Cisco Reports Fourth Quarter And Fiscal Year 2019 Earnings

Q4 Results: ¹
- Revenue: $13.4 billion
  - Growth of 6% year over year
- Earnings per Share: GAAP: $0.51; Non-GAAP: $0.83
  - Non-GAAP EPS increased 19% year over year
FY 2019 Results: ¹
- Revenue: $51.7 billion
  - Growth of 7% year over year
- Earnings per Share: GAAP: $2.61; Non-GAAP: $3.10
  - Non-GAAP EPS increased 20% year over year
Q1 Guidance: ¹
- Revenue: 0% to 2% growth year over year
- Earnings per Share: GAAP: $0.64 to $0.69; Non-GAAP: $0.80 to $0.82

¹ Normalized to exclude the divested SPVSS business

Q4FY19 Earnings Infographics

SAN JOSE, Calif., Aug. 14, 2019 -- Cisco today reported fourth quarter and fiscal year results for the period ended July 27, 2019. Cisco reported fourth quarter revenue of $13.4 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.2 billion or $0.51 per share, and non-GAAP net income of $3.6 billion or $0.83 per share.

Earnings History

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 Q1 FY 2020 guidance have been normalized to exclude the SPVSS business from prior periods for comparative purposes.

"Our Q4 results marked a strong end to a great year. We are executing well in a dynamic environment, delivering tremendous innovation across our portfolio and extending our market leadership," said Chuck Robbins, chairman and CEO of Cisco. "We are committed to providing our customers ongoing value through differentiated solutions, and we are well positioned to take advantage of the long-term growth opportunities ahead."

Q4 GAAP Results

	Q4 FY 2019		Q4 FY 2018		Vs. Q4 FY 2018
Revenue (including SPVSS business for all periods)	$	13.4 billion	$	12.8 billion	5%
Revenue (excluding SPVSS business for all periods)	$	13.4 billion	$	12.6 billion	6%
Net Income	$	2.2 billion	$	3.8 billion	(42)%
Diluted Earnings per Share (EPS)	$	0.51	$	0.81	(37)%

Q4 GAAP results for fiscal 2019 and 2018 include a $0.9 billion charge and $0.9 billion benefit, respectively, related to the Tax Cuts and Jobs Act.

Q4 Non-GAAP Results

	Q4 FY 2019		Q4 FY 2018		Vs. Q4 FY 2018
Net Income (excluding SPVSS business for all periods)	$	3.6 billion	$	3.3 billion	9%
EPS (excluding SPVSS business for all periods)	$	0.83	$	0.70	19%

Fiscal Year GAAP Results

	FY 2019		FY 2018		Vs. FY 2018
Revenue (including SPVSS business for all periods)	$	51.9 billion	$	49.3 billion	5%
Revenue (excluding SPVSS business for all periods)	$	51.7 billion	$	48.4 billion	7%
Net Income	$	11.6 billion	$	0.1 billion	NM
EPS	$	2.61	$	0.02	NM

NM - Not meaningful

GAAP results for fiscal 2019 and 2018 include charges related to the Tax Cuts and Jobs Act of $0.9 billion and $10.4 billion, respectively.

Fiscal Year Non-GAAP Results

	FY 2019		FY 2018		Vs. FY 2018
Net Income (excluding SPVSS business for all periods)	$	13.8 billion	$	12.7 billion	9%
EPS (excluding SPVSS business for all periods)	$	3.10	$	2.59	20%

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 are pleased with our solid execution and performance in Q4, delivering revenue growth of 6%, non-GAAP EPS growth of 19%, and strong margins," said Kelly Kramer, CFO of Cisco. "We continue to transform our business model with software subscriptions now at 70% of our software revenue. The returns on our investments in key strategic areas position Cisco for long-term growth and shareholder value."

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 "Q4 FY 2019 Highlights" and "FY 2019 Highlights" sections are presented excluding the SPVSS business for all periods as it was divested during the second quarter, on October 28, 2018.

Q4 FY 2019 Highlights

Revenue -- Total revenue was $13.4 billion, up 6%, with product revenue up 7% and service revenue up 4%. Revenue by geographic segment was: Americas up 9%, EMEA up 7%, and APJC down 4%. Product revenue performance was broad based with growth in Security, up 14%, Applications, up 11%, and Infrastructure Platforms, up 6%.

Gross Margin -- On a GAAP basis, total gross margin, product gross margin, and service gross margin were 63.9%, 62.9%, and 66.8%, respectively, as compared with 61.7%, 60.2%, and 66.0%, respectively, in the fourth quarter of 2018.

On a non-GAAP basis, total gross margin, product gross margin, and service gross margin were 65.5%, 64.7%, and 67.9%, respectively, as compared with 63.2%, 61.9%, and 67.2%, respectively, in the fourth quarter of 2018.

Total gross margins by geographic segment were: 66.8% for the Americas, 65.2% for EMEA and 60.8% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.9 billion, up 7%. Non-GAAP operating expenses were $4.4 billion, up 9%, and were 32.8% of revenue.

Operating Income -- GAAP operating income was $3.7 billion, up 10%, with GAAP operating margin of 27.5%. Non-GAAP operating income was $4.4 billion, up 11%, with non-GAAP operating margin at 32.6%.

Provision for Income Taxes -- The GAAP tax provision rate was 40.4%, which includes a $0.9 billion charge related to the Tax Cuts and Jobs Act. The non-GAAP tax provision rate was 18.8%.

Net Income and EPS -- On a GAAP basis, net income was $2.2 billion and EPS was $0.51. On a non-GAAP basis, net income was $3.6 billion, an increase of 9%, and EPS was $0.83, an increase of 19%.

Cash Flow from Operating Activities -- $3.9 billion for the fourth quarter of fiscal 2019, a decrease of 4% compared with $4.1 billion for the fourth quarter of fiscal 2018.

FY 2019 Highlights

Revenue -- Total revenue was $51.7 billion, an increase of 7%.

Net Income and EPS -- On a GAAP basis, net income was $11.6 billion and EPS was $2.61. On a non-GAAP basis, net income was $13.8 billion, up 9% compared to fiscal 2018, and EPS was $3.10, an increase of 20%.

Cash Flow from Operating Activities -- $15.8 billion for fiscal 2019 compared with $13.7 billion for fiscal 2018, an increase of 16%. Operating cash flow for fiscal 2019 and 2018 include payments of $0.8 billion and $1.4 billion, respectively, related to the Tax Cuts and Jobs Act. Fiscal 2019 also includes the receipt of $0.4 billion related to a litigation settlement with Arista Networks. Operating cash flow increased 8%, normalized for these items.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- $33.4 billion at the end of the fourth quarter of fiscal 2019, compared with $34.6 billion at the end of the third quarter of fiscal 2019, and compared with $46.5 billion at the end of fiscal 2018.

Deferred Revenue -- $18.5 billion, down 6% in total, with deferred product revenue down 18%. Deferred service revenue was up 2%.

Remaining Performance Obligations -- $25.3 billion at the end of fiscal 2019.

Capital Allocation -- In the fourth quarter of fiscal 2019, we returned $6.0 billion to shareholders through share buybacks and dividends. We declared and paid a cash dividend of $0.35 per common share, or $1.5 billion, and repurchased approximately 82 million shares of common stock under our stock repurchase program at an average price of $54.99 per share for an aggregate purchase price of $4.5 billion.

Acquisitions

On July 9, 2019, we announced our intent to acquire Acacia Communications, Inc., a publicly-traded fabless semiconductor company that develops, manufactures and sells high-speed coherent optical interconnect products that are designed to transform communications networks through improvements in performance, capacity and cost. The acquisition is expected to close during the second half of fiscal 2020, subject to customary closing conditions and regulatory approvals.

Guidance for Q1 FY 2020

Cisco expects to achieve the following results for the first quarter of fiscal 2020 (normalized to exclude the divested SPVSS business):

Q1 FY 2020
Revenue		0% to 2% growth Y/Y
Non-GAAP gross margin rate		64% - 65%
Non-GAAP operating margin rate		32% - 33%
Non-GAAP tax provision rate		20%
Non-GAAP EPS		$0.80 - $0.82

Revenue for the divested SPVSS business for the first quarter of fiscal 2019 was $168 million.

Cisco estimates that GAAP EPS will be $0.64 to $0.69 in the first quarter of fiscal 2020.

A reconciliation between the Guidance for Q1 FY 2020 on a GAAP and non-GAAP basis is provided in the table entitled "GAAP to non-GAAP Guidance for Q1 FY 2020" located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

Editor's Notes:

Q4 fiscal year 2019 conference call to discuss Cisco's results along with its guidance will be held on Wednesday, August 14, 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, August 14, 2019 to 4:00 p.m. Pacific Time, August 21, 2019 at 1-866-463-4969 (United States) or 1-203-369-1404 (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, August 14, 2019. Text of the conference call's prepared remarks will be available within 24 hours of completion of the call. The webcast will include both the prepared remarks and the question-and-answer session. This information, along with the GAAP to non-GAAP reconciliation information, will be available on the Cisco Investor Relations website at https://investor.cisco.com.

CISCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per-share amounts) (Unaudited)

	Three Months Ended				Fiscal Year Ended
	July 27, 2019		July 28, 2018		July 27, 2019		July 28, 2018
REVENUE:
Product	$	10,120	$	9,642	$	39,005	$	36,709
Service	3,308		3,202		12,899		12,621
Total revenue	13,428		12,844		51,904		49,330
COST OF SALES:
Product	3,757		3,833		14,863		14,427
Service	1,097		1,089		4,375		4,297
Total cost of sales	4,854		4,922		19,238		18,724
GROSS MARGIN	8,574		7,922		32,666		30,606
OPERATING EXPENSES:
Research and development	1,753		1,626		6,577		6,332
Sales and marketing	2,487		2,348		9,571		9,242
General and administrative	566		543		1,827		2,144
Amortization of purchased intangible assets	38		33		150		221
Restructuring and other charges	40		26		322		358
Total operating expenses	4,884		4,576		18,447		18,297
OPERATING INCOME	3,690		3,346		14,219		12,309
Interest income	305		353		1,308		1,508
Interest expense	(204)		(224)		(859)		(943)
Other income (loss), net	(87)		117		(97)		165
Interest and other income (loss), net	14		246		352		730
INCOME BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES	3,704		3,592		14,571		13,039
Provision for (benefit from) income taxes ⁽¹⁾	1,498		(211)		2,950		12,929
NET INCOME	$	2,206	$	3,803	$	11,621	$	110

Net income per share:
Basic	$	0.52	$	0.81	$	2.63	$	0.02
Diluted	$	0.51	$	0.81	$	2.61	$	0.02
Shares used in per-share calculation:
Basic	4,269		4,672		4,419		4,837
Diluted	4,307		4,722		4,453		4,881

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 fiscal year ended July 27, 2019 includes three months of financial results for this business.

⁽¹⁾ For the three months ended July 27, 2019 and July 28, 2018, the provision for (benefit from) income taxes include a $0.9 billion charge and $0.9 billion benefit, respectively, related to the Tax Cuts and Jobs Act. Fiscal 2019 and 2018 include charges related to the Tax Cuts and Jobs Act of $0.9 billion and $10.4 billion, respectively.

CISCO SYSTEMS, INC. REVENUE BY SEGMENT (In millions, except percentages)

	July 27, 2019
	Three Months Ended			Fiscal Year Ended
	Amount		Y/Y %	Amount		Y/Y %
Revenue:
Including SPVSS business for all periods:
Americas	$	8,129	8%	$	30,927	6%
EMEA	3,297		4%	13,100		5%
APJC	2,002		(5)%	7,877		1%
Total	$	13,428	5%	$	51,904	5%
Excluding SPVSS business for all periods:
Americas	$	8,129	9%	$	30,850	8%
EMEA	3,297		7%	13,034		8%
APJC	2,002		(4)%	7,853		3%
Total	$	13,428	6%	$	51,737	7%

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 July 28, 2018 was $206 million and for the fiscal years ended July 27, 2019 and July 28, 2018 was $168 million and $903 million, respectively.

CISCO SYSTEMS, INC. GROSS MARGIN PERCENTAGE BY SEGMENT (In percentages)

	July 27, 2019
	Three Months Ended	Fiscal Year Ended
Gross Margin Percentage:
Including SPVSS business for all periods:
Americas	66.8%	65.8%
EMEA	65.2%	64.6%
APJC	60.8%	59.5%
Excluding SPVSS business for all periods ⁽¹⁾:
Americas	66.8%	65.9%
EMEA	65.2%	64.6%
APJC	60.8%	59.5%

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

CISCO SYSTEMS, INC. REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES (In millions, except percentages)

	July 27, 2019
	Three Months Ended			Fiscal Year Ended
	Amount		Y/Y %	Amount		Y/Y %
Revenue:
Including SPVSS business for all periods:
Infrastructure Platforms	$	7,876	6%	$	30,191	7%
Applications	1,487		11%	5,803		15%
Security	714		14%	2,730		16%
Other Products	42		(81)%	281		(72)%
Total Product	10,120		5%	39,005		6%
Services	3,308		3%	12,899		2%
Total	$	13,428	5%	$	51,904	5%
Excluding SPVSS business for all periods:
Infrastructure Platforms	$	7,876	6%	$	30,191	7%
Applications	1,487		11%	5,803		15%
Security	714		14%	2,730		16%
Other Products	42		(4)%	135		(31)%
Total Product	10,120		7%	38,859		8%
Services	3,308		4%	12,879		3%
Total	$	13,428	6%	$	51,737	7%

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

CISCO SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In millions) (Unaudited)

	July 27, 2019		July 28, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	11,750	$	8,934
Investments	21,663		37,614
Accounts receivable, net of allowance for doubtful accounts of $136 at July 27, 2019 and $129 at July 28, 2018	5,491		5,554
Inventories	1,383		1,846
Financing receivables, net	5,095		4,949
Other current assets	2,373		2,940
Total current assets	47,755		61,837
Property and equipment, net	2,789		3,006
Financing receivables, net	4,958		4,882
Goodwill	33,529		31,706
Purchased intangible assets, net	2,201		2,552
Deferred tax assets	4,065		3,219
Other assets	2,496		1,582
TOTAL ASSETS	$	97,793	$	108,784
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt	$	10,191	$	5,238
Accounts payable	2,059		1,904
Income taxes payable	1,149		1,004
Accrued compensation	3,221		2,986
Deferred revenue	10,668		11,490
Other current liabilities	4,424		4,413
Total current liabilities	31,712		27,035
Long-term debt	14,475		20,331
Income taxes payable	8,927		8,585
Deferred revenue	7,799		8,195
Other long-term liabilities	1,309		1,434
Total liabilities	64,222		65,580
Total equity	33,571		43,204
TOTAL LIABILITIES AND EQUITY	$	97,793	$	108,784

CISCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited)

	Fiscal Year Ended
	July 27, 2019		July 28, 2018
Cash flows from operating activities:
Net income	$	11,621	$	110
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and other	1,897		2,192
Share-based compensation expense	1,570		1,576
Provision (benefit) for receivables	40		(134)
Deferred income taxes	(350)		900
(Gains) losses on divestitures, investments and other, net	(24)		(322)
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
Accounts receivable	(84)		(269)
Inventories	131		(244)
Financing receivables	(249)		(219)
Other assets	(955)		66
Accounts payable	87		504
Income taxes, net	312		8,118
Accrued compensation	277		100
Deferred revenue	1,407		1,205
Other liabilities	151		83
Net cash provided by operating activities	15,831		13,666
Cash flows from investing activities:
Purchases of investments	(2,416)		(14,285)
Proceeds from sales of investments	7,388		17,706
Proceeds from maturities of investments	12,928		15,769
Acquisitions and divestitures	(2,175)		(2,979)
Purchases of investments in privately held companies	(148)		(267)
Return of investments in privately held companies	159		168
Acquisition of property and equipment	(909)		(834)
Proceeds from sales of property and equipment	22		59
Other	(12)		(19)
Net cash provided by investing activities	14,837		15,318
Cash flows from financing activities:
Issuances of common stock	640		623
Repurchases of common stock - repurchase program	(20,717)		(17,547)
Shares repurchased for tax withholdings on vesting of restricted stock units	(862)		(703)
Short-term borrowings, original maturities of 90 days or less, net	3,446		(2,502)
Issuances of debt	2,250		6,877
Repayments of debt	(6,780)		(12,375)
Dividends paid	(5,979)		(5,968)
Other	113		(169)
Net cash used in financing activities	(27,889)		(31,764)
Net increase (decrease) in cash, cash equivalents, and restricted cash	2,779		(2,780)
Cash, cash equivalents, and restricted cash, beginning of fiscal year	8,993		11,773
Cash, cash equivalents, and restricted cash, end of fiscal year	$	11,772	$	8,993

Supplemental cash flow information:
Cash paid for interest	$	839	$	910
Cash paid for income taxes, net	$	2,986	$	3,911

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

CISCO SYSTEMS, INC. DEFERRED REVENUE (In millions)

	July 27, 2019		April 27, 2019		July 28, 2018
Deferred revenue:
Service	$	11,709	$	11,297	$	11,431
Product	6,758		6,159		8,254
Total	$	18,467	$	17,456	$	19,685
Reported as:
Current	$	10,668	$	10,117	$	11,490
Noncurrent	7,799		7,339		8,195
Total	$	18,467	$	17,456	$	19,685

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
July 27, 2019	$	0.35	$	1,490	82	$	54.99	$	4,515	$	6,005
April 27, 2019	$	0.35	$	1,519	116	$	52.14	$	6,020	$	7,539
January 26, 2019	$	0.33	$	1,470	111	$	45.09	$	5,016	$	6,486
October 27, 2018	$	0.33	$	1,500	109	$	46.01	$	5,026	$	6,526

Fiscal 2018
July 28, 2018	$	0.33	$	1,535	138	$	43.58	$	6,015	$	7,550
April 28, 2018	$	0.33	$	1,572	140	$	42.83	$	6,015	$	7,587
January 27, 2018	$	0.29	$	1,425	103	$	39.07	$	4,011	$	5,436
October 28, 2017	$	0.29	$	1,436	51	$	31.80	$	1,620	$	3,056

CISCO SYSTEMS, INC. RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES GAAP TO NON-GAAP NET INCOME (In millions, except per-share amounts)

	Three Months Ended				Fiscal Year Ended
	July 27, 2019		July 28, 2018		July 27, 2019		July 28, 2018
GAAP net income	$	2,206	$	3,803	$	11,621	$	110
Adjustments to cost of sales:
Share-based compensation expense	57		59		220		227
Amortization of acquisition-related intangible assets	144		134		562		578
Supplier component remediation charge (adjustment), net	17		(36)		16		(77)
Acquisition-related/divestiture costs	1		3		10		7
Legal and indemnification settlements	—		—		5		122
Total adjustments to GAAP cost of sales	219		160		813		857
Adjustments to operating expenses:
Share-based compensation expense	335		329		1,309		1,339
Amortization of acquisition-related intangible assets	38		33		150		221
Acquisition-related/divestiture costs	61		79		299		274
Legal and indemnification settlements	—		—		(396)		—
Significant asset impairments and restructurings	40		26		322		358
Total adjustments to GAAP operating expenses	474		467		1,684		2,192
Adjustments to GAAP interest and other income (loss), net:
(Gains) and losses on equity investments	20		—		(57)		—
Total adjustments to GAAP income before provision for income taxes	713		627		2,440		3,049
Income tax effect of non-GAAP adjustments	(168)		(253)		(722)		(866)
Significant tax matters ⁽¹⁾	835		(851)		448		10,410
Total adjustments to GAAP provision for income taxes	667		(1,104)		(274)		9,544
Non-GAAP net income	$	3,586	$	3,326	$	13,787	$	12,703

Diluted net income per share:
GAAP	$	0.51	$	0.81	$	2.61	$	0.02
Non-GAAP ⁽²⁾	$	0.83	$	0.70	$	3.10	$	2.60

⁽¹⁾The three months ended July 27, 2019 and July 28, 2018 includes a $0.9 billion charge and $0.9 billion benefit, respectively, related to the Tax Cuts and Jobs Act. Fiscal 2019 and 2018 include charges related to the Tax Cuts and Jobs Act of $0.9 billion and $10.4 billion, respectively.

⁽²⁾ Fiscal 2018 Non-GAAP EPS excluding the SPVSS business was $2.59.

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 (In millions, except percentages)

	Three Months Ended
	July 27, 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	$	6,363	$	2,211	$	8,574	$	4,884	7%	$	3,690	10%	$	14	(94)%	$	2,206	(42)%
% of revenue	62.9%		66.8%		63.9%		36.4%			27.5%			0.1%			16.4%
Adjustments to GAAP amounts:
Share-based compensation expense	23		34		57		335			392			—			392
Amortization of acquisition-related intangible assets	144		—		144		38			182			—			182
Supplier component remediation charge (adjustment), net	17		—		17		—			17			—			17
Acquisition/divestiture-related costs	—		1		1		61			62			—			62
Significant asset impairments and restructurings	—		—		—		40			40			—			40
(Gains) and losses on equity investments	—		—		—		—			—			20			20
Income tax effect/significant tax matters ⁽¹⁾	—		—		—		—			—			—			667
Non-GAAP amount	$	6,547	$	2,246	$	8,793	$	4,410	9%	$	4,383	11%	$	34	(86)%	$	3,586	9%
% of revenue	64.7%		67.9%		65.5%		32.8%			32.6%			0.3%			26.7%

⁽¹⁾ Includes a $0.9 billion charge related to the Tax Cuts and Jobs Act.

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 fourth quarter of fiscal 2018.

	Three Months Ended
	July 28, 2018
	Product Gross Margin		Service Gross Margin		Total Gross Margin		Operating Expenses		Operating Income		Net Income
GAAP amount	$	5,809	$	2,113	$	7,922	$	4,576	$	3,346	$	3,803
% of revenue	60.2%		66.0%		61.7%		35.6%		26.1%		29.6%
Adjustments to GAAP amounts:
Share-based compensation expense	24		35		59		329		388		388
Amortization of acquisition-related intangible assets	134		—		134		33		167		167
Supplier component remediation charge (adjustment), net	(36)		—		(36)		—		(36)		(36)
Acquisition/divestiture-related costs	2		1		3		79		82		82
Significant asset impairments and restructurings	—		—		—		26		26		26
Income tax effect/significant tax matters ⁽¹⁾	—		—		—		—		—		(1,104)
Non-GAAP amount	$	5,933	$	2,149	$	8,082	$	4,109	$	3,973	$	3,326
Less: SPVSS business ⁽²⁾	(76)		(13)		(89)		(59)		(30)		(24)
Non-GAAP amount (excluding SPVSS business)	$	5,857	$	2,136	$	7,993	$	4,050	$	3,943	$	3,302
% of revenue	61.9%		67.2%		63.2%		32.0%		31.2%		26.1%

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

⁽¹⁾ Includes a $0.9 billion benefit as related to the Tax Cuts and Jobs Act.

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

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 (In millions, except percentages)

	Fiscal Year Ended
	July 27, 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	$	24,142	$	8,524	$	32,666	$	18,447	1%	$	14,219	16%	$	352	(52)	%	$	11,621	NM
% of revenue	61.9%		66.1%		62.9%		35.5%			27.4%			0.7%				22.4%
Adjustments to GAAP amounts:
Share-based compensation expense	90		130		220		1,309			1,529			—				1,529
Amortization of acquisition-related intangible assets	562		—		562		150			712			—				712
Supplier component remediation charge (adjustment), net	16		—		16		—			16			—				16
Legal and indemnification settlements	5		—		5		(396)			(391)			—				(391)
Acquisition/divestiture-related costs	4		6		10		299			309			—				309
Significant asset impairments and restructurings	—		—		—		322			322			—				322
(Gains) and losses on equity investments	—		—		—		—			—			(57)				(57)
Income tax effect/significant tax matters⁽¹⁾	—		—		—		—			—			—				(274)
Non-GAAP amount	$	24,819	$	8,660	$	33,479	$	16,763		$	16,716		$	295			$	13,787
% of revenue	63.6%		67.1%		64.5%		32.3%			32.2%			0.6%				26.6%
Less: SPVSS business ⁽²⁾	(51)		(9)		(61)		(60)			—			—				—
Non-GAAP amount (excluding SPVSS business)	$	24,768	$	8,651	$	33,418	$	16,703	5%	$	16,716	9%	$	295	(60)	%	$	13,787	9%
% of revenue	63.7%		67.2%		64.6%		32.3%			32.3%			0.6%				26.6%

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

⁽¹⁾ Includes a $0.9 billion charge related to the Tax Cuts and Jobs Act.

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

	Fiscal Year Ended
	July 28, 2018
	Product Gross Margin		Service Gross Margin		Total Gross Margin		Operating Expenses		Operating Income		Net Income
GAAP amount	$	22,282	$	8,324	$	30,606	$	18,297	$	12,309	$	110
% of revenue	60.7%		66.0%		62.0%		37.1%		25.0%		0.2%
Adjustments to GAAP amounts:
Share-based compensation expense	94		133		227		1,339		1,566		1,566
Amortization of acquisition-related intangible assets	578		—		578		221		799		799
Supplier component remediation charge (adjustment), net	(77)		—		(77)		—		(77)		(77)
Legal and indemnification settlements	122		—		122		—		122		122
Acquisition/divestiture-related costs	3		4		7		274		281		281
Significant asset impairments and restructurings	—		—		—		358		358		358
Income tax effect/significant tax matters ⁽¹⁾	—		—		—		—		—		9,544
Non-GAAP amount	$	23,002	$	8,461	$	31,463	$	16,105	$	15,358	$	12,703
Less: SPVSS business ⁽²⁾	(276)		(41)		(316)		(250)		(66)		(53)
Non-GAAP amount (excluding SPVSS business)	$	22,726	$	8,420	$	31,147	$	15,855	$	15,292	$	12,650
% of revenue	63.3%		67.3%		64.3%		32.7%		31.6%		26.1%

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

⁽¹⁾ Includes a $10.4 billion charge as related to the enactment of the Tax Cuts and Jobs Act.

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

CISCO SYSTEMS, INC. RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES EFFECTIVE TAX RATE (In percentages)

	Three Months Ended		Fiscal Year Ended
	July 27, 2019	July 28, 2018	July 27, 2019	July 28, 2018
GAAP effective tax rate ⁽¹⁾	40.4%	(5.9)%	20.2%	99.2%
Total adjustments to GAAP provision for income taxes	(21.6)%	27.1%	(1.2)%	(78.2)%
Non-GAAP effective tax rate	18.8%	21.2%	19.0%	21.0%

⁽¹⁾ The three months ended July 27, 2019 and July 28, 2018 includes a $0.9 billion charge and $0.9 billion benefit, respectively, related to the Tax Cuts and Jobs Act. Fiscal 2019 and 2018 include charges related to the Tax Cuts and Jobs Act of $0.9 billion and $10.4 billion, respectively.

GAAP TO NON-GAAP GUIDANCE FOR Q1 FY 2020

Q1 FY 2020	Gross Margin Rate	Operating Margin Rate	Tax Provision Rate	Earnings per Share ⁽¹⁾
GAAP	62.5% - 63.5%	25.5%- 26.5%	18%	$0.64 - $0.69
Estimated adjustments for:
Share-based compensation expense	0.5%	3.0%		$0.05 - $0.06