CSCO
$52.74
Cisco Systems
($1.20)
(2.22%)
Earnings Details
2nd Quarter January 2019
Wednesday, February 13, 2019 4:05:00 PM
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Summary

Cisco Systems Reports In-line

Cisco Systems (CSCO) reported 2nd Quarter January 2019 earnings of $0.74 per share on revenue of $12.4 billion. The consensus earnings estimate was $0.72 per share on revenue of $12.4 billion. The Earnings Whisper number was $0.74 per share. Revenue grew 4.7% on a year-over-year basis.

The company said it expects third quarter non-GAAP earnings of $0.76 to $0.78 per share on revenue of $12.96 billion to $13.21 billion. The current consensus earnings estimate is $0.77 per share on revenue of $12.80 billion for the quarter ending April 30, 2019.

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
$0.74
Earnings Whisper
$0.74
Consensus Estimate
$0.72
Reported Revenue
$12.45 Bil
Revenue Estimate
$12.40 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Cisco Reports Second Quarter Earnings

Dividend Increased 6 Percent, Additional $15 Billion Authorized for Stock Repurchase

  • Q2 Results:
    • Revenue: $12.4 billion
      • Growth of 7% year over year (normalized to exclude the divested SPVSS business for Q2 FY 2018)
    • Earnings per Share: GAAP: $0.63; Non-GAAP: $0.73
      • Non-GAAP EPS increased 16% year over year
  • Q3 Guidance (normalized to exclude the divested SPVSS business for Q3 FY 2018):
    • Revenue: 4% to 6% growth year over year
    • Earnings per Share: GAAP: $0.63 to $0.68; Non-GAAP: $0.76 to $0.78

SAN JOSE, Calif., Feb. 13, 2019 /PRNewswire/ -- Cisco today reported second quarter results for the period ended January 26, 2019. Cisco reported second quarter revenue of $12.4 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.8 billion or $0.63 per share, and non-GAAP net income of $3.3 billion or $0.73 per share.

Cisco Logo (PRNewsfoto/Cisco)

As previously disclosed, Cisco completed the divestiture of the Service Provider Video Software Solutions (SPVSS) business in the second quarter of fiscal 2019 on October 28, 2018. Revenue, non-GAAP financial information, and Q3 FY 2019 guidance have been normalized to exclude the SPVSS business from prior periods for comparative purposes.

"We are very pleased with our strong performance in the quarter," said Chuck Robbins, chairman and CEO of Cisco. "Our teams are executing incredibly well, aggressively transitioning to a software model and accelerating our pace of innovation. We are redefining and connecting every domain of the networking infrastructure to deliver the agility, operational efficiency and security our customers require to embrace multicloud, edge computing and digital transformation." 

GAAP Results










Q2 FY 2019


Q2 FY 2018


Vs. Q2 FY 2018

Revenue (including SPVSS business for all periods)


$

12.4 billion


$

11.9 billion


5%

Revenue (excluding SPVSS business for all periods)


$

12.4 billion


$

11.7 billion


7%

Net Income (Loss)


$

2.8 billion


$

(8.8) billion


NM

Earnings (Loss) per Share


$

0.63



$

(1.78)



NM

NM - Not meaningful

GAAP results for the second quarter of fiscal 2018 include a $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act.

Non-GAAP Results










Q2 FY 2019


Q2 FY 2018


Vs. Q2 FY 2018

Net Income (excluding SPVSS business for all periods)


$

3.3 billion


$

3.1 billion


6%

Diluted Earnings per Share (EPS) (excluding SPVSS business for all periods)


$

0.73



$

0.63



16%

Reconciliations between net income (loss), earnings (loss) per share, 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; Stock Repurchase Program Authorization Increased

Cisco has declared a quarterly dividend of $0.35 per common share, a 2-cent increase or up 6% over the previous quarter's dividend, to be paid on April 24, 2019 to all shareholders of record as of the close of business on April 5, 2019. Future dividends will be subject to Board approval.

Cisco's board of directors has also approved a $15 billion increase to the authorization of the stock repurchase program. There is no fixed termination date for the repurchase program. The remaining authorized amount for stock repurchases including the additional authorization is approximately $24 billion.

"Q2 was a solid quarter with continued momentum across the business delivering revenue growth of 7% and non-GAAP EPS growth of 16%. I'm also very pleased with our revenue from software subscriptions which is now 65% of total software revenue," said Kelly Kramer, CFO of Cisco. "Our increased dividend and share repurchase authorization show confidence in the strength of our ongoing cash flows and reinforce our commitment to returning capital to our shareholders."

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 2019 Highlights" section are presented excluding the SPVSS business for all periods as it was divested during the second quarter on October 28, 2018.

Q2 FY 2019 Highlights

Revenue -- Total revenue was $12.4 billion, up 7%, with product revenue up 9% and service revenue up 1%. Revenue by geographic segment was: Americas up 7%, EMEA up 8%, and APJC up 5%. Product revenue performance was broad based with growth in Applications, up 24%, Security, up 18%, and Infrastructure Platforms, up 6%.

Gross Margin -- On a GAAP basis, total gross margin, product gross margin, and service gross margin were 62.5%, 61.0%, and 66.6%, respectively, as compared with 63.1%, 61.5%, and 67.4%, respectively, in the second quarter of fiscal 2018.

On a non-GAAP basis, total gross margin, product gross margin, and service gross margin were 64.1%, 62.8%, and 67.7%, respectively, as compared with 65.1%, 63.8%, and 68.7%, respectively, in the second quarter of fiscal 2018.

Total gross margins by geographic segment were: 65.2% for the Americas, 64.2% for EMEA and 59.2% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.6 billion, up 3%. Non-GAAP operating expenses were $4.0 billion, up 3%, and were 31.9% of revenue.

Operating Income -- GAAP operating income was $3.2 billion, up 4%, with GAAP operating margin of 25.8%. Non-GAAP operating income was $4.0 billion, up 7%, with non-GAAP operating margin flat at 32.1%.

Provision for Income Taxes -- The GAAP tax provision rate was 15.6%. The non-GAAP tax provision rate was 19.0%.

Net Income and EPS -- On a GAAP basis, net income was $2.8 billion and EPS was $0.63. On a non-GAAP basis, net income was $3.3 billion, an increase of 6%, and EPS was $0.73, an increase of 16%.

Cash Flow from Operating Activities -- $3.8 billion for the second quarter of fiscal 2019, a decrease of 7% compared with $4.1 billion for the second quarter of fiscal 2018. Operating cash flow includes the payment of $0.8 billion in relation to a transition tax payment as a result of the Tax Cuts and Jobs Act. Operating cash flow increased 12%, normalized for this payment.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- $40.4 billion at the end of the second quarter of fiscal 2019, compared with $42.6 billion at the end of the first quarter of fiscal 2019, and compared with $46.5 billion at the end of fiscal 2018.

Deferred Revenue -- $17.3 billion, down 8% in total, with deferred product revenue down 23%. Deferred service revenue was up 3%.

Capital Allocation -- For the second quarter of fiscal 2019, we returned $6.5 billion to shareholders through share buybacks and dividends. We declared and paid a cash dividend of $0.33 per common share, or $1.5 billion, and repurchased approximately 111 million shares of common stock under our stock repurchase program at an average price of $45.09 per share for an aggregate purchase price of $5.0 billion.

Acquisitions

On December 18, 2018, we announced our intent to acquire Luxtera, Inc., a privately held semiconductor company. On January 30, 2019, we announced our intent to acquire Singularity Networks, a privately held network infrastructure analytics company. Both acquisitions closed in the third quarter of fiscal 2019.

Guidance for Q3 FY 2019

Cisco expects to achieve the following results for the third quarter of fiscal 2019 (normalized to exclude the divested SPVSS business):

Q3 FY 2019



Revenue


4% - 6% growth Y/Y

Non-GAAP gross margin rate


64% - 65%

Non-GAAP operating margin rate


31% - 32%

Non-GAAP tax provision rate


19%

Non-GAAP EPS


$0.76 - $0.78

Revenue for the divested SPVSS business for the third quarter of fiscal 2018 was $219 million.

Cisco estimates that GAAP EPS will be $0.63 to $0.68 in the third quarter of fiscal 2019.

A reconciliation between the Guidance for Q3 FY 2019 on a GAAP and non-GAAP basis is provided in the table entitled "GAAP to non-GAAP Guidance for Q3 FY 2019" located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

Editor's Notes:

  • Q2 fiscal year 2019 conference call to discuss Cisco's results along with its guidance will be held on Wednesday, February 13, 2019 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 13, 2019 to 4:00 p.m. Pacific Time, February 20, 2019 at 1-800-391-9851 (United States) or 1-203-369-3268 (international). The replay will also be available via webcast on the Cisco Investor Relations website at 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, February 13, 2019. 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


Six Months Ended


January 26, 2019


January 27, 2018


January 26, 2019


January 27, 2018

REVENUE:








Product

$

9,273



$

8,709



$

19,163



$

17,763


Service

3,173



3,178



6,355



6,260


Total revenue

12,446



11,887



25,518



24,023


COST OF SALES:








Product

3,614



3,354



7,413



6,969


Service

1,059



1,035



2,186



2,129


Total cost of sales

4,673



4,389



9,599



9,098


GROSS MARGIN

7,773



7,498



15,919



14,925


OPERATING EXPENSES:








Research and development

1,557



1,549



3,165



3,116


Sales and marketing

2,271



2,235



4,681



4,569


General and administrative

509



483



720



1,040


Amortization of purchased intangible assets

39



60



73



121


Restructuring and other charges

186



98



264



250


Total operating expenses

4,562



4,425



8,903



9,096


OPERATING INCOME

3,211



3,073



7,016



5,829


Interest income

328



396



672



775


Interest expense

(223)



(247)



(444)



(482)


Other income (loss), net

27



10



8



72


Interest and other income (loss), net

132



159



236



365


INCOME BEFORE PROVISION FOR INCOME TAXES

3,343



3,232



7,252



6,194


Provision for income taxes (1)

521



12,010



881



12,578


NET INCOME (LOSS)

$

2,822



$

(8,778)



$

6,371



$

(6,384)










Net income (loss) per share:








Basic

$

0.63



$

(1.78)



$

1.41



$

(1.29)


Diluted

$

0.63



$

(1.78)



$

1.40



$

(1.29)


Shares used in per-share calculation:








Basic

4,470



4,924



4,517



4,942


Diluted

4,505



4,924



4,557



4,942


The Consolidated Statements of Operations include the results of the SPVSS business prior to its divestiture during the second quarter of fiscal 2019 on October 28, 2018. Accordingly, the six months ended January 26, 2019 includes three months of financial results for this business.

(1) The provision for income taxes for the three and six months ended January 27, 2018 includes an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act.

CISCO SYSTEMS, INC.

REVENUE BY SEGMENT

(In millions, except percentages)






January 26, 2019



Three Months Ended


Six Months Ended



Amount


Y/Y %


Amount


Y/Y %

Revenue:









Including SPVSS business for all periods:









Americas


$

7,352



5%


$

15,103



5%

EMEA


3,223



5%


6,447



8%

APJC


1,872



3%


3,968



7%

Total


$

12,446



5%


$

25,518



6%

Excluding SPVSS business for all periods:









Americas


$

7,352



7%


$

15,027



6%

EMEA


3,223



8%


6,381



10%

APJC


1,872



5%


3,944



10%

Total


$

12,446



7%


$

25,351



8%

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

During the second quarter of fiscal 2019 on October 28, 2018, we completed the divestiture of the SPVSS business. SPVSS business revenue for the three months ended January 27, 2018 was $230 million and for the six months ended January 26, 2019 and January 27, 2018 was $168 million and $478 million, respectively.

CISCO SYSTEMS, INC.

GROSS MARGIN PERCENTAGE BY SEGMENT

(In percentages)






January 26, 2019



Three Months Ended


Six Months Ended

Gross Margin Percentage:





Including SPVSS business for all periods:





Americas


65.2%


65.3%

EMEA


64.2%


64.2%

APJC


59.2%


58.2%

Excluding SPVSS business for all periods (1):





Americas


65.2%


65.6%

EMEA


64.2%


64.3%

APJC


59.2%


58.4%

(1) During the second quarter of fiscal 2019 on October 28, 2018, we completed the divestiture of the SPVSS business.

CISCO SYSTEMS, INC.

REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES

(In millions, except percentages)






January 26, 2019



Three Months Ended


Six Months Ended



Amount


Y/Y %


Amount


Y/Y %

Revenue:









Including SPVSS business for all periods:









Infrastructure Platforms


$

7,128



6%


$

14,770



8%

Applications


1,465



24%


2,884



21%

Security


658



18%


1,308



15%

Other Products


22



(91)%


200



(63)%

Total Product


9,273



6%


19,163



8%

Services


3,173



—%


6,355



2%

Total


$

12,446



5%


$

25,518



6%

Excluding SPVSS business for all periods:









Infrastructure Platforms


$

7,128



6%


$

14,770



8%

Applications


1,465



24%


2,884



21%

Security


658



18%


1,308



15%

Other Products


22



(59)%


54



(53)%

Total Product


9,273



9%


19,017



10%

Services


3,173



1%


6,334



2%

Total


$

12,446



7%


$

25,351



8%

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

During the second quarter of fiscal 2019 on October 28, 2018, we completed the divestiture of the SPVSS business. SPVSS business revenue for the three months ended January 27, 2018 was $230 million and for the six months ended January 26, 2019 and January 27, 2018 was $168 million and $478 million, respectively.

CISCO SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)






January 26, 2019


July 28, 2018

ASSETS




Current assets:




Cash and cash equivalents

$

9,835



$

8,934


Investments

30,548



37,614


Accounts receivable, net of allowance for doubtful accounts of $135 at January 26, 2019 and $129 at July 28, 2018

3,745



5,554


Inventories

1,701



1,846


Financing receivables, net

5,057



4,949


Other current assets

2,231



2,940


Total current assets

53,117



61,837


Property and equipment, net

2,931



3,006


Financing receivables, net

4,565



4,882


Goodwill

33,293



31,706


Purchased intangible assets, net

2,270



2,552


Deferred tax assets

4,081



3,219


Other assets

2,205



1,582


TOTAL ASSETS

$

102,462



$

108,784


LIABILITIES AND EQUITY




Current liabilities:




Short-term debt

$

9,737



$

5,238


Accounts payable

1,655



1,904


Income taxes payable

1,110



1,004


Accrued compensation

2,599



2,986


Deferred revenue

9,976



11,490


Other current liabilities

4,402



4,413


Total current liabilities

29,479



27,035


Long-term debt

15,893



20,331


Income taxes payable

7,760



8,585


Deferred revenue

7,285



8,195


Other long-term liabilities

1,256



1,434


Total liabilities

61,673



65,580


Total equity

40,789



43,204


TOTAL LIABILITIES AND EQUITY

$

102,462



$

108,784


 

CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)




Six Months Ended


January 26,
 2019


January 27,
 2018

Cash flows from operating activities:




Net income (loss)

$

6,371



$

(6,384)


Adjustments to reconcile net income (loss) to net cash provided by operating activities:




Depreciation, amortization, and other

952



1,112


Share-based compensation expense

792



785


Provision (benefit) for receivables

30



(43)


Deferred income taxes

(257)



1,021


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

(77)



(174)


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




Accounts receivable

1,613



1,236


Inventories

(203)



(276)


Financing receivables

161



(156)


Other assets

(652)



(15)


Accounts payable

(296)



(338)


Income taxes, net

(830)



10,246


Accrued compensation

(339)



(189)


Deferred revenue

207



237


Other liabilities

88



88


Net cash provided by operating activities

7,560



7,150


Cash flows from investing activities:




Purchases of investments

(677)



(13,954)


Proceeds from sales of investments

3,055



9,111


Proceeds from maturities of investments

6,263



7,365


Acquisitions and divestitures

(1,599)



(727)


Purchases of investments in privately held companies

(68)



(89)


Return of investments in privately held companies

43



124


Acquisition of property and equipment

(473)



(379)


Proceeds from sales of property and equipment

10



51


Other

(12)



(17)


Net cash provided by investing activities

6,542



1,485


Cash flows from financing activities:




Issuances of common stock

312



302


Repurchases of common stock - repurchase program

(10,062)



(5,457)


Shares repurchased for tax withholdings on vesting of restricted stock units

(514)



(433)


Short-term borrowings, original maturities of 90 days or less, net



5,095


Issuances of debt



6,877


Repayments of debt



(6,230)


Dividends paid

(2,970)



(2,861)


Other

18



(22)


Net cash used in financing activities

(13,216)



(2,729)


Net increase in cash, cash equivalents, and restricted cash

886



5,906


Cash, cash equivalents, and restricted cash, beginning of period

8,993



11,773


Cash, cash equivalents, and restricted cash, end of period

$

9,879



$

17,679


Supplemental cash flow information:




Cash paid for interest

$

421



$

454


Cash paid for income taxes, net

$

1,968



$

1,311


Prior period information has been retrospectively adjusted due to the adoption of ASU 2016-18, Statement of Cash Flows, Restricted Cash at the beginning of the first quarter of fiscal 2019.

CISCO SYSTEMS, INC.

DEFERRED REVENUE

(In millions)








January 26, 2019


October 27, 2018


January 27, 2018

Deferred revenue:






Service

$

11,246



$

11,062



$

10,963


Product

6,015



5,752



7,825


Total

$

17,261



$

16,814



$

18,788


Reported as:






Current

$

9,976



$

9,637



$

11,102


Noncurrent

7,285



7,177



7,686


Total

$

17,261



$

16,814



$

18,788


 

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 2019













January 26, 2019


$

0.33



$

1,470



111



$

45.09



$

5,016



$

6,486


October 27, 2018


$

0.33



$

1,500



109



$

46.01



$

5,026



$

6,526


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


 

CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

 

GAAP NET INCOME (LOSS) TO NON-GAAP NET INCOME

(In millions, except per-share amounts)






Three Months Ended


Six Months Ended


January 26,
 2019


January 27,
 2018


January 26,
 2019


January 27,
 2018

GAAP net income (loss)

$

2,822



$

(8,778)



$

6,371



$

(6,384)


Adjustments to cost of sales:








Share-based compensation expense

53



54



109



111


Amortization of acquisition-related intangible assets

141



144



277



283


Supplier component remediation charge (adjustment), net



(13)



(1)



(32)


Acquisition-related/divestiture costs

3



2



7



2


Legal and indemnification settlements

5





5



122


Total adjustments to GAAP cost of sales

202



187



397



486


Adjustments to operating expenses:








Share-based compensation expense

323



333



652



668


Amortization of acquisition-related intangible assets

39



60



73



121


Acquisition-related/divestiture costs

39



23



160



106


Legal and indemnification settlements





(395)




Significant asset impairments and restructurings

186



98



264



250


Total adjustments to GAAP operating expenses

587



514



754



1,145


Adjustments to GAAP interest and other income (loss), net:








(Gains) and losses on equity investments

(64)





(73)




Total adjustments to GAAP income (loss) before provision for income taxes

725



701



1,078



1,631


Income tax effect of non-GAAP adjustments

(209)



(157)



(394)



(445)


Significant tax matters (1)

(43)



11,380



(308)



11,380


Total adjustments to GAAP provision for income taxes

(252)



11,223



(702)



10,935


Non-GAAP net income

$

3,295



$

3,146



$

6,747



$

6,182


Net income (loss) per share (2):








GAAP

$

0.63



$

(1.78)



$

1.40



$

(1.29)


Non-GAAP

$

0.73



$

0.63



$

1.48



$

1.24


(1) During the second quarter of fiscal 2018, we recorded charges relating to significant tax matters that were excluded from non-GAAP net income for the second quarter and first six months of fiscal 2018. $11.1 billion of these charges were provisional amounts related to the enactment of the Tax Cuts and Jobs Act comprised of $9.0 billion related to the U.S. transition tax, $1.2 billion related to foreign withholding tax and $0.9 billion related to the re-measurement of net deferred tax assets. The amounts were provisional based on Securities and Exchange Commission Staff Accounting Bulletin No. 118. The remaining $0.3 billion was related to other significant tax matters.

(2) GAAP net loss per share for the three and six months ended January 27, 2018 was calculated using basic shares of 4,924 million and 4,942 million respectively, due to the net loss resulting from the tax charge as discussed in footnote (1). Non-GAAP net income per share for the respective periods was calculated using diluted shares of 4,966 million and 4,982 million, as we had non-GAAP net income for these periods.

CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

 

GROSS MARGINS, OPERATING EXPENSES, OPERATING MARGINS, INTEREST AND OTHER INCOME (LOSS), NET, AND NET INCOME (LOSS)

(In millions, except percentages)




Three Months Ended


January 26, 2019


Product Gross Margin


Service Gross Margin


Total Gross Margin


Operating Expenses


Y/Y


Operating Income


Y/Y


Interest and other income (loss), net


Y/Y


Net Income


Y/Y

GAAP amount

$

5,659



$

2,114



$

7,773



$

4,562



3%


$

3,211



4%


$

132



(17)%


$

2,822



NM

% of revenue

61.0

%


66.6

%


62.5

%


36.7

%




25.8

%




1.1

%




22.7

%



Adjustments to GAAP amounts:






















Share-based compensation expense

22



31



53



323





376









376




Amortization of acquisition-related intangible assets

141





141



39





180









180




Legal and indemnification settlements

5





5







5









5




Acquisition/divestiture-related costs

1



2



3



39





42









42




Significant asset impairments and restructurings







186





186









186




(Gains) and losses on equity investments















(64)





(64)




Income tax effect/significant tax matters



















(252)




Non-GAAP amount

$

5,828



$

2,147



$

7,975



$

3,975



3%


$

4,000



7%


$

68



(57)%


$

3,295



6%

% of revenue

62.8

%


67.7

%


64.1

%


31.9

%




32.1

%




0.5

%




26.5

%



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

During the second quarter of fiscal 2019 on October 28, 2018, we completed the divestiture of the SPVSS business. Accordingly, the non-GAAP growth rates are normalized to exclude the SPVSS business for the second quarter of fiscal 2018.


Three Months Ended


January 27, 2018


Product Gross Margin


Service Gross Margin


Total Gross Margin


Operating Expenses


Operating

Income


Net

Income (Loss)

GAAP amount

$

5,355



$

2,143



$

7,498



$

4,425



$

3,073



$

(8,778)


% of revenue

61.5

%


67.4

%


63.1

%


37.2

%


25.9

%


(73.8)

%

Adjustments to GAAP amounts:












Share-based compensation expense

23



31



54



333



387



387


Amortization of acquisition-related intangible assets

144





144



60



204



204


Supplier component remediation charge (adjustment), net

(13)





(13)





(13)



(13)


Acquisition/divestiture-related costs



2



2



23



25



25


Significant asset impairments and restructurings







98



98



98


Income tax effect/significant tax matters (1)











11,223


Non-GAAP amount

$

5,509



$

2,176



$

7,685



$

3,911



$

3,774



$

3,146


Less: SPVSS business (2)

(82)



(10)



(92)



(64)



(28)



(22)


Non-GAAP amount (excluding SPVSS business)

$

5,427



$

2,166



$

7,593



$

3,847



$

3,746



$

3,123


% of revenue

63.8

%


68.7

%


65.1

%


33.0

%


32.1

%


26.8

%

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

(1) Includes an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act.

(2) Reflects three months of operations for the SPVSS business. For the SPVSS business, EPS was $0.00 for the second quarter of fiscal 2018.

CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

 

GROSS MARGINS, OPERATING EXPENSES, OPERATING MARGINS, INTEREST AND OTHER INCOME (LOSS), NET, AND NET INCOME (LOSS)

(In millions, except percentages)




Six Months Ended


January 26, 2019


Product Gross Margin


Service Gross Margin


Total Gross Margin


Operating Expenses


Y/Y


Operating Income


Y/Y


Interest and other income (loss), net


Y/Y


Net Income


Y/Y

GAAP amount

$

11,750



$

4,169



$

15,919



$

8,903



(2)%


$

7,016



20%


$

236



(35)%


$

6,371



NM

% of revenue

61.3

%


65.6

%


62.4

%


34.9

%




27.5

%




0.9

%




25.0

%



Adjustments to GAAP amounts:






















Share-based compensation expense

45



64



109



652





761









761




Amortization of acquisition-related intangible assets

277





277



73





350









350




Supplier component remediation charge (adjustment), net

(1)





(1)







(1)









(1)




Legal and indemnification settlements

5





5



(395)





(390)









(390)




Acquisition/divestiture-related costs

3



4



7



160





167









167




Significant asset impairments and restructurings







264





264









264




(Gains) and losses on equity investments















(73)





(73)




Income tax effect/significant tax matters



















(702)




Non-GAAP amount

$

12,079



$

4,237



$

16,316



$

8,149





$

8,167





$

163





$

6,747




% of revenue

63.0

%


66.7

%


63.9

%


31.9

%




32.0

%




0.6

%




26.4

%



Less: SPVSS business (1)

(52)



(9)



(61)



(59)





(1)









(1)




Non-GAAP amount (excluding SPVSS business)

$

12,028



$

4,228



$

16,255



$

8,090



3%


$

8,166



10%


$

163



(55)%


$

6,747



10%

% of revenue

63.2

%


66.7

%


64.1

%


31.9

%




32.2

%




0.6

%




26.6

%



(1) Reflects three months of operations for the SPVSS business.

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

During the second quarter of fiscal 2019 on October 28, 2018, we completed the divestiture of the SPVSS business. Accordingly, the non-GAAP growth rates are normalized to exclude the SPVSS business for the first six months of fiscal 2018.


Six Months Ended


January 27, 2018


Product Gross Margin


Service Gross Margin


Total Gross Margin


Operating Expenses


Operating

Income


Net

Income (Loss)

GAAP amount

$

10,794



$

4,131



$

14,925



$

9,096



$

5,829



$

(6,384)


% of revenue

60.8

%


66.0

%


62.1

%


37.9

%


24.3

%


(26.6)

%

Adjustments to GAAP amounts:












Share-based compensation expense

46



65



111



668



779



779


Amortization of acquisition-related intangible assets

283





283



121



404



404


Supplier component remediation charge (adjustment), net

(32)





(32)





(32)



(32)


Legal and indemnification settlements

122





122





122



122


Acquisition/divestiture-related costs



2



2



106



108



108


Significant asset impairments and restructurings







250



250



250


Income tax effect/significant tax matters (1)











10,935


Non-GAAP amount

$

11,213



$

4,198



$

15,411



$

7,951



$

7,460



$

6,182


Less: SPVSS business (2)

(144)



(16)



(160)



(131)



(29)



(23)


Non-GAAP amount (excluding SPVSS business)

$

11,070



$

4,181



$

15,251



$

7,821



$

7,430



$

6,158


% of revenue

63.9

%


67.3

%


64.8

%


33.2

%


31.6

%


26.2

%

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

(1) Includes an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act.

(2) Reflects six months of operations for the SPVSS business.

CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

 

EFFECTIVE TAX RATE

(In percentages)






Three Months Ended


Six Months Ended


January 26, 2019


January 27, 2018


January 26, 2019


January 27, 2018

GAAP effective tax rate (1)

15.6

%


371.6

%


12.1

%


203.1

%

Total adjustments to GAAP provision for income taxes

3.4

%


(351.6)

%


6.9

%


(182.1)

%

Non-GAAP effective tax rate

19.0

%


20.0

%


19.0

%


21.0

%

(1) Includes an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act for the three and six months ended January 27, 2018.

GAAP TO NON-GAAP GUIDANCE FOR Q3 FY 2019










Q3 FY 2019


Gross Margin Rate


Operating Margin Rate


Tax Provision Rate


Earnings per Share (2)

GAAP


62.5% - 63.5%


25.5%- 26.5%


18%


$0.63 - $0.68

Estimated adjustments for:









Share-based compensation expense


0.5%


3.0%



$0.06 - $0.07

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


1.0%


2.0%



$0.04 - $0.05

Significant asset impairments and restructurings (1)



0.5%



$0.00 - $0.01

Income tax effect of non-GAAP adjustments






1%



Non-GAAP


64% - 65%


31% - 32%


19%


$0.76 - $0.78

(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 with estimated pretax charges of approximately $600 million. We have recognized pretax charges of $372 million to our GAAP financial results in relation to this restructuring plan since its inception. We expect to recognize approximately $50 million of pretax charges under this plan in the third quarter of fiscal 2019.

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

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, our ability to continue to transition to a software model and to grow revenue from software subscriptions, our ability to accelerate our pace of innovation, our ability to deliver the agility, operational efficiency and security our customers require to embrace multicloud, edge computing and digital transformation, continued momentum across the business delivering growth, and the strength of our ongoing cash flows and our ability to return capital to our shareholders) and the future financial performance of Cisco (including the guidance for Q3 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; cyber-attacks, data breaches or malware; vulnerabilities and critical security defects; 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 20, 2018 and September 6, 2018, 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 Form 10-K as each may be amended from time to time. Cisco's results of operations for the three and six months ended January 26, 2019 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 interest and other income (loss), net, 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, gains and losses on equity 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 its Service Provider Video Software Solutions business (SPVSS) during the second quarter of fiscal 2019 on October 28, 2018. This release includes, where indicated, financial measures that exclude the SPVSS 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 SPVSS business will not be part of Cisco on a go forward basis. Cisco's management also uses the financial measures excluding the SPVSS business in reviewing the financial results of Cisco.

About Cisco

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

Copyright © 2019 Cisco and/or its affiliates. All rights reserved. Cisco and the Cisco logo are trademarks or registered trademarks of Cisco and/or its affiliates in the U.S. and other countries. To view a list of Cisco trademarks, go to: www.cisco.com/go/trademarks. Third-party trademarks mentioned in this document are the property of their respective owners. The use of the word partner does not imply a partnership relationship between Cisco and any other company. This document is Cisco Public Information.

 

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