Cisco Systems, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended July 30, 2011 (52 weeks); prior fiscal year ended July 31, 2010 (53 weeks). The filing also reports the quarter ended July 30, 2011.
Business context and reporting period
Cisco designs, manufactures, and sells IP networking products and related services, including routing, switching, collaboration, data center, security, wireless, and video solutions. It serves enterprise, service-provider, commercial, and consumer markets globally. Management planned to reorganize geographic reporting into three segments beginning in fiscal 2012.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $43.218 billion | $40.040 billion |
| Gross margin | $26.536 billion; 61.4% | $25.643 billion; 64.0% |
| Operating income / margin | $7.674 billion; 17.8% | $9.164 billion; 22.9% |
| Net income | $6.490 billion | $7.767 billion |
| Diluted EPS | $1.17 | $1.33 |
| Operating cash flow | $10.079 billion | $10.173 billion |
- Sales rose 7.9%; product sales increased 6.5% to $34.526 billion and service revenue increased 14.1% to $8.692 billion.
- Product gross margin fell to 60.5% from 64.2%, primarily due to discounts and pricing, product mix, acquired-intangible amortization, and restructuring. Service gross margin rose to 65.1% from 63.6%.
- Operating expenses increased 14.5% to $18.862 billion, including $799 million of restructuring and other charges in operating expenses. An additional $124 million of restructuring-related charges was recorded in cost of sales.
- Cash and investments totaled $44.585 billion, versus $39.861 billion. Total assets were $87.095 billion; current assets were $57.231 billion and current liabilities were $17.506 billion.
- Debt was $16.822 billion on the balance sheet, including $16.0 billion principal amount of senior notes and $500 million of commercial paper. Cisco had an undrawn $3.0 billion revolving credit facility and reported compliance with debt covenants.
- Deferred revenue was $12.207 billion, up from $11.083 billion. DSO improved to 38 days from 41; inventory increased to $1.486 billion from $1.327 billion.
- During FY2011 Cisco repurchased 351 million shares for $6.8 billion and paid $658 million in dividends, its first year of cash dividends. The declared dividend was $0.12 per share.
Material changes versus the prior comparable period
- Revenue grew, but net income declined 16.4%, operating margin contracted 5.1 percentage points, and diluted EPS fell 12.0%.
- New Products revenue increased 14.4%, led by data center growth of 44% and collaboration growth of 31% (including Tandberg acquisition-related revenue). Router revenue rose 5.5%; switching revenue was essentially flat.
- Emerging Markets revenue grew 13.7%; Asia Pacific Markets grew 12.2%. United States and Canada and European Markets each grew about 6%.
- Fiscal 2011 was impacted by lower public-sector spending in developed markets, weakness in traditional set-top boxes and consumer products, and competitive pressure in switching. Consumer-market sales declined, including as Cisco exited Flip Video.
- Cash and investments increased by $4.724 billion, primarily on operating cash generation and debt issuance, partially offset by repurchases, capital expenditures, and dividends. Cash flow from operations was slightly lower than in FY2010.
Outlook, management commentary, risks, and unusual items
- Management targeted approximately $1 billion in annualized operating-expense reductions, using FY2011 fourth-quarter expense levels as the baseline, with the target expected to be achieved during FY2012. Cisco announced up to $1.3 billion of pretax expense-reduction charges; remaining charges were expected in FY2012.
- Restructuring included a planned workforce reduction of approximately 6,500 employees, voluntary retirements, realignment of the consumer business, and exit from Flip Video. The planned sale of Juarez manufacturing operations was expected to transfer approximately 5,000 employees to the buyer in FY2012.
- Management cited improving general business momentum in the fourth quarter and growth in commercial, enterprise excluding public sector, services, collaboration, and data center. It warned that new product transitions could continue to pressure product margins.
- Fourth-quarter net sales were $11.195 billion and net income was $1.232 billion, compared with $10.836 billion and $1.935 billion, respectively, in the prior-year quarter. FY2011 fourth-quarter net income included $602 million of restructuring and other charges, net of tax.
- Risks include uncertain global demand and public-sector budgets, service-provider spending volatility, intense price competition, product-transition execution, supply constraints and inventory exposure, and the potential for lower margins. The Japan earthquake and tsunami contributed to industry component constraints and Cisco increased commitments to secure supply.
- Brazilian authorities asserted import-tax, interest, and penalty claims totaling approximately $3.782 billion. Cisco disputed the claims, intends to defend them, and said it could not determine the likelihood of an unfavorable outcome or reasonably estimate a loss. The filing also describes shareholder securities and derivative lawsuits; loss estimates were not available.
- Approximately $39.8 billion of cash and investments was held outside the United States. Repatriation could trigger additional U.S. and foreign taxes; Cisco intended to reinvest certain foreign earnings indefinitely.
Important facts for investors to verify
- Whether the targeted FY2012 expense savings are achieved and how restructuring charges, workforce reductions, and the Juarez sale affect costs and execution.
- Whether revenue growth in collaboration, data center, and other new products can offset flat switching, consumer weakness, and public-sector and service-provider pressures without further gross-margin erosion.
- The scale and trajectory of discounts, product mix, inventory, supplier commitments, and financing receivables, including whether these create additional margin or credit-loss risk.
- Developments in the Brazilian tax matter and shareholder litigation; the filing provides no estimable loss range for the principal claims.
- Capital allocation and liquidity: cash held offshore, debt maturities and interest costs, continued repurchases, and the sustainability of dividends.