Cisco Systems, Inc. — FY2020 Form 10-K Summary
Business context and reporting period
Cisco designs and sells networking, security, collaboration, applications, and cloud technologies, as well as related services. It reports geographically across the Americas, EMEA, and APJC. Fiscal 2020 was the 52-week year ended July 25, 2020; the fourth quarter was the three months ended on that date. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $49.301 billion | $51.904 billion | Down 5% |
| Product revenue | $35.978 billion | $39.005 billion | Down 8% |
| Service revenue | $13.323 billion | $12.899 billion | Up 3% |
| Gross margin | $31.683 billion; 64.3% | $32.666 billion; 62.9% | Margin up 1.4 points |
| Operating income | $13.620 billion; 27.6% of revenue | $14.219 billion; 27.4% | Down 4% |
| Net income | $11.214 billion | $11.621 billion | Down 4% |
| Diluted EPS | $2.64 | $2.61 | Up 1% |
| Cash from operating activities | $15.426 billion | $15.831 billion | Down $405 million |
| Free cash flow | $14.656 billion | $14.922 billion | Down $266 million |
Revenue fell in all three geographic segments: Americas by 5%, EMEA by 3%, and APJC by 7%. Infrastructure Platforms revenue declined 10% and Applications declined 4%; Security grew 12%. Product gross margin improved to 63.3% from 61.9%, mainly from productivity improvements and product mix, partly offset by pricing pressure. Service gross margin rose to 66.8% from 66.1%.
At July 25, 2020, cash, cash equivalents, and investments totaled $29.419 billion, down from $33.413 billion. Total assets were $94.853 billion and total liabilities were $56.933 billion. Debt was $14.583 billion on the balance sheet, including $3.005 billion current; senior notes had $14.5 billion principal outstanding. Cisco had no commercial paper outstanding and had not drawn on its $2.75 billion revolving credit facility. Cash and investments exceeded total debt, but the company also had substantial contractual and tax-payment obligations.
Deferred revenue increased 11% to $20.446 billion, while remaining performance obligations rose 12% to $28.354 billion; Cisco expected approximately 54% of RPO to be recognized over the following year. Dividends paid were $6.016 billion; stock repurchases under the program were $2.619 billion, far below the prior year’s $20.577 billion. The annual dividend declared per share increased to $1.42 from $1.36.
Material changes versus the prior comparable period
- Annual revenue declined 5%, with product revenue down 8%; service revenue growth partly cushioned the product decline.
- Operating margin edged up 0.2 percentage points despite lower operating income. Gross margin improved, while operating expenses as a share of revenue increased 0.8 points.
- Net income decreased 4%, although diluted EPS increased 1%, helped by a 199 million reduction in diluted shares.
- Fourth-quarter revenue fell 9% year over year to $12.154 billion; product revenue fell 13% and service revenue was flat. Q4 net income rose 19% and diluted EPS rose 22%, partly because Q4 FY2019 included a $0.9 billion Tax Act-related charge.
- Cash returned through the repurchase program fell sharply from FY2019, while cash dividends remained broadly stable.
Outlook, management commentary, risks, and unusual items
- Management reported broad-based macroeconomic weakness, including pressure in commercial and enterprise markets and continuing weakness in service providers and emerging countries. COVID-19 caused supply-chain and component constraints, notably in Q3, and increased uncertainty around demand, collections, logistics, and customer spending. The filing provides no clear numerical revenue or earnings guidance.
- Cisco said it would continue investing in security, applications, cloud collaboration, analytics, SD-WAN, multicloud, 5G, Wi-Fi 6, and next-generation networking. Management described progress in subscriptions and software, but product revenue remained under pressure.
- A fiscal 2021 restructuring plan, initiated after year-end and including voluntary early retirement, was estimated to incur approximately $900 million in pretax charges and generate about $1.0 billion of annualized savings over the next few quarters. Cisco expected substantial completion in FY2021. It also said savings from earlier restructuring actions would be substantially reinvested.
- Management believed available cash, investments, operating cash flow, and access to capital would cover liquidity requirements for at least 12 months. The pandemic could nevertheless adversely affect liquidity and operations if economic conditions deteriorated.
- Key risks include unpredictable demand and shipment timing; price competition and gross-margin pressure; supply-chain concentration and excess inventory; dependence on channel partners; cybersecurity and product-quality issues; foreign currency, geopolitical, and regulatory exposures; and execution risks in transitioning toward software and subscriptions.
- Brazilian tax authorities’ remaining asserted claims against Cisco’s subsidiary totaled approximately $1.294 billion, including tax, interest, and penalties. Cisco said it believed the claims were without merit, but could not assess the likelihood of an unfavorable outcome or reasonably estimate a loss. A separate $0.8 billion of federal penalty and interest claims was dismissed in FY2020.
- At year-end, Cisco had announced a proposed approximately $2.6 billion net-cash acquisition of Acacia, subject to closing conditions and regulatory approvals. The ThousandEyes acquisition closed on August 7, 2020, after fiscal year-end. CFO Kelly Kramer notified Cisco of her decision to resign on August 12, 2020, and was to remain in the role until a replacement was appointed.
Important facts for investors to verify
- Whether product demand stabilizes, especially in Infrastructure Platforms, commercial and service-provider markets, and emerging countries.
- Whether Cisco sustains gross-margin gains despite pricing pressure, logistics costs, and changes in product and subscription mix.
- Actual charges, timing, and realized savings from the FY2021 restructuring plan, including how much savings is reinvested.
- Cash generation, capital returns, debt maturities, and the company’s ability to meet contractual and transition-tax payments.
- Progress in converting deferred revenue and remaining performance obligations into recognized revenue, and the pace and economics of subscription growth.
- Developments in the Brazilian tax matter and other litigation, plus acquisition approvals, integration, and associated spending.