capital return, including another $0.02 dividend increase to $0.21 per quarter. And fourth, every country, every city, every business, every home and every car is becoming digital. In our view, Cisco is better positioned than any other company to help our customers reinvent their business and technology strategies as they become digital organizations. Today, every company and every industry is a technology digital company, something people would not have said a year ago. Over the last month, I have met individually with over 100 business and government leaders. Without exception, these leaders recognized the role technology plays in their future, not just how it creates opportunity, but also with customers around the world both business and governments are aligning with strategic partners in order to be more successful in the digital transition. They are increasingly choosing Cisco as their strategic partner and you are seeing the evidence in our financial performance. Let’s start with a basic question, like why Cisco? With the network at the center, Cisco has the portfolio and ability to bring our customer solutions to drive down cost, help secure their businesses and increase the speed and agility, so they can innovate across their own organizations. In our view, our track record of disrupting markets by leveraging the power of the Internet is unmatched. Our strategy has always been based on understanding the direction of major market transitions, transforming ourselves to meet the needs of our customers and demonstrating the courage to disrupt not just the markets but even our self. The market is moving fast and change is exponential. We are in the strong position today we are today because we made dramatic moves in how we are innovating, how we are interfacing with our most important customers and how we are organized to ensure Cisco is leading where the market is going. Most companies resist changing until it’s too late and their market credibility is eroded, the classic innovators dilemma. It was our choice to move early and boldly with incredible speed to realign 40% of our employees to priority areas. To be organized from product groups and to integrated solution teams, to replace more than 30% of our leaders. We are seeing the results and our relevancy with our customers and our operational excellence and that is driving our financial performance. Since fiscal year ‘11 we have added $4.9 billion in revenue with about $300 million in incremental non-GAAP OpEx. Said another way, for every dollar of revenue we have added over this transitional period, we have only added about $0.06 of non-GAAP OpEx, I think you will find this as best in class by a factor of 5 to 10 fold. In the 90s we were the best example of a company capitalized on the Internet. And that gave us tremendous credibility with customers and fueled our growth. Today, as every company becomes to digital, every CEO knows he or she needs to evolve their organization to move with speed, agility and efficiency. The Internet of Everything will demand of them. Our strategy is to be the model in how we have reorganized and the customers we are driving as a result. And we have done the heavy lifting with our peers and customers are just starting. As a result I am now spending a significant amount of time with our customers’ executive teams and in their board rooms discussing how they organize for digitization, innovation, security and the Internet of Everything. We could not be better positioned in the market. We have worked very hard to get here your and the opportunity feels very much like it did in the 90s when the Internet became mission-critical to our customers. We have said for were several years that we believe the impact of the Internet of Everything will be 5 to 10 times greater than that of the Internet today. At CES and the World Economic Forum almost every leader we saw agreed. We have been building this opportunity. We have the innovation, operational excellence, speed, agility and efficiencies in our business to drive the greatest possible benefit for our customers, our partners and our shareholders. On to guidance, as we said for the last 2 quarters, we are pleased that in spite of the headwinds, we are growing well again. We are well positioned for a positive turn in either service provider or emerging markets. But we are not modeling those turns for several quarters despite the better results we saw in this last quarter for reasons you all are very much aware of. For Q3, we expect to see revenue growth in the range of 3% to 5% and non-GAAP earnings per share in the range of $0.51 to $0.53. Let me now provide some additional detail on the business momentum we see in our geographies, customer segments, products and services business within portfolio. In terms of business momentum as a reminder the geographies are primarily the way we run our business. For geographies and customer segments, I will speak in terms of product orders year-over-year unless otherwise noted. We finished the quarter with product orders up 5% and product book to bill greater than one. Let’s move first to the Americas, the U.S. continue to accelerate growing 7% compared with Q1 3% growth. Latin America returned to double-digit growth at 12% versus Q1 of 5% and negative growth in fiscal year ’14. Strength in the U.S. public sector continued growing 17% with U.S. federal growing 23% and U.S. state and local growing at 8%. Moving on to our Europe, Middle East and Africa operations, as we said on last quarter’s conference call, we were more optimistic about Europe than most of our peers. And we saw that business play out as we called with growth in EMEA up 7% year-over-year. We saw phenomenal execution in the UK, up 17%, Germany up 12%, and something no one else in the industry is coming even close to Southern Europe actually grew 20% year-over-year speaking to the relevancy that we provide to companies and governments. Over the last 6 quarters, our growth year-over-year in EMEA has gone from minus 4% to minus 2% to minus 1% to 2% to 6% in Q1 and now 7% in Q2. And we remain cautiously optimistic. In Asia-Pacific, Japan and China, and China in particular we continue to see challenges that all of you are aware of. And we saw our China business decline by 19%. However, we saw India grow by 11%. The rest of APJC not including China was down 1% this quarter. And finally emerging markets, emerging markets total grew 1% with emerging markets excluding BRICS plus Mexico, up 8%, a major change from last quarter. We continue to see the BRICS plus Mexico challenged, down 6% in total with Russia down 16%, Brazil down 8%, China as I said earlier, down 19%. We did see growth in Mexico up 21%, India up 11%. While we are pleased with these results, we believe it is still way too early to call a turn in emerging markets and are modeling for them to be challenging for several more quarters. Customer segments, total global commercial grew a healthy 8%. Our success in the U.S. commercial continues to be very strong, up 12% in Q2. We have built a model based on success in the U.S. commercial and best practices from around the world and have implemented the model outside the U.S. DNR orders go from down 5% in fiscal year ‘14, to up 4% year-to-date. In total Cisco business terms that improved performance added a full point to our company’s growth rates. Our new operating remodel and global service provider is also showing some traction. This quarter our service provider business was down 1% after having been down on average 10% or more for the last 5 quarters. Like many in the industry we are modeling total global service provider CapEx down in the mid-single digits for calendar year 2015. We are focused on growing share of wallet. We believe we are very well-positioned in terms of our portfolio and how we have aligned with our service provider customers, but we expect the next several quarters to continue to be challenging and service provider along with emerging markets remain our two challenged areas. Total global enterprise grew 10% versus 2% in Q1. We did see U.S. enterprise grow a bit slower than expected at 3% growth due in part to the timings in very large deals. The enterprise pipeline continues to see rapid growth in very large multiyear deals, which would benefit Cisco over several years. Our global enterprise U.S. customers which are the largest 28 enterprise accounts not included in regular U.S. enterprise discussion grew about 30% year-over-year. Global public sector continue to be solid at 7% growth year-over-year. I will now move on to discussion of our products and services business, which I will discuss in terms of revenue year-over-year unless otherwise stated. Starting with switching, we saw very strong switching growth of 11% with strong performance in both the data center switching and our campus switching business. We were especially pleased with the continued momentum of our Nexus ACI portfolio including the Nexus 3K and nexus 9K, and the APIC controller. As an example the nexus 3K plus 9K grew 350% year-over-year. We have seen the nexus 9K and ACI customers grow each quarter from 580 customers two quarters ago to 970 customers last quarter to1,700 this quarter. APIC customers grew to over 300 and the Nexus 9K passed 1 million installed port mark this quarter, less than one year after the first shipments. We are pulling away from our competitors and leading in both the SDN thought leadership and customer implementations. The market has recognized the benefit of ACI as compared to PowerPoint concepts of aspirational competitors. ACI and APIC will become the cornerstone of the next generation of networking architectures for many years, much like the UCS has become in the data center. I am particularly pleased that we have kept gross margins extremely stable in switching and have actually grown gross margins in many of our product switching areas, which were already very strong in new areas, such as the ACI portfolio. Moving on to data center, which grew an impressive 40%. UCS has now reached over $3 billion revenue run-rate with over 41,000 customers. More than 85% of the Fortune 500 have chosen UCS, because of the innovative architecture with particular traction in cloud, big data and enterprise application solutions. The innovation underlying UCS, the convergence of compute network and storage is continuing to fuel our growth in the data center and differentiates Cisco. Now, we are converging networking, applications, security, with scale for our ACI platform. And we are doing it with the speed and the scale that no one else is coming close to it. Next to NGN routing, which grew 2% year-over-year in terms of revenue. We saw strong performance in high-end routing, up 5% with continued strong performance in our new product introductions such as the CRS-X and NCS. With the global macro changes and headwinds like net neutrality and industry consolidation, we expect this business to be challenged going forward, but we believe we are taking market share and will continue to take market share. Wireless had another strong quarter, up 18% year-over-year compared with Q1, which was up 11%. We saw strong growth in our traditional business, but in Meraki, cloud networking business continues its stellar growth, up another 100% with an annualized run-rate of approximately $400 million. Security grew 6% with orders growing even faster. We saw very strong adoption of our Cisco ASA with firepower services, which integrates our Sourcefire software products together. Our acquisition strategy in our security business has been very successful as we integrate the various elements into our overall security architecture. We fight point players in some areas, but no other vendor can play at the level across the enterprise that our customers need. In this volatile environment with change happening faster than ever before, the importance of security has never been more significant. The level of danger has been raised from a firewall breach to the potential for enterprise destruction and having robust security solutions before, during and after attack is table stakes. In this environment, customers are migrating to partners they can trust who will lead with innovation and who will be around tomorrow. This trusted partnership is core to our success and drives everything we do. Cisco is the number one security player in terms of revenue and we are progressing nicely toward our goal becoming the number one security company in terms of mind share, which literally we announced a 1.5 year ago, an intention to do so. Moving on to collaboration, last quarter, we boldly stated our intention is to lead in the next generation of collaboration and become the number one collaboration player. After a complete portfolio of refresh and four quarters of decline, we made very good progress this quarter with growth of 10%. Kelly, I think it was flat or negative last quarter if I remember. Within collaboration, the strongest growth came from our telepresence business, where we saw on the back of our new telepresence portfolio, a 60% growth in units and revenue growth at 35%. We continue to grow our recurring business in collaboration. Our deferred collaboration revenue was up 26% in the quarter to $1.1 billion, SP video declined 19%. We have announced key partnership wins to develop the next-generation end-to-end video solutions from the set-top box to the cloud. Service revenues grew 5%. We saw our portfolio in cloud, security, consultant, and analytics all grew in double-digits. This quarter we launched Cisco Connected Analytics Strategy to manage the exclusive growth of data at the edge of the networks. As the Internet of Everything evolves we forecast as much as 50% of the data will be handled and decisions will be made at the edge of the network. Given Cisco’s position in the network, Cisco is the only company positioned to manage and capture the insight from distributive data. This has the potential to be an important growth area for Cisco and even more importantly to drive the value of the Internet of Everything. Let me now provide an update on Cisco’s momentum in the cloud. Cisco’s cloud strategy is pervasive throughout our portfolio. We continue to lead in the hybrid cloud market and our InterCloud momentum continues. As you look at our cloud business, I would look at the following metrics to track our success. First, Cisco’s leadership in cloud infrastructure was once more reaffirmed with the release of the latest Synergy Group’s research report showing we have retained and strengthened our number one position for sales of hardware and software used to build cloud infrastructure. Second, we are growing our cloud services, including managed security, project squared and collaboration, EnergyWise and Meraki for enterprise. Cisco and Telstra are now both in production with open stack-based public cloud services. And third, our InterCloud ecosystem continues to grow and now exceeds over 50 partners more than 400 data centers across more than 50 countries, Rob just a great job by your team and your leadership. Customers are using InterCloud fabric and ACI to implement highly secure and on-premise hybrid cloud capabilities across heterogeneous environment. To summarize my comments, our customer conversations today are not about standalone products, they are about new revenue streams, growth and outcomes, about securing and about managing their businesses, about how they have to reorganize to drive the innovation their survival requires. We are executing across our business because we are bringing together our product leadership in every category into architectures and solutions that deliver real outcomes. I will now turn the call over the Kelly for her comments on the quarter and guidance for the next quarter. Kelly, welcome and great to have you leading the conference call.

Thanks John. Overall, we had a strong quarter and executed well. From a top line perspective, total revenue was $11.9 billion, growing 7%. We grew profits faster than revenue with non-GAAP net income of $2.7 billion, up 9% and non-GAAP EPS of $0.53, up 13%. Our GAAP net income was $2.4 billion and GAAP earnings per share on a fully diluted basis of $0.46. Product revenue increased 8% and service revenue increased 5% with product book to bill greater than one. Our non-GAAP operating margin was 28.4%. In our guidance last quarter we told you that we expected total non-GAAP gross margins to be in the range of 61% to 62%. For Q2, our total non-GAAP gross margins and non-GAAP product gross margins came in at 61.7% and 60.8% reflecting the mix of our business and especially the strength of UCS. Non-GAAP service gross margin was 64.8%. Our non-GAAP operating expenses were $4.0 billion or 33.3% as a percentage of revenue compared to 34.1% in Q1 of fiscal year ‘15. Non-GAAP operating expenses were down 5% quarter-over-quarter and up 6% year-over-year, reflecting investments in key growth areas such as security, cloud and software. Our GAAP net income and GAAP earnings per share for Q2 fiscal year ‘15 included a pretax gain of the $126 million or approximately $0.02 per share related to the reorganization of our investment VCE. This gain is excluded from our non-GAAP results. Now, moving on to our non-GAAP tax provision rate, which was 22% consistent with our expectations. In connection with the recently reinstated U.S. Federal R&D tax credit, we had a tax benefit of $91 million related to fiscal 2014 that we excluded from our non-GAAP net income. The extension of the R&D tax credit did not have a material impact on our non-GAAP tax rate during Q2 and is not expected to have a material impact on our non-GAAP tax rate for the remainder of fiscal ’15 since the benefit only extended through December 31, 2014. We ended the quarter with our headcount at 70,112, a decrease of 2,135 from Q1. As a reminder, we took restructuring actions to invest in growth, innovation and talent, while managing costs and driving efficiencies. We announced and completed one acquisition during the quarter, Neohapsis, a provider of network and security consulting services to enhance our offerings to our customers. Looking at our geographic segment results, in terms of total revenue on a year-over-year basis, our Americas segment was up 10%, EMEA was up 7%, and APJC was down 3%. Total gross margin for the Americas was 62.0%, EMEA was 61.8%, and APJC was 60.3%. From a balance sheet and cash flow perspective, total cash, cash equivalents and investments were $53.0 billion, including a $3.2 billion available in the U.S. at the end of the quarter. We generated operating cash flow of $2.9 billion during the quarter. Deferred revenue was $14 billion, up 6% year-over-year. Product deferred revenue grew 14%, largely driven by subscription-based offerings, while services deferred revenue grew 2%. We continue to build the greater mix of recurring revenue as reflected in our deferred revenue balance. Our DSO was strong at 35 days as compared to 36 days in Q2 fiscal year ‘14. In Q2, we returned $2.2 billion to shareholders that included $1.2 billion through share repurchases and $974 million through our quarterly dividends. In the first half of fiscal year ‘15, we have returned approximately $4.2 billion or 86% of our free cash flow to our shareholders comprised of $2.2 billion of share repurchases and nearly $2 billion of dividends. In addition, today, our Board approved an increase of $0.02 to the quarterly dividend to $0.21 per share, an approximate 11% increase representing a yield of approximately 3.1%. We remain firmly committed to our capital allocation strategy. Let me now provide a few comments on our guidance for the third quarter. Let me remind you again that our comments include forward-looking statements. You should review our recent SEC filings that identify important risk factors and understand that actual results could materially differ from those contained in the forward-looking statements and actual results could be above or below guidance. The guidance we are providing is on a non-GAAP basis with a reconciliation to GAAP. As John mentioned, we expect total revenue to be in the range of 3% to 5% on a year-over-year basis. For the third quarter, we anticipate non-GAAP gross margin to be in the range of 61% to 62%. And as we have said in the past, forecasting non-GAAP gross margin has always been challenging due to various factors such as volume, product mix, cost savings and pricing. As a reminder, non-GAAP gross margin may vary quarter-to-quarter by a point in either direction of our guidance range. Our non-GAAP operating margin in Q3 is expected to be in the range of 27.5% to 28.5%. Our non-GAAP tax provision rate is expected to be approximately 22% in the third quarter. Our Q3 ‘15 non-GAAP earnings per share is expected to range from $0.51 to $0.53. We anticipate our GAAP earnings to be lower than our non-GAAP EPS by $0.09 to $0.12 per share in Q3 ‘15. The range includes a pre-tax charge of up to $100 million in Q3 ‘15 as a result of the restructuring actions that we announced in the first quarter. During Q2, we recognized a pre-tax charge in our GAAP financial statements of $69 million related to that announcement and we expect total charges not to exceed $600 million during fiscal year ‘15. Please see the slides that accompany this webcast for more detail. Other than those quantified items noted previously, there are no other significant differences between GAAP and our non-GAAP. This guidance assumes no additional acquisitions, asset impairments, restructurings and tax or other events, which may or may not be significant. Our guidance does not assume a significant improvement in the emerging markets or the service provider segment in the near future. Although we believe we are executing well in a rapidly transforming market, with these types of uncertainties in mind, we will continue to provide our guidance with all the appropriate caveats one quarter at a time. We encourage our shareholders to have similar considerations. As a reminder, Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. I will now hand it back to John for his summary comments.

Thank you, Kelly. Our results this quarter which were the best results in three years in terms of balanced growth across all of our geographies, products, and segments reflects the increased relevancy of Cisco around the world. The Cisco brand is as strong as it’s ever been. Our vision has always been to change the way the people work, live, play and learn. And you have heard us say this for nearly 20 years digitization is the next and perhaps the most significant evolution of our vision. At CES, 15 years ago, we showed a network car Wi-Fi enabled and connected to a coffee shop, so you could order your own drinks and make changes to that. Fast forward to several years ago, we introduced the market to the Internet of Everything. While the concepts were thought leadership for many years, this year companies and countries are seeing the Internet of Everything as a business imperative and top priority. To take advantage of the Internet of Everything, every country, company, city, home and car has to be digital. The single most important investments are at the center of their digital business and technology strategy for our customers and at the center of that will be the intelligent network from the data center to the edge through the cloud, all brought together with an end to end security and Cisco is never ever been better positioned. In the 90s when companies need to get online on the Internet Cisco was the thought leader, the company with the product leadership and the best example of a company capitalizing on the all the transitions. Our customers wanted our help and to follow our example. Fast forward to today, the next generation of the Internet, the Internet of Everything should generate at least 5 to 10 times the value of the first generation of the Internet to-date. Again no one is better positioned than Cisco in terms of strategy, market position, product leadership, architectures and organization structure. I am not sure those outside Cisco appreciate the magnitude of the changes we have implemented over the last year largely because of our ability to continue to deliver to long-term value to our customers and to out shareholders despite the challenges in the market. Most companies wait to change until they have to. When it’s obvious and it’s often game over and those companies get left behind. In the last year, we were willing to disrupt our leadership position for example in switching and routing by introducing entirely new platforms. We knew, we'd see a short-term impact but told the market how we would grow. Once again, we did what we said we would do. This is just one of many examples and these are exactly the hard decisions our customers, employees, partners and shareholders have trusted us to make so we can lead in this market transitions. I want to congratulate and thank the Cisco team for believing in the vision and executing one of the most successful company transformations the industry has witnessed. Very few companies could do what we have done with the speed and the results we have driven and the opportunity we created for ourselves is truly exciting and in many ways just getting started. Our transformational work will continue as we help our customers digitize everything, secure everything and organize their companies, their governments, their businesses for the Internet of Everything because of the agility we built into our organization and our ability to align directly with our customer’s goals, we are helping our customers with their business outcomes and let me very direct here. We're winning very large service provider, enterprise and public sector deals that we would not have won just as recently as one year ago. We do see our competitors struggling and no we are not immune from economic or other challenges in the market. While we believe we have positioned the company better than any of our peers, we do still see the same challenges we had discussed in the past few quarters specifically emerging markets and service providers as continuing to provide a negative drag for the next few quarters. What I believe the market now understands is that Cisco is managing effectively through a challenging macro leading through transitions, disrupting markets, increasing our relevancy with our customers and delivering value to our shareholders. Looking forward, we’ve laid an incredibly exciting foundation for future growth, innovation and leadership. Reinventing the network with application centric infrastructure, a platform at the very early stages of its future potential. Our leadership and security, the most important topic in IT today in many ways. Our emerging role in data and analytics at the edge and how we will bring all this together to enable the Internet of Everything. We have our stakes in the ground to capture tremendous opportunities in front of us and are well on our way to becoming the number one IT company. The momentum in the business feels extremely good and we are excited about the opportunities ahead. We will now move, Mel, to what I enjoy the most which is the Q&A section and it’s over to you Mel and I will try to keep my answers tight and I will do better this time.

Okay. Operator, can we please open for questions?

Thank you. And our first question comes from Amitabh Passi with UBS.

Hi, guys. I had maybe sort of two half questions. John, I guess the first one for you, services gross margin probably came in at the lowest level that we have seen in a few quarters. I was hoping you could maybe elaborate on what’s happening there? And then just secondarily, on your security business, I know you have sounded very bullish on security and the momentum. 6% seemed a little disappointing, would love to get some clarity there?

Got it. So, Amitabh, I like the way that you went. We probably had eight or nine areas that we are very close to the highest growth rate we have had in two areas and you are focusing me on the two challenges more than fair. So, let’s go to the issue of services gross margins. If you watch, we start with a big picture. Our revenue growth areas, what is our gross margins, our OpEx, Kelly and I have a lot of leverage we can pull within that. Within the gross margins, we have never been more comfortable. And actually I said that’s almost three or four quarters ago, Mel. I have never been more comfortable with any aspect of our business than our ability to maintain gross margins. It’s a mixed issue as you go through it. To the services question, we have had great services gross margins unequalled in the industry. Gary, our technical services, what you and Joe Pinto have done is amazing there. Our advanced services is an area that we are moving very aggressively in and that’s where you see all little bit of the pull down on the services model. And as you become outcome-based, as you refocus on these new growth areas being able to literally digitize a country, digitize a city, digitize a manufacturing company a healthcare company etcetera, you saw us invest an awful lot in vertical consultancy, you saw us invest in security in a big way with major expectations in terms of expertise centers, etcetera and in cloud. So, we are going to continue to make investments in these areas and I am very comfortable with our gross margin portfolio. I actually think our gross margins, has been the most predictable part of our total business, although we have a lot of various variables in that. On security, security will occasionally be bumpy. We reorganized our realization and realigned security across the whole globe with a separate sales force. As you make those changes, you occasionally lose a little bit of momentum before you pick it up. The order growth was actually at 9% for security. I expect security to grow very healthily as we move forward and you will continue to see us make a number of both resource investments in areas like services, sales investments to really lead in that and consultancy in a way that really brings this picture to light, but I think you are going to see good growth out of our security business. I think we are positioned extremely well and I kind of in a fun way challenge you. When an enterprise customer has 45 to 60 security players in the environment, how many they really have? And you look at a CEO in the eye and I get it done. We have got to consolidate this in the networks where it’s going to get consolidated. So, very comfortable in terms of our security growth over time, do not see any issues in terms of strategy, vision or margins here.

Great, thanks Amitabh. Operator, next question?

Thank you. Your next question comes from Brian Modoff from Deutsche Bank.

Hi, John, I would like to talk about Meraki. You had obviously good numbers $400 million annual run-rate. At Cisco Live, you announced that you were expanding it out to a broader range of customers. Can you talk a little bit about that and what that might do to the growth there and how this might affect your overall margin mix as you continue to say you are comfortable with where that’s headed?

Sure. So, Meraki overall, Kelly keep me honest here, very good margins. We are very comfortable with that. When you begin to look at a company that is now at $400 million run-rate and grow to the 100%, I mean, that’s harder than almost any startups in the industry with great gross margins. And what Rob is doing in leadership on cloud and what Nick is doing with our service providers and what we are seeing is a continued leverage of the Meraki type of vision for how we grow our resources and how we grow our relevance to our customers. Rob, would like to add some to that?

I would just add that we are expanding globally with recent additions of Meraki presence in EMEA as well as building out in Europe. They are not – there is no margin impact. It’s a very profitable business model and we did expand and announced the expansion of the Meraki portfolio at Cisco Live in Milan in January, which will see an expansion of the enterprise offer, including a really neat mobile device manager. So, profitable platform John growing very, very quickly to 100% and geographic expansion is part of that model.

Got it. It’s a nice way of saying. This is really hot, it’s going to Kelly, be one of our better acquisitions, but then you turn to Sourcefire which was the other big one we did in the last year and a half. It’s literally on fire too. Thanks, Mil.

Very good.

Yes, she is not so sure. Thanks, Brian.

Thanks, Brian. Operator, next question.

Thank you. Your next question comes from Simona Jankowski with Goldman Sachs.

Hi, thanks very much. So, you had obviously a good quarter and good guidance, but John, your tone seems even more bullish than kind of the numbers would suggest? And I mean, I couldn’t count how many times you said that you have never been better positioned. And I just wanted to see if you can just provide another layer of detail behind that. So, just let us understand better what’s behind that tone? I think you kind of referenced some large deals in the U.S. with enterprises, service providers, public sector and I noticed your deferred was up 6%, but the long-term deferred, even though short-term looks flat. So, are there large multi-year deals in there that are giving you that kind of a bullish outlook?

Simona, it literally is across the board. And we see this in every country, every segment of our business, even those that are challenged like emerging markets and service provider, we make huge inroads because of the momentum we have gained. Mel told me not to be too enthusiastic on the call. I went out and ran 4 miles this morning. I had my best time. And as the last year lifted weight successor and I am sorry, Mel, just full of energy, it is exciting what’s in front of us. And when you sit across from the customers, you could have been at with and I could take this to our shareholders. Anybody who walked out of with 21 of the sessions were about Cisco related areas from what you are going to do with infrastructure to digitizing countries, to cities, to how you bring this to bear and how does it affect the environment, we are right in the middle. And in so many different ways, we are not just in thought leadership no one can compete individual pinpoint products are going to get killed in this marketplace. And the different competitive models that you see evolving or different models we saw coming for 4 to 5 years, so yes, I feel really good and the only area that I would be critical was we got to do better in service provider video and we do have a portfolio like we have in customer segments and products, it feels good. But to your point, our relevance in major government bids and major enterprise bids, we are winning bids that we would not have come close to in a year ago. And it isn’t just we are running from the beginning, we have got an ability to adjust in engineering and sales and services to meet their needs as we are not – we are taking to competitors. It really feels good and it’s really fine. See you tomorrow by the way, Simona. Looking forward to be on stage with you. Go easy on your questions, tomorrow.

Alright. Thanks, Simona. Operator, next question.

Thank you. Our next question comes from James Faucette with Morgan Stanley.

Thanks very much. Hey, good afternoon. Just quick question, you said that you are expecting a turn in service provider and emerging markets not for at least several more quarters. Others have indicated that they thought we could see a rebound in service provider spending maybe in the next couple of quarters. Just wondering what’s making you a bit more cautious than that? And I guess trying to gauge your level of confidence that you can really see your service provider and emerging market businesses rebound, I guess exiting this year and going into 2016? Thanks.

So, let’s start with the overall premise. My premise on service providers is you are going to see negative growth in terms of CapEx for this year, with a lot of the experts saying it’s actually going to be uglier in the next six months than it will at the back half of the year. So, our assumption is any gain in service providers will be share wallet gain and market share gains. What makes me very, very bullish on this is on the things we can control if you watch what Nick Adamo, heads up sales, Kelly Ahuja that Nike have done services Kelly is engineering. We are now winning big service provider deals that we would not even have been in the game in a year or two ago. And our ability to do this at a different margin level, our agility on this and we are taking it to our competitors and you are seeing this across the board. I would have vastly preferred it. You can never do it exactly how you want, but having had five quarters of 10% or more negative service provider growth, I would rather go on from negative 10% to negative 5% or 6% to negative 1% then positive went up from there. We have got a couple of deals writing this quarter, which caused us to go from minus 10% to minus 1%. That’s more than I think anybody else anticipated in the marketplace, especially when you have areas like SP video, which drives you down by 2 to 3 points off of that. I just didn’t want the market getting ahead of us. My comfort level with seeing growth this by the end of the year and probably that is extremely good in this market, but I am modeling all wallet share gains and market share gains. I do not think service provider CapEx will be up this year. I hope I am wrong, in which case we will get more of our share there. So, I feel very, very good into positioning. Was there second question on this? Okay, thanks James.

Alright. Thanks, Simona. Operator, next question.

Thank you. Our next question comes from Rod Hall with JPMorgan.

Yes, hi guys. Thanks for taking my questions. I guess the first one I wanted to start with was switching the quarter-on-quarter….

Go ahead.

Sorry, can you guys hear me?

Yes.

Yes. So, the quarter-on-quarter trajectory is switching seasonally a little bit more than normal about down 6% quarter-on-quarter, if our math is right, in the average a little bit below 3% over the last 5 years. So, the last year there was some Osborne Effect ahead of 9K, just wondering if you guys could comment on color there I mean what might have driven that seasonality, did we some FX impact, just normal seasonality from your point of view, etcetera. And then also John I know you are lifting weights and running doing all the stuff, could you just give us an update on your tenure at Cisco, I mean it doesn’t’ sound like you are in the mood to retire, but could you just give us kind of an update on what your plan there is? Thanks.

The next time you hear Rod about any talk about the change will be when we announce that, that hasn’t changed overall. We have got an amazing team with several of the players around this table being examples now that and we will make this a non-issue as we make the transition. To the first part of the question, no I disagree with your basic premise. We don’t give booking by category, by seasonality. But if you watch our normal booking trends and if you watch where we have gone and let’s use total bookings as an example. From Q1 to Q2, it was up at the very high end of our seasonality bookings sequentially and the year-over-year numbers. So either way you want to measure it, we are in good shape on that. I do agree with several of you premises in terms of the 9K growth, it feels very, very good. Rod you got to know I completely disagree dramatically with your comment about our switching products commoditizing. They are going in the opposite way. This is one that I think you are going to see us get our competitors very aggressively. And even in merchant silicon like Nexus 3000, we are doing extremely well in terms of growth in gross margins. It’s an architectural play now. We saw this coming 4.5 years ago with switching you got to have security, you got to have collaboration, it’s got to integrate to processor capability, it’s got to tie the Internet of Everything. There has to be a architecture that brings us together, business results and I think are relevant in our value to the customers are exact opposite way. We have shown remarkable consistency in switching gross margins. And I feel very, very good about our future in that regard.

Thanks Rod. Operator, next question.

And your next question comes from Mark Sue with RBC Capital Markets.

Hi Mark.

How are you? The gross margin improvements and the cash returns was a major driver and your stocks outperformance last year, so I am trying to understand the opportunities ahead on top of the ongoing improvements you have made to-date. For example, I know that it’s a multi-year progress, but the progress in terms of becoming a software company maybe if can give us an update there and your go to market. And as it relates to your financials maybe thoughts on future cash flow, returns to investors considering free cash flow is now on parity with net income?

Got it. So I am going to let Kelly take the other part on thoughts about cash and where we are going Kelly and our overall and I don’t mind you even comment a little bit about the programs we have on gross margins through that. And on the first part giving out that question the first question Mr. Mark was.

Just what the strength in gross margins last year was…

Okay. So we have leverage in every single category. If you watch what we are doing whether it’s operating expenses, whether it’s the gross margins by products, products and switching, funding areas that don’t have as good a gross margin picture to gain momentum, etcetera. And there is leverage really everywhere. We are seeing no unusual competition in the market, no unusual competition with white label or white box, nor will we in the future. We saw that coming as I said a long time ago, wins on architectures and this whole call literally is about that. So I feel very good about our total gross margin mix. We will absolutely be aggressive when we want to move consulting, as an example to play a much larger role in business outcomes. And our ability to have multiple leverage that we can catch on I think feels very, very good. We are going to invest in some of the areas and we are going to do a large part of it literally what we said earlier. Moving 40% of our resources around in a year is almost unheard of and then literally unfortunately taking down 6,000 people in backup, 6,000 people with the different skill sets speaks to the agility we have in the market. Kelly your thoughts?

Yes, I mean to answer your question Mark on our cash as you can to tell our commitment to the capital allocation hasn’t changed as evidenced by giving back 86% of our free cash flow back as a dividend and the buyback and as well as increasing our dividend going forward. So that’s not changing. We are extremely focused on increasing our cash flow. And to John’s point focused on driving that through improvements in our margin both in gross margin and operating margin. So that focus will continue and we still have lots of flexibility with our balance sheet to continue the balance of giving back to our shareholders as well as having that flexibility strategically for M&A and other investments.

Gary, you and Kelly are working jointly on gross margins any additional thoughts?

Yes. I mean so Mark I think we have demonstrated our ability to manage the gross margins and pull the levers and the different things that we have those haven’t gone away. The investments we are making in value – design value engineering that gets – keep on giving. And we have double down our efforts so we will keep going. We are going through functional transformation. John pointed out $0.06 for every $1 of revenue over the last 3.5 years, 4 years. And I think we can continue to do that. So it’s about freeing up the assets to reinvest in the growth areas for the future and we are doing that spot on. And we are looking at this for the long-term.

And Mark and I was probably going to assume laps around here before I answer the question. But if you watch what changes architectures save our customers huge amount of operating expense. It allows them to get their business outcomes much quicker. And when you combine an architecture like data center with an architecture like InterCloud, with an architecture like collaboration, with an architecture like security, with architectures about big data edge of the network with mobility we can do that in a way that no one else can to get business outcomes. Customers will pay probably 3% to 5% - excuse me 3 to 5 times more per business outcome than they will for a standalone switch or standalone router. So as we make that transition this is where you re-see our relevance change. And this why when you talk about digitizing countries or digitizing cities we are all by ourselves and our ability to do it, it’s about how we bring all those together in the Internet of Everything and that has great gross margins. That’s where I think the market need to do a better job mill of explaining to the market why our gross margins and why we are so optimistic about our future if we do it right.

Great. Thanks Mark. Operator, next question.

And your next question comes from Itai Kidron from Oppenheimer.

Thanks and congrats guys on great execution on the quarter. Following up on this last point of gross margin John looking at the regional gross margin it seems like Europe was certainly standout we haven’t seen that gross margin that poor since I have to go all the way back 2011, was that just a function of FX meaning with the move and that is depressing in dollars you had to do a little bit more active discounting in order to get the volume that you need, how do we think about that?

Yes. A fair question, I think Europe is a great example. First of all, Europe was 7% growth which I don’t think anybody else is getting. You take Russia absence it would have been 9% growth. But you did see remarkable growth across many big countries where they are really being impacted by foreign exchange, etcetera. The way we look at foreign exchange we do business in dollars as most of you know on that. So we perhaps can’t draw the correlation as quickly as now this. But it does mean the deal size may not be as large where it does mean that there might be pressure on discounts to provide a total solution. And when you us grow at 20% across Southern Europe I mean I am not aware of anybody else that is growing in Southern Europe period much less of those type of numbers. It speaks to our strategy working. Foreign exchange does have some impact on it. And Kelly maybe if you would like to add some addition to that.

Yes. Just to add to the Itai from a pricing perspective actually our pricing is in line, our normal quarter-on-quarter pricing as well as the year-over-year if I look over the last 6 quarters. So we haven’t really seen that increase on discounting. But we did see drive in the margins in Europe is definitely the mix of our strength in our UCS is a big, big driver of it.

Operator next question.

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

I have a question on switching, great growth, the question is can you distinguish between plain, vanilla upgrades just because you have new platforms. And between really changes to the architecture of data centers one has a short cycle, one has a longer cycle, longer impact on the company. Is there anyway we can look at it, think about our side, is there anyway we can have evidence that the cycle is longer rather than shorter when it comes to switching? Thanks.

I think the data center switching cycle is a very, very long one I think we would all agree with in scale. And even though we will face new competitors white label etcetera in this market we saw that as I said coming a long time ago and this is where it is and about switching the data center it’s about convergence about switching with storage with servers, with security even within the data center. And then the ability with application centric infrastructure to run that and the data center or a cloud in the wane all the way to the edge and that’s about applications again with the network with security, with scale. You combine those two and we are almost unbeatable in the approach. You do have a natural upgrade cycle with new products coming in. And there was probably a little bit of a stall when we stalled ourselves a year ago deliberately and we knew what we are doing, but we need it to transition to the new ion switching and needed to signal people where we are going. There are additional drivers we are starting to win network refresh and some competitors refresh purely because of security. In this environment they are going to risk and this where we are just going to I can’t say crush, I think there is white label. This is where we are going to really crush the white people. I mean, it’s got to be a security architecture type of approach. If you just say, I am going to get merchant silicon and throw software on top of it and run data centers and run WANs and everything, all it takes is one breach and you have done more damage to your brand is it company or is it government, then you could in 100 years of saving on a little bit of switching difference and that’s before you get to the outcomes in terms of the direction. Now, is switching going to grow double-digits? Of course, not, but I think more down to the mid single-digits and we will go up and down depending on the quarter. There will be a different mix in the data center versus campus.

Great. Thanks, Tal. Operator, next question.

Thank you. Your next question comes from Benjamin Reitzes with Barclays Capital.

Hey, thanks a lot guys. Can you talk about the new relationship you have with the VCE? Is there any change? The data center numbers were very good, but I was wondering if there is any impact on switching in the quarter and do you see yourself partner strategy changing and getting more robust perhaps with some other partners with what’s going on with that, that could be material to revenue going forward? Thanks a lot.

Yes, Ben. Let me ask you direct question in the second one that you didn’t ask me which I know is on people’s minds as well. In terms of BCE, we have a very good relationship with EMC. I look for that to be continued very strong. Gary, you are our key interface there. You and Howard and Joe and I all the time go back and forth. VMware is a competitor. We view them as a competitor. We are going to beat them as a competitor and we will beat them and have fun doing it. I wish I was a better person, but I am not. And we are going to take it to a bunch of our competitors and I think you like the projects that you are going to continue to see there. We are however going to continue to partner with NetApp, which is a great relationship almost no competitive overlap and we announced what we are doing with IBM. And I think to the second part of your question, when we talk about pace of change, it means that your strategic partnerships and the Wall Street Journal had an article, I think before December that talked about the role of strategic partnerships will dramatically change and this will be customer partnerships as well. We will be dramatically different looking out over the next several years and determine a company’s success or not in ways they haven’t in the past. And part of that pace of change is you are going to have at times even very good customers, very good partners go into our area, we are at the center of every transition, so, anytime anybody makes a networking announcement they are going to say either with Cisco or doesn’t and you are going to see our evolution of our partners go on that. Having said that, you will see us do more strategic partnering, much deeper with many, many partners such as players like Rockville that you might have not thought it before or GE or players that we are literally closer to in terms of the direction here. Relationship with EMC is very, very good. We like them. They like us and we two have lot of business together. I think Gary the run-rate was 50% year-over-year growth together plus some.

Plus some and it’s a strong relationship and the partnership has all the elements it does before. We have just restructured with them.

Okay, thank you Ben.

Thanks, Ben. Operator next question.

Thank you. We have our next question from Simon Leopold with Raymond James.

Hey, Simon.

Hey, John, thank you for all the detail as usual. I wanted to follow-up on the VCE relationship in terms of how it affects your business from a modeling perspective. As I understand it, you do sell a significant amount of the UCS products and maybe some switching products through that channel. If you could help us put that into perspective as to how significant that is as a source of revenue for the UCS? And then in terms of below the sales levels, I understand that you have some benefits exiting the VCE that you are not incurring the expenses you had been in the partnership? Can you help us understand the implications of this from a both revenue as well as operating expense perspective?

Yes. If I were to summarize the revenue perspective, it’s a very good one for us, just like NetApp is. The growth rates are unbelievable. Our field sales teams, the EMC’s sales team and the Cisco sales team you often get some of the difference between them out in the field in terms of how they come together. It’s very, very good for us and we feel very good growth from that relationship. And by the way the same is true with the other partners we have alluded to in terms of the direction. So, I think what you are seeing is just an evolution of a partnership model and some competition versus VMware, which is I think the world we live in today. Next question please.

Thank you. Your next question comes from Paul Silverstein with Cowen & Company.

Hey, Paul.

Hi, good evening. One clarification, I think it’s obvious from your previous comments, but I just want to make sure I understood. The traditional breakout you gave us between pricing and productivity improvement volume, etcetera, it appears and again I just want to confirm that the rate of price erosion did not change from the trend we have seen recently and same thing with your rate of productivity improvement. Can you give us the numbers if you have them?

Kelly?

Yes, hi, Paul. So we don’t see that in our Q filing but I can tell you, the range, the ranges that we typically see on a quarter-on-quarter basis has been in the range over the last six quarters from half a percentage point impact on gross margin up to over a point and a half and we are well on the—we are basically in the middle of that range and year-over-year in the middle of the range as well when I look over six quarter. So you will see that when we have our 10-Q filing.

You know if I look and Mel has given me that I am out of time, so I wish we could do a couple more questions. I want to just summarize with, I have never felt better about our business and our future. We are as many of you have already said, we are back and this movie I have seen before and I wish I could just bottle with and I wish I could bottle the conversations that we have with government leaders and business leaders and how different than before it’s just not one product area, it’s how we can bring architectures together with services in a different sales motion. We had the courage to disrupt our sales starting three years ago and we did a huge amount of organizational evolution over the last year that allowed us to do fast innovation and agility and speed with which others cannot meet. There is no surprises to us in the market, and I mean none at the present time. It’s playing out very much like we expected. It’s a world that pace of change will go exponentially but as you walk away just kind of think about it. You are executing extremely well at healthy growth. Digitization would be ten times I think, we will say five to ten, to keeping solid. The impact of Internet of Everything really affects every country, every citizen in the world and every company. Our product portfolio across the board you saw all but one area increases nice when I get beat up on just 6% growth, I mean that is a pleasant position to be in Kelly probably one we won’t always experience as nicely as that. The balance geographically and even our headwind areas while we’ve signaled there will be a couple of more quarters to work through, showed a lot of progress and that means we are positioned as they eventually turn an emerging markets which they will and there will always be challenges in a group like China and Russia and Brazil but the rest of them feel heading the right direction pretty well and if you watch where we are doing in terms of our product leadership in each category and then integrating them together with architectures feels good, so I get bumped up. It hasn’t changed and I hope that came across the pace of change and the new competitors and new challenges is something that will change will drop exponentially, I believe we are going to become the number one IT company and our goal was to show you that and get the reward our shareholders, our customers, employees deserve. Mel, back to you.

Great, thanks. Cisco’s next quarterly call which will reflect our FY ‘15 third quarter results will be on Wednesday, May 13, 2015 at 1:30 PM Pacific Time, 4:30 PM Eastern Time. I would like to remind you that in light of Regulation FD, Cisco plan to retain its long standing policy to note comment on its financial guidance during the quarter unless it’s sent 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 continued support. This concludes our call.

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