Cisco Systems, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2021, ended May 1, 2021. The quarter had 14 weeks versus 13 weeks in the prior-year quarter; Cisco estimates the extra week contributed about 3 percentage points to quarterly revenue growth. Fiscal 2021 is a 53-week year. Amounts below are U.S. dollars.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $12.803B | $11.983B | $36.692B | $37.147B |
| Gross margin | $8.185B; 63.9% | $7.771B; 64.9% | $23.550B; 64.2% | $23.999B; 64.6% |
| Operating income | $3.465B; 27.1% margin | $3.414B; 28.5% margin | $9.258B; 25.2% margin | $10.373B; 27.9% margin |
| Net income | $2.863B | $2.774B | $7.582B | $8.578B |
| Diluted EPS | $0.68 | $0.65 | $1.79 | $2.01 |
Quarterly revenue rose 7% (product +6%, services +8%); quarterly net income rose 3% and diluted EPS rose 5%. For the nine months, revenue fell 1% (product −3%, services +4%), operating income fell 11%, net income fell 12%, and diluted EPS fell 11%. The nine-month decline in earnings included higher restructuring charges.
Quarterly product revenue grew in Infrastructure Platforms (+6%), Applications (+5%), and Security (+13%). Nine-month product revenue declined in Infrastructure Platforms (−5%) and Applications (−1%), while Security grew 9%. Total software revenue was $3.8B in Q3, up 13%; 81% was sold as subscriptions, 7 percentage points higher year over year.
Cash flow, balance sheet, and capital allocation
- Nine-month operating cash flow was $10.950B, versus $11.624B; capital expenditures were $530M, resulting in reported free cash flow of $10.420B, versus $11.062B.
- Cash, cash equivalents, and investments totaled $23.579B at May 1, 2021, down from $29.419B at July 25, 2020. Current assets were $37.060B and current liabilities $24.262B.
- Total debt carrying value was $11.532B ($2.000B current and $9.532B long-term), down from $14.583B. Cisco reported compliance with debt covenants and no commercial paper outstanding. A $3.0B five-year revolving credit facility was entered into after quarter-end, on May 13, 2021.
- Deferred revenue was $20.889B. Remaining performance obligations were $28.138B, of which Cisco expected approximately 53% to be recognized over the next 12 months.
- For the first nine months, Cisco paid $4.601B in dividends and repurchased $2.111B of stock under its repurchase program. Management’s stated policy is to return at least 50% of annual free cash flow through dividends and repurchases.
Material developments, outlook, and risks
- Supply constraints: Component shortages, including semiconductors, increased costs and pressured product gross margin. Cisco expected these supply-chain challenges to continue at least through the end of calendar 2021. Purchase commitments rose to $9.809B from $4.406B at fiscal year-end, and inventory increased 23% to $1.579B.
- Restructuring: The fiscal 2021 plan, including voluntary early retirement, had estimated pretax charges of approximately $900M; $869M had been incurred in the first nine months. Cisco expected substantial completion in fiscal 2021 and approximately $1.0B in annualized savings over the next few quarters. The prior fiscal 2020 plan had incurred cumulative charges of $264M.
- Acquisitions: Cisco completed eight acquisitions in the first nine months, including Acacia Communications on March 1, 2021. Acquisition cash outflows, net of acquired cash and divestitures, were $6.333B.
- Liquidity outlook: Management believed cash, investments, operating cash generation, capital-market access, and committed credit lines would meet liquidity needs for at least the next 12 months. The filing provides no specific revenue or EPS guidance for the next quarter or full year.
- Legal and tax contingencies: Centripetal Networks received a $1.9B patent judgment, which Cisco appealed; execution was stayed pending appeal, and Cisco disputed the ruling. Brazilian tax authorities asserted claims totaling $1.252B, including interest and penalties; Cisco said it could not estimate the likelihood or range of loss. Cisco also disclosed a $6.9B U.S. transition-tax payable, with approximately $0.7B due within one year.
- Other risks: The filing highlights COVID-19-related uncertainty, supply and inventory risks, competitive pressure, customer spending variability, cybersecurity threats, foreign-exchange and interest-rate exposure, and risks associated with acquisitions and intellectual-property litigation. Cisco stated the pandemic had not materially affected liquidity to date, but future effects remained uncertain.
Most important facts for investors to verify
- How much of Q3’s 7% revenue growth reflects the extra fiscal week, and whether underlying demand remains broad-based.
- Whether supply constraints persist as expected, and the effect of higher component costs and purchase commitments on margins, delivery, and inventory risk.
- Whether the restructuring plan delivers the stated savings and whether charges are substantially complete in fiscal 2021.
- Progress in product and subscription growth, especially Infrastructure Platforms and the Security and Applications businesses.
- Developments in the Centripetal appeal, Brazilian tax disputes, and other litigation or indemnity matters, including any change in potential exposure.
- Cash generation and capital returns relative to acquisition spending, debt maturities, and the transition-tax payment schedule.