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Cisco Q2 Earnings Beat Expectations

February 16, 2017

Cisco reported second quarter results for the period ended January 28, 2017. Cisco reported second quarter revenue of $11.6 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.3 billion or $0.47 per share, and non-GAAP net income of $2.9 billion or $0.57 per share.

Investors expected Cisco to report earnings of 56 cents per share, adjusted, on revenue of $11.56 billion.

"We are pleased with the quarter and the continued customer momentum as we help them drive security, automation and intelligence across the network and into the cloud," said Chuck Robbins, Cisco CEO. "This quarter we announced our intent to acquire AppDynamics which, combined with Cisco's networking analytics, will provide customers with unprecedented insights into business performance. We will remain focused on accelerating innovation across our portfolio as we continue to deliver value to customers and shareholders."

Cisco Increases Quarterly Cash Dividend

 

Cisco has also declared a quarterly dividend of $0.29 per common share, a three-cent increase over the previous quarter's dividend, to be paid on April 26, 2017 to all shareholders of record as of the close of business on April 6, 2017. Future dividends will be subject to Board approval.

"We delivered a solid Q2 with $11.6 billion in revenues and further growth in key business areas of collaboration, security and services," said Kelly Kramer, Cisco CFO. "I am pleased with our progress on business transformation to software and recurring revenues. We expect to continue to execute well and return value to our shareholders including our board approved an increase of three-cents to the quarterly dividend to $0.29 per share."

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 "Q2 FY 2017 Highlights" section is presented excluding the SP Video CPE Business for prior periods as it was divested during the second quarter of fiscal 2016 on November 20, 2015.

Q2 FY 2017 Highlights

Revenue -- Total revenue was $11.6 billion, down 2%, with product revenue down 4% and service revenue up 5%. Revenue by geographic segment was: Americas down 3%, EMEA flat, and APJC down 3%. Product revenue performance was led by Security which increased 14%. Collaboration and Wireless product revenue increased by 4% and 3%, respectively. NGN Routing, Switching and Data Center product revenue decreased by 10%, 5% and 4%, respectively. Service Provider Video product revenue decreased by 41%.

Gross Margin -- On a GAAP basis, total gross margin and product gross margin were 62.8% and 61.1%, respectively. The decrease in the product gross margin compared with 61.3% in the second quarter of fiscal 2016 was primarily due to pricing and to a lesser extent product mix, partially offset by continued productivity improvements and the divestiture of the SP Video CPE Business.

Non-GAAP total gross margin and product gross margin were 64.1% and 62.4%, respectively. The decrease in non-GAAP product gross margin compared with 63.3% in the second quarter of fiscal 2016 was primarily due to pricing and to a lesser extent product mix, partially offset by continued productivity improvements.

GAAP service gross margin was 67.7% and non-GAAP service gross margin was 68.8%.

Total gross margins by geographic segment were: 64.4% for the Americas, 65.6% for EMEA and 60.4% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.4 billion, up 6%, primarily due to the gain recorded in the second quarter of fiscal 2016 from the sale of the SP Video CPE Business. Non-GAAP operating expenses were $3.8 billion, down 2%, and were 33.0% of revenue. Headcount compared with the end of the first quarter of fiscal 2017 decreased by 426 to 71,959, driven by our fiscal 2017 restructuring actions that began in the first quarter, offset by additional headcount primarily in our investments in key growth areas.

Operating Income -- GAAP operating income was $2.9 billion, down 12%, with GAAP operating margin of 25.0%. Non-GAAP operating income was $3.6 billion, down 3%, with non-GAAP operating margin at 31.0%.

Provision for Income Taxes -- The GAAP tax provision rate was 20.8%. The non-GAAP tax provision rate was 22.0%.

Net Income and EPS -- On a GAAP basis, net income was $2.3 billion and EPS was $0.47. On a non-GAAP basis, net income was $2.9 billion, a decrease of 2%, and EPS was flat at $0.57.

Cash Flow from Operating Activities -- was $3.8 billion, a decrease of 4% compared with $3.9 billion for the second quarter of fiscal 2016.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- were $71.8 billion at the end of the second quarter of fiscal 2017, compared with $71.0 billion at the end of the first 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 second quarter of fiscal 2017 were $9.6 billion.

Deferred Revenue -- was $17.1 billion, up 13% in total, with deferred product revenue up 19%, driven largely by subscription-based and software offerings. Deferred service revenue was up 9%. The portion of product deferred revenue related to recurring software and subscription businesses grew 51%.

Capital Allocation -- In the second quarter of fiscal 2017, Cisco declared and paid a cash dividend of $0.26 per common share, or $1.3 billion. For the second quarter of fiscal 2017, Cisco repurchased approximately 33 million shares of common stock under its stock repurchase program at an average price of $30.33 per share for an aggregate purchase price of $1.0 billion.

As of January 28, 2017, Cisco had repurchased and retired 4.7 billion shares of Cisco common stock at an average price of $21.17 per share for an aggregate purchase price of approximately $98.6 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $13.4 billion with no termination date.

Announced Acquisition of AppDynamics -- On January 24, 2017, Cisco announced its intent to acquire AppDynamics, Inc., a privately held application intelligence software company. The acquisition is expected to close in the third quarter of fiscal 2017.

Business Outlook for Q3 FY 2017

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

Q3 FY 2017    
Revenue   (2)% to 0% Y/Y
Non-GAAP gross margin rate   63% - 64%
Non-GAAP operating margin rate   29% - 30%
Non-GAAP tax provision rate   22%
Non-GAAP EPS   $0.57 - $0.59

The third quarter of fiscal 2016 included an extra week which resulted in higher revenue of $265 million and higher non-GAAP cost of sales and operating expenses of $150 million resulting in $115 million of non-GAAP operating income in that quarter.

Cisco estimates that GAAP EPS will be $0.44 to $0.49 which is lower than non-GAAP EPS by $0.10 to $0.13 per share in the third quarter of fiscal 2017.

Cisco's expected Q3 earnings per share between 57 cents and 59 cents is in line with the for 58 cents investors seek.

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