CSCO
$31.27
Cisco Systems
$.59
1.92%
Earnings Details
4th Quarter July 2017
Wednesday, August 16, 2017 4:05:19 PM
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Summary

Cisco Systems Misses

Cisco Systems (CSCO) reported 4th Quarter July 2017 earnings of $0.61 per share on revenue of $12.1 billion. The consensus earnings estimate was $0.61 per share on revenue of $12.1 billion. The Earnings Whisper number was $0.63 per share. Revenue fell 4.0% compared to the same quarter a year ago.

The company said it expects first quarter non-GAAP earnings of $0.59 to $0.61 per share on revenue of $11.98 billion to $12.23 billion. The current consensus earnings estimate is $0.61 per share on revenue of $12.12 billion for the quarter ending October 31, 2017.

Cisco Systems Inc is engaged in designing, manufacturing and selling of Internet Protocol (IP) based networking products and services related to the communications and information technology (IT) industry.

Results
Reported Earnings
$0.61
Earnings Whisper
$0.63
Consensus Estimate
$0.61
Reported Revenue
$12.13 Bil
Revenue Estimate
$12.06 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Cisco Reports Fourth Quarter and Fiscal Year 2017 Earnings

SAN JOSE, CA--(Marketwired - Aug 16, 2017) - Cisco (CSCO)

Q4 Revenue: $12.1 billion Decrease of (4)% year over year

Decrease of (4)% year over year

Recurring revenue was 31% of total revenue, up 4 pts year over year

Q4 Earnings per Share: $0.48 GAAP; $0.61 non-GAAP

FY 2017 Earnings per Share: $1.90 GAAP; $2.39 non-GAAP

Q1 FY 2018 Outlook: Revenue: (3)% to (1)% decline year over year

Revenue: (3)% to (1)% decline year over year

Earnings per Share: GAAP: $0.48 to $0.53; Non-GAAP: $0.59 to $0.61

Cisco today reported fourth quarter and fiscal year results for the period ended July 29, 2017. Cisco reported fourth quarter revenue of $12.1 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.4 billion or $0.48 per share, and non-GAAP net income of $3.1 billion or $0.61 per share.

"We had another strong quarter and a transformative year. We made tremendous progress transitioning our business to more software and recurring revenue and delivered on our commitment to accelerate innovation in our core and across the portfolio," said Chuck Robbins, CEO, Cisco. "The network has never been more critical to business success and we are building the network of the future."

 
Q4 GAAP Results
 
 
  Q4 FY 2017
  Q4 FY 2016
  Vs. Q4 FY 2016
Revenue
  $
12.1
 billion   $
12.6
 billion   (4)%
Net Income
  $
2.4
 billion   $
2.8
 billion   (14)%
Diluted Earnings per Share (EPS)
  $
0.48
 
  $
0.56
 
  (14)%
 
Q4 Non-GAAP Results
 
 
  Q4 FY 2017
  Q4 FY 2016
  Vs. Q4 FY 2016
Net Income
  $
3.1
 billion   $
3.2
 billion   (3)%
EPS
  $
0.61
 
  $
0.63
 
  (3)%
 
Fiscal Year GAAP Results
 
 
  FY 2017
  FY 2016
  Vs. FY 2016
Revenue (excluding SP Video CPE Business for all periods)
  $
48.0
 billion   $
48.7
 billion   (2)%
Revenue (including SP Video CPE Business for all periods)
  $
48.0
 billion   $
49.2
 billion   (3)%
Net Income
  $
9.6
 billion   $
10.7
 billion   (11)%
EPS
  $
1.90
 
  $
2.11
 
  (10)%
 
Fiscal Year Non-GAAP Results
 
 
  FY 2017
  FY 2016
  Vs. FY 2016
Net Income (excluding SP Video CPE Business for all periods)   $
12.1
 billion   $
12.0
 billion   --%
EPS (excluding SP Video CPE Business for all periods)
  $
2.39
 
  $
2.36
 
  1%
 
       
       
   

Reconciliations between net income, EPS, and other measures on a GAAP and non-GAAP basis are provided in the tables located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

"We delivered another solid quarter and fiscal year. We executed well, drove solid profitability, strong cash flow, and we continued to deliver on our strategic growth priorities," said Kelly Kramer, CFO, Cisco. "We will continue to focus on making the right bets to offer the most innovative technologies to our customers in the way they want to consume it and deliver value to our shareholders."

Financial Summary All comparative percentages are on a year-over-year basis unless otherwise noted.

Q4 FY 2017 Highlights

Revenue -- Total revenue was $12.1 billion, down 4%, with product revenue down 5% and service revenue up 1%. 31% of total revenue was from recurring offers, up 4 percentage points from the fourth quarter of fiscal 2016. Revenue by geographic segment was: Americas down 6%, EMEA down 6%, and APJC up 6%. Product revenue performance was led by Wireless and Security which increased 5% and 3%, respectively. NGN Routing and Switching revenue each decreased 9%. Service Provider Video, Data Center, and Collaboration revenue decreased 10%, 4%, and 3%, respectively.

Gross Margin -- On a GAAP basis, total gross margin and product gross margin were 62.2% and 60.3%, respectively. The decrease in the product gross margin compared with 62.2% in the fourth quarter of fiscal 2016 was primarily due to pricing, partially offset by productivity improvements and to a lesser extent product mix.

Non-GAAP total gross margin and product gross margin were 63.7% and 61.9%, respectively. The decrease in non-GAAP product gross margin compared with 63.9% in the fourth quarter of fiscal 2016 was also primarily due to pricing, partially offset by continued productivity improvements and to a lesser extent product mix.

GAAP service gross margin was 67.8% and non-GAAP service gross margin was 68.8%.

Total gross margins by geographic segment were: 64.0% for the Americas, 63.8% for EMEA and 62.1% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.5 billion, down 3%. Non-GAAP operating expenses were $3.9 billion, down 7%, and were 32.2% of revenue.

Operating Income -- GAAP operating income was $3.0 billion, down 8%, with GAAP operating margin of 25.0%. Non-GAAP operating income was $3.8 billion, down 4%, with non-GAAP operating margin at 31.5%.

Provision for Income Taxes -- The GAAP tax provision rate was 23.8%. The non-GAAP tax provision rate was 22.3%.

Net Income and EPS -- On a GAAP basis, net income was $2.4 billion and EPS was $0.48. On a non-GAAP basis, net income was $3.1 billion, a decrease of 3%, and EPS was $0.61, a decrease of 3%.

Cash Flow from Operating Activities -- was $4.0 billion for the fourth quarter of fiscal 2017, an increase of 5% compared with $3.8 billion for the fourth quarter of fiscal 2016.

FY 2017 Highlights The revenue and non-GAAP information in this section is presented excluding the SP Video CPE Business for fiscal 2016 as it was divested during the second quarter of fiscal 2016 on November 20, 2015.

Revenue -- Total revenue was $48.0 billion, a decrease of 2%.

Net Income and EPS -- On a GAAP basis, net income was $9.6 billion and EPS was $1.90. On a non-GAAP basis, net income was $12.1 billion, flat compared to fiscal 2016, and EPS was $2.39, an increase of 1%.

Cash Flow from Operating Activities -- was $13.9 billion for fiscal 2017, compared with $13.6 billion for fiscal 2016, an increase of 2%.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- were $70.5 billion at the end of the fourth quarter of fiscal 2017, compared with $68.0 billion at the end of the third quarter of fiscal 2017, and compared with $65.8 billion at the end of fiscal 2016. The total cash and cash equivalents and investments available in the United States at the end of the fourth quarter of fiscal 2017 were $3.0 billion.

Deferred Revenue -- was $18.5 billion, up 12% in total, with deferred product revenue up 23%, driven largely by subscription-based and software offerings, and deferred service revenue was up 6%. The portion of product deferred revenue related to recurring software and subscription offers increased 50%.

Product Backlog -- was approximately $4.8 billion at the end of fiscal 2017, an increase of 3% compared with the balance at the end of fiscal 2016.

Capital Allocation -- In the fourth quarter of fiscal 2017, Cisco declared and paid a cash dividend of $0.29 per common share, or $1.4 billion. For the full fiscal year, Cisco declared and paid cash dividends of $1.10 per common share, or $5.5 billion.

For the fourth quarter of fiscal 2017, Cisco repurchased approximately 38 million shares of common stock under its stock repurchase program at an average price of $31.61 per share for an aggregate purchase price of $1.2 billion. For the full fiscal year, Cisco repurchased approximately 118 million shares of common stock under its stock repurchase program at an average price of $31.38 per share for an aggregate purchase price of $3.7 billion. As of July 29, 2017, Cisco had repurchased and retired 4.7 billion shares of Cisco common stock at an average price of $21.30 per share for an aggregate purchase price of approximately $100.3 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $11.7 billion with no termination date.

For the full fiscal year, Cisco returned $9.2 billion to shareholders through share buybacks and dividends.

Acquisitions -- In the fourth quarter of fiscal 2017, we closed the acquisition of MindMeld, Inc. and the acquisition of the advanced analytics team and associated intellectual property developed by Saggezza. We also announced our intent to acquire Viptela, Inc., a privately held company that provides software-defined wide area networking products, and Observable Networks, Inc., a privately held company that offers cloud-native network forensics security applications delivered as a service. Both acquisitions closed in the first quarter of fiscal 2018.

Business Outlook for Q1 FY 2018

Cisco expects to achieve the following results for the first quarter of fiscal 2018:

Q1 FY 2018
   
Revenue
  (3)% to (1)% decline Y/Y
Non-GAAP gross margin rate
  63% - 64%
Non-GAAP operating margin rate   29.5% - 30.5%
Non-GAAP tax provision rate
  22%
Non-GAAP EPS
  $0.59 - $0.61
 
   

Cisco estimates that GAAP EPS will be $0.48 to $0.53 which is lower than non-GAAP EPS by $0.08 to $0.11 per share in the first quarter of fiscal 2018.

A reconciliation between the Business Outlook for Q1 FY 2018 on a GAAP and non-GAAP basis is provided in the table entitled "GAAP to non-GAAP Business Outlook for Q1 FY 2018" located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

Editor’s Notes:

Q4 fiscal year 2017 conference call to discuss Cisco’s results along with its business outlook will be held on Wednesday, August 16, 2017 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, August 16, 2017 to 4:00 p.m. Pacific Time, August 23, 2017 at 1-800-391-9851 (United States) or 1-203-369-3268 (international). The replay will also be available via webcast 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, August 16, 2017. 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.

 
 
CISCO SYSTEMS, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(In millions, except per-share amounts)
 
(Unaudited)
 
 
 
 
  Three Months Ended
    Fiscal Year Ended
 
 
  July 29,
    July 30,
    July 29,
    July 30,
 
2017
2016
2017
2016
REVENUE:
                               
 
Product
  $
9,027
    $
9,552
    $
35,705     $
37,254  
 
Service
    3,106
      3,086
      12,300       11,993  
 
 
Total revenue
    12,133       12,638       48,005       49,247  
COST OF SALES:
                               
 
Product
    3,586
      3,614
      13,699       14,161  
 
Service
    1,001
      1,049
      4,082
      4,126
 
 
 
Total cost of sales
    4,587
      4,663
      17,781       18,287  
GROSS MARGIN
    7,546
      7,975
      30,224       30,960  
OPERATING EXPENSES:
                               
 
Research and development
    1,499
      1,601
      6,059
      6,296
 
 
Sales and marketing
    2,318
      2,443
      9,184
      9,619
 
 
General and administrative
    495
      533
      1,993
      1,814
 
 
Amortization of purchased intangible assets
    58
      82
      259
      303
 
 
Restructuring and other charges
    142
      13
      756
      268
 
 
 
Total operating expenses
    4,512
      4,672
      18,251       18,300  
OPERATING INCOME
    3,034
      3,303
      11,973       12,660  
 
Interest income
    360
      273
      1,338
      1,005
 
 
Interest expense
    (222
)
    (180
)
    (861
)
    (676
)
 
Other income (loss), net
    8
      (2
)
    (163
)
    (69
)
 
 
Interest and other income (loss), net     146
      91
      314
      260
 
INCOME BEFORE PROVISION FOR INCOME TAXES
    3,180
      3,394
      12,287       12,920  
Provision for income taxes
    756
      581
      2,678
      2,181
 
NET INCOME
  $
2,424
    $
2,813
    $
9,609
    $
10,739  
Net income per share:
                               
 
Basic
  $
0.49
    $
0.56
    $
1.92
    $
2.13
 
 
Diluted
  $
0.48
    $
0.56
    $
1.90
    $
2.11
 
Shares used in per-share calculation:
                               
 
Basic
    4,993
      5,031
      5,010
      5,053
 
 
Diluted
    5,027
      5,067
      5,049
      5,088
 
Cash dividends declared per common share
  $
0.29
    $
0.26
    $
1.10
    $
0.94
 
 
                               
 
CISCO SYSTEMS, INC.
REVENUE BY SEGMENT
(In millions, except percentages)
 
 
  July 29, 2017
 
  Three Months Ended
  Fiscal Year Ended
 
   
       
  Excluding SP Video CPE Business   Including SP Video CPE Business
 
  Amount
  Y/Y %
  Amount
  Y/Y %
  Y/Y %
Revenue:
                   
   
  Americas
  $
7,202
  (6)%
  $
28,351   (2)%
  (4)%
  EMEA
    2,927
  (6)%
    12,004   (2)%
  (2)%
  APJC
    2,004
  6%
    7,650
  2%
  1%
    Total
  $
12,133   (4)%
  $
48,005   (2)%
  (3)%
                         
   

During the second quarter of fiscal 2016 on November 20, 2015, Cisco completed its divestiture of the SP Video CPE Business. SP Video CPE Business revenue for fiscal 2016 was $504 million.

 
CISCO SYSTEMS, INC.
GROSS MARGIN PERCENTAGE BY SEGMENT
(In percentages)
 
 
  July 29, 2017
 
  Three Months Ended   Fiscal Year Ended
Gross Margin Percentage:
   
   
 
Americas
  64.0%
  64.5%
 
EMEA
  63.8%
  65.4%
 
APJC
  62.1%
  62.0%
 
 
   
   
 
CISCO SYSTEMS, INC.
REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES
(In millions, except percentages)
 
 
  July 29, 2017
 
  Three Months Ended
  Fiscal Year Ended
 
  Amount
  Y/Y %
  Amount
  Y/Y % (1)
Revenue:
                   
  Switching
  $
3,439
  (9)%
  $
13,949   (5)%
  NGN Routing
    1,893
  (9)%
    7,831
  (4)%
  Collaboration
    1,113
  (3)%
    4,278
  (2)%
  Data Center
    837
  (4)%
    3,228
  (4)%
  Wireless
    799
  5%
    2,766
  5%
  Security
    558
  3%
    2,153
  9%
  Service Provider Video
    227
  (10)%
    946
  (23)%
  Other
    161
  31%
    554
  53%
   
Product
    9,027
  (5)%
    35,705   (3)%
   
Service
    3,106
  1%
    12,300   3%
   
 
Total
  $
12,133   (4)%
  $
48,005   (2)%
   
 
 
                   

(1) During the second quarter of fiscal 2016 on November 20, 2015, Cisco completed its divestiture of the SP Video CPE Business. SP Video CPE Business revenue for fiscal 2016 was $504 million.

 
CISCO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
 
 
  July 29,
  July 30,
2017
2016
ASSETS
     
     
Current assets:
     
     
 
Cash and cash equivalents
  $
11,708
  $
7,631
 
Investments
    58,784
    58,125
 
Accounts receivable, net of allowance for doubtful accounts of $211 at July 29, 2017 and $249 at July 30, 2016
    5,146
    5,847
 
Inventories
    1,616
    1,217
 
Financing receivables, net
    4,856
    4,272
 
Other current assets
    1,593
    1,627
 
Total current assets
    83,703
    78,719
Property and equipment, net
    3,322
    3,506
Financing receivables, net
    4,738
    4,158
Goodwill
    29,766
    26,625
Purchased intangible assets, net
    2,539
    2,501
Deferred tax assets
    4,239
    4,299
Other assets
    1,511
    1,844
 
TOTAL ASSETS
  $
129,818   $
121,652
LIABILITIES AND EQUITY
     
     
Current liabilities:
     
     
 
Short-term debt
  $
7,992
  $
4,160
 
Accounts payable
    1,385
    1,056
 
Income taxes payable
    98
    517
 
Accrued compensation
    2,895
    2,951
 
Deferred revenue
    10,821
    10,155
 
Other current liabilities
    4,392
    6,072
 
 
Total current liabilities
    27,583
    24,911
Long-term debt
    25,725
    24,483
Income taxes payable
    1,250
    925
Deferred revenue
    7,673
    6,317
Other long-term liabilities
    1,450
    1,431
 
Total liabilities
    63,681
    58,067
Total equity
    66,137
    63,585
 
TOTAL LIABILITIES AND EQUITY
  $
129,818   $
121,652
 
 
     
     
 
 
CISCO SYSTEMS, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In millions)
 
(Unaudited)
 
 
 
 
  Fiscal Year Ended
 
 
  July 29,
    July 30,
 
2017
2016
Cash flows from operating activities:
     
       
 
 
Net income
  $
9,609
    $
10,739
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
     
       
 
 
 
Depreciation, amortization, and other
    2,286
      2,150
 
 
 
Share-based compensation expense
    1,526
      1,458
 
 
 
Provision for receivables
    (8
)
    (9
)
 
 
Deferred income taxes
    (124
)
    (194
)
 
 
Excess tax benefits from share-based compensation
    (153
)
    (129
)
 
 
(Gains) losses on divestitures, investments and other, net
    154
      (317
)
 
 
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
     
       
 
 
 
 
Accounts receivable
    756
      (404
)
 
 
 
Inventories
    (394
)
    315
 
 
 
 
Financing receivables
    (1,038
)
    (150
)
 
 
 
Other assets
    15
      (37
)
 
 
 
Accounts payable
    311
      (65
)
 
 
 
Income taxes, net
    60
      (300
)
 
 
 
Accrued compensation
    (110
)
    (101
)
 
 
 
Deferred revenue
    1,683
      1,219
 
 
 
 
Other liabilities
    (697
)
    (605
)
 
 
 
 
Net cash provided by operating activities     13,876
      13,570
 
Cash flows from investing activities:
     
       
 
 
Purchases of investments
    (42,702 )
    (46,760 )
 
Proceeds from sales of investments
    28,827
      28,778
 
 
Proceeds from maturities of investments
    12,143
      14,115
 
 
Acquisition of businesses, net of cash and cash equivalents acquired
    (3,324
)
    (3,161
)
 
Proceeds from business divestiture
    --
      372
 
 
Purchases of investments in privately held companies
    (222
)
    (256
)
 
Return of investments in privately held companies
    203
      91
 
 
Acquisition of property and equipment
    (964
)
    (1,146
)
 
Proceeds from sales of property and equipment
    7
      41
 
 
Other
    39
      (191
)
 
 
 
 
Net cash used in investing activities
    (5,993
)
    (8,117
)
Cash flows from financing activities:
     
       
 
 
Issuances of common stock
    708
      1,127
 
 
Repurchases of common stock - repurchase program
    (3,685
)
    (3,909
)
 
Shares repurchased for tax withholdings on vesting of restricted stock units
    (619
)
    (557
)
 
Short-term borrowings, original maturities less than 90 days, net
    2,497
      (4
)
 
Issuances of debt
    6,980
      6,978
 
 
Repayments of debt
    (4,151
)
    (3,863
)
 
Excess tax benefits from share-based compensation
    153
      129
 
 
Dividends paid
    (5,511
)
    (4,750
)
 
Other
    (178
)
    150
 
 
 
 
 
Net cash used in financing activities
    (3,806
)
    (4,699
)
Net increase in cash and cash equivalents
    4,077
      754
 
Cash and cash equivalents, beginning of fiscal year
    7,631
      6,877
 
Cash and cash equivalents, end of fiscal year
  $
11,708
    $
7,631
 
 
     
       
 
Supplemental cash flow information:
     
       
 
Cash paid for interest
  $
897
    $
859
 
Cash paid for income taxes, net
  $
2,742
    $
2,675
 
 
     
       
 
 
CISCO SYSTEMS, INC.
DEFERRED REVENUE
(In millions)
 
 
  July 29,
  April 29,
  July 30,
2017
2017
2016
Deferred revenue:
                 
  Service
  $
11,302   $
10,532   $
10,621
  Product:
                 
    Deferred revenue related to recurring software and subscription businesses     4,971
    4,352
    3,308
    Other product deferred revenue
    2,221
    2,438
    2,543
    Total product deferred revenue
    7,192
    6,790
    5,851
     
Total
  $
18,494   $
17,322   $
16,472
Reported as:
                 
  Current
  $
10,821   $
10,344   $
10,155
  Noncurrent
    7,673
    6,978
    6,317
     
Total
  $
18,494   $
17,322   $
16,472
     
 
                 
 
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 2017
                   
 
           
  July 29, 2017
  $
0.29
  $
1,448
  38
  $
31.61
  $
1,201
  $
2,649
  April 29, 2017
    0.29
    1,451
  15
   
33.71
    503
    1,954
  January 28, 2017
    0.26
    1,304
  33
   
30.33
    1,001
    2,305
  October 29, 2016
    0.26
    1,308
  32
   
31.12
    1,001
    2,309
 
  $
1.10
  $
5,511
  118
  $
31.38
  $
3,706
  $
9,217
 
                   
 
           
Fiscal 2016
                   
 
           
  July 30, 2016
  $
0.26
  $
1,309
  28
  $
28.70
  $
800
  $
2,109
  April 30, 2016
    0.26
    1,308
  27
   
24.08
    649
    1,957
  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
   
Total
  $
0.94
  $
4,750
  148
  $
26.45
  $
3,918
  $
8,668
   
 
                   
 
           
 
 
CISCO SYSTEMS, INC.
 
RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES
 
 
 
GAAP TO NON-GAAP NET INCOME
 
(In millions, except per-share amounts)
 
 
 
 
  Three Months Ended
    Fiscal Year Ended
 
 
  July 29,
    July 30,
    July 29,
    July 30,
 
2017
2016
2017
2016
GAAP net income
  $
2,424
    $
2,813
    $
9,609
    $
10,739  
 
Adjustments to cost of sales:
                               
 
 
Share-based compensation expense
    56
      52
      219
      212
 
 
 
Amortization of acquisition-related intangible assets
    140
      141
      483
      507
 
 
 
Supplier component remediation charge (adjustment), net     (18
)
    --
      (47
)
    (74
)
 
 
Acquisition-related/divestiture costs
    --
      --
      1
      1
 
 
 
Significant asset impairments and restructurings
    --
      --
      --
      (2
)
 
Total adjustments to GAAP cost of sales
    178
      193
      656
      644
 
 
Adjustments to operating expenses:
                               
 
 
Share-based compensation expense
    344
      293
      1,307
      1,220
 
 
 
Amortization of acquisition-related intangible assets
    58
      82
      259
      303
 
 
 
Acquisition-related/divestiture costs (1)
    62
      82
      219
      27
 
 
 
Significant asset impairments and restructurings
    142
      13
      756
      268
 
 
Total adjustments to GAAP operating expenses
    606
      470
      2,541
      1,818
 
 
Total adjustments to GAAP income before provision for income taxes
    784
      663
      3,197
      2,462
 
 
Income tax effect of non-GAAP adjustments
    (235
)
    (196
)
    (847
)
    (623
)
 
Significant tax matters
    108
      (91
)
    108
      (556
)
 
Total adjustments to GAAP provision for income taxes
    (127
)
    (287
)
    (739
)
    (1,179 )
Non-GAAP net income
  $
3,081
    $
3,189
    $
12,067     $
12,022  
 
                               
Diluted net income per share:
                               
GAAP
  $
0.48
    $
0.56
    $
1.90
    $
2.11
 
Non-GAAP
  $
0.61
    $
0.63
    $
2.39
    $
2.36
 
 
                               

(1) During the second quarter of fiscal 2016 on November 20, 2015, Cisco completed its divestiture of the SP Video CPE Business. This sale resulted in a pre-tax gain of $253 million, net of certain transaction costs incurred. The gain on this transaction was excluded from non-GAAP net income for fiscal 2016.

 
CISCO SYSTEMS, INC.
RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES
 
GROSS MARGINS, OPERATING EXPENSES, OPERATING MARGINS, AND NET INCOME
(In millions, except percentages)
 
   
 
 
  Three Months Ended
 
 
  July 29, 2017
 
 
  Product Gross Margin
    Service Gross Margin
    Total Gross Margin
    Operating Expenses
    Y/Y
    Operating Income
    Y/Y
    Net Income
    Y/Y
 
GAAP amount
  $
5,441
    $
2,105
    $
7,546
    $
4,512
    (3
)%
  $
3,034
    (8
)%
  $
2,424
    (14
)%
% of revenue
   
60.3
%
   
67.8
%
   
62.2
%
   
37.2
%
         
25.0
%
          20.0
%
     
Adjustments to GAAP amounts:
   
 
     
 
     
 
     
 
           
 
                     
 
Share-based compensation expense
   
23
     
33
     
56
     
344
           
400
            400
       
 
Amortization of acquisition-related intangible assets
   
140
     
--
     
140
     
58
           
198
            198
       
 
Supplier component remediation charge (adjustment), net    
(18
)
   
--
     
(18
)
   
--
           
(18
)
          (18
)
     
 
Acquisition/divestiture-related costs
   
--
     
--
     
--
     
62
           
62
            62
       
 
Significant asset impairments and restructurings
   
--
     
--
     
--
     
142
           
142
            142
       
 
Income tax/significant tax matters
   
--
     
--
     
--
     
--
           
--
            (127
)
     
 
Non-GAAP amount
  $
5,586
    $
2,138
    $
7,724
    $
3,906
    (7
)%
  $
3,818
    (4
)%
  $
3,081
    (3
)%
% of revenue
   
61.9
%
   
68.8
%
   
63.7
%
   
32.2
%
         
31.5
%
          25.4
%
     
 
   
 
     
 
     
 
     
 
           
 
                     
 
   
 
 
  Three Months Ended
 
 
  July 30, 2016
 
 
  Product Gross Margin
    Service Gross Margin
    Total Gross Margin
    Operating Expenses
    Operating
    Net
 
Income
Income
GAAP amount
  $
5,938
    $
2,037
    $
7,975
    $
4,672
    $
3,303
    $
2,813
 
% of revenue
   
62.2
%
   
66.0
%
   
63.1
%
   
37.0
%
    26.1
%
    22.3
%
Adjustments to GAAP amounts:
   
 
     
 
     
 
     
 
                 
 
Share-based compensation expense
   
20
     
32
     
52
     
293
      345
      345
 
 
Amortization of acquisition-related intangible assets    
141
     
--
     
141
     
82
      223
      223
 
 
Acquisition/divestiture-related costs
   
--
     
--
     
--
     
82
      82
      82
 
 
Significant asset impairments and restructurings
   
--
     
--
     
--
     
13
      13
      13
 
 
Income tax/significant tax matters
   
--
     
--
     
--
     
--
      --
      (287
)
Non-GAAP amount
  $
6,099
    $
2,069
    $
8,168
    $
4,202
    $
3,966
    $
3,189
 
% of revenue
   
63.9
%
   
67.0
%
   
64.6
%
   
33.2
%
    31.4
%
    25.2
%
 
   
 
     
 
     
 
     
 
                 
 
CISCO SYSTEMS, INC.
RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES
 
GROSS MARGINS, OPERATING EXPENSES, OPERATING MARGINS, AND NET INCOME
(In millions, except percentages)
 
   
 
 
  Fiscal Year Ended
 
 
  July 29, 2017
 
 
  Product Gross Margin
    Service Gross Margin
    Total Gross Margin
    Operating Expenses
    Y/Y
    Operating Income
    Y/Y
    Net Income
    Y/Y
 
GAAP amount
  $
22,006
    $
8,218
    $
30,224
    $
18,251
    --
%
  $
11,973
    (5
)%
  $
9,609
    (11
)%
% of revenue
   
61.6
%
   
66.8
%
   
63.0
%
   
38.0
%
         
24.9
%
          20.0
%
     
Adjustments to GAAP amounts:
   
 
     
 
     
 
     
 
           
 
                     
 
Share-based compensation expense
   
85
     
134
     
219
     
1,307
           
1,526
            1,526
       
 
Amortization of acquisition-related intangible assets
   
483
     
--
     
483
     
259
           
742
            742
       
 
Supplier component remediation charge (adjustment), net    
(47
)
   
--
     
(47
)
   
--
           
(47
)
          (47
)
     
 
Acquisition/divestiture-related costs
   
--
     
1
     
1
     
219
           
220
            220
       
 
Significant asset impairments and restructurings
   
--
     
--
     
--
     
756
           
756
            756
       
 
Income tax/significant tax matters
   
--
     
--
     
--
     
--
           
--
            (739
)
     
 
Non-GAAP amount
  $
22,527
    $
8,353
    $
30,880
    $
15,710
    (4
)%
  $
15,170
    --
%
  $
12,067     --
%
% of revenue
   
63.1
%
   
67.9
%
   
64.3
%
   
32.7
%
         
31.6
%
          25.1
%
     
 
   
 
     
 
     
 
     
 
           
 
                     

During the second quarter of fiscal 2016 on November 20, 2015, Cisco completed its divestiture of the SP Video CPE Business. Accordingly, the non-GAAP growth rates above are normalized to exclude the SP Video CPE Business.

 
   
 
 
  Fiscal Year Ended
 
 
  July 30, 2016
 
 
  Product Gross Margin
    Service Gross Margin
    Total Gross Margin
    Operating Expenses
    Operating
    Net
 
Income
Income
GAAP amount
  $
23,093
    $
7,867
    $
30,960
    $
18,300
    $
12,660     $
10,739  
% of revenue
   
62.0
%
   
65.6
%
   
62.9
%
   
37.2
%
    25.7
%
    21.8
%
Adjustments to GAAP amounts:
   
 
     
 
     
 
     
 
                 
 
Share-based compensation expense
   
70
     
142
     
212
     
1,220
      1,432
      1,432
 
 
Amortization of acquisition-related intangible assets
   
507
     
--
     
507
     
303
      810
      810
 
 
Supplier component remediation charge (adjustment), net    
(74
)
   
--
     
(74
)
   
--
      (74
)
    (74
)
 
Acquisition/divestiture-related costs
   
--
     
1
     
1
     
27
      28
      28
 
 
Significant asset impairments and restructurings
   
(2
)
   
--
     
(2
)
   
268
      266
      266
 
 
Income tax/significant tax matters
   
--
     
--
     
--
     
--
      --
      (1,179 )
Non-GAAP amount
  $
23,594
    $
8,010
    $
31,604
    $
16,482
    $
15,122     $
12,022  
 
Less: SP Video CPE Business (1)
   
(56
)
   
--
     
(56
)
   
(43
)
    (13
)
    (10
)
Non-GAAP amount (excluding SP Video CPE Business)
  $
23,538
    $
8,010
    $
31,548
    $
16,439
    $
15,109     $
12,012  
% of revenue
   
64.0
%
   
66.8
%
   
64.7
%
   
33.7
%
    31.0
%
    24.6
%
 
   
 
     
 
     
 
     
 
                 

(1) Reflects four months of operations for the SP Video CPE Business, which was divested during the second quarter of fiscal 2016 on November 20, 2015.

 
 
CISCO SYSTEMS, INC.
 
RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES
 
 
 
EFFECTIVE TAX RATE
 
(In percentages)
 
 
 
 
  Three Months Ended
    Fiscal Year Ended
 
 
  July 29, 2017     July 30, 2016     July 29, 2017     July 30, 2016  
GAAP effective tax rate
  23.8
%
  17.1
%
  21.8
%
  16.9
%
 
Total adjustments to GAAP provision for income taxes   (1.5
)%
  4.3
%
  0.3
%
  4.9
%
Non-GAAP effective tax rate
  22.3
%
  21.4
%
  22.1
%
  21.8
%
 
   
     
     
     
 
 
GAAP TO NON-GAAP BUSINESS OUTLOOK FOR Q1 FY 2018
 
Q1 FY 2018
  Gross Margin
  Operating Margin   Tax Provision   Earnings per
Rate
Rate
Rate
Share (2)
GAAP
  61.5% - 62.5%   23.5% - 24.5%
  18%
  $0.48 - $0.53
Estimated adjustments for:
   
   
   
   
Share-based compensation expense
  0.5%
  3.0%
   
  $0.04 - $0.05
Amortization of purchased intangible assets and other acquisition-related/divestiture costs   1.0%
  2.0%
   
  $0.03 - $0.04
Restructuring and other charges (1)
  --
  1.0%
   
  $0.01 - $0.02
Income tax effect of non-GAAP adjustments
  --
  --
  4%
   
Non-GAAP
  63% - 64%
  29.5% - 30.5%
  22%
  $0.59 - $0.61
 
   
   
   
   

(1) In August 2016, we began taking action under a restructuring plan in order to reinvest in our key priority areas in which up to 6,600 employees would be impacted, with estimated pretax charges of approximately $850 million. During fiscal 2017, we have recognized pretax charges of $756 million to our GAAP financial results in relation to this restructuring plan. We expect this plan to be substantially completed by the end of the first quarter of fiscal 2018.

(2) Estimated adjustments to GAAP earnings per share are shown after income tax effects.

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

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 our progress transitioning our business to more software and recurring revenue, our ability to accelerate innovation in our core and across the portfolio and to build the network of the future, our ability to deliver on our strategic growth priorities, our ability to offer the most innovative technologies to our customers in the way they want to consume it, and our continued ability to deliver value to our shareholders) and the future financial performance of Cisco (including the business outlook for Q1 FY 2018) 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, key growth areas, and in certain geographical locations, as well as maintaining leadership in routing, switching and services; 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; our ability to achieve the benefits of the announced restructuring and possible changes in the size and timing of the related charges; man-made problems such as cyber-attacks, data protection breaches, computer viruses or terrorism; 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 reports on Forms 10-Q and 10-K filed on May 23, 2017 and September 8, 2016, 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 reports on Forms 10-Q and 10-K as each may be amended from time to time. Cisco’s results of operations for the three months and the year ended July 29, 2017 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, and non-GAAP net income per share data 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.

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, acquisition-related/divestiture costs, significant asset impairments and restructurings, significant litigation and other contingencies, significant gains and losses on investments, the income tax effects of the foregoing and significant tax matters. Cisco’s 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 is no longer part of Cisco and 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.

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