CSCO
$33.99
Cisco Systems
($.09)
(.26%)
Earnings Details
2nd Quarter January 2017
Wednesday, February 15, 2017 4:05:18 PM
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Summary

Cisco Systems Beats

Cisco Systems (CSCO) reported 2nd Quarter January 2017 earnings of $0.59 per share on revenue of $11.6 billion. The consensus earnings estimate was $0.56 per share on revenue of $11.6 billion. The Earnings Whisper number was $0.58 per share. Revenue fell 2.9% compared to the same quarter a year ago.

The company said it expects third quarter non-GAAP earnings of $0.57 to $0.59 per share on revenue of $11.76 billion to $12.00 billion. The current consensus earnings estimate is $0.58 per share on revenue of $11.87 billion for the quarter ending April 30, 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
$0.59
Earnings Whisper
$0.58
Consensus Estimate
$0.56
Reported Revenue
$11.58 Bil
Revenue Estimate
$11.55 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Cisco Reports Second Quarter Earnings

Increases Quarterly Cash Dividend 12% to $0.29

SAN JOSE, CA--(Marketwired - Feb 15, 2017) - Cisco (CSCO)

Q2 Revenue: $11.6 billion Decrease of (2)% year over year -- Q2 guidance was (2)% to (4)% decline year over year (normalized to exclude the SP Video CPE Business for Q2 FY2016)

Decrease of (2)% year over year -- Q2 guidance was (2)% to (4)% decline year over year (normalized to exclude the SP Video CPE Business for Q2 FY2016)

Q2 Earnings per Share: $0.47 GAAP; $0.57 non-GAAP

Q3 FY2017 Outlook: Revenue: (2)% to 0% year over year

Revenue: (2)% to 0% year over year

Earnings per Share: GAAP $0.44 to $0.49; Non-GAAP: $0.57 to $0.59

Cisco (CSCO) today reported second quarter results for the period ended January 28, 2017. Cisco reported second quarter revenue of $11.6 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.3 billion or $0.47 per share, and non-GAAP net income of $2.9 billion or $0.57 per share.

"We are pleased with the quarter and the continued customer momentum as we help them drive security, automation and intelligence across the network and into the cloud," said Chuck Robbins, Cisco CEO. "This quarter we announced our intent to acquire AppDynamics which, combined with Cisco’s networking analytics, will provide customers with unprecedented insights into business performance. We will remain focused on accelerating innovation across our portfolio as we continue to deliver value to customers and shareholders."

 GAAP Results
 
 
Q2 FY2017
  Q2 FY2016
  Vs. Q2 FY2016
Revenue (excluding SP Video CPE Business for all periods) $
11.6
  billion   $
11.8
  billion   (2)%
Revenue (including SP Video CPE Business for all periods) $
11.6
  billion   $
11.9
  billion   (3)%
Net Income
$
2.3
  billion   $
3.1
  billion   (25)%
Diluted Earnings per Share (EPS)
$
0.47
   
  $
0.62
   
  (24)%
 
       
         
   
 
       
         
   
Non-GAAP Results
 
 
Q2 FY2017
  Q2 FY2016
  Vs. Q2 FY2016
Net Income (excluding SP Video CPE Business for all periods) $
2.9
  billion   $
2.9
  billion   (2)%
EPS (excluding SP Video CPE Business for all periods)
$
0.57    
  $
0.57    
  -- %

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."

Cisco Increases Quarterly Cash Dividend

Cisco has also declared a quarterly dividend of $0.29 per common share, a three-cent increase over the previous quarter’s dividend, to be paid on April 26, 2017 to all shareholders of record as of the close of business on April 6, 2017. Future dividends will be subject to Board approval.

"We delivered a solid Q2 with $11.6 billion in revenues and further growth in key business areas of collaboration, security and services," said Kelly Kramer, Cisco CFO. "I am pleased with our progress on business transformation to software and recurring revenues. We expect to continue to execute well and return value to our shareholders including our board approved an increase of three-cents to the quarterly dividend to $0.29 per share."

Financial Summary

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

All revenue, non-GAAP, and geographic financial information in the "Q2 FY 2017 Highlights" section is presented excluding the SP Video CPE Business for prior periods as it was divested during the second quarter of fiscal 2016 on November 20, 2015.

Q2 FY 2017 Highlights

Revenue -- Total revenue was $11.6 billion, down 2%, with product revenue down 4% and service revenue up 5%. Revenue by geographic segment was: Americas down 3%, EMEA flat, and APJC down 3%. Product revenue performance was led by Security which increased 14%. Collaboration and Wireless product revenue increased by 4% and 3%, respectively. NGN Routing, Switching and Data Center product revenue decreased by 10%, 5% and 4%, respectively. Service Provider Video product revenue decreased by 41%.

Gross Margin -- On a GAAP basis, total gross margin and product gross margin were 62.8% and 61.1%, respectively. The decrease in the product gross margin compared with 61.3% in the second quarter of fiscal 2016 was primarily due to pricing and to a lesser extent product mix, partially offset by continued productivity improvements and the divestiture of the SP Video CPE Business.

Non-GAAP total gross margin and product gross margin were 64.1% and 62.4%, respectively. The decrease in non-GAAP product gross margin compared with 63.3% in the second quarter of fiscal 2016 was primarily due to pricing and to a lesser extent product mix, partially offset by continued productivity improvements.

GAAP service gross margin was 67.7% and non-GAAP service gross margin was 68.8%.

Total gross margins by geographic segment were: 64.4% for the Americas, 65.6% for EMEA and 60.4% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.4 billion, up 6%, primarily due to the gain recorded in the second quarter of fiscal 2016 from the sale of the SP Video CPE Business. Non-GAAP operating expenses were $3.8 billion, down 2%, and were 33.0% of revenue. Headcount compared with the end of the first quarter of fiscal 2017 decreased by 426 to 71,959, driven by our fiscal 2017 restructuring actions that began in the first quarter, offset by additional headcount primarily in our investments in key growth areas.

Operating Income -- GAAP operating income was $2.9 billion, down 12%, with GAAP operating margin of 25.0%. Non-GAAP operating income was $3.6 billion, down 3%, with non-GAAP operating margin at 31.0%.

Provision for Income Taxes -- The GAAP tax provision rate was 20.8%. The non-GAAP tax provision rate was 22.0%.

Net Income and EPS -- On a GAAP basis, net income was $2.3 billion and EPS was $0.47. On a non-GAAP basis, net income was $2.9 billion, a decrease of 2%, and EPS was flat at $0.57.

Cash Flow from Operating Activities -- was $3.8 billion, a decrease of 4% compared with $3.9 billion for the second quarter of fiscal 2016.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- were $71.8 billion at the end of the second quarter of fiscal 2017, compared with $71.0 billion at the end of the first 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 second quarter of fiscal 2017 were $9.6 billion.

Deferred Revenue -- was $17.1 billion, up 13% in total, with deferred product revenue up 19%, driven largely by subscription-based and software offerings. Deferred service revenue was up 9%. The portion of product deferred revenue related to recurring software and subscription businesses grew 51%.

Capital Allocation -- In the second quarter of fiscal 2017, Cisco declared and paid a cash dividend of $0.26 per common share, or $1.3 billion. For the second quarter of fiscal 2017, Cisco repurchased approximately 33 million shares of common stock under its stock repurchase program at an average price of $30.33 per share for an aggregate purchase price of $1.0 billion.

As of January 28, 2017, Cisco had repurchased and retired 4.7 billion shares of Cisco common stock at an average price of $21.17 per share for an aggregate purchase price of approximately $98.6 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $13.4 billion with no termination date.

Announced Acquisition of AppDynamics -- On January 24, 2017, Cisco announced its intent to acquire AppDynamics, Inc., a privately held application intelligence software company. The acquisition is expected to close in the third quarter of fiscal 2017.

Business Outlook for Q3 FY 2017

Cisco expects to achieve the following results for the third quarter of fiscal 2017:

Q3 FY 2017
   
Revenue
  (2)% to 0% Y/Y
Non-GAAP gross margin rate
  63% - 64%
Non-GAAP operating margin rate   29% - 30%
Non-GAAP tax provision rate
  22%
Non-GAAP EPS
  $0.57 - $0.59

The third quarter of fiscal 2016 included an extra week which resulted in higher revenue of $265 million and higher non-GAAP cost of sales and operating expenses of $150 million resulting in $115 million of non-GAAP operating income in that quarter.

Cisco estimates that GAAP EPS will be $0.44 to $0.49 which is lower than non-GAAP EPS by $0.10 to $0.13 per share in the third quarter of fiscal 2017.

A reconciliation between the Business Outlook for Q3 FY 2017 on a GAAP and non-GAAP basis is provided in the table entitled "GAAP to non-GAAP Business Outlook for Q3 FY 2017" located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

Editor’s Notes:

Q2 fiscal year 2017 conference call to discuss Cisco’s results along with its business outlook will be held on Wednesday, February 15, 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, February 15, 2017 to 4:00 p.m. Pacific Time, February 22, 2017 at 1-866-357-1423 (United States) or 1-203-369-0115 (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, February 15, 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
    Six Months Ended
 
 
January 28,
    January 23,
    January 28,
    January 23,
 
2017
2016
2017
2016
REVENUE:
 
     
     
     
 
 
 
Product
$
8,491
    $
8,983
    $
17,793     $
18,827  
 
 
Service
  3,089
      2,944
      6,139
      5,782
 
 
 
 
Total revenue
  11,580       11,927       23,932       24,609  
COST OF SALES:
                             
 
 
Product
  3,305
      3,480
      6,708
      7,333
 
 
 
Service
  999
      1,015
      2,064
      2,012
 
 
 
 
Total cost of sales
  4,304
      4,495
      8,772
      9,345
 
GROSS MARGIN
  7,276
      7,432
      15,160       15,264  
OPERATING EXPENSES:
                             
 
 
Research and development
  1,508
      1,509
      3,053
      3,069
 
 
 
Sales and marketing
  2,222
      2,286
      4,640
      4,729
 
 
 
General and administrative
  456
      176
      1,011
      715
 
 
 
Amortization of purchased intangible assets
  64
      71
      142
      140
 
 
 
Restructuring and other charges
  133
      96
      544
      238
 
 
 
 
Total operating expenses
  4,383
      4,138
      9,390
      8,891
 
OPERATING INCOME
  2,893
      3,294
      5,770
      6,373
 
 
 
Interest income
  329
      237
      624
      462
 
 
 
Interest expense
  (222
)
    (162
)
    (420
)
    (321
)
 
 
Other income (loss), net
  (37
)
    (63
)
    (58
)
    (71
)
 
 
 
Interest and other income (loss), net   70
      12
      146
      70
 
INCOME BEFORE PROVISION FOR INCOME TAXES
  2,963
      3,306
      5,916
      6,443
 
Provision for income taxes
  615
      159
      1,246
      866
 
 
 
NET INCOME
$
2,348
    $
3,147
    $
4,670
    $
5,577
 
 
                             
Net income per share:
                             
 
Basic
$
0.47
    $
0.62
    $
0.93
    $
1.10
 
 
Diluted
$
0.47
    $
0.62
    $
0.92
    $
1.09
 
Shares used in per-share calculation:
                             
 
Basic
  5,015
      5,070
      5,021
      5,075
 
 
Diluted
  5,040
      5,097
      5,054
      5,106
 
 
                             
Cash dividends declared per common share
$
0.26
    $
0.21
    $
0.52
    $
0.42
 
 
                             

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

 
CISCO SYSTEMS, INC.
REVENUE BY SEGMENT
(In millions, except percentages)
 
 
  January 28, 2017
 
  Three Months Ended
  Six Months Ended
 
   
  Excluding SP Video CPE Business   Including SP Video CPE Business    
  Excluding SP Video CPE Business   Including SP Video CPE Business
 
  Amount
  Y/Y %
  Y/Y %
  Amount
  Y/Y %
  Y/Y %
Revenue:
     
   
   
     
   
   
  Americas
  $
6,660
    (3)%
  (4)%
  $
14,103     (2)%
  (4)%
  EMEA
    3,065
    --%
  (1)%
    6,078
    --%
  (2)%
  APJC
    1,855
    (3)%
  (4)%
    3,751
    1%
  1%
    Total
  $
11,580     (2)%
  (3)%
  $
23,932     (1)%
  (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 the three and six months ended January 23, 2016 was $93 million and $504 million, respectively.

 
CISCO SYSTEMS, INC.
GROSS MARGIN PERCENTAGE BY SEGMENT
(In percentages)
 
 
  January 28, 2017
 
  Three Months Ended   Six Months Ended
Gross Margin Percentage:
   
   
 
Americas
  64.4%
  64.7%
 
EMEA
  65.6%
  66.2%
 
APJC
  60.4%
  62.0%
 
 
   
   
 
 
   
   
 
 
   
   
CISCO SYSTEMS, INC.
REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES
(In millions, except percentages)
 
 
  January 28, 2017
 
  Three Months Ended
  Six Months Ended
 
  Amount
  Y/Y %
  Amount
  Y/Y %
Revenue:
     
         
   
  Switching
  $
3,305
    (5)%
  $
7,021
    (6)%
  NGN Routing
    1,817
    (10)%
    3,906
    (2)%
  Collaboration
    1,062
    4%
    2,143
    --%
  Data Center
    790
    (4)%
    1,624
    (3)%
  Wireless
    632
    3%
    1,264
    --%
  Security
    528
    14%
    1,068
    13%
  Service Provider Video(1)
    241
    (41)%
    512
    (25)%
  Other
    116
    53%
    255
    70%
   
Product -- excluding SP Video CPE Business (1)
    8,491
    (4)%
    17,793     (3)%
   
Service
    3,089
    5%
    6,139
    6%
   
 
Total -- excluding SP Video CPE Business (1)   $
11,580     (2)%
  $
23,932     (1)%
   
 
 
                       

(1) Excludes SP Video CPE Business revenue for all periods presented as it was divested during the second quarter of fiscal 2016 on November 20, 2015. SP Video CPE Business revenue for the three and six months ended January 23, 2016 was $93 million and $504 million, respectively.

 
CISCO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
 
 
January 28, 2017
  July 30, 2016
ASSETS
   
     
Current assets:
   
     
 
Cash and cash equivalents
$
10,898
    $
7,631
 
 
Investments
  60,947
      58,125
 
 
Accounts receivable, net of allowance for doubtful accounts of $225 at January 28, 2017 and $249 at July 30, 2016   4,458
      5,847
 
 
Inventories
  1,264
      1,217
 
 
Financing receivables, net
  4,496
      4,272
 
 
Other current assets
  1,329
      1,627
 
 
 
 
Total current assets
  83,392
      78,719
 
Property and equipment, net
  3,422
      3,506
 
Financing receivables, net
  4,664
      4,158
 
Goodwill
  26,822
      26,625
 
Purchased intangible assets, net
  2,117
      2,501
 
Deferred tax assets
  4,293
      4,299
 
Other assets
  1,538
      1,844
 
 
 
 
TOTAL ASSETS
$
126,248     $
121,652  
LIABILITIES AND EQUITY
   
     
Current liabilities:
   
     
 
Short-term debt
$
4,451
    $
4,160
 
 
Accounts payable
  957
      1,056
 
 
Income taxes payable
  57
      517
 
 
Accrued compensation
  2,522
      2,951
 
 
Deferred revenue
  10,243
      10,155
 
 
Other current liabilities
  4,478
      6,072
 
 
 
 
Total current liabilities
  22,708
      24,911
 
Long-term debt
  30,471
      24,483
 
Income taxes payable
  1,025
      925
 
Deferred revenue
  6,843
      6,317
 
Other long-term liabilities
  1,383
      1,431
 
 
 
 
Total liabilities
  62,430
      58,067
 
Total equity
  63,818
      63,585
 
 
 
TOTAL LIABILITIES AND EQUITY
$
126,248     $
121,652  
 
 
 
   
       
 
 
 
 
   
       
 
 
 
 
   
       
 
CISCO SYSTEMS, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In millions)
 
(Unaudited)
 
 
 
 
Six Months Ended
 
 
January 28,
    January 23,
 
 2017
 2016
Cash flows from operating activities:
   
       
 
 
Net income
$
4,670
    $
5,577
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
   
       
 
 
 
Depreciation, amortization, and other
  1,148
      1,005
 
 
 
Share-based compensation expense
  724
      706
 
 
 
Provision for receivables
  4
      31
 
 
 
Deferred income taxes
  (26
)
    274
 
 
 
Excess tax benefits from share-based compensation
  (101
)
    (82
)
 
 
(Gains) losses on divestitures, investments and other, net
  79
      (260
)
 
 
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
   
       
 
 
 
 
Accounts receivable
  1,396
      988
 
 
 
 
Inventories
  (51
)
    153
 
 
 
 
Financing receivables
  (764
)
    (171
)
 
 
 
Other assets
  155
      (181
)
 
 
 
Accounts payable
  (98
)
    (147
)
 
 
 
Income taxes, net
  (257
)
    (764
)
 
 
 
Accrued compensation
  (417
)
    (348
)
 
 
 
Deferred revenue
  611
      69
 
 
 
 
Other liabilities
  (571
)
    (162
)
 
 
 
 
Net cash provided by operating activities
  6,502
      6,688
 
Cash flows from investing activities:
   
       
 
 
Purchases of investments
  (27,847 )
    (19,089 )
 
Proceeds from sales of investments
  18,420
      10,247
 
 
Proceeds from maturities of investments
  5,245
      7,955
 
 
Acquisition of businesses, net of cash and cash equivalents acquired
  (251
)
    (1,089
)
 
Proceeds from business divestiture
  --
      372
 
 
Purchases of investments in privately held companies
  (142
)
    (166
)
 
Return of investments in privately held companies
  108
      35
 
 
Acquisition of property and equipment
  (526
)
    (576
)
 
Proceeds from sales of property and equipment
  5
      11
 
 
Other
  10
      (87
)
 
 
 
 
Net cash used in investing activities
  (4,978
)
    (2,387
)
Cash flows from financing activities:
   
       
 
 
Issuances of common stock
  386
      701
 
 
Repurchases of common stock - repurchase program
  (1,991
)
    (2,344
)
 
Shares repurchased for tax withholdings on vesting of restricted stock units
  (432
)
    (412
)
 
Short-term borrowings, original maturities less than 90 days, net
  300
      (4
)
 
Issuances of debt
  6,232
      --
 
 
Repayments of debt
  (1
)
    (862
)
 
Excess tax benefits from share-based compensation
  101
      82
 
 
Dividends paid
  (2,612
)
    (2,133
)
 
Other
  (240
)
    108
 
 
 
 
 
Net cash provided by (used in) financing activities   1,743
      (4,864
)
Net increase (decrease) in cash and cash equivalents
  3,267
      (563
)
Cash and cash equivalents, beginning of period
  7,631
      6,877
 
Cash and cash equivalents, end of period
$
10,898
    $
6,314
 
Supplemental cash flow information:
   
       
 
Cash paid for interest
$
419
    $
426
 
Cash paid for income taxes, net
$
1,529
    $
1,355
 
 
   
       
 
 
   
       
 
 
   
       
 
CISCO SYSTEMS, INC.
DEFERRED REVENUE
(In millions)
 
 
January 28, 2017
  October 29, 2016
  January 23, 2016
Deferred revenue:
   
     
     
  Service
$
10,525     $
10,424     $
9,657
 
  Product:
   
     
     
    Deferred revenue related to recurring software and subscription businesses   3,997
      3,801
      2,654
 
    Deferred revenue related to two-tier distributors
  401
      439
      554
 
    Other product deferred revenue
  2,163
      2,287
      2,320
 
    Total product deferred revenue
  6,561
      6,527
      5,528
 
     
Total
$
17,086     $
16,951     $
15,185  
Reported as:
   
     
     
  Current
$
10,243     $
10,215     $
9,796
 
  Noncurrent
  6,843
      6,736
      5,389
 
     
Total
$
17,086     $
16,951     $
15,185  
     
 
                     
     
 
                     
     
 
                     
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
     
     
   
   
 
     
     
  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
 
   
Total
  $
0.52
    $
2,612
    65
    $
30.72
 
  $
2,002
    $
4,614
 
 
     
     
   
   
 
     
     
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
    Six Months Ended
 
 
January 28,
    January 23,
    January 28,
    January 23,
 
 2017
 2016
 2017
 2016
GAAP net income
$
2,348
    $
3,147
    $
4,670
    $
5,577
 
 
Adjustments to cost of sales:
                             
 
 
Share-based compensation expense
  53
      51
      107
      102
 
 
 
Amortization of acquisition-related intangible assets
  107
      123
      219
      251
 
 
 
Supplier component remediation charge (adjustment), net (1)   (16
)
    --
      (16
)
    --
 
 
 
Acquisition-related/divestiture costs
  1
      1
      1
      1
 
 
 
Significant asset impairments and restructurings
  --
      (1
)
    --
      (2
)
 
Total adjustments to GAAP cost of sales
  145
      174
      311
      352
 
 
Adjustments to operating expenses:
                             
 
 
Share-based compensation expense
  299
      280
      614
      590
 
 
 
Amortization of acquisition-related intangible assets
  64
      71
      142
      140
 
 
 
Acquisition-related/divestiture costs (2)
  61
      (222
)
    114
      (131
)
 
 
Significant asset impairments and restructurings
  133
      96
      544
      238
 
 
Total adjustments to GAAP operating expenses
  557
      225
      1,414
      837
 
 
Total adjustments to GAAP income before provision for income taxes
  702
      399
      1,725
      1,189
 
 
Income tax effect of non-GAAP adjustments
  (191
)
    (98
)
    (435
)
    (294
)
 
Significant tax matters (3)
  --
      (519
)
    --
      (519
)
 
Total adjustments to GAAP provision for income taxes
  (191
)
    (617
)
    (435
)
    (813
)
Non-GAAP net income
$
2,859
    $
2,929
    $
5,960
    $
5,953
 
Diluted net income per share:
                             
GAAP
$
0.47
    $
0.62
    $
0.92
    $
1.09
 
Non-GAAP
$
0.57
    $
0.57
    $
1.18
    $
1.17
 
 
                             

(1) GAAP net income for the second quarter of fiscal 2017 included two supplier component related items as follows: 1) a pre-tax charge to product cost of sales of $125 million related to the expected remediation costs for anticipated failures in future periods of a widely-used clock-signal component sourced from a third party which is included in several of the Company’s products, and 2) a pre-tax adjustment (reduction to product cost of sales) of $141 million to a liability originally recorded in the second quarter of fiscal 2014, related to lower than expected defects and future costs of remediation of issues with products sold in prior fiscal years containing memory components manufactured by a single supplier.

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

(3) 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.

 
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
 
 
January 28, 2017
 
 
Product Gross Margin
    Service Gross Margin
    Total Gross Margin
    Operating Expenses
    Y/Y
    Operating Income
    Y/Y
    Net Income
    Y/Y
 
GAAP amount
$
5,186
    $
2,090
    $
7,276
    $
4,383
    6
%
  $
2,893
    (12
)%
  $
2,348
    (25
)%
% of revenue
 
61.1
%
   
67.7
%
   
62.8
%
   
37.8
%
         
25.0
%
          20.3
%
     
Adjustments to GAAP amounts:
 
 
     
 
     
 
     
 
           
 
                     
 
Share-based compensation expense
 
19
     
34
     
53
     
299
           
352
            352
       
 
Amortization of acquisition-related intangible assets
 
107
     
--
     
107
     
64
           
171
            171
       
 
Supplier component remediation charge (adjustment), net  
(16
)
   
--
     
(16
)
   
--
           
(16
)
          (16
)
     
 
Acquisition-related/divestiture costs
 
--
     
1
     
1
     
61
           
62
            62
       
 
Significant asset impairments and restructurings
 
--
     
--
     
--
     
133
           
133
            133
       
 
Income tax effect
 
--
     
--
     
--
     
--
           
--
            (191
)
     
 
Non-GAAP amount
$
5,296
    $
2,125
    $
7,421
    $
3,826
    (2
)%
  $
3,595
    (3
)%
  $
2,859
    (2
)%
% of revenue
 
62.4
%
   
68.8
%
   
64.1
%
   
33.0
%
         
31.0
%
          24.7
%
     

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 for the second quarter of fiscal 2016 as detailed in the table below.

 
 
 
 
 
 
 
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 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
    Six Months Ended
 
 
January 28, 2017     January 23, 2016     January 28, 2017     January 23, 2016  
GAAP effective tax rate
20.8
%
  4.8
%
  21.1
%
  13.4
%
 
Total adjustments to GAAP provision for income taxes 1.2
%
  16.1
%
  0.9
%
  8.6
%
Non-GAAP effective tax rate
22.0
%
  20.9
%
  22.0
%
  22.0
%
 
 
     
     
     
 
 
 
     
     
     
 
FREE CASH FLOW
 
(In millions)
 
 
 
 
Three Months Ended
 
 
January 28, 2017
    October 24, 2016
    January 23, 2016
 
Net cash provided by operating activities $
3,772
    $
2,730
    $
3,922
 
Acquisition of property and equipment
 
(251
)
   
(275
)
   
(314
)
Free cash flow
$
3,521
    $
2,455
    $
3,608
 
 
 
 
     
 
     
 
 
 
 
 
     
 
     
 
 
GAAP TO NON-GAAP BUSINESS OUTLOOK FOR Q3 FY 2017
 
Q3 FY 2017
Gross Margin
  Operating Margin Rate   Tax Provision   Earnings per
Rate
Rate
Share (2)
GAAP
61.5% - 62.5%   23% - 24%
  21%
  $0.44 to $0.49
Estimated adjustments for:
 
   
   
   
Share-based compensation expense
0.5%
  3%
  --
  $0.05 - $0.06
Amortization of purchased intangible assets and other acquisition-related/divestiture costs 1.0%
  2%
  --
  $0.03 - $0.04
Restructuring and other charges (1)
--
  1%
  --
  $0.02 - $0.03
Income tax effect of non-GAAP adjustments
--
  --
  1%
   
Non-GAAP
63% - 64%
  29% - 30%
  22%
  $0.57 - $0.59
 
 
   
   
   

(1) During the first six months of fiscal 2017, Cisco recognized pretax charges of $544 million to the GAAP financial results in relation to the restructuring plan. Cisco currently estimates that it will recognize pretax charges to its GAAP financial results of approximately $700 million consisting of severance and other one-time termination benefits, and other associated costs. These charges are primarily cash-based. Cisco expects that approximately $100 million to $150 million of these charges will be recognized during the third quarter of fiscal 2017 with the remaining amount to be recognized during the rest of the fiscal year.

(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 continued customer momentum, our ability to accelerate innovation across our portfolio, our ability to successfully close the acquisition of AppDynamics and to achieve the expected benefits of the acquisition, growth in key business areas of collaboration, security and services, the transformation of our business to software and recurring revenues, and our ability to execute well and return value to our shareholders) 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 November 22, 2016 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 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 28, 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, non-GAAP net income per share data, 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. 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, 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.

About Cisco

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