Cisco Systems, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended July 29, 2023 (52 weeks), with comparisons to fiscal 2022. The filing also reports fourth-quarter results. Cisco designs and sells networking, security, collaboration, application and cloud technologies, plus related services, and manages its business across the Americas, EMEA and APJC.
Financial results
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $57.0 billion | $51.6 billion | +11% |
| Product revenue | $43.1 billion | $38.0 billion | +13% |
| Service revenue | $13.9 billion | $13.5 billion | +2% |
| Gross margin / rate | $35.8 billion / 62.7% | $32.2 billion / 62.5% | Rate +0.2 points |
| Operating income / rate | $15.0 billion / 26.4% | $14.0 billion / 27.1% | Income +8%; rate −0.7 points |
| Net income / diluted EPS | $12.6 billion / $3.07 | $11.8 billion / $2.82 | Income +7%; EPS +9% |
| Cash from operations | $19.9 billion | $13.2 billion | +$6.7 billion |
| Free cash flow | $19.0 billion | $12.7 billion | +$6.3 billion |
Fourth-quarter revenue was $15.2 billion, up 16% year over year; net income was $4.0 billion, up 41%, and diluted EPS was $0.97, up 43%. Quarterly gross margin was 64.1%, versus 61.3% a year earlier.
Liquidity, debt and capital allocation
- Cash, cash equivalents and investments totaled $26.1 billion at year-end, compared with $19.3 billion in FY2022. Cash and cash equivalents alone were $10.1 billion.
- Senior notes had $8.5 billion principal outstanding; balance-sheet debt was $8.4 billion. No commercial paper was outstanding. Cisco had an undrawn $3.0 billion revolving credit facility and reported covenant compliance.
- FY2023 capital expenditures were $849 million. Cisco returned $10.6 billion to shareholders: $6.3 billion in dividends and $4.3 billion in repurchases. Its stated target is to return at least 50% of annual free cash flow through dividends and repurchases.
- Remaining performance obligations were $34.9 billion, up 11%; Cisco expects approximately 51% to be recognized as revenue over the next 12 months.
Material changes and management commentary
- Product revenue benefited from improved industry supply constraints and higher deliveries, although Cisco said product demand declined as customers absorbed prior shipments, adjusted to shorter lead times and responded to macroeconomic conditions.
- Secure, Agile Networks revenue rose 22% for the year and drove most product growth. Collaboration declined 9%; Internet for the Future grew 1%, End-to-End Security 4%, and Optimized Application Experiences 11%.
- Software revenue was $17.0 billion, up 12%; subscription revenue increased 16%. Cisco described continued movement toward software, subscriptions and service-based offerings.
- Product gross margin increased to 61.5%, from 61.0%, reflecting pricing and product mix, partly offset by productivity-related costs. Service gross margin declined to 66.4%, from 66.8%.
- Operating margin fell despite higher operating income, mainly because operating expenses rose and restructuring charges totaled $531 million. A fiscal 2023 restructuring plan affecting approximately 5% of the global workforce has estimated pretax charges of about $700 million; Cisco expects to substantially complete it by the end of FY2024 Q1 and reinvest substantially all savings.
Outlook, risks and contingencies
The 10-K does not provide numerical forward guidance. Management describes the macroeconomic and competitive environment as uncertain and intends to invest in priority areas for long-term profitable growth. It expects elevated inventory and other supply-related payments through at least the next 12 months and says available liquidity and access to capital should meet requirements for at least that period. Approximately $2.8 billion of federal tax payments were deferred to October 2023, increasing expected FY2024 Q1 cash taxes.
Key risks include volatile IT and service-provider spending, price competition, execution of product and subscription transitions, supply-chain and inventory exposure, reliance on channel partners and contract manufacturers, cybersecurity and privacy incidents, AI-related legal or regulatory issues, foreign exchange, geopolitical and trade developments, and changing regulation. Inventory was $3.6 billion, while supplier and contract-manufacturer purchase commitments were $7.3 billion; Cisco cautions that weaker demand could lead to excess or obsolete inventory and margin charges.
Notable contingencies include Brazilian tax claims against Cisco’s subsidiary aggregating approximately $1.57 billion, including interest and penalties; Cisco says it believes the claims lack merit but cannot estimate the likelihood or range of loss. The prior $1.9 billion Centripetal patent judgment was vacated on appeal and further district-court proceedings were pending; Cisco says the ultimate outcome is not reasonably estimable. Cisco also disclosed Russia-related claims and lawsuits; Russian and Belarusian assets together represented less than 0.1% of total assets. The auditor issued unqualified opinions on the financial statements and internal control; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether product demand and service-provider orders stabilize after FY2023’s delivery recovery, and how demand trends affect revenue and margins.
- Whether inventory, purchase commitments and supply costs continue to decline without material write-downs or margin pressure.
- Progress on the restructuring plan, associated charges, and the planned reinvestment of savings.
- Conversion of the $34.9 billion RPO into revenue, including the timing and sustainability of subscription growth.
- Cash-tax payments following the approximately $2.8 billion deferral, and developments in the Brazilian, Centripetal and other legal matters.