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Cisco Reports Second Quarter Earnings

SAN JOSE, CA--(Marketwired - Feb 10, 2016) - Cisco ( NASDAQ : CSCO )

  • Q2 Revenue (excluding SP Video CPE Business) : $11.8 billion
    • Increase of 2% year over year -- (Q2 guidance was 0% - 2% growth year over year)
  • Q2 Earnings per Share: $0.62 GAAP; $0.57 non-GAAP
  • Q3 Guidance:
    • Revenue: 1% - 4% growth year over year (normalized to exclude SP Video CPE Business for Q3 2015)
    • Non-GAAP Earnings per Share: $0.54 - $0.56

Cisco, the worldwide leader in networking that transforms how people connect, communicate and collaborate, today reported second quarter results for the period ended January 23, 2016. Cisco reported second quarter revenue of $11.9 billion, net income on a generally accepted accounting principles (GAAP) basis of $3.1 billion or $0.62 per share, and non-GAAP net income of $2.9 billion or $0.57 per share. Second quarter revenue was $11.8 billion excluding $93 million of revenue from the Customer Premises Equipment portion of the Service Provider Video Connected Devices business (SP Video CPE Business) that was divested during the second quarter on November 20, 2015.

"We delivered a strong Q2, and are managing the business extremely well in a challenging macro environment," said Chuck Robbins, Cisco chief executive officer. "We're managing the company on two fronts. We're focused on continued strong execution in the near term while investing in the innovation to lead our customers into the future."

 
GAAP Results
 
    Q2 2016   Q2 2015   Vs. Q2 2015
Revenue (including SP Video CPE Business for all periods)   $ 11.9   billion   $ 11.9   billion   -- %
Revenue (excluding SP Video CPE Business for all periods)   $ 11.8   billion   $ 11.6   billion   2 %
Net Income   $ 3.1   billion   $ 2.4   billion   31 %
Diluted Earnings per Share (EPS)   $ 0.62       $ 0.46       35 %
                           
   
Non-GAAP Results  
   
    Q2 2016   Q2 2015   Vs. Q2 2015  
Net Income   $ 2.9   billion   $ 2.7   billion   7 %
EPS   $ 0.57       $ 0.53       8 %
                           

A reconciliation between net income and EPS on a GAAP and non-GAAP basis is provided in the table following the Consolidated Statements of Operations. Supplementary information related to other GAAP and non-GAAP measures is also provided in the tables below.

Cisco Increases Quarterly Cash Dividend; Stock Repurchase Program Authorization Increased

Cisco has also declared a quarterly dividend of $0.26 per common share, a 24% or five-cent increase over the previous quarter's dividend, to be paid on April 27, 2016 to all shareholders of record as of the close of business on April 6, 2016. 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. Cisco's board had previously authorized up to $97 billion in stock repurchases. There is no fixed termination date for the repurchase program. The remaining authorized amount for stock repurchases under this program, including the additional authorization, is approximately $16.9 billion.

"We had another strong quarter, delivering both the top line and bottom line growth," said Kelly Kramer, Cisco executive vice president and chief financial officer. "I'm happy with the progress we are making as we continue to shift our business model to more software, and recurring revenue. We are very confident in the strength of our business and future cash flows allowing the substantial increase of our dividend this quarter to $0.26. We remain committed to our shareholders in delivering profitable growth and returning a minimum of 50 percent of our free cash flow back annually."

Financial Highlights for Q2 FY16
(All comparative percentages are on a year-over-year basis unless otherwise noted)

All revenue, non-GAAP, and geographic financial information in this "Financial Highlights for Q2 FY16" section are presented excluding the SP Video CPE Business for all periods as it was divested during the second quarter on November 20, 2015.

Revenue -- Revenue was $11.8 billion, up 2% with product revenue up 2%. Service revenue growth was 3%. Revenue by geographic segment was: Americas and EMEA each up 1%, and APJC up 11%. Product revenue growth was led by Security which increased 11%, and NGN Routing and Collaboration which increased 5% and 3%, respectively. Wireless was flat while Switching and Data Center declined 4% and 3%, respectively.

Gross Margin -- On a GAAP basis, total gross margin and product gross margin were at 62.3% and 61.3%, respectively. Non-GAAP total gross margin and product gross margin were 64.2% and 63.3%, respectively. This increase in the non-GAAP product gross margin as compared with 62.5% in the second quarter of fiscal 2015 was driven by continued productivity improvements, partially offset by pricing and to a lesser extent product mix. GAAP service margin was 65.5% and non-GAAP service gross margin was 66.7%. Total gross margins by geographic segment were: 64.3% for the Americas, 65.4% for EMEA, and 61.8% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.1 billion, down 7%. Non-GAAP operating expenses were $3.9 billion, down 1%, and at 33.0% of revenue. Headcount compared with the end of the first quarter of fiscal 2016 decreased by 406 to 71,657, which included the impact from the divestiture of the SP Video CPE Business and our workforce realignment, partially offset by additional headcount from acquisitions and investments in key growth areas such as security, cloud and software. 

Operating Income -- GAAP operating income was $3.3 billion, up 26%, with GAAP operating margin of 27.6%. Non-GAAP operating income was $3.7 billion, up 10%, with non-GAAP operating margin at 31.2%.

Provision for Income Taxes -- The GAAP tax provision rate was 4.8%. Tax benefits of $519 million related to prior-year periods were included in the GAAP tax provision rate but were excluded in the non-GAAP tax provision rate. The non-GAAP tax provision rate was 20.9%, reflecting the reinstatement of the U.S. federal R&D tax credit.

Net Income and EPS -- On a GAAP basis, net income was $3.1 billion and EPS was $0.62. On a non-GAAP basis, net income was $2.9 billion, an increase of 8%, and EPS was $0.57, an increase of 8%.

Cash Flow from Operating Activities -- was $3.9 billion an increase of 36% compared with $2.9 billion for the second quarter of fiscal 2015.

Cash and Cash Equivalents and Investments -- were $60.4 billion at the end of the second quarter of fiscal 2016, compared with $59.1 billion at the end of the first quarter of fiscal 2016, and compared with $60.4 billion at the end of fiscal 2015. The total cash and cash equivalents and investments available in the United States at the end of the second quarter of fiscal 2016 were $3.9 billion.

Deferred Revenue -- was $15.2 billion, up 8% in total, with deferred product revenue up 11%, driven largely by subscription based and software offerings, and deferred service revenue up 7%. Cisco continued to build a greater mix of recurring revenue as reflected in deferred revenue.

Days Sales Outstanding in Accounts Receivable (DSO) -- was 33 days at the end of the second quarter of fiscal 2016, compared with 34 days at the end of the first quarter of fiscal 2016.

Other Financial Highlights

In the second quarter of fiscal 2016, Cisco declared and paid a cash dividend of $0.21 per common share, or $1.1 billion. For the second quarter of fiscal 2016, Cisco repurchased approximately 48 million shares of common stock under its stock repurchase program at an average price of $26.12 per share for an aggregate purchase price of $1.3 billion.

As of January 23, 2016, Cisco had repurchased and retired 4.5 billion shares of Cisco common stock at an average price of $20.97 per share for an aggregate purchase price of approximately $95.1 billion since the inception of the stock repurchase program.

Acquisitions

During the second quarter of fiscal 2016, Cisco completed the acquisitions of Portcullis, ParStream, Lancope and 1 Mainstream in the security, data analytics and video markets. These moves are consistent with Cisco's strategy to increase innovation and R&D investment in growth areas. Cisco recently completed the acquisition of Acano to help accelerate Cisco's collaboration strategy to deliver video more broadly. In addition, on February 3, 2016, Cisco announced its intent to acquire Jasper Technologies, a company that provides a cloud-based Internet of Things (IoT) software-as-a-service platform, which is expected to close in the third quarter of fiscal year 2016.

Business Outlook for the Third Quarter of Fiscal Year 2016

On November 20, 2015, during the second quarter of fiscal 2016, Cisco completed its divestiture of the SP Video CPE Business. In order to provide a clear view of Cisco's continuing expected financial performance, the revenue guidance for the third quarter of fiscal 2016 is normalized to exclude the SP Video CPE Business for the third quarter of fiscal 2015. The corresponding revenue in the third quarter of fiscal 2015 for the SP Video CPE Business was $519 million.

Cisco expects to achieve the following results for the third quarter of fiscal year 2016:

 
Q3 FY16    
Revenue (normalized to exclude SP Video CPE Business for Q3 FY15)   1% - 4% growth Y/Y
Non-GAAP gross margin rate   62.5% - 63.5%
Non-GAAP operating margin rate   28.5% - 29.5%
Non-GAAP tax provision rate   22%
Non-GAAP EPS   $0.54 - $0.56
     

Cisco's third quarter of fiscal 2016 will have 14 weeks compared to 13 weeks for the third quarter of fiscal 2015 which is reflected in the guidance.

Cisco estimates that GAAP EPS will be lower than non-GAAP EPS by $0.08 to $0.12 per share in the third quarter of fiscal 2016 as follows:

     
Q3 FY16    
Share-based compensation expense   $0.05 - $0.06
Amortization of purchased intangible assets and other acquisition-related/divestiture costs   0.03 - 0.05
  Subtotal   0.08 - 0.11
Restructuring and other charges   0.00 - 0.01
  Total   $0.08 - $0.12
     

Share-based compensation expense is expected to impact Cisco's results of operations in similar proportions as the second quarter of fiscal 2016. Amortization of purchased intangible assets and other acquisition-related/divestiture costs will be reported as GAAP operating expenses, cost of sales, or other income/(loss) as applicable.

Except as noted above, this guidance does not include the effects of any future acquisitions/divestitures, asset impairments, restructurings and tax or other events, which may or may not be significant unless specifically stated.

Editor's Notes:

  • Q2 fiscal year 2016 conference call to discuss Cisco's results along with its business outlook will be held on Wednesday, February 10, 2016 at 1:30 p.m. Pacific Time. Conference call number is 1-888-848-6507 (United States) or 1-212-519-0847 (international).
  • Conference call replay will be available from 4:00 p.m. Pacific Time, February 10, 2016 to 4:00 p.m. Pacific Time, February 19, 2016 at 1-888-562-6191 (United States) or 1-402-280-9986 (international). The replay will also be available via webcast from February 10, 2016 through April 22, 2016 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, February 10, 2016. Text of the conference call's prepared remarks will be available within 24 hours of completion of the call. The webcast will include both the prepared remarks and the question-and-answer session. This information, along with the GAAP to non-GAAP reconciliation information, will be available on the Cisco Investor Relations website at http://investor.cisco.com .
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
(Unaudited)
 
  Three Months Ended     Six Months Ended  
  January 23,
 2016
    January 24,
 2015
    January 23,
 2016
    January 24,
 2015
 
REVENUE:                              
  Product $ 8,983     $ 9,078     $ 18,827     $ 18,513  
  Service   2,944       2,858       5,782       5,668  
    Total revenue   11,927       11,936       24,609       24,181  
COST OF SALES:                              
  Product   3,480       3,806       7,333       7,725  
  Service   1,015       1,040       2,012       2,033  
    Total cost of sales   4,495       4,846       9,345       9,758  
GROSS MARGIN   7,432       7,090       15,264       14,423  
OPERATING EXPENSES:                              
  Research and development   1,509       1,529       3,069       3,112  
  Sales and marketing   2,286       2,308       4,729       4,823  
  General and administrative   176       490       715       994  
  Amortization of purchased intangible assets   71       72       140       143  
  Restructuring and other charges   96       69       238       387  
    Total operating expenses   4,138       4,468       8,891       9,459  
OPERATING INCOME   3,294       2,622       6,373       4,964  
  Interest income   237       189       462       368  
  Interest expense   (162 )     (139 )     (321 )     (278 )
  Other income (loss), net   (63 )     201       (71 )     179  
    Interest and other income (loss), net   12       251       70       269  
INCOME BEFORE PROVISION FOR INCOME TAXES   3,306       2,873       6,443       5,233  
Provision for income taxes   159       476       866       1,008  
NET INCOME $ 3,147     $ 2,397     $ 5,577     $ 4,225  
                               
Net income per share:                              
  Basic $ 0.62     $ 0.47     $ 1.10     $ 0.83  
  Diluted $ 0.62     $ 0.46     $ 1.09     $ 0.82  
Shares used in per-share calculation:                              
  Basic   5,070       5,117       5,075       5,115  
  Diluted   5,097       5,160       5,106       5,159  
                               
Cash dividends declared per common share $ 0.21     $ 0.19     $ 0.42     $ 0.38  
                               
                               

The Consolidated Statements of Operations include the results of the SP Video CPE Business prior to its divestiture on November 20, 2015. Accordingly, the three months ended January 23, 2016 includes only one month of financial results for this business.

CISCO SYSTEMS, INC.  
RECONCILIATION OF GAAP TO NON-GAAP NET INCOME  
(In millions, except per-share amounts)  
   
  Three Months Ended     Six Months Ended  
  January 23,
 2016
    January 24,
 2015
    January 23,
 2016
    January 24,
 2015
 
GAAP net income $ 3,147     $ 2,397     $ 5,577     $ 4,225  
  Adjustments to cost of sales:                              
    Share-based compensation expense   51       45       102       93  
    Amortization of acquisition-related intangible assets   123       233       251       414  
    Rockstar patent portfolio charge   --       --       --       188  
    Acquisition-related/divestiture costs   1       --       1       --  
    Significant asset impairments and restructurings   (1 )     --       (2 )     --  
  Total adjustments to GAAP cost of sales   174       278       352       695  
  Adjustments to operating expenses:                              
    Share-based compensation expense   280       261       590       586  
    Amortization of acquisition-related intangible assets   71       72       140       143  
    Acquisition-related/divestiture costs (1)   (222 )     92       (131 )     193  
    Significant asset impairments and restructurings   96       69       238       387  
  Total adjustments to GAAP operating expenses   225       494       837       1,309  
  Adjustments to other income (loss), net:                              
    Gain on VCE reorganization   --       (126 )     --       (126 )
  Total adjustments to GAAP income before provision for income taxes   399       646       1,189       1,878  
  Income tax effect of non-GAAP adjustments   (98 )     (164 )     (294 )     (422 )
  Significant tax matters (2)   (519 )     (134 )     (519 )     (134 )
  Total adjustments to GAAP provision for income taxes   (617 )     (298 )     (813 )     (556 )
Non-GAAP net income $ 2,929     $ 2,745     $ 5,953     $ 5,547  
                               
Diluted net income per share:                              
GAAP $ 0.62     $ 0.46     $ 1.09     $ 0.82  
Non-GAAP $ 0.57     $ 0.53     $ 1.17     $ 1.08  
                               
                               

(1) The sale of the SP Video CPE Business resulted in a pre-tax gain of $286 million, net of certain transaction costs incurred in prior periods. The gain on this transaction was excluded from non-GAAP net income for the second quarter and first six months of fiscal 2016.

(2) During the second quarter of fiscal 2016, Cisco recorded certain net tax benefits totaling $519 million related to prior-year periods that were excluded from non-GAAP net income for the second quarter and first six months of fiscal 2016. These net tax benefits are primarily comprised of settlement of all outstanding items related to Cisco's U.S. federal income tax returns for the fiscal years ended July 26, 2008 through July 31, 2010 of $367 million, the retroactive reinstatement of the U.S. federal R&D tax credit of $84 million related to fiscal 2015, and a net tax benefit of $68 million related to other significant tax matters.

CISCO SYSTEMS, INC.  
REVENUE BY SEGMENT  
(In millions, except percentages)  
   
  January 23, 2016  
  Three Months Ended     Six Months Ended  
  Amount   Y/Y %     Amount   Y/Y %  
Revenue:                      
  Including SP Video CPE Business for all periods:                      
    Americas $ 6,912   (3 )%   $ 14,711   1 %
    EMEA   3,088   -- %     6,175   1 %
    APJC   1,927   10 %     3,723   7 %
      Total $ 11,927   -- %   $ 24,609   2 %
                       
  Excluding SP Video CPE Business for all periods:                      
    Americas $ 6,846   1 %   $ 14,333   3 %
    EMEA   3,065   1 %     6,067   2 %
    APJC   1,923   11 %     3,705   7 %
      Total $ 11,834   2 %   $ 24,105   3 %
                       
                       
CISCO SYSTEMS, INC.
GROSS MARGIN PERCENTAGE BY SEGMENT
(In percentages)
 
    January 23, 2016
    Three Months Ended   Six Months Ended
Gross Margin Percentage:        
  Including SP Video CPE Business for all periods:        
    Americas   63.8%   63.6%
    EMEA   64.9%   64.6%
    APJC   61.7%   60.9%
         
  Excluding SP Video CPE Business for all periods (1) :        
    Americas   64.3%   65.0%
    EMEA   65.4%   65.5%
    APJC   61.8%   61.2%
         

(1) For the three months ended January 23, 2016 the calculation of gross margin percentages excludes gross profit for the SP Video CPE Business of $13 million for the Americas. For the six months ended January 23, 2016, the calculation of gross margin percentages excludes gross profit for the SP Video CPE Business of $41 million and $15 million for the Americas and EMEA, respectively.

CISCO SYSTEMS, INC.  
REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES  
(In millions, except percentages)  
   
  January 23, 2016  
  Three Months Ended     Six Months Ended  
  Amount   Y/Y %     Amount   Y/Y %  
Revenue:                      
  Switching $ 3,483   (4 )%   $ 7,505   1 %
  NGN Routing   1,845   5 %     3,638   (2 )%
  Collaboration   1,019   3 %     2,134   10 %
  Data Center   822   (3 )%     1,681   9 %
  Wireless   613   -- %     1,258   3 %
  Service Provider Video*   569   37 %     1,008   25 %
  Security   462   11 %     947   9 %
  Other   77   31 %     152   21 %
    Product -- excluding SP Video CPE Business   8,890   2 %     18,323   4 %
    Service   2,944   3 %     5,782   2 %
      Total -- excluding SP Video CPE Business   11,834   2 %     24,105   3 %
  SP Video CPE Business (1)   93           504      
      Total $ 11,927   -- %   $ 24,609   2 %

* Excludes SP Video CPE Business revenue for all periods presented.
(1) The three months ended January 23, 2016 included one month of revenue for the SP Video CPE Business, which was divested during the second quarter on November 20, 2015.

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CISCO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
 
  January 23,
 2016
  July 25,
 2015
ASSETS          
Current assets:          
  Cash and cash equivalents $ 6,314   $ 6,877
  Investments   54,061     53,539
  Accounts receivable, net of allowance for doubtful accounts of $325 at January 23, 2016 and $302 at July 25, 2015   4,302     5,344
  Inventories   1,362     1,627
  Financing receivables, net   4,514     4,491
  Deferred tax assets   2,834     2,915
  Other current assets   1,618     1,490
    Total current assets   75,005     76,283
Property and equipment, net   3,386     3,332
Financing receivables, net   3,903     3,858
Goodwill   24,958     24,469
Purchased intangible assets, net   2,322     2,376
Other assets   3,068     3,163
    TOTAL ASSETS $ 112,642   $ 113,481
LIABILITIES AND EQUITY          
Current liabilities:          
  Short-term debt $ 3,008   $ 3,897
  Accounts payable   962     1,104
  Income taxes payable   370     62
  Accrued compensation   2,667     3,049
  Deferred revenue   9,796     9,824
  Other current liabilities   5,996     5,687
    Total current liabilities   22,799     23,623
Long-term debt   21,591     21,457
Income taxes payable   706     1,876
Deferred revenue   5,389     5,359
Other long-term liabilities