News Release

Cisco Systems Reports Fourth Quarter and Fiscal Year 2002 Earnings

Cisco Press Release

Company also announces expansion of stock repurchase program

  • Q4 Revenues: $4.8 Billion
  • Q4 Operating Cash Flow: $1.6 Billion
  • Q4 Earnings Per Share: $0.10 GAAP; $0.14 Pro Forma
SAN JOSE, Calif., August 6, 2002 -- Cisco Systems, Inc., the worldwide leader in networking for the Internet, today reported its fourth quarter and fiscal year results for the period ended July 27, 2002.

Net sales for the fourth quarter of fiscal 2002 were $4.8 billion, compared to $4.3 billion for the fourth quarter of fiscal 2001, an increase of 12%, and compared to $4.8 billion for the third quarter of fiscal 2002.

Net income for the fourth quarter of fiscal 2002 on a generally accepted accounting principle (GAAP) basis, was $772 million or $0.10 per share, compared with net income of $7 million or $0.00 per share for the fourth quarter of fiscal 2001, and $729 million or $0.10 per share for the third quarter of fiscal 2002. Pro forma net income for the fourth quarter of fiscal 2002, which excludes the effects of acquisition charges, payroll tax on employee stock option exercises, and certain nonrecurring items, was $1.0 billion or $0.14 per share, compared with pro forma net income of $163 million or $0.02 per share for the fourth quarter of fiscal 2001, and $838 million or $0.11 per share for the third quarter of fiscal 2002.

During the quarter, Cisco completed the acquisitions of Hammerhead Networks, Inc. and Navarro Networks, Inc. The total combined purchase price recorded during the quarter, including assumed liabilities, was approximately $260 million. In addition, Cisco took a one-time charge of $28 million, or less than $0.01 per share on an after-tax basis, as a write-off of in-process research and development.

Net sales for fiscal 2002 were $18.9 billion, compared to $22.3 billion for fiscal 2001, a decrease of 15%.

GAAP net income for fiscal 2002 was $1.9 billion or $0.25 per share, compared with a net loss of $1.0 billion or $0.14 per share for fiscal 2001. Pro forma net income for fiscal 2002 was $2.9 billion or $0.39 per share, compared with pro forma net income of $3.1 billion or $0.41 per share for fiscal 2001.

Cash and cash equivalents and total investments were $21.5 billion at fiscal year-end 2002. Cash flow from operations was $1.6 billion for the fourth quarter and $6.6 billion for the full fiscal year 2002.

"This was another solid quarter for Cisco, despite the ongoing challenges in the economy," said Cisco President and CEO John Chambers. "We continued to focus on what we can control, and the results speak for themselves. Our operational performance is on par with peak historical results, especially in the areas of gross margins and income as a percentage of revenue."

Further commenting on Cisco's performance, Chambers noted, "Throughout this challenging time, we have focused on four key areas: profits, cash generation, productivity, and profitable market-share gains. We have consistently improved quarter by quarter in each of these categories, with our fourth quarter bringing in more than $1 billion in pro forma net income, $1.6 billion in cash from operations, a 22 percent productivity increase over last year's fourth quarter and 12 percent year-over-year revenue growth compared to a 44 percent decline by our top ten competitors."

"We continue to see global leaders capturing the productivity benefits that result from Internet business solutions based on Cisco networks," said Chambers. "Cisco continues to innovate in core routing and switching technologies that serve as the foundation of our customers' productivity gains, as well as in emerging technology markets that we believe will drive the next wave of productivity, such as IP telephony, storage, security and mobility."

Stock Repurchase Program Expanded

Cisco also today announced that its board of directors has increased the company's stock repurchase program to a total of up to $8 billion through September 12, 2003. This represents an increase of $5 billion from the original $3 billion authorized in September 2001. Of the $8 billion total, approximately $2 billion has been repurchased to date.

Market Segment Update

Enterprise
Enterprise customers continue to be cautious but steady in spending. Cisco's strategy is focused on providing market-leading technology solutions that help its customers extend their enterprises across traditional corporate boundaries.

Cisco continued its market-share leadership in enterprise routing, switching, security, and voice over IP, with new products introduced across all of these categories during the quarter. This momentum is a direct result of organizations seeking to maximize benefits of current IT investments while preparing for the future. Examples include the Bulgarian Ministry of Transportation and Communications, which is deploying Cisco's Internet Protocol (IP) telephony solution, and FINAMA Asset Management in France, which is implementing an IP storage area network with Cisco technology. In Canada, more than 20 schools, universities and educational boards have implemented Cisco voice solutions.

Cisco also introduced new enterprise IP storage, content switching, and network management solutions during the quarter, while reaching a major milestone by shipping its one-millionth IP telephone. The company continues to see acceptance of voice-over-IP technologies with more than eight million voice ports shipped worldwide.

Service Provider
The worldwide service provider market remained challenged as carriers searched for innovative ways to generate revenue while controlling expenses. In response to this need, Cisco continued working closely with service providers to both identify and deploy profitable services, while also helping them to reduce costs through internal productivity improvements.

Service providers are also looking to Cisco for assistance in the development and marketing of revenue-generating services that meet their enterprise customers' needs today. An example of this collaboration is the Cisco alliance with Sprint, announced earlier this fiscal year. As a result of this alliance, Sprint has gained five major customers over the past quarter, including Chico's retail stores, Coast Dental Services, Inc., Meredith College, Elon University, and Starwood Hotels and Resorts Worldwide.

Cisco introduced several new technology innovations intended to reduce service providers' total cost of ownership, allowing them to use their current assets to scale existing services and lay a foundation for future services. Among them were two new advanced multiservice switches - the Cisco MGX® 8950 and the Cisco MGX 8830 - that allowed carriers to offer new packet-based services such as IP virtual private networks (VPNs) and IP telephony on top of their existing ATM or Multiprotocol Label Switching (MPLS) infrastructure.

Additionally, Cisco introduced the industry's most comprehensive portfolio of technologies for enabling managed central services over MPLS VPNs. These new technologies, available in Cisco IOS. Software, deliver greater simplicity and functionality to Layer 3 MPLS VPN architectures, enabling service providers to move beyond providing connectivity services to offering their customers value-added services.

Commercial
The commercial market segment remains an area of healthy growth for network adoption and deployment of intelligent network solutions. The emerging markets, which include network security, mobility, and converged voice and data solutions, are of specific interest to small- and medium-sized businesses (SMBs).

Cisco took another step forward in bringing intelligent services to the midsized network edge with the introduction of enhanced security services on the Cisco Catalyst® 3550 and 2950 Series Intelligent Ethernet switches. These services deliver more secure network administration, stronger user authentication, and improved security management.

Independent research by AMI-Partners estimates that of the more than 14 million SMBs worldwide with local area networks (LANs), approximately nine million have more than one office location. According to AMI, the global number of SMBs expected to adopt wide area networks (WANs), storage area networks (SANs), or VPNs is projected to grow at annual rates of 20 to 50 percent during the next three-to-four quarters as these businesses network their distributed locations for enhanced productivity. This trending represents ongoing demand for Cisco's portfolio of networking infrastructure solutions to benefit the SMB market place.

The commercial market remains interested in the convergence of data and voice networks to reduce cost and improve productivity. The introduction of new Cisco access routers and customer premises equipment is expected to increase as small and medium businesses seek to take advantage of IP telephony as a cost-effective means to gain competitive advantage.

Editors Note:

  • Q4 conference call to be held at 1:45 p.m. PDT on Tuesday, Aug. 6; conference call number is 888-790-1779 (United States), 312-470-7077 (International Callers)
  • Conference call replay available from 8/6/02 at 4:30 p.m. PDT through 8/13/02 at 800-839-1151 (United States), 402-998-1598 (International Callers)
  • Additional information regarding Cisco's financials, as well as corresponding Web cast with visuals designed to guide participants through the call also available at 1:45 p.m. PST, please visit our investor relations site at http://www.cisco.com/go/investors
  • Additional information regarding Cisco's fiscal year 2002 and Q4 available on Cisco's news site, including:

About Cisco Systems

Cisco Systems, Inc., (NASDAQ: CSCO) is the worldwide leader in networking for the Internet. News and information are available at www.cisco.com.

# # #

This release contains projections and other forward-looking statements regarding future events 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. Readers are referred to the documents filed by Cisco with the SEC, specifically the most recent reports on Form 10-K, 10-Q and 8-K, each as it may be amended from time to time, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. In addition to these risk factors, other factors that could cause actual results to differ materially include the following: business and economic conditions and growth trends in the networking industry in various geographic regions; global economic conditions; overall information technology spending; the growth 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; the ability to successfully restructure existing businesses; the timing of orders and manufacturing lead times; changes in customer order patterns; insufficient, excess or obsolete inventory; variations in sales channels, product costs, or mix of products sold; the ability to successfully reduce overhead and manage expenses; the ability to successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses and technologies; increased competition in the networking industry; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; the trend towards sales of integrated network solutions; manufacturing and sourcing risks; Internet infrastructure problems and government regulation of the Internet; international operations; the timing and amount of employer payroll tax to be paid on employees' gains on stock options exercised; litigation involving patents, intellectual property, antitrust, stockholder and other matters; possible disruption in commercial activities occasioned by terrorist activity and armed conflict, such as changes in logistics and security arrangements, and reduced end-user purchases relative to expectations; exposure to credit risks relating to certain customers and credit exposures in weakened markets; the ability to recruit and retain key personnel; stock price volatility; financial risk management; and potential volatility in operating results, among others. 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 Form 10-K and Form 10-Q, each as it may be amended from time to time. Cisco's results of operations for the three and twelve months ended July 27, 2002 are not necessarily indicative of Cisco's operating results for any future periods.

Cisco provides pro forma net income and pro forma net income per share data as additional information for its operating results. These measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from pro forma measures used by other companies.

Catalyst, Cisco, Cisco IOS, Cisco Systems, the Cisco Systems logo, and MGX are registered trademarks or trademarks of Cisco Systems, Inc. and/or its affiliates in the U.S. and certain other countries. All other trademarks mentioned in this document or Web site 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. Copyright © 2002 Cisco Systems, Inc. All rights reserved.


Cisco Systems, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
(Unaudited)
Three Months Ended Twelve Months Ended
July 27,
2002
July 28,
2001
July 27,
2002
July 28,
2001
NET SALES:
Product $ 3,998 $ 3,577 $ 15,669 $ 19,559
Service 831 721 3,246 2,734
Total net sales 4,829 4,298 18,915 22,293
COST OF SALES:
Product 1,306 1,635 5,914 10,198
Service 240 227 988 1,023
Total cost of sales 1,546 1,862 6,902 11,221
GROSS MARGIN 3,283 2,436 12,013 11,072
OPERATING EXPENSES:
Research and development 797 893 3,301 3,778
Sales and marketing 1,028 1,138 4,235 5,240
General and administrative 152 190 611 768
Restructuring costs and other special charges - - - 1,170
Payroll tax on employee stock option exercises - 5 7 55
Amortization of deferred
stock-based compensation
43 49 176 155
Amortization of goodwill - 196 - 690
Amortization of purchased intangible assets 288 102 699 365
In-process research and development 28 - 65 855
Total operating expenses 2,336 2,573 9,094 13,076
OPERATING INCOME (LOSS) 947 (137) 2,919 (2,004)
Net gains (losses) on investments - - (858) 190
Interest and other income, net 150 199 649 940
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 1,097 62 2,710 (874)
Provision for income taxes 325 55 817 140
NET INCOME (LOSS) $ 772 $ 7 $ 1,893 $ (1,014)
Net income (loss) per
share-- basic
$ 0.11 $ 0.00 $ 0.26 $ (0.14)
Net income (loss) per
share--diluted (1)
$ 0.10 $ 0.00 $ 0.25 $ (0.14)
Shares used in per-share calculation--basic 7,292 7,294 7,301 7,196
Shares used in per-share calculation--diluted (1) 7,410 7,484 7,447 7,196
Note 1: Diluted net loss per share for the twelve months ended July 28, 2001 is computed using the weighted-average number of common shares outstanding during the period and excludes common-equivalent shares, as their effect is anti-dilutive. The dilutive potential common shares that were antidilutive for fiscal 2001 amounted to 348 million shares.

Cisco Systems, Inc.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(See pro forma adjustments listed in table below)
(In millions, except per-share amounts)
(Unaudited)
Three Months Ended Twelve Months Ended
July 27,
2002
July 28,
2001
July 27,
2002
July 28,
2001
NET SALES:
Product $ 3,998 $ 3,577 $ 15,669 $ 19,559
Service 831 721 3,246 2,734
Total net sales 4,829 4,298 18,915 22,293
COST OF SALES:
Product 1,319 1,822 6,439 8,136
Service 240 227 988 1,023
Total cost of sales 1,559 2,049 7,427 9,159
GROSS MARGIN 3,270 2,249 11,488 13,134
OPERATING EXPENSES:
Research and development 797 893 3,301 3,778
Sales and marketing 1,028 1,138 4,235 5,240
General and administrative 152 190 611 768
Total operating expenses 1,977 2,221 8,147 9,786
OPERATING INCOME 1,293 28 3,341 3,348
Interest and other income, net 150 199 649 940
INCOME BEFORE PROVISION FOR INCOME TAXES 1,443 227 3,990 4,288
Provision for income taxes 404 64 1,117 1,202
NET INCOME $ 1,039 $ 163 $ 2,873 $ 3,086
Net income per
share-- basic
$ 0.14 $ 0.02 $ 0.39 $ 0.43
Net income per
share--diluted
$ 0.14 $ 0.02 $ 0.39 $ 0.41
Shares used in per-share calculation--basic 7,292 7,294 7,301 7,196
Shares used in per-share calculation--diluted 7,410 7,484 7,447 7,544
The above pro forma amounts have been adjusted to exclude the following items:
In-process research and development $ 28 $ - $ 65 $ 855
Payroll tax on employee stock option exercises - 5 7 55
Amortization of deferred
stock-based compensation
43 49 176 155
Amortization of goodwill - 196 - 690
Amortization of purchased intangible assets 288 102 699 365
Net (gains) losses on investments - - 858 (190)
Restructuring costs and other special charges - - - 1,170
Excess inventory (benefit) charge (13) (187) (525) 2,062
Income tax effect (79) (9) (300) (1,062)
$ 267 $ 156 $ 980 $ 4,100

Cisco Systems, Inc.
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
$ 35,238
July 27,
2002
July 28, 2001
ASSETS
Current assets:
Cash and cash equivalents $ 9,484 $ 4,873
Short-term investments 3,172 2,034
Accounts receivable, net of allowance for doubtful accounts of $335 at July 27, 2002 and $288 at July 28, 2001 1,105 1,466
Inventories, net 880 1,684
Deferred tax assets 2,030 1,809
Lease receivables, net 239 405
Prepaid expenses and other current assets 523 564
Total current assets 17,433 12,835
Investments 8,800 10,346
Restricted investments - 1,264
Property and equipment, net 4,102 2,591
Goodwill 3,565 3,189
Purchased intangible assets, net 797 1,470
Lease receivables, net 39 253
Other assets 3,059 3,290
TOTAL ASSETS $ 37,795

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 470 $ 644
Income taxes payable 579 241
Accrued compensation 1,365 1,058
Deferred revenue 3,143 2,470
Other accrued liabilities 2,496 2,553
Restructuring liabilities 322 386
Total current liabilities 8,375 7,352
Deferred revenue 749 744
Total liabilities 9,124 8,096
Minority interest 15 22
Shareholders' equity 28,656 27,120
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,795 $ 35,238

Cisco Systems, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Twelve Months Ended
July 27,
2002
July 28, 2001
Cash flows from operating activities:
Net income (loss) $ 1,893 $ (1,014)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,957 2,236
Provision for doubtful accounts 91 268
Provision for inventory 149 2,775
Deferred income taxes (573) (924)
Tax benefits from employee stock option plans 61 1,397
In-process research and development 53 739
Net (gains) losses on investments and provision for losses 1,127 43
Restructuring costs and other special charges - 501
Change in operating assets and liabilities:
Accounts receivable 270 569
Inventories 673 (1,644)
Prepaid expenses and other current assets (28) (25)
Accounts payable (174) (105)
Income taxes payable 389 (434)
Accrued compensation 307 (256)
Deferred revenue 678 1,629
Other accrued liabilities (222) 251
Restructuring liabilities (64) 386
Net cash provided by operating activities 6,587 6,392
Cash flows from investing activities:
Purchases of short-term investments (5,473) (4,594)
Proceeds from sales and maturities of short-term investments 5,868 4,370
Purchases of investments (15,760) (18,306)
Proceeds from sales and maturities of investments 15,317 15,579
Purchases of restricted investments (291) (941)
Proceeds from sales and maturities of restricted investments 1,471 1,082
Acquisition of property and equipment (2,641) (2,271)
Acquisition of businesses, net of cash and cash equivalents 16 (13)
Change in lease receivables, net 380 457
Purchases of investments in privately held companies (58) (1,161)
Lease deposits 320 (320)
Purchase of minority interest of Cisco Systems, K.K. (Japan) (115) (365)
Other 159 (520)
Net cash used in investing activities (807) (7,003)
Cash flows from financing activities:
Issuance of common stock 655 1,262
Repurchase of common stock (1,854) -
Other 30 (12)
Net cash (used in) provided by financing activities (1,169) 1,250
Net increase in cash and cash equivalents 4,611 639
Cash and cash equivalents, beginning of fiscal year 4,873 4,234
Cash and cash equivalents, end of fiscal year $ 9,484 $ 4,873