EX-99.1 2 d134423dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

 

LOGO

 

Press Contact:     Investor Relations Contact:
Andrea Duffy     Marilyn Mora
Cisco     Cisco
1 (646) 295-5241     1 (408) 527-7452
anduffy@cisco.com     marilmor@cisco.com

CISCO REPORTS SECOND QUARTER EARNINGS

Strong Execution and Cash Flows in Q2; Dividend Increased 24 Percent, Additional $15 Billion Authorized for Stock Repurchase

 

    Q2 Revenue (excluding SP Video CPE Business): $11.8 billion

 

    Increase of 2% year over year — (Q2 guidance was 0% - 2% growth year over year)

 

    Q2 Earnings per Share: $0.62 GAAP; $0.57 non-GAAP

 

    Q3 Guidance:

 

    Revenue: 1% - 4% growth year over year (normalized to exclude SP Video CPE Business for Q3 2015)

 

    Non-GAAP Earnings per Share: $0.54 - $0.56

SAN JOSE, Calif. — February 10, 2016 — Cisco, the worldwide leader in networking that transforms how people connect, communicate and collaborate, today reported second quarter results for the period ended January 23, 2016. Cisco reported second quarter revenue of $11.9 billion, net income on a generally accepted accounting principles (GAAP) basis of $3.1 billion or $0.62 per share, and non-GAAP net income of $2.9 billion or $0.57 per share. Second quarter revenue was $11.8 billion excluding $93 million of revenue from the Customer Premises Equipment portion of the Service Provider Video Connected Devices business (SP Video CPE Business) that was divested during the second quarter on November 20, 2015.

“We delivered a strong Q2, and are managing the business extremely well in a challenging macro environment,” said Chuck Robbins, Cisco chief executive officer. “We’re managing the company on two fronts. We’re focused on continued strong execution in the near term while investing in the innovation to lead our customers into the future.”

GAAP Results

 

     Q2 2016      Q2 2015      Vs. Q2 2015  

Revenue (including SP Video CPE Business for all periods)

   $   11.9 billion       $   11.9 billion         —  

Revenue (excluding SP Video CPE Business for all periods)

   $ 11.8 billion       $ 11.6 billion         2

Net Income

   $ 3.1 billion       $ 2.4 billion         31

Diluted Earnings per Share (EPS)

   $ 0.62       $ 0.46         35

Non-GAAP Results

 

     Q2 2016      Q2 2015      Vs. Q2 2015  

Net Income

   $   2.9 billion       $   2.7 billion         7

EPS

   $ 0.57       $ 0.53         8

A reconciliation between net income and EPS on a GAAP and non-GAAP basis is provided in the table following the Consolidated Statements of Operations. Supplementary information related to other GAAP and non-GAAP measures is also provided in the tables below.

 

1


Cisco Increases Quarterly Cash Dividend; Stock Repurchase Program Authorization Increased

Cisco has also declared a quarterly dividend of $0.26 per common share, a 24% or five-cent increase over the previous quarter’s dividend, to be paid on April 27, 2016 to all shareholders of record as of the close of business on April 6, 2016. Future dividends will be subject to Board approval.

Cisco’s board of directors has also approved a $15 billion increase to the authorization of the stock repurchase program. Cisco’s board had previously authorized up to $97 billion in stock repurchases. There is no fixed termination date for the repurchase program. The remaining authorized amount for stock repurchases under this program, including the additional authorization, is approximately $16.9 billion.

“We had another strong quarter, delivering both the top line and bottom line growth,” said Kelly Kramer, Cisco executive vice president and chief financial officer. “I’m happy with the progress we are making as we continue to shift our business model to more software, and recurring revenue. We are very confident in the strength of our business and future cash flows allowing the substantial increase of our dividend this quarter to $0.26. We remain committed to our shareholders in delivering profitable growth and returning a minimum of 50 percent of our free cash flow back annually.”

Financial Highlights for Q2 FY16

(All comparative percentages are on a year-over-year basis unless otherwise noted)

All revenue, non-GAAP, and geographic financial information in this “Financial Highlights for Q2 FY16” section are presented excluding the SP Video CPE Business for all periods as it was divested during the second quarter on November 20, 2015.

Revenue Revenue was $11.8 billion, up 2% with product revenue up 2%. Service revenue growth was 3%. Revenue by geographic segment was: Americas and EMEA each up 1%, and APJC up 11%. Product revenue growth was led by Security which increased 11%, and NGN Routing and Collaboration which increased 5% and 3%, respectively. Wireless was flat while Switching and Data Center declined 4% and 3%, respectively.

Gross Margin — On a GAAP basis, total gross margin and product gross margin were at 62.3% and 61.3%, respectively. Non-GAAP total gross margin and product gross margin were 64.2% and 63.3%, respectively. This increase in the non-GAAP product gross margin as compared with 62.5% in the second quarter of fiscal 2015 was driven by continued productivity improvements, partially offset by pricing and to a lesser extent product mix. GAAP service margin was 65.5% and non-GAAP service gross margin was 66.7%. Total gross margins by geographic segment were: 64.3% for the Americas, 65.4% for EMEA, and 61.8% for APJC.

Operating Expenses — On a GAAP basis, operating expenses were $4.1 billion, down 7%. Non-GAAP operating expenses were $3.9 billion, down 1%, and at 33.0% of revenue. Headcount compared with the end of the first quarter of fiscal 2016 decreased by 406 to 71,657, which included the impact from the divestiture of the SP Video CPE Business and our workforce realignment, partially offset by additional headcount from acquisitions and investments in key growth areas such as security, cloud and software.

Operating Income — GAAP operating income was $3.3 billion, up 26%, with GAAP operating margin of 27.6%. Non-GAAP operating income was $3.7 billion, up 10%, with non-GAAP operating margin at 31.2%.

Provision for Income Taxes — The GAAP tax provision rate was 4.8%. Tax benefits of $519 million related to prior-year periods were included in the GAAP tax provision rate but were excluded in the non-GAAP tax provision rate. The non-GAAP tax provision rate was 20.9%, reflecting the reinstatement of the U.S. federal R&D tax credit.

Net Income and EPS — On a GAAP basis, net income was $3.1 billion and EPS was $0.62. On a non-GAAP basis, net income was $2.9 billion, an increase of 8%, and EPS was $0.57, an increase of 8%.

Cash Flow from Operating Activities — was $3.9 billion an increase of 36% compared with $2.9 billion for the second quarter of fiscal 2015.

Cash and Cash Equivalents and Investments — were $60.4 billion at the end of the second quarter of fiscal 2016, compared with $59.1 billion at the end of the first quarter of fiscal 2016, and compared with $60.4 billion at the end of fiscal 2015. The total cash and cash equivalents and investments available in the United States at the end of the second quarter of fiscal 2016 were $3.9 billion.

Deferred Revenue — was $15.2 billion, up 8% in total, with deferred product revenue up 11%, driven largely by subscription based and software offerings, and deferred service revenue up 7%. Cisco continued to build a greater mix of recurring revenue as reflected in deferred revenue.

Days Sales Outstanding in Accounts Receivable (DSO) — was 33 days at the end of the second quarter of fiscal 2016, compared with 34 days at the end of the first quarter of fiscal 2016.

 

2


Other Financial Highlights

In the second quarter of fiscal 2016, Cisco declared and paid a cash dividend of $0.21 per common share, or $1.1 billion. For the second quarter of fiscal 2016, Cisco repurchased approximately 48 million shares of common stock under its stock repurchase program at an average price of $26.12 per share for an aggregate purchase price of $1.3 billion.

As of January 23, 2016, Cisco had repurchased and retired 4.5 billion shares of Cisco common stock at an average price of $20.97 per share for an aggregate purchase price of approximately $95.1 billion since the inception of the stock repurchase program.

Acquisitions

During the second quarter of fiscal 2016, Cisco completed the acquisitions of Portcullis, ParStream, Lancope and 1 Mainstream in the security, data analytics and video markets. These moves are consistent with Cisco’s strategy to increase innovation and R&D investment in growth areas. Cisco recently completed the acquisition of Acano to help accelerate Cisco’s collaboration strategy to deliver video more broadly. In addition, on February 3, 2016, Cisco announced its intent to acquire Jasper Technologies, a company that provides a cloud-based Internet of Things (IoT) software-as-a-service platform, which is expected to close in the third quarter of fiscal year 2016.

Business Outlook for the Third Quarter of Fiscal Year 2016

On November 20, 2015, during the second quarter of fiscal 2016, Cisco completed its divestiture of the SP Video CPE Business. In order to provide a clear view of Cisco’s continuing expected financial performance, the revenue guidance for the third quarter of fiscal 2016 is normalized to exclude the SP Video CPE Business for the third quarter of fiscal 2015. The corresponding revenue in the third quarter of fiscal 2015 for the SP Video CPE Business was $519 million.

Cisco expects to achieve the following results for the third quarter of fiscal year 2016:

 

Q3 FY16

    

Revenue (normalized to exclude SP Video CPE Business for Q3 FY15)

   1% - 4% growth Y/Y

Non-GAAP gross margin rate

   62.5% - 63.5%

Non-GAAP operating margin rate

   28.5% - 29.5%

Non-GAAP tax provision rate

   22%

Non-GAAP EPS

   $0.54 - $0.56

Cisco’s third quarter of fiscal 2016 will have 14 weeks compared to 13 weeks for the third quarter of fiscal 2015 which is reflected in the guidance.

Cisco estimates that GAAP EPS will be lower than non-GAAP EPS by $0.08 to $0.12 per share in the third quarter of fiscal 2016 as follows:

 

Q3 FY16

      

Share-based compensation expense

   $ 0.05 - $0.06   

Amortization of purchased intangible assets and other acquisition-related/divestiture costs

     0.03 -   0.05   
  

 

 

 

Subtotal

     0.08 -   0.11   

Restructuring and other charges

     0.00 -   0.01   
  

 

 

 

Total

   $ 0.08 - $0.12   
  

 

 

 

Share-based compensation expense is expected to impact Cisco’s results of operations in similar proportions as the second quarter of fiscal 2016. Amortization of purchased intangible assets and other acquisition-related/divestiture costs will be reported as GAAP operating expenses, cost of sales, or other income/(loss) as applicable.

Except as noted above, this guidance does not include the effects of any future acquisitions/divestitures, asset impairments, restructurings and tax or other events, which may or may not be significant unless specifically stated.

 

3


Editor’s Notes:

 

    Q2 fiscal year 2016 conference call to discuss Cisco’s results along with its business outlook will be held on Wednesday, February 10, 2016 at 1:30 p.m. Pacific Time. Conference call number is 1-888-848-6507 (United States) or 1-212-519-0847 (international).

 

    Conference call replay will be available from 4:00 p.m. Pacific Time, February 10, 2016 to 4:00 p.m. Pacific Time, February 19, 2016 at 1-888-562-6191(United States) or 1-402-280-9986 (international). The replay will also be available via webcast from February 10, 2016 through April 22, 2016 on the Cisco Investor Relations website at http://investor.cisco.com.

 

    Additional information regarding Cisco’s financials, as well as a webcast of the conference call with visuals designed to guide participants through the call, will be available at 1:30 p.m. Pacific Time, February 10, 2016. Text of the conference call’s prepared remarks will be available within 24 hours of completion of the call. The webcast will include both the prepared remarks and the question-and-answer session. This information, along with the GAAP to non-GAAP reconciliation information, will be available on the Cisco Investor Relations website at http://investor.cisco.com.

 

4


CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per-share amounts)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     January 23,
2016
    January 24,
2015
    January 23,
2016
    January 24,
2015
 

REVENUE:

        

Product

   $ 8,983      $ 9,078      $ 18,827      $ 18,513   

Service

     2,944        2,858        5,782        5,668   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     11,927        11,936        24,609        24,181   
  

 

 

   

 

 

   

 

 

   

 

 

 

COST OF SALES:

        

Product

     3,480        3,806        7,333        7,725   

Service

     1,015        1,040        2,012        2,033   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

     4,495        4,846        9,345        9,758   
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS MARGIN

     7,432        7,090        15,264        14,423   

OPERATING EXPENSES:

        

Research and development

     1,509        1,529        3,069        3,112   

Sales and marketing

     2,286        2,308        4,729        4,823   

General and administrative

     176        490        715        994   

Amortization of purchased intangible assets

     71        72        140        143   

Restructuring and other charges

     96        69        238        387   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     4,138        4,468        8,891        9,459   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     3,294        2,622        6,373        4,964   

Interest income

     237        189        462        368   

Interest expense

     (162     (139     (321     (278

Other income (loss), net

     (63     201        (71     179   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest and other income (loss), net

     12        251        70        269   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

     3,306        2,873        6,443        5,233   

Provision for income taxes

     159        476        866        1,008   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 3,147      $ 2,397      $ 5,577      $ 4,225   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ 0.62      $ 0.47      $ 1.10      $ 0.83   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.62      $ 0.46      $ 1.09      $ 0.82   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in per-share calculation:

        

Basic

     5,070        5,117        5,075        5,115   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     5,097        5,160        5,106        5,159   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.21      $ 0.19      $ 0.42      $ 0.38   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Consolidated Statements of Operations include the results of the SP Video CPE Business prior to its divestiture on November 20, 2015. Accordingly, the three months ended January 23, 2016 includes only one month of financial results for this business.

 

5


CISCO SYSTEMS, INC.

RECONCILIATION OF GAAP TO NON-GAAP NET INCOME

(In millions, except per-share amounts)

 

     Three Months Ended     Six Months Ended  
     January 23,
2016
    January 24,
2015
    January 23,
2016
    January 24,
2015
 

GAAP net income

   $ 3,147      $ 2,397      $ 5,577      $ 4,225   

Adjustments to cost of sales:

        

Share-based compensation expense

     51        45        102        93   

Amortization of acquisition-related intangible assets

     123        233        251        414   

Rockstar patent portfolio charge

     —          —          —          188   

Acquisition-related/divestiture costs

     1        —          1        —     

Significant asset impairments and restructurings

     (1     —          (2     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments to GAAP cost of sales

     174        278        352        695   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to operating expenses:

        

Share-based compensation expense

     280        261        590        586   

Amortization of acquisition-related intangible assets

     71        72        140        143   

Acquisition-related/divestiture costs (1)

     (222     92        (131     193   

Significant asset impairments and restructurings

     96        69        238        387   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments to GAAP operating expenses

     225        494        837        1,309   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to other income (loss), net:

        

Gain on VCE reorganization

     —          (126     —          (126
  

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments to GAAP income before provision for income taxes

     399        646        1,189        1,878   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax effect of non-GAAP adjustments

     (98     (164     (294     (422

Significant tax matters (2)

     (519     (134     (519     (134
  

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments to GAAP provision for income taxes

     (617     (298     (813     (556
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP net income

   $ 2,929      $ 2,745      $ 5,953      $ 5,547   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share:

        

GAAP

   $ 0.62      $ 0.46      $ 1.09      $ 0.82   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP

   $ 0.57      $ 0.53      $ 1.17      $ 1.08   
  

 

 

   

 

 

   

 

 

   

 

 

 

(1) The sale of the SP Video CPE Business resulted in a pre-tax gain of $286 million, net of certain transaction costs incurred in prior periods. The gain on this transaction was excluded from non-GAAP net income for the second quarter and first six months of fiscal 2016.

(2) During the second quarter of fiscal 2016, Cisco recorded certain net tax benefits totaling $519 million related to prior-year periods that were excluded from non-GAAP net income for the second quarter and first six months of fiscal 2016. These net tax benefits are primarily comprised of settlement of all outstanding items related to Cisco’s U.S. federal income tax returns for the fiscal years ended July 26, 2008 through July 31, 2010 of $367 million, the retroactive reinstatement of the U.S. federal R&D tax credit of $84 million related to fiscal 2015, and a net tax benefit of $68 million related to other significant tax matters.

 

6


CISCO SYSTEMS, INC.

REVENUE BY SEGMENT

(In millions, except percentages)

 

     January 23, 2016
     Three Months Ended   Six Months Ended
     Amount      Y/Y %   Amount      Y/Y %

Revenue:

          

Including SP Video CPE Business for all periods:

          

Americas

   $ 6,912       (3)%   $ 14,711       1%

EMEA

     3,088       —  %     6,175       1%

APJC

     1,927       10%     3,723       7%
  

 

 

      

 

 

    

Total

   $ 11,927       —  %   $ 24,609       2%
  

 

 

      

 

 

    

Excluding SP Video CPE Business for all periods:

          

Americas

   $ 6,846       1%   $ 14,333       3%

EMEA

     3,065       1%     6,067       2%

APJC

     1,923       11%     3,705       7%
  

 

 

      

 

 

    

Total

   $ 11,834       2%   $ 24,105       3%
  

 

 

      

 

 

    

CISCO SYSTEMS, INC.

GROSS MARGIN PERCENTAGE BY SEGMENT

(In percentages)

 

    January 23, 2016
    Three Months Ended   Six Months Ended

Gross Margin Percentage:

   

Including SP Video CPE Business for all periods:

   

Americas

  63.8%   63.6%

EMEA

  64.9%   64.6%

APJC

  61.7%   60.9%

Excluding SP Video CPE Business for all periods (1):

   

Americas

  64.3%   65.0%

EMEA

  65.4%   65.5%

APJC

  61.8%   61.2%

(1) For the three months ended January 23, 2016 the calculation of gross margin percentages excludes gross profit for the SP Video CPE Business of $13 million for the Americas. For the six months ended January 23, 2016, the calculation of gross margin percentages excludes gross profit for the SP Video CPE Business of $41 million and $15 million for the Americas and EMEA, respectively.

 

7


CISCO SYSTEMS, INC.

REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES

(In millions, except percentages)

 

     January 23, 2016  
     Three Months Ended      Six Months Ended  
     Amount      Y/Y %      Amount      Y/Y %  

Revenue:

           

Switching

   $ 3,483         (4)%       $ 7,505         1%    

NGN Routing

     1,845         5%          3,638         (2)%   

Collaboration

     1,019         3%          2,134         10%    

Data Center

     822         (3)%         1,681         9%    

Wireless

     613         —  %          1,258         3%    

Service Provider Video*

     569         37%          1,008         25%    

Security

     462         11%          947         9%    

Other

     77         31%          152         21%    
  

 

 

       

 

 

    

Product - excluding SP Video CPE Business

     8,890         2%          18,323         4%    

Service

     2,944         3%          5,782         2%    
  

 

 

       

 

 

    

Total - excluding SP Video CPE Business

     11,834         2%          24,105         3%    
  

 

 

       

 

 

    

SP Video CPE Business (1)

     93            504      
  

 

 

       

 

 

    

Total

   $ 11,927         —  %        $ 24,609         2%    
  

 

 

       

 

 

    

* Excludes SP Video CPE Business revenue for all periods presented.

(1) The three months ended January 23, 2016 included one month of revenue for the SP Video CPE Business, which was divested during the second quarter on November 20, 2015.

 

8


CISCO SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

     January 23,
2016
     July 25,
2015
 

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 6,314       $ 6,877   

Investments

     54,061         53,539   

Accounts receivable, net of allowance for doubtful accounts of $325 at January 23, 2016 and $302 at July 25, 2015

     4,302         5,344   

Inventories

     1,362         1,627   

Financing receivables, net

     4,514         4,491   

Deferred tax assets

     2,834         2,915   

Other current assets

     1,618         1,490   
  

 

 

    

 

 

 

Total current assets

     75,005         76,283   

Property and equipment, net

     3,386         3,332   

Financing receivables, net

     3,903         3,858   

Goodwill

     24,958         24,469   

Purchased intangible assets, net

     2,322         2,376   

Other assets

     3,068         3,163   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 112,642       $ 113,481   
  

 

 

    

 

 

 

LIABILITIES AND EQUITY

     

Current liabilities:

     

Short-term debt

   $ 3,008       $ 3,897   

Accounts payable

     962         1,104   

Income taxes payable

     370         62   

Accrued compensation

     2,667         3,049   

Deferred revenue

     9,796         9,824   

Other current liabilities

     5,996         5,687   
  

 

 

    

 

 

 

Total current liabilities

     22,799         23,623   

Long-term debt

     21,591         21,457   

Income taxes payable

     706         1,876   

Deferred revenue

     5,389         5,359   

Other long-term liabilities

     1,279         1,459   
  

 

 

    

 

 

 

Total liabilities

     51,764         53,774   

Total equity

     60,878         59,707   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 112,642       $ 113,481   
  

 

 

    

 

 

 

 

9


CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     Six Months Ended  
     January 23,
2016
    January 24,
2015
 

Cash flows from operating activities:

    

Net income

   $ 5,577      $ 4,225   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation, amortization, and other

     1,005        1,229   

Share-based compensation expense

     706        677   

Provision for receivables

     31        62   

Deferred income taxes

     274        385   

Excess tax benefits from share-based compensation

     (82     (83

(Gains) losses on divestitures, investments and other, net

     (260     (182

Change in operating assets and liabilities, net of effects of acquisitions and divestitures:

    

Accounts receivable

     988        501   

Inventories

     153        (340

Financing receivables

     (171     74   

Other assets

     (181     (223

Accounts payable

     (147     (32

Income taxes, net

     (764     (528

Accrued compensation

     (348     (390

Deferred revenue

     69        26   

Other liabilities

     (162     (27
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,688        5,374   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investments

     (19,089     (20,061

Proceeds from sales of investments

     10,247        9,948   

Proceeds from maturities of investments

     7,955        7,212   

Acquisition of businesses, net of cash and cash equivalents acquired

     (1,089     (217

Proceeds from business divestiture

     372        —     

Purchases of investments in privately held companies

     (166     (91

Return of investments in privately held companies

     35        227   

Acquisition of property and equipment

     (576     (550

Proceeds from sales of property and equipment

     11        5   

Other

     (87     (109
  

 

 

   

 

 

 

Net cash used in investing activities

     (2,387     (3,636
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuances of common stock

     701        1,162   

Repurchases of common stock—repurchase program

     (2,344     (2,196

Shares repurchased for tax withholdings on vesting of restricted stock units

     (412     (369

Short-term borrowings, original maturities less than 90 days, net

     (4     (4

Repayments of debt

     (862     (506

Excess tax benefits from share-based compensation

     82        83   

Dividends paid

     (2,133     (1,947

Other

     108        110   
  

 

 

   

 

 

 

Net cash used in financing activities

     (4,864     (3,667
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (563     (1,929

Cash and cash equivalents, beginning of period

     6,877        6,726   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 6,314      $ 4,797   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid for interest

   $ 426      $ 383   

Cash paid for income taxes, net

   $ 1,355      $ 1,152   

Certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.

 

10


CISCO SYSTEMS, INC.

DEFERRED REVENUE

(In millions)

 

     January 23,
2016
     October 24,
2015
     January 24,
2015
 

Deferred revenue:

        

Service

   $ 9,657       $ 9,689       $ 9,020   

Product:

        

Unrecognized revenue on product shipments and other deferred revenue

     4,974         4,888         4,276   

Cash receipts related to unrecognized revenue from two-tier distributors

     554         585         725   
  

 

 

    

 

 

    

 

 

 

Total product deferred revenue

     5,528         5,473         5,001   
  

 

 

    

 

 

    

 

 

 

Total

   $ 15,185       $ 15,162       $ 14,021   
  

 

 

    

 

 

    

 

 

 

Reported as:

        

Current

   $ 9,796       $ 9,821       $ 9,369   

Noncurrent

     5,389         5,341         4,652   
  

 

 

    

 

 

    

 

 

 

Total

   $ 15,185       $ 15,162       $ 14,021   
  

 

 

    

 

 

    

 

 

 

CISCO SYSTEMS, INC.

INVENTORIES AND INVENTORY TURNS

(In millions, except annualized inventory turns)

 

     January 23,
2016
    October 24,
2015
    January 24,
2015
 

Inventories:

      

Raw materials

   $ 99      $ 107      $ 265   

Work in process

     1        1        2   

Finished goods:

      

Distributor inventory and deferred cost of sales

     564        631        733   

Manufactured finished goods

     446        464        577   
  

 

 

   

 

 

   

 

 

 

Total finished goods

     1,010        1,095        1,310   

Service-related spares

     224        240        274   

Demonstration systems

     28        39        39   
  

 

 

   

 

 

   

 

 

 

Total

   $ 1,362      $ 1,482      $ 1,890   
  

 

 

   

 

 

   

 

 

 

Annualized inventory turns - GAAP

     12.6        12.5        10.9   

Cost of sales adjustments

     (0.4     (0.5     (0.7
  

 

 

   

 

 

   

 

 

 

Annualized inventory turns - non-GAAP

     12.2        12.0        10.2   
  

 

 

   

 

 

   

 

 

 

 

11


CISCO SYSTEMS, INC.

DIVIDENDS PAID AND REPURCHASES OF COMMON STOCK

(In millions, except per-share amounts)

 

     DIVIDENDS      STOCK REPURCHASE PROGRAM      TOTAL  

Quarter Ended

   Per Share      Amount      Shares      Weighted-
Average Price
per Share
     Amount      Amount  

Fiscal 2016

                 

January 23, 2016

   $ 0.21       $ 1,065         48       $ 26.12       $ 1,262       $ 2,327   

October 24, 2015

   $ 0.21       $ 1,068         45       $ 26.83       $ 1,207       $ 2,275   

Fiscal 2015

                 

July 25, 2015

   $ 0.21       $ 1,069         35       $ 28.62       $ 1,005       $ 2,074   

April 25, 2015

     0.21         1,070         35         28.39         1,008         2,078   

January 24, 2015

     0.19         974         44         27.63         1,208         2,182   

October 25, 2014

     0.19         973         41         24.58         1,013         1,986   
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

Total

   $ 0.80       $ 4,086         155       $ 27.22       $ 4,234       $ 8,320   
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

CISCO SYSTEMS, INC.

FREE CASH FLOW

(In millions)

 

     Three Months Ended  
     January 23, 2016     October 24, 2015     January 24, 2015  

Net cash provided by operating activities

   $ 3,922      $ 2,766      $ 2,883   

Acquisition of property and equipment

     (314     (262     (265
  

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 3,608      $ 2,504      $ 2,618   
  

 

 

   

 

 

   

 

 

 

 

12


CISCO SYSTEMS, INC.

SUPPLEMENTARY INFORMATION - RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

GROSS MARGINS, OPERATING EXPENSES, OPERATING MARGINS, AND NET INCOME

(In millions, except percentages)

 

    Three Months Ended

 

January 23, 2016

 
   
 

 

Product
Gross

  Margin  

  
  

  

   

 

 

Service

Gross

  Margin  

  

  

  

   

 

 

Total

Gross

  Margin  

  

  

  

   

 

Operating

  Expenses  

  

  

      Y/Y         

 

Operating

  Income  

  

  

      Y/Y         

 

Net

  Income  

  

  

      Y/Y     

 

GAAP amount

  $ 5,503         $ 1,929         $ 7,432         $ 4,138           (7)%       $ 3,294           26%       $ 3,147           31%    

 

% of revenue

    61.3%        65.5%        62.3%        34.7%          27.6%          26.4%     

 

Adjustments to GAAP amounts:

                 

 

Share-based compensation expense

    16           35           51           280             331             331        

 

Amortization of acquisition-related intangible assets

    123           —           123           71             194             194        

 

Acquisition-related/divestiture costs

    —           1           1           (222)            (221)            (221)       

 

Significant asset impairments and restructurings

    (1)          —           (1)          96             95             95        

 

Income tax/significant tax matters

    —           —           —           —             —             (617)       
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Non-GAAP amount

  $ 5,641         $ 1,965         $ 7,606         $ 3,913           (2)%       $ 3,693           9%       $ 2,929           7%    

 

% of revenue

    62.8%        66.7%        63.8%        32.8%          31.0%          24.6%     

 

Less: SP Video CPE Business*

    (13)          —           (13)          (11)            (2)            (2)       
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
Non-GAAP amount (excluding SP Video CPE Business)   $  5,628         $   1,965         $  7,593         $   3,902           (1)%       $   3,691           10%       $  2,927           8%    
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

% of revenue

    63.3%        66.7%        64.2%        33.0%          31.2%          24.7%     

*Reflects one month of operations for the SP Video CPE Business, which was divested during the second quarter on November 20, 2015.

 

    Three Months Ended
January 24, 2015
 
    Product
Gross
  Margin  
    Service
Gross
  Margin  
    Total
Gross
  Margin  
      Operating  
Expenses
      Operating  
Income
    Net
  Income  
 

GAAP amount

  $ 5,272         $ 1,818         $ 7,090         $ 4,468         $ 2,622         $ 2,397      

 

Adjustments to GAAP amounts:

           

 

Share-based compensation expense

    11           34           45           261           306           306      

 

Amortization of acquisition-related intangible assets

    233           —           233           72           305           305      

 

Acquisition-related/divestiture costs

    —           —           —           92           92           92      

 

Significant asset impairments and restructurings

    —           —           —           69           69           69      

 

Gain on VCE reorganization

    —           —           —           —           —           (126)     

 

Income tax/significant tax matters

    —           —           —           —           —           (298)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP amount

  $ 5,516         $ 1,852         $ 7,368         $ 3,974         $ 3,394         $ 2,745      

 

Less: SP Video CPE Business*

    (66)          —           (66)          (35)          (31)          (24)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP amount (excluding SP Video CPE Business)

  $   5,450         $   1,852         $   7,302         $     3,939         $     3,363         $   2,721      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

*Reflects three months of operations for the SP Video CPE Business.

 

13


EFFECTIVE TAX RATE

(In percentages)

 

     Three Months Ended     Six Months Ended  
     January 23,
2016
    January 24,
2015
    January 23,
2016
    January 24,
2015
 

GAAP effective tax rate

     4.8     16.6     13.4     19.3

Tax effect of non-GAAP adjustments to net income

     16.1     5.4     8.6     2.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP effective tax rate

     20.9     22.0     22.0     22.0
  

 

 

   

 

 

   

 

 

   

 

 

 

COST OF SALES USED IN INVENTORY TURNS

(In millions)

 

     Three Months Ended  
     January 23,
2016
    October 24,
2015
    January 24,
2015
 

GAAP cost of sales

   $ 4,495      $ 4,850      $ 4,846   

Cost of sales adjustments:

      

Share-based compensation expense

     (51     (51     (45

Amortization of acquisition-related intangible assets

     (123     (128     (233

Acquisition-related/divestiture costs

     (1     —          —     

Significant asset impairments and restructurings

     1        1        —     
  

 

 

   

 

 

   

 

 

 

Non-GAAP cost of sales

   $ 4,321      $ 4,672      $ 4,568   
  

 

 

   

 

 

   

 

 

 

 

14


Forward Looking Statements, Non-GAAP Information and Additional Information

This release may be deemed to contain forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events (such as the impact of the macro environment, our innovation strategy and execution, our ability to shift our business model to more software and recurring revenue, our ability to deliver profitable growth and strong cash generation, our business strength, financial guidance, and our capital allocation strategy) and the future financial performance of Cisco that involve risks and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including: business and economic conditions and growth trends in the networking industry, our customer markets and various geographic regions; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; the growth and evolution of the Internet and levels of capital spending on Internet-based systems; variations in customer demand for products and services, including sales to the service provider market and other customer markets; the return on our investments in certain priorities, including our foundational priorities, and in certain geographical locations; the timing of orders and manufacturing and customer lead times; changes in customer order patterns or customer mix; insufficient, excess or obsolete inventory; variability of component costs; variations in sales channels, product costs or mix of products sold; our ability to successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses and technologies; our ability to achieve expected benefits of our partnerships; increased competition in our product and service markets, including the data center market; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; manufacturing and sourcing risks; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters, and governmental investigations; natural catastrophic events; a pandemic or epidemic; our ability to achieve the benefits anticipated from our investments in sales, engineering, service, marketing and manufacturing activities; our ability to recruit and retain key personnel; our ability to manage financial risk, and to manage expenses during economic downturns; risks related to the global nature of our operations, including our operations in emerging markets; currency fluctuations and other international factors; changes in provision for income taxes, including changes in tax laws and regulations or adverse outcomes resulting from examinations of our income tax returns; potential volatility in operating results; and other factors listed in Cisco’s most recent report on Forms 10-Q and 10-K filed on November 19, 2015 and September 8, 2015, respectively. The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes thereto included in Cisco’s most recent report on Form 10-K as it may be amended from time to time. Cisco’s results of operations for the three and six months ended January 23, 2016 are not necessarily indicative of Cisco’s operating results for any future periods. Any projections in this release are based on limited information currently available to Cisco, which is subject to change. Although any such projections and the factors influencing them will likely change, Cisco will not necessarily update the information, since Cisco will only provide guidance at certain points during the year. Such information speaks only as of the date of this release.

This release includes non-GAAP net income, non-GAAP gross margins, non-GAAP operating expenses, non-GAAP operating income and margin, non-GAAP effective tax rates, non-GAAP net income per share data, non-GAAP inventory turns and free cash flow for the periods presented. It also includes future estimated ranges for gross margin, operating margin, tax provision rate and EPS on a non-GAAP basis.

These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Cisco believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Cisco’s results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate Cisco’s results of operations in conjunction with the corresponding GAAP measures.

Cisco believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to its financial condition and its historical and projected results of operations. In addition, Cisco believes that the presentation of non-GAAP inventory turns provides useful information to investors and management regarding financial and business trends relating to inventory management based on the operating activities of the periods presented. Cisco believes that the presentation of free cash flow, which it defines as the net cash provided by operating activities less cash used to acquire property and equipment, to be a liquidity measure that provides useful information to management and investors because of its intent to return a stated percentage of free cash flow to shareholders in the form of dividends and stock repurchases. Cisco further regards free cash flow as a useful measure because it reflects cash that can be used to, among other things, invest in its business, make strategic acquisitions, repurchase common stock and pay dividends on its common stock, after deducting capital investments.

For its internal budgeting process, Cisco’s management uses financial statements that do not include, when applicable, share-based compensation expense, amortization of acquisition-related intangible assets, impact to cost of sales from purchase accounting adjustments to inventory, acquisition-related/divestiture costs, significant asset impairments and restructurings, significant litigation and other contingencies, the income tax effects of the foregoing and significant tax matters. Cisco’s

 

15


management also uses the foregoing non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the financial results of Cisco. In prior periods, Cisco has excluded other items that it no longer excludes for purposes of its non-GAAP financial measures. From time to time in the future there may be other items that Cisco may exclude for purposes of its internal budgeting process and in reviewing its financial results. For additional information on the items excluded by Cisco from one or more of its non-GAAP financial measures, refer to the Form 8-K regarding this release furnished today to the Securities and Exchange Commission.

Cisco divested the Customer Premises Equipment portion of the Service Provider Video Connected Devices business (“SP Video CPE Business”) during the second quarter of fiscal 2016 on November 20, 2015. This release includes, where indicated, financial measures that exclude the SP Video CPE Business. Cisco believes that the presentation of these measures provides useful information to investors and management regarding financial and business trends relating to its financial condition and its historical and projected results of operations because the SP Video CPE Business will not be part of Cisco on a go forward basis. Cisco’s management also uses the financial measures excluding the SP Video CPE Business in reviewing the financial results of Cisco.

About Cisco

Cisco (NASDAQ: CSCO) is the worldwide technology leader that has been making the Internet work since 1984. Our people, products, and partners help society securely connect and seize tomorrow’s digital opportunity today. Discover more at thenetwork.cisco.com and follow us on Twitter at @Cisco.

Copyright © 2016 Cisco and/or its affiliates. All rights reserved. Cisco and the Cisco logo are trademarks or registered trademarks of Cisco and/or its affiliates in the U.S. and other countries. To view a list of Cisco trademarks, go to: www.cisco.com/go/trademarks. Third-party trademarks mentioned in this document are the property of their respective owners. The use of the word partner does not imply a partnership relationship between Cisco and any other company. This document is Cisco Public Information.

 

16