Cisco Systems, Inc. — FY2013 Form 10-K
Business context and reporting period. Cisco designs and sells networking, communications and IT products, and related services, globally. It reports by geography: Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific, Japan and China (APJC). Fiscal 2013 was a 52-week year ended July 27, 2013; the fourth quarter ended on that date. Amounts below are U.S. dollars.
Key financial results
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $48.607 billion | $46.061 billion | +5.5% |
| Product revenue | $38.029 billion | $36.326 billion | +4.7% |
| Service revenue | $10.578 billion | $9.735 billion | +8.7% |
| Gross margin | $29.440 billion; 60.6% | $28.209 billion; 61.2% | Margin down 0.6 percentage points |
| Operating income | $11.196 billion; 23.0% of revenue | $10.065 billion; 21.9% | +11.2% |
| Net income | $9.983 billion | $8.041 billion | +24.2% |
| Diluted EPS | $1.86 | $1.49 | +24.8% |
| Operating cash flow | $12.894 billion | $11.491 billion | +12.2% |
| Free cash flow (company-defined) | $11.734 billion | $10.365 billion | +13.2% |
FY2013 net margin was 20.5%, versus 17.5% in FY2012. The effective tax rate fell to 11.1% from 20.8%; a $794 million IRS settlement benefit and $184 million of R&D tax-credit benefits materially contributed to the lower rate and higher net income.
In Q4 FY2013, revenue was $12.417 billion, up 6.2% year over year; gross margin was 59.2%, down 1.4 points; operating income was $2.814 billion; net income was $2.270 billion; and diluted EPS was $0.42, up from $0.36.
Financial position and capital allocation
- At July 27, 2013, cash, cash equivalents and investments totaled $50.610 billion, up from $48.716 billion. Cash and cash equivalents were $7.925 billion; investments were $42.685 billion.
- Total debt was approximately $16.2 billion, including $3.3 billion classified as short-term, principally because notes were due in 2014. No commercial paper was outstanding; a $3.0 billion revolving credit facility was undrawn. Cisco reported compliance with debt covenants.
- Total current assets were $65.521 billion and current liabilities $22.192 billion. Deferred revenue was $13.423 billion, up $543 million.
- Accounts receivable rose to $5.470 billion; days sales outstanding increased to 40 from 34, primarily reflecting shipments later in Q4. Inventory declined to $1.476 billion, while supplier and contract-manufacturer purchase commitments rose to $4.033 billion.
- Cash from operations was $12.894 billion; capital expenditures were $1.160 billion. Cisco paid $3.310 billion in dividends and repurchased $2.773 billion of shares during FY2013. It stated an objective to return at least 50% of annual free cash flow to shareholders and said it achieved that objective in FY2013.
- $40.4 billion of cash and investments was held by foreign subsidiaries; $10.2 billion was available in the United States. Repatriation of foreign funds could result in additional U.S. and foreign taxes.
Material changes and operating trends
- Revenue growth was led by the Americas (+8.1%); EMEA grew 1.1% and APJC 3.6%. Q4 APJC revenue declined 3% year over year. Management cited European economic weakness, lower public-sector spending, and challenges in China and Japan.
- Data Center revenue increased 59.7% to $2.073 billion; Wireless rose 30.6% to $2.166 billion; and Service Provider Video rose 25.7% to $4.852 billion, substantially reflecting the NDS acquisition. NGN Routing declined 1.8%, Collaboration declined 5.7%, and Other Products declined 33.8%.
- Product gross margin fell to 59.1% from 60.1%, affected by discounting and pricing, product mix, NDS-related amortization and acquired-inventory adjustments, and the TiVo settlement. Productivity improvements partly offset these pressures. Service gross margin was 65.7%, up slightly from 65.6%.
- Operating expenses were $18.244 billion, versus $18.144 billion. R&D increased 8.3% to $5.942 billion; combined R&D, sales and marketing, and G&A declined as a share of revenue to 36.5% from 37.9%. Operating income benefited from revenue growth, expense management and lower restructuring charges.
- Acquisition cash outflow was $6.766 billion. Cisco completed the NDS acquisition for approximately $5.0 billion and acquired Meraki, Intucell and Ubiquisys, among others. Goodwill rose to $21.919 billion, primarily due to acquisitions.
Outlook, commentary, risks and unusual items
- Cisco provided no specific revenue or earnings guidance in the supplied filing text. Management said FY2014 could continue to face macroeconomic pressure, cautious customer IT spending, public-sector weakness and weakness in certain emerging markets.
- In August 2013, Cisco announced a workforce reduction affecting approximately 4,000 employees, or 5% of its workforce, to rebalance resources toward growth areas including cloud, data center, mobility, services, software and security. It estimated pretax charges of up to $550 million, primarily cash-based, with $250–$300 million expected in Q1 FY2014.
- The company identified risks from intense price and technology competition; product transitions and execution; volatile service-provider orders; channel and inventory management; component and contract-manufacturer supply; acquisitions and integration; customer financing and credit exposure; foreign exchange; and uncertain global economic and geopolitical conditions.
- Brazilian tax authorities asserted claims against Cisco’s subsidiary totaling approximately $385 million in taxes, $1.1 billion in interest and $1.7 billion in penalties. Cisco disputed the claims, but said it could not determine the likelihood of an unfavorable outcome or reasonably estimate any loss; a final judicial decision was not expected for several years.
- Cisco paid TiVo $294 million to settle video-related litigation; $172 million was recorded in Q4 cost of sales, with the remainder applied to prior reserves and an intangible asset. A separate XpertUniverse jury awarded $70 million on a fraud-by-concealment claim; Cisco challenged the award and said it did not expect the matter to be material. A VirnetX jury found no infringement, but a new-trial motion remained pending.
- The planned Sourcefire acquisition was subject to closing conditions and regulatory review at filing. Cisco expected to pay approximately $2.7 billion in cash and retention-based incentives.
- Auditors gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded internal controls were effective.
Most important facts for investors to verify
- How much FY2013 net-income and EPS growth reflects recurring operations versus the $794 million IRS settlement benefit and R&D tax credits.
- Whether product pricing, mix and acquisition-related costs continue to pressure gross margins, particularly as lower-margin Data Center products grow.
- Collection trends after DSO rose to 40 days, and the adequacy of allowances for financing receivables and customer credit risk.
- Execution, timing and total charges for the 4,000-person workforce reduction, and whether savings are reinvested effectively.
- Developments in the Brazilian tax claims, the XpertUniverse post-trial proceedings, and other legal contingencies.
- Sourcefire acquisition completion and funding, the use of cash held abroad, and the company’s ability to meet near-term debt maturities while sustaining dividends and repurchases.