Cisco Systems, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2023, ended April 29, 2023; comparisons are with the quarter ended April 30, 2022. The filing also reports results for the first nine months of fiscal 2023. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Cisco designs and sells networking and related technologies, including security, collaboration, applications and cloud offerings, as well as associated services. It reports geographically across the Americas, EMEA, and APJC. Management cited continued improvement in component supply constraints, which enabled more product deliveries, while noting that customers were absorbing prior shipments and placing fewer new orders amid shorter lead times and macroeconomic uncertainty.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | First 9 months FY2023 | First 9 months FY2022 |
|---|---|---|---|---|
| Revenue | $14.571 billion | $12.835 billion | $41.795 billion | $38.455 billion |
| Gross margin / margin rate | $9.232 billion / 63.4% | $8.121 billion / 63.3% | $26.005 billion / 62.2% | $24.223 billion / 63.0% |
| Operating income / margin | $3.946 billion / 27.1% | $3.610 billion / 28.1% | $10.778 billion / 25.8% | $10.535 billion / 27.4% |
| Net income / net margin | $3.212 billion / 22.0% | $3.044 billion / 23.7% | $8.655 billion / 20.7% | $8.997 billion / 23.4% |
| Diluted EPS | $0.78 | $0.73 | $2.11 | $2.14 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $13.920 billion | $9.549 billion |
| Free cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $13.304 billion | $9.211 billion |
- Quarterly revenue rose 14%: product revenue grew 17% to $11.092 billion and service revenue grew 3% to $3.479 billion. Total software revenue was $4.3 billion, up 18%; subscription revenue increased 17%.
- Quarterly Secure, Agile Networks revenue rose 29%; Collaboration fell 13%. All geographic segments grew, led by EMEA at 16% and the Americas at 13%.
- Quarterly gross margin rate edged up 0.1 percentage point, with product margin up 0.9 point on pricing and mix, partly offset by costs; service margin fell 1.9 points.
- For the first nine months, revenue rose 9%, but net income declined 4% and diluted EPS declined 1%. Gross margin rate declined 0.8 point. Management attributed pressure principally to higher supply-chain costs and lower investment returns, including losses and impairment charges on privately held investments.
Liquidity, debt and capital allocation
- At April 29, 2023, cash and cash equivalents were $8.044 billion and investments were $15.244 billion on the balance sheet; management’s cash-and-investments measure was $23.288 billion, up $4.021 billion from July 30, 2022.
- Total debt carrying value was $8.394 billion, including $1.731 billion current and $6.663 billion long-term. Cisco reported $8.5 billion principal amount of senior notes, no commercial paper outstanding, and no borrowings under its $3.0 billion revolving credit facility. It reported compliance with debt covenants.
- Current assets were $39.950 billion and current liabilities were $28.719 billion. These imply a current ratio of approximately 1.39.
- Nine-month operating cash flow was $13.920 billion; capital expenditures were $616 million. Cash dividends paid were $4.713 billion and stock repurchases under the program were approximately $3.0 billion. The company targets returning at least 50% of annual free cash flow to shareholders.
- Deferred revenue was $24.260 billion, up from $23.264 billion; remaining performance obligations were $32.082 billion, up 2%. Cisco expects approximately 53% of RPO to be recognized as revenue over the next 12 months.
Changes, outlook and notable items
- Product deliveries benefited from improved supply availability, but management said product demand had declined year over year as customers digested prior shipments, ordered less far in advance, and responded to macroeconomic conditions. Certain component shortages and elevated supply costs remained.
- Inventory rose 35% from fiscal year-end to $3.474 billion, while inventory purchase commitments fell 30% to $9.059 billion. Management warned that weaker-than-expected demand could result in excess or obsolete inventory and related losses.
- A fiscal 2023 restructuring plan is estimated to incur approximately $600 million in pretax charges and affect about 5% of the global workforce. Cisco had incurred $330 million in the first nine months and expects substantial completion by the end of Q1 FY2024. It expects to reinvest substantially all savings, so future-period cost savings are not expected to be material.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management believes available cash, investments, operating cash generation, capital-market access and committed credit lines will meet liquidity needs for at least the next 12 months. It expects increased inventory and supply-related payments during that period.
- Cisco deferred approximately $1.7 billion of federal tax payments following an IRS postponement; it expects a significant increase in cash taxes in Q1 FY2024 as deferred payments fall due.
- Legal matters include Brazilian tax claims totaling $1.471 billion in asserted tax, interest and penalties; Cisco disputes liability and says it cannot estimate the likelihood or range of loss. The filing also describes ongoing patent litigation, including Centripetal proceedings; Cisco says outcomes are uncertain.
- Other risks highlighted include macroeconomic and geopolitical uncertainty, competition, supply-chain concentration and disruption, customer demand and order timing, investment and interest-rate exposure, cybersecurity and privacy, intellectual property claims, and tax matters.
Important facts for investors to verify
- Whether improving component availability translates into sustainable orders and revenue, given management’s reported decline in product demand.
- Whether inventory, supplier commitments and deposits can be aligned with actual demand without material write-downs or cancellation costs.
- Whether margins recover from nine-month declines as supply costs, pricing and product mix evolve, and whether restructuring charges remain within the stated estimate.
- How privately held investment valuations and related losses affect other income and net earnings.
- The timing and amount of deferred federal tax payments, and developments in the Brazilian tax and patent litigation matters.
- Whether RPO converts to revenue on the expected schedule and whether cash generation continues to support dividends, repurchases and other commitments.