S&P Assigns 'AA-' Rating to Cisco Systems (CSCO) Proposed Senior Unsecured Notes

September 13, 2016 11:29 AM EDT

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S&P Global Ratings assigned its 'AA-' issue-level rating to Cisco Systems Inc.'s (Nasdaq: CSCO) proposed senior unsecured notes. We expect the company to use the net proceeds of this offering for general corporate purposes, which may include share repurchases and repayment of debt.

The 'AA-' corporate credit rating on Cisco is unchanged, and the outlook remains stable. The rating incorporates our view of the company's strong market position in its core networking products, growing software and services businesses, significant scale and product diversification, and strong operating efficiency. In our view, these strengths mitigate the challenges to Cisco's overall business outlook. We expect Cisco's growth prospects to remain somewhat muted over the next 12 months as the traditional network equipment industry matures and the company continues to migrate private data centers to the Cloud. Growth in Cisco's core switching and routing product categories is slowing, and the company faces the long-term threat of software-defined networking technology replacing existing networking products. We expect that Cisco's growth prospects will increasingly come from the data center, collaboration, wireless, and security business segments. In the fiscal year ended July 30, 2016, Cisco's EBITDA was about $16.6 billion. We consider the company's profitability to be above average, with an EBITDA margin of about 33.8% during the period.

Our view of Cisco's financial risk profile reflects the company's conservative financial policies, with $28.6 billion of funded debt and $65.8 billion of cash and investments as of July 30, 2016; and its strong free operating cash flow, which was about $12.4 billion in fiscal 2016. Cisco's significant cash balance and robust free operating cash flow generation give it the flexibility to engage in large acquisitions or pursue shareholder-friendly initiatives without detracting from its overall credit quality. As of July 30, 2016, Cisco's remaining share repurchase authorization was about $15.4 billion.



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