News Release

Cisco Reports Second Quarter FY19 Earnings

Cisco Press Release

Dividend Increased 6 Percent, Additional $15 Billion Authorized for Stock Repurchase

  • Q2 Results:
    • Revenue: $12.4 billion
      • Growth of 7% year over year (normalized to exclude the divested SPVSS business for Q2 FY 2018)
    • Earnings per Share: GAAP: $0.63; Non-GAAP: $0.73
      • Non-GAAP EPS increased 16% year over year
  • Q3 Guidance (normalized to exclude the divested SPVSS business for Q3 FY 2018):
    • Revenue: 4% to 6% growth year over year
    • Earnings per Share: GAAP: $0.63 to $0.68; Non-GAAP: $0.76 to $0.78

Q2FY19 Earnings Infographics

 

SAN JOSE, Calif., Feb. 13, 2019 -- Cisco today reported second quarter results for the period ended January 26, 2019. Cisco reported second quarter revenue of $12.4 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.8 billion or $0.63 per share, and non-GAAP net income of $3.3 billion or $0.73 per share.

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 Q3 FY 2019 guidance have been normalized to exclude the SPVSS business from prior periods for comparative purposes.

"We are very pleased with our strong performance in the quarter," said Chuck Robbins, chairman and CEO of Cisco. "Our teams are executing incredibly well, aggressively transitioning to a software model and accelerating our pace of innovation. We are redefining and connecting every domain of the networking infrastructure to deliver the agility, operational efficiency and security our customers require to embrace multicloud, edge computing and digital transformation." 

GAAP Results

             
   

Q2 FY 2019

 

Q2 FY 2018

 

Vs. Q2 FY 2018

Revenue (including SPVSS business for all periods)

 

$

12.4 billion

 

$

11.9 billion

 

5%

Revenue (excluding SPVSS business for all periods)

 

$

12.4 billion

 

$

11.7 billion

 

7%

Net Income (Loss)

 

$

2.8 billion

 

$

(8.8) billion

 

NM

Earnings (Loss) per Share

 

$

0.63

   

$

(1.78)

   

NM

NM - Not meaningful

GAAP results for the second quarter of fiscal 2018 include a $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act.

Non-GAAP Results

             
   

Q2 FY 2019

 

Q2 FY 2018

 

Vs. Q2 FY 2018

Net Income (excluding SPVSS business for all periods)

 

$

3.3 billion

 

$

3.1 billion

 

6%

Diluted Earnings per Share (EPS) (excluding SPVSS business for all periods)

 

$

0.73

   

$

0.63

   

16%

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 $0.35 per common share, a 2-cent increase or up 6% over the previous quarter's dividend, to be paid on April 24, 2019 to all shareholders of record as of the close of business on April 5, 2019. 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. There is no fixed termination date for the repurchase program. The remaining authorized amount for stock repurchases including the additional authorization is approximately $24 billion.

"Q2 was a solid quarter with continued momentum across the business delivering revenue growth of 7% and non-GAAP EPS growth of 16%. I'm also very pleased with our revenue from software subscriptions which is now 65% of total software revenue," said Kelly Kramer, CFO of Cisco. "Our increased dividend and share repurchase authorization show confidence in the strength of our ongoing cash flows and reinforce our commitment to returning capital to our shareholders."

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 "Q2 FY 2019 Highlights" section are presented excluding the SPVSS business for all periods as it was divested during the second quarter on October 28, 2018.

Q2 FY 2019 Highlights

Revenue -- Total revenue was $12.4 billion, up 7%, with product revenue up 9% and service revenue up 1%. Revenue by geographic segment was: Americas up 7%, EMEA up 8%, and APJC up 5%. Product revenue performance was broad based with growth in Applications, up 24%, Security, up 18%, and Infrastructure Platforms, up 6%.

Gross Margin -- On a GAAP basis, total gross margin, product gross margin, and service gross margin were 62.5%, 61.0%, and 66.6%, respectively, as compared with 63.1%, 61.5%, and 67.4%, respectively, in the second quarter of fiscal 2018.

On a non-GAAP basis, total gross margin, product gross margin, and service gross margin were 64.1%, 62.8%, and 67.7%, respectively, as compared with 65.1%, 63.8%, and 68.7%, respectively, in the second quarter of fiscal 2018.

Total gross margins by geographic segment were: 65.2% for the Americas, 64.2% for EMEA and 59.2% for APJC.

Operating Expenses --On a GAAP basis, operating expenses were $4.6 billion, up 3%. Non-GAAP operating expenses were $4.0 billion, up 3%, and were 31.9% of revenue.

Operating Income -- GAAP operating income was $3.2 billion, up 4%, with GAAP operating margin of 25.8%. Non-GAAP operating income was $4.0 billion, up 7%, with non-GAAP operating margin flat at 32.1%.

Provision for Income Taxes -- The GAAP tax provision rate was 15.6%. The non-GAAP tax provision rate was 19.0%.

Net Income and EPS -- On a GAAP basis, net income was $2.8 billion and EPS was $0.63. On a non-GAAP basis, net income was $3.3 billion, an increase of 6%, and EPS was $0.73, an increase of 16%.

Cash Flow from Operating Activities -- $3.8 billion for the second quarter of fiscal 2019, a decrease of 7% compared with $4.1 billion for the second quarter of fiscal 2018. Operating cash flow includes the payment of $0.8 billion in relation to a transition tax payment as a result of the Tax Cuts and Jobs Act. Operating cash flow increased 12%, normalized for this payment.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- $40.4 billion at the end of the second quarter of fiscal 2019, compared with $42.6 billion at the end of the first quarter of fiscal 2019, and compared with $46.5 billion at the end of fiscal 2018.

Deferred Revenue -- $17.3 billion, down 8% in total, with deferred product revenue down 23%. Deferred service revenue was up 3%.

Capital Allocation -- For the second quarter of fiscal 2019, we returned $6.5 billion to shareholders through share buybacks and dividends. We declared and paid a cash dividend of $0.33 per common share, or $1.5 billion, and repurchased approximately 111 million shares of common stock under our stock repurchase program at an average price of $45.09 per share for an aggregate purchase price of $5.0 billion.

Acquisitions

On December 18, 2018, we announced our intent to acquire Luxtera, Inc., a privately held semiconductor company. On January 30, 2019, we announced our intent to acquire Singularity Networks, a privately held network infrastructure analytics company. Both acquisitions closed in the third quarter of fiscal 2019.

Guidance for Q3 FY 2019

Cisco expects to achieve the following results for the third quarter of fiscal 2019 (normalized to exclude the divested SPVSS business):

Q3 FY 2019

   

Revenue

 

4% - 6% growth Y/Y

Non-GAAP gross margin rate

 

64% - 65%

Non-GAAP operating margin rate

 

31% - 32%

Non-GAAP tax provision rate

 

19%

Non-GAAP EPS

 

$0.76 - $0.78

Revenue for the divested SPVSS business for the third quarter of fiscal 2018 was $219 million.

Cisco estimates that GAAP EPS will be $0.63 to $0.68 in the third quarter of fiscal 2019.

A reconciliation between the Guidance for Q3 FY 2019 on a GAAP and non-GAAP basis is provided in the table entitled "GAAP to non-GAAP Guidance for Q3 FY 2019" located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

Editor's Notes:

  • Q2 fiscal year 2019 conference call to discuss Cisco's results along with its guidance will be held on Wednesday, February 13, 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, February 13, 2019 to 4:00 p.m. Pacific Time, February 20, 2019 at 1-800-391-9851 (United States) or 1-203-369-3268 (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 13, 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

 

Six Months Ended

 

January 26, 2019

 

January 27, 2018

 

January 26, 2019

 

January 27, 2018

REVENUE:

             

Product

$

9,273

   

$

8,709

   

$

19,163

   

$

17,763

 

Service

3,173

   

3,178

   

6,355

   

6,260

 

Total revenue

12,446

   

11,887

   

25,518

   

24,023

 

COST OF SALES:

             

Product

3,614

   

3,354

   

7,413

   

6,969

 

Service

1,059

   

1,035

   

2,186

   

2,129

 

Total cost of sales

4,673

   

4,389

   

9,599

   

9,098

 

GROSS MARGIN

7,773

   

7,498

   

15,919

   

14,925

 

OPERATING EXPENSES:

             

Research and development

1,557

   

1,549

   

3,165

   

3,116

 

Sales and marketing

2,271

   

2,235

   

4,681

   

4,569

 

General and administrative

509

   

483

   

720

   

1,040

 

Amortization of purchased intangible assets

39

   

60

   

73

   

121

 

Restructuring and other charges

186

   

98

   

264

   

250

 

Total operating expenses

4,562

   

4,425

   

8,903

   

9,096

 

OPERATING INCOME

3,211

   

3,073

   

7,016

   

5,829

 

Interest income

328

   

396

   

672

   

775

 

Interest expense

(223)

   

(247)

   

(444)

   

(482)

 

Other income (loss), net

27

   

10

   

8

   

72

 

Interest and other income (loss), net

132

   

159

   

236

   

365

 

INCOME BEFORE PROVISION FOR INCOME TAXES

3,343

   

3,232

   

7,252

   

6,194

 

Provision for income taxes (1)

521

   

12,010

   

881

   

12,578

 

NET INCOME (LOSS)

$

2,822

   

$

(8,778)

   

$

6,371

   

$

(6,384)

 
               

Net income (loss) per share:

             

Basic

$

0.63

   

$

(1.78)

   

$

1.41

   

$

(1.29)

 

Diluted

$

0.63

   

$

(1.78)

   

$

1.40

   

$

(1.29)

 

Shares used in per-share calculation:

             

Basic

4,470

   

4,924

   

4,517

   

4,942

 

Diluted

4,505

   

4,924

   

4,557

   

4,942

 

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 six months ended January 26, 2019 includes three months of financial results for this business.

(1) The provision for income taxes for the three and six months ended January 27, 2018 includes an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act.

CISCO SYSTEMS, INC.

REVENUE BY SEGMENT

(In millions, except percentages)

     
   

January 26, 2019

   

Three Months Ended

 

Six Months Ended

   

Amount

 

Y/Y %

 

Amount

 

Y/Y %

Revenue:

               

Including SPVSS business for all periods:

               

Americas

 

$

7,352

   

5%

 

$

15,103

   

5%

EMEA

 

3,223

   

5%

 

6,447

   

8%

APJC

 

1,872

   

3%

 

3,968

   

7%

Total

 

$

12,446

   

5%

 

$

25,518

   

6%

Excluding SPVSS business for all periods:

               

Americas

 

$

7,352

   

7%

 

$

15,027

   

6%

EMEA

 

3,223

   

8%

 

6,381

   

10%

APJC

 

1,872

   

5%

 

3,944

   

10%

Total

 

$

12,446

   

7%

 

$

25,351

   

8%

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 January 27, 2018 was $230 million and for the six months ended January 26, 2019 and January 27, 2018 was $168 million and $478 million, respectively.

CISCO SYSTEMS, INC.

GROSS MARGIN PERCENTAGE BY SEGMENT

(In percentages)

     
   

January 26, 2019

   

Three Months Ended

 

Six Months Ended

Gross Margin Percentage:

       

Including SPVSS business for all periods:

       

Americas

 

65.2%

 

65.3%

EMEA

 

64.2%

 

64.2%

APJC

 

59.2%

 

58.2%

Excluding SPVSS business for all periods (1):

       

Americas

 

65.2%

 

65.6%

EMEA

 

64.2%

 

64.3%

APJC

 

59.2%

 

58.4%

(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)

     
   

January 26, 2019

   

Three Months Ended

 

Six Months Ended

   

Amount

 

Y/Y %

 

Amount

 

Y/Y %

Revenue:

               

Including SPVSS business for all periods:

               

Infrastructure Platforms

 

$

7,128

   

6%

 

$

14,770

   

8%

Applications

 

1,465

   

24%

 

2,884

   

21%

Security

 

658

   

18%

 

1,308

   

15%

Other Products

 

22

   

(91)%

 

200

   

(63)%

Total Product

 

9,273

   

6%

 

19,163

   

8%

Services

 

3,173

   

—%

 

6,355

   

2%

Total

 

$

12,446

   

5%

 

$

25,518

   

6%

Excluding SPVSS business for all periods:

               

Infrastructure Platforms

 

$

7,128

   

6%

 

$

14,770

   

8%

Applications

 

1,465

   

24%

 

2,884

   

21%

Security

 

658

   

18%

 

1,308

   

15%

Other Products

 

22

   

(59)%

 

54

   

(53)%

Total Product

 

9,273

   

9%

 

19,017

   

10%

Services

 

3,173

   

1%

 

6,334

   

2%

Total

 

$

12,446

   

7%

 

$

25,351

   

8%

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 January 27, 2018 was $230 million and for the six months ended January 26, 2019 and January 27, 2018 was $168 million and $478 million, respectively.

CISCO SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

       
 

January 26, 2019

 

July 28, 2018

ASSETS

     

Current assets:

     

Cash and cash equivalents

$

9,835

   

$

8,934

 

Investments

30,548

   

37,614

 

Accounts receivable, net of allowance for doubtful accounts of $135 at January 26, 2019 and $129 at July 28, 2018

3,745

   

5,554

 

Inventories

1,701

   

1,846

 

Financing receivables, net

5,057

   

4,949

 

Other current assets

2,231

   

2,940

 

Total current assets

53,117

   

61,837

 

Property and equipment, net

2,931

   

3,006

 

Financing receivables, net

4,565

   

4,882

 

Goodwill

33,293

   

31,706

 

Purchased intangible assets, net

2,270

   

2,552

 

Deferred tax assets

4,081

   

3,219

 

Other assets

2,205

   

1,582

 

TOTAL ASSETS

$

102,462

   

$

108,784

 

LIABILITIES AND EQUITY

     

Current liabilities:

     

Short-term debt

$

9,737

   

$

5,238

 

Accounts payable

1,655

   

1,904

 

Income taxes payable

1,110

   

1,004

 

Accrued compensation

2,599

   

2,986

 

Deferred revenue

9,976

   

11,490

 

Other current liabilities

4,402

   

4,413

 

Total current liabilities

29,479

   

27,035

 

Long-term debt

15,893

   

20,331

 

Income taxes payable

7,760

   

8,585

 

Deferred revenue

7,285

   

8,195

 

Other long-term liabilities

1,256

   

1,434

 

Total liabilities

61,673

   

65,580

 

Total equity

40,789

   

43,204

 

TOTAL LIABILITIES AND EQUITY

$

102,462

   

$

108,784

 

 

CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

   
 

Six Months Ended

 

January 26,
 2019

 

January 27,
 2018

Cash flows from operating activities:

     

Net income (loss)

$

6,371

   

$

(6,384)

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

     

Depreciation, amortization, and other

952

   

1,112

 

Share-based compensation expense

792

   

785

 

Provision (benefit) for receivables

30

   

(43)

 

Deferred income taxes

(257)

   

1,021

 

(Gains) losses on divestitures, investments and other, net

(77)

   

(174)

 

Change in operating assets and liabilities, net of effects of acquisitions and divestitures:

     

Accounts receivable

1,613

   

1,236

 

Inventories

(203)

   

(276)

 

Financing receivables

161

   

(156)

 

Other assets

(652)

   

(15)

 

Accounts payable

(296)

   

(338)

 

Income taxes, net

(830)

   

10,246

 

Accrued compensation

(339)

   

(189)

 

Deferred revenue

207

   

237

 

Other liabilities

88

   

88

 

Net cash provided by operating activities

7,560

   

7,150

 

Cash flows from investing activities:

     

Purchases of investments

(677)

   

(13,954)

 

Proceeds from sales of investments

3,055

   

9,111

 

Proceeds from maturities of investments

6,263

   

7,365

 

Acquisitions and divestitures

(1,599)

   

(727)

 

Purchases of investments in privately held companies

(68)

   

(89)

 

Return of investments in privately held companies

43

   

124

 

Acquisition of property and equipment

(473)

   

(379)

 

Proceeds from sales of property and equipment

10

   

51

 

Other

(12)

   

(17)

 

Net cash provided by investing activities

6,542

   

1,485

 

Cash flows from financing activities:

     

Issuances of common stock

312

   

302

 

Repurchases of common stock - repurchase program

(10,062)

   

(5,457)

 

Shares repurchased for tax withholdings on vesting of restricted stock units

(514)

   

(433)

 

Short-term borrowings, original maturities of 90 days or less, net

   

5,095

 

Issuances of debt

   

6,877

 

Repayments of debt

   

(6,230)

 

Dividends paid

(2,970)

   

(2,861)

 

Other

18

   

(22)

 

Net cash used in financing activities

(13,216)

   

(2,729)

 

Net increase in cash, cash equivalents, and restricted cash

886

   

5,906

 

Cash, cash equivalents, and restricted cash, beginning of period

8,993

   

11,773

 

Cash, cash equivalents, and restricted cash, end of period

$

9,879

   

$

17,679

 

Supplemental cash flow information:

     

Cash paid for interest

$

421

   

$

454

 

Cash paid for income taxes, net

$

1,968

   

$

1,311

 

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)

           
 

January 26, 2019

 

October 27, 2018

 

January 27, 2018

Deferred revenue:

         

Service

$

11,246

   

$

11,062

   

$

10,963

 

Product

6,015

   

5,752

   

7,825

 

Total

$

17,261

   

$

16,814

   

$

18,788

 

Reported as:

         

Current

$

9,976

   

$

9,637

   

$

11,102

 

Noncurrent

7,285

   

7,177

   

7,686

 

Total

$

17,261

   

$

16,814

   

$

18,788

 

 

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

                       

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 NET INCOME (LOSS) TO NON-GAAP NET INCOME

(In millions, except per-share amounts)

       
 

Three Months Ended

 

Six Months Ended

 

January 26,
 2019

 

January 27,
 2018

 

January 26,
 2019

 

January 27,
 2018

GAAP net income (loss)

$

2,822

   

$

(8,778)

   

$

6,371

   

$

(6,384)

 

Adjustments to cost of sales:

             

Share-based compensation expense

53

   

54

   

109

   

111

 

Amortization of acquisition-related intangible assets

141

   

144

   

277

   

283

 

Supplier component remediation charge (adjustment), net

   

(13)

   

(1)

   

(32)

 

Acquisition-related/divestiture costs

3

   

2

   

7

   

2

 

Legal and indemnification settlements

5

   

   

5

   

122

 

Total adjustments to GAAP cost of sales

202

   

187

   

397

   

486

 

Adjustments to operating expenses:

             

Share-based compensation expense

323

   

333

   

652

   

668

 

Amortization of acquisition-related intangible assets

39

   

60

   

73

   

121

 

Acquisition-related/divestiture costs

39

   

23

   

160

   

106

 

Legal and indemnification settlements

   

   

(395)

   

 

Significant asset impairments and restructurings

186

   

98

   

264

   

250

 

Total adjustments to GAAP operating expenses

587

   

514

   

754

   

1,145

 

Adjustments to GAAP interest and other income (loss), net:

             

(Gains) and losses on equity investments

(64)

   

   

(73)

   

 

Total adjustments to GAAP income (loss) before provision for income taxes

725

   

701

   

1,078

   

1,631

 

Income tax effect of non-GAAP adjustments

(209)

   

(157)

   

(394)

   

(445)

 

Significant tax matters (1)

(43)

   

11,380

   

(308)

   

11,380

 

Total adjustments to GAAP provision for income taxes

(252)

   

11,223

   

(702)

   

10,935

 

Non-GAAP net income

$

3,295

   

$

3,146

   

$

6,747

   

$

6,182

 

Net income (loss) per share (2):

             

GAAP

$

0.63

   

$

(1.78)

   

$

1.40

   

$

(1.29)

 

Non-GAAP

$

0.73

   

$

0.63

   

$

1.48

   

$

1.24

 

(1) During the second quarter of fiscal 2018, we 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 were 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 was 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 was calculated using diluted shares of 4,966 million and 4,982 million, as we had non-GAAP net income for these periods.

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 (LOSS)

(In millions, except percentages)

   
 

Three Months Ended

 

January 26, 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

$

5,659

   

$

2,114

   

$

7,773

   

$

4,562

   

3%

 

$

3,211

   

4%

 

$

132

   

(17)%

 

$

2,822

   

NM

% of revenue

61.0

%

 

66.6

%

 

62.5

%

 

36.7

%

     

25.8

%

     

1.1

%

     

22.7

%

   

Adjustments to GAAP amounts:

                                         

Share-based compensation expense

22

   

31

   

53

   

323

       

376

       

       

376

     

Amortization of acquisition-related intangible assets

141

   

   

141

   

39

       

180

       

       

180

     

Legal and indemnification settlements

5

   

   

5

   

       

5

       

       

5

     

Acquisition/divestiture-related costs

1

   

2

   

3

   

39

       

42

       

       

42

     

Significant asset impairments and restructurings

   

   

   

186

       

186

       

       

186

     

(Gains) and losses on equity investments

   

   

   

       

       

(64)

       

(64)

     

Income tax effect/significant tax matters

   

   

   

       

       

       

(252)

     

Non-GAAP amount

$

5,828

   

$

2,147

   

$

7,975

   

$

3,975

   

3%

 

$

4,000

   

7%

 

$

68

   

(57)%

 

$

3,295

   

6%

% of revenue

62.8

%

 

67.7

%

 

64.1

%

 

31.9

%

     

32.1

%

     

0.5

%

     

26.5

%

   

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 second quarter of fiscal 2018.

 

Three Months Ended

 

January 27, 2018

 

Product Gross Margin

 

Service Gross Margin

 

Total Gross Margin

 

Operating Expenses

 

Operating

Income

 

Net

Income (Loss)

GAAP amount

$

5,355

   

$

2,143

   

$

7,498

   

$

4,425

   

$

3,073

   

$

(8,778)

 

% 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

 

Non-GAAP amount

$

5,509

   

$

2,176

   

$

7,685

   

$

3,911

   

$

3,774

   

$

3,146

 

Less: SPVSS business (2)

(82)

   

(10)

   

(92)

   

(64)

   

(28)

   

(22)

 

Non-GAAP amount (excluding SPVSS business)

$

5,427

   

$

2,166

   

$

7,593

   

$

3,847

   

$

3,746

   

$

3,123

 

% of revenue

63.8

%

 

68.7

%

 

65.1

%

 

33.0

%

 

32.1

%

 

26.8

%

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

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

(2) Reflects three months of operations for the SPVSS business. For the SPVSS business, EPS was $0.00 for the second quarter of fiscal 2018.

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 (LOSS)

(In millions, except percentages)

   
 

Six Months Ended

 

January 26, 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

$

11,750

   

$

4,169

   

$

15,919

   

$

8,903

   

(2)%

 

$

7,016

   

20%

 

$

236

   

(35)%

 

$

6,371

   

NM

% of revenue

61.3

%

 

65.6

%

 

62.4

%

 

34.9

%

     

27.5

%

     

0.9

%

     

25.0

%

   

Adjustments to GAAP amounts:

                                         

Share-based compensation expense

45

   

64

   

109

   

652

       

761

       

       

761

     

Amortization of acquisition-related intangible assets

277

   

   

277

   

73

       

350

       

       

350

     

Supplier component remediation charge (adjustment), net

(1)

   

   

(1)

   

       

(1)

       

       

(1)

     

Legal and indemnification settlements

5

   

   

5

   

(395)

       

(390)

       

       

(390)

     

Acquisition/divestiture-related costs

3

   

4

   

7

   

160

       

167

       

       

167

     

Significant asset impairments and restructurings

   

   

   

264

       

264

       

       

264

     

(Gains) and losses on equity investments

   

   

   

       

       

(73)

       

(73)

     

Income tax effect/significant tax matters

   

   

   

       

       

       

(702)

     

Non-GAAP amount

$

12,079

   

$

4,237

   

$

16,316

   

$

8,149

       

$

8,167

       

$

163

       

$

6,747

     

% of revenue

63.0

%

 

66.7

%

 

63.9

%

 

31.9

%

     

32.0

%

     

0.6

%

     

26.4

%

   

Less: SPVSS business (1)

(52)

   

(9)

   

(61)

   

(59)

       

(1)

       

       

(1)

     

Non-GAAP amount (excluding SPVSS business)

$

12,028

   

$

4,228

   

$

16,255

   

$

8,090

   

3%

 

$

8,166

   

10%

 

$

163

   

(55)%

 

$

6,747

   

10%

% of revenue

63.2

%

 

66.7

%

 

64.1

%

 

31.9

%

     

32.2

%

     

0.6

%

     

26.6

%

   

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

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 first six months of fiscal 2018.

 

Six Months Ended

 

January 27, 2018

 

Product Gross Margin

 

Service Gross Margin

 

Total Gross Margin

 

Operating Expenses

 

Operating

Income

 

Net

Income (Loss)

GAAP amount

$

10,794

   

$

4,131

   

$

14,925

   

$

9,096

   

$

5,829

   

$

(6,384)

 

% 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

 

Non-GAAP amount

$

11,213

   

$

4,198

   

$

15,411

   

$

7,951

   

$

7,460

   

$

6,182

 

Less: SPVSS business (2)

(144)

   

(16)

   

(160)

   

(131)

   

(29)

   

(23)

 

Non-GAAP amount (excluding SPVSS business)

$

11,070

   

$

4,181

   

$

15,251

   

$

7,821

   

$

7,430

   

$

6,158

 

% of revenue

63.9

%

 

67.3

%

 

64.8

%

 

33.2

%

 

31.6

%

 

26.2

%

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

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

(2) Reflects six 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

 

Six Months Ended

 

January 26, 2019

 

January 27, 2018

 

January 26, 2019

 

January 27, 2018

GAAP effective tax rate (1)

15.6

%

 

371.6

%

 

12.1

%

 

203.1

%

Total adjustments to GAAP provision for income taxes

3.4

%

 

(351.6)

%

 

6.9

%

 

(182.1)

%

Non-GAAP effective tax rate

19.0

%

 

20.0

%

 

19.0

%

 

21.0

%

(1) Includes an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act for the three and six months ended January 27, 2018.

GAAP TO NON-GAAP GUIDANCE FOR Q3 FY 2019

                 

Q3 FY 2019

 

Gross Margin Rate

 

Operating Margin Rate

 

Tax Provision Rate

 

Earnings per Share (2)

GAAP

 

62.5% - 63.5%

 

25.5%- 26.5%

 

18%

 

$0.63 - $0.68

Estimated adjustments for:

               

Share-based compensation expense

 

0.5%

 

3.0%

 

 

$0.06 - $0.07

Amortization of acquisition-related intangible assets and acquisition/divestiture-related costs

 

1.0%

 

2.0%

 

 

$0.04 - $0.05

Significant asset impairments and restructurings (1)

 

 

0.5%

 

 

$0.00 - $0.01

Income tax effect of non-GAAP adjustments

         

1%

   

Non-GA