CSCO
$29.33
Cisco Systems
($.20)
(.68%)
Earnings Details
1st Quarter October 2016
Wednesday, November 16, 2016 4:05:22 PM
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Summary

Cisco Systems Beats but Guides Lower

Cisco Systems (CSCO) reported 1st Quarter October 2016 earnings of $0.60 per share on revenue of $12.4 billion. The consensus earnings estimate was $0.59 per share on revenue of $12.3 billion. The Earnings Whisper number was $0.60 per share. Revenue fell 2.6% compared to the same quarter a year ago.

The company said it expects second quarter non-GAAP earnings of $0.55 to $0.57 per share on revenue of $11.45 billion to $11.69 billion. The current consensus earnings estimate is $0.59 per share on revenue of $12.08 billion for the quarter ending January 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
$0.60
Earnings Whisper
$0.60
Consensus Estimate
$0.59
Reported Revenue
$12.35 Bil
Revenue Estimate
$12.34 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Cisco Reports First Quarter Earnings

SAN JOSE, CA--(Marketwired - Nov 16, 2016) - Cisco (CSCO)

Q1 Revenue: $12.4 billion Growth of 1% year over year -- Q1 guidance was -1% to 1% growth year over year (normalized to exclude the SP Video CPE Business for Q1 FY2016)

Growth of 1% year over year -- Q1 guidance was -1% to 1% growth year over year (normalized to exclude the SP Video CPE Business for Q1 FY2016)

Q1 Earnings per Share: $0.46 GAAP; $0.61 non-GAAP

Q2 FY 2017 Outlook: Revenue: (2)% to (4)% decline year over year (normalized to exclude the SP Video CPE Business for Q2 FY2016)

Revenue: (2)% to (4)% decline year over year (normalized to exclude the SP Video CPE Business for Q2 FY2016)

Earnings per Share: GAAP $0.42 - $0.47; Non-GAAP: $0.55 to $0.57

Cisco today reported first quarter results for the period ended October 29, 2016. Cisco reported first quarter revenue of $12.4 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.3 billion or $0.46 per share, and non-GAAP net income of $3.1 billion or $0.61 per share.

"We had a good quarter despite a challenging global business environment and we performed well in our priority areas," said Chuck Robbins, CEO, Cisco. "We are leading our customers in their digital transition by providing them with highly secure, automated, and intelligent solutions in the ways they want to consume them. Our innovation pipeline is robust and we are well positioned for the future."

 
GAAP Results
 
 
  Q1 FY2017
  Q1 FY2016
  Vs. Q1 FY2016
Revenue (excluding SP Video CPE Business for all periods)
  $
12.4  billion   $
12.3  billion   1%
Revenue (including SP Video CPE Business for all periods)
  $
12.4  billion   $
12.7  billion   (3)%
Net Income
  $
2.3
 billion   $
2.4
 billion   (4)%
Diluted Earnings per Share (EPS)
  $
0.46  
  $
0.48  
  (4)%
 
 
Non-GAAP Results
 
 
  Q1 FY2017
  Q1 FY2016
  Vs. Q1 FY2016
Net Income (excluding SP Video CPE Business for all periods)   $
3.1
 billion   $
3.0
 billion   3%
EPS (excluding SP Video CPE Business for all periods)
  $
0.61  
  $
0.59  
  3%
 
     
     
   

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 executed well in Q1 delivering profitable growth, and saw strong adoption of our subscription-based and software offerings as we transition our business to a more recurring revenue model," said Kelly Kramer, CFO, Cisco.  "We will invest in key growth areas and continue to focus on delivering shareholder value."

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 "Q1 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.

Q1 FY 2017 Highlights

Revenue -- Total revenue was $12.4 billion, up 1%, with product revenue down 1% and service revenue up 7%. Revenue by geographic segment was: Americas down 1%, EMEA flat, and APJC up 6%. Product revenue performance was led by Security and NGN Routing which increased 11% and 6%, respectively. Switching decreased 7%, Collaboration and Data Center each decreased 3%, and Wireless and Service Provider Video each decreased 2%.

Gross Margin -- On a GAAP basis, total gross margin and product gross margin were 63.8% and 63.4%, respectively. The increase in the product gross margin compared with 60.9% in the first quarter of fiscal 2016 was primarily due to continued productivity improvements and the divestiture of the SP Video CPE Business, partially offset by pricing and to a lesser extent product mix.

Non-GAAP total gross margin and product gross margin were 65.2% and 64.8%, respectively. The increase in non-GAAP product gross margin compared with 64.5% in the first quarter of fiscal 2016 was primarily due to continued productivity improvements, partially offset by pricing and to a lesser extent product mix.

GAAP service margin was 65.1% and non-GAAP service gross margin was 66.2%.

Total gross margins by geographic segment were: 64.9% for the Americas, 66.8% for EMEA and 63.5% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $5.0 billion, up 5%, driven in large part by higher restructuring charges in the first quarter of fiscal 2017. Non-GAAP operating expenses were $4.2 billion, up 1%, and were 33.6% of revenue. Headcount compared with the end of the fourth quarter of fiscal 2016 decreased by 1,326 to 72,385, driven by our fiscal 2017 restructuring actions that began in the first quarter, offset by additional headcount primarily from our investments in key growth areas.

Operating Income -- GAAP operating income was $2.9 billion, down 7%, with GAAP operating margin of 23.3%. Non-GAAP operating income was $3.9 billion, up 1%, with non-GAAP operating margin at 31.6%.

Provision for Income Taxes -- The GAAP tax provision rate was 21.4%. 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 $0.46. On a non-GAAP basis, net income was $3.1 billion, an increase of 3%, and EPS was $0.61, an increase of 3%.

Cash Flow from Operating Activities -- was $2.7 billion, a decrease of 1% compared with $2.8 billion for the first quarter of fiscal 2016.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- were $71.0 billion at the end of the first quarter of fiscal 2017, 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 first quarter of fiscal 2017 were $10.4 billion.

Deferred Revenue -- was $17.0 billion, up 12% in total, with deferred product revenue up 19%, driven largely by subscription-based and software offerings. Deferred service revenue was up 8%. The portion of product deferred revenue related to recurring and subscription businesses grew 48%.

Capital Allocation -- In the first quarter of fiscal 2017, Cisco declared and paid a cash dividend of $0.26 per common share, or $1.3 billion. For the first quarter of fiscal 2017, Cisco repurchased approximately 32 million shares of common stock under its stock repurchase program at an average price of $31.12 per share for an aggregate purchase price of $1.0 billion.

As of October 29, 2016, Cisco had repurchased and retired 4.6 billion shares of Cisco common stock at an average price of $21.11 per share for an aggregate purchase price of approximately $97.6 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $14.4 billion with no termination date.

Acquisitions During the first quarter of fiscal 2017, Cisco completed the following acquisitions:

CloudLock, Inc. -- a privately held company, to further enhance Cisco’s security portfolio and build on Cisco’s Security Everywhere strategy, designed to provide protection from the cloud to the network to the endpoint and also aligns with our strategy to deliver more cloud-based subscription services.

ContainerX, Inc. --  an early stage company which was focused on developing enterprise-class container management technology that works across a range of platforms.

Heroik Labs, Inc. -- doing business as Worklife. Worklife, a privately held company, provides software to improve meeting productivity.

Business Outlook for Q2 FY 2017 On November 20, 2015, during the second quarter of fiscal 2016, Cisco completed its divestiture of the SP Video CPE Business. In order to provide a clear view of Cisco’s continuing expected financial performance, the revenue outlook for the second quarter of fiscal 2017 is normalized to exclude the SP Video CPE Business for the second quarter of fiscal 2016. The corresponding revenue in the second quarter of fiscal 2016 for the SP Video CPE Business was $93 million.

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

 
   
Q2 FY 2017
   
Revenue (normalized to exclude SP Video CPE Business for Q2 FY2016)   (2)% to (4)% decline 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
  $0.55 - $0.57

Cisco estimates that GAAP EPS will be $0.42 to $0.47 which is lower than non-GAAP EPS by $0.10 to $0.13 per share in the second quarter of fiscal 2017.

A reconciliation between the Business Outlook for Q2 FY 2017 on a GAAP and non-GAAP basis is provided in the table entitled "GAAP to non-GAAP Business Outlook for Q2 FY 2017" located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

Editor’s Notes:

Q1 fiscal year 2017 conference call to discuss Cisco’s results along with its business outlook will be held on Wednesday, November 16, 2016 at 1:30 p.m. Pacific Time. Conference call number is 1-888-848-6507 (United States) or 1-212-519-0847 (international).

Conference call replay will be available from 4:00 p.m. Pacific Time, November 16, 2016 to 4:00 p.m. Pacific Time, November 23, 2016 at 1-866-439-3743 (United States) or 1-203-369-1047 (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, November 16, 2016. Text of the conference call’s prepared remarks will be available within 24 hours of completion of the call. The webcast will include both the prepared remarks and the question-and-answer session. This information, along with the GAAP to non-GAAP reconciliation information, will be available on the Cisco Investor Relations website at http://investor.cisco.com.

 
 
CISCO SYSTEMS, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(In millions, except per-share amounts)
 
(Unaudited)
 
 
 
 
  Three Months Ended
 
 
  October 29, 2016
    October 24, 2015
 
REVENUE:
   
     
 
 
Product
  $
9,302
    $
9,844
 
 
Service
   
3,050
     
2,838
 
 
 
Total revenue
   
12,352
     
12,682
 
COST OF SALES:
   
 
     
 
 
 
Product
   
3,403
     
3,853
 
 
Service
   
1,065
     
997
 
 
 
Total cost of sales
   
4,468
     
4,850
 
GROSS MARGIN
   
7,884
     
7,832
 
OPERATING EXPENSES:
   
 
     
 
 
 
Research and development
   
1,545
     
1,560
 
 
Sales and marketing
   
2,418
     
2,443
 
 
General and administrative
   
555
     
539
 
 
Amortization of purchased intangible assets
   
78
     
69
 
 
Restructuring and other charges
   
411
     
142
 
 
 
Total operating expenses
   
5,007
     
4,753
 
OPERATING INCOME
   
2,877
     
3,079
 
 
Interest income
   
295
     
225
 
 
Interest expense
   
(198
)
   
(159
)
 
Other income (loss), net
   
(21
)
   
(8
)
 
 
Interest and other income (loss), net    
76
     
58
 
INCOME BEFORE PROVISION FOR INCOME TAXES
   
2,953
     
3,137
 
Provision for income taxes
   
631
     
707
 
 
NET INCOME
  $
2,322
    $
2,430
 
 
   
 
     
 
 
Net income per share:
   
 
     
 
 
 
Basic
  $
0.46
    $
0.48
 
 
Diluted
  $
0.46
    $
0.48
 
Shares used in per-share calculation:
   
 
     
 
 
 
Basic
   
5,027
     
5,080
 
 
Diluted
   
5,066
     
5,113
 
Cash dividends declared per common share
  $
0.26
    $
0.21
 
 
   
 
     
 
 

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.

 
CISCO SYSTEMS, INC.
REVENUE BY SEGMENT
(In millions, except percentages)
 
 
  Three Months Ended October 29, 2016
 
   
  Excluding SP Video CPE Business   Including SP Video CPE Business
 
  Amount
  Y/Y %
  Y/Y %
Revenue:
   
   
   
  Americas
  $
7,443
  (1)%
  (4)%
  EMEA
    3,013
  --%
  (3)%
  APJC
    1,896
  6%
  6%
    Total
  $
12,352   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 months ended October 24, 2015 was $411 million.

 
CISCO SYSTEMS, INC.
GROSS MARGIN PERCENTAGE BY SEGMENT
(In percentages)
 
 
 
Three Months Ended
October 29, 2016
Gross Margin Percentage:
 
 
 
Americas
 
64.9%
 
EMEA
 
66.8%
 
APJC
 
63.5%
 
 
 
 
 
CISCO SYSTEMS, INC.
REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES
(In millions, except percentages)
 
 
  Three Months Ended
 
  October 29, 2016
 
  Amount
  Y/Y %
Revenue:
   
   
  Switching
  $
3,716
  (7)%
  NGN Routing
    2,089
  6%
  Collaboration
    1,081
  (3)%
  Data Center
    834
  (3)%
  Wireless
    632
  (2)%
  Security
    540
  11%
  Service Provider Video(1)
    271
  (2)%
  Other
    139
  88%
   
Product -- excluding SP Video CPE Business (1)
    9,302
  (1)%
   
Service
    3,050
  7%
   
 
Total -- excluding SP Video CPE Business (1)   $
12,352   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 months ended October 24, 2015 was $411 million.

 
CISCO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
 
 
  October 29, 2016
  July 30, 2016
ASSETS
   
   
Current assets:
   
 
     
 
Cash and cash equivalents
  $
8,583
  $
7,631
 
Investments
   
62,385
    58,125
 
Accounts receivable, net of allowance for doubtful accounts of $247 at October 29, 2016 and $249 at July 30, 2016    
4,805
    5,847
 
Inventories
   
1,176
    1,217
 
Financing receivables, net
   
4,541
    4,272
 
Other current assets
   
1,651
    1,627
 
 
Total current assets
   
83,141
    78,719
Property and equipment, net
   
3,499
    3,506
Financing receivables, net
   
4,784
    4,158
Goodwill
   
26,823
    26,625
Purchased intangible assets, net
   
2,297
    2,501
Deferred tax assets
   
4,057
    4,299
Other assets
   
1,686
    1,844
 
 
TOTAL ASSETS
  $
126,287
  $
121,652
LIABILITIES AND EQUITY
   
 
     
Current liabilities:
   
 
     
 
Short-term debt
  $
4,155
  $
4,160
 
Accounts payable
   
996
    1,056
 
Income taxes payable
   
32
    517
 
Accrued compensation
   
2,619
    2,951
 
Deferred revenue
   
10,215
    10,155
 
Other current liabilities
   
5,200
    6,072
 
 
Total current liabilities
   
23,217
    24,911
Long-term debt
   
30,634
    24,483
Income taxes payable
   
883
    925
Deferred revenue
   
6,736
    6,317
Other long-term liabilities
   
1,404
    1,431
 
 
Total liabilities
   
62,874
    58,067
Total equity
   
63,413
    63,585
 
TOTAL LIABILITIES AND EQUITY
  $
126,287
  $
121,652
 
 
   
 
     
 
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
 
  Three Months Ended
 
  October 29,
  October 24,
 2016
 2015
Cash flows from operating activities:
     
     
 
Net income
  $
2,322
    $
2,430
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
     
     
 
 
Depreciation, amortization, and other
    599
      507
 
 
 
Share-based compensation expense
    372
      376
 
 
 
Provision for receivables
    15
      7
 
 
 
Deferred income taxes
    158
      193
 
 
 
Excess tax benefits from share-based compensation
    (91
)
    (73
)
 
 
(Gains) losses on investments and other, net
    32
      (4
)
 
 
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
     
     
 
 
 
Accounts receivable
    1,049
      631
 
 
 
 
Inventories
    44
      130
 
 
 
 
Financing receivables
    (900
)
    (206
)
 
 
 
Other assets
    191
      129
 
 
 
 
Accounts payable
    (63
)
    4
 
 
 
 
Income taxes, net
    (440
)
    (315
)
 
 
 
Accrued compensation
    (333
)
    (434
)
 
 
 
Deferred revenue
    462
      (19
)
 
 
 
Other liabilities
    (687
)
    (590
)
 
 
 
 
Net cash provided by operating activities
    2,730
      2,766
 
 Cash flows from investing activities:
     
     
 
Purchases of investments
    (18,667 )
    (10,823 )
 
Proceeds from sales of investments
    11,337
      6,675
 
 
Proceeds from maturities of investments
    2,449
      4,133
 
 
Acquisition of businesses, net of cash and cash equivalents acquired
    (251
)
    (614
)
 
Purchases of investments in privately held companies
    (38
)
    (78
)
 
Return of investments in privately held companies
    24
      24
 
 
Acquisition of property and equipment
    (275
)
    (262
)
 
Proceeds from sales of property and equipment
    2
      6
 
 
Other
    23
      (11
)
 
 
 
 
Net cash used in investing activities
    (5,396
)
    (950
)
 Cash flows from financing activities:
     
     
 
Issuances of common stock
    88
      385
 
 
Repurchases of common stock - repurchase program
    (1,023
)
    (1,210
)
 
Shares repurchased for tax withholdings on vesting of restricted stock units
    (401
)
    (382
)
 
Short-term borrowings, original maturities less than 90 days, net
    --
      (4
)
 
Issuances of debt
    6,232
      --
 
 
Repayments of debt
    (1
)
    (852
)
 
Excess tax benefits from share-based compensation
    91
      73
 
 
Dividends paid
    (1,308
)
    (1,068
)
 
Other
    (60
)
    123
 
 
 
 
 
Net cash provided by (used in) financing activities     3,618
      (2,935
)
Net increase (decrease) in cash and cash equivalents
    952
      (1,119
)
Cash and cash equivalents, beginning of period
    7,631
      6,877
 
Cash and cash equivalents, end of period
  $
8,583
    $
5,758
 
Supplemental cash flow information:
     
     
Cash paid for interest
  $
248
    $
264
 
Cash paid for income taxes, net
  $
913
    $
828
 
 
     
       
 
 
CISCO SYSTEMS, INC.
DEFERRED REVENUE
(In millions)
 
 
  October 29,
  July 30,
  October 24,
 2016
 2016
 2015
Deferred revenue:
                 
  Service
  $
10,424   $
10,621   $
9,689
  Product:
                 
    Deferred revenue related to recurring and subscription businesses     3,801
    3,308
    2,571
    Deferred revenue related to two-tier distributors
    439
    377
    585
    Other product deferred revenue
    2,287
    2,166
    2,317
    Total product deferred revenue
    6,527
    5,851
    5,473
     
Total
  $
16,951   $
16,472   $
15,162
Reported as:
                 
  Current
  $
10,215   $
10,155   $
9,821
  Noncurrent
    6,736
    6,317
    5,341
     
Total
  $
16,951   $
16,472   $
15,162
 
                 
 
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
                   
 
           
  October 29, 2016
  $
0.26
  $
1,308
  32
  $
31.12
  $
1,001
  $
2,309
   
                   
 
           
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
 
  October 29, 2016
  October 24, 2015
GAAP net income
  $
2,322
    $
2,430
 
 
Adjustments to cost of sales:
     
     
 
 
Share-based compensation expense
    54
      51
 
 
 
Amortization of acquisition-related intangible assets     112
      128
 
 
 
Significant asset impairments and restructurings
    --
      (1
)
 
Total adjustments to GAAP cost of sales
    166
      178
 
 
Adjustments to operating expenses:
     
     
 
 
Share-based compensation expense
    315
      310
 
 
 
Amortization of acquisition-related intangible assets     78
      69
 
 
 
Acquisition-related/divestiture costs
    53
      91
 
 
 
Significant asset impairments and restructurings
    411
      142
 
 
Total adjustments to GAAP operating expenses
    857
      612
 
 
 
               
 
Total adjustments to GAAP income before provision for income taxes
    1,023
      790
 
 
Income tax effect of non-GAAP adjustments
    (244
)
    (196
)
Non-GAAP net income
  $
3,101
    $
3,024
 
Diluted net income per share:
     
     
GAAP
  $
0.46
    $
0.48
 
Non-GAAP
  $
0.61
    $
0.59
 
 
               
 
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
 
October 29, 2016
 
Product Gross Margin   Service Gross Margin   Total Gross Margin
  Operating Expenses
  Y/Y
  Operating Income
  Y/Y
  Net Income
  Y/Y
GAAP amount
$
5,899
    $
1,985
    $
7,884
    $
5,007
    5
%
  $
2,877
    (7) %
  $
2,322
    (4) %
% of revenue
  63.4
%
    65.1
%
    63.8
%
    40.5
%
   
    23.3
%
   
    18.8
%
   
Adjustments to GAAP amounts:
   
     
     
     
   
     
   
     
   
 
Share-based compensation expense
  21
      33
      54
      315
     
    369
     
    369
     
 
Amortization of acquisition-related intangible assets   112
      --
      112
      78
     
    190
     
    190
     
 
Acquisition/divestiture-related costs
  --
      --
      --
      53
     
    53
     
    53
     
 
Significant asset impairments and restructurings
  --
      --
      --
      411
     
    411
     
    411
     
 
Income tax effect
  --
      --
      --
      --
     
    --
     
    (244)
     
 
Non-GAAP amount
$
6,032
    $
2,018
    $
8,050
    $
4,150
    1
%
  $
3,900
    1
%
  $
3,101
    3
%
% of revenue
  64.8
%
    66.2
%
    65.2
%
    33.6
%
   
    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 for the first quarter of fiscal 2016 as detailed in the table below.

 
 
 
Three Months Ended
 
October 24, 2015
 
Product Gross Margin   Service Gross Margin   Total Gross Margin
  Operating Expenses
  Operating
  Net
Income
Income
GAAP amount
$
5,991
    $
1,841
    $
7,832
    $
4,753
    $
3,079
    $
2,430
 
% of revenue
  60.9
%
    64.9
%
    61.8
%
    37.5
%
    24.3
%
    19.2
%
Adjustments to GAAP amounts:
   
     
     
     
     
     
 
Share-based compensation expense
  13
      38
      51
      310
      361
      361
 
 
Amortization of acquisition-related intangible assets   128
      --
      128
      69
      197
      197
 
 
Acquisition/divestiture-related costs
  --
      --
      --
      91
      91
      91
 
 
Significant asset impairments and restructurings
  (1
)
    --
      (1
)
    142
      141
      141
 
 
Income tax effect
  --
      --
      --
      --
      --
      (196
)
Non-GAAP amount
$
6,131
    $
1,879
    $
8,010
    $
4,141
    $
3,869
    $
3,024
 
 
Less: SP Video CPE Business
  (43
)
    --
      (43
)
    (32
)
    (11
)
    (8
)
Non-GAAP amount (excluding SP Video CPE Business)
$
6,088
    $
1,879
    $
7,967
    $
4,109
    $
3,858
    $
3,016
 
% of revenue
  64.5
%
    66.2
%
    64.9
%
    33.5
%
    31.4
%
    24.6
%
 
                                             
 
CISCO SYSTEMS, INC.
RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES
 
EFFECTIVE TAX RATE
(In percentages)
 
 
  Three Months Ended
 
  October 29, 2016
  October 24, 2015
GAAP effective tax rate
  21.4
%
  22.5
%
 
Total adjustments to GAAP provision for income taxes   0.6
%
  0.5
%
Non-GAAP effective tax rate
  22.0
%
  23.0
%
 
   
 
   
 
 
FREE CASH FLOW
(In millions)
 
 
  Three Months Ended
 
  October 29, 2016
  July 30, 2016
  October 24, 2015
Net cash provided by operating activities   $
2,730
    $
3,818
    $
2,766
 
Acquisition of property and equipment
    (275
)
    (266
)
    (262
)
Free cash flow
  $
2,455
    $
3,552
    $
2,504
 
 
                       
 
GAAP TO NON-GAAP BUSINESS OUTLOOK FOR Q2 FY 2017
 
Q2 FY 2017
  Gross Margin Rate   Operating Margin Rate   Tax Provision Rate   Earnings per Share (2)
GAAP
  61.5% - 62.5%
  22.5%- 23.5%
  21%
  $0.42 to $0.47
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)
  --
  1.5%
  --
  $0.02 - $0.03
Income tax effect of non-GAAP adjustments
  --
  --
  1%
   
Non-GAAP
  63% - 64%
  29% - 30%
  22%
  $0.55 - $0.57
 
   
   
   
   

(1)  During the first quarter of fiscal 2017, Cisco recognized pretax charges of $411 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 up to $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 $125 million to $175 million of these charges will be recognized during the second 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 the impact of the challenging global business environment, our ability to successfully perform in our priority areas and invest in key growth areas, our ability to lead our customers in their digital transition, adoption by customers of our subscription-based and software offerings, our innovation pipeline, the transition of our business to a more recurring revenue model, and our ability to deliver shareholder value) and the future financial performance of Cisco (including the business outlook for Q2 FY 2017) 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 report on Form 10-K filed on September 8, 2016. 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 months ended October 29, 2016 are not necessarily indicative of Cisco’s operating results for any future periods. Any projections in this release are based on limited information currently available to Cisco, which is subject to change. Although any such projections and the factors influencing them will likely change, Cisco will not necessarily update the information, since Cisco will only provide guidance at certain points during the year. Such information speaks only as of the date of this release.

This release includes non-GAAP net income, non-GAAP gross margins, non-GAAP operating expenses, non-GAAP operating income and margin, non-GAAP effective tax rates, non-GAAP net income per share data, 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.

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