Cisco Reports Q1 FY10 Earnings
- Q1 Net Sales: $9.0 billion (decrease of 13% year over year)
- Q1 Net Income: $1.8 billion GAAP; $2.1 billion non-GAAP
- Q1 Earnings per Share: $0.30 GAAP (decrease of 19% year over year); $0.36 non-GAAP (decrease of 14% year over year)
- Total Cash, Cash Equivalents and Investments: $35.4 billion
SAN JOSE, Calif. November 4, 2009 Cisco, the worldwide leader in networking that transforms how people connect, communicate and collaborate, today reported its first quarter results for the period ended October 24, 2009. Cisco reported first quarter net sales of $9.0 billion, net income on a generally accepted accounting principles (GAAP) basis of $1.8 billion or $0.30 per share, and non-GAAP net income of $2.1 billion or $0.36 per share.
Commenting on the quarter, Chairman and Chief Executive Officer John Chambers noted, "Building off what we saw as a clear tipping point in Q4, our Q1 results continued to reflect strong sequential growth trends that meet or exceed expectations during normal economic times. We view the improving economic outlook, combined with solid execution on our growth strategy, as creating unparalleled opportunity to drive more value into the core of the network. Simply said, we believe that key market transitions across collaboration, virtualization and video will drive productivity and growth in network loads for the next decade, and are evolving even faster than expected."
Chambers continued, "Our ability to launch four proposed acquisitions, the ecosystem-shifting coalition with EMC/VMware, and five new products and industry solutions into the Cisco pipeline in the past few months alone underscore this momentum. Our build buy - partner innovation engine is clearly running on all cylinders, while our operational machine is pulling costs out of the business even as we scale new models for growth. Execution and results over time will demonstrate the long-term impact of this vision and strategy but a new model of productivity based on collaboration is clearly emerging and we believe this may be the most profound opportunity for businesses in our 25 years as a company."
Q1 2010 Q1 2009 Vs. Q1 2009 Net Sales $9.0 billion $10.3 billion -12.7% Net Income $1.8 billion $2.2 billion -18.8% Earnings per Share $0.30 $0.37 -18.9%
Q1 2010 Q1 2009 Vs. Q1 2009 Net Income $2.1 billion $2.5 billion -15.3% Earnings per Share $0.36 $0.42 -14.3%
In October 2009, the Financial Accounting Standards Board issued new accounting guidance related to revenue recognition. Cisco elected to adopt this accounting guidance early on a prospective basis for transactions originating or materially modified in the first quarter of fiscal 2010. Net sales for the first quarter of fiscal 2010 were approximately $50 million higher than the net sales that would have been recorded under the previous accounting guidance.
A reconciliation between net income on a GAAP basis and non-GAAP net income is provided in the table on page 6.
Cisco will discuss first quarter results and business outlook on a conference call and webcast at 1:30 p.m. Pacific Time today. Call information and related charts are available at http://www.cisco.com/go/investors. A Q&A session with Cisco's Chairman and CEO John Chambers and CFO Frank Calderoni will also be available at http://newsroom.cisco.com. To view a video of Cisco's CFO discussing first quarter results, visit http://blogs.cisco.com.
Stock Repurchase Program Expanded
Cisco also announced that on November 4, 2009 its board of directors authorized up to $10 billion in additional repurchases of its common stock. Cisco's board had previously authorized up to $62 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 $13.1 billion.
Other Financial Highlights
- Cash flows from operations were $1.5 billion for the first quarter of fiscal 2010, compared with $2.7 billion for the first quarter of fiscal 2009, and compared with $2.0 billion for the fourth quarter of fiscal 2009.
- Cash and cash equivalents and investments were $35.4 billion at the end of the first quarter of fiscal 2010, compared with $35.0 billion at the end of fiscal 2009.
- During the first quarter of fiscal 2010, Cisco repurchased 76 million shares of common stock under the stock repurchase program at an average price of $22.99 per share for an aggregate purchase price of $1.8 billion. As of October 24, 2009, Cisco had repurchased and retired 2.9 billion shares of Cisco common stock at an average price of $20.47 per share for an aggregate purchase price of approximately $58.9 billion since the inception of the stock repurchase program.
- Days sales outstanding in accounts receivable (DSO) at the end of the first quarter of fiscal 2010 were 32 days, compared with 34 days at the end of the fourth quarter of fiscal 2009, and compared with 29 days at the end of the first quarter of fiscal 2009.
- Inventory turns on a GAAP basis were 11.6 in the first quarter of fiscal 2010, compared with 11.7 in the fourth quarter of fiscal 2009, and compared with 11.9 in the first quarter of fiscal 2009. Non-GAAP inventory turns were 11.3 in the first quarter of fiscal 2010, compared with 11.3 in the fourth quarter of fiscal 2009, and compared with 11.6 in the first quarter of fiscal 2009.
"Cisco's strong first quarter results represent two quarters of sequentially positive revenue growth and demonstrate our ability to execute on our innovation and operational excellence priorities," said Frank Calderoni, Cisco chief financial officer. "We delivered earnings per share on a GAAP basis of $0.30 and non-GAAP of $0.36, which were above our expectations, driven by balance across a broad portfolio and intense focus on execution. Our results validate our strategy and portfolio approach of balancing disciplined expense management with strategic investment, to drive continued profitability through varying economic environments."
- Cisco expanded its Cisco TelePresenceTM portfolio with the single-screen, single-camera Cisco TelePresence System 1100 for multipurpose rooms. Service providers AT&T, BT, Orange, NTT, Tata Communications, Telefonica, Telstra and Telmex have announced commercial intercompany Cisco TelePresence service offerings.
- Cisco announced its Borderless Networks Architecture strategy, together with announcing its new Integrated Services Router Generation 2 (ISR G2), which helps businesses and service providers simplify and scale delivery of on-demand, networked business services such as video and collaborative applications.
- Cisco launched Cisco IronPortTM Web Usage Controls, a product designed to provide real-time content categorization to accurately identify up to 90 percent of "dark web" sites in the most egregious content categories.
- Cisco and salesforce.com announced the Customer Interaction Cloud, a combined solution that uses a connector to integrate salesforce.com's Service Cloud 2 with Cisco® Unified Contact Center's functionality, empowering small and medium-sized companies to run their customer service function completely in the cloud.
- Cisco announced the creation of a Smart Grid Ecosystem, with more than 25 initial partners, to facilitate the adoption of Internet Protocol (IP)-based communications standards for smart grids designed to benefit the energy industry as well as business and residential customers. Cisco also created a Smart Grid Technical Advisory Board made up of leading innovative utility and energy companies from around the world.
Select Customer Announcements
- Tutor Perini Corporation, a leading civil and building construction company, is consolidating five data centers into one new facility which utilizes the Cisco Unified Computing SystemTM as its computing platform.
- The Miami Dolphins National Football League franchise announced the deployment of Cisco TelePresence and Cisco StadiumVisionTM systems to help fans "Live the Game" at Miami's Land Shark Stadium.
- Kenya's Ministry of Information and Communications Technology launched the first network-enabled Pilot Pasha Centre in Kangundo with the aim of enhancing the livelihoods of local citizens and encouraging new micro-enterprises.
- Cisco and Gale International expanded their relationship on Smart + Connected Communities under development in Korea's Songdo International Business District, with the aim of creating a repeatable model for smart, sustainable cities of the future.
- German electricity company Yello Strom launched an energy-saving smart grid pilot to create an intelligent energy system that communicates over an IP network.
Select Acquisitions and Investments
- Cisco announced a definitive agreement to acquire Starent Networks, Corp., a leading supplier of IP-based mobile infrastructure solutions targeting mobile and converged carriers.
- Cisco announced a definitive agreement for Cisco to launch a recommended voluntary cash offer to acquire TANDBERG ASA, a global leader in video communications.
- Q1 FY 2010 conference call to discuss Cisco's results along with its business outlook will be held at 1:30 p.m. Pacific Time, Wednesday, November 4, 2009. Conference call number is 888-848-6507 (United States) or 212-519-0847 (international).
- Conference call replay will be available from 4:00 p.m. Pacific Time, November 4, 2009 to 4:00 p.m. Pacific Time, November 11, 2009 at 866-357-4205 (United States) or 203-369-0122 (international). The replay also will be available via webcast from November 4, 2009 through January 15, 2010 on the Cisco Investor Relations website at http://www.cisco.com/go/investors.
- 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 4, 2009. 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 GAAP reconciliation information, will be available on the Cisco Investor Relations Website at http://www.cisco.com/go/investors.
- A Q&A session with Cisco's Chairman and CEO John Chambers and CFO Frank Calderoni about Q1 FY 2010 results will be available at http://newsroom.cisco.com.
- To view a video of Cisco's CFO discussing Q1 FY 2010 results, visit Cisco's blog site, The Platform, at http://blogs.cisco.com.
Cisco (NASDAQ: CSCO) is the worldwide leader in networking that transforms how people connect, communicate and collaborate. Information about Cisco can be found at http://www.cisco.com. For ongoing news, visit http://newsroom.cisco.com.
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This release may be deemed to contain forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events (such as the improving economic outlook and related opportunity, market transitions across collaboration, virtualization and video driving productivity and growth in network loads for the next decade, and the emergence of a new model of productivity based on collaboration and related business opportunity) and the future financial performance of Cisco 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 market adjacencies and geographical locations during the current economic downturn; 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; increased competition in our product and service markets, including the data center; 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; natural catastrophic events; a pandemic or epidemic; our ability to achieve the benefits anticipated from our investments in sales and engineering activities; our ability to recruit and retain key personnel; our ability to manage financial risk, and to manage expenses during the current economic downturn; risks related to the global nature of our operations, including our operations in emerging markets; currency fluctuations and other international factors, including relating to transactions to hedge foreign currency consideration for acquisitions; changes in provision for income taxes, including changes in tax laws and regulations or adverse outcomes resulting from examinations of our income tax returns; potential volatility in operating results; and other factors listed in Cisco's most recent report on Form 10-K. The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes thereto included in Cisco's most recent report on Form 10-K filed on September 11, 2009, as it may be amended from time to time. Cisco's results of operations for the three months ended October 24, 2009 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 net income per share data, shares used in non-GAAP net income per share calculation, and non-GAAP inventory turns.
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 net income, non-GAAP net income per share data and shares used in non-GAAP net income per share calculation, 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 results of operations. In addition, Cisco believes that the presentation of non-GAAP inventory turns provides useful information to investors and management regarding financial and business trends relating to inventory management based on the operating activities of the period presented.
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, other acquisition-related costs, enhanced early retirement benefits, the income tax effects of the foregoing, significant effects of retroactive tax legislation, and significant transfer pricing adjustments related to share-based compensation. 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; for example, effective in the third quarter of fiscal 2009, Cisco no longer excludes payroll tax on stock option exercises and effective beginning in fiscal 2010, Cisco no longer excludes in-process research and development as it is no longer expensed as a result of new accounting guidance. 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.
Copyright ©2009 Cisco Systems, Inc. All rights reserved. Cisco, the Cisco logo, Cisco Systems, Cisco IronPort, Cisco StadiumVision, Cisco TelePresence, Cisco Unified Computing System, and IronPort are registered trademarks or trademarks of Cisco Systems, Inc. and/or its affiliates in the United States and certain other countries. All other 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.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
Three Months Ended October 24, 2009 October 25, 2008 NET SALES: Product $ 7,200 $ 8,635 Service 1,821 1,696 Total net sales 9,021 10,331 COST OF SALES: Product 2,486 2,981 Service 647 669 Total cost of sales 3,133 3,650 GROSS MARGIN 5,888 6,681 OPERATING EXPENSES: Research and development 1,224 1,406 Sales and marketing 1,995 2,283 General and administrative 440 395 Amortization of purchased intangible assets 105 112 In-process research and development --- 3 Total operating expenses 3,764 4,199 OPERATING INCOME 2,124 2,482 Interest income, net 54 195 Other income (loss), net 61 (72) Interest and other income, net 115 123 INCOME BEFORE PROVISION FOR INCOME TAXES 2,239 2,605 Provision for income taxes 452 404 NET INCOME $ 1,787 $ 2,201 Net income per share: Basic $ 0.31 $ 0.37 Diluted $ 0.30 $ 0.37 Shares used in per-share calculation: Basic 5,767 5,881 Diluted 5,871 5,972
RECONCILIATION OF GAAP TO NON-GAAP NET INCOME
(In millions, except per-share amounts)
Three Months Ended October 24, 2009 October 25, 2008 GAAP net income $ 1,787 $ 2,201
Share-based compensation expense (1)
Payroll tax on stock option exercises (2)
In-process research and development (3)
Amortization of acquisition-related intangible assets
Other acquisition-related costs (4)
Total adjustments to GAAP income before provision for income taxes
Income tax effect
Effect of retroactive tax legislation (5)
Total adjustments to GAAP provision for income taxes
(145) (300) Non-GAAP net income $ 2,116 $ 2,497 Diluted net income per share: GAAP $ 0.30 $ 0.37 Non-GAAP $ 0.36 $ 0.42 Shares used in diluted net income per share calculation: GAAP 5,871 5,972 Non-GAAP 5,880 5,979
(1) Share-based compensation expense for the first quarter of fiscal 2010 and fiscal 2009 includes $28 million and $22 million, respectively, of share-based compensation related to acquisitions.
(2) Effective in the third quarter of fiscal 2009, Cisco no longer excludes payroll tax on stock option exercises for purposes of its non-GAAP financial measures.
(3) Effective beginning in fiscal 2010, Cisco no longer excludes in-process research and development for purposes of its non-GAAP financial measures as it is no longer expensed as a result of new accounting guidance.
(4) Other acquisition-related costs for the first quarter of fiscal 2010 includes a $42 million mark-to-market impact related to transactions to hedge a portion of the foreign currency consideration of an announced, pending business combination.
(5) In the first quarter of fiscal 2009, the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 reinstated the U.S. federal R&D tax credit, retroactive to January 1, 2008. GAAP net income for the first quarter 2009 included a $106 million tax benefit related to fiscal 2008 R&D expenses. Non-GAAP net income for the first quarter of fiscal 2009 excluded the $106 million tax benefit related to fiscal 2008 R&D expenses.
Certain reclassifications have been made to prior period amounts to conform to the current period's presentation.
Additional reconciliations between GAAP and non-GAAP financial measures are provided in the tables that follow on page 10.
CONSOLIDATED BALANCE SHEETS
October 24, 2009 July 25, 2009 ASSETS Current assets:
Cash and cash equivalents
$ 4,774 $ 5,718
Accounts receivable, net of allowance for doubtful accounts of $216 at October 24, 2009 and July 25, 2009
Deferred tax assets
Other current assets
Total current assets
44,697 44,177 Property and equipment, net 3,976 4,043 Goodwill 12,942 12,925 Purchased intangible assets, net 1,552 1,702 Other assets 5,513 5,281 TOTAL ASSETS $ 68,680 $ 68,128 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
$ 729 $ 675
Income taxes payable
Other current liabilities
Total current liabilities
13,162 13,655 Long-term debt 10,273 10,295 Income taxes payable 1,755 2,007 Deferred revenue 2,874 2,955 Other long-term liabilities 590 539 Total liabilities 28,654 29,451 Shareholders' equity 40,026 38,677 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 68,680 $ 68,128
Certain reclassifications have been made to prior period amounts to conform to the current period's presentation.CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended October 24, 2009 October 25, 2008 Cash flows from operating activities:
$ 1,787 $ 2,201 Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and other noncash items
Share-based compensation expense
Provision for doubtful accounts
Deferred income taxes
Excess tax benefits from share-based compensation
In-process research and development
Net (gains) losses on investments
(47) 70 Change in operating assets and liabilities, net of effects of acquisitions:
Lease receivables, net
Income taxes payable
(110) 47 Net cash provided by operating activities 1,488 2,718 Cash flows from investing activities:
Purchases of investments
Proceeds from sales of investments
Proceeds from maturities of investments
Acquisition of property and equipment
Acquisition of businesses, net of cash and cash equivalents acquired
Change in investments in privately held companies
43 (60) Net cash used in investing activities (1,253) (2,839) Cash flows from financing activities:
Issuance of common stock
Repurchase of common stock
Excess tax benefits from share-based compensation
35 (112) Net cash used in financing activities (1,179) (873) Net decrease in cash and cash equivalents (944) (994) Cash and cash equivalents, beginning of period 5,718 5,191 Cash and cash equivalents, end of period $ 4,774 $ 4,197
Certain reclassifications have been made to prior period amounts to conform to the current period's presentation.
ADDITIONAL FINANCIAL INFORMATION
October 24, 2009 July 25, 2009 CASH AND CASH EQUIVALENTS AND INVESTMENTS Cash and cash equivalents $ 4,774 $ 5,718 Fixed income securities 29,548 28,355 Publicly traded equity securities 1,043 928 Total $ 35,365 $ 35,001 INVENTORIES Raw materials $ 167 $ 165 Work in process 33 33 Finished goods:
Distributor inventory and deferred cost of sales
Manufactured finished goods
307 310 Total finished goods 710 692 Service-related spares 147 151 Demonstration systems 32 33 Total $ 1,089 $ 1,074 PROPERTY AND EQUIPMENT, NET Land, buildings, building improvements, and leasehold improvements $ 4,501 $ 4,618 Computer equipment and related software 1,569 1,823 Production, engineering, and other equipment 5,273 5,075 Operating lease assets 242 227 Furniture and fixtures 471 465 12,056 12,208 Less accumulated depreciation and amortization (8,080) (8,165) Total $ 3,976 $ 4,043 OTHER ASSETS Deferred tax assets $ 2,112 $ 2,122 Investments in privately held companies 728 709 Lease receivables, net (1) 1,043 966 Financed service contracts (2) 648 676 Loan receivables(3) 712 537 Other 270 271 Total $ 5,513 $ 5,281 DEFERRED REVENUE Service $ 6,194 $ 6,496 Product
Unrecognized revenue on product shipments and other deferred revenue
Cash receipts related to unrecognized revenue from two-tier distributors
526 407 Total product deferred revenue 3,077 2,897 Total $ 9,271 $ 9,393 Reported as: Current $ 6,397 $ 6,438 Noncurrent 2,874 2,955 Total $ 9,271 $ 9,393
(1) The current portion of lease receivables, net, which was $689 million and $626 million as of October 24, 2009 and July 25, 2009, respectively, is recorded in other current assets.
(2) The current portion of financed service contracts, which was $1.0 billion and $940 million as of October 24, 2009 and July 25, 2009, respectively, is recorded in other current assets. These financed service contracts primarily relate to technical support services, and the associated revenue is deferred and recognized ratably over the period during which the services are to be performed, which is typically from one to three years.
(3) The current portion of loan receivables, net, which was $328 million and $236 million as of October 24, 2009 and July 25, 2009, respectively, is recorded in other current assets.
SUMMARY OF SHARE-BASED COMPENSATION EXPENSE
Three Months Ended October 24, 2009 October 25, 2008 Cost of sales - product $ 12 $ 11 Cost of sales - service 33 31 Share-based compensation expense in cost of sales 45 42 Research and development 97 94 Sales and marketing 113 113 General and administrative 66 55 Share-based compensation expense in operating expenses 276 262 Total share-based compensation expense $ 321 $ 304
The income tax benefit for share-based compensation expense was $85 million and $82 million for the first quarter of fiscal 2010 and fiscal 2009, respectively.
RECONCILIATION OF SHARES USED IN THE GAAP AND NON-GAAP DILUTED NET INCOME PER SHARE CALCULATION
Three Months Ended October 24, 2009 October 25, 2008 Shares used in diluted net income per share calculation - GAAP 5,871 5,972 Effect of share-based compensation expense 9 7 Shares used in diluted net income per share calculation - Non-GAAP 5,880 5,979
RECONCILIATION OF GAAP TO NON-GAAP COST OF SALES USED IN INVENTORY TURNS
Three Months Ended October 24, 2009 July 25, 2009 October 25, 2008 GAAP cost of sales $ 3,133 $ 3,074 $ 3,650 Share-based compensation expense (45) (47) (42) Amortization of acquisition-related intangible assets (44) (39) (54) Enhanced early retirement benefits --- (28) --- Non-GAAP cost of sales $ 3,044 $ 2,960 $ 3,554