News Details

Cisco Reports Third Quarter Earnings

May 15, 2019
  • Q3 Results:
    • Revenue: $13.0 billion
      • Growth of 6% year over year (normalized to exclude the divested SPVSS business for Q3 FY 2018)
    • Earnings per Share: GAAP: $0.69; Non-GAAP: $0.78
      • Non-GAAP EPS increased 18% year over year
  • Q4 Guidance (normalized to exclude the divested SPVSS business for Q4 FY 2018):
    • Revenue: 4.5% to 6.5% growth year over year
    • Earnings per Share: GAAP: $0.66 to $0.71; Non-GAAP: $0.80 to $0.82

SAN JOSE, Calif., May 15, 2019 /PRNewswire/ -- Cisco today reported third quarter results for the period ended April 27, 2019. Cisco reported third quarter revenue of $13.0 billion, net income on a generally accepted accounting principles (GAAP) basis of $3.0 billion or $0.69 per share, and non-GAAP net income of $3.5 billion or $0.78 per share.

Cisco Logo (PRNewsfoto/Cisco)

As previously disclosed, Cisco completed the divestiture of the Service Provider Video Software Solutions (SPVSS) business in the second quarter of fiscal 2019 on October 28, 2018. Revenue, non-GAAP financial information, and Q4 FY 2019 guidance have been normalized to exclude the SPVSS business from prior periods for comparative purposes.

"Our strong performance in the quarter was across the business, reflecting our customers' confidence in our strategy, business model and market-leading portfolio," said Chuck Robbins, chairman and CEO of Cisco. "Technology is at the heart of our customers' strategies and we are building the technology to help them achieve their business objectives."

GAAP Results










Q3 FY 2019


Q3 FY 2018


Vs. Q3 FY 2018

Revenue (including SPVSS business for all periods)


$

13.0 billion


$

12.5 billion


4%

Revenue (excluding SPVSS business for all periods)


$

13.0 billion


$

12.2 billion


6%

Net Income


$

3.0 billion


$

2.7 billion


13%

Diluted Earnings per Share (EPS)


$

0.69



$

0.56



23%

 

Non-GAAP Results










Q3 FY 2019


Q3 FY 2018


Vs. Q3 FY 2018

Net Income (excluding SPVSS business for all periods)


$

3.5 billion


$

3.2 billion


8%

EPS (excluding SPVSS business for all periods)


$

0.78



$

0.66



18%

Reconciliations between net income, EPS, and other measures on a GAAP and non-GAAP basis are provided in the tables located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

"We executed well in Q3, delivering revenue growth of 6%, non-GAAP EPS growth of 18%, as well as strong margins and cash flow," said Kelly Kramer, CFO of Cisco. "We continue to invest in our innovation pipeline to drive long-term profitable growth, while successfully evolving our business model through software offerings and subscriptions and delivering value for shareholders."

Financial Summary

All comparative percentages are on a year-over-year basis unless otherwise noted.

All revenue, non-GAAP, and geographic financial information in the "Q3 FY 2019 Highlights" section are presented excluding the SPVSS business for all periods as it was divested during the second quarter, on October 28, 2018.

Q3 FY 2019 Highlights

Revenue -- Total revenue was $13.0 billion, up 6%, with product revenue up 7% and service revenue up 3%. Revenue by geographic segment was: Americas up 9%, EMEA up 5%, and APJC down 4%. Product revenue performance was broad based with growth in Security, up 21%, Applications, up 9%, and Infrastructure Platforms, up 5%.

Gross Margin --  On a GAAP basis, total gross margin, product gross margin, and service gross margin were 63.1%, 62.0%, and 66.3%, respectively, as compared with 62.3%, 61.0%, and 65.8%, respectively, in the third quarter of fiscal 2018.

On a non-GAAP basis, total gross margin, product gross margin, and service gross margin were 64.6%, 63.7%, and 67.3%, respectively, as compared with 64.5%, 63.7%, and 67.1%, respectively, in the third quarter of fiscal 2018.

Total gross margins by geographic segment were: 65.6% for the Americas, 64.5% for EMEA and 60.7% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.7 billion, up 1%. Non-GAAP operating expenses were $4.2 billion, up 6%, and were 32.4% of revenue.

Operating Income -- GAAP operating income was $3.5 billion, up 12%, with GAAP operating margin of 27.1%. Non-GAAP operating income was $4.2 billion, up 6%, with non-GAAP operating margin at 32.2%.

Provision for Income Taxes -- The GAAP tax provision rate was 15.8%. The non-GAAP tax provision rate was 19.0%.

Net Income and EPS -- On a GAAP basis, net income was $3.0 billion and EPS was $0.69. On a non-GAAP basis, net income was $3.5 billion, an increase of 8%, and EPS was $0.78, an increase of 18%.

Cash Flow from Operating Activities -- $4.3 billion for the third quarter of fiscal 2019, an increase of 79% compared with $2.4 billion for the third quarter of fiscal 2018. Operating cash flow for the third quarter of fiscal 2018 included the payment of $1.3 billion of one-time foreign taxes as related to the Tax Cuts and Jobs Act. Operating cash flow increased 16%, normalized for these tax payments.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- $34.6 billion at the end of the third quarter of fiscal 2019, compared with $40.4 billion at the end of the second quarter of fiscal 2019, and compared with $46.5 billion at the end of fiscal 2018.

Deferred Revenue -- $17.5 billion, down 8% in total, with deferred product revenue down 23%. Deferred service revenue was up 3%.

Capital Allocation -- In the third quarter of fiscal 2019, we returned $7.5 billion to shareholders through share buybacks and dividends. We declared and paid a cash dividend of $0.35 per common share, or $1.5 billion, and repurchased approximately 116 million shares of common stock under our stock repurchase program at an average price of $52.14 per share for an aggregate purchase price of $6.0 billion. The remaining authorized amount for stock repurchases under the program is $18.0 billion with no termination date.

Acquisitions

In the third quarter of fiscal 2019, we closed the acquisitions of Luxtera, Inc., a privately held semiconductor company, and Singularity Networks, a privately held network infrastructure analytics company.

Guidance for Q4 FY 2019

Cisco expects to achieve the following results for the fourth quarter of fiscal 2019 (normalized to exclude the divested SPVSS business):

Q4 FY 2019



Revenue


4.5% - 6.5% growth Y/Y

Non-GAAP gross margin rate


64% - 65%

Non-GAAP operating margin rate


31% - 32%

Non-GAAP tax provision rate


19%

Non-GAAP EPS


$0.80 - $0.82

Revenue for the divested SPVSS business for the fourth quarter of fiscal 2018 was $206 million.

Cisco estimates that GAAP EPS will be $0.66 to $0.71 in the fourth quarter of fiscal 2019.

A reconciliation between the Guidance for Q4 FY 2019 on a GAAP and non-GAAP basis is provided in the table entitled "GAAP to non-GAAP Guidance for Q4 FY 2019" located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

Editor's Notes:

  • Q3 fiscal year 2019 conference call to discuss Cisco's results along with its guidance will be held on Wednesday, May 15, 2019 at 1:30 p.m. Pacific Time. Conference call number is 1-888-848-6507 (United States) or 1-212-519-0847 (international).
  • Conference call replay will be available from 4:00 p.m. Pacific Time, May 15, 2019 to 4:00 p.m. Pacific Time, May 22, 2019 at 1-888-446-2545 (United States) or 1-402-998-1344 (international). The replay will also be available via webcast on the Cisco Investor Relations website at https://investor.cisco.com.
  • Additional information regarding Cisco's financials, as well as a webcast of the conference call with visuals designed to guide participants through the call, will be available at 1:30 p.m. Pacific Time, May 15, 2019. Text of the conference call's prepared remarks will be available within 24 hours of completion of the call. The webcast will include both the prepared remarks and the question-and-answer session. This information, along with the GAAP to non-GAAP reconciliation information, will be available on the Cisco Investor Relations website at https://investor.cisco.com.
  • Cisco is hosting Cisco Live, its premier annual customer and partner conference June 9-13 in San Diego, Calif. Register now for keynotes, hands-on learnings experiences, expert demos and networking.

 

CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per-share amounts)

(Unaudited)






Three Months Ended


Nine Months Ended


April 27, 2019


April 28, 2018


April 27, 2019


April 28, 2018

REVENUE:








Product

$

9,722



$

9,304



$

28,885



$

27,067


Service

3,236



3,159



9,591



9,419


Total revenue

12,958



12,463



38,476



36,486


COST OF SALES:








Product

3,693



3,625



11,106



10,594


Service

1,092



1,079



3,278



3,208


Total cost of sales

4,785



4,704



14,384



13,802


GROSS MARGIN

8,173



7,759



24,092



22,684


OPERATING EXPENSES:








Research and development

1,659



1,590



4,824



4,706


Sales and marketing

2,403



2,325



7,084



6,894


General and administrative

541



561



1,261



1,601


Amortization of purchased intangible assets

39



67



112



188


Restructuring and other charges

18



82



282



332


Total operating expenses

4,660



4,625



13,563



13,721


OPERATING INCOME

3,513



3,134



10,529



8,963


Interest income

331



380



1,003



1,155


Interest expense

(211)



(237)



(655)



(719)


Other income (loss), net

(18)



(24)



(10)



48


Interest and other income (loss), net

102



119



338



484


INCOME BEFORE PROVISION FOR INCOME TAXES

3,615



3,253



10,867



9,447


Provision for income taxes (1)

571



562



1,452



13,140


NET INCOME (LOSS)

$

3,044



$

2,691



$

9,415



$

(3,693)










Net income (loss) per share:








Basic

$

0.70



$

0.56



$

2.11



$

(0.76)


Diluted

$

0.69



$

0.56



$

2.09



$

(0.76)


Shares used in per-share calculation:








Basic

4,370



4,791



4,468



4,892


Diluted

4,415



4,844



4,509



4,892


The Consolidated Statements of Operations include the results of the SPVSS business prior to its divestiture during the second quarter of fiscal 2019 on October 28, 2018. Accordingly, the nine months ended April 27, 2019 includes three months of financial results for this business.

(1) The provision for income taxes for the nine months ended April 28, 2018 includes an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act.

CISCO SYSTEMS, INC.

REVENUE BY SEGMENT

(In millions, except percentages)






April 27, 2019



Three Months Ended


Nine Months Ended



Amount


Y/Y %


Amount


Y/Y %

Revenue:









Including SPVSS business for all periods:









Americas


$

7,695



7%


$

22,798



6%

EMEA


3,356



2%


9,803



6%

APJC


1,907



(6)%


5,875



3%

Total


$

12,958



4%


$

38,476



5%

Excluding SPVSS business for all periods:









Americas


$

7,695



9%


$

22,721



7%

EMEA


3,356



5%


9,737



8%

APJC


1,907



(4)%


5,851



5%

Total


$

12,958



6%


$

38,309



7%

Amounts may not sum and percentages may not recalculate due to rounding.

During the second quarter of fiscal 2019 on October 28, 2018, we completed the divestiture of the SPVSS business. SPVSS business revenue for the three months ended April 28, 2018 was $219 million and for the nine months ended April 27, 2019 and April 28, 2018 was $168 million and $697 million, respectively.

CISCO SYSTEMS, INC.

GROSS MARGIN PERCENTAGE BY SEGMENT

(In percentages)






April 27, 2019



Three Months Ended


Nine Months Ended

Gross Margin Percentage:





Including SPVSS business for all periods:





Americas


65.6%


65.4%

EMEA


64.5%


64.3%

APJC


60.7%


59.0%

Excluding SPVSS business for all periods (1):





Americas


65.6%


65.6%

EMEA


64.5%


64.4%

APJC


60.7%


59.1%

(1) During the second quarter of fiscal 2019 on October 28, 2018, we completed the divestiture of the SPVSS business.

CISCO SYSTEMS, INC.

REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES

(In millions, except percentages)






April 27, 2019



Three Months Ended


Nine Months Ended



Amount


Y/Y %


Amount


Y/Y %

Revenue:









Including SPVSS business for all periods:









Infrastructure Platforms


$

7,545



5%


$

22,315



7%

Applications


1,431



9%


4,315



17%

Security


707



21%


2,016



17%

Other Products


39



(83)%


239



(69)%

Total Product


9,722



4%


28,885



7%

Services


3,236



2%


9,591



2%

Total


$

12,958



4%


$

38,476



5%

Excluding SPVSS business for all periods:









Infrastructure Platforms


$

7,545



5%


$

22,315



7%

Applications


1,431



9%


4,315



17%

Security


707



21%


2,016



17%

Other Products


39



3%


93



(39)%

Total Product


9,722



7%


28,739



9%

Services


3,236



3%


9,570



2%

Total


$

12,958



6%


$

38,309



7%

Amounts may not sum and percentages may not recalculate due to rounding.

During the second quarter of fiscal 2019 on October 28, 2018, we completed the divestiture of the SPVSS business. SPVSS business revenue for the three months ended April 28, 2018 was $219 million and for the nine months ended April 27, 2019 and April 28, 2018 was $168 million and $697 million, respectively.

CISCO SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)






April 27, 2019


July 28, 2018

ASSETS




Current assets:




Cash and cash equivalents

$

10,251



$

8,934


Investments

24,392



37,614


Accounts receivable, net of allowance for doubtful accounts of $124 at April 27, 2019 and $129 at July 28, 2018

3,795



5,554


Inventories

1,513



1,846


Financing receivables, net

5,029



4,949


Other current assets

2,331



2,940


Total current assets

47,311



61,837


Property and equipment, net

2,834



3,006


Financing receivables, net

4,862



4,882


Goodwill

33,544



31,706


Purchased intangible assets, net

2,398



2,552


Deferred tax assets

4,023



3,219


Other assets

2,315



1,582


TOTAL ASSETS

$

97,287



$

108,784


LIABILITIES AND EQUITY




Current liabilities:




Short-term debt

$

7,777



$

5,238


Accounts payable

2,022



1,904


Income taxes payable

953



1,004


Accrued compensation

2,872



2,986


Deferred revenue

10,117



11,490


Other current liabilities

4,172



4,413


Total current liabilities

27,913



27,035


Long-term debt

15,921



20,331


Income taxes payable

8,038



8,585


Deferred revenue

7,339



8,195


Other long-term liabilities

1,272



1,434


Total liabilities

60,483



65,580


Total equity

36,804



43,204


TOTAL LIABILITIES AND EQUITY

$

97,287



$

108,784


 

CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)




Nine Months Ended


April 27,

 2019


April 28,

 2018

Cash flows from operating activities:




Net income (loss)

$

9,415



$

(3,693)


Adjustments to reconcile net income (loss) to net cash provided by operating activities:




Depreciation, amortization, and other

1,433



1,676


Share-based compensation expense

1,166



1,184


Provision (benefit) for receivables

32



(104)


Deferred income taxes

(281)



1,013


(Gains) losses on divestitures, investments and other, net

(79)



(159)


Change in operating assets and liabilities, net of effects of acquisitions and divestitures:




Accounts receivable

1,560



1,064


Inventories

(1)



(289)


Financing receivables

(112)



(165)


Other assets

(736)



(135)


Accounts payable

52



148


Income taxes, net

(759)



8,795


Accrued compensation

(68)



53


Deferred revenue

421



415


Other liabilities

(154)



(237)


Net cash provided by operating activities

11,889



9,566


Cash flows from investing activities:




Purchases of investments

(1,176)



(14,132)


Proceeds from sales of investments

5,391



12,422


Proceeds from maturities of investments

10,797



12,259


Acquisitions and divestitures

(2,175)



(2,762)


Purchases of investments in privately held companies

(118)



(126)


Return of investments in privately held companies

127



163


Acquisition of property and equipment

(701)



(620)


Proceeds from sales of property and equipment

15



54


Other

(12)



(16)


Net cash provided by investing activities

12,148



7,242


Cash flows from financing activities:




Issuances of common stock

321



318


Repurchases of common stock - repurchase program

(16,042)



(11,562)


Shares repurchased for tax withholdings on vesting of restricted stock units

(601)



(541)


Short-term borrowings, original maturities of 90 days or less, net

1,723



(2,502)


Issuances of debt

1,530



6,877


Repayments of debt

(5,250)



(9,875)


Dividends paid

(4,489)



(4,433)


Other

51



(92)


Net cash used in financing activities

(22,757)



(21,810)


Net increase (decrease) in cash, cash equivalents, and restricted cash

1,280



(5,002)


Cash, cash equivalents, and restricted cash, beginning of period

8,993



11,773


Cash, cash equivalents, and restricted cash, end of period

$

10,273



$

6,771


Supplemental cash flow information:




Cash paid for interest

$

690



$

739


Cash paid for income taxes, net

$

2,491



$

3,332


Prior period information has been retrospectively adjusted due to the adoption of ASU 2016-18, Statement of Cash Flows, Restricted Cash at the beginning of the first quarter of fiscal 2019.

CISCO SYSTEMS, INC.

DEFERRED REVENUE

(In millions)








April 27, 2019


January 26, 2019


April 28, 2018

Deferred revenue:






Service

$

11,297



$

11,246



$

10,960


Product

6,159



6,015



7,993


Total

$

17,456



$

17,261



$

18,953


Reported as:






Current

$

10,117



$

9,976



$

11,301


Noncurrent

7,339



7,285



7,652


Total

$

17,456



$

17,261



$

18,953


 

CISCO SYSTEMS, INC.

DIVIDENDS PAID AND REPURCHASES OF COMMON STOCK

(In millions, except per-share amounts)










DIVIDENDS


STOCK REPURCHASE PROGRAM


TOTAL

Quarter Ended


Per Share


Amount


Shares


Weighted-
Average Price
per Share


Amount


Amount

Fiscal 2019













April 27, 2019


$

0.35



$

1,519



116



$

52.14



$

6,020



$

7,539


January 26, 2019


$

0.33



$

1,470



111



$

45.09



$

5,016



$

6,486


October 27, 2018


$

0.33



$

1,500



109



$

46.01



$

5,026



$

6,526


Fiscal 2018













July 28, 2018


$

0.33



$

1,535



138



$

43.58



$

6,015



$

7,550


April 28, 2018


$

0.33



$

1,572



140



$

42.83



$

6,015



$

7,587


January 27, 2018


$

0.29



$

1,425



103



$

39.07



$

4,011



$

5,436


October 28, 2017


$

0.29



$

1,436



51



$

31.80



$

1,620



$

3,056


 

CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES


GAAP NET INCOME (LOSS) TO NON-GAAP NET INCOME

(In millions, except per-share amounts)






Three Months Ended


Nine Months Ended


April 27,

 2019


April 28,

 2018


April 27,

 2019


April 28,

 2018

GAAP net income (loss)

$

3,044



$

2,691



$

9,415



$

(3,693)


Adjustments to cost of sales:








Share-based compensation expense

54



57



163



168


Amortization of acquisition-related intangible assets

141



161



418



444


Supplier component remediation charge (adjustment), net



(9)



(1)



(41)


Acquisition-related/divestiture costs

2



2



9



4


Legal and indemnification settlements





5



122


Total adjustments to GAAP cost of sales

197



211



594



697


Adjustments to operating expenses:








Share-based compensation expense

322



342



974



1,010


Amortization of acquisition-related intangible assets

39



67



112



188


Acquisition-related/divestiture costs

78



89



238



195


Legal and indemnification settlements

(1)





(396)




Significant asset impairments and restructurings

18



82



282



332


Total adjustments to GAAP operating expenses

456



580



1,210



1,725


Adjustments to GAAP interest and other income (loss), net:








(Gains) and losses on equity investments

(4)





(77)




Total adjustments to GAAP income (loss) before provision for income taxes

649



791



1,727



2,422


Income tax effect of non-GAAP adjustments

(160)



(168)



(554)



(613)


Significant tax matters (1)

(79)



(119)



(387)



11,261


Total adjustments to GAAP provision for income taxes

(239)



(287)



(941)



10,648


Non-GAAP net income

$

3,454



$

3,195



$

10,201



$

9,377


Net income (loss) per share (2):








GAAP

$

0.69



$

0.56



$

2.09



$

(0.76)


Non-GAAP

$

0.78



$

0.66



$

2.26



$

1.90


(1) For the first nine months of fiscal 2018, we recorded charges relating to significant tax matters that were excluded from non-GAAP net income. $11.1 billion of these charges were provisional amounts related to the enactment of the Tax Cuts and Jobs Act comprised of $8.9 billion related to the U.S. transition tax, $1.2 billion related to foreign withholding tax and $1.0 billion related to the re-measurement of net deferred tax assets. The amounts were provisional based on Securities and Exchange Commission Staff Accounting Bulletin No. 118. The remaining $0.2 billion was related to other significant tax matters.

(2) GAAP net loss per share for the nine months ended April 28, 2018 was calculated using basic shares of 4,892 million, due to the net loss resulting from the tax charge as discussed in footnote (1). Non-GAAP net income per share for the period was calculated using diluted shares of 4,936 million, as we had non-GAAP net income for this period.

CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES


GROSS MARGINS, OPERATING EXPENSES, OPERATING MARGINS, INTEREST AND OTHER INCOME (LOSS), NET, AND NET INCOME

(In millions, except percentages)




Three Months Ended


April 27, 2019


Product Gross Margin


Service Gross Margin


Total Gross Margin


Operating Expenses


Y/Y


Operating Income


Y/Y


Interest and other income (loss), net


Y/Y


Net Income


Y/Y

GAAP amount

$

6,029



$

2,144



$

8,173



$

4,660



1%


$

3,513



12%


$

102



(14)%


$

3,044



13%

% of revenue

62.0

%


66.3

%


63.1

%


36.0

%




27.1

%




0.8

%




23.5

%



Adjustments to GAAP amounts:






















Share-based compensation expense

22



32



54



322





376









376




Amortization of acquisition-related intangible assets

141





141



39





180









180




Legal and indemnification settlements







(1)





(1)









(1)




Acquisition/divestiture-related costs

1



1



2



78





80









80




Significant asset impairments and restructurings







18





18









18




(Gains) and losses on equity investments















(4)





(4)




Income tax effect/significant tax matters



















(239)




Non-GAAP amount

$

6,193



$

2,177



$

8,370



$

4,204



6%


$

4,166



6%


$

98



(18)%


$

3,454



8%

% of revenue

63.7

%


67.3

%


64.6

%


32.4

%




32.2

%




0.8

%




26.7

%



Amounts may not sum and percentages may not recalculate due to rounding.

During the second quarter of fiscal 2019 on October 28, 2018, we completed the divestiture of the SPVSS business. Accordingly, the non-GAAP growth rates are normalized to exclude the SPVSS business for the third quarter of fiscal 2018.


Three Months Ended


April 28, 2018


Product Gross Margin


Service Gross Margin


Total Gross Margin


Operating Expenses


Operating

Income


Net

Income

GAAP amount

$

5,679



$

2,080



$

7,759



$

4,625



$

3,134



$

2,691


% of revenue

61.0

%


65.8

%


62.3

%


37.1

%


25.1

%


21.6

%

Adjustments to GAAP amounts:












Share-based compensation expense

24



33



57



342



399



399


Amortization of acquisition-related intangible assets

161





161



67



228



228


Supplier component remediation charge (adjustment), net

(9)





(9)





(9)



(9)


Acquisition/divestiture-related costs

1



1



2



89



91



91


Significant asset impairments and restructurings







82



82



82


Income tax effect/significant tax matters











(287)


Non-GAAP amount

$

5,856



$

2,114



$

7,970



$

4,045



$

3,925



$

3,195


Less: SPVSS business (1)

(56)



(11)



(66)



(61)



(5)



(4)


Non-GAAP amount (excluding SPVSS business)

$

5,800



$

2,103



$

7,903



$

3,984



$

3,919



$

3,191


% of revenue

63.7

%


67.1

%


64.5

%


32.5

%


32.0

%


26.1

%

Amounts may not sum and percentages may not recalculate due to rounding.

(1) Reflects three months of operations for the SPVSS business.

CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES


GROSS MARGINS, OPERATING EXPENSES, OPERATING MARGINS, INTEREST AND OTHER INCOME (LOSS), NET, AND NET INCOME (LOSS)

(In millions, except percentages)




Nine Months Ended


April 27, 2019


Product Gross Margin


Service Gross Margin


Total Gross Margin


Operating Expenses


Y/Y


Operating Income


Y/Y


Interest and other income (loss), net


Y/Y


Net Income


Y/Y

GAAP amount

$

17,779



$

6,313



$

24,092



$

13,563



(1)%


$

10,529



17%


$

338



(30)%


$

9,415



NM

% of revenue

61.6

%


65.8

%


62.6

%


35.3

%




27.4

%




0.9

%




24.5

%



Adjustments to GAAP amounts:






















Share-based compensation expense

67



96



163



974





1,137









1,137




Amortization of acquisition-related intangible assets

418





418



112





530









530




Supplier component remediation charge (adjustment), net

(1)





(1)







(1)









(1)




Legal and indemnification settlements

5





5



(396)





(391)









(391)




Acquisition/divestiture-related costs

4



5



9



238





247









247




Significant asset impairments and restructurings







282





282









282




(Gains) and losses on equity investments















(77)





(77)




Income tax effect/significant tax matters



















(941)




Non-GAAP amount

$

18,272



$

6,414



$

24,686



$

12,353





$

12,333





$

261





$

10,201




% of revenue

63.3

%


66.9

%


64.2

%


32.1

%




32.1

%




0.7

%




26.5

%



Less: SPVSS business (1)

(52)



(9)



(61)



(59)





(1)









(1)




Non-GAAP amount (excluding SPVSS business)

$

18,220



$

6,405



$

24,625



$

12,293



4%


$

12,332



9%


$

261



(46)%


$

10,200



9%

% of revenue

63.4

%


66.9

%


64.3

%


32.1

%




32.2

%




0.7

%




26.6

%



NM — Not meaningful

(1) Reflects three months of operations for the SPVSS business.

Amounts may not sum and percentages may not recalculate due to rounding.

During the second quarter of fiscal 2019 on October 28, 2018, we completed the divestiture of the SPVSS business. Accordingly, the non-GAAP growth rates are normalized to exclude the SPVSS business for the first nine months of fiscal 2018.


Nine Months Ended


April 28, 2018


Product Gross Margin


Service Gross Margin


Total Gross Margin


Operating Expenses


Operating

Income


Net

Income (Loss)

GAAP amount

$

16,473



$

6,211



$

22,684



$

13,721



$

8,963



$

(3,693)


% of revenue

60.9

%


65.9

%


62.2

%


37.6

%


24.6

%


(10.1)

%

Adjustments to GAAP amounts:












Share-based compensation expense

70



98



168



1,010



1,178



1,178


Amortization of acquisition-related intangible assets

444





444



188



632



632


Supplier component remediation charge (adjustment), net

(41)





(41)





(41)



(41)


Legal and indemnification settlements

122





122





122



122


Acquisition/divestiture-related costs

1



3



4



195



199



199


Significant asset impairments and restructurings







332



332



332


Income tax effect/significant tax matters (1)











10,648


Non-GAAP amount

$

17,069



$

6,312



$

23,381



$

11,996



$

11,385



$

9,377


Less: SPVSS business (2)

(200)



(27)



(226)



(192)



(34)



(27)


Non-GAAP amount (excluding SPVSS business)

$

16,870



$

6,284



$

23,154



$

11,805



$

11,349



$

9,348


% of revenue

63.8

%


67.3

%


64.7

%


33.0

%


31.7

%


26.1

%

Amounts may not sum and percentages may not recalculate due to rounding.

(1) Includes an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act.

(2) Reflects nine months of operations for the SPVSS business.

CISCO SYSTEMS, INC.

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES


EFFECTIVE TAX RATE

(In percentages)






Three Months Ended


Nine Months Ended


April 27, 2019


April 28, 2018


April 27, 2019


April 28, 2018

GAAP effective tax rate (1)

15.8

%


17.3

%


13.4

%


139.1

%

Total adjustments to GAAP provision for income taxes

3.2

%


3.7

%


5.6

%


(118.1)

%

Non-GAAP effective tax rate

19.0

%


21.0

%


19.0

%


21.0

%

(1) Includes an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act for the nine months ended April 28, 2018.

GAAP TO NON-GAAP GUIDANCE FOR Q4 FY 2019










Q4 FY 2019


Gross Margin Rate


Operating Margin Rate


Tax Provision Rate


Earnings per Share (1)

GAAP


62.5% - 63.5%


26% - 27%


17%


$0.66 - $0.71

Estimated adjustments for:









Share-based compensation expense


0.5%


3.0%



$0.06 - $0.07

Amortization of acquisition-related intangible assets and acquisition/divestiture-related costs


1.0%


2.0%



$0.05 - $0.06

Significant asset impairments and restructurings



0.0%



$0.00 - $0.01

Income tax effect of non-GAAP adjustments






2%



Non-GAAP


64% - 65%


31% - 32%


19%


$0.80 - $0.82

(1) Estimated adjustments to GAAP earnings per share are shown after income tax effects.

Except as noted above, this guidance does not include the effects of any future acquisitions/divestitures, asset impairments, restructurings and significant tax matters or other events, which may or may not be significant unless specifically stated.

Forward Looking Statements, Non-GAAP Information and Additional Information

This release may be deemed to contain forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events (such as our customers' confidence in our strategy, business model and market-leading portfolio, our ability to build the technology to help our customers achieve their business objectives, our investment in our innovation pipeline to drive long-term profitable growth, our ability to successfully evolve our business model through software offerings and subscriptions and our ability to deliver value to our shareholders) and the future financial performance of Cisco (including the guidance for Q4 FY 2019) that involve risks and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including: business and economic conditions and growth trends in the networking industry, our customer markets and various geographic regions; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; the growth and evolution of the Internet and levels of capital spending on Internet-based systems; variations in customer demand for products and services, including sales to the service provider market and other customer markets; the return on our investments in certain priorities, key growth areas, and in certain geographical locations, as well as maintaining leadership in routing, switching and services; the timing of orders and manufacturing and customer lead times; changes in customer order patterns or customer mix; insufficient, excess or obsolete inventory; variability of component costs; variations in sales channels, product costs or mix of products sold; our ability to successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses and technologies; our ability to achieve expected benefits of our partnerships; increased competition in our product and service markets, including the data center market; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; manufacturing and sourcing risks; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters, and governmental investigations; our ability to achieve the benefits of the announced restructuring and possible changes in the size and timing of the related charges; cyber-attacks, data breaches or malware; vulnerabilities and critical security defects; terrorism; natural catastrophic events; a pandemic or epidemic; our ability to achieve the benefits anticipated from our investments in sales, engineering, service, marketing and manufacturing activities; our ability to recruit and retain key personnel; our ability to manage financial risk, and to manage expenses during economic downturns; risks related to the global nature of our operations, including our operations in emerging markets; currency fluctuations and other international factors; changes in provision for income taxes, including changes in tax laws and regulations or adverse outcomes resulting from examinations of our income tax returns; potential volatility in operating results; and other factors listed in Cisco's most recent reports on Forms 10-Q and 10-K filed on February 19, 2019 and September 6, 2018, respectively. The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes thereto included in Cisco's most recent reports on Forms 10-Q and Form 10-K as each may be amended from time to time. Cisco's results of operations for the three and nine months ended April 27, 2019 are not necessarily indicative of Cisco's operating results for any future periods. Any projections in this release are based on limited information currently available to Cisco, which is subject to change. Although any such projections and the factors influencing them will likely change, Cisco will not necessarily update the information, since Cisco will only provide guidance at certain points during the year. Such information speaks only as of the date of this release.

This release includes non-GAAP net income, non-GAAP gross margins, non-GAAP operating expenses, non-GAAP operating income and margin, non-GAAP effective tax rates, non-GAAP interest and other income (loss), net, and non-GAAP net income per share data for the periods presented. It also includes future estimated ranges for gross margin, operating margin, tax provision rate and EPS on a non-GAAP basis.

These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Cisco believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Cisco's results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate Cisco's results of operations in conjunction with the corresponding GAAP measures.

Cisco believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to its financial condition and its historical and projected results of operations.

For its internal budgeting process, Cisco's management uses financial statements that do not include, when applicable, share-based compensation expense, amortization of acquisition-related intangible assets, acquisition-related/divestiture costs, significant asset impairments and restructurings, significant litigation settlements and other contingencies, gains and losses on equity investments, the income tax effects of the foregoing and significant tax matters. Cisco's management also uses the foregoing non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the financial results of Cisco. In prior periods, Cisco has excluded other items that it no longer excludes for purposes of its non-GAAP financial measures. From time to time in the future there may be other items that Cisco may exclude for purposes of its internal budgeting process and in reviewing its financial results. For additional information on the items excluded by Cisco from one or more of its non-GAAP financial measures, refer to the Form 8-K regarding this release furnished today to the Securities and Exchange Commission.

Cisco divested its Service Provider Video Software Solutions business (SPVSS) during the second quarter of fiscal 2019 on October 28, 2018. This release includes, where indicated, financial measures that exclude the SPVSS business. Cisco believes that the presentation of these measures provides useful information to investors and management regarding financial and business trends relating to its financial condition and its historical and projected results of operations because the SPVSS business will not be part of Cisco on a go forward basis. Cisco's management also uses the financial measures excluding the SPVSS business in reviewing the financial results of Cisco.

About Cisco

Cisco (Nasdaq: CSCO) is the worldwide technology leader that has been making the Internet work since 1984. Our people, products and partners help society securely connect and seize tomorrow's digital opportunity today. Discover more at newsroom.cisco.com and follow us on Twitter at @Cisco.

Copyright © 2019 Cisco and/or its affiliates. All rights reserved. Cisco and the Cisco logo are trademarks or registered trademarks of Cisco and/or its affiliates in the U.S. and other countries. To view a list of Cisco trademarks, go to: www.cisco.com/go/trademarks. Third-party trademarks mentioned in this document are the property of their respective owners. The use of the word partner does not imply a partnership relationship between Cisco and any other company. This document is Cisco Public Information.

 

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