Cisco Systems, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended July 31, 2021; the year included 53 weeks versus 52 weeks in FY2020. Cisco designs and sells networking, security, collaboration, applications, and cloud technologies, and reports by Americas, EMEA, and APJC geography. Figures below are in U.S. dollars.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $49.818B | $49.301B | +1% |
| Product revenue | $36.014B | $35.978B | Flat |
| Service revenue | $13.804B | $13.323B | +4% |
| Gross margin | $31.894B; 64.0% | $31.683B; 64.3% | +1% in dollars; down 0.3 points |
| Operating income | $12.833B; 25.8% of revenue | $13.620B; 27.6% | Down 6%; margin down 1.8 points |
| Net income | $10.591B; 21.3% of revenue | $11.214B; 22.7% | Down 6% |
| Diluted EPS | $2.50 | $2.64 | Down 5% |
| Operating cash flow | $15.454B | $15.426B | Approximately flat |
| Free cash flow | $14.762B | $14.656B | Approximately flat |
Fourth-quarter revenue was $13.126B, up 8% year over year; net income was $3.009B, up 14%, and diluted EPS was $0.71, up 15%. Fourth-quarter gross margin was 63.6%, up 0.4 percentage points.
Business and material changes
- Annual product revenue was essentially flat: Security grew 7% to $3.382B, while Applications declined 1% to $5.504B; Infrastructure Platforms was flat at $27.109B. Service revenue growth reflected maintenance and solution support.
- Total software revenue was $15.0B, up 7%; subscription revenue increased 15%. Deferred revenue rose 8% to $22.164B, and remaining performance obligations increased 9% to $30.893B. Cisco expects about 53% of RPO to be recognized over the next 12 months.
- Geographically, Americas revenue declined 0.4% to $29.161B, EMEA increased 2% to $12.951B, and APJC increased 5% to $7.706B. Management said the extra fiscal week accounted for a majority of the annual revenue increase.
- Product gross margin fell 0.2 points to 63.1%, as pricing erosion and supply-chain costs outweighed productivity and product mix benefits. Service gross margin declined 0.3 points to 66.5%.
- Cash, cash equivalents, and investments totaled $24.518B, down from $29.419B. Total debt principal was $11.5B; no commercial paper was outstanding. Cisco had a $3.0B undrawn revolving credit facility and reported compliance with debt covenants.
- Inventory rose 22% to $1.559B. Supplier and contract-manufacturer purchase commitments increased to $10.254B from $4.406B, primarily to secure component supply and pricing. Financing receivables declined 14% to $9.264B.
Capital allocation, outlook, and risks
- Cisco paid $6.163B in dividends ($1.46 per share) and repurchased $2.902B of shares in FY2021. Its stated policy is to return at least 50% of annual free cash flow through dividends and repurchases; approximately $7.9B remained authorized for repurchases at year-end.
- The FY2021 restructuring generated $886M of charges, including $881M under the FY2021 plan. The plan was substantially completed; Cisco estimated approximately $1.0B of annualized cost savings and said remaining charges were not expected to be material.
- Cisco completed 13 acquisitions, including Acacia for approximately $4.983B. Total FY2021 acquisition consideration was $7.455B; acquisition-related cash outflow, net of cash acquired and divestitures, was $7.038B.
- Management said semiconductor and other component constraints, higher component costs, expedited freight, and longer lead times would likely persist through at least the first half of FY2022 and possibly into the second half. Cisco increased inventory and long-term supply commitments; lower-than-expected demand could create excess or obsolete inventory and pressure margins.
- Management stated available cash, investments, operating cash generation, and access to capital were expected to meet liquidity needs for at least 12 months. The filing does not provide a formal full-year FY2022 revenue or earnings forecast.
- Key risks include supply-chain disruption and purchase commitments, intense pricing and technology competition, volatile service-provider demand, customer and channel-partner credit exposure, cybersecurity and product-quality issues, foreign exchange and geopolitical risks, and execution of the shift toward software and subscriptions.
- Significant contingencies include a Brazilian tax dispute with asserted claims aggregating to approximately $1.31B, for which Cisco said the claims lacked merit but it could not estimate the likelihood or range of loss. A separate U.S. patent judgment in the Centripetal litigation was $1.9B and included an ongoing royalty; execution was stayed pending appeal. Cisco challenged the judgment and said the ultimate outcome could not be reasonably estimated.
Most important facts for investors to verify
- Whether revenue growth persists after adjusting for the extra fiscal week, and whether subscription growth and rising RPO convert into recognized revenue and cash.
- Whether component availability, purchase commitments, inventory levels, and associated costs improve as management anticipated, and the effect on product gross margin.
- Whether the restructuring delivers the estimated $1.0B annualized savings without impairing growth or execution in strategic areas.
- Progress and cash requirements relating to acquisitions, particularly Acacia integration, and the effect of acquired intangibles and amortization.
- Developments in the Brazilian tax matter, Centripetal appeal and royalty exposure, and other material litigation or indemnification claims.
- Cash and investment balances, debt maturities, dividends, and share repurchases relative to free cash flow and other obligations.