Nasdaq GlobeNewswire

Cisco Reports Fourth Quarter and Fiscal Year 2018 Earnings

Del

•   Q4 Results:

  • Revenue: $12.8 billion

    ▪   Increase of 6% year over year
    ▪   Recurring revenue was 32% of total revenue, up 1 point year over year
  • Earnings per Share: GAAP: $0.81; Non-GAAP: $0.70
    ▪   Non-GAAP EPS increased 15% year over year

•   FY 2018 Results:

  • Revenue: $49.3 billion; increase of 3% year over year
  • Earnings per Share: GAAP: $0.02; Non-GAAP: $2.60
    ▪   Non-GAAP EPS increased 9% year over year
    ▪   GAAP results include a $10.4 billion charge related to the enactment of the Tax Cuts and Jobs Acts

•   Q1 FY 2019 Guidance:

  • Revenue: 5% to 7% growth year over year
  • Earnings per Share: GAAP: $0.69 to $0.74; Non-GAAP: $0.70 to $0.72

SAN JOSE, Calif., Aug. 15, 2018 (GLOBE NEWSWIRE) -- Cisco today reported fourth quarter and fiscal year results for the period ended July 28, 2018. Cisco reported fourth quarter revenue of $12.8 billion, net income on a generally accepted accounting principles (GAAP) basis of $3.8 billion or $0.81 per share, and non-GAAP net income of $3.3 billion or $0.70 per share.

“We had a very strong finish to a great year and generated our highest quarterly revenue of $12.8 billion,” said Chuck Robbins, Chairman and CEO of Cisco. “Our results demonstrate a combination of strong customer adoption of our latest innovations, the ongoing value customers see in our software and subscription offerings, and excellent execution across our customer segments and geographies. Our strategy is working and we believe that are well-positioned to capture growth across our portfolio with our pipeline of innovation.”

Q4 GAAP Results

    Q4 FY 2018   Q4 FY 2017   Vs. Q4 FY 2017
Revenue   $ 12.8 billion   $ 12.1 billion   6 %
Net Income   $ 3.8 billion   $ 2.4 billion   57 %
Diluted
Earnings
per
Share
(EPS)
  $ 0.81     $ 0.48     69 %
                       

Q4 GAAP results include an $863 million benefit related to the Tax Cuts and Jobs Act. Non-GAAP results exclude this benefit.

   
Q4 Non-GAAP Results

    Q4 FY 2018   Q4 FY 2017   Vs. Q4 FY 2017
Net Income   $ 3.3 billion   $ 3.1 billion   8 %
EPS   $ 0.70     $ 0.61     15 %
                       

Fiscal Year GAAP Results

    FY 2018   FY 2017        Vs. FY 2017 
Revenue   $ 49.3 billion   $ 48.0 billion   3 %
Net Income   $ 0.1 billion   $ 9.6 billion   (99 )%
EPS   $ 0.02     $ 1.90     (99 )%

Fiscal year GAAP results include a $10.4 billion charge related to the enactment of the Tax Cuts and Jobs Act comprised of $8.1 billion for the U.S. transition tax, $1.2 billion for foreign withholding tax and $1.1 billion for the re-measurement of net deferred tax assets.

        Fiscal Year Non-GAAP Results

    FY 2018   FY 2017        Vs. FY 2017 
Net Income   $ 12.7 billion   $ 12.1 billion   5%
EPS   $ 2.60     $ 2.39     9%


Reconciliations between net income, EPS, and other measures on a GAAP and non-GAAP basis are provided in the tables located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

“Q4 was another quarter of broad-based strength across our portfolio reflecting our strong execution and momentum. We delivered record quarterly revenue, up 6%, and non-GAAP EPS, up 15%,” said Kelly Kramer, CFO of Cisco. “We are seeing solid demand for our products and solutions while continuing to make progress in transforming our business model and driving long-term shareholder value.”

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

Q4 FY 2018 Highlights

Revenue -- Total revenue was $12.8 billion, up 6%, with product revenue up 7% and service revenue up 3%. Recurring revenue as a percentage of total revenue was 32%, up 1 point year over year. Revenue by geographic segment was: Americas up 5%, EMEA up 8%, and APJC up 6%. Product revenue performance was generally broad based with growth in Security, up 12%, Applications, up 10%, and Infrastructure Platforms, up 7%.

Gross Margin -- On a GAAP basis, total gross margin, product gross margin, and service gross margin were 61.7%, 60.2%, and 66.0%, respectively, as compared with 62.2%, 60.3%, and 67.8%, respectively, in the fourth quarter of 2017.

On a non-GAAP basis, total gross margin, product gross margin, and service gross margin were 62.9%, 61.5%, and 67.1%, respectively, as compared with 63.7%, 61.9%, and 68.8%, respectively, in the fourth quarter of 2017.

Total gross margins by geographic segment were: 64.1% for the Americas, 63.7% for EMEA and 57.7% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.6 billion, up 1%. Non-GAAP operating expenses were $4.1 billion, up 5%, and were 32.0% of revenue.

Operating Income -- GAAP operating income was $3.3 billion, up 10%, with GAAP operating margin of 26.1%. Non-GAAP operating income was $4.0 billion, up 4%, with non-GAAP operating margin at 30.9%.

Provision for (benefit from) Income Taxes -- The GAAP tax provision rate was (5.9)%, which includes an $863 million benefit related to the Tax Cuts and Jobs Act. The non-GAAP tax provision rate was 21.2%.

Net Income and EPS -- On a GAAP basis, net income was $3.8 billion and EPS was $0.81. On a non-GAAP basis, net income was $3.3 billion, an increase of 8%, and EPS was $0.70, an increase of 15%.

Cash Flow from Operating Activities -- $4.1 billion for the fourth quarter of fiscal 2018, an increase of 2% compared with $4.0 billion for the fourth quarter of fiscal 2017.

FY 2018 Highlights

Revenue -- Total revenue was $49.3 billion, an increase of 3%.

Net Income and EPS -- On a GAAP basis, net income was $0.1 billion and EPS was $0.02. GAAP net income includes a $10.4 billion charge related to the enactment of the Tax Cuts and Jobs Act comprised of $8.1 billion for the U.S. transition tax, $1.2 billion for foreign withholding tax and $1.1 billion for the re-measurement of net deferred tax assets.

On a non-GAAP basis, net income was $12.7 billion, up 5% compared to fiscal 2017, and EPS was $2.60, an increase of 9%.

Cash Flow from Operating Activities -- $13.7 billion for fiscal 2018, compared with $13.9 billion for fiscal 2017, a decrease of 2%. Operating cash flow for fiscal 2018 includes the payments of $1.4 billion of one-time foreign taxes as related to the Tax Cuts and Jobs Act. Operating cash flow increased 8%, normalized for these tax payments.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- $46.5 billion at the end of the fourth quarter of fiscal 2018, compared with $54.4 billion at the end of the third 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 fourth quarter of fiscal 2018 were $40.4 billion.

Deferred Revenue -- $19.7 billion, up 6% in total, with deferred product revenue up 15%, driven largely by subscription-based and software offers, and deferred service revenue was up 1%. The portion of deferred product revenue related to recurring software and subscription offers increased 23%.

Product Backlog -- $6.6 billion at the end of fiscal 2018, an increase of 38% compared with the balance at the end of fiscal 2017.

Capital Allocation -- For the fourth quarter of fiscal 2018, Cisco returned $7.5 billion to shareholders through share buybacks and dividends. Cisco declared and paid a cash dividend of $0.33 per common share, or $1.5 billion. Cisco repurchased approximately 138 million shares of common stock under its stock repurchase program at an average price of $43.58 per share for an aggregate purchase price of $6.0 billion.

For the full fiscal year, Cisco returned $23.6 billion to shareholders through share buybacks and dividends. Cisco declared and paid cash dividends of $1.24 per common share, or $6.0 billion. Cisco repurchased approximately 432 million shares of common stock under its stock repurchase program at an average price of $40.88 per share for an aggregate purchase price of $17.7 billion. The remaining authorized amount for stock repurchases under the program is approximately $19.0 billion with no termination date.

Acquisitions and Divestitures

In the fourth quarter of fiscal 2018, we closed the acquisition of Accompany, a privately held company that provides an AI-driven relationship intelligence platform. We also announced our intent to acquire July Systems, Inc., a privately held company that provides enterprise-grade location platform through cloud-based subscription offerings. This acquisition closed in the first quarter of fiscal 2019. In the fourth quarter of fiscal 2018, we announced an agreement to sell our Service Provider Video Software Solutions (SPVSS) business. We expect this transaction to close in the first half of fiscal 2019 subject to customary closing conditions and regulatory approvals.

On August 2, 2018, we announced our intent to acquire Duo Security, a privately held company that provides unified access security and multi-factor authentication delivered through the cloud. The acquisition is expected to close in the first quarter of fiscal 2019, subject to customary closing conditions and regulatory approvals.

Guidance for Q1 FY 2019

Cisco expects to achieve the following results for the first quarter of fiscal 2019:

     
Q1 FY 2019    
Revenue   5% to 7% growth Y/Y
Non-GAAP gross margin rate   63% - 64%
Non-GAAP operating margin rate   30% - 31%
Non-GAAP tax provision rate   19%
Non-GAAP EPS   $0.70 - $0.72
     

The guidance includes our SPVSS business that we recently agreed to sell and excludes the Duo Security acquisition since both transactions have not closed. We expect the SPVSS transaction to close in the first half of fiscal 2019 subject to customary closing conditions and regulatory approvals.

At the beginning of fiscal 2019, Cisco adopted the Financial Accounting Standards Board new standard on revenue recognition (ASC 606) using the modified retrospective method. The revenue guidance in the preceding table includes the impact of ASC 606 which we estimate to be a benefit of about 1% year over year.

Cisco estimates that GAAP EPS will be $0.69 to $0.74 in the first quarter of fiscal 2019.

A reconciliation between the Guidance for Q1 FY 2019 on a GAAP and non-GAAP basis is provided in the table entitled "GAAP to non-GAAP Guidance for Q1 FY 2019" located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

Editor's Notes:

  • Q4 fiscal year 2018 conference call to discuss Cisco's results along with its guidance will be held on Wednesday, August 15, 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, August 15, 2018 to 4:00 p.m. Pacific Time, August 22, 2018 at 1-866-417-5767 (United States) or 1-203-369-0735 (international). The replay will also be available via webcast on the Cisco Investor Relations website at https://investor.cisco.com.

  • Additional information regarding Cisco's financials, as well as a webcast of the conference call with visuals designed to guide participants through the call, will be available at 1:30 p.m. Pacific Time, August 15, 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   Fiscal Year Ended
  July 28,
 2018
  July 29,
 2017
  July 28,
 2018
  July 29,
 2017
REVENUE:              
Product $ 9,642     $ 9,027     $ 36,709     $ 35,705  
Service 3,202     3,106     12,621     12,300  
Total revenue 12,844     12,133     49,330     48,005  
COST OF SALES:              
Product 3,833     3,586     14,427     13,699  
Service 1,089     1,001     4,297     4,082  
Total cost of sales 4,922     4,587     18,724     17,781  
GROSS MARGIN 7,922     7,546     30,606     30,224  
OPERATING EXPENSES:              
Research and development 1,626     1,499     6,332     6,059  
Sales and marketing 2,348     2,318     9,242     9,184  
General and administrative 543     495     2,144     1,993  
Amortization of purchased intangible assets 33     58     221     259  
Restructuring and other charges 26     142     358     756  
Total operating expenses 4,576     4,512     18,297     18,251  
OPERATING INCOME 3,346     3,034     12,309     11,973  
Interest income 353     360     1,508     1,338  
Interest expense (224 )   (222 )   (943 )   (861 )
Other income (loss), net 117     8     165     (163 )
Interest and other income (loss), net 246     146     730     314  
INCOME BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES 3,592     3,180     13,039     12,287  
Provision for (benefit from) income taxes (1) (211 )   756     12,929     2,678  
NET INCOME $ 3,803     $ 2,424     $ 110     $ 9,609  
               
Net income per share:              
Basic $ 0.81     $ 0.49     $ 0.02     $ 1.92  
Diluted $ 0.81     $ 0.48     $ 0.02     $ 1.90  
Shares used in per-share calculation:              
Basic 4,672     4,993     4,837     5,010  
Diluted 4,722     5,027     4,881     5,049  
               
Cash dividends declared per common share $ 0.33     $ 0.29     $ 1.24     $ 1.10  
                               

(1) For the three months ended July 28, 2018, the provision for (benefit from) income taxes includes an $863 million benefit as related to the Tax Cuts and Jobs Act. For fiscal year ended 2018, the provision for income taxes includes a $10.4 billion charge as related to the enactment of the Tax Cuts and Jobs Act.

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

    July 28, 2018
    Three Months Ended   Fiscal Year Ended
    Amount   Y/Y %   Amount   Y/Y %
Revenue:                
Americas   $ 7,555     5 %   $ 29,070     3 %
EMEA   3,174     8 %   12,425     4 %
APJC   2,116     6 %   7,834     2 %
Total   $ 12,844     6 %   $ 49,330     3 %
                             

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


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

    July 28, 2018
    Three Months Ended   Fiscal Year Ended
Gross Margin Percentage:        
Americas   64.1 %   64.6 %
EMEA   63.7 %   63.9 %
APJC   57.7 %   60.3 %
             



CISCO SYSTEMS, INC.

REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES
(In millions, except percentages)

    July 28, 2018
    Three Months Ended   Fiscal Year Ended
    Amount   Y/Y %   Amount   Y/Y %
Revenue:                
Infrastructure Platforms   $ 7,443     7 %   $ 28,270     2 %
Applications   1,339     10 %   5,035     10 %
Security   627     12 %   2,353     9 %
Other Products   232     (18 )%   1,050     (13 )%
Total Product   9,642     7 %   36,709     3 %
Services   3,202     3 %   12,621     3 %
Total   $ 12,844     6 %   $ 49,330     3 %
                             

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

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

  July 28,
 2018
  July 29,
 2017
ASSETS      
Current assets:      
Cash and cash equivalents $ 8,934     $ 11,708  
Investments 37,614     58,784  
Accounts receivable, net of allowance for doubtful accounts 
of $129 at July 28, 2018 and $211 at July 29, 2017
5,554     5,146  
Inventories 1,846     1,616  
Financing receivables, net 4,949     4,856  
Other current assets 2,940     1,593  
Total current assets 61,837     83,703  
Property and equipment, net 3,006     3,322  
Financing receivables, net 4,882     4,738  
Goodwill 31,706     29,766  
Purchased intangible assets, net 2,552     2,539  
Deferred tax assets 3,219     4,239  
Other assets 1,582     1,511  
TOTAL ASSETS $ 108,784     $ 129,818  
LIABILITIES AND EQUITY      
Current liabilities:      
Short-term debt $ 5,238     $ 7,992  
Accounts payable 1,904     1,385  
Income taxes payable 1,004     98  
Accrued compensation 2,986     2,895  
Deferred revenue 11,490     10,821  
Other current liabilities 4,413     4,392  
Total current liabilities 27,035     27,583  
Long-term debt 20,331     25,725  
Income taxes payable 8,585     1,250  
Deferred revenue 8,195     7,673  
Other long-term liabilities 1,434     1,450  
Total liabilities 65,580     63,681  
Total equity 43,204     66,137  
TOTAL LIABILITIES AND EQUITY $ 108,784     $ 129,818  
               


CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

  Fiscal Year Ended
  July 28,
 2018
  July 29,
 2017
Cash flows from operating activities:      
Net income $ 110     $ 9,609  
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation, amortization, and other 2,192     2,286  
Share-based compensation expense 1,576     1,526  
Provision for receivables (134 )   (8 )
Deferred income taxes 900     (124 )
Excess tax benefits from share-based compensation     (153 )
(Gains) losses on divestitures, investments and other, net (322 )   154  
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:      
Accounts receivable (269 )   756  
Inventories (244 )   (394 )
Financing receivables (219 )   (1,038 )
Other assets 66     15  
Accounts payable 504     311  
Income taxes, net 8,118     60  
Accrued compensation 100     (110 )
Deferred revenue 1,205     1,683  
Other liabilities 83     (697 )
Net cash provided by operating activities 13,666     13,876  
Cash flows from investing activities:      
Purchases of investments (14,285 )   (42,702 )
Proceeds from sales of investments 17,706     28,827  
Proceeds from maturities of investments 15,769     12,143  
Acquisition of businesses, net of cash and cash equivalents acquired (3,006 )   (3,324 )
Proceeds from business divestitures 27      
Purchases of investments in privately held companies (267 )   (222 )
Return of investments in privately held companies 168     203  
Acquisition of property and equipment (834 )   (964 )
Proceeds from sales of property and equipment 59     7  
Other (13 )   39  
Net cash provided by (used in) investing activities 15,324     (5,993 )
Cash flows from financing activities:      
Issuances of common stock 623     708  
Repurchases of common stock - repurchase program (17,547 )   (3,685 )
Shares repurchased for tax withholdings on vesting of restricted stock units (703 )   (619 )
Short-term borrowings, original maturities of 90 days or less, net (2,502 )   2,497  
Issuances of debt 6,877     6,980  
Repayments of debt (12,375 )   (4,151 )
Excess tax benefits from share-based compensation     153  
Dividends paid (5,968 )   (5,511 )
Other (169 )   (178 )
Net cash used in financing activities (31,764 )   (3,806 )
Net (decrease) increase in cash and cash equivalents (2,774 )   4,077  
Cash and cash equivalents, beginning of fiscal year 11,708     7,631  
Cash and cash equivalents, end of fiscal year $ 8,934     $ 11,708  
       
Supplemental cash flow information:      
Cash paid for interest $ 910     $ 897  
Cash paid for income taxes, net $ 3,911     $ 2,742  
               


CISCO SYSTEMS, INC.

DEFERRED REVENUE
(In millions)

  July 28,
 2018
  April 28,
 2018
  July 29,
 2017
Deferred revenue:          
Service $ 11,431     $ 10,960     $ 11,302  
Product:          
Deferred revenue related to recurring software and subscription offers 6,120     5,635     4,971  
Other product deferred revenue 2,134     2,358     2,221  
Total product deferred revenue 8,254     7,993     7,192  
Total $ 19,685     $ 18,953     $ 18,494  
Reported as:          
Current $ 11,490     $ 11,301     $ 10,821  
Noncurrent 8,195     7,652     7,673  
Total $ 19,685     $ 18,953     $ 18,494  
                       



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                        
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  
                         
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 TO NON-GAAP NET INCOME
(In millions, except per-share amounts)

  Three Months Ended   Fiscal Year Ended
  July 28,
 2018
  July 29,
 2017
  July 28,
 2018
  July 29,
 2017
GAAP net income $ 3,803     $ 2,424     $ 110     $ 9,609  
Adjustments to cost of sales:              
Share-based compensation expense 59     56     227     219  
Amortization of acquisition-related intangible assets 134     140     578     483  
Supplier component remediation charge (adjustment), net (36 )   (18 )   (77 )   (47 )
Acquisition-related/divestiture costs 3         7     1  
Legal and indemnification settlements         122      
Total adjustments to GAAP cost of sales 160     178     857     656  
Adjustments to operating expenses:              
Share-based compensation expense 329     344     1,339       1,307  
Amortization of acquisition-related intangible assets 33     58     221     259  
Acquisition-related/divestiture costs 79     62     274     219  
Significant asset impairments and restructurings 26     142     358     756  
Total adjustments to GAAP operating expenses 467     606     2,192     2,541  
Total adjustments to GAAP income before provision for income taxes 627     784     3,049     3,197  
Income tax effect of non-GAAP adjustments (253 )   (235 )   (866 )   (847 )
Significant tax matters (1) (851 )   108     10,410     108  
Total adjustments to GAAP provision for income taxes (1,104 )   (127 )   9,544     (739 )
Non-GAAP net income $ 3,326     $ 3,081     $ 12,703     $ 12,067  
               
Diluted net income per share:              
GAAP $ 0.81     $ 0.48     $ 0.02     $ 1.90  
Non-GAAP $ 0.70     $ 0.61     $ 2.60     $ 2.39  
                               

(1) In the fourth quarter of fiscal 2018, Cisco recorded adjustments to the provisional amounts related to the U.S. transition tax on accumulated earnings of foreign subsidiaries and re-measurement of net deferred tax assets. These adjustments include an $863 million benefit to the U.S. transition tax provisional amount related to the U.S. taxation of deemed foreign dividends after the date of enactment in the transition fiscal year.

For fiscal year 2018, Cisco recorded charges relating to significant tax matters that were excluded from non-GAAP net income. $10.4 billion of these charges were provisional amounts related to the enactment of the Tax Cuts and Jobs Act comprised of $8.1 billion related to the U.S. transition tax, $1.2 billion related to foreign withholding tax and $1.1 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.


CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

GROSS MARGINS, OPERATING EXPENSES, OPERATING MARGINS, AND NET INCOME
(In millions, except percentages)

  Three Months Ended
  July 28, 2018
  Product
Gross
Margin
  Service
Gross
Margin
  Total
Gross
Margin
  Operating
Expenses
  Y/Y   Operating
Income
  Y/Y   Net
Income
  Y/Y
GAAP amount $ 5,809     $ 2,113     $ 7,922     $ 4,576     1 %   $ 3,346     10 %   $ 3,803     57 %
% of revenue 60.2 %   66.0 %   61.7 %   35.6 %       26.1 %       29.6 %    
Adjustments to GAAP amounts:                                  
Share-based compensation expense 24     35     59     329         388         388      
Amortization of acquisition-related intangible assets 134         134     33         167         167      
Supplier component remediation charge (adjustment), net (36 )       (36 )           (36 )       (36 )    
Acquisition/divestiture-related costs 2     1     3     79         82         82      
Significant asset impairments and restructurings             26         26         26      
Income tax effect/significant tax matters (1)                             (1,104 )    
Non-GAAP amount $ 5,933     $ 2,149     $ 8,082     $ 4,109     5 %   $ 3,973     4 %   $ 3,326     8 %
% of revenue 61.5 %   67.1 %   62.9 %   32.0 %       30.9 %       25.9 %    
                                               

(1) Includes an $863 million benefit as related to the Tax Cuts and Jobs Act.

   
  Three Months Ended
  July 29, 2017
  Product
Gross
Margin
  Service
Gross
Margin
  Total
Gross
Margin
  Operating
Expenses
  Y/Y   Operating
Income
  Y/Y   Net
Income
  Y/Y
GAAP amount $ 5,441     $ 2,105     $ 7,546     $ 4,512     (3 )%   $ 3,034     (8 )%   $ 2,424     (14 )%
% of revenue 60.3 %   67.8 %   62.2 %   37.2 %       25.0 %       20.0 %    
Adjustments to GAAP amounts:                                  
Share-based compensation expense 23     33     56     344         400         400      
Amortization of acquisition-related intangible assets 140         140     58         198         198      
Supplier component remediation charge (adjustment), net (18 )       (18 )           (18 )       (18 )    
Acquisition/divestiture-related costs             62         62         62      
Significant asset impairments and restructurings             142         142         142      
Income tax effect/significant tax matters                             (127 )    
Non-GAAP amount $ 5,586     $ 2,138     $ 7,724     $ 3,906     (7 )%   $ 3,818     (4 )%   $ 3,081     (3 )%
% of revenue 61.9 %   68.8 %   63.7 %   32.2 %       31.5 %       25.4 %    
                                               



CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

GROSS MARGINS, OPERATING EXPENSES, OPERATING MARGINS, AND NET INCOME
(In millions, except percentages)

  Fiscal Year Ended
  July 28, 2018
  Product
Gross
Margin
  Service
Gross
Margin
  Total
Gross
Margin
  Operating
Expenses
  Y/Y   Operating
Income
  Y/Y   Net
Income
  Y/Y
GAAP amount $ 22,282     $ 8,324     $ 30,606     $ 18,297     %   $ 12,309     3 %   $ 110     (99 )%
% of revenue 60.7 %   66.0 %   62.0 %   37.1 %       25.0 %       0.2 %    
Adjustments to GAAP amounts:                                  
Share-based compensation expense 94     133     227     1,339         1,566         1,566      
Amortization of acquisition-related intangible assets 578         578     221         799         799      
Supplier component remediation charge (adjustment), net (77 )       (77 )           (77 )       (77 )    
Legal and indemnification settlements 122         122             122         122      
Acquisition/divestiture-related costs 3     4     7     274         281         281      
Significant asset impairments and restructurings             358         358         358      
Income tax effect/significant tax matters (1)                             9,544   (1 )  
Non-GAAP amount $ 23,002     $ 8,461     $ 31,463     $ 16,105     3 %   $ 15,358     1 %   $ 12,703     5 %
% of revenue 62.7 %   67.0 %   63.8 %   32.6 %       31.1 %       25.8 %    
                                               

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

  Fiscal Year Ended
  July 29, 2017
  Product
Gross
Margin
  Service
Gross
Margin
  Total
Gross
Margin
  Operating
Expenses
  Y/Y   Operating
Income
  Y/Y   Net
Income
  Y/Y
GAAP amount $ 22,006     $ 8,218     $ 30,224     $ 18,251     %   $ 11,973     (5 )%   $ 9,609     (11 )%
% of revenue 61.6 %   66.8 %   63.0 %   38.0 %       24.9 %       20.0 %    
Adjustments to GAAP amounts:                                  
Share-based compensation expense 85     134     219     1,307         1,526         1,526      
Amortization of acquisition-related intangible assets 483         483     259         742         742      
Supplier component remediation charge (adjustment), net (47 )       (47 )           (47 )       (47 )    
Acquisition/divestiture-related costs     1     1     219         220         220      
Significant asset impairments and restructurings             756         756         756      
Income tax effect/significant tax matters                             (739 )    
Non-GAAP amount $ 22,527     $ 8,353     $ 30,880     $ 15,710     (4 )%   $ 15,170     %   $ 12,067     %
% of revenue 63.1 %   67.9 %   64.3 %   32.7 %       31.6 %       25.1 %    
                                               



CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

EFFECTIVE TAX RATE
(In percentages)

       
  Three Months Ended   Fiscal Year Ended
  July 28,
2018
  July 29,
2017
  July 28,
2018
  July 29,
2017
GAAP effective tax rate (1) (5.9)%     23.8%     99.2%     21.8%  
Total adjustments to GAAP provision for income taxes 27.1%     (1.5)%     (78.2)%     0.3%  
Non-GAAP effective tax rate 21.2%     22.3%     21.0%     22.1%  
                       

(1) The three months ended July 28, 2018 includes an $863 million benefit as related to the Tax Cuts and Jobs Act. The fiscal year ended July 28, 2018 includes a $10.4 billion charge as related to the enactment of the Tax Cuts and Jobs Act.

GAAP TO NON-GAAP GUIDANCE FOR Q1 FY 2019

                 
Q1 FY 2019   Gross Margin
Rate
  Operating Margin
Rate
  Tax Provision
Rate
  Earnings per
Share (4)
GAAP   61.5% - 62.5%   27.5% - 28.5%   9%   $0.69 - $0.74
Estimated adjustments for:                
Share-based compensation expense   0.5 %   3.0 %       $0.04 - $0.05
Amortization of purchased intangible assets and other acquisition-related/divestiture costs   1.0 %   2.0 %       $0.04 - $0.05
Restructuring and other charges (1)       0.5 %       $0.01 
Legal settlements (2)       (3.0 )%         ($0.07)
Significant tax matters (3)                   ($0.03) - ($0.04)
Income tax effect of non-GAAP adjustments               10%    
Non-GAAP   63% - 64%   30% - 31%   19%   $0.70 - $0.72
                 

(1) In the third quarter of fiscal 2018, we initiated a restructuring plan in order to realign the organization and enable further investment in key priority areas. The total pretax cash charges to the GAAP financial results is estimated to be approximately $300 million consisting of severance and other one-time benefits, and other associated costs. During fiscal 2018, we have recognized pretax charges of approximately $108 million to our GAAP financial results in relation to this restructuring plan. We expect to recognize up to $70 million of these charges in the first quarter of fiscal 2019 with the remaining amount to be recognized during the rest of the fiscal year.

(2) In the first quarter of fiscal 2019, we entered into a binding term sheet with Arista Networks, settling most of the outstanding litigation between the companies, which will result in a payment to Cisco of $400 million. We will recognize this benefit in our GAAP financial results in the first quarter of fiscal 2019. The remaining litigation will not have a financial impact on Cisco.

(3) We will recognize net indirect benefits to our GAAP provision for income taxes related to intercompany adjustments upon adoption of ASC 606.

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

The guidance includes our SPVSS business that we recently agreed to sell and excludes the Duo Security acquisition since both transactions have not closed. We expect the SPVSS transaction to close in the first half of fiscal 2019 subject to customary closing conditions and regulatory approvals.

At the beginning of fiscal 2019, we adopted the Financial Accounting Standards Board new standard on revenue recognition (ASC 606) using the modified retrospective method. The revenue guidance in the preceding table includes the impact of ASC 606 which we estimate to be a benefit of about 1% year over year.

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 execution on our strategy, the ability to grow across our portfolio with our pipeline of innovation, continued customer adoption of our innovations and continued solid demand for our products and solutions, continued progress in transforming our business model and the ongoing value customers see in our software and subscription offerings, execution across our customer segments and geographies, continued broad-based strength across our portfolio, continued strong execution and momentum, and our ability to deliver profitable growth and drive long-term shareholder value) and the future financial performance of Cisco (including the guidance for Q1 FY 2019) 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 May 22, 2018 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 months and the year ended July 28, 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.

     
Press Contact:   Investor Relations Contact:
Robyn Blum   Marilyn Mora
Cisco   Cisco
1 (408) 853-9848   1 (408) 527-7452
rojenkin@cisco.com   marilmor@cisco.com
     

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