CSCO
$47.46
Cisco Systems
$.35
.74%
Earnings Details
4th Quarter July 2018
Wednesday, August 15, 2018 4:05:00 PM
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Summary

Cisco Systems Beats

Cisco Systems (CSCO) reported 4th Quarter July 2018 earnings of $0.71 per share on revenue of $12.8 billion. The consensus earnings estimate was $0.69 per share on revenue of $12.8 billion. The Earnings Whisper number was $0.70 per share. Revenue grew 5.9% on a year-over-year basis.

The company said it expects first quarter non-GAAP earnings of $0.70 to $0.72 per share on revenue of $12.74 billion to $12.99 billion. The current consensus earnings estimate is $0.69 per share on revenue of $12.59 billion for the quarter ending October 31, 2018.

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
$0.71
Earnings Whisper
$0.70
Consensus Estimate
$0.69
Reported Revenue
$12.84 Bil
Revenue Estimate
$12.77 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Cisco Reports Fourth Quarter and Fiscal Year 2018 Earnings

•   Q4 Results:

  • Revenue: $12.8 billion

    ?   Increase of 6% year over year
    ?   Recurring revenue was 32% of total revenue, up 1 point year over year
  • Earnings per Share: GAAP: $0.81; Non-GAAP: $0.70
    ?   Non-GAAP EPS increased 15% year over year

•   FY 2018 Results:

  • Revenue: $49.3 billion; increase of 3% year over year
  • Earnings per Share: GAAP: $0.02; Non-GAAP: $2.60
    ?   Non-GAAP EPS increased 9% year over year
    ?   GAAP results include a $10.4 billion charge related to the enactment of the Tax Cuts and Jobs Acts

•   Q1 FY 2019 Guidance:

  • Revenue: 5% to 7% growth year over year
  • Earnings per Share: GAAP: $0.69 to $0.74; Non-GAAP: $0.70 to $0.72

SAN JOSE, Calif., Aug. 15, 2018 (GLOBE NEWSWIRE) -- Cisco today reported fourth quarter and fiscal year results for the period ended July 28, 2018. Cisco reported fourth quarter revenue of $12.8 billion, net income on a generally accepted accounting principles (GAAP) basis of $3.8 billion or $0.81 per share, and non-GAAP net income of $3.3 billion or $0.70 per share.

“We had a very strong finish to a great year and generated our highest quarterly revenue of $12.8 billion,” said Chuck Robbins, Chairman and CEO of Cisco. “Our results demonstrate a combination of strong customer adoption of our latest innovations, the ongoing value customers see in our software and subscription offerings, and excellent execution across our customer segments and geographies. Our strategy is working and we believe that are well-positioned to capture growth across our portfolio with our pipeline of innovation.”

Q4 GAAP Results

  Q4 FY 2018 Q4 FY 2017 Vs. Q4 FY 2017
Revenue $12.8billion $12.1billion 6%
Net Income $3.8billion $2.4billion 57%
Diluted
Earnings
per
Share
(EPS)
 $0.81  $0.48  69%
            

Q4 GAAP results include an $863 million benefit related to the Tax Cuts and Jobs Act. Non-GAAP results exclude this benefit.

   
Q4 Non-GAAP Results

  Q4 FY 2018 Q4 FY 2017 Vs. Q4 FY 2017
Net Income $3.3billion $3.1billion 8%
EPS $0.70  $0.61  15%
            

Fiscal Year GAAP Results

  FY 2018 FY 2017      Vs. FY 2017 
Revenue $49.3billion $48.0billion 3%
Net Income $0.1billion $9.6billion (99)%
EPS $0.02  $1.90  (99)%

Fiscal year GAAP results include a $10.4 billion charge related to the enactment of the Tax Cuts and Jobs Act comprised of $8.1 billion for the U.S. transition tax, $1.2 billion for foreign withholding tax and $1.1 billion for the re-measurement of net deferred tax assets.

        Fiscal Year Non-GAAP Results

  FY 2018 FY 2017      Vs. FY 2017 
Net Income $12.7billion $12.1billion 5%
EPS $2.60  $2.39  9%


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."

“Q4 was another quarter of broad-based strength across our portfolio reflecting our strong execution and momentum. We delivered record quarterly revenue, up 6%, and non-GAAP EPS, up 15%,” said Kelly Kramer, CFO of Cisco. “We are seeing solid demand for our products and solutions while continuing to make progress in transforming our business model and driving long-term shareholder value.”

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

Q4 FY 2018 Highlights

Revenue -- Total revenue was $12.8 billion, up 6%, with product revenue up 7% and service revenue up 3%. Recurring revenue as a percentage of total revenue was 32%, up 1 point year over year. Revenue by geographic segment was: Americas up 5%, EMEA up 8%, and APJC up 6%. Product revenue performance was generally broad based with growth in Security, up 12%, Applications, up 10%, and Infrastructure Platforms, up 7%.

Gross Margin -- On a GAAP basis, total gross margin, product gross margin, and service gross margin were 61.7%, 60.2%, and 66.0%, respectively, as compared with 62.2%, 60.3%, and 67.8%, respectively, in the fourth quarter of 2017.

On a non-GAAP basis, total gross margin, product gross margin, and service gross margin were 62.9%, 61.5%, and 67.1%, respectively, as compared with 63.7%, 61.9%, and 68.8%, respectively, in the fourth quarter of 2017.

Total gross margins by geographic segment were: 64.1% for the Americas, 63.7% for EMEA and 57.7% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.6 billion, up 1%. Non-GAAP operating expenses were $4.1 billion, up 5%, and were 32.0% of revenue.

Operating Income -- GAAP operating income was $3.3 billion, up 10%, with GAAP operating margin of 26.1%. Non-GAAP operating income was $4.0 billion, up 4%, with non-GAAP operating margin at 30.9%.

Provision for (benefit from) Income Taxes -- The GAAP tax provision rate was (5.9)%, which includes an $863 million benefit related to the Tax Cuts and Jobs Act. The non-GAAP tax provision rate was 21.2%.

Net Income and EPS -- On a GAAP basis, net income was $3.8 billion and EPS was $0.81. On a non-GAAP basis, net income was $3.3 billion, an increase of 8%, and EPS was $0.70, an increase of 15%.

Cash Flow from Operating Activities -- $4.1 billion for the fourth quarter of fiscal 2018, an increase of 2% compared with $4.0 billion for the fourth quarter of fiscal 2017.

FY 2018 Highlights

Revenue -- Total revenue was $49.3 billion, an increase of 3%.

Net Income and EPS -- On a GAAP basis, net income was $0.1 billion and EPS was $0.02. GAAP net income includes a $10.4 billion charge related to the enactment of the Tax Cuts and Jobs Act comprised of $8.1 billion for the U.S. transition tax, $1.2 billion for foreign withholding tax and $1.1 billion for the re-measurement of net deferred tax assets.

On a non-GAAP basis, net income was $12.7 billion, up 5% compared to fiscal 2017, and EPS was $2.60, an increase of 9%.

Cash Flow from Operating Activities -- $13.7 billion for fiscal 2018, compared with $13.9 billion for fiscal 2017, a decrease of 2%. Operating cash flow for fiscal 2018 includes the payments of $1.4 billion of one-time foreign taxes as related to the Tax Cuts and Jobs Act. Operating cash flow increased 8%, normalized for these tax payments.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- $46.5 billion at the end of the fourth quarter of fiscal 2018, compared with $54.4 billion at the end of the third quarter of fiscal 2018, and compared with $70.5 billion at the end of fiscal 2017. The total cash and cash equivalents and investments available in the United States at the end of the fourth quarter of fiscal 2018 were $40.4 billion.

Deferred Revenue -- $19.7 billion, up 6% in total, with deferred product revenue up 15%, driven largely by subscription-based and software offers, and deferred service revenue was up 1%. The portion of deferred product revenue related to recurring software and subscription offers increased 23%.

Product Backlog -- $6.6 billion at the end of fiscal 2018, an increase of 38% compared with the balance at the end of fiscal 2017.

Capital Allocation -- For the fourth quarter of fiscal 2018, Cisco returned $7.5 billion to shareholders through share buybacks and dividends. Cisco declared and paid a cash dividend of $0.33 per common share, or $1.5 billion. Cisco repurchased approximately 138 million shares of common stock under its stock repurchase program at an average price of $43.58 per share for an aggregate purchase price of $6.0 billion.

For the full fiscal year, Cisco returned $23.6 billion to shareholders through share buybacks and dividends. Cisco declared and paid cash dividends of $1.24 per common share, or $6.0 billion. Cisco repurchased approximately 432 million shares of common stock under its stock repurchase program at an average price of $40.88 per share for an aggregate purchase price of $17.7 billion. The remaining authorized amount for stock repurchases under the program is approximately $19.0 billion with no termination date.

Acquisitions and Divestitures

In the fourth quarter of fiscal 2018, we closed the acquisition of Accompany, a privately held company that provides an AI-driven relationship intelligence platform. We also announced our intent to acquire July Systems, Inc., a privately held company that provides enterprise-grade location platform through cloud-based subscription offerings. This acquisition closed in the first quarter of fiscal 2019. In the fourth quarter of fiscal 2018, we announced an agreement to sell our Service Provider Video Software Solutions (SPVSS) business. We expect this transaction to close in the first half of fiscal 2019 subject to customary closing conditions and regulatory approvals.

On August 2, 2018, we announced our intent to acquire Duo Security, a privately held company that provides unified access security and multi-factor authentication delivered through the cloud. The acquisition is expected to close in the first quarter of fiscal 2019, subject to customary closing conditions and regulatory approvals.

Guidance for Q1 FY 2019

Cisco expects to achieve the following results for the first quarter of fiscal 2019:

   
Q1 FY 2019  
Revenue 5% to 7% growth Y/Y
Non-GAAP gross margin rate 63% - 64%
Non-GAAP operating margin rate 30% - 31%
Non-GAAP tax provision rate 19%
Non-GAAP EPS $0.70 - $0.72
   

The guidance includes our SPVSS business that we recently agreed to sell and excludes the Duo Security acquisition since both transactions have not closed. We expect the SPVSS transaction to close in the first half of fiscal 2019 subject to customary closing conditions and regulatory approvals.

At the beginning of fiscal 2019, Cisco adopted the Financial Accounting Standards Board new standard on revenue recognition (ASC 606) using the modified retrospective method. The revenue guidance in the preceding table includes the impact of ASC 606 which we estimate to be a benefit of about 1% year over year.

Cisco estimates that GAAP EPS will be $0.69 to $0.74 in the first quarter of fiscal 2019.

A reconciliation between the Guidance for Q1 FY 2019 on a GAAP and non-GAAP basis is provided in the table entitled "GAAP to non-GAAP Guidance for Q1 FY 2019" located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

Editor's Notes:

  • Q4 fiscal year 2018 conference call to discuss Cisco's results along with its guidance will be held on Wednesday, August 15, 2018 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 15, 2018 to 4:00 p.m. Pacific Time, August 22, 2018 at 1-866-417-5767 (United States) or 1-203-369-0735 (international). The replay will also be available via webcast on the Cisco Investor Relations website at https://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 15, 2018. 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 https://investor.cisco.com.


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
(Unaudited)

 Three Months Ended Fiscal Year Ended
 July 28,
 2018
 July 29,
 2017
 July 28,
 2018
 July 29,
 2017
REVENUE:       
Product$9,642  $9,027  $36,709  $35,705 
Service3,202  3,106  12,621  12,300 
Total revenue12,844  12,133  49,330  48,005 
COST OF SALES:       
Product3,833  3,586  14,427  13,699 
Service1,089  1,001  4,297  4,082 
Total cost of sales4,922  4,587  18,724  17,781 
GROSS MARGIN7,922  7,546  30,606  30,224 
OPERATING EXPENSES:       
Research and development1,626  1,499  6,332  6,059 
Sales and marketing2,348  2,318  9,242  9,184 
General and administrative543  495  2,144  1,993 
Amortization of purchased intangible assets33  58  221  259 
Restructuring and other charges26  142  358  756 
Total operating expenses4,576  4,512  18,297  18,251 
OPERATING INCOME3,346  3,034  12,309  11,973 
Interest income353  360  1,508  1,338 
Interest expense(224) (222) (943) (861)
Other income (loss), net117  8  165  (163)
Interest and other income (loss), net246  146  730  314 
INCOME BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES3,592  3,180  13,039  12,287 
Provision for (benefit from) income taxes (1)(211) 756  12,929  2,678 
NET INCOME$3,803  $2,424  $110  $9,609 
        
Net income per share:       
Basic$0.81  $0.49  $0.02  $1.92 
Diluted$0.81  $0.48  $0.02  $1.90 
Shares used in per-share calculation:       
Basic4,672  4,993  4,837  5,010 
Diluted4,722  5,027  4,881  5,049 
        
Cash dividends declared per common share$0.33  $0.29  $1.24  $1.10 
                

(1) For the three months ended July 28, 2018, the provision for (benefit from) income taxes includes an $863 million benefit as related to the Tax Cuts and Jobs Act. For fiscal year ended 2018, the provision for income taxes includes a $10.4 billion charge as related to the enactment of the Tax Cuts and Jobs Act.

CISCO SYSTEMS, INC.
REVENUE BY SEGMENT
(In millions, except percentages)

  July 28, 2018
  Three Months Ended Fiscal Year Ended
  Amount Y/Y % Amount Y/Y %
Revenue:        
Americas $7,555  5% $29,070  3%
EMEA 3,174  8% 12,425  4%
APJC 2,116  6% 7,834  2%
Total $12,844  6% $49,330  3%
               

Amounts may not sum and percentages may not recalculate due to rounding.


CISCO SYSTEMS, INC.
GROSS MARGIN PERCENTAGE BY SEGMENT
(In percentages)

  July 28, 2018
  Three Months Ended Fiscal Year Ended
Gross Margin Percentage:    
Americas 64.1% 64.6%
EMEA 63.7% 63.9%
APJC 57.7% 60.3%
       



CISCO SYSTEMS, INC.

REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES
(In millions, except percentages)

  July 28, 2018
  Three Months Ended Fiscal Year Ended
  Amount Y/Y % Amount Y/Y %
Revenue:        
Infrastructure Platforms $7,443  7% $28,270  2%
Applications 1,339  10% 5,035  10%
Security 627  12% 2,353  9%
Other Products 232  (18)% 1,050  (13)%
Total Product 9,642  7% 36,709  3%
Services 3,202  3% 12,621  3%
Total $12,844  6% $49,330  3%
               

Amounts may not sum and percentages may not recalculate due to rounding.

CISCO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)

 July 28,
 2018
 July 29,
 2017
ASSETS   
Current assets:   
Cash and cash equivalents$8,934  $11,708 
Investments37,614  58,784 
Accounts receivable, net of allowance for doubtful accounts 
of $129 at July 28, 2018 and $211 at July 29, 2017
5,554  5,146 
Inventories1,846  1,616 
Financing receivables, net4,949  4,856 
Other current assets2,940  1,593 
Total current assets61,837  83,703 
Property and equipment, net3,006  3,322 
Financing receivables, net4,882  4,738 
Goodwill31,706  29,766 
Purchased intangible assets, net2,552  2,539 
Deferred tax assets3,219  4,239 
Other assets1,582  1,511 
TOTAL ASSETS$108,784  $129,818 
LIABILITIES AND EQUITY   
Current liabilities:   
Short-term debt$5,238  $7,992 
Accounts payable1,904  1,385 
Income taxes payable1,004  98 
Accrued compensation2,986  2,895 
Deferred revenue11,490  10,821 
Other current liabilities4,413  4,392 
Total current liabilities27,035  27,583 
Long-term debt20,331  25,725 
Income taxes payable8,585  1,250 
Deferred revenue8,195  7,673 
Other long-term liabilities1,434  1,450 
Total liabilities65,580  63,681 
Total equity43,204  66,137 
TOTAL LIABILITIES AND EQUITY$108,784  $129,818 
        


CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

 Fiscal Year Ended
 July 28,
 2018
 July 29,
 2017
Cash flows from operating activities:   
Net income$110  $9,609 
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation, amortization, and other2,192  2,286 
Share-based compensation expense1,576  1,526 
Provision for receivables(134) (8)
Deferred income taxes900  (124)
Excess tax benefits from share-based compensation  (153)
(Gains) losses on divestitures, investments and other, net(322) 154 
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:   
Accounts receivable(269) 756 
Inventories(244) (394)
Financing receivables(219) (1,038)
Other assets66  15 
Accounts payable504  311 
Income taxes, net8,118  60 
Accrued compensation100  (110)
Deferred revenue1,205  1,683 
Other liabilities83  (697)
Net cash provided by operating activities13,666  13,876 
Cash flows from investing activities:   
Purchases of investments(14,285) (42,702)
Proceeds from sales of investments17,706  28,827 
Proceeds from maturities of investments15,769  12,143 
Acquisition of businesses, net of cash and cash equivalents acquired(3,006) (3,324)
Proceeds from business divestitures27   
Purchases of investments in privately held companies(267) (222)
Return of investments in privately held companies168  203 
Acquisition of property and equipment(834) (964)
Proceeds from sales of property and equipment59  7 
Other(13) 39 
Net cash provided by (used in) investing activities15,324  (5,993)
Cash flows from financing activities:   
Issuances of common stock623  708 
Repurchases of common stock - repurchase program(17,547) (3,685)
Shares repurchased for tax withholdings on vesting of restricted stock units(703) (619)
Short-term borrowings, original maturities of 90 days or less, net(2,502) 2,497 
Issuances of debt6,877  6,980 
Repayments of debt(12,375) (4,151)
Excess tax benefits from share-based compensation  153 
Dividends paid(5,968) (5,511)
Other(169) (178)
Net cash used in financing activities(31,764) (3,806)
Net (decrease) increase in cash and cash equivalents(2,774) 4,077 
Cash and cash equivalents, beginning of fiscal year11,708  7,631 
Cash and cash equivalents, end of fiscal year$8,934  $11,708 
    
Supplemental cash flow information:   
Cash paid for interest$910  $897 
Cash paid for income taxes, net$3,911  $2,742 
        


CISCO SYSTEMS, INC.

DEFERRED REVENUE
(In millions)

 July 28,
 2018
 April 28,
 2018
 July 29,
 2017
Deferred revenue:     
Service$11,431  $10,960  $11,302 
Product:     
Deferred revenue related to recurring software and subscription offers6,120  5,635  4,971 
Other product deferred revenue2,134  2,358  2,221 
Total product deferred revenue8,254  7,993  7,192 
Total$19,685  $18,953  $18,494 
Reported as:     
Current$11,490  $11,301  $10,821 
Noncurrent8,195  7,652  7,673 
Total$19,685  $18,953  $18,494 
            



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 2018            
July 28, 2018 $0.33  $1,535  138  $43.58  $6,015  $7,550 
April 28, 2018 $0.33  $1,572  140  $42.83  $6,015  $7,587 
January 27, 2018 $0.29  $1,425  103  $39.07  $4,011  $5,436 
October 28, 2017 $0.29  $1,436  51  $31.80  $1,620  $3,056 
             
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 
                        


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 28,
 2018
 July 29,
 2017
 July 28,
 2018
 July 29,
 2017
GAAP net income$3,803  $2,424  $110  $9,609 
Adjustments to cost of sales:       
Share-based compensation expense59  56  227  219 
Amortization of acquisition-related intangible assets134  140  578  483 
Supplier component remediation charge (adjustment), net(36) (18) (77) (47)
Acquisition-related/divestiture costs3    7  1 
Legal and indemnification settlements    122   
Total adjustments to GAAP cost of sales160  178  857  656 
Adjustments to operating expenses:       
Share-based compensation expense329  344  1,339   1,307 
Amortization of acquisition-related intangible assets33  58  221  259 
Acquisition-related/divestiture costs79  62  274  219 
Significant asset impairments and restructurings26  142  358  756 
Total adjustments to GAAP operating expenses467  606  2,192  2,541 
Total adjustments to GAAP income before provision for income taxes627  784  3,049  3,197 
Income tax effect of non-GAAP adjustments(253) (235) (866) (847)
Significant tax matters (1)(851) 108  10,410  108 
Total adjustments to GAAP provision for income taxes(1,104) (127) 9,544  (739)
Non-GAAP net income$3,326  $3,081  $12,703  $12,067 
        
Diluted net income per share:       
GAAP$0.81  $0.48  $0.02  $1.90 
Non-GAAP$0.70  $0.61  $2.60  $2.39 
                

(1) In the fourth quarter of fiscal 2018, Cisco recorded adjustments to the provisional amounts related to the U.S. transition tax on accumulated earnings of foreign subsidiaries and re-measurement of net deferred tax assets. These adjustments include an $863 million benefit to the U.S. transition tax provisional amount related to the U.S. taxation of deemed foreign dividends after the date of enactment in the transition fiscal year.

For fiscal year 2018, Cisco recorded charges relating to significant tax matters that were excluded from non-GAAP net income. $10.4 billion of these charges were provisional amounts related to the enactment of the Tax Cuts and Jobs Act comprised of $8.1 billion related to the U.S. transition tax, $1.2 billion related to foreign withholding tax and $1.1 billion related to the re-measurement of net deferred tax assets. The amounts are provisional based on Securities and Exchange Commission Staff Accounting Bulletin No. 118.


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 28, 2018
 Product
Gross
Margin
 Service
Gross
Margin
 Total
Gross
Margin
 Operating
Expenses
 Y/Y Operating
Income
 Y/Y Net
Income
 Y/Y
GAAP amount$5,809  $2,113  $7,922  $4,576  1% $3,346  10% $3,803  57%
% of revenue60.2% 66.0% 61.7% 35.6%   26.1%   29.6%  
Adjustments to GAAP amounts:                 
Share-based compensation expense24  35  59  329    388    388   
Amortization of acquisition-related intangible assets134    134  33    167    167   
Supplier component remediation charge (adjustment), net(36)   (36)     (36)   (36)  
Acquisition/divestiture-related costs2  1  3  79    82    82   
Significant asset impairments and restructurings      26    26    26   
Income tax effect/significant tax matters (1)              (1,104)  
Non-GAAP amount$5,933  $2,149  $8,082  $4,109  5% $3,973  4% $3,326  8%
% of revenue61.5% 67.1% 62.9% 32.0%   30.9%   25.9%  
                        

(1) Includes an $863 million benefit as related to the Tax Cuts and Jobs Act.

  
 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 revenue60.3% 67.8% 62.2% 37.2%   25.0%   20.0%  
Adjustments to GAAP amounts:                 
Share-based compensation expense23  33  56  344    400    400   
Amortization of acquisition-related intangible assets140    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 effect/significant tax matters              (127)  
Non-GAAP amount$5,586  $2,138  $7,724  $3,906  (7)% $3,818  (4)% $3,081  (3)%
% of revenue61.9% 68.8% 63.7% 32.2%   31.5%   25.4%  
                        



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 28, 2018
 Product
Gross
Margin
 Service
Gross
Margin
 Total
Gross
Margin
 Operating
Expenses
 Y/Y Operating
Income
 Y/Y Net
Income
 Y/Y
GAAP amount$22,282  $8,324  $30,606  $18,297  % $12,309  3% $110  (99)%
% of revenue60.7% 66.0% 62.0% 37.1%   25.0%   0.2%  
Adjustments to GAAP amounts:                 
Share-based compensation expense94  133  227  1,339    1,566    1,566   
Amortization of acquisition-related intangible assets578    578  221    799    799   
Supplier component remediation charge (adjustment), net(77)   (77)     (77)   (77)  
Legal and indemnification settlements122    122      122    122   
Acquisition/divestiture-related costs3  4  7  274    281    281   
Significant asset impairments and restructurings      358    358    358   
Income tax effect/significant tax matters (1)              9,544 (1) 
Non-GAAP amount$23,002  $8,461  $31,463  $16,105  3% $15,358  1% $12,703  5%
% of revenue62.7% 67.0% 63.8% 32.6%   31.1%   25.8%  
                        

(1) Includes a $10.4 billion charge as related to the enactment of the Tax Cuts and Jobs Act.

 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 revenue61.6% 66.8% 63.0% 38.0%   24.9%   20.0%  
Adjustments to GAAP amounts:                 
Share-based compensation expense85  134  219  1,307    1,526    1,526   
Amortization of acquisition-related intangible assets483    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 effect/significant tax matters              (739)  
Non-GAAP amount$22,527  $8,353  $30,880  $15,710  (4)% $15,170  % $12,067  %
% of revenue63.1% 67.9% 64.3% 32.7%   31.6%   25.1%  
                        



CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

EFFECTIVE TAX RATE
(In percentages)

    
 Three Months Ended Fiscal Year Ended
 July 28,
2018
 July 29,
2017
 July 28,
2018
 July 29,
2017
GAAP effective tax rate (1)(5.9)%  23.8%  99.2%  21.8% 
Total adjustments to GAAP provision for income taxes27.1%  (1.5)%  (78.2)%  0.3% 
Non-GAAP effective tax rate21.2%  22.3%  21.0%  22.1% 
            

(1) The three months ended July 28, 2018 includes an $863 million benefit as related to the Tax Cuts and Jobs Act. The fiscal year ended July 28, 2018 includes a $10.4 billion charge as related to the enactment of the Tax Cuts and Jobs Act.

GAAP TO NON-GAAP GUIDANCE FOR Q1 FY 2019

         
Q1 FY 2019 Gross Margin
Rate
 Operating Margin
Rate
 Tax Provision
Rate
 Earnings per
Share (4)
GAAP 61.5% - 62.5% 27.5% - 28.5% 9% $0.69 - $0.74
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%   $0.04 - $0.05
Restructuring and other charges (1)   0.5%   $0.01 
Legal settlements (2)   (3.0)%    ($0.07)
Significant tax matters (3)         ($0.03) - ($0.04)
Income tax effect of non-GAAP adjustments       10%  
Non-GAAP 63% - 64% 30% - 31% 19% $0.70 - $0.72
         

(1) In the third quarter of fiscal 2018, we initiated a restructuring plan in order to realign the organization and enable further investment in key priority areas. The total pretax cash charges to the GAAP financial results is estimated to be approximately $300 million consisting of severance and other one-time benefits, and other associated costs. During fiscal 2018, we have recognized pretax charges of approximately $108 million to our GAAP financial results in relation to this restructuring plan. We expect to recognize up to $70 million of these charges in the first quarter of fiscal 2019 with the remaining amount to be recognized during the rest of the fiscal year.

(2) In the first quarter of fiscal 2019, we entered into a binding term sheet with Arista Networks, settling most of the outstanding litigation between the companies, which will result in a payment to Cisco of $400 million. We will recognize this benefit in our GAAP financial results in the first quarter of fiscal 2019. The remaining litigation will not have a financial impact on Cisco.

(3) We will recognize net indirect benefits to our GAAP provision for income taxes related to intercompany adjustments upon adoption of ASC 606.

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

The guidance includes our SPVSS business that we recently agreed to sell and excludes the Duo Security acquisition since both transactions have not closed. We expect the SPVSS transaction to close in the first half of fiscal 2019 subject to customary closing conditions and regulatory approvals.

At the beginning of fiscal 2019, we adopted the Financial Accounting Standards Board new standard on revenue recognition (ASC 606) using the modified retrospective method. The revenue guidance in the preceding table includes the impact of ASC 606 which we estimate to be a benefit of about 1% year over year.

Except as noted above, this guidance 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 execution on our strategy, the ability to grow across our portfolio with our pipeline of innovation, continued customer adoption of our innovations and continued solid demand for our products and solutions, continued progress in transforming our business model and the ongoing value customers see in our software and subscription offerings, execution across our customer segments and geographies, continued broad-based strength across our portfolio, continued strong execution and momentum, and our ability to deliver profitable growth and drive long-term shareholder value) and the future financial performance of Cisco (including the guidance for Q1 FY 2019) 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 22, 2018 and September 7, 2017, 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 28, 2018 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 settlements 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.

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.

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Source: Cisco