Cisco Reports Fourth Quarter and Fiscal Year 2018 Earnings

 

  •   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.

About Cisco

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