Cisco Systems, Inc.
Q1 2006 Earnings Call Transcript
Published:
- Operator:
- Hello and welcome to Cisco Systems' First Quarter Fiscal Year 2006 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 Mr. Dennis Powell, Chief Financial Officer of Cisco Systems. Sir, you may begin.
- Dennis Powell:
- Good afternoon, everyone, and welcome to our 63rd quarterly conference call. This is Dennis Powell with John Chambers, our President and CEO; Rick Justice, Senior Vice President of Worldwide Field Operations; and Charlie Giancarlo, Chief Development Officer. The first quarter of fiscal year 2006 press release is on First Call, Old National Business Wire, the European Business and Technical Wire and on the Cisco website at www.cisco.com. If you would like a fax of the press release, please call 408-526-8890 and follow the instructions. Information regarding Cisco's financials and corresponding web-cast with visuals designed to guide participants through the call are available on the Cisco website at www.cisco.com in the Investor Relations section. Additionally, a replay of this call will be available via telephone at 866-357-4205 or 203-369-0122 for international callers. Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results. Throughout the call, we will refer to our non-GAAP results as pro forma. Please note we have provided complete GAAP reconciliation information on our website in the Investor Relations section. Additionally, we have provided information relating to both our GAAP financial results and our pro forma financial results, along with a reconciliation table between our GAAP and pro forma financial statements in our press release. The financial results in the press releases are unaudited. The matters we will be discussing today include forward-looking statements and as such are subjected to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent Reports on Forms 10-K and 10-Q and any applicable amendments which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. Unauthorized recording of this conference call is not permitted. Consistent with previous quarters, we will conclude our call promptly at 3
- John Chambers:
- Dennis, thank you very much. I would summarize the quarter as a solid quarter. Our balanced approach to the market in terms of our four customer segments, core and advanced technologies and five key geographic theaters continues to work very well, with solid results in the majority of categories. For example, our very good results in the U.S., Asia-Pacific, emerging market theaters, core routing and switching and advanced technologies balanced the slower orders we experienced in Europe. Going into fiscal 2006, we focused additional resources and management time on five key areas in addition to our normal strategy, those five key areas being the commercial marketplace, additional sales coverage, advanced and emerging technologies, our evolving support model and the emerging market theater. As we will discuss later in this call, each of these investments appear to be producing solid results. Now, moving on to the discussion of Q1, reminding everyone that Q1 is by definition the start of our new fiscal year and as such experiences normal seasonality, especially in the U.S. federal business and European market as well as being the beginning of the direct sales force new year following a super Q4. Q1 normally will be the lowest quarter in terms of orders and revenues, with momentum building throughout the year during normal economic times. Revenue growth was approximately 10% in terms of year-over-year, and flat relative to an extremely good Q4. Product orders grew year-over-year, faster than revenues. Product orders year-over-year grew in the 12 to 13% range in Q1. Product book-to-bill was slightly below 1. And in anticipation of questions we usually get about the linearity of orders during the quarters, the orders gained momentum in each of the three months in terms of year-over-year growth rates throughout the quarter. GAAP net income was 1.3 billion and earnings per share were $0.20 on a GAAP basis, which includes a charge from stock options of $0.04 per share. Pro forma net income was 1.6 billion, and earnings per share were $0.25. Total pro forma gross margins were 68.1 versus last quarter's 67.9. Pro forma product gross margins were 68.5 versus last quarter's 68.4. Staying with the same theme from the last quarter's conference call, there were a number of key takeaways from the quarter, all relating directly or indirectly to our advantages from a balanced opportunity perspective, and additional resources and management focus committed to the five key areas for fiscal 2006 discussed briefly above. First, from a balanced theater perspective, the advantage of having four large theaters is that when there is a challenge in one theater, it is often balanced or offset by the strength in the other three large theaters. And that is what occurred this quarter with the U.S., Asia-Pacific and emerging market theaters offsetting the slowing of growth in Europe. The U.S. continued to perform at the higher end of our expectations, with orders growth slightly above 15% year-over-year. This is better in terms of year-over-year growth than we experienced in any quarter during the last fiscal year. Our Asia-Pacific operation returned to high order growth. We were very pleased with the Asia-Pacific's Q1 growth of approximately 30% year-over-year in terms of orders, something we did not see in any quarter during fiscal year 2005. And our emerging market continued with order growth of approximately 30% year-over-year. Japan, which represents about 5% of our business, as was probably expected by many, continued to be challenging. And Europe was slower than we expected, with orders year-over-year being flat. In the spring of this calendar year, our senior leadership team determined that where the key incremental resources and management attention areas for fiscal 2006. We decided upon the five critical areas for additional growth and differentiation within our overall corporate strategy first, the commercial market segment of our business; second, expanded sales coverage; third, emerging markets; fourth, expanded focus on existing and new advanced technologies, including the focus on new emerging technologies that Charlie will discuss later; and fifth, an evolution of our support model focused on customer satisfaction, loyalty, which contributes to our ability to maintain solid gross margins for our products and services. I'd like to briefly cover each of these five areas of focus so as to put them in perspective on our progress in Q1 and areas of possible opportunity for the remainder of the fiscal year. The first area I would like to address is the commercial markets, which should be the fastest-growing of our market segments in the world, in terms of both new jobs and company creation. Starting last fiscal year and increasing this year, we made major investments and resource realignment in all of the major functions of our business. Those included sales, channels, marketing, product development, finance, solutions, services, etc., in order to better address this commercial opportunity. These investments appear to be paying solid dividends, with the commercial market segment having its strongest year-over-year growth, in the mid-20s, which is better than in any quarter in the last several years in terms of year-over-year order growth. This was the only market segment where we saw solid balance across all five of our theaters, with each of the theaters' growth ranging from the high teens to approximately 50% in each of the five theaters. And, as we said in the last quarter's call, the commercial marketplace, while representing approximately 25% of our total product business, is delivering on our vision of being the fastest-growing large market segments over the next five years. Second, as we shared with you in the last call, we made a decision to expand sales coverage, especially in the commercial and the low-end of the enterprise and the emerging market areas. And this appears, as you can see from the results, to be paying off as we had hoped. In Q1, for example, over 80% of our total Companyβs incremental headcount increases of approximately 850 people were in sales. Third, with the expanded organizational structure focusing on our emerging markets around the world, this theater grew by approximately 30% year-over-year in terms of orders. Fourth, the advanced technologies continued a solid growth in revenues in what is often a seasonally slower quarter at approximately 25% growth in revenues year-over-year. We intend to announce two new advanced technologies before the end of this calendar year. And finally, our revolving support model, designed to help our customers integrate both technology and business architecture at a faster speed with lower risk, is paying off. And it's off to a very good, solid start, with very positive customer feedback. This is another one of those major reasons that we continue to be able to maintain very high gross margins, as experienced during this quarter. We will cover these five areas in additional detail in other sections of the call. Cash flow from operations was a solid $1.4 billion. During the quarter, we repurchased approximately 3.5 billion of the common stock. We exited the quarter with approximately 13.5 billion in cash, cash equivalents and investments. This represents our 14th consecutive quarter of having pro forma net income exceed $1 billion and our pro forma profits exceed 20% of the revenue. We continue to believe, we have uniquely positioned Cisco as network IT continues to gain momentum. As anticipated, Q1's pro forma operating expenses were 37% of revenue versus Q4's 36%. Our total headcount increased by approximately 850, with over 700 of those going into the sales coverage that I discussed earlier. In summary, we view Q1 as a solid quarter for us in most of our operational measurements. Dennis will cover some of these items in more detail later in the discussion. In the remainder of today's call, we will use the following format
- Dennis Powell:
- Thanks, John. Now for some comments on our P&L. Total revenue for the first quarter was $6.5 billion, an increase of approximately 10% year-over-year. Of total revenue, 5.5 billion related to product revenue and 1.06 billion related to service revenue. This was the second quarter that service revenue has exceeded $1 billion. Service revenue includes technical support services, advanced services and other revenue. Of the total revenue in Q1, routing was $1.42 billion, up 13% year-over-year. Switching was $2.68 billion, up 3% year-over-year. Advanced technologies were $1.21 billion, up 25% year-over-year. And other was 183 million, down 15% year-over-year, and services were $1.06 billion, up 12.9% year-over-year. Other revenues were down 35 million year-over-year due to a Q1 change in classification of mobile wireless revenue into the routing category. As I begin the overview of our income statement, I would like to remind you that Q1 is the first quarter that we include the impact of FAS 123R, or employee stock option expensing, in our GAAP financial statements. The stock option expense for Q1 was $228 million net of tax, or $0.04 per share. This amount is allocated in our GAAP income statement as follows
- John Chambers:
- Dennis, thank you. Nice job. Now moving on to our quarterly overview, in this section we will highlight information from our geographies and customer markets. Starting with the geographies, this is the data on which I primarily rely to run our business and watch very closely on a day-to-day basis. The following is the theater breakout for Q1 in terms of total product orders. As we said in the last quarter's call, this quarter we will present the data in our new theater organizational structure. In this call, we will also present the four preceding quarters, so you have a base with the new theater structure to judge seasonality and other factors. The U.S. and Canada in Q1 of this fiscal year accounted for 53% of our business. In Q4 of last fiscal year, it was 50; in Q3 of last fiscal year, 49; in Q2, 47% of the total; and in Q1 of last fiscal year, 51%. Europe
- Charlie Giancarlo:
- Thanks, John. John has asked me to address Cisco's strategy for describing new technologies and provide more visibility into how we will do business in this area. Cisco's first six advanced technologies represent examples of exploiting market transitions ahead of competitors and executing against the opportunity to drive growth. As John has said many times, the best time to capture a market transition, whether it's for technology or for business model or a new market, is well before the transition is apparent to the mainstream of the market. As a reminder, we've defined an advanced technology as an opportunity which is adjacent to our other businesses that can generate Cisco revenue of $1 billion or more, where Cisco can secure the number one or number two market share position, although, John, I've never seen you let us just go for number two --
- John Chambers:
- You're right, Charlie.
- Charlie Giancarlo:
- -- with clear and sustainable differentiation over time, and that fits into our long-term architectural technology vision. We expect, as you've heard, to announce a new advanced technology every three to four months throughout this fiscal year. And we expect to announce two by the end of this calendar year. Now, in addition to the new advanced technologies, we will from time to time introduce new, what we're calling emerging technologies in the early phases of a new market, when it's too early to predict the eventual size of the overall market or the eventual size of Cisco's business. Emerging technologies are new areas which Cisco believes are promising and could mature into formal advanced technologies, but still have a degree of market risk that does not allow us to target a full billion dollars or greater run rate for Cisco at this time. As many of you are aware, in the last six months, Cisco publicly announced its first two emerging technologies, Application-Oriented Networking, or AON, enabling application interoperability, and our IP Interoperability and Collaboration System, or IPICS, which enables radio interoperability. We've received positive initial customer interest in both these technologies, which are both in early field trials. Emerging technologies are a mechanism to incubate new ideas, products, business models and new markets based on customer interest and our estimation of early potential market opportunity with limited resources, primarily from engineering and small overlay sales. In addition to the new advanced technologies that we have indicated we will announce over the year, we also hope to announce a number of new emerging technologies as well. Thank you, John.
- John Chambers:
- Thank you, Charlie. Nice job. Moving on to our usual summary of what went well and our normal healthy concerns, starting with what went well, again discussing this in terms of orders and the balance of geography, product and customer segments discussed earlier. From a geographic point of view, there were two major highlights. First is the continued strength and balance in the U.S. across all three major market segments. The growth in orders was about 15% year-over-year, was better than we saw in any quarter in the fiscal year of '05, and momentum combined with the additional sales rep coverage looks pretty good. The second major highlight was the growth and balance from our Asia-Pacific operations, where our new theater lead, Owen Chan, is off to a great start. I just visited China and India last month, and I believe that both countries are well-positioned for growth. As you may remember, we made our key investments in China approximately 10 years ago, and those investments have served us well over the last decade and we expect will serve us well in the future. Four years ago, we made our first major commitment to India, and on my most recent trip, we made additional major commitments of over $1 billion from a sales, R&D, product development, venture capital and support perspective. On that trip, we visited the majority of our large service provider customers, key conglomerates, financial institutions and government leadership. We have had growth in India of excess of 50% in each of the last two years, and I feel that the momentum looks very solid for this year, with a very good chance of growing above 40% year-over-year in the future, with the appropriate caveats. In summary, we think we are well-positioned in both China and India, and while we are cautiously optimistic about our growth in China, it would not surprise me to see India actually challenge China from a Cisco perspective in terms of our business revenue per year, looking out three to four years. We also continue to do very well throughout the rest of Asia. Australia and New Zealand continue their very solid momentum, with Australia growing approximately 40% year-over-year in this quarter and New Zealand approximately 70%. From a product perspective, more and more of our large customers, especially in the enterprise, are committing to an architectural approach where routing, switching, security, wireless, IP telephony, the home and datacenter products are at first loosely and then we believe tightly coupled over time. There are very large advantages in terms of total cost of ownership, flexibility and time to market for customers under this approach. To put this in perspective in terms of cost of ownership, many of our customers articulate their costs at 25% being product costs, 50% supporting those products and 25% physical space and the associated expenses. The advantages of being the market leader in terms of innovation across, let's say 10-plus major product areas, combined with the dramatically lower costs to support and physical requirements from a tightly coupled approach, are becoming more obvious. We continue to demonstrate market leadership in most of our product areas. When you look at our competitors in each product area, none of them go across more than two of our product areas of focus, with even close to a leadership position. Having just attended our annual CIO Summit with 130 CIOs and having just met with a large number of other global CIOs in the last month as we traveled around the world, Cisco's architectural approach is continuing to gain momentum and acceptance. Many of you have asked for revenue growth numbers in terms of your ability to understand market share evolution. This quarter in terms of year-over-year growth, our revenue in the advanced technologies were in the mid-20s, as we had said earlier, with storage growing approximately 100% year-over-year from a revenue perspective, optical flat, enterprise IP communications in the low 40s, wireless in the upper teens, network home in the high single digits and security in the high 20s. Again, I'd like to recap our position versus our competition. While we face a very large number of bigger and very effective small companies, we believe that the industry will consolidate and that the consolidation will be along both technology and business architectural lines. We believe the technology architecture will be one where layers 1 through 7 of the OSI stack are first loosely and then tightly coupled. And that is exactly where you see us taking our core and advanced technology products, and Charlie, the emerging technology products that you and your team are working on as well. Innovation will continue to be through internal development, through acquisitions and partnerships. In our opinion, for companies to lead, they must be able to do all three. Perhaps most importantly, companies also have to gain the confidence of their customers from a vision and strategy perspective, a product architectural leadership perspective, and a service and support perspective. We think we are very uniquely positioned to continue to win the hearts, minds and capital investments of our customers. In summary, while there's always a room for improvement, we are pleased with our results. In our opinion, our results continue to show the effectiveness of our strategy and our ability to capitalize on major market transitions. Now, moving on to concerns, reminding those of you who have had limited exposure to our prior conference calls, we try to give equal balance to both what went well and our concerns. Given our normal sense of healthy paranoia, we have a number of general concerns. First, we continue to see some swings in global economic activity and capital spending. The trends that we have discussed last quarter in Japan, especially those in the service provider space, continued, and the concerns that we shared about our peers seeing some slowing in their European operations did develop in terms of our own business. Germany and France continue to be relatively slow, with growth in orders year-over-year down slightly. We have had a very solid success in the UK in recent years. UK is now our second-largest country in terms of total business and approximately, to put it in proportionate understanding, the size of Germany and France combined in terms of business for Cisco. Therefore, when we experience a dramatic slowing of growth in the UK in Q1, we have to have the appropriate amount of concern. This becomes even more important in Q2 in what has traditionally been a strong quarter for Europe versus a seasonally slow Q1. Second area of concern, we have always had a healthy respect for our competitors, and as I've said many times before, we expect an expanding wave of low-priced competitors from Asia. Third, we continue to see the opportunity to move into new advanced technology markets with additional resources. We also continue to see shorter-term payback by hiring additional salespeople. This second point speaks to some of the market elasticity and coverage issues. Therefore, we will continue to hire additional salespeople as long as we anticipate a reasonable ramp over one to two years approaching current productivity levels. If this develops the way we anticipate, it obviously presents key opportunities in terms of revenue growth and market share gains over the next several years. As you would expect, there is a natural lag between when you add these resources before you get payback for several quarters. This will obviously put a bit, a little bit of expense pressure on the percentage of operating expenses in the short run, but if executed right and the elasticity continues to be reasonably broad, it will have substantial benefits in the longer term. Having said that, our experience in Q1 indicates that these new incremental sales reps are rapidly coming up to speed in terms of orders after just several quarters of learning about their customers and Cisco. Fourth, we were very pleased with our year-over-year growth in the low 30s in the federal business, and we are cautiously optimistic about Q2 of the federal business. That is, we've often heard, and from prior experience, these funds can be quickly redirected to other issues. And finally in terms of concerns, at the risk of repeating the obvious, as you said in each of the conference calls for over a decade, whenever there is a GDP increase or slowdown in countries around the world, this is usually followed by a corresponding reaction in capital expenditures and therefore orders for Cisco and our peers. It is argued that GDP will continue to be a good indicator of what you should expect over the long run from our traditional business. However, this should also be combined with additional opportunities from advanced technologies, the service provider market segment and our commercial market segment, as well as potential market share gains. Our success is obviously dependent upon how well we execute and how well our strategy has or has not anticipated major market transitions now and in the future. Now, moving onto guidance. In very simple terms, we continue to focus on our strategy for architectural differentiation to uniquely position Cisco as our customers' networks, and therefore our industry, continues to evolve toward the benefits and value of systems approaching networking. As we discussed in the last quarter's conference call, we will continue to provide detailed quarterly guidance one quarter at a time, and we will also be providing fiscal year guidance, which as you would expect by definition, will have more uncertainty, accuracy risk and a wider range. This continues to be requested by many of our shareholders. And while we clearly understand the risk and uncertainty, we believe the benefits to our shareholders outweigh the risks. However, we do want to remind you with this yearly guidance, there will be more variability both up and down in our best estimates, and we will always try to make the best decision for our customers and shareholders in the long run, not tying decisions to a short-term quarterly mentality. As we've said on many occasions, we believe that the markets in which we participate, and according to the view of a number of industry resources, will support revenue growth in the coming years in the 10 to 15% annual growth range. And in fiscal 2006, we are continuing to stay with our prior revenue guidance, 10 to 12%. We were very pleased with the balance in U.S. operations, Asia-Pacific and emerging markets in Q1. And, with the appropriate risk consideration, the odds are good that solid momentum will continue in these three theaters in Q2. We believe Japan will continue to be challenging. Europe is the most difficult theater to predict at this time, given our Q1 results and similar experiences from some of our large industry peers. Q2 normally sees a seasonal slowing of U.S. federal orders, more than offset by seasonally strong stronger Q2 orders from Europe. This is what we would expect to happen in this quarter, and with appropriate concerns given a slow Q1 in Europe and some of the challenges that our peers have seen. We also believe that the additional focus on the commercial marketplace, sales coverage and emerging markets will continue to gain traction and associated business results. Therefore, we think there are opportunities for growth as well as market share gains, and many of our products have focused on the commercial market. As we have discussed in a number of financial sessions, we are getting more aggressive in expanding our sales coverage, resources committed to current advanced technologies and resources focused on a second wave of new advanced technologies, including emerging technologies that Charlie discussed. Therefore, you should expect our headcount and related expenses to increase slightly in Q2 versus Q1, just as it did in Q1 versus Q4. With these factors in mind, our guidance for fiscal 2006 is for product orders to grow year-over-year in the 10 to 15% range, with all the appropriate caveats regarding micro issues, execution risk and a marketplace that can change rapidly in either direction. As we said in the Q4 conference call, we would expect when comparing Q1 and Q2 fiscal year '06 year-over-year to Q1 and Q2 of fiscal year '05, in which we had a book-to-bill below 1, orders should most likely grow faster than revenues year-over-year. This is clearly how Q1 evolved, as expected, and we would expect Q2 to follow a similar pattern. In anticipation of a question in last quarter's conference call, let me use a theoretical example of how order growth and revenue growth can be different in terms of book-to-bill in Q1 and Q2. So, theoretically, let's assume that Q1 fiscal year '05 book-to-bill as announced was below 1. Let's say the same number actually theoretically being 0.95. And let's assume that our Q1 of this year being slightly below 1 was theoretically 0.98. Therefore, if revenues grew at 10%, it would be very logical that orders would grow approximately 13%. Each of you can decide whether your focus on revenues or growth projections on orders as being the most accurate indicator of growth. And I realize that among our shareholders, there are people in both camps or a combination. Having said that, my view has not changed. I focus on the order momentum and providing guidance and judging the degree of success of our strategies and what's going on from a global perspective. Also, as we said in the last conference call, with the appropriate risk considerations, we expect Q3 and Q4 of fiscal year '06 for revenue to grow faster than orders in year-over-year comparisons, given that Q3 and Q4 of FY '05 had a product book-to-bill of greater than 1. In Q2 FY '06, we would anticipate product order growth rate in terms of year-over-year to be in the 10 to 14% range. Our overall revenue guidance in Q2 FY '06 in comparison to Q2 FY '05 will be up year-over-year approximately 8 to 9%. From an overall sequential revenue perspective, Q2 FY '06 will be flat to up slightly versus Q1 FY '06. Dennis will discuss this in more detail in his section. In anticipation of some of your possible questions regarding our level of confidence and optimism, I would summarize our position in the following terms. We are continuing to be aggressive and optimistic on what we can control and influence. Key examples of this optimism and confidence would be the following, first, we continue to add resources. Second, we are beginning to develop what we believe will be a second wave of advanced technologies and have set an aggressive goal of announcing a new advanced technology every three to four months during the fiscal year '06. Third, we are getting even more aggressive on the opportunities in the commercial marketplace, as illustrated in our results and commitments in the most recent quarter. Fourth, our operational focus and results from the emerging markets developing at are better than we expected. And fifth, our market share and industry leadership gains. As always, I want to thank our shareholders, customers, employees and partners for their support and continued confidence in our ability to execute during rapid industry consolidation, market transitions, and challenging economic times. And now, I'd like to turn it over to Dennis. Dennis?
- Dennis Powell:
- Thank you, John. Let me remind you again that our comments include forward-looking statements, and you should review our recent SEC filings that identify important risk factors, and actual results could differ from those contained in the forward-looking statements. As a reminder, we are providing guidance on a pro forma basis with a reconciliation to GAAP. Moving on to our detailed guidance. We continue to believe that for the next few years, Cisco's long-term revenue growth rate should be between 10 and 15% on an annual basis. We realize that many factors, including our own execution, will impact whether we are at the high end or at the low end of this range. Additionally, we could possibly be above or below this range. As we said last quarter, our revenue guidance for the full fiscal year '06 is 10 to 12%. We encourage you to model conservatively with the understanding that we will continue to provide updates and further guidance each quarter. Regarding gross margin, forecasting gross margin has always been challenging due to various factors, such as shipping, volume, product mix, variable component costs, customer and channel mix, and competitive pricing pressures. We expect the total gross margin to be between 66 to 67% over the course of this fiscal year. As we have mentioned, we continue to see investment opportunities in this first half of FY '06. Consequently, we expect that operating expenses will trend up slightly in Q2. However, we continue to expect that operating expenses for the full year will be around 36% of revenue. Now, some guidance specifically on Q2. We expect revenue in the second quarter of fiscal year 2006 to be up approximately 8 to 9% year-over-year. We expect the Q2 FY '06 gross margin will be approximately 67%, meaning it could be slightly above or slightly below this level. Operating income should be in the range of 30% of revenue. We would expect interest and other incomes to be approximately 150 million in the second quarter. We expect to continue our share buyback program, but it is difficult to predict the exact weighted average share count for EPS purposes. We continue to model a net reduction of 50 million shares per quarter. Regarding our Q2 FY '06 GAAP earnings, before the impact of FAS 123R on stock-based compensation, we anticipate that Q2 GAAP EPS will be $0.01 to $0.02 lower than pro forma EPS due to ongoing amortization of purchased intangible assets and stock-based compensation costs arising from various purchase acquisitions and investments. These charges will be reported as GAAP operating expenses. With the adoption of FAS 123R, we continue to anticipate that Q2 GAAP EPS will be a further approximately $0.03 to $0.04 per share lower, giving a total potential reduction of $0.04 to $0.06 to our Q2 GAAP EPS. For the FY fiscal year '06, we expect the impact of stock option expensing will be a reduction of between $0.12 to $0.14 to our GAAP EPS, giving a total FY '06 impact of $0.16 to $0.22. We anticipate the FAS 123R stock option expenses for the remainder of FY '06 will be allocated to the various line items of the GAAP income statement in similar proportions as Q1 FY '06. These expenses will continue to be reported in the individual line items on the face of the income statement and will be included in the GAAP financial statements only. Other than those items noted above, there are no other significant differences between GAAP and our pro forma guidance. This guidance assumes no additional acquisitions, asset impairments, restructuring or other unanticipated events which may or may not be significant. Regarding cash flow from operations, we would expect no change to our prior guidance of 300 to 600 million per month at these revenue levels. Our tax provision rate is expected to remain at 28% for Q2. 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 is done through a public disclosure. Our next quarterly conference call, which will reflect our second-quarter fiscal 2006 results, will be on Tuesday, February 7, 2006, at 1
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