Cisco Systems, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Quarter ended April 30, 2022; financial statements are unaudited. Comparisons are with the quarter ended May 1, 2021, and the first nine months of FY2022 with the corresponding FY2021 period.
Financial performance and position
| Metric | Q3 FY2022 | Change year over year |
|---|---|---|
| Revenue | $12.835 billion | Flat |
| Product / service revenue | $9.448 billion / $3.387 billion | +3% / −8% |
| Gross margin | $8.121 billion; 63.3% | −0.6 percentage points |
| Operating income | $3.610 billion; 28.1% of revenue | +4%; margin +1.0 point |
| Net income | $3.044 billion | +6% |
| Diluted EPS | $0.73 | +7% |
- For the first nine months, revenue was $38.455 billion (+5%), net income $8.997 billion (+19%), diluted EPS $2.14 (+20%), and operating income $10.535 billion (+14%). Gross margin was 63.0%, down 1.2 points.
- Nine-month operating cash flow was $9.549 billion versus $10.950 billion; free cash flow, as defined by Cisco, was $9.211 billion versus $10.420 billion. Dividends paid were $4.657 billion and repurchases under the program were $5.332 billion.
- Cash, cash equivalents and investments totaled $20.108 billion at April 30, down $4.410 billion from July 31, 2021. Cash and cash equivalents were $6.952 billion.
- Debt carrying value was $9.418 billion, including $1.000 billion current and $8.418 billion long term; principal outstanding was $9.5 billion. Cisco had no commercial paper outstanding and had not drawn its $3.0 billion revolving facility; it reported compliance with debt covenants.
- Current assets were $35.981 billion and current liabilities $24.150 billion. Deferred revenue was $22.293 billion; remaining performance obligations were $30.205 billion, with about 54% expected to be recognized within 12 months.
Material changes and business drivers
- Q3 revenue was affected by supply constraints and COVID-related lockdowns in China, which caused shortages of critical components and prevented anticipated shipments. Management expected the additional China-related supply challenges to continue at least into Q4 FY2022.
- The prior-year Q3 had 14 weeks versus 13 weeks in the current quarter; Cisco estimated the extra week contributed approximately 3% to prior-year revenue growth. The Russia and Ukraine war reduced current-quarter revenue by about $200 million. Together, these factors represented an estimated 5% negative comparison for total revenue, 3% for product revenue and 8% for service revenue.
- By product category, Q3 growth in Secure, Agile Networks (+4%), Internet for the Future (+6%), End-to-End Security (+7%) and Optimized Application Experiences (+8%) was partly offset by Collaboration (−7%). Service revenue fell 8%.
- Product gross margin declined 0.8 points in Q3, primarily from higher component, freight and expedite costs; favorable pricing partly offset the pressure. Inventory increased to $2.231 billion from $1.559 billion at fiscal year-end, while supplier purchase commitments rose to $13.099 billion from $10.254 billion.
- Q3 software revenue was $3.7 billion, down 3%; subscription revenue decreased 1%. Other income benefited from gains on privately held investments, contributing to higher interest and other income overall.
Outlook, risks and unusual items
- The filing provides no clear quantified full-year or next-quarter revenue or earnings guidance. Management described the operating environment as challenging and uncertain, citing component shortages, the China lockdowns, the Russia and Ukraine war, macroeconomic conditions and competition.
- Cisco said it intended to stop business operations in Russia and Belarus for the foreseeable future and ceased recognizing revenue in Russia, Belarus and Ukraine effective March 2022. It recorded $67 million of Q3 non-recurring charges related to asset recoverability and employee support, and reserved for substantially all assets in Russia and Belarus.
- Supply mitigation—including higher-cost sourcing, extended supplier coverage and prepayments—has increased inventory exposure and commitments. Cisco warned that weaker-than-expected demand could lead to excess or obsolete inventory and additional losses. It expected higher inventory and supply-related payments for at least the next 12 months.
- Material contingencies include Brazilian tax claims totaling $1.405 billion in asserted tax, interest and penalties; Cisco said it believes the claims are without merit but cannot estimate the likelihood or range of loss. A U.S. Centripetal patent judgment of $1.9 billion, plus potential running royalties, was stayed pending appeal; no payment was then due. Other patent and commercial disputes are described in the filing.
- Market risks include interest-rate exposure, foreign exchange movements, investment valuation changes and credit risk in customer financing. Cisco reported $3.1 billion of unrecognized tax benefits and estimated up to $534 million of future acquisition-related cash compensation expense.
- Management stated that cash, investments, operating cash generation and access to capital markets and committed credit lines were expected to cover liquidity needs for at least the next 12 months.
Most important facts for investors to verify
- Whether component availability and China-related disruptions improve, and whether Cisco can convert demand and backlog into shipments without further margin pressure.
- Whether elevated inventory, $13.1 billion of purchase commitments and supplier prepayments remain appropriate if demand changes.
- How the Russia and Ukraine war, including discontinued operations and asset recoverability, affects subsequent revenue, costs and legal exposure.
- Whether operating cash flow, free cash flow and liquidity remain sufficient alongside dividends, buybacks, debt repayments and higher supply-chain spending.
- Developments in the Brazilian tax matter, Centripetal appeal and other litigation, as well as tax audit outcomes and the value of private-investment gains.