Cisco Reports Fourth Quarter And Fiscal Year 2020 Earnings

August 12, 2020 4:05 PM
  • Q4 Results:
    • Revenue: $12.2 billion
      • Decrease of (9)% year over year
    • Earnings per Share: GAAP: $0.62; Non-GAAP: $0.80
      • GAAP EPS increased 22% year over year
      • Non-GAAP EPS decreased (4)% year over year
  • FY 2020 Results:
    • Revenue: $49.3 billion
      • Decrease of (5)% year over year
      • 51% of revenue from software and services
    • Earnings per Share: GAAP: $2.64; Non-GAAP: $3.21
      • GAAP EPS increased 1% year over year
      • Non-GAAP EPS increased 4% year over year
  • Q1 Guidance:
    • Revenue: (9)% to (11)% decline year over year
    • Earnings per Share: GAAP: $0.41 to $0.47; Non-GAAP: $0.69 to $0.71

SAN JOSE, Calif., Aug. 12, 2020 /PRNewswire/ -- Cisco today reported fourth quarter and fiscal year results for the period ended July 25, 2020. Cisco reported fourth quarter revenue of $12.2 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.6 billion or $0.62 per share, and non-GAAP net income of $3.4 billion or $0.80 per share.

As previously disclosed, Cisco completed the divestiture of the Service Provider Video Software Solutions (SPVSS) business in the second quarter of fiscal 2019 on October 28, 2018. Revenue and non-GAAP financial information have been normalized to exclude the SPVSS business from prior periods for comparative purposes.

"By the end of fiscal 2020, we achieved our goal of more than half of our revenue coming from software and services, and this strategy continues to resonate with customers as they digitize their organizations. Throughout fiscal 2020, Cisco has demonstrated operational resilience based on our strong customer relationships, solid financial foundation, and differentiated innovation," said Chuck Robbins, chairman and CEO of Cisco. "As we focus on the future, we are rebalancing our R&D investments to focus on new areas so we can continue to offer customers the best, most relevant technology in simpler, more easily consumable ways."

Q4 GAAP Results

Q4 FY 2020

Q4 FY 2019

Vs. Q4 FY 2019

Revenue

$

12.2

billion

$

13.4

billion

(9)%

Net Income

$

2.6

billion

$

2.2

billion

19%

Diluted Earnings per Share (EPS)

$

0.62

$

0.51

22%

Q4 GAAP results for fiscal 2019 include a $0.9 billion charge related to the Tax Cuts and Jobs Act.

Q4 Non-GAAP Results

Q4 FY 2020

Q4 FY 2019

Vs. Q4 FY 2019

Net Income

$

3.4

billion

$

3.6

billion

(5)%

EPS

$

0.80

$

0.83

(4)%

Fiscal Year GAAP Results

FY 2020

FY 2019

Vs. FY 2019

Revenue (including SPVSS business for all periods)

$

49.3

billion

$

51.9

billion

(5)%

Revenue (excluding SPVSS business for all periods)

$

49.3

billion

$

51.7

billion

(5)%

Net Income

$

11.2

billion

$

11.6

billion

(4)%

EPS

$

2.64

$

2.61

1%

GAAP results for fiscal 2019 include charges related to the Tax Cuts and Jobs Act of $0.9 billion.

Fiscal Year Non-GAAP Results

FY 2020

FY 2019

Vs. FY 2019

Net Income (excluding SPVSS business for all periods)

$

13.7

billion

$

13.8

billion

(1)%

EPS (excluding SPVSS business for all periods)

$

3.21

$

3.10

4%

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."

"We executed well in Q4, delivering strong margins despite the very challenging environment," said Kelly Kramer, CFO of Cisco. "Software subscriptions now make up 78% of our software revenue and remaining performance obligations continued to grow strongly in the quarter, reflecting the strength of our portfolio of software and services. We are seeing the returns on our investments in innovation as we focus on delivering long term growth and shareholder value."

Financial Summary

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

All revenue, non-GAAP, and geographic financial information in the "FY 2020 Highlights" sections are presented excluding the SPVSS business for all prior periods as it was divested during the second quarter of fiscal 2019, on October 28, 2018.

Q4 FY 2020 Highlights

Revenue -- Total revenue was $12.2 billion, down 9%, with product revenue down 13% and service revenue was flat. Revenue by geographic segment was: Americas down 12%, EMEA down 6%, and APJC down 7%. Product revenue was led by growth in Security, up 10%. Infrastructure Platforms was down 16% and Applications was down 9%.

Gross Margin -- On a GAAP basis, total gross margin, product gross margin, and service gross margin were 63.2%, 61.2%, and 68.7%, respectively, as compared with 63.9%, 62.9%, and 66.8%, respectively, in the fourth quarter of 2019.

On a non-GAAP basis, total gross margin, product gross margin, and service gross margin were 65.0%, 63.2%, and 69.8%, respectively, as compared with 65.5%, 64.7%, and 67.9%, respectively, in the fourth quarter of 2019.

Total gross margins by geographic segment were: 65.6% for the Americas, 64.9% for EMEA and 63.2% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.4 billion, down 9%, and were 36.5% of revenue. Non-GAAP operating expenses were $3.9 billion, down 12%, and were 32.0% of revenue.

Operating Income -- GAAP operating income was $3.2 billion, down 12%, with GAAP operating margin of 26.7%. Non-GAAP operating income was $4.0 billion, down 8%, with non-GAAP operating margin at 33.0%.

Provision for Income Taxes -- The GAAP tax provision rate was 20.3%. The non-GAAP tax provision rate was 16.7%.

Net Income and EPS -- On a GAAP basis, net income was $2.6 billion, an increase of 19%, and EPS was $0.62, an increase of 22%. On a non-GAAP basis, net income was $3.4 billion, a decrease of 5%, and EPS was $0.80, a decrease of 4%.

Cash Flow from Operating Activities -- $3.8 billion for the fourth quarter of fiscal 2020, a decrease of 4% compared with $3.9 billion for the fourth quarter of fiscal 2019.

FY 2020 Highlights

Revenue -- Total revenue was $49.3 billion, a decrease of 5%.

Net Income and EPS -- On a GAAP basis, net income was $11.2 billion, a decrease of 4%, and EPS was $2.64, an increase of 1%. On a non-GAAP basis, net income was $13.7 billion, a decrease of 1% compared to fiscal 2019, and EPS was $3.21, an increase of 4%.

Cash Flow from Operating Activities -- $15.4 billion for fiscal 2020 compared with $15.8 billion for fiscal 2019, a decrease of 3%. Operating cash flow for fiscal 2019 includes the receipt of $0.4 billion related to a litigation settlement with Arista Networks. Operating cash flow was flat normalized for this item.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- $29.4 billion at the end of the fourth quarter of fiscal 2020, compared with $28.6 billion at the end of the third quarter of fiscal 2020, and compared with $33.4 billion at the end of fiscal 2019.

Deferred Revenue -- $20.4 billion, up 11% in total, with deferred product revenue up 17%. Deferred service revenue was up 7%.

Remaining Performance Obligations -- $28.4 billion at the end of fiscal 2020, up 12%.

Capital Allocation -- In the fourth quarter of fiscal 2020, we declared and paid a cash dividend of $0.36 per common share, or $1.5 billion.

Acquisitions

In the first quarter of fiscal 2021, we closed the acquisition of privately held ThousandEyes, Inc. ThousandEyes' Internet and Cloud intelligence platform delivers deep visibility and insights into the digital delivery of applications and services over the Internet.

Guidance for Q1 FY 2021

Cisco expects to achieve the following results for the first quarter of fiscal 2021:

Q1 FY 2021

Revenue

(9)% - (11)% decline Y/Y

Non-GAAP gross margin rate

64% - 65%

Non-GAAP operating margin rate

30% - 31%

Non-GAAP tax provision rate

19%

Non-GAAP EPS

$0.69 - $0.71

Cisco estimates that GAAP EPS will be $0.41 to $0.47 in the first quarter of fiscal 2021.

A reconciliation between the Guidance for Q1 FY 2021 on a GAAP and non-GAAP basis is provided in the table entitled "GAAP to non-GAAP Guidance for Q1 FY 2021" located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

Editor's Notes:

  • Q4 fiscal year 2020 conference call to discuss Cisco's results along with guidance will be held on Wednesday, August 12, 2020 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 12, 2020 to 4:00 p.m. Pacific Time, August 19, 2020 at 1-866-429-0574 (United States) or 1-203-369-0916 (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 12, 2020. 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 25,

2020

July 27,

2019

July 25,

2020

July 27,

2019

REVENUE:

Product

$

8,832

$

10,120

$

35,978

$

39,005

Service

3,322

3,308

13,323

12,899

Total revenue

12,154

13,428

49,301

51,904

COST OF SALES:

Product

3,429

3,757

13,199

14,863

Service

1,041

1,097

4,419

4,375

Total cost of sales

4,470

4,854

17,618

19,238

GROSS MARGIN

7,684

8,574

31,683

32,666

OPERATING EXPENSES:

Research and development

1,565

1,753

6,347

6,577

Sales and marketing

2,218

2,487

9,169

9,571

General and administrative

494

566

1,925

1,827

Amortization of purchased intangible assets

33

38

141

150

Restructuring and other charges

127

40

481

322

Total operating expenses

4,437

4,884

18,063

18,447

OPERATING INCOME

3,247

3,690

13,620

14,219

Interest income

187

305

920

1,308

Interest expense

(119)

(204)

(585)

(859)

Other income (loss), net

(9)

(87)

15

(97)

Interest and other income (loss), net

59

14

350

352

INCOME BEFORE PROVISION FOR INCOME TAXES

3,306

3,704

13,970

14,571

Provision for income taxes (1)

670

1,498

2,756

2,950

NET INCOME

$

2,636

$

2,206

$

11,214

$

11,621

Net income per share:

Basic

$

0.62

$

0.52

$

2.65

$

2.63

Diluted

$

0.62

$

0.51

$

2.64

$

2.61

Shares used in per-share calculation:

Basic

4,227

4,269

4,236

4,419

Diluted

4,244

4,307

4,254

4,453

The Consolidated Statements of Operations include the results of the SPVSS business prior to its divestiture during the second quarter of fiscal 2019 on October 28, 2018. Accordingly, the fiscal year ended July 27, 2019 includes three months of financial results for this business.

(1) The provision for income taxes included a $0.9 billion charge for the three months and fiscal year ended July 27, 2019 related to the Tax Cuts and Jobs Act.

CISCO SYSTEMS, INC.

REVENUE BY SEGMENT

(In millions, except percentages)

July 25, 2020

Three Months Ended

Fiscal Year Ended

Excluding

SPVSS

business

Including

SPVSS

business

Amount

Y/Y%

Amount

Y/Y%

Y/Y%

Revenue:

Americas

$

7,185

(12)%

$

29,291

(5)%

(5)%

EMEA

3,106

(6)%

12,659

(3)%

(3)%

APJC

1,863

(7)%

7,352

(6)%

(7)%

Total

$

12,154

(9)%

$

49,301

(5)%

(5)%

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

During the second quarter of fiscal 2019 on October 28, 2018, we completed the divestiture of the SPVSS business. SPVSS business revenue for the fiscal year ended July 27, 2019 was $168 million.

CISCO SYSTEMS, INC.

GROSS MARGIN PERCENTAGE BY SEGMENT

(In percentages)

July 25, 2020

Three Months Ended

Fiscal Year Ended

Gross Margin Percentage:

Americas

65.6%

66.7%

EMEA

64.9%

65.6%

APJC

63.2%

63.8%

CISCO SYSTEMS, INC.

REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES

(In millions, except percentages)

July 25, 2020

Three Months Ended

Fiscal Year Ended

ExcludingSPVSSbusiness

IncludingSPVSSbusiness

Amount

Y/Y %

Amount

Y/Y%

Y/Y %

Revenue:

Infrastructure Platforms

$

6,626

(16)%

$

27,122

(10)%

(10)%

Applications

1,357

(9)%

5,568

(4)%

(4)%

Security

814

10%

3,154

12%

12%

Other Products

35

(17)%

135

—%

(52)%

Total Product

8,832

(13)%

35,978

(7)%

(8)%

Services

3,322

—%

13,323

3%

3%

Total

$

12,154

(9)%

$

49,301

(5)%

(5)%

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

During the second quarter of fiscal 2019 on October 28, 2018, we completed the divestiture of the SPVSS business. SPVSS business revenue for the fiscal year ended July 27, 2019 was $168 million.

CISCO SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

July 25,

2020

July 27,

2019

ASSETS

Current assets:

Cash and cash equivalents

$

11,809

$

11,750

Investments

17,610

21,663

Accounts receivable, net of allowance for doubtful accounts of $143 at July 25, 2020 and $136 at July 27, 2019

5,472

5,491

Inventories

1,282

1,383

Financing receivables, net

5,051

5,095

Other current assets

2,349

2,373

Total current assets

43,573

47,755

Property and equipment, net

2,453

2,789

Financing receivables, net

5,714

4,958

Goodwill

33,806

33,529

Purchased intangible assets, net

1,576

2,201

Deferred tax assets

3,990

4,065

Other assets

3,741

2,496

TOTAL ASSETS

$

94,853

$

97,793

LIABILITIES AND EQUITY

Current liabilities:

Short-term debt

$

3,005

$

10,191

Accounts payable

2,218

2,059

Income taxes payable

839

1,149

Accrued compensation

3,122

3,221

Deferred revenue

11,406

10,668

Other current liabilities

4,741

4,424

Total current liabilities

25,331

31,712

Long-term debt

11,578

14,475

Income taxes payable

8,837

8,927

Deferred revenue

9,040

7,799

Other long-term liabilities

2,147

1,309

Total liabilities

56,933

64,222

Total equity

37,920

33,571

TOTAL LIABILITIES AND EQUITY

$

94,853

$

97,793

CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

Fiscal Year Ended

July 25,

2020

July 27,

2019

Cash flows from operating activities:

Net income

$

11,214

$

11,621

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation, amortization, and other

1,808

1,897

Share-based compensation expense

1,569

1,570

Provision for receivables

93

40

Deferred income taxes

(38)

(350)

(Gains) losses on divestitures, investments and other, net

(138)

(24)

Change in operating assets and liabilities, net of effects of acquisitions and divestitures:

Accounts receivable

(107)

(84)

Inventories

84

131

Financing receivables

(797)

(249)

Other assets

96

(955)

Accounts payable

141

87

Income taxes, net

(322)

312

Accrued compensation

(78)

277

Deferred revenue

2,011

1,407

Other liabilities

(110)

151

Net cash provided by operating activities

15,426

15,831

Cash flows from investing activities:

Purchases of investments

(9,212)

(2,416)

Proceeds from sales of investments

5,631

7,388

Proceeds from maturities of investments

7,975

12,928

Acquisitions and divestitures

(327)

(2,175)

Purchases of investments in privately held companies

(190)

(148)

Return of investments in privately held companies

224

159

Acquisition of property and equipment

(770)

(909)

Proceeds from sales of property and equipment

179

22

Other

(10)

(12)

Net cash provided by investing activities

3,500

14,837

Cash flows from financing activities:

Issuances of common stock

655

640

Repurchases of common stock - repurchase program

(2,659)

(20,717)

Shares repurchased for tax withholdings on vesting of restricted stock units

(727)

(862)

Short-term borrowings, original maturities of 90 days or less, net

(3,470)

3,446

Issuances of debt

2,250

Repayments of debt

(6,720)

(6,780)

Dividends paid

(6,016)

(5,979)

Other

51

113

Net cash used in financing activities

(18,886)

(27,889)

Net increase in cash, cash equivalents, and restricted cash

40

2,779

Cash, cash equivalents, and restricted cash, beginning of fiscal year

11,772

8,993

Cash, cash equivalents, and restricted cash, end of fiscal year

$

11,812

$

11,772

Supplemental cash flow information:

Cash paid for interest

$

603

$

892

Cash paid for income taxes, net

$

3,116

$

2,986

CISCO SYSTEMS, INC.

DEFERRED REVENUE

(In millions)

July 25,

2020

April 25,

2020

July 27,

2019

Deferred revenue:

Service

$

12,551

$

11,423

$

11,709

Product

7,895

7,225

6,758

Total

$

20,446

$

18,648

$

18,467

Reported as:

Current

$

11,406

$

10,710

$

10,668

Noncurrent

9,040

7,938

7,799

Total

$

20,446

$

18,648

$

18,467

CISCO SYSTEMS, INC.

REMAINING PERFORMANCE OBLIGATIONS

(In millions, except percentages)

July 25, 2020

April 25, 2020

July 27, 2019

Amount

Y/Y %

Amount

Y/Y %

Amount

Y/Y %

Product

$

11,261

17

%

$

10,386

25

%

$

9,603

N/A

Service

17,093

9

%

15,142

3

%

15,702

N/A

Total

$

28,354

12

%

$

25,528

11

%

$

25,305

N/A

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 2020

July 25, 2020

$

0.36

$

1,525

$

$

$

1,525

April 25, 2020

$

0.36

$

1,519

25

$

39.71

$

981

$

2,500

January 25, 2020

$

0.35

$

1,486

18

$

46.71

$

870

$

2,356

October 26, 2019

$

0.35

$

1,486

16

$

48.91

$

768

$

2,254

Fiscal 2019

July 27, 2019

$

0.35

$

1,490

82

$

54.99

$

4,515

$

6,005

April 27, 2019

$

0.35

$

1,519

116

$

52.14

$

6,020

$

7,539

January 26, 2019

$

0.33

$

1,470

111

$

45.09

$

5,016

$

6,486

October 27, 2018

$

0.33

$

1,500

109

$

46.01

$

5,026

$

6,526

The remaining authorized amount for stock repurchases under the program is $10.8 billion with no termination date.

CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

GAAP TO NON-GAAP NET INCOME

(In millions)

Three Months Ended

Fiscal Year Ended

July 25,

2020

July 27,

2019

July 25,

2020

July 27,

2019

GAAP net income

$

2,636

$

2,206

$

11,214

$

11,621

Adjustments to cost of sales:

Share-based compensation expense

61

57

237

220

Amortization of acquisition-related intangible assets

157

144

611

562

Supplier component remediation charge (adjustment), net

17

16

Acquisition-related/divestiture costs

1

3

10

Legal and indemnification settlements

4

5

Total adjustments to GAAP cost of sales

218

219

855

813

Adjustments to operating expenses:

Share-based compensation expense

332

335

1,307

1,309

Amortization of acquisition-related intangible assets

33

38

141

150

Acquisition-related/divestiture costs

55

61

246

299

Legal and indemnification settlements

(396)

Significant asset impairments and restructurings

127

40

481

322

Total adjustments to GAAP operating expenses

547

474

2,175

1,684

Adjustments to GAAP interest and other income (loss), net:

(Gains) and losses on equity investments

2

20

(97)

(57)

Total adjustments to GAAP income before provision for income taxes

767

713

2,933

2,440

Income tax effect of non-GAAP adjustments

(175)

(168)

(722)

(722)

Significant tax matters (1)

166

835

233

448

Total adjustments to GAAP provision for income taxes

(9)

667

(489)

(274)

Non-GAAP net income

$

3,394

$

3,586

$

13,658

$

13,787

(1) The three months and fiscal year ended July 27, 2019 includes a $0.9 billion charge related to the Tax Cuts and Jobs Act.

CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

GAAP TO NON-GAAP EPS

Three Months Ended

Fiscal Year Ended

July 25,

2020

July 27,

2019

July 25,

2020

July 27,

2019

GAAP EPS

$

0.62

$

0.51

$

2.64

$

2.61

Adjustments to GAAP:

Share-based compensation expense

0.09

0.09

0.36

0.34

Amortization of acquisition-related intangible assets

0.04

0.04

0.18

0.16

Acquisition-related/divestiture costs

0.01

0.01

0.06

0.07

Legal and indemnification settlements

(0.09)

Significant asset impairments and restructurings

0.03

0.01

0.11

0.07

(Gains) and losses on equity investments

(0.02)

(0.01)

Income tax effect of non-GAAP adjustments

(0.04)

(0.04)

(0.17)

(0.16)

Significant tax matters

0.04

0.19

0.05

0.10

Non-GAAP EPS

$

0.80

$

0.83

$

3.21

$

3.10

Amounts may not sum due to rounding.

CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

GROSS MARGINS, OPERATING EXPENSES, OPERATING MARGINS, INTEREST AND OTHER INCOME (LOSS), NET, AND NET INCOME

(In millions, except percentages)

Three Months Ended

July 25, 2020

Product

Gross

Margin

Service

Gross

Margin

Total

Gross

Margin

Operating

Expenses

Y/Y

Operating

Income

Y/Y

Interest

and

other

income

(loss),

net

Net

Income

Y/Y

GAAP amount

$

5,403

$

2,281

$

7,684

$

4,437

(9)%

$

3,247

(12)%

$

59

$

2,636

19%

% of revenue

61.2

%

68.7

%

63.2

%

36.5

%

26.7

%

0.5

%

21.7

%

Adjustments to GAAP amounts:

Share-based compensation expense

24

37

61

332

393

393

Amortization of acquisition-related intangible assets

157

157

33

190

190

Acquisition/divestiture-related costs

55

55

55

Significant asset impairments and restructurings

127

127

127

(Gains) and losses on equity investments

2

2

Income tax effect/significant tax matters

(9)

Non-GAAP amount

$

5,584

$

2,318

$

7,902

$

3,890

(12)%

$

4,012

(8)%

$

61

$

3,394

(5)%

% of revenue

63.2

%

69.8

%

65.0

%

32.0

%

33.0

%

0.5

%

27.9

%

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

Three Months Ended

July 27, 2019

Product

Gross

Margin

Service

Gross

Margin

Total

Gross

Margin

Operating

Expenses

Operating

Income

Interest

and

other

income

(loss),

net

Net

Income

GAAP amount

$

6,363

$

2,211

$

8,574

$

4,884

$

3,690

$

14

$

2,206

% of revenue

62.9

%

66.8

%

63.9

%

36.4

%

27.5

%

0.1

%

16.4

%

Adjustments to GAAP amounts:

Share-based compensation expense

23

34

57

335

392

392

Amortization of acquisition-related intangible assets

144

144

38

182

182

Supplier component remediation charge (adjustment), net

17

17

17

17

Acquisition/divestiture-related costs

1

1

61

62

62

Significant asset impairments and restructurings

40

40

40

(Gains) and losses on equity investments

20

20

Income tax effect/significant tax matters (1)

667

Non-GAAP amount

$

6,547

$

2,246

$

8,793

$

4,410

$

4,383

$

34

$

3,586

% of revenue

64.7

%

67.9

%

65.5

%

32.8

%

32.6

%

0.3

%

26.7

%

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

(1) Includes a $0.9 billion charge related to the Tax Cuts and Jobs Act.

CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

GROSS MARGINS, OPERATING EXPENSES, OPERATING MARGINS, INTEREST AND OTHER INCOME (LOSS), NET, AND NET INCOME

(In millions, except percentages)

Fiscal Year Ended

July 25, 2020

Product

Gross

Margin

Service

Gross

Margin

Total

Gross

Margin

Operating

Expenses

Y/Y

Operating

Income

Y/Y

Interest

and

other

income

(loss),

net

Net

Income

Y/Y

GAAP amount

$

22,779

$

8,904

$

31,683

$

18,063

(2)%

$

13,620

(4)%

$

350

$

11,214

(4)%

% of revenue

63.3

%

66.8

%

64.3

%

36.6

%

27.6

%

0.7

%

22.7

%

Adjustments to GAAP amounts:

Share-based compensation expense

93

144

237

1,307

1,544

1,544

Amortization of acquisition-related intangible assets

611

611

141

752

752

Legal and indemnification settlements

4

4

4

4

Acquisition/divestiture-related costs

3

3

246

249

249

Significant asset impairments and restructurings

481

481

481

(Gains) and losses on equity investments

(97)

(97)

Income tax effect/significant tax matters

(489)

Non-GAAP amount

$

23,487

$

9,051

$

32,538

$

15,888

(5)%

$

16,650

—%

$

253

$

13,658

(1)%

% of revenue

65.3

%

67.9

%

66.0

%

32.2

%

33.8

%

0.5

%

27.7

%

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

During the second quarter of fiscal 2019 on October 28, 2018, we completed the divestiture of the SPVSS business. Accordingly, the non-GAAP growth rates are normalized to exclude the SPVSS business for fiscal 2019.

Fiscal Year Ended

July 27, 2019

Product

Gross

Margin

Service

Gross

Margin

Total

Gross

Margin

Operating

Expenses

Operating

Income

Interest

and

other

income

(loss),

net

Net

Income

GAAP amount

$

24,142

$

8,524

$

32,666

$

18,447

$

14,219

$

352

$

11,621

% of revenue

61.9

%

66.1

%

62.9

%

35.5

%

27.4

%

0.7

%

22.4

%

Adjustments to GAAP amounts:

Share-based compensation expense

90

130

220

1,309

1,529

1,529

Amortization of acquisition-related intangible assets

562

562

150

712

712

Supplier component remediation charge (adjustment), net

16

16

16

16

Legal and indemnification settlements

5

5

(396)

(391)

(391)

Acquisition/divestiture-related costs

4

6

10

299

309

309

Significant asset impairments and restructurings

322

322

322

(Gains) and losses on equity investments

(57)

(57)

Income tax effect/significant tax matters (1)

(274)

Non-GAAP amount

$

24,819

$

8,660

$

33,479

$

16,763

$

16,716

$

295

$

13,787

Less: SPVSS business (2)

(51)

(9)

(61)

(60)

Non-GAAP amount (excluding SPVSS business)

$

24,768

$

8,651

$

33,418

$

16,703

$

16,716

$

295

$

13,787

% of revenue

63.7

%

67.2

%

64.6

%

32.3

%

32.3

%

0.6

%

26.6

%

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

(1) Includes a $0.9 billion charge related to the Tax Cuts and Jobs Act.

(2) Reflects three months of operations for the SPVSS business.

CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

EFFECTIVE TAX RATE

(In percentages)

Three Months Ended

Fiscal Year Ended

July 25,

2020

July 27,

2019

July 25,

2020

July 27,

2019

GAAP effective tax rate (1)

20.3

%

40.4

%

19.7

%

20.2

%

Total adjustments to GAAP provision for income taxes

(3.6)

%

(21.6)

%

(0.5)

%

(1.2)

%

Non-GAAP effective tax rate

16.7

%

18.8

%

19.2

%

19.0

%

(1) The three months and fiscal year ended July 27, 2019 includes a $0.9 billion charge related to the Tax Cuts and Jobs Act.

GAAP TO NON-GAAP GUIDANCE FOR Q1 FY 2021

Q1 FY 2021

Gross Margin

Rate

Operating Margin

Rate

Tax Provision

Rate

Earnings per

Share (2)

GAAP

62% - 63%

18% - 19%

19%

$0.41 - $0.47

Estimated adjustments for:

Share-based compensation expense

0.5%

3.5%

$0.07 - $0.08

Amortization of acquisition-related intangible assets and acquisition/divestiture-related costs

1.5%

2.0%

$0.04 - $0.05

Significant asset impairments and restructurings (1)

6.5%

$0.13 - $0.15

Income tax effect of non-GAAP adjustments

Non-GAAP

64% - 65%

30% - 31%

19%

$0.69 - $0.71

(1) In the first quarter of fiscal 2021, we initiated a restructuring plan, which includes a voluntary early retirement program, in order to realign the organization and enable further investment in key priority areas with estimated pretax charges of approximately $900 million consisting of severance and other one-time termination benefits, and other costs. We expect to recognize approximately $800 million of these charges in the first quarter of fiscal 2021 with the remaining amount to be recognized during the rest of the fiscal year.

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

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 continued execution of our strategy to shift to revenue coming from software and services, the strength of our portfolio of software and services to continue to resonate with customers as they digitize their organizations, our ability to successfully rebalance our R&D investments to focus on new areas so that we can continue to offer customer relevant technology in simpler, consumable ways, our continued ability to deliver long term growth and shareholder value, and future responses to and effects of the COVID-19 pandemic) and the future financial performance of Cisco (including the guidance for Q1 FY 2021) 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: the impact of the COVID-19 pandemic; 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; cyber-attacks, data breaches or malware; vulnerabilities and critical security defects; terrorism; natural catastrophic events; any other 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 18, 2020 and September 5, 2019, 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 25, 2020 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, non-GAAP interest and other income (loss), net, 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, gains and losses on equity 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.

Cisco divested its Service Provider Video Software Solutions business (SPVSS) during the second quarter of fiscal 2019 on October 28, 2018. This release includes, where indicated, financial measures that exclude the SPVSS business. Cisco believes that the presentation of these 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 because the SPVSS business will not be part of Cisco on a go forward basis. Cisco's management also uses the financial measures excluding the SPVSS business in reviewing the financial results of Cisco.

About Cisco

Cisco (Nasdaq: CSCO) is the worldwide leader in technology that powers the Internet. Cisco inspires new possibilities by reimagining your applications, securing your data, transforming your infrastructure, and empowering your teams for a global and inclusive future. Discover more at newsroom.cisco.com and follow us on Twitter at @Cisco.

Copyright © 2020 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.

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