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Cisco Q3 Earnings - Beats - Guides Down

May 17, 2017

Cisco reported third quarter results for the period ended April 29, 2017. Cisco reported third quarter revenue of $11.9 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.5 billion or $0.50 per share, and non-GAAP net income of $3.0 billion or $0.60 per share.

Investors were only looking for 58 cents per share in earnings on $11.89 billion revenue.

Cisco guided revenues to fall 4 percent to 6 percent year-over-year in the fourth quarter, with earnings of 60 cents to 62 cents per share, adjusted. The Street was anticipating revenue to fall 1 percent in the fourth quarter, with a midpoint of 62 cents per share for earnings.

"I am pleased with the progress we are making on the multi-year transformation of our business," said Chuck Robbins, CEO, Cisco. "The Network is becoming even more critical to business success as our customers add billions of new connections to their enterprises. We are laser focused on delivering unparalleled value through highly secure, software-defined, automated and intelligent infrastructure."

The third quarter of fiscal 2017 had 13 weeks compared with 14 weeks in the third quarter of fiscal 2016.

"We executed well in Q3, delivering $11.9 billion in total revenue, while driving solid profitability and cash generation as we deliver on our strategic priorities," said Kelly Kramer, CFO, Cisco. "We will continue to invest in growth areas as we move the business toward more software and recurring revenue and return value to shareholders."

Financial Summary

Q3 FY 2017 Highlights

Revenue -- Total revenue was $11.9 billion, down 1%, with product revenue flat and service revenue down 2%. 31% of total revenue was from recurring offers, up from 29% for the third quarter of fiscal 2016. Revenue by geographic segment was: Americas flat, EMEA flat, and APJC down 2%. Product revenue performance was led by Wireless and Security, which increased by 13% and 9%, respectively. Switching revenue increased by 2%. NGN Routing, Collaboration, Data Center, and Service Provider Video revenue decreased by 2%, 4%, 5%, and 30%, respectively.

Gross Margin -- On a GAAP basis, total gross margin and product gross margin were 63.0% and 61.7%, respectively. The decrease in the product gross margin compared with 63.8% in the third quarter of fiscal 2016 was primarily due to pricing, a supplier component remediation adjustment in the third quarter of fiscal 2016, and product mix, partially offset by continued productivity improvements.

Non-GAAP total gross margin and product gross margin were 64.4% and 63.2%, respectively. The decrease in non-GAAP product gross margin compared with 64.5% in the third quarter of fiscal 2016 was primarily due to pricing and product mix, partially offset by continued productivity improvements.

GAAP service gross margin was 66.7% and non-GAAP service gross margin was 67.8%.

Total gross margins by geographic segment were: 64.6% for the Americas, 65.5% for EMEA and 61.8% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.3 billion, down 8%. Non-GAAP operating expenses were $3.8 billion, down 9%, and were 32.1% of revenue.

Operating Income -- GAAP operating income was $3.2 billion, up 6%, with GAAP operating margin of 26.5%. Non-GAAP operating income was $3.9 billion, up 7%, with non-GAAP operating margin at 32.3%.

Provision for Income Taxes -- The GAAP tax provision rate was 21.2%. The non-GAAP tax provision rate was 22.0%.

Net Income and EPS -- On a GAAP basis, net income was $2.5 billion and EPS was $0.50. On a non-GAAP basis, net income was $3.0 billion, an increase of 5%, and EPS was $0.60, an increase of 5%.

Cash Flow from Operating Activities -- was $3.4 billion, an increase of 10% compared with $3.1 billion for the third quarter of fiscal 2016.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- were $68.0 billion at the end of the third quarter of fiscal 2017, compared with $71.8 billion at the end of the second quarter of fiscal 2017, and compared with $65.8 billion at the end of fiscal 2016. The total cash and cash equivalents and investments available in the United States at the end of the third quarter of fiscal 2017 were $2.9 billion.

Deferred Revenue -- was $17.3 billion, up 13% in total, with deferred product revenue up 26%, driven largely by subscription-based and software offerings. Deferred service revenue was up 7%. The portion of product deferred revenue related to recurring software and subscription businesses grew 57% which includes the acquisition during the third quarter of fiscal 2017 of AppDynamics. Excluding AppDynamics, the increase was 51%.

Capital Allocation -- In the third quarter of fiscal 2017, Cisco declared and paid a cash dividend of $0.29 per common share, or $1.5 billion. For the third quarter of fiscal 2017, Cisco repurchased approximately 15 million shares of common stock under its stock repurchase program at an average price of $33.71 per share for an aggregate purchase price of $0.5 billion.

As of April 29, 2017, Cisco had repurchased and retired 4.7 billion shares of Cisco common stock at an average price of $21.21 per share for an aggregate purchase price of approximately $99.1 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $12.9 billion with no termination date.

Acquisitions

In the third quarter of fiscal 2017, Cisco completed its acquisition of AppDynamics, Inc. The AppDynamics acquisition provides cloud application and business monitoring platforms that are designed to enable companies to improve application and business performance.

On May 1, 2017, Cisco announced its intent to acquire Viptela, Inc., a privately held software-defined wide area network company. The acquisition is expected to close in the second half of calendar 2017.

On May 4, 2017, Cisco announced its intent to acquire the Advanced Analytics team and associated advanced analytics intellectual property developed by Saggezza, a privately held technology services company. The acquisition is expected to close in the fourth quarter of fiscal 2017.

On May 11, 2017, Cisco announced its intent to acquire MindMeld, Inc., a privately held artificial intelligence (AI) company. The acquisition is expected to close in the fourth quarter of fiscal 2017.

Business Outlook for Q4 FY 2017

Cisco expects to achieve the following results for the fourth quarter of fiscal 2017:

     
Q4 FY 2017    
Revenue   (6)% to (4)% decline Y/Y
Non-GAAP gross margin rate   63% - 64%
Non-GAAP operating margin rate   29.5% - 30.5%
Non-GAAP tax provision rate   22%
Non-GAAP EPS   $0.60 - $0.62
     

Cisco estimates that GAAP EPS will be $0.46 to $0.51 which is lower than non-GAAP EPS by $0.11 to $0.14 per share in the fourth quarter of fiscal 2017.

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