News Release

Cisco Reports Second Quarter Earnings

Cisco Press Release

Dividend Increased 14 Percent, Additional $25 Billion Authorized for Stock Repurchase

 
  • Q2 Revenue: $11.9 billion
    • Increase of 3% year over year
       
    • Recurring revenue was 33% of total revenue, up 2 points year over year
       
  • Q2 Earnings (Loss) per Share: $(1.78) GAAP; $0.63 non-GAAP
    • GAAP results include an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act
       
  • Q3 FY 2018 Guidance:
    • Revenue: 3% to 5% growth year over year
       
    • Earnings per Share: GAAP: $0.50 to $0.55; Non-GAAP: $0.64 to $0.66

Q2FY18 Earnings Infographics

 

SAN JOSE, Calif., Feb. 14, 2018 -- Cisco (NASDAQ:CSCO) today reported second quarter results for the period ended January 27, 2018. Cisco reported second quarter revenue of $11.9 billion, net loss on a generally accepted accounting principles (GAAP) basis of $(8.8) billion or $(1.78) per share, and non-GAAP net income of $3.1 billion or $0.63 per share.

"We had a great quarter which demonstrates that our strategy is working. Our business is growing, we have a fantastic innovation pipeline, our balance sheet is strong and we have a team that's executing incredibly well," said Chuck Robbins, Chairman and CEO, Cisco. "The network is more critical to business success than ever, and our new intent-based networking portfolio has great momentum including the fastest ramping new product in our history."

             
GAAP Results
             
    Q2 FY 2018   Q2 FY 2017   Vs. Q2 FY 2017
Revenue   $ 11.9  billion   $ 11.6  billion   3 %
Net Income (Loss)   $ (8.8 ) billion   $ 2.3  billion   (474 )%
Earnings (Loss) per Share   $ (1.78 )   $ 0.47     (479 )%

GAAP results include an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act comprised of $9.0 billion for the U.S. transition tax, $1.2 billion for foreign withholding tax and $0.9 billion for the re-measurement of net deferred tax assets.

             
Non-GAAP Results
             
    Q2 FY 2018   Q2 FY 2017   Vs. Q2 FY 2017
Net Income   $ 3.1  billion   $ 2.9  billion   10 %
Diluted Earnings per Share (EPS)   $ 0.63     $ 0.57     11 %

Reconciliations between net income (loss), earnings (loss) per share, and other measures on a GAAP and non-GAAP basis are provided in the tables located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

 

Cisco Increases Quarterly Cash Dividend; Stock Repurchase Program Authorization Increased

Cisco has declared a quarterly dividend of $0.33 per common share, a 4-cent increase or up 14% over the previous quarter's dividend, to be paid on April 25, 2018 to all shareholders of record as of the close of business on April 5, 2018. Future dividends will be subject to Board approval.

Cisco's board of directors has also approved a $25 billion increase to the authorization of the stock repurchase program. There is no fixed termination date for the repurchase program. The remaining authorized amount for stock repurchases including the additional authorization is approximately $31 billion.

"Q2 was a great quarter with 3% revenue growth and strong margins and cash flow," said Kelly Kramer, CFO of Cisco. "We continue to make progress as we shift the business toward more software and recurring revenue. Our significant dividend increase and additional share repurchase authorization reinforce our commitment to returning capital to our shareholders and show confidence in the strength of our ongoing cash flows."

Financial Summary

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

Q2 FY 2018 Highlights

Revenue -- Total revenue was $11.9 billion, up 3%, with product revenue up 3% and service revenue up 3%. 33% of total revenue was from recurring offers, up 2 percentage points from the second quarter of fiscal 2017. Revenue by geographic segment was: Americas up 5%, EMEA flat, and APJC down 2%. Product revenue performance reflected solid growth in Applications and Security, which each increased 6%. Infrastructure Platforms increased by 2%.

Gross Margin -- On a GAAP basis, total gross margin and product gross margin were 63.1% and 61.5%, respectively. Product gross margin increased compared with 61.1% in the second quarter of fiscal 2017.

Non-GAAP total gross margin and product gross margin were 64.7% and 63.3%, respectively. Non-GAAP product gross margin increased compared with 62.4% in the second quarter of fiscal 2017. The increase was primarily due to improved productivity benefits and to a lesser extent product mix, partially offset by pricing.

GAAP service gross margin was 67.4% and non-GAAP service gross margin was 68.5%.

Total gross margins by geographic segment were: 65.9% for the Americas, 64.6% for EMEA and 60.1% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.4 billion, up 1%. Non-GAAP operating expenses were $3.9 billion, up 2%, and were 32.9% of revenue.

Operating Income -- GAAP operating income was $3.1 billion, up 6%, with GAAP operating margin of 25.9%. Non-GAAP operating income was $3.8 billion, up 5%, with non-GAAP operating margin of 31.7%.

Provision for Income Taxes -- The GAAP tax provision rate was 371.6% which includes an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act. The non-GAAP tax provision rate was 20.0%.

Net Income (Loss) and Earnings (Loss) per Share -- On a GAAP basis, net loss was $(8.8) billion and earnings (loss) per share was $(1.78). On a non-GAAP basis, net income was $3.1 billion, an increase of 10%, and EPS was $0.63, an increase of 11%.

Cash Flow from Operating Activities -- was $4.1 billion, an increase of 8% compared with $3.8 billion for the second quarter of fiscal 2017.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- were $73.7 billion at the end of the second quarter of fiscal 2018, compared with $71.6 billion at the end of the first quarter of fiscal 2018, and 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 second quarter of fiscal 2018 were $2.4 billion.

Deferred Revenue -- was $18.8 billion, up 10% in total, with deferred product revenue up 19%, driven largely by subscription-based and software offers, and deferred service revenue was up 4%. The portion of deferred product revenue related to recurring software and subscription offers increased 36%.

Capital Allocation -- In the second quarter of fiscal 2018, Cisco declared and paid a cash dividend of $0.29 per common share, or $1.4 billion. For the second quarter of fiscal 2018, Cisco repurchased approximately 103 million shares of common stock under its stock repurchase program at an average price of $39.07 per share for an aggregate purchase price of $4.0 billion.

Acquisitions

In the first quarter of fiscal 2018, we announced a definitive agreement to acquire BroadSoft, Inc., a publicly held company that offers cloud calling and contact center solutions. The BroadSoft acquisition closed in the third quarter of fiscal 2018.

On January 24, 2018, we announced our intent to acquire Skyport Systems, Inc., a privately held company providing cloud-managed, hyper-converged systems that run and protect business critical applications. The Skyport acquisition closed in the third quarter of fiscal 2018.

 

Guidance for Q3 FY 2018

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

     
Q3 FY 2018    
Revenue   3% - 5% growth Y/Y
Non-GAAP gross margin rate   63% - 64%
Non-GAAP operating margin rate   29.5% - 30.5%
Non-GAAP tax provision rate   21%  
Non-GAAP EPS   $0.64 - $0.66
     

The impact of the BroadSoft acquisition is factored into our guidance.

Cisco estimates that GAAP EPS will be $0.50 to $0.55 in the third quarter of fiscal 2018.

A reconciliation between the Guidance for Q3 FY 2018 on a GAAP and non-GAAP basis is provided in the table entitled "GAAP to non-GAAP Guidance for Q3 FY 2018" located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

 

Editor's Notes:

  • Q2 fiscal year 2018 conference call to discuss Cisco's results along with its guidance will be held on Wednesday, February 14, 2018 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 14, 2018 to 4:00 p.m. Pacific Time, February 21, 2018 at 1-800-391-9854 (United States) or 1-402-220-9828 (international). The replay will also be available via webcast on the Cisco Investor Relations website at https://investor.cisco.com.
     
  • Additional information regarding Cisco's financials, as well as a webcast of the conference call with visuals designed to guide participants through the call, will be available at 1:30 p.m. Pacific Time, February 14, 2018. 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   Six Months Ended
  January 27,
2018
  January 28,
2017
  January 27,
2018
  January 28,
2017
REVENUE:              
Product $ 8,709     $ 8,491     $ 17,763     $ 17,793  
Service 3,178     3,089     6,260     6,139  
      Total revenue 11,887     11,580     24,023     23,932  
COST OF SALES:              
Product 3,354     3,305     6,969     6,708  
Service 1,035     999     2,129     2,064  
      Total cost of sales 4,389     4,304     9,098     8,772  
GROSS MARGIN 7,498     7,276     14,925     15,160  
OPERATING EXPENSES:              
Research and development 1,549     1,508     3,116     3,053  
Sales and marketing 2,235     2,222     4,569     4,640  
General and administrative 483     456     1,040     1,011  
Amortization of purchased intangible assets 60     64     121     142  
Restructuring and other charges 98     133     250     544  
      Total operating expenses 4,425     4,383     9,096     9,390  
OPERATING INCOME 3,073     2,893     5,829     5,770  
Interest income 396     329     775     624  
Interest expense (247 )   (222 )   (482 )   (420 )
Other income (loss), net 10     (37 )   72     (58 )
      Interest and other income (loss), net 159     70     365     146  
INCOME BEFORE PROVISION FOR INCOME TAXES 3,232     2,963     6,194     5,916  
Provision for income taxes (1) 12,010     615     12,578     1,246  
NET INCOME (LOSS) $ (8,778 )   $ 2,348     $ (6,384 )   $ 4,670  
               
Net income (loss) per share:              
Basic $ (1.78 )   $ 0.47     $ (1.29 )   $ 0.93  
Diluted $ (1.78 )   $ 0.47     $ (1.29 )   $ 0.92  
Shares used in per-share calculation:              
Basic 4,924     5,015     4,942     5,021  
Diluted 4,924     5,040     4,942     5,054  
               
Cash dividends declared per common share $ 0.29     $ 0.26     $ 0.58     $ 0.52  

(1) The provision for income taxes includes an $11.1 billion charge as related to the enactment of the Tax Cuts and Jobs Act.

     
     
CISCO SYSTEMS, INC.
REVENUE BY SEGMENT
(In millions, except percentages)
     
    January 27, 2018
    Three Months Ended   Six Months Ended
    Amount   Y/Y %   Amount   Y/Y%
Revenue:                
Americas   $ 7,004     5 %   $ 14,354     2 %
EMEA   3,062     %   5,971     (2 )%
APJC   1,821     (2 )%   3,698     (1 )%
      Total   $ 11,887     3 %   $ 24,023     %

 

     
     
CISCO SYSTEMS, INC.
GROSS MARGIN PERCENTAGE BY SEGMENT
(In percentages)
     
    January 27, 2018
    Three Months Ended   Six Months Ended
Gross Margin Percentage:        
Americas   65.9%   65.0%
EMEA   64.6%   63.9%
APJC   60.1%   61.1%

 

     
     
CISCO SYSTEMS, INC.
REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES
(In millions, except percentages)
     
    January 27, 2018
    Three Months Ended   Six Months Ended
    Amount   Y/Y %   Amount   Y/Y%
Revenue:                
Infrastructure Platforms   $ 6,694     2 %   $ 13,664     (1 )%
Applications   1,184     6 %   2,387     6 %
Security   558     6 %   1,143     7 %
Other Products   273     (10 )%   569     (13 )%
Total Product   8,709     3 %   17,763     %
Services   3,178     3 %   6,260     2 %
      Total   $ 11,887     3 %   $ 24,023     %

 

       
       
CISCO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
       
  January 27, 2018   July 29, 2017
ASSETS      
Current assets:      
Cash and cash equivalents $ 17,624     $ 11,708  
Investments 56,059     58,784  
Accounts receivable, net of allowance for doubtful accounts of $181 at January 27, 2018 and $211 at July 29, 2017 3,963     5,146  
Inventories 1,896     1,616  
Financing receivables, net 4,925     4,856  
Other current assets 1,583     1,593  
      Total current assets 86,050     83,703  
Property and equipment, net 3,113     3,322  
Financing receivables, net 4,913     4,738  
Goodwill 30,391     29,766  
Purchased intangible assets, net 2,474     2,539  
Deferred tax assets 3,097     4,239  
Other assets 1,472     1,511  
      TOTAL ASSETS $ 131,510     $ 129,818  
LIABILITIES AND EQUITY      
Current liabilities:      
Short-term debt $ 13,741     $ 7,992  
Accounts payable 1,060     1,385  
Income taxes payable 2,204     98  
Accrued compensation 2,736     2,895  
Deferred revenue 11,102     10,821  
Other current liabilities 4,521     4,392  
      Total current liabilities 35,364     27,583  
Long-term debt 25,625     25,725  
Income taxes payable 9,185     1,250  
Deferred revenue 7,686     7,673  
Other long-term liabilities 1,668     1,450  
      Total liabilities 79,528     63,681  
Total equity 51,982     66,137  
TOTAL LIABILITIES AND EQUITY $ 131,510     $ 129,818  

 

   
   
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
   
  Six Months Ended
  January 27,
 2018
  January 28,
 2017
Cash flows from operating activities:      
Net income (loss) $ (6,384 )   $ 4,670  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:      
     Depreciation, amortization, and other 1,112     1,148  
     Share-based compensation expense 785     724  
     Provision for receivables (43 )   4  
     Deferred income taxes 1,021     (26 )
     Excess tax benefits from share-based compensation     (101 )
     (Gains) losses on divestitures, investments and other, net (174 )   79  
     Change in operating assets and liabilities, net of effects of acquisitions and divestitures:      
         Accounts receivable 1,236     1,396  
         Inventories (276 )   (51 )
         Financing receivables (156 )   (764 )
         Other assets (15 )   155  
         Accounts payable (338 )   (98 )
         Income taxes, net 10,246     (257 )
         Accrued compensation (189 )   (417 )
         Deferred revenue 237     611  
         Other liabilities 88     (571 )
             Net cash provided by operating activities 7,150     6,502  
Cash flows from investing activities:      
Purchases of investments (13,954 )   (27,847 )
Proceeds from sales of investments 9,111     18,420  
Proceeds from maturities of investments 7,365     5,245  
Acquisition of businesses, net of cash and cash equivalents acquired (754 )   (251 )
Proceeds from business divestitures 27      
Purchases of investments in privately held companies (89 )   (142 )
Return of investments in privately held companies 124     108  
Acquisition of property and equipment (379 )   (526 )
Proceeds from sales of property and equipment 51     5  
Other (7 )   10  
             Net cash provided by (used in) investing activities 1,495     (4,978 )
Cash flows from financing activities:      
Issuances of common stock 302     386  
Repurchases of common stock - repurchase program (5,457 )   (1,991 )
Shares repurchased for tax withholdings on vesting of restricted stock units (433 )   (432 )
Short-term borrowings, original maturities of 90 days or less, net 5,095     300  
Issuances of debt 6,877     6,232  
Repayments of debt (6,230 )   (1 )
Excess tax benefits from share-based compensation     101  
Dividends paid (2,861 )   (2,612 )
Other (22 )   (240 )
             Net cash provided by (used in) financing activities (2,729 )   1,743  
Net increase (decrease) in cash and cash equivalents 5,916     3,267  
Cash and cash equivalents, beginning of period 11,708     7,631  
Cash and cash equivalents, end of period $ 17,624     $ 10,898  
Supplemental cash flow information:      
Cash paid for interest $ 454     $ 419  
Cash paid for income taxes, net $ 1,311     $ 1,529  

 

           
           
CISCO SYSTEMS, INC.
DEFERRED REVENUE
(In millions)
           
  January 27,
2018
  October 28,
2017
  January 28,
2017
Deferred revenue:          
Service $ 10,963     $ 10,991     $ 10,525  
Product:          
     Deferred revenue related to recurring software and subscription offers 5,451     5,213     3,997  
     Other product deferred revenue 2,374     2,361     2,564  
     Total product deferred revenue 7,825     7,574     6,561  
         Total $ 18,788     $ 18,565     $ 17,086  
Reported as:          
Current $ 11,102     $ 10,920     $ 10,243  
Noncurrent 7,686     7,645     6,843  
         Total $ 18,788     $ 18,565     $ 17,086  

 

             
             
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 2018                        
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  
Fiscal 2017                        
July 29, 2017   $ 0.29     $ 1,448     38     $ 31.61     $ 1,201     $ 2,649  
April 29, 2017   $ 0.29     $ 1,451     15     $ 33.71     $ 503     $ 1,954  
January 28, 2017   $ 0.26     $ 1,304     33     $ 30.33     $ 1,001     $ 2,305  
October 29, 2016   $ 0.26     $ 1,308     32     $ 31.12     $ 1,001     $ 2,309  

 

       
       
CISCO SYSTEMS, INC.
RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

GAAP NET INCOME (LOSS) TO NON-GAAP NET INCOME
(In millions, except per-share amounts)
       
  Three Months Ended   Six Months Ended
  January 27,
 2018
  January 28,
 2017
  January 27,
 2018
  January 28,
 2017
GAAP net income (loss) $ (8,778 )   $ 2,348     $ (6,384 )   $ 4,670  
Adjustments to cost of sales:              
Share-based compensation expense 54     53     111     107  
Amortization of acquisition-related intangible assets 144     107     283     219  
Supplier component remediation charge (adjustment), net (13 )   (16 )   (32 )   (16 )
Acquisition-related/divestiture costs 2     1     2     1  
Legal and indemnification settlements         122      
Total adjustments to GAAP cost of sales 187     145     486     311  
Adjustments to operating expenses:              
Share-based compensation expense 333     299     668     614  
Amortization of acquisition-related intangible assets 60     64     121     142  
Acquisition-related/divestiture costs 23     61     106     114  
Significant asset impairments and restructurings 98     133     250     544  
Total adjustments to GAAP operating expenses 514     557     1,145     1,414  
Total adjustments to GAAP income (loss) before provision for income taxes 701     702     1,631     1,725  
Income tax effect of non-GAAP adjustments (157 )   (191 )   (445 )   (435 )
Significant tax matters (1) 11,380         11,380      
Total adjustments to GAAP provision for income taxes 11,223     (191 )   10,935     (435 )
Non-GAAP net income $ 3,146     $ 2,859     $ 6,182     $ 5,960  
Net income (loss) per share: (2)              
GAAP $ (1.78 )   $ 0.47     $ (1.29 )   $ 0.92  
Non-GAAP $ 0.63     $ 0.57     $ 1.24     $ 1.18  

(1) During the second quarter of fiscal 2018, Cisco recorded charges relating to significant tax matters that were excluded from non-GAAP net income for the second quarter and first six months of fiscal 2018. $11.1 billion of these charges were provisional amounts related to the enactment of the Tax Cuts and Jobs Act comprised of $9.0 billion related to the U.S. transition tax, $1.2 billion related to foreign withholding tax and $0.9 billion related to the re-measurement of net deferred tax assets. The amounts are provisional based on Securities and Exchange Commission Staff Accounting Bulletin No. 118. The remaining $0.3 billion was related to other significant tax matters.

(2) GAAP net loss per share for the three and six months ended January 27, 2018 is calculated using basic shares of 4,924 million and 4,942 million respectively, due to the net loss resulting from the tax charge as discussed in footnote (1). Non-GAAP net income per share for the respective periods is calculated using diluted shares of 4,966 million and 4,982 million, as the Company had non-GAAP net income for these periods.

 

   
   
CISCO SYSTEMS, INC.
RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

GROSS MARGINS, OPERATING EXPENSES, OPERATING MARGINS, AND NET INCOME (LOSS)
(In millions, except percentages)
   
  Three Months Ended
  January 27, 2018
  Product
Gross
Margin
  Service
Gross
Margin
  Total
Gross
Margin
  Operating
Expenses
  Y/Y   Operating
Income
  Y/Y   Net
Income
(Loss)
  Y/Y
GAAP amount $ 5,355     $ 2,143     $ 7,498     $ 4,425     1 %   $ 3,073     6 %   $ (8,778 )   (474 )%
% of revenue 61.5 %   67.4 %   63.1 %   37.2 %       25.9 %       (73.8 )%    
Adjustments to GAAP amounts:                                  
Share-based compensation expense 23     31     54     333         387         387      
Amortization of acquisition-related intangible assets 144         144     60         204         204      
Supplier component remediation charge (adjustment), net (13 )       (13 )           (13 )       (13 )    
Acquisition/divestiture-related costs     2     2     23         25         25      
Significant asset impairments and restructurings             98         98         98      
Income tax effect/significant tax matters (1)                             11,223   (1 )  
Non-GAAP amount $ 5,509     $ 2,176     $ 7,685     $ 3,911     2 %   $ 3,774     5 %   $ 3,146     10 %
% of revenue 63.3 %   68.5 %   64.7 %   32.9 %       31.7 %       26.5 %    

(1) Includes an $11.1 billion charge as related to the enactment of the Tax Cuts and Jobs Act.

  Three Months Ended
  January 28, 2017
  Product
Gross
Margin
  Service
Gross
Margin
  Total
Gross
Margin
  Operating
Expenses
  Operating
Income
  Net
Income
GAAP amount $ 5,186     $ 2,090     $ 7,276     $ 4,383     $ 2,893     $ 2,348  
% of revenue 61.1 %   67.7 %   62.8 %   37.8 %   25.0 %   20.3 %
Adjustments to GAAP amounts:                      
Share-based compensation expense 19     34     53     299     352     352  
Amortization of acquisition-related intangible assets 107         107     64     171     171  
Supplier component remediation charge (adjustment), net (16 )       (16 )       (16 )   (16 )
Acquisition/divestiture-related costs     1     1     61     62     62  
Significant asset impairments and restructurings             133     133     133  
Income tax effect                     (191 )
Non-GAAP amount $ 5,296     $ 2,125     $ 7,421     $ 3,826     $ 3,595     $ 2,859  
% of revenue 62.4 %   68.8 %   64.1 %   33.0 %   31.0 %   24.7 %

 

   
   
CISCO SYSTEMS, INC.
RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

GROSS MARGINS, OPERATING EXPENSES, OPERATING MARGINS, AND NET INCOME (LOSS)
(In millions, except percentages)
   
  Six Months Ended
  January 27, 2018
  Product
Gross
Margin
  Service
Gross
Margin
  Total
Gross
Margin
  Operating
Expenses
  Y/Y   Operating
Income
  Y/Y   Net
Income
(Loss)
  Y/Y
GAAP amount $ 10,794     $ 4,131     $ 14,925     $ 9,096     (3 )%   $ 5,829     1 %   $ (6,384 )   (237 )%
% of revenue 60.8 %   66.0 %   62.1 %   37.9 %       24.3 %       (26.6 )%    
Adjustments to GAAP amounts:                                  
Share-based compensation expense 46     65     111     668         779         779      
Amortization of acquisition-related intangible assets 283         283     121         404         404      
Supplier component remediation charge (adjustment), net (32 )       (32 )           (32 )       (32 )    
Legal and indemnification settlements 122         122             122         122      
Acquisition/divestiture-related costs     2     2     106         108         108      
Significant asset impairments and restructurings             250         250         250      
Income tax effect/significant tax matters (1)                             10,935   (1 )  
Non-GAAP amount $ 11,213     $ 4,198     $ 15,411     $ 7,951     %   $ 7,460     %   $ 6,182     4 %
% of revenue 63.1 %   67.1 %   64.2 %   33.1 %       31.1 %       25.7 %    

(1) Includes an $11.1 billion charge as related to the enactment of the Tax Cuts and Jobs Act.

  Six Months Ended
  January 28, 2017
  Product
Gross
Margin
  Service
Gross
Margin
  Total
Gross
Margin
  Operating
Expenses
  Operating
Income
  Net
Income
GAAP amount $ 11,085     $ 4,075     $ 15,160     $ 9,390     $ 5,770     $ 4,670  
% of revenue 62.3 %   66.4 %   63.3 %   39.2 %   24.1 %   19.5 %
Adjustments to GAAP amounts:                      
Share-based compensation expense. 40     67     107     614     721     721  
Amortization of acquisition-related intangible assets 219         219     142     361     361  
Supplier component remediation charge (adjustment), net (16 )       (16 )       (16 )   (16 )
Acquisition/divestiture-related costs     1     1     114     115     115  
Significant asset impairments and restructurings             544     544     544  
Income tax effect/significant tax matters                     (435 )
Non-GAAP amount $ 11,328     $ 4,143     $ 15,471     $ 7,976     $ 7,495     $ 5,960  
% of revenue 63.7 %   67.5 %   64.6 %   33.3 %   31.3 %   24.9 %

 

       
       
CISCO SYSTEMS, INC.
RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

EFFECTIVE TAX RATE
(In percentages)
       
  Three Months Ended   Six Months Ended
  January 27,
2018
  January 28,
2017
  January 27,
2018
  January 28,
2017
GAAP effective tax rate (1) 371.6 %   20.8 %   203.1 %   21.1 %
Total adjustments to GAAP provision for income taxes (351.6 )%   1.2 %   (182.1 )%   0.9 %
Non-GAAP effective tax rate 20.0 %   22.0 %   21.0 %   22.0 %

(1) Includes an $11.1 billion charge as related to the enactment of the Tax Cuts and Jobs Act.

 

GAAP TO NON-GAAP GUIDANCE FOR Q3 FY 2018
 
Q3 FY 2018   Gross Margin
Rate
  Operating Margin
Rate
  Tax Provision
Rate
  Earnings per
Share (2)
GAAP   61.5% - 62.5%   24%- 25%   22%   $0.50 - $0.55
Estimated adjustments for:                
Share-based compensation expense   0.5 %   3.5 %   —    $0.06 - $0.07
Amortization of purchased intangible assets and other acquisition-related/divestiture costs   1.0 %   2.0 %   —    $0.05 - $0.06
Restructuring and other charges (1)           —    $0.00 - $0.01
Income tax effect of non-GAAP adjustments           (1)%    
Non-GAAP   63% - 64%   29.5% - 30.5%   21%   $0.64 - $0.66
                 

 

(1) In August 2016, we began taking action under a restructuring plan in order to reinvest in our key priority areas. We have incurred charges of approximately $1.0 billion in relation to this plan since its inception through Q2 FY2018. We have a small amount of charges that remain which will be recognized over the remainder of the fiscal year.

(2) Estimated adjustments to GAAP earnings per share are shown after income tax effects.

The impact of the BroadSoft acquisition is factored into our guidance.

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

Forward Looking Statements, Non-GAAP Information and Additional Information

This release may be deemed to contain forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events (such as continued execution on our strategy, our ability to continue to innovate and grow our business, the continued criticality of the network to the business success of our customers, the momentum of our intent-based networking portfolio, continued progress in shifting our business toward more software and recurring revenue, and our ability to continue to execute well, deliver profitable growth and return capital to our shareholders) and the future financial performance of Cisco (including the guidance for Q3 FY 2018) that involve risks and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including: business and economic conditions and growth trends in the networking industry, our customer markets and various geographic regions; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; the growth and evolution of the Internet and levels of capital spending on Internet-based systems; variations in customer demand for products and services, including sales to the service provider market and other customer markets; the return on our investments in certain priorities, key growth areas, and in certain geographical locations, as well as maintaining leadership in routing, switching and services; the timing of orders and manufacturing and customer lead times; changes in customer order patterns or customer mix; insufficient, excess or obsolete inventory; variability of component costs; variations in sales channels, product costs or mix of products sold; our ability to successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses and technologies; our ability to achieve expected benefits of our partnerships; increased competition in our product and service markets, including the data center market; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; manufacturing and sourcing risks; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters, and governmental investigations; our ability to achieve the benefits of the announced restructuring and possible changes in the size and timing of the related charges; man-made problems such as cyber-attacks, data protection breaches, computer viruses or terrorism; natural catastrophic events; a pandemic or epidemic; our ability to achieve the benefits anticipated from our investments in sales, engineering, service, marketing and manufacturing activities; our ability to recruit and retain key personnel; our ability to manage financial risk, and to manage expenses during economic downturns; risks related to the global nature of our operations, including our operations in emerging markets; currency fluctuations and other international factors; changes in provision for income taxes, including changes in tax laws and regulations or adverse outcomes resulting from examinations of our income tax returns; potential volatility in operating results; and other factors listed in Cisco's most recent reports on Forms 10-Q and 10-K filed on November 21, 2017 and September 7, 2017, respectively. The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes thereto included in Cisco's most recent reports on Forms 10-Q and 10-K as each may be amended from time to time. Cisco's results of operations for the three and six months ended January 27, 2018 are not necessarily indicative of Cisco's operating results for any future periods. Any projections in this release are based on limited information currently available to Cisco, which is subject to change. Although any such projections and the factors influencing them will likely change, Cisco will not necessarily update the information, since Cisco will only provide guidance at certain points during the year. Such information speaks only as of the date of this release.

This release includes non-GAAP net income, non-GAAP gross margins, non-GAAP operating expenses, non-GAAP operating income and margin, non-GAAP effective tax rates, and non-GAAP net income per share data for the periods presented. It also includes future estimated ranges for gross margin, operating margin, tax provision rate and EPS on a non-GAAP basis.

These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Cisco believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Cisco's results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate Cisco's results of operations in conjunction with the corresponding GAAP measures.

Cisco believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to its financial condition and its historical and projected results of operations.

For its internal budgeting process, Cisco's management uses financial statements that do not include, when applicable, share-based compensation expense, amortization of acquisition-related intangible assets, acquisition-related/divestiture costs, significant asset impairments and restructurings, significant litigation settlements and other contingencies, significant gains and losses on investments, the income tax effects of the foregoing and significant tax matters. Cisco's management also uses the foregoing non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the financial results of Cisco. In prior periods, Cisco has excluded other items that it no longer excludes for purposes of its non-GAAP financial measures. From time to time in the future there may be other items that Cisco may exclude for purposes of its internal budgeting process and in reviewing its financial results. For additional information on the items excluded by Cisco from one or more of its non-GAAP financial measures, refer to the Form 8-K regarding this release furnished today to the Securities and Exchange Commission.

About Cisco

Cisco (NASDAQ:CSCO) is the worldwide technology leader that has been making the Internet work since 1984. Our people, products and partners help society securely connect and seize tomorrow's digital opportunity today. Discover more at thenetwork.cisco.com and follow us on Twitter at @Cisco.

Copyright © 2018 Cisco and/or its affiliates. All rights reserved. Cisco and the Cisco logo are trademarks or registered trademarks of Cisco and/or its affiliates in the U.S. and other countries. To view a list of Cisco trademarks, go to: www.cisco.com/go/trademarks. Third-party trademarks mentioned in this document are the property of their respective owners. The use of the word partner does not imply a partnership relationship between Cisco and any other company. This document is Cisco Public Information.

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Release Contacts

Robyn Blum press
1 (408) 853-9848 rojenkin@cisco.com
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1 (408) 527-7452 marilmor@cisco.com