Cisco Systems, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended January 29, 2022. Financial statements are unaudited; amounts below are in U.S. dollars. Year-over-year comparisons use the corresponding period ended January 23, 2021.
Financial performance
| Metric | Q2 FY2022 | Change year over year | Six months FY2022 | Change year over year |
|---|---|---|---|---|
| Revenue | $12.72 billion | +6% | $25.62 billion | +7% |
| Product revenue | $9.35 billion | +9% | $18.88 billion | +10% |
| Service revenue | $3.37 billion | -1% | $6.74 billion | Flat |
| Gross margin | $8.05 billion; 63.3% | Margin down 1.8 points | $16.10 billion; 62.8% | Margin down 1.5 points |
| Operating income | $3.49 billion; 27.4% of revenue | +8%; margin up 0.5 points | $6.93 billion; 27.0% of revenue | +20%; margin up 2.8 points |
| Net income | $2.97 billion | +17% | $5.95 billion | +26% |
| Diluted EPS | $0.71 | +18% | $1.41 | +27% |
| Operating cash flow | Not provided as a quarterly figure | $5.89 billion | Down from $7.07 billion | |
| Free cash flow | Not provided as a quarterly figure | $5.66 billion | Down from $6.71 billion |
Q2 product gross margin was 61.8%, down 2.7 percentage points, mainly because of higher component, freight, and expedite costs tied to supply constraints, with additional pressure from pricing and product mix. Service gross margin was 67.3%, up 0.7 points. Six-month net income growth also benefited from lower restructuring charges compared with the prior year.
Business and revenue trends
- Product growth was led by Internet for the Future, up 42% in Q2, and Secure, Agile Networks, up 7%. End-to-End Security grew 7%; Optimized Application Experiences grew 12%.
- Hybrid Work revenue declined 9% in Q2. Services declined 1%.
- Geographic revenue grew in Q2 across the Americas (+3%), EMEA (+11%), and APJC (+13%).
- Subscription revenue increased 12% in Q2; total software revenue increased 6% to $3.8 billion.
- Remaining performance obligations were $30.5 billion, down 1% from July 31, 2021; Cisco expects approximately 53% to be recognized over the next 12 months.
Cash, debt, and liquidity
- Cash, cash equivalents, and investments totaled $21.1 billion at January 29, 2022, down $3.4 billion from fiscal year-end. Cash and cash equivalents alone were $6.7 billion.
- Total balance-sheet debt was approximately $11.5 billion: $2.5 billion short-term and $9.0 billion long-term. This includes $2.0 billion of commercial paper. Cisco reported compliance with debt covenants and no borrowing under its $3.0 billion revolving credit facility.
- Six-month cash uses included $5.1 billion of share repurchases, $3.1 billion of dividends, and $2.0 billion of net debt repayment. Inventory rose to $2.1 billion; inventory commitments rose to $12.3 billion.
- Management believes available cash, investments, operating cash generation, and access to capital markets and credit lines will meet liquidity requirements for at least the next 12 months. It expects higher inventory and other supply-related payments during that period.
Outlook, commentary, risks, and unusual items
- No specific revenue or earnings guidance for a future quarter or the full fiscal year is stated in the provided filing text. Management expected significant industry supply constraints to continue through the second half of fiscal 2022.
- Management cited a dynamic, inflationary, and supply-constrained environment. It increased inventory, supplier commitments, and supplier deposits to secure supply and meet demand, while warning that a sudden demand decline could lead to excess or obsolete inventory and losses.
- Q2 interest and other income included $121 million of net gains on privately held investments; six-month gains were $326 million. Investment gains contributed to the increase in other income.
- On February 16, 2022, after quarter-end, the Board authorized an additional $15 billion for share repurchases, bringing remaining authorization to approximately $18 billion, and declared a $0.38 quarterly dividend.
- Material litigation includes a U.S. patent case in which a district court awarded Centripetal $1.9 billion plus ongoing royalties. Cisco appealed; execution of the judgment was stayed, and no payment was then due. Cisco said it could not reasonably estimate the outcome. Brazilian tax claims aggregate to about $1.3 billion including interest and penalties; Cisco contests the claims and cannot estimate a range of loss.
- Other significant exposures include component shortages and supplier commitments, customer and financing receivable credit risk, tax uncertainties, foreign exchange and investment volatility, cybersecurity, and competitive and macroeconomic pressures. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether supply constraints, inflation, and elevated component and logistics costs persist, and how they affect delivery lead times and product margins.
- Whether inventory, deposits, and purchase commitments convert into shipments and revenue without material excess or obsolete inventory charges.
- Whether product growth, particularly in Internet for the Future and core networking, offsets continued weakness in Hybrid Work and services.
- How much of reported earnings growth is supported by recurring operating performance versus investment gains, tax-rate changes, and lower restructuring charges.
- Developments in the Centripetal appeal and Brazilian tax litigation, including any change in expected financial exposure.
- The pace of cash returns and their effect on liquidity, given substantial repurchases and dividends alongside supply-chain funding needs.