Cisco Systems, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2012, ended April 28, 2012; comparisons are with the quarter ended April 30, 2011, unless otherwise noted. Financial statements are unaudited. Amounts are in U.S. dollars; financial figures are in millions except per-share data.
Business context and results
Cisco sells networking products and related services globally. Its fiscal 2012 reporting segments are the Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific, Japan and China (APJC). Management’s stated priorities include core routing and switching, collaboration, data center and cloud, video, and business-transformation architectures.
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Net sales | $11,588 | $10,866 | $34,371 | $32,023 |
| Gross margin | $7,169 | $6,659 | $21,124 | $19,675 |
| Operating income | $2,750 | $2,183 | $7,694 | $6,218 |
| Net income | $2,165 | $1,807 | $6,124 | $5,258 |
| Diluted EPS | $0.40 | $0.33 | $1.13 | $0.94 |
| Gross margin percentage | 61.9% | 61.3% | 61.5% | 61.4% |
| Operating margin percentage | 23.7% | 20.1% | 22.4% | 19.4% |
| Net income as percentage of sales | 18.7% | 16.6% | 17.8% | 16.4% |
| Effective tax rate | 22.1% | 18.0% | 21.2% | 17.3% |
Revenue drivers and material changes
- Q3 sales grew 6.6%: product revenue rose 5.0% and service revenue 13.0%. Nine-month sales grew 7.3%, with product revenue up 6.1% and services up 12.1%.
- Q3 regional sales growth was 3.2% in the Americas, 4.6% in EMEA and 24.1% in APJC. Management attributed part of APJC’s strength to large, multiyear projects; it cautioned that their completion affects comparability.
- Q3 product growth was strongest in Data Center (+68%), Wireless (+20%), Service Provider Video (+12%) and Security (+9%). Switching rose 5%; NGN Routing and Collaboration were flat. Data Center growth reflected Cisco Unified Computing System sales.
- Operating income and EPS rose faster than sales, reflecting improved gross margin, lower operating expenses as a percentage of revenue, and a lower diluted share count. Q3 R&D and sales and marketing expenses declined year over year; G&A increased 20.6%.
- Q3 gross margin improved 0.6 percentage points. Lower manufacturing costs and the absence of significant prior-year consumer restructuring charges helped, while discounts, pricing and mix of lower-margin products weighed on product margins. Nine-month gross margin was nearly flat year over year.
- Comparability also reflects $225 of restructuring charges in the first nine months of FY2012 versus $31 in the comparable period, partly offset by no purchased-intangible impairment charges in FY2012 versus $164 in FY2011. The nine-month FY2012 restructuring charge included $195 of severance and $30 of other costs.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $8,403, up from $7,255. Investing activities used $6,244, including net investment purchases; financing activities used $3,360. Cash and cash equivalents ended at $6,461, down $1,201 from July 30, 2011.
- Cash, cash equivalents and investments totaled $48,412 at April 28, 2012, compared with $44,585 at July 30, 2011. Cisco reported $42.3 billion of this amount held by foreign subsidiaries and $6.1 billion available in the United States; repatriation could result in additional taxes.
- Total debt was approximately $16.4 billion: $83 short-term and $16,286 long-term. Cisco had no commercial paper outstanding and had not borrowed under its new $3.0 billion revolving credit facility, which expires in 2017. The company reported compliance with debt covenants.
- Current assets were $61,212 and current liabilities $17,124. Deferred revenue was $12,648, up $441 from fiscal year-end. Accounts receivable was $3,980; days sales outstanding fell to 31 from 38 at fiscal year-end. Management expects DSO of 30–40 days.
- Nine-month capital expenditures were $830. Cisco paid $1,076 in dividends and reported $2,868 of common-stock repurchases in cash-flow financing activities. The quarterly dividend was $0.08 per share; $7.7 billion remained authorized for repurchases.
Outlook, commentary and risks
- The filing provides no specific revenue or earnings forecast. Management described global IT spending as hesitant, citing continued European economic challenges, cautious customer capital spending and public-sector weakness. It also said product transitions and new products could pressure margins, particularly as lower-margin Data Center and Service Provider Video products grow.
- Cisco expected total pretax charges for its restructuring actions to be approximately $1 billion, with remaining charges expected in Q4 FY2012. Cumulative charges under the actions were $946 million through April 28, 2012.
- Cisco had agreed to acquire NDS Group Limited for approximately $5 billion, including assumed debt and retention incentives. Closing was expected in the second half of calendar 2012, subject to customary conditions and regulatory review.
- Other notable commitments include up to $750 million of potential Insieme milestone compensation, dependent on specified conditions, and expected additional investment and possible losses in the VCE joint venture.
- Brazilian tax authorities asserted claims against Cisco’s subsidiary totaling approximately $429 million in alleged import taxes, $1.0 billion in interest and $2.0 billion in penalties. Cisco disputes the claims; it said the likelihood of an unfavorable outcome and any loss range could not be determined, and a final judicial decision was not expected for several years.
- Shareholder securities and derivative lawsuits were also pending; Cisco said it intended to defend them and could not estimate a loss range. Management did not expect ordinary-course legal matters overall to materially adversely affect consolidated results, financial position or cash flows.
- Key disclosed risks include economic and geopolitical uncertainty, competition and pricing pressure, product and customer mix, supply constraints and inventory exposure (including effects associated with Japan and Thailand), execution of product transitions, customer credit and financing exposure, tax uncertainty, and investment or acquisition performance.
Important facts for investors to verify
- Whether APJC growth and large project completions are repeatable, and whether weaker routing, collaboration, public-sector and European trends persist.
- Whether discounts, product mix and new-product transitions continue to pressure product gross margins despite cost reductions.
- The timing, regulatory approval, financing and integration of the NDS acquisition, and the conditions attached to Insieme milestone payments.
- Updates on the Brazilian tax dispute and shareholder litigation, including whether any loss becomes estimable or accruals are recorded.
- Cash availability and potential tax costs associated with foreign-held funds, alongside the company’s capital-return plans and debt obligations.