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Cisco Tops Expectations

November 15, 2018

Cisco reported first quarter results for the period ended October 27, 2018. Cisco reported first quarter revenue of $13.1 billion, net income on a generally accepted accounting principles (GAAP) basis of $3.5 billion or $0.77 per share, and non-GAAP net income of $3.5 billion or $0.75 per share.

Investors only sought earnings 72 cents per share and revenue of $12.87 billion.

"We had a strong start to fiscal 2019 and we believe our opportunity has never been greater," said Chuck Robbins, chairman and CEO of Cisco. "Our customers are looking to Cisco as a trusted partner to help them operate in a multi-cloud world and to transform their businesses. Our strategy is working and we are well positioned with our growing and differentiated portfolio across multiple domains to bring our customers a more secure, automated and simple IT infrastructure."

"We executed well, with broad-based growth across all of our geographies, product categories and customer segments, and delivered 8% revenue growth and 23% non-GAAP EPS growth," said Kelly Kramer, CFO of Cisco. "We are seeing the returns on our investments in innovation as we continue to transform our business model."

Q1 FY 2019 Highlights

Revenue -- Total revenue was $13.1 billion, up 8%, with product revenue up 9% and service revenue up 3%. Revenue by geographic segment was: Americas up 5%, EMEA up 11%, and APJC up 12%. Product revenue performance was generally broad based with growth in Applications, up 18%, Security, up 11%, and Infrastructure Platforms, up 9%.

Gross Margin -- On a GAAP basis, total gross margin, product gross margin, and service gross margin were 62.3%, 61.6%, and 64.6%, respectively, as compared with 61.2%, 60.1%, and 64.5%, respectively, in the first quarter of fiscal 2018.

On a non-GAAP basis, total gross margin, product gross margin, and service gross margin were 63.8%, 63.2%, and 65.7%, respectively, as compared with 63.7%, 63.0%, and 65.6%, respectively in the first quarter of fiscal 2018.

Total gross margins by geographic segment were: 65.4% for the Americas, 64.2% for EMEA and 57.2% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.3 billion, down 7%. Non-GAAP operating expenses were $4.2 billion, up 3%, and were 31.9% of revenue.

Operating Income -- GAAP operating income was $3.8 billion, up 38%, with GAAP operating margin of 29.1%. Non-GAAP operating income was $4.2 billion, up 13%, with non-GAAP operating margin at 31.9%.

Provision for Income Taxes -- The GAAP tax provision rate was 9.2%. The non-GAAP tax provision rate was 19.0%.

Net Income and EPS -- On a GAAP basis, net income was $3.5 billion and EPS was $0.77. On a non-GAAP basis, net income was $3.5 billion, an increase of 14%, and EPS was $0.75, an increase of 23%.

Cash Flow from Operating Activities -- $3.8 billion for the first quarter of fiscal 2019, an increase of 22% compared with $3.1 billion for the first quarter of fiscal 2018. Operating cash flow includes the receipt of $0.4 billion in relation to the litigation settlement with Arista Networks. Operating cash flow increased 9%, normalized for this receipt.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- $42.6 billion at the end of the first quarter of fiscal 2019, compared with $46.5 billion at the end of fiscal 2018.

Deferred Revenue -- $16.8 billion, down 9% in total, with deferred product revenue down 24%. Deferred service revenue was up 1%.

Capital Allocation -- For the first quarter of fiscal 2019, Cisco returned $6.5 billion to shareholders through share buybacks and dividends. Cisco declared and paid a cash dividend of $0.33 per common share, or $1.5 billion. Cisco repurchased approximately 109 million shares of common stock under its stock repurchase program at an average price of $46.01 per share for an aggregate purchase price of $5.0 billion. The remaining authorized amount for stock repurchases under the program is $14.0 billion with no termination date.

Acquisitions and Divestitures

In the first quarter of fiscal 2019, we closed the acquisition of Duo Security, a privately held company that provides unified access security and multi-factor authentication delivered through the cloud. We also closed the acquisition of July Systems, Inc., a privately held company that provides an enterprise-grade location platform through cloud-based subscription offerings.

In the fourth quarter of fiscal 2018, we announced an agreement to sell our Service Provider Video Software Solutions (SPVSS) business. This transaction closed in the second quarter of fiscal 2019.

Guidance for Q2 FY 2019

In the second quarter of fiscal 2019 on October 28, 2018, Cisco completed its divestiture of the SPVSS business. In order to provide a clear view of Cisco's continuing expected performance, the revenue outlook for the second quarter of fiscal 2019 is normalized to exclude the SPVSS business for the second quarter of fiscal 2018. The corresponding revenue in the second quarter of fiscal 2018 for the SPVSS business was $230 million.

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

Q2 FY 2019    
Revenue   5% - 7% growth Y/Y
Non-GAAP gross margin rate   63.5% - 64.5%
Non-GAAP operating margin rate   30.5% - 31.5%
Non-GAAP tax provision rate   19%
Non-GAAP EPS   $0.71 - $0.73

Cisco estimates that GAAP EPS will be $0.56 to $0.61 in the second quarter of fiscal 2019.

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