Cisco Reports Second Quarter Earnings

Strong Momentum and Results; Dividend Increase to $0.21

SAN JOSE, CA – Feb 11, 2015 – Cisco (NASDAQ: CSCO)

  • Q2 Revenue: $11.9 billion (increase of 7% year over year)
  • Q2 Earnings per Share: $0.46 GAAP; $0.53 non-GAAP

Cisco, the worldwide leader in networking that transforms how people connect, communicate and collaborate, today reported its second quarter results for the period ended January 24, 2015. Cisco reported second quarter revenue of $11.9 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.4 billion or $0.46 per share, and non-GAAP net income of $2.7 billion or $0.53 per share.

“Our Q2 results reflect continued progress as we transform Cisco to become the #1 IT company. In the quarter we grew revenues by 7%, with strong EPS growth, and saw the best balance of growth across all our geographies, products, and segments. We delivered this strong performance despite a volatile economic environment,” stated Cisco chairman and CEO John Chambers.

“Our strong momentum is the direct result of how well we have managed our company transformation over the last three plus years and our leadership position in the key technology transitions of cloud, mobility, big data, security, collaboration, and the Internet of Everything. Every nation, every company, everything is becoming digitized and the network is at the center of this transformation.”

   
GAAP Results  
   
    Q2 2015   Q2 2014   Vs. Q2 2014  
Revenue   $ 11.9   billion   $ 11.2   billion   7.0 %
Net Income   $ 2.4   billion   $ 1.4   billion   67.7 %
Earnings per Share   $ 0.46       $ 0.27       70.4 %
   
Non-GAAP Results  
   
    Q2 2015   Q2 2014   Vs. Q2 2014  
Net Income   $ 2.7   billion   $ 2.5   billion   8.9 %
Earnings per Share   $ 0.53       $ 0.47       12.8 %
                           

Revenue for the first six months of fiscal 2015 was $24.2 billion, compared with $23.2 billion for the first six months of fiscal 2014. Net income for the first six months of fiscal 2015, on a GAAP basis, was $4.2 billion or $0.82 per share, compared with $3.4 billion or $0.64 per share for the first six months of fiscal 2014. Non-GAAP net income for the first six months of fiscal 2015 was $5.5 billion or $1.08 per share, compared with $5.4 billion or $1.00 per share for the first six months of fiscal 2014.

A reconciliation between net income on a GAAP basis and non-GAAP net income is provided in the table following the Consolidated Statements of Operations.

Cisco will discuss second 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.

Cisco Increases Quarterly Cash Dividend
Cisco is also announcing that earlier today its Board of Directors declared a quarterly dividend of $0.21 per common share, a two-cent increase over the previous quarter’s dividend, to be paid on April 22, 2015 to all shareholders of record as of the close of business on April 2, 2015. Future dividends will be subject to Board approval.

“This was a good quarter to start as CFO,” stated Kelly Kramer, EVP and CFO. “The momentum in the business feels good and we are excited about the opportunities ahead. Our revenue growth and increased EPS allows us to continue to give back to shareholders as we returned $2.2 billion to shareholders in Q2 and remain committed to returning at least 50% of our free cash flow annually. We are also pleased to increase our dividend to $0.21 this quarter, an 11% increase.”

Other Financial Highlights

  • Cash flows from operations were $2.9 billion for the second quarter of fiscal 2015, compared with $2.5 billion for the first quarter of fiscal 2015, and compared with $2.9 billion for the second quarter of fiscal 2014.
  • Cash and cash equivalents and investments were $53.0 billion at the end of the second quarter of fiscal 2015, compared with $52.1 billion at the end of the first quarter of fiscal 2015, and compared with $52.1 billion at the end of the fourth quarter of fiscal 2014.
  • During the second quarter of fiscal 2015, Cisco paid a cash dividend of $0.19 per common share, or $974 million.
  • Cisco repurchased approximately 44 million shares of common stock under the stock repurchase program at an average price of $27.63 per share for an aggregate purchase price of $1.2 billion during the second quarter of fiscal 2015. As of January 24, 2015, Cisco had repurchased and retired 4.4 billion shares of Cisco common stock at an average price of $20.73 per share for an aggregate purchase price of approximately $90.7 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $6.3 billion with no termination date.

Internet of Everything

  • The Metropolitan Regional Government of Santiago signed a collaboration agreement with Cisco Chile with the aim to turn Santiago into a “Smart City.”
  • Cisco announced the opening of a new Internet of Everything (IoE) Innovation Center in Tokyo.

Fast IT

  • Cisco released the Cisco 2015 Annual Security Report that revealed a widening gap between perception and reality of cybersecurity readiness.
  • The Cisco® Connected Analytics for the IoE was unveiled to help customers access, analyze and act on data — from the cloud to the data center to the network’s edge.
  • Cisco and IBM announced the VersaStack solution that combines the innovation of the Cisco UCS® Integrated Infrastructure with the efficiency of the IBM Storwize storage system.
  • The fourth annual Cisco Global Cloud Index (2013-2018) projected that over the next five years data center traffic will nearly triple, with cloud representing 76 percent of total data center traffic.
  • Cisco Meraki® solutions will be used to offer Internet connectivity under Mexico Conectado, a program developed by the Mexican federal government that offers broadband connectivity to the population in public areas.
  • Cisco announced that four new cloud providers from across Latin America have joined the Intercloud partner ecosystem.
  • Cisco announced that beIN SPORTS selected the Cisco Videoscape™ TV platform to deliver advanced sports video experiences across more than 20 countries in the Middle East and North Africa.

Innovation

  • Cisco completed the acquisition of Neohapsis to help deliver comprehensive services to help customers build the security capabilities required to remain secure and competitive in today’s markets.
  • Cisco and Charter Communications entered a strategic agreement to supply key Cisco products in support of Charter’s next-generation video solution.
  • In December 2014, Cisco celebrated 30 years of innovation.
  • Cisco unveiled Project Squared, a business collaboration app that combines chat, audio, video, multi-party meetings and content sharing in a single experience that supports the demanding collaboration needs of modern teams.
  • Cisco introduced the TelePresence™ IX5000 series, a world-class quality video collaboration experience for 6-to-18 people.
  • Cisco was named one of the 50 most innovative companies by Boston Consulting Group and jumped to 14th from 46th last year.

Editor’s Notes:

  • Q2 fiscal year 2015 conference call to discuss Cisco’s results along with its business outlook will be held on Wednesday, February 11, 2015 at 1:30 p.m. Pacific Time. Conference call number is 1-888-848-6507 (United States) or 1-212-519-0847 (international).
  • Conference call replay will be available from 4:00 p.m. Pacific Time, February 11, 2015 to 4:00 p.m. Pacific Time, on February 18, 2015 at 1-866-410-5841 (United States) or 1-203-369-0643 (international). The replay will also be available via webcast from February 11, 2015 through April 17, 2015 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, February 11, 2015. 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 http://investor.cisco.com.

About Cisco
Cisco (NASDAQ: CSCO) is the worldwide leader in IT that helps companies seize the opportunities of tomorrow by proving that amazing things can happen when you connect the previously unconnected. For ongoing news, please go to http://thenetwork.cisco.com.

   
CONSOLIDATED STATEMENTS OF OPERATIONS  
(In millions, except per-share amounts)  
(Unaudited)  
   
    Three Months Ended     Six Months Ended  
    January 24,
 2015
    January 25,
 2014
    January 24,
 2015
    January 25,
 2014
 
REVENUE:                                
    Product   $ 9,078     $ 8,423     $ 18,513     $ 17,820  
    Service     2,858       2,732       5,668       5,420  
      Total revenue     11,936       11,155       24,181       23,240  
COST OF SALES:                                
    Product     3,806       4,323       7,725       8,070  
    Service     1,040       881       2,033       1,812  
      Total cost of sales     4,846       5,204       9,758       9,882  
GROSS MARGIN     7,090       5,951       14,423       13,358  
OPERATING EXPENSES:                                
    Research and development     1,529       1,412       3,112       3,136  
    Sales and marketing     2,308       2,277       4,823       4,688  
    General and administrative     490       451       994       966  
    Amortization of purchased intangible assets     72       71       143       136  
    Restructuring and other charges     69       73       387       310  
      Total operating expenses     4,468       4,284       9,459       9,236  
OPERATING INCOME     2,622       1,667       4,964       4,122  
    Interest income     189       169       368       338  
    Interest expense     (139 )     (136 )     (278 )     (276 )
    Other income (loss), net     201       55       179       111  
      Interest and other income (loss), net     251       88       269       173  
                                 
INCOME BEFORE PROVISION FOR INCOME TAXES     2,873       1,755       5,233       4,295  
Provision for income taxes     476       326       1,008       870  
    NET INCOME   $ 2,397     $ 1,429     $ 4,225     $ 3,425  
Net income per share:                                
  Basic   $ 0.47     $ 0.27     $ 0.83     $ 0.64  
  Diluted   $ 0.46     $ 0.27     $ 0.82     $ 0.64  
Shares used in per-share calculation:                                
  Basic     5,117       5,294       5,115       5,336  
  Diluted     5,160       5,327       5,159       5,383  
Cash dividends declared per common share   $ 0.19     $ 0.17     $ 0.38     $ 0.34  
                                 
                                 
   
RECONCILIATION OF GAAP TO NON-GAAP NET INCOME  
(In millions, except per-share amounts)  
   
    Three Months Ended     Six Months Ended  
    January 24,
 2015
    January 25,
 2014
    January 24,
 2015
    January 25,
 2014
 
GAAP net income   $ 2,397     $ 1,429     $ 4,225     $ 3,425  
  Adjustments to cost of sales:                                
    Share-based compensation expense     45       52       93       95  
    Amortization of acquisition-related intangible assets     233       182       414       349  
    Supplier component remediation charge           655             655  
    Patent portfolio charge                 188        
  Total adjustments to GAAP cost of sales     278       889       695       1,099  
  Adjustments to operating expenses:                                
    Share-based compensation expense     261       296       586       565  
    Amortization of acquisition-related intangible assets     72       71       143       136  
    Acquisition-related/divestiture costs     92       107       193       415  
    Significant asset impairments and restructurings     69       73       387       310  
  Total adjustments to GAAP operating expenses     494       547       1,309       1,426  
  Adjustments to other income (loss), net:                                
    Gain on VCE reorganization     (126 )           (126 )      
                                 
  Total adjustments to GAAP income before provision for income taxes     646       1,436       1,878       2,525  
                                 
  Income tax effect of non-GAAP adjustments     (164 )     (275 )     (422 )     (493 )
  Significant tax matters (1)     (134 )     (69 )     (134 )     (69 )
  Total adjustments to GAAP provision for income taxes     (298 )     (344 )     (556 )     (562 )
                                 
Non-GAAP net income   $ 2,745     $ 2,521     $ 5,547     $ 5,388  
                                 
Diluted net income per share:                                
GAAP   $ 0.46     $ 0.27     $ 0.82     $ 0.64  
Non-GAAP   $ 0.53     $ 0.47     $ 1.08     $ 1.00  
                                 
(1)   During the second quarter of fiscal 2015, Cisco recorded certain net tax benefits totaling $134 million related to prior year periods that were excluded from non-GAAP net income for the second quarter and first six months of fiscal 2015. These net tax benefits are comprised of the retroactive reinstatement of the U.S. federal R&D tax credit of $91 million related to fiscal 2014 and a net tax benefit of $43 million related to prior fiscal years.
     
     
   
RECONCILIATION OF GAAP TO NON-GAAP EFFECTIVE TAX RATE  
   
    Three Months Ended     Six Months Ended  
    January 24,
 2015
    January 25,
 2014
    January 24,
 2015
    January 25,
 2014
 
GAAP effective tax rate   16.6 %   18.6 %   19.3 %   20.3 %
Tax effect of non-GAAP adjustments to net income   5.4 %   2.4 %   2.7 %   0.7 %
Non-GAAP effective tax rate   22.0 %   21.0 %   22.0 %   21.0 %
                         
                         
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
 
    January 24,
 2015
  July 26,
 2014
ASSETS            
Current assets:            
  Cash and cash equivalents   $ 4,797   $ 6,726
  Investments     48,225     45,348
  Accounts receivable, net of allowance for doubtful accounts of $270 at January 24, 2015 and $265 at July 26, 2014     4,541     5,157
  Inventories     1,890     1,591
  Financing receivables, net     4,210     4,153
  Deferred tax assets     2,654     2,808
  Other current assets     1,565     1,331
    Total current assets     67,882     67,114
Property and equipment, net     3,212     3,252
Financing receivables, net     3,549     3,918
Goodwill     24,382     24,239
Purchased intangible assets, net     2,755     3,280
Other assets     3,142     3,331
TOTAL ASSETS   $ 104,922   $ 105,134
LIABILITIES AND EQUITY            
Current liabilities:            
  Short-term debt   $ 855   $ 508
  Accounts payable     988     1,032
  Income taxes payable         159
  Accrued compensation     2,694     3,181
  Deferred revenue     9,369     9,478
  Other current liabilities     6,128     5,451
    Total current liabilities     20,034     19,809
Long-term debt     19,667     20,401
Income taxes payable     1,433     1,851
Deferred revenue     4,652     4,664
Other long-term liabilities     1,403     1,748
Total liabilities     47,189     48,473
Total equity     57,733     56,661
TOTAL LIABILITIES AND EQUITY   $ 104,922   $ 105,134
             
             
   
CONSOLIDATED STATEMENTS OF CASH FLOWS  
(In millions)  
(Unaudited)  
   
    Six Months Ended  
    January 24,
 2015
    January 25,
 2014
 
Cash flows from operating activities:                
  Net income   $ 4,225     $ 3,425  
  Adjustments to reconcile net income to net cash provided by operating activities:                
    Depreciation, amortization, and other     1,224       1,203  
    Share-based compensation expense     677       656  
    Provision for receivables     62       56  
    Deferred income taxes     385       (26 )
    Excess tax benefits from share-based compensation     (83 )     (73 )
    (Gains) losses on investments and other, net     (182 )     (163 )
    Change in operating assets and liabilities, net of effects of acquisitions and divestitures:                
      Accounts receivable     501       1,134  
      Inventories     (340 )     (77 )
      Financing receivables     74       245  
      Other assets     (218 )     179  
      Accounts payable     (32 )     (161 )
      Income taxes, net     (528 )     (444 )
      Accrued compensation     (390 )     (804 )
      Deferred revenue     26       (205 )
      Other liabilities     (27 )     577  
        Net cash provided by operating activities     5,374       5,522  
                 
Cash flows from investing activities:                
  Purchases of investments     (20,061 )     (15,874 )
  Proceeds from sales of investments     9,948       9,081  
  Proceeds from maturities of investments     7,212       7,988  
  Acquisition of businesses, net of cash and cash equivalents acquired     (217 )     (2,784 )
  Purchases of investments in privately held companies     (91 )     (263 )
  Return of investments in privately held companies     227       81  
  Acquisition of property and equipment     (550 )     (577 )
  Proceeds from sales of property and equipment     5       164  
  Other     (109 )     (6 )
        Net cash used in investing activities     (3,636 )     (2,190 )
                 
Cash flows from financing activities:                
  Issuances of common stock     1,162       837  
  Repurchases of common stock – repurchase program     (2,196 )     (5,680 )
  Shares repurchased for tax withholdings on vesting of restricted stock units     (369 )     (309 )
  Short-term borrowings, original maturities less than 90 days, net     (4 )     998  
  Issuances of debt           4  
  Repayments of debt     (506 )     (22 )
  Excess tax benefits from share-based compensation     83       73  
  Dividends paid     (1,947 )     (1,810 )
  Other     110       (9 )
        Net cash used in financing activities     (3,667 )     (5,918 )
Net decrease in cash and cash equivalents     (1,929 )     (2,586 )
Cash and cash equivalents, beginning of period     6,726       7,925  
Cash and cash equivalents, end of period   $ 4,797     $ 5,339  
                 
Supplemental cash flow information:                
Cash paid for interest   $ 383     $ 340  
Cash paid for income taxes, net   $ 1,152     $ 1,340  
                 
                 
 
CASH AND CASH EQUIVALENTS AND INVESTMENTS
(In millions)
 
    January 24,
 2015
  July 26,
 2014
Cash and cash equivalents and investments:            
  Cash and cash equivalents   $ 4,797   $ 6,726
  Fixed income securities     46,377     43,396
  Publicly traded equity securities     1,848     1,952
    Total   $ 53,022   $ 52,074
                 
                 
   
RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES  
TO FREE CASH FLOW (NON-GAAP)  
(In millions)  
   
    Three Months Ended  
    January 24,
 2015
    October 25,
 2014
    January 25,
 2014
 
Net cash provided by operating activities   $ 2,883     $ 2,491     $ 2,873  
Acquisition of property and equipment     (265 )     (285 )     (262 )
Free cash flow   $ 2,618     $ 2,206     $ 2,611  
                         
                         
 
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 2015                                  
  January 24, 2015   $ 0.19   $ 974   44   $ 27.63   $ 1,208   $ 2,182
  October 25, 2014   $ 0.19   $ 973   41   $ 24.58   $ 1,013   $ 1,986
                                   
Fiscal 2014                                  
  July 26, 2014   $ 0.19   $ 974   61   $ 25.11   $ 1,514   $ 2,488
  April 26, 2014     0.19     974   90   $ 22.24     2,005     2,979
  January 25, 2014     0.17     896   185   $ 21.73     4,020     4,916
  October 26, 2013     0.17     914   84   $ 23.65     2,000     2,914
Total   $ 0.72   $ 3,758   420   $ 22.71   $ 9,539   $ 13,297
                                   
                                   
 
ACCOUNTS RECEIVABLE AND DSO
(In millions, except DSO)
 
    January 24,
 2015
  October 25,
 2014
  January 25,
 2014
Accounts receivable, net   $ 4,541   $ 4,375   $ 4,378
Days sales outstanding in accounts receivable (DSO)     35     33     36
                   
                   
 
INVENTORIES
(In millions)
 
    January 24,
 2015
  October 25,
 2014
  January 25,
 2014
Inventories:                  
  Raw materials   $ 265   $ 173   $ 81
  Work in process     2     3     6
  Finished goods:                  
    Distributor inventory and deferred cost of sales     733     654     598
    Manufactured finished goods     577     535     579
      Total finished goods     1,310     1,189     1,177
  Service-related spares     274     275     244
  Demonstration systems     39     36     40
      Total   $ 1,890   $ 1,676   $ 1,548
                         
   
   
INVENTORY TURNS AND RECONCILIATION OF GAAP TO NON-GAAP  
COST OF SALES USED IN INVENTORY TURNS  
(In millions, except annualized inventory turns)  
   
    Three Months Ended  
    January 24,
 2015
    October 25,
 2014
    January 25,
 2014
 
Annualized inventory turns – GAAP     10.9       12.0       13.8  
  Cost of sales adjustments     (0.7 )     (1.0 )     (2.3 )
Annualized inventory turns – non-GAAP     10.2       11.0       11.5  
                         
GAAP cost of sales   $ 4,846     $ 4,912     $ 5,204  
  Cost of sales adjustments:                        
      Share-based compensation expense     (45 )     (48 )     (52 )
      Amortization of acquisition-related intangible assets     (233 )     (181 )     (182 )
      Supplier component remediation charge                 (655 )
      Patent portfolio charge           (188 )      
Non-GAAP cost of sales   $ 4,568     $ 4,495     $ 4,315  
                         
                         
 
DEFERRED REVENUE
(In millions)
 
    January 24,
 2015
  October 25,
 2014
  January 25,
 2014
Deferred revenue:                  
  Service   $ 9,020   $ 9,029   $ 8,843
  Product:                  
    Unrecognized revenue on product shipments and other deferred revenue     4,276     4,056     3,549
    Cash receipts related to unrecognized revenue from two-tier distributors     725     659     852
    Total product deferred revenue     5,001     4,715     4,401
      Total   $ 14,021   $ 13,744   $ 13,244
Reported as:                  
  Current   $ 9,369   $ 9,449   $ 9,350
  Noncurrent     4,652     4,295     3,894
      Total   $ 14,021   $ 13,744   $ 13,244
                         
                         
   
SUMMARY OF SHARE-BASED COMPENSATION EXPENSE  
(In millions)  
   
    Three Months Ended     Six Months Ended  
    January 24,
 2015
  January 25,
 2014
    January 24,
 2015
    January 25,
 2014
 
Cost of sales – product   $ 11   $ 12     $ 22     $ 22  
Cost of sales – service     34     40       71       73  
  Share-based compensation expense in cost of sales     45     52       93       95  
Research and development     105     108       224       200  
Sales and marketing     114     141       261       264  
General and administrative     42     47       101       101  
Restructuring and other charges     2     (1 )     (2 )     (4 )
  Share-based compensation expense in operating expenses     263     295       584       561  
  Total share-based compensation expense   $ 308   $ 347     $ 677     $ 656  
Income tax benefit for share-based compensation   $ 85   $ 82     $ 179     $ 160