Exhibit 99.1

 

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Press Contact:       Investor Relations Contact:
Robyn Blum       Marilyn Mora
Cisco       Cisco
1 (408) 930-8548       1 (408) 527-7452
rojenkin@cisco.com       marilmor@cisco.com

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. — February 13, 2019 — 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.

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.”

 

1


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.

 

2


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.

 

3


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.

 

4


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.

 

5


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.

 

6


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  
  

 

 

    

 

 

 

 

7


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.

 

8


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  

 

9


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.

 

10


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.

 

11


     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.

 

12


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.

 

13


     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.

 

14


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.

 

15


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.

 

 

16


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.

 

17

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