Cisco Systems, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended July 27, 2019; fourth quarter ended the same date. Cisco designs and sells networking, security, collaboration, applications, cloud and related services. It reports geographically across the Americas, EMEA, and APJC.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $51.904 billion | $49.330 billion | +5% reported; +7% excluding SPVSS in both comparison periods |
| Gross margin | $32.666 billion; 62.9% | $30.606 billion; 62.0% | Margin +0.9 percentage points |
| Operating income | $14.219 billion; 27.4% of revenue | $12.309 billion; 25.0% | +16%; margin +2.4 points |
| Net income | $11.621 billion | $110 million | Not meaningfully comparable due primarily to FY2018 tax charges |
| Diluted EPS | $2.61 | $0.02 | Not meaningfully comparable |
| Operating cash flow | $15.831 billion | $13.666 billion | +16% |
| Free cash flow | $14.922 billion | $12.832 billion | Up; defined by Cisco as operating cash flow less property and equipment purchases |
Product revenue was $39.005 billion (+6%); services revenue was $12.899 billion (+2%). Infrastructure Platforms grew 7%, Applications 15%, and Security 16%; Other Products declined 72%, principally reflecting the SPVSS divestiture. Gross margin improved with productivity gains and the exit of lower-margin SPVSS, partly offset by pricing pressure and product mix. Operating expenses were $18.447 billion, including $322 million of restructuring charges.
Fourth quarter
Revenue was $13.428 billion, up 5% year over year; product revenue increased 5% and services 3%. Gross margin was 63.9%, versus 61.7%, and operating margin was 27.5%, versus 26.1%. Net income was $2.206 billion and diluted EPS was $0.51, down 42% and 37%, respectively, primarily because FY2019 Q4 included an $872 million tax charge while FY2018 Q4 included a $863 million tax benefit related to the Tax Act.
Liquidity, debt and capital allocation
- Cash, cash equivalents and investments totaled $33.413 billion at year-end, down from $46.548 billion. Operating cash flow was $15.831 billion; capital expenditures were $909 million.
- Debt carrying value was approximately $24.7 billion: $20.5 billion principal of senior notes and $4.2 billion of commercial paper. The $3.0 billion revolving credit facility was undrawn; Cisco reported covenant compliance.
- Current assets were $47.755 billion and current liabilities $31.712 billion. Deferred revenue was $18.467 billion, down from $19.685 billion.
- Cisco repurchased $20.577 billion of shares and paid $5.979 billion in dividends during FY2019. It stated an intent to return at least 50% of free cash flow annually to shareholders. Remaining repurchase authorization was approximately $13.5 billion.
- Management believed available liquidity, operating cash generation and access to capital would meet requirements for at least the next 12 months.
Material changes, outlook and risks
- Cisco adopted ASC 606 using the modified retrospective method. The standard accelerated recognition for certain software arrangements and distributor sales, increasing FY2019 revenue by $1.0 billion; it also reduced opening deferred revenue by $2.8 billion. Comparisons with prior periods are affected.
- FY2019’s effective tax rate was 20.2%, versus 99.2% in FY2018. FY2018 included a $10.4 billion provisional Tax Act charge; a further $872 million charge in FY2019 reversed a previously recorded benefit. The filing does not provide formal quantified forward financial guidance.
- Management described broad business growth and progress in software and subscription offerings, while emphasizing ongoing uncertainty in service-provider demand and a challenging, competitive operating environment. It plans continued investment in priority areas; savings from the FY2018 restructuring plan are expected to be substantially reinvested, not to produce material net cost savings. The plan was expected to be substantially complete in the first half of FY2020.
- In July 2019 Cisco announced a proposed $2.6 billion cash acquisition of Acacia Communications, expected to close in the second half of FY2020 subject to conditions and regulatory approvals.
- Material risks include volatile service-provider orders, pricing and competition, uncertain global conditions and weakness in China, supply and inventory exposure, execution of the software/subscription transition, cybersecurity and product quality, currency and tax uncertainty, and acquisition integration.
- Brazilian tax authorities asserted claims against Cisco’s subsidiary totaling $214 million in taxes, $1.4 billion in interest and $1.0 billion in penalties. Cisco disputes the claims, but stated it could not assess the likelihood of an unfavorable outcome or reasonably estimate any loss.
Important facts for investors to verify
- Separate underlying revenue and earnings trends from ASC 606 timing effects, SPVSS divestiture impacts and unusual Tax Act items.
- Monitor service-provider demand, China and APJC trends, pricing pressure, and whether software and subscription growth supports margins and recurring revenue.
- Review cash and investment balances alongside near-term maturities, commercial paper, transition-tax payments, buybacks, dividends and the proposed Acacia acquisition.
- Track the Brazil tax proceedings and other litigation, including outcomes that could change the currently uncertain exposure.
- Assess the assumptions behind inventory and supplier commitments, customer financing and credit allowances, and continued shareholder distributions.