Cisco Reports $11.9B 2Q Revenue, Up 3% YoY

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SAN JOSE, Calif. -- Cisco today reported second quarter results for the period ended January 27, 2018. Cisco reported second quarter revenue of $11.9 billion, net loss on a generally accepted accounting principles (GAAP) basis of $(8.8) billion or $(1.78) per share, and non-GAAP net income of $3.1 billion or $0.63 per share.

  • Q2 Revenue: $11.9 billion
    • Increase of 3% year over year
    • Recurring revenue was 33% of total revenue, up 2 points year over year
  • Q2 Earnings (Loss) per Share: $(1.78) GAAP; $0.63 non-GAAP
    • GAAP results include an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act
  • Q3 FY 2018 Guidance:
    • Revenue: 3% to 5% growth year over year
    • Earnings per Share: GAAP: $0.50 to $0.55; Non-GAAP: $0.64 to $0.66

"We had a great quarter which demonstrates that our strategy is working. Our business is growing, we have a fantastic innovation pipeline, our balance sheet is strong and we have a team that's executing incredibly well," said Chuck Robbins, Chairman and CEO, Cisco. "The network is more critical to business success than ever, and our new intent-based networking portfolio has great momentum including the fastest ramping new product in our history."

GAAP results include an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act comprised of $9.0 billion for the U.S. transition tax, $1.2 billion for foreign withholding tax and $0.9 billion for the re-measurement of net deferred tax assets.

Cisco Increases Quarterly Cash Dividend; Stock Repurchase Program Authorization Increased

Cisco has declared a quarterly dividend of $0.33 per common share, a 4-cent increase or up 14% over the previous quarter's dividend, to be paid on April 25, 2018 to all shareholders of record as of the close of business on April 5, 2018. Future dividends will be subject to Board approval.

Cisco's board of directors has also approved a $25 billion increase to the authorization of the stock repurchase program. There is no fixed termination date for the repurchase program. The remaining authorized amount for stock repurchases including the additional authorization is approximately $31 billion.

"Q2 was a great quarter with 3% revenue growth and strong margins and cash flow," said Kelly Kramer, CFO of Cisco. "We continue to make progress as we shift the business toward more software and recurring revenue. Our significant dividend increase and additional share repurchase authorization reinforce our commitment to returning capital to our shareholders and show confidence in the strength of our ongoing cash flows."

Financial Summary

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

Q2 FY 2018 Highlights

Revenue -- Total revenue was $11.9 billion, up 3%, with product revenue up 3% and service revenue up 3%. 33% of total revenue was from recurring offers, up 2 percentage points from the second quarter of fiscal 2017. Revenue by geographic segment was: Americas up 5%, EMEA flat, and APJC down 2%. Product revenue performance reflected solid growth in Applications and Security, which each increased 6%. Infrastructure Platforms increased by 2%.

Gross Margin -- On a GAAP basis, total gross margin and product gross margin were 63.1% and 61.5%, respectively. Product gross margin increased compared with 61.1% in the second quarter of fiscal 2017.

Non-GAAP total gross margin and product gross margin were 64.7% and 63.3%, respectively. Non-GAAP product gross margin increased compared with 62.4% in the second quarter of fiscal 2017. The increase was primarily due to improved productivity benefits and to a lesser extent product mix, partially offset by pricing.

GAAP service gross margin was 67.4% and non-GAAP service gross margin was 68.5%.

Total gross margins by geographic segment were: 65.9% for the Americas, 64.6% for EMEA and 60.1% for APJC.

Operating Expenses --On a GAAP basis, operating expenses were $4.4 billion, up 1%. Non-GAAP operating expenses were $3.9 billion, up 2%, and were 32.9% of revenue.

Operating Income -- GAAP operating income was $3.1 billion, up 6%, with GAAP operating margin of 25.9%. Non-GAAP operating income was $3.8 billion, up 5%, with non-GAAP operating margin of 31.7%.

Provision for Income Taxes -- The GAAP tax provision rate was 371.6% which includes an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act. The non-GAAP tax provision rate was 20.0%.

Net Income (Loss) and Earnings (Loss) per Share -- On a GAAP basis, net loss was $(8.8) billion and earnings (loss) per share was $(1.78). On a non-GAAP basis, net income was $3.1 billion, an increase of 10%, and EPS was $0.63, an increase of 11%.

Cash Flow from Operating Activities -- was $4.1 billion, an increase of 8% compared with $3.8 billion for the second quarter of fiscal 2017.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- were $73.7 billion at the end of the second quarter of fiscal 2018, compared with $71.6 billion at the end of the first quarter of fiscal 2018, and compared with $70.5 billion at the end of fiscal 2017. The total cash and cash equivalents and investments available in the United States at the end of the second quarter of fiscal 2018 were $2.4 billion.

Deferred Revenue -- was $18.8 billion, up 10% in total, with deferred product revenue up 19%, driven largely by subscription-based and software offers, and deferred service revenue was up 4%. The portion of deferred product revenue related to recurring software and subscription offers increased 36%.

Capital Allocation -- In the second quarter of fiscal 2018, Cisco declared and paid a cash dividend of $0.29 per common share, or $1.4 billion. For the second quarter of fiscal 2018, Cisco repurchased approximately 103 million shares of common stock under its stock repurchase program at an average price of $39.07 per share for an aggregate purchase price of $4.0 billion.

Acquisitions

In the first quarter of fiscal 2018, we announced a definitive agreement to acquire BroadSoft, Inc., a publicly held company that offers cloud calling and contact center solutions. The BroadSoft acquisition closed in the third quarter of fiscal 2018.

On January 24, 2018, we announced our intent to acquire Skyport Systems, Inc., a privately held company providing cloud-managed, hyper-converged systems that run and protect business critical applications. The Skyport acquisition closed in the third quarter of fiscal 2018.

Guidance for Q3 FY 2018

Cisco expects to achieve the following results for the third quarter of fiscal 2018:

Q3 FY 2018

Revenue: 3%-5% growth Y/Y
Non-GAAP gross margin rate: 63%-64%
Non-GAAP operating margin rate: 29.5%-30.5%
Non-GAAP tax provision rate: 21%
Non-GAAP EPS: $0.64-$0.66

The impact of the BroadSoft acquisition is factored into our guidance.

Cisco estimates that GAAP EPS will be $0.50 to $0.55 in the third quarter of fiscal 2018.

Cisco Systems Inc. (Nasdaq: CSCO)

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