Cisco Reports First Quarter Earnings

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SAN JOSE, CA–(Marketwired – Nov 15, 2017) – Cisco (NASDAQ: CSCO)

  • Q1 Revenue: $12.1 billion
    • Decrease of (2)% year over year
    • Recurring revenue was 32% of total revenue, up over 3 points year over year
  • Q1 Earnings per Share: $0.48 GAAP; $0.61 non-GAAP
  • Q2 FY 2018 Outlook:
    • Revenue: 1% to 3% growth year over year
    • Earnings per Share: GAAP $0.46 to $0.51; Non-GAAP: $0.58 to $0.60

Cisco today reported first quarter results for the period ended October 28, 2017. Cisco reported first quarter revenue of $12.1 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.4 billion or $0.48 per share, and non-GAAP net income of $3.0 billion or $0.61 per share.

“Our results in Q1 demonstrate the continued progress we're making on our strategy,” said Chuck Robbins, CEO of Cisco. “The network has never been more critical to business success. Cisco is delivering more insights and intelligence as we help our customers build highly secure, intelligent platforms for digital business.”

 
    GAAP Results
    Q1 FY 2018   Q1 FY 2017   Vs. Q1 FY 2017
Revenue   $ 12.1 billion   $ 12.4 billion   (2)%
Net Income   $ 2.4 billion   $ 2.3 billion   3%
Diluted Earnings per Share (EPS)   $ 0.48   $ 0.46   4%
 
 
  Non-GAAP Results
    Q1 FY 2018   Q1 FY 2017   Vs. Q1 FY 2017
Net Income   $ 3.0 billion   $ 3.1 billion   (2)%
EPS   $ 0.61   $ 0.61   –%

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 delivered a solid Q1 and executed well as we focus on strategic priorities and maintaining rigorous discipline on profitability and cash generation,” said Kelly Kramer, CFO of Cisco. “We delivered strong growth in operating and free cash flow, focused investments on long term profitable growth, and returned $3.1 billion to shareholders through repurchases and quarterly dividends.”

Financial Summary

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

Q1 FY 2018 Highlights

Revenue — Total revenue was $12.1 billion, down 2%, with product revenue down 3% and service revenue up 1%. 32% of total revenue was from recurring offers, up over 3 percentage points from the first quarter of fiscal 2017. Revenue by geographic segment was: Americas down 1%, EMEA down 3%, and APJC down 1%. Product revenue performance was led by Security and Applications, which increased by 8% and 6%, respectively. Infrastructure Platforms revenue decreased by 4%.

Gross Margin — On a GAAP basis, total gross margin and product gross margin were 61.2% and 60.1%, respectively. The decrease in the product gross margin compared with 63.4% in the first quarter of fiscal 2017 was primarily due to pricing, legal and indemnification settlements, and lower productivity benefits.

Non-GAAP total gross margin and product gross margin were 63.7% and 63.0%, respectively. The decrease in non-GAAP product gross margin compared with 64.8% in the first quarter of fiscal 2017 was primarily due to pricing and lower productivity benefits. While productivity was positive, the benefit was lower than in the prior year as productivity improvements continued to be adversely impacted by an increase in the cost of certain memory components, consistent with our expectations.

GAAP service gross margin was 64.5% and non-GAAP service gross margin was 65.6%.

Total gross margins by geographic segment were: 64.2% for the Americas, 63.2% for EMEA and 62.1% for APJC.

Operating Expenses — On a GAAP basis, operating expenses were $4.7 billion, down 7%. Non-GAAP operating expenses were $4.0 billion, down 3%, and were 33.3% of revenue.

Operating Income — GAAP operating income was $2.8 billion, down 4%, with GAAP operating margin of 22.7%. Non-GAAP operating income was $3.7 billion, down 5%, with non-GAAP operating margin of 30.4%.

Provision for Income Taxes — The GAAP tax provision rate was 19.2%. The non-GAAP tax provision rate was 22.0%.

Net Income and EPS — On a GAAP basis, net income was $2.4 billion and EPS was $0.48. On a non-GAAP basis, net income was $3.0 billion, a decrease of 2%, and EPS was flat at $0.61.

Cash Flow from Operating Activities — was $3.1 billion, an increase of 13% compared with $2.7 billion for the first quarter of fiscal 2017.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments — were $71.6 billion at the end of the first quarter of fiscal 2018, compared with $70.5 billion at the end of fiscal 2017. The total cash and cash equivalents and investments available in the United States at the end of the first quarter of fiscal 2018 were $2.5 billion.

Deferred Revenue — was $18.6 billion, up 10% in total, with deferred product revenue up 16%, driven largely by subscription-based and software offers, and deferred service revenue was up 5%. The portion of product deferred revenue related to recurring software and subscription offers increased 37%.

Capital Allocation — In the first quarter of fiscal 2018, Cisco declared and paid a cash dividend of $0.29 per common share, or $1.4 billion. For the first quarter of fiscal 2018, Cisco repurchased approximately 51 million shares of common stock under its stock repurchase program at an average price of $31.80 per share for an aggregate purchase price of $1.6 billion.

As of October 28, 2017, Cisco had repurchased and retired 4.8 billion shares of Cisco common stock at an average price of $21.41 per share for an aggregate purchase price of approximately $101.9 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $10.1 billion with no termination date.

Acquisitions
In the first quarter of fiscal 2018, we announced the acquisitions of privately held Springpath, Inc. and privately held Perspica, Inc. The Springpath acquisition is designed to enhance our ability to deliver next-generation data center innovation to customers through hyperconvergence software. The Springpath acquisition closed in the first quarter of fiscal 2018. The Perspica acquisition provides machine learning and data processing technology which enables customers to analyze large amounts of application-related data, in real-time and with business context. The Perspica acquisition closed in the second quarter of fiscal 2018.

We also closed our acquisitions of Viptela, Inc., a privately held company that provides software-defined wide area networking products, and Observable Networks, Inc., a privately held company that offers cloud-native network forensics security applications delivered as a service.

On October 23, 2017, we announced a definitive agreement to acquire BroadSoft, Inc., a publicly held company that offers cloud calling and contact center solutions. The acquisition is expected to close after completion of customary regulatory reviews.

Business Outlook for Q2 FY 2018

Cisco expects to achieve the following results for the second quarter of fiscal 2018:

Q2 FY 2018    
Revenue   1% to 3% growth Y/Y
Non-GAAP gross margin rate   62.5% – 63.5%
Non-GAAP operating margin rate   29.5% – 30.5%
Non-GAAP tax provision rate   22%
Non-GAAP EPS   $0.58 – $0.60

Our Q2 FY2018 business outlook does not reflect any impact from the pending acquisition of BroadSoft.

Cisco estimates that GAAP EPS will be $0.46 to $0.51 in the second quarter of fiscal 2018.

A reconciliation between the Business Outlook for Q2 FY 2018 on a GAAP and non-GAAP basis is provided in the table entitled “GAAP to non-GAAP Business Outlook for Q2 FY 2018” located in the section entitled “Reconciliations of GAAP to non-GAAP Measures.”

Editor's Notes:

  • Q1 fiscal year 2018 conference call to discuss Cisco's results along with its business outlook will be held on Wednesday, November 15, 2017 at 1:30 p.m. Pacific Time. Conference call number is 1-888-848-6507 (United States) or 1-212-519-0847 (international).
  • Conference call replay will be available from 4:00 p.m. Pacific Time, November 15, 2017 to 4:00 p.m. Pacific Time, November 22, 2017 at 1-866-421-0447 (United States) or 1-203-369-0803 (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 15, 2017. Text of the conference call's prepared remarks will be available within 24 hours of completion of the call. The webcast will include both the prepared remarks and the question-and-answer session. This information, along with the GAAP to non-GAAP reconciliation information, will be available on the Cisco Investor Relations website at http://investor.cisco.com.
   
   
CISCO SYSTEMS, INC.  
CONSOLIDATED STATEMENTS OF OPERATIONS  
(In millions, except per-share amounts)  
(Unaudited)  
   
    Three Months Ended  
    October 28, 2017     October 29, 2016  
REVENUE:                
  Product   $ 9,054     $ 9,302  
  Service     3,082       3,050  
    Total revenue     12,136       12,352  
COST OF SALES:                
  Product     3,615       3,403  
  Service     1,094       1,065  
    Total cost of sales     4,709       4,468  
GROSS MARGIN     7,427       7,884  
OPERATING EXPENSES:                
  Research and development     1,567       1,545  
  Sales and marketing     2,334       2,418  
  General and administrative     557       555  
  Amortization of purchased intangible assets     61       78  
  Restructuring and other charges     152       411  
    Total operating expenses     4,671       5,007  
OPERATING INCOME     2,756       2,877  
  Interest income     379       295  
  Interest expense     (235 )     (198 )
  Other income (loss), net     62       (21 )
    Interest and other income (loss), net     206       76  
INCOME BEFORE PROVISION FOR INCOME TAXES     2,962       2,953  
Provision for income taxes     568       631  
  NET INCOME   $ 2,394     $ 2,322  
                 
Net income per share:                
  Basic   $ 0.48     $ 0.46  
  Diluted   $ 0.48     $ 0.46  
Shares used in per-share calculation:                
  Basic     4,959       5,027  
  Diluted     4,994       5,066  
                 
Cash dividends declared per common share   $ 0.29     $ 0.26  
 
 
CISCO SYSTEMS, INC.
REVENUE BY SEGMENT
(In millions, except percentages)
 
    Three Months Ended
    October 28, 2017
    Amount   Y/Y %
Revenue:          
  Americas   $ 7,350   (1)%
  EMEA     2,909   (3)%
  APJC     1,877   (1)%
    Total   $ 12,136   (2)%
 
 
CISCO SYSTEMS, INC.
GROSS MARGIN PERCENTAGE BY SEGMENT
(In percentages)
 
    Three Months Ended
    October 28, 2017
Gross Margin Percentage:    
  Americas   64.2%
  EMEA   63.2%
  APJC   62.1%
 
 
CISCO SYSTEMS, INC.
REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES
(In millions, except percentages)
 
    Three Months Ended
    October 28, 2017
    Amount   Y/Y %
Revenue:          
  Infrastructure Platforms   $ 6,970   (4)%
  Applications     1,203   6%
  Security     585   8%
  Other Products     296   (16)%
    Total Product     9,054   (3)%
  Services     3,082   1%
    Total   $ 12,136   (2)%

Effective Q1 FY 2018, we began reporting our product and service revenue in the following five categories: Infrastructure Platforms, Applications, Security, Other Products and Services. The change better aligns our product categories with our evolving business model. Our segments will continue to be based on geographies which consist of the Americas, EMEA, and APJC. This change only impacts how we report revenue by product category. The reclassified product category revenue by quarter is available on Cisco's Investor Relations website at investor.cisco.com/investor-relations/financial-information/Financial-Results/default.aspx.

 
 
CISCO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
 
    October 28, 2017   July 29, 2017
ASSETS            
Current assets:            
  Cash and cash equivalents   $ 11,043   $ 11,708
  Investments     60,545     58,784
  Accounts receivable, net of allowance for doubtful accounts of $193 at October 28, 2017 and $211 at July 29, 2017     4,206     5,146
  Inventories     1,693     1,616
  Financing receivables, net     5,038     4,856
  Other current assets     1,555     1,593
    Total current assets     84,080     83,703
Property and equipment, net     3,202     3,322
Financing receivables, net     4,876     4,738
Goodwill     30,233     29,766
Purchased intangible assets, net     2,677     2,539
Deferred tax assets     4,006     4,239
Other assets     1,448     1,511
    TOTAL ASSETS   $ 130,522   $ 129,818
LIABILITIES AND EQUITY            
Current liabilities:            
  Short-term debt   $ 10,239   $ 7,992
  Accounts payable     1,155     1,385
  Income taxes payable     86     98
  Accrued compensation     2,684     2,895
  Deferred revenue     10,920     10,821
  Other current liabilities     4,200     4,392
    Total current liabilities     29,284     27,583
  Long-term debt     25,684     25,725
  Income taxes payable     883     1,250
  Deferred revenue     7,645     7,673
  Other long-term liabilities     1,476     1,450
    Total liabilities     64,972     63,681
Total equity     65,550     66,137
   TOTAL LIABILITIES AND EQUITY   $ 130,522   $ 129,818
   
   
CISCO SYSTEMS, INC.  
CONSOLIDATED STATEMENTS OF CASH FLOWS  
(In millions)  
(Unaudited)  
   
    Three Months Ended  
    October 28,
 2017
    October 29,
 2016
 
Cash flows from operating activities:                
  Net income   $ 2,394     $ 2,322  
  Adjustments to reconcile net income to net cash provided by operating activities:                
    Depreciation, amortization, and other     566       599  
    Share-based compensation expense     392       372  
    Provision for receivables     (17 )     15  
    Deferred income taxes     178       158  
    Excess tax benefits from share-based compensation           (91 )
    (Gains) losses on divestitures, investments and other, net     (56 )     32  
    Change in operating assets and liabilities, net of effects of acquisitions and divestitures:                
      Accounts receivable     957       1,049  
      Inventories     (80 )     44  
      Financing receivables     (333 )     (900 )
      Other assets     8       191  
      Accounts payable     (235 )     (63 )
      Income taxes, net     (419 )     (440 )
      Accrued compensation     (215 )     (333 )
      Deferred revenue     77       462  
      Other liabilities     (137 )     (687 )
        Net cash provided by operating activities     3,080       2,730  
Cash flows from investing activities:                
  Purchases of investments     (8,275 )     (18,667 )
  Proceeds from sales of investments     2,682       11,337  
  Proceeds from maturities of investments     3,929       2,449  
  Acquisition of businesses, net of cash and cash equivalents acquired     (725 )     (251 )
  Purchases of investments in privately held companies     (20 )     (38 )
  Return of investments in privately held companies     81       24  
  Acquisition of property and equipment     (168 )     (275 )
  Proceeds from sales of property and equipment     1       2  
  Other           23  
        Net cash used in investing activities     (2,495 )     (5,396 )
Cash flows from financing activities:                
  Issuances of common stock     9       88  
  Repurchases of common stock – repurchase program     (1,686 )     (1,023 )
  Shares repurchased for tax withholdings on vesting of restricted stock units     (342 )     (401 )
  Short-term borrowings, original maturities of 90 days or less, net     (2,498 )      
  Issuances of debt     5,482       6,232  
  Repayments of debt     (748 )     (1 )
  Excess tax benefits from share-based compensation           91  
  Dividends paid     (1,436 )     (1,308 )
  Other     (31 )     (60 )
        Net cash provided by (used in) financing activities     (1,250 ) &
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Maria Burns

Maria Burns

Maria is a Viral News Editor who graduated from the University Of California. She likes social media trends, being semi-healthy, Buffalo Wild Wings and vodka with lime. When she isn’t writing, Maria loves to travel. She last went to Thailand to play with elephants and is planning a trip to Bali.
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