Cisco Systems, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended October 29, 2011. Unaudited results are compared with the three months ended October 30, 2010 unless otherwise noted. Financial amounts are in U.S. dollars; income statement and cash-flow figures are in millions.
Financial performance
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $11,256 | $10,750 | +4.7% |
| Product revenue | $8,952 | $8,700 | +2.9% |
| Service revenue | $2,304 | $2,050 | +12.4% |
| Gross margin | $6,890; 61.2% | $6,755; 62.8% | +2.0% in dollars; down 1.6 points |
| Operating income | $2,210; 19.6% margin | $2,351; 21.9% margin | Down 6.0%; margin down 2.3 points |
| Net income | $1,777 | $1,930 | Down 7.9% |
| Diluted EPS | $0.33 | $0.34 | Down 2.9% |
| Cash from operations | $2,333 | $1,667 | Up $666 |
Product gross margin fell 2.5 points to 60.2%, mainly from higher discounts, rebates, unfavorable pricing and product mix; manufacturing-cost savings and volume partly offset the decline. Service gross margin rose 1.5 points to 65.1%.
Liquidity, debt and balance sheet
- Cash, cash equivalents and investments totaled $44.4 billion at October 29, 2011, versus $44.6 billion at July 30, 2011. Cash and cash equivalents alone fell to $4.7 billion from $7.7 billion, while investments increased to $39.6 billion from $36.9 billion.
- Total debt was approximately $16.9 billion: $589 million short-term and $16.3 billion long-term. Long-term debt principal was $16.0 billion; its reported carrying value includes accounting adjustments. Cisco said it was in compliance with debt covenants and had not drawn on its $3.0 billion revolving credit facility.
- Management said available cash, investments, operating cash flow and access to capital were expected to meet liquidity requirements for at least the next 12 months. About $40.6 billion of cash and investments was held outside the United States, potentially subject to additional U.S. and foreign withholding taxes if repatriated.
- Total assets were $87.0 billion and total liabilities $39.8 billion at quarter-end. Deferred revenue was $12.4 billion, up from $12.2 billion at fiscal year-end.
Material changes and operating trends
- Revenue increased across all three geographic segments: Americas +4.3%, EMEA +1.8%, and APJC +11.2%. Public-sector weakness partly offset growth in other customer markets.
- Product growth was strongest in Data Center (+107%), Service Provider Video (+13%) and Collaboration (+12%). Switching was essentially flat; NGN Routing declined 3%.
- R&D, sales and marketing, and G&A combined were $4.379 billion, up 2.1% in dollars but down to 38.9% of sales from 39.9%. Restructuring charges were $202 million, versus none in the prior-year quarter.
- Operating cash flow increased, supported mainly by higher deferred revenue and lower tax payments, partly offset by restructuring payments. Cisco repurchased 100 million shares for $1.5 billion and paid $322 million in dividends; the declared dividend was $0.06 per share.
- Accounts receivable days sales outstanding improved to 35 days from 38 at fiscal year-end. Inventory rose to $1.6 billion from $1.5 billion, while annualized inventory turns declined to 11.2 from 11.8 in the prior quarter.
Outlook, management commentary and risks
- No specific revenue or earnings guidance for the next quarter or full year is provided in the supplied filing text. Management reported improving business momentum and said it was on track for a planned $1 billion reduction in annualized operating expenses compared with the fourth-quarter FY2011 run rate.
- The July 2011 restructuring plan was expected to incur pretax charges of up to $1.3 billion and be completed by the end of FY2012. Cumulative charges were approximately $925 million through October 29, 2011.
- Management expected a minimal financial impact in Q2 FY2012 from Japan-related supply constraints and Thailand flooding, while noting potential supply-chain effects could continue for several quarters. Cisco remained cautious about Europe and the global economy and cited public-sector spending weakness.
- Key business risks include pricing and competitive pressure, lower-margin product mix, uncertain IT and public-sector spending, customer financing and credit exposure, inventory and supplier constraints, and execution and returns on strategic investments and restructuring.
- Brazilian tax authorities asserted claims of approximately $483 million in taxes, $929 million in interest and $2.2 billion in penalties. Cisco disputed the claims, but said it could not assess the likelihood of an unfavorable outcome or reasonably estimate any loss; a final judicial determination was not expected for several years. Shareholder securities and derivative lawsuits were also pending, with potential losses not estimable from the filing.
- Financing receivables were $6.5 billion net, with a $365 million credit-loss allowance. Financing guarantees had maximum potential payments of $608 million, reduced to $113 million after associated deferred revenue; historical payments were described as immaterial.
Investor verification checklist
- Track whether product pricing, discounts and mix stabilize gross margin, particularly in core Switching and lower-margin Data Center products.
- Check progress toward the $1 billion expense reduction and the remaining restructuring costs against the stated $1.3 billion pretax ceiling.
- Monitor supply availability and the actual effects of Thailand flooding and Japan-related constraints on shipments, costs and inventory.
- Assess the location and accessibility of the company’s substantial offshore cash and investments, including potential repatriation taxes.
- Follow developments in the Brazilian tax matter and shareholder litigation, for which the company could not estimate potential losses.