Press Release

Cisco Reports Third Quarter Earnings

Cisco Press Release

SAN JOSE, CA -- (May 11, 2011) - Cisco (NASDAQ: CSCO)

  • Q3 Net Sales: $10.9 billion (increase of 5% year over year)

  • Q3 Net Income: $1.8 billion GAAP; $2.3 billion non-GAAP

  • Q3 Earnings per Share: $0.33 GAAP (decrease of 11% year over year); $0.42 non-GAAP (flat year over year)

Cisco, the worldwide leader in networking that transforms how people connect, communicate and collaborate, today reported its third quarter results for the period ended April 30, 2011. Cisco reported third quarter net sales of $10.9 billion, net income on a generally accepted accounting principles (GAAP) basis of $1.8 billion or $0.33 per share, and non-GAAP net income of $2.3 billion or $0.42 per share.

"This quarter played out as we expected," said John Chambers, chairman and CEO, Cisco.  "We have acknowledged our challenges. We know what we have to do. We have a clear game plan, and we are a company with a track record of market-shaping innovation.  We thank our shareholders, employees, customers and partners as we transition to the next phase of Cisco."

GAAP Results
 
  Q3 2011   Q3 2010   Vs. Q3 2010
Net Sales $ 10.9 billion   $ 10.4 billion   4.8   %
Net Income $ 1.8 billion   $ 2.2 billion   (17.6 ) %
Earnings per Share $ 0.33   $ 0.37   (10.8 ) %
                   
Non-GAAP Results
 
  Q3 2011   Q3 2010   Vs. Q3 2010
Net Income $ 2.3 billion   $ 2.5 billion   (5.1 ) %
Earnings per Share $ 0.42   $ 0.42   --   %

The third quarter of fiscal 2011 had 13 weeks compared with 14 weeks in the third quarter of fiscal 2010.

Net sales for the first nine months of fiscal 2011 were $32.0 billion, compared with $29.2 billion for the first nine months of fiscal 2010. Net income for the first nine months of fiscal 2011, on a GAAP basis, was $5.3 billion or $0.94 per share, compared with $5.8 billion or $0.99 per share for the first nine months of fiscal 2010. Non-GAAP net income for the first nine months of fiscal 2011 was $6.8 billion or $1.22 per share, compared with $6.9 billion or $1.18 per share for the first nine months of fiscal 2010.

A reconciliation between net income on a GAAP basis and non-GAAP net income is provided in the table on page 6.

Cisco will discuss third quarter results and business outlook on a conference call and webcast at 1:30 p.m. Pacific Time today. Call information and related charts are available at http://investor.cisco.com.

Other Financial Highlights

  • Cash flows from operations were $3.0 billion for the third quarter of fiscal 2011, compared with $2.6 billion for the second quarter of fiscal 2011, and compared with $3.0 billion for the third quarter of fiscal 2010.

  • Cash and cash equivalents and investments were $43.4 billion at the end of the third quarter of fiscal 2011, compared with $40.2 billion at the end of the second quarter of fiscal 2011, and compared with $39.9 billion at the end of fiscal 2010.

  • On March 17, 2011, Cisco's Board of Directors approved the initiation of quarterly cash dividends to its shareholders. A quarterly dividend of $0.06 per common share was paid on April 20, 2011 to shareholders of record as of the close of business on March 31, 2011. Any future dividends will be subject to Board approval.

  • During the third quarter of fiscal 2011, Cisco repurchased 54 million shares of common stock under the stock repurchase program at an average price of $18.39 per share for an aggregate purchase price of $1.0 billion. As of April 30, 2011, Cisco had repurchased and retired 3.4 billion shares of Cisco common stock at an average price of $20.77 per share for an aggregate purchase price of approximately $70.3 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $11.7 billion with no termination date.

  • Days sales outstanding in accounts receivable (DSO) at the end of the third quarter of fiscal 2011 were 37 days, compared with 40 days at the end of the second quarter of fiscal 2011, and compared with 39 days at the end of the third quarter of fiscal 2010.

  • Inventory turns on a GAAP basis were 11.1 in the third quarter of fiscal 2011, compared with 10.6 in the second quarter of fiscal 2011, and compared with 11.5 in the third quarter of fiscal 2010. Non-GAAP inventory turns were 10.3 in the third quarter of fiscal 2011, compared with 10.0 in the second quarter of fiscal 2011, and compared with 11.1 in the third quarter of fiscal 2010.

Select Global Business Highlights

  • Cisco completed the acquisition of privately held newScale Inc., a leading provider of software that delivers a service catalog and self-service portal for information technology organizations to select and quickly deploy cloud services within their businesses.
  • Cisco completed the acquisition of privately held Inlet Technologies, Inc., a leading provider of Adaptive Bit Rate digital media processing platforms.
  • Cisco completed the acquisition of privately held Pari Networks, Inc., a leading provider of network configuration and change management (NCCM) and compliance management solutions that will complement Cisco's smart service capabilities.

Cisco Innovation

  • Cisco announced that one year after it was introduced, the Cisco CRS-3 Carrier Routing System is being adopted faster than was the original CRS-1 platform with 80 customers in more than 30 countries, including AT&T and Comcast. Cisco also introduced new capabilities on the CRS-3 platform designed to expand its addressable market while reducing the cost for service providers to deliver packet-transport services.
  • Cisco introduced new security, management, and video solutions to its Borderless Networks portfolio to help information technology departments more efficiently manage the proliferation of mobile devices, ongoing changes in workforce habits, and the impact of video on the network.
  • Cisco introduced technology innovations across its Data Center Business Advantage portfolio, including the Cisco Nexus® 7000 family and Nexus 5000 Series, the new ultra-low latency platform Cisco Nexus 3000, Cisco® MDS storage switches, the Cisco Unified Computing System™, the Cisco Data Center Network Manager, and Cisco NX-OS, a comprehensive data center operating system that spans the Cisco data center portfolio.

Select Customer Announcements

  • AEG Digital Media, a leading provider of complete webcast management and digital media services for live video-streaming events, has expanded its existing deployment of Cisco technology to enable the delivery of live streaming video to devices over Internet Protocol (IP) networks. AEG Digital Media's innovative use of Cisco's digital media processing technology, a foundational part of the Cisco Videoscape™ portfolio, has helped AEG Digital Media fuel its business, and grow its applications and customer base.
  • Gloucestershire Constabulary, a police force covering six districts across southwest England, became the 500th customer of the Cisco Unified Computing System in Europe.
  • The Kuwait National Petroleum Company chose to deploy Cisco Unified Communications technology solutions at its headquarters, refineries and marketing offices in Kuwait, where nearly 8,500 staff are employed.
  • Cisco, EllisDon Corp. and FlexITy Solutions, a Cisco Gold Certified and Master Unified Communications Specialized Partner, announced the completion of one of the most advanced digital health care facilities in Canada at Sault Area Hospital. The hospital infrastructure will run on a Cisco Medical-Grade Network.
  • Euronet Worldwide, a provider of highly secure electronic financial transaction solutions, deployed the Cisco Unified Computing System at its central data center in Budapest, Hungary. The solution's cloud architecture is enabling Euronet to provide hybrid cloud services, serving both its internal information technology department as well as customers.

Editor's Note:

  • Q3 FY 2011 conference call to discuss Cisco's results along with its business outlook will be held at 1:30 p.m. Pacific Time, Wednesday, May 11, 2011. Conference call number is 888-848-6507 (United States) or 212-519-0847 (international).

  • Conference call replay will be available from 4:30 p.m. Pacific Time, May 11, 2011 to 4:30 p.m. Pacific Time, May 18, 2011 at 866-357-4205 (United States) or 203-369-0122 (international). The replay also will be available via webcast from May 11, 2011 through July 22, 2011 on the Cisco Investor Relations website at http://investor.cisco.com.

  • Additional information regarding Cisco's financials, as well as a webcast of the conference call with visuals designed to guide participants through the call, will be available at 1:30 p.m. Pacific Time, May 11, 2011. Text of the conference call's prepared remarks will be available within 24 hours of completion of the call. The webcast will include both the prepared remarks and the question-and-answer session. This information, along with GAAP reconciliation information, will be available on the Cisco Investor Relations website at http://investor.cisco.com.

About Cisco

Cisco (NASDAQ: CSCO) is the worldwide leader in networking that transforms how people connect, communicate and collaborate. Information about Cisco can be found at http://www.cisco.com. For ongoing news, please go to http://newsroom.cisco.com.

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 [WILL INSERT ONCE WE HAVE QUOTES]) and the future financial performance of Cisco that involve risks and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including: business and economic conditions and growth trends in the networking industry, our customer markets and various geographic regions; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; the growth and evolution of the Internet and levels of capital spending on Internet-based systems; variations in customer demand for products and services, including sales to the service provider market and other customer markets; the return on our investments in certain market adjacencies and geographical locations; the timing of orders and manufacturing and customer lead times; changes in customer order patterns or customer mix; insufficient, excess or obsolete inventory; variability of component costs; variations in sales channels, product costs or mix of products sold; our ability to successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses and technologies; increased competition in our product and service markets, including the data center; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; manufacturing and sourcing risks; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters, and governmental investigations; natural catastrophic events; a pandemic or epidemic; our ability to achieve the benefits anticipated from our investments in sales and engineering activities; our ability to recruit and retain key personnel; our ability to manage financial risk, and to manage expenses during 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 Form 10-K and 10-Q, filed on September 21, 2010 and February 23, 2011, 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 report on Form 10-Q and report on Form 8-K filed on March 9, 2011, as each may be amended from time to time. Cisco's results of operations for the three and nine months ended April 30, 2011 are not necessarily indicative of Cisco's operating results for any future periods. Any projections in this release are based on limited information currently available to Cisco, which is subject to change. Although any such projections and the factors influencing them will likely change, Cisco will not necessarily update the information, since Cisco will only provide guidance at certain points during the year. Such information speaks only as of the date of this release.

This release includes non-GAAP net income, non-GAAP net income per share data and non-GAAP inventory turns.

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

Cisco believes that the presentation of non-GAAP net income and non-GAAP net income per share data when shown in conjunction with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to its financial condition and results of operations. In addition, Cisco believes that the presentation of non-GAAP inventory turns provides useful information to investors and management regarding financial and business trends relating to inventory management based on the operating activities of the period presented.

For its internal budgeting process, Cisco's management uses financial statements that do not include, when applicable, share-based compensation expense, amortization of acquisition-related intangible assets, other acquisition-related costs, significant asset impairments and restructurings, the income tax effects of the foregoing, significant effects of retroactive tax legislation, and significant transfer pricing adjustments related to share-based compensation. Cisco's management also uses the foregoing non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the financial results of Cisco. In prior periods, Cisco has excluded other items that it no longer excludes for purposes of its non-GAAP financial measures. From time to time in the future, there may be other items that Cisco may exclude for purposes of its internal budgeting process and in reviewing its financial results.

For additional information on the items excluded by Cisco from one or more of its non-GAAP financial measures, refer to the Form 8-K regarding this release furnished today to the Securities and Exchange Commission.

Copyright © 2011 Cisco Systems, Inc. and or its affiliates. All rights reserved. Cisco, the Cisco logo, Cisco Systems, Cisco Nexus, Cisco TelePresence, Cisco ūmi, Cisco Unified Computing System, and Cisco Videoscape are registered trademarks or trademarks of Cisco and/or its affiliates in the United States and other countries. 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.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
(Unaudited)
           
  Three Months Ended     Nine Months Ended  
  April 30,
2011
    May 1,
2010
    April 30,
2011
    May 1,
2010
 
NET SALES:                              
  Product $ 8,669     $ 8,436     $ 25,605     $ 23,612  
  Service   2,197       1,932       6,418       5,592  
                               
    Total net sales   10,866       10,368       32,023       29,204  
                               
COST OF SALES:                              
  Product   3,437       3,010       10,068       8,311  
  Service   770       728       2,280       2,043  
                               
    Total cost of sales   4,207       3,738       12,348       10,354  
                               
GROSS MARGIN   6,659       6,630       19,675       18,850  
               
OPERATING EXPENSES:                              
  Research and development   1,430       1,411       4,339       3,882  
  Sales and marketing   2,446       2,278       7,292       6,414  
  General and administrative   466       479       1,376       1,355  
  Amortization of purchased intangible assets   103       117       419       360  
  Restructuring and other charges   31       --       31       --  
                               
    Total operating expenses   4,476       4,285       13,457       12,011  
                               
OPERATING INCOME   2,183       2,345       6,218       6,839  
  Interest income   161       158       477       481  
  Interest expense   (153 )     (182 )     (480 )     (454 )
  Other income, net   12       82       143       131  
                               
    Interest and other income, net   20       58       140       158  
                               
INCOME BEFORE PROVISION FOR INCOME TAXES   2,203       2,403       6,358       6,997  
Provision for income taxes   396       211       1,100       1,165  
                               
  NET INCOME $ 1,807     $ 2,192     $ 5,258     $ 5,832  
                               
               
Net income per share:                              
Basic $ 0.33     $ 0.38     $ 0.95     $ 1.01  
                               
Diluted $ 0.33     $ 0.37     $ 0.94     $ 0.99  
                               
Shares used in per-share calculation:                              
Basic   5,508       5,731       5,545       5,746  
                               
Diluted   5,537       5,869       5,596       5,869  
               
               
Cash dividends declared per common share $ 0.06     $ --     $ 0.06     $ --  
                               

Certain reclassifications have been made to prior period amounts to conform to the current period's presentation.

RECONCILIATION OF GAAP TO NON-GAAP NET INCOME
(In millions, except per-share amounts)
 
  Three Months Ended     Nine Months Ended  
  April 30, 2011     May 1, 2010     April 30, 2011     May 1, 2010  
                               
GAAP net income $ 1,807     $ 2,192     $ 5,258     $ 5,832  
                               
  Adjustments to cost of sales:                              
    Share-based compensation expense   60       63       182       164  
    Amortization of acquisition-related intangible assets(1)   102       64       367       162  
    Significant asset impairments and restructurings(2)   120       --       120       --  
                               
  Total adjustments to GAAP cost of sales   282       127       669       326  
                               
  Adjustments to operating expenses:                              
    Share-based compensation expense   340       371       1,055       962  
    Amortization of acquisition-related intangible assets(1)   103       117       419       360  
    Other acquisition-related costs   14       29       123       118  
    Significant asset impairments and restructurings(2)   31       --       31       --  
                               
  Total adjustments to GAAP operating expenses   488       517       1,628       1,440  
                                 
  Adjustments to other income, net:                              
    Other acquisition-related costs   --       14       --       10  
                               
  Total adjustments to GAAP income before provision for income taxes   770       658       2,297       1,776  
                                 
  Income tax effect   (228 )     (216 )     (652 )     (519 )
  Effect of retroactive tax legislation (3)   --       --       (65 )     --  
  Transfer pricing adjustment related to share-based compensation (4)   --       (158 )     --       (158 )
                                 
  Total adjustments to GAAP provision for income taxes   (228 )     (374 )     (717 )     (677 )
                               
Non-GAAP net income $ 2,349     $ 2,476     $ 6,838     $ 6,931  
                               
Diluted net income per share:                              
GAAP $ 0.33     $ 0.37     $ 0.94     $ 0.99  
                               
Non-GAAP $ 0.42     $ 0.42     $ 1.22     $ 1.18  
                               
(1)   Amortization of acquisition-related intangible assets for the first nine months of fiscal 2011 includes impairment charges of approximately $155 million, with $63 million recorded in product cost of sales and $92 million in operating expenses.
     
(2)   Significant asset impairments and restructurings for the third quarter and first nine months of fiscal 2011 primarily consist of charges for exiting, realigning and restructuring certain aspects of our consumer business.
     
(3)   In the second quarter of fiscal 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reinstated the U.S. federal R&D tax credit, retroactive to January 1, 2010. GAAP net income for the first nine months of fiscal 2011 included a $65 million tax benefit related to fiscal 2010 R&D expenses. Non-GAAP net income for the first nine months of fiscal 2011 excluded the $65 million tax benefit related to fiscal 2010 R&D expenses.
     
(4)   In the third quarter of fiscal 2010, the U.S. Court of Appeals for the Ninth Circuit affirmed a 2005 U.S. Tax Court ruling in Xilinx, Inc. v. Commissioner. The decision affirmed the tax treatment of share-based compensation expenses for the purpose of determining intangible development costs under a company's research and development cost sharing arrangement. While Cisco was not a party to the case, as a result of this ruling, the Company recorded a tax benefit of $158 million as a reduction to the provision for income taxes during the three months ended May 1, 2010.

Additional reconciliations between GAAP and non-GAAP financial measures are provided in the tables that follow on page 10.

CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
         
  April 30, 2011   July 31, 2010
ASSETS          
Current assets:          
  Cash and cash equivalents $ 6,635   $ 4,581
  Investments   36,732     35,280
  Accounts receivable, net of allowance for doubtful accounts of $200 at April 30, 2011 and $235 at July 31, 2010   4,413     4,929
  Inventories   1,442     1,327
  Deferred tax assets   2,120     2,126
  Other current assets   3,862     3,178
             
  Total current assets   55,204     51,421
Property and equipment, net   4,023     3,941
Goodwill   16,880     16,674
Purchased intangible assets, net   2,702     3,274
Other assets   6,541     5,820
           
TOTAL ASSETS $ 85,350   $ 81,130
           
LIABILITIES AND EQUITY          
Current liabilities:          
  Short-term debt $ 581   $ 3,096
  Accounts payable   799     895
  Income taxes payable   78     90
  Accrued compensation   2,964     3,129
  Deferred revenue   7,771     7,664
  Other current liabilities   3,917     4,359
             
  Total current liabilities   16,110     19,233
Long-term debt   16,168     12,188
Income taxes payable   1,166     1,353
Deferred revenue   3,928     3,419
Other long-term liabilities   772     652
           
Total liabilities   38,144     36,845
Total equity   47,206     44,285
           
TOTAL LIABILITIES AND EQUITY $ 85,350   $ 81,130
           
           
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
     
  Nine Months Ended  
  April 30,
2011
    May 1,
2010
 
Cash flows from operating activities:              
  Net income $ 5,258     $ 5,832  
  Adjustments to reconcile net income to net cash provided by operating activities:              
    Depreciation, amortization, and other   1,813       1,415  
    Share-based compensation expense   1,237       1,126  
    Provision for doubtful accounts   (1 )     18  
    Deferred income taxes   (37 )     (256 )
    Excess tax benefits from share-based compensation   (65 )     (177 )
    Net gains on investments   (185 )     (147 )
    Change in operating assets and liabilities, net of effects of acquisitions and divestitures:              
      Accounts receivable   603       (662 )
      Inventories   (105 )     (86 )
      Lease receivables, net   (332 )     (263 )
      Accounts payable   (103 )     160  
      Income taxes payable   (192 )     (204 )
      Accrued compensation   (265 )     138  
      Deferred revenue   537       740  
      Other assets   (567 )     (544 )
      Other liabilities   (341 )     (149 )
               
        Net cash provided by operating activities   7,255       6,941  
               
Cash flows from investing activities:              
  Purchases of investments   (30,303)       (35,263 )
  Proceeds from sales of investments   14,942       12,193  
  Proceeds from maturities of investments   14,134       17,474  
  Acquisition of property and equipment   (930 )     (699 )
  Acquisition of businesses, net of cash and cash equivalents acquired   (266 )     (4,950 )
  Change in investments in privately held companies   (86 )     (68 )
  Other   48       80  
               
        Net cash used in investing activities   (2,461 )     (11,233 )
               
Cash flows from financing activities:              
  Issuances of common stock   1,516       2,780  
  Repurchases of common stock   (5,564 )     (5,440 )
  Short-term borrowings, maturities less than 90 days, net   392       62  
  Issuances of debt, maturities greater than 90 days   4,109       4,944  
  Repayments of debt, maturities greater than 90 days   (3,000 )     --  
  Settlements of interest rate derivatives related to long-term debt   --       23  
  Excess tax benefits from share-based compensation   65       177  
  Dividends paid   (329 )     --  
  Other   71       (11 )
               
        Net cash (used in) provided by financing activities   (2,740 )     2,535  
               
Net increase (decrease) in cash and cash equivalents   2,054       (1,757 )
Cash and cash equivalents, beginning of period   4,581       5,718  
               
Cash and cash equivalents, end of period $ 6,635     $ 3,961  
               
ADDITIONAL FINANCIAL INFORMATION
(In millions)
(Unaudited)
             
  April 30, 2011     July 31, 2010  
CASH AND CASH EQUIVALENTS AND INVESTMENTS              
Cash and cash equivalents $ 6,635     $ 4,581  
Fixed income securities   35,312       34,029  
Publicly traded equity securities   1,420       1,251  
               
Total $ 43,367     $ 39,861  
               
INVENTORIES              
Raw materials $ 283     $ 217  
Work in process   28       50  
Finished goods:              
  Distributor inventory and deferred cost of sales   612       587  
  Manufactured finished goods   278       260  
               
Total finished goods   890       847  
Service-related spares   181       161  
Demonstration systems   60       52  
               
Total $ 1,442     $ 1,327  
               
PROPERTY AND EQUIPMENT, NET              
Land, buildings, and building & leasehold improvements $ 4,773     $ 4,470  
Computer equipment and related software   1,420       1,405  
Production, engineering, and other equipment   4,977       4,702  
Operating lease assets   281       255  
Furniture and fixtures   488       476  
               
    11,939       11,308  
Less accumulated depreciation and amortization   (7,916 )     (7,367 )
               
Total $ 4,023     $ 3,941  
               
OTHER ASSETS              
Deferred tax assets $ 2,034     $ 2,079  
Investments in privately held companies   837       756  
Lease receivables, net (1)   1,412       1,176  
Financed service contracts and other, net (2)   1,225       763  
Loan receivables, net (3)   667       675  
Other   366       371  
               
Total $ 6,541     $ 5,820  
               
DEFERRED REVENUE              
Service $ 8,010     $ 7,428  
Product:              
  Unrecognized revenue on product shipments and other deferred revenue   2,898       2,788  
  Cash receipts related to unrecognized revenue from two-tier distributors   791       867  
               
Total product deferred revenue   3,689       3,655  
               
Total $ 11,699     $ 11,083  
               
Reported as:              
Current $ 7,771     $ 7,664  
Noncurrent   3,928       3,419  
               
Total $ 11,699     $ 11,083  

Note:

(1)   The current portion of lease receivables, net, which was $1.0 billion and $813 million as of April 30, 2011 and July 31, 2010, respectively, is recorded in other current assets.
(2)   The current portion of financed service contracts and other, net, which was $1.2 billion and $989 million as of April 30, 2011 and July 31, 2010, respectively, is recorded in other current assets.
(3)   The current portion of loan receivables, net, which was $595 million and $501 million as of April 30, 2011 and July 31, 2010, respectively, is recorded in other current assets.
 
SUMMARY OF SHARE-BASED COMPENSATION EXPENSE
(In millions)

The following table summarizes share-based compensation expense (in millions):

  Three Months Ended   Nine Months Ended
  April 30,
2011
  May 1,
2010
  April 30,
2011
  May 1,
2010
Cost of sales--product $ 16   $ 16   $ 47   $ 43
Cost of sales--service   44     47     135     121
                       
Share-based compensation expense in cost of sales   60     63     182     164
                       
Research and development   120     129     373     336
Sales and marketing   160     171     491     444
General and administrative   60     71     191     182
                       
Share-based compensation expense in operating expenses   340     371     1,055     962
                       
Total share-based compensation expense $ 400   $ 434   $ 1,237   $ 1,126

Certain reclassifications have been made to prior period amounts to conform to the current period's presentation.

The income tax benefit for share-based compensation expense was $107 million and $335 million for the three and nine months ended April 30, 2011, respectively, and $118 million and $304 million for the three and nine months ended May 1, 2010, respectively.

RECONCILIATION OF GAAP TO NON-GAAP
COST OF SALES USED IN INVENTORY TURNS
(In millions)
 
  Three Months Ended  
  April 30, 2011     January 29, 2011     May 1, 2010  
GAAP cost of sales $ 4,207     $ 4,146     $ 3,738  
                       
  Share-based compensation expense   (60 )     (64 )     (63 )
  Amortization of acquisition-related intangible assets   (102 )     (164 )     (64 )
  Significant asset impairments and restructurings   (120 )     --       --  
                       
Non-GAAP cost of sales $ 3,925     $ 3,918     $ 3,611