CISCO SYSTEMS, INC. Forward-Looking Statements This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "momentum," "seeks," "estimates," "continues," "endeavors," "strives," "may," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, future responses to and effects of the COVID-19 pandemic, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those under "Part II, Item 1A. Risk Factors," and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
OVERVIEW
Cisco designs and sells a broad range of technologies that power the Internet. We are integrating our platforms across networking, security, collaboration, applications and the cloud. These platforms are designed to help our customers manage more users, devices and things connecting to their networks. This will enable us to provide customers with a highly secure, intelligent platform for their digital business. A summary of our results is as follows (in millions, except percentages and per-share amounts): Three Months Ended October 30, October 24, 2021 2020 % Variance Revenue$ 12,900 $ 11,929 8 % Gross margin percentage 62.4 % 63.6 % (1.2) pts Research and development$ 1,714 $ 1,612 6 % Sales and marketing$ 2,261 $ 2,217 2 % General and administrative$ 551 $ 544 1 %
Total research and development, sales and marketing, general and administrative
$ 4,526 $ 4,373 3 % Total as a percentage of revenue 35.1 % 36.7 % (1.6) pts
Amortization of purchased intangible assets included in operating expenses
$ 84 $ 36 133 % Restructuring and other charges included in operating expenses $ 5$ 602 (99) % Operating income as a percentage of revenue 26.7 % 21.5 % 5.2 pts Interest and other income (loss), net$ 219 $ 111 97 % Income tax percentage 18.5 % 18.9 % (0.4) pts Net income$ 2,980 $ 2,174 37 % Net income as a percentage of revenue 23.1 % 18.2 % 4.9 pts Earnings per share-diluted$ 0.70 $ 0.51 37 % 40
--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Three Months Ended October 30, 2021 Compared with Three Months Ended October 24,
2020
In the first quarter of fiscal 2022, we had strong performance delivering solid
revenue growth and strong profitability. As customers are defining their hybrid
work strategy, we remain focused on executing and increasing our investments in
our technologies to assist in that transition. Total revenue increased by 8%
compared with the first quarter of fiscal 2021. Our product revenue reflected
growth in Secure, Agile Networks; Internet for the Future; End-to-End Security;
and Optimized Application Experiences; partially offset by declines in Hybrid
Work. While our revenue growth was solid, it was negatively impacted by supply
constraints seen industry wide. We continue to manage these significant supply
constraints due to component shortages and are taking multiple steps in order to
mitigate the supply shortages and deliver products to our customers. We expect
these supply constraints to continue into the second half of fiscal 2022. We
continued to make progress in the transition of our business model delivering
increased software and subscriptions. We remain focused on accelerating
innovation across our portfolio, and we believe that we have made continued
progress on our strategic priorities. We continue to operate in a challenging
macroeconomic and highly competitive environment. While the overall environment
remains uncertain, we continue to aggressively invest in priority areas with the
objective of driving profitable growth over the long term.
Within total revenue, product revenue increased by 11% and service revenue
increased by 1%. In the first quarter of fiscal 2022, total software revenue was
$3.7 billion across all product areas and service, an increase of 1%. Within
total software revenue, subscription revenue increased 4%. Total gross margin
decreased by 1.2 percentage points. Product gross margin decreased by 1.2
percentage points, largely driven by increased costs related to supply
constraints. The effect of pricing erosion was moderate, partially offset by
favorable product mix. As a percentage of revenue, research and development,
sales and marketing, and general and administrative expenses, collectively,
decreased by 1.6 percentage points. Operating income as a percentage of revenue
increased by 5.2 percentage points. Diluted earnings per share increased 37%,
driven by a 37% increase in net income.
In terms of our geographic segments, revenue from the Americas increased $363
million , EMEA revenue increased by $339 million and APJC revenue increased by
$269 million . The "BRICM" countries experienced product revenue growth of 21% in
the aggregate, driven by an increase in product revenue across each of the BRICM
countries with the exception of Russia .
From a customer market standpoint, we experienced product revenue growth in all
customer markets. We continued to see improvement in business momentum in our
customer markets.
From a product category perspective, the product revenue increase of 11% was
driven by growth in revenue in Secure, Agile Networks of 10%; Internet for the
Future of 46%; End-to-End Security of 4%; and Optimized Application Experiences
of 18%; partially offset by a product revenue decline in Hybrid Work of 7%.
41--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
COVID-19 Pandemic Response Summary
During the COVID-19 pandemic, our priority has been supporting our employees,
customers, partners and communities, while positioning Cisco for the future. The
pandemic has driven organizations across the globe to digitize their operations
and support remote workforces at a faster speed and greater scale than ever
before. We remain focused on providing the technology and solutions our
customers need to accelerate their digital organizations. The actions we have
taken and are taking include:
Employees
•Most of our global workforce is working from home.
•Seamless transition to work from home with a long-standing flexible work
policy, and we build the technologies that allow organizations to stay
connected, secure and productive.
•For the remainder who must be in the office to perform their roles, we are
focused on their health and safety, and are taking all of the necessary
precautions.
Customer and Partners
•Provided a variety of free offers and trials for our Webex and security
technologies as they dramatically shifted entire workforces to be remote.
Communities
•Committed significant funds to support both global and local pandemic response
efforts.
•Provided technology and financial support for non-profits, first responders,
and governments.
•Donated personal protective equipment to hospital workers including N95 masks
and face shields 3D-printed by Cisco volunteers around the world.
We are moving towards a hybrid work model, giving our employees the flexibility
to work offsite or at onsite Cisco locations.
42--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Strategy and Priorities
As our customers add billions of new connections to their enterprises, and as
more applications move to a multicloud environment, the network becomes even
more critical. Our customers are navigating change at an unprecedented pace and
our mission is to shape the future of the Internet by inspiring new
possibilities for them by helping transform their infrastructure, expand
applications and analytics, address their security needs, and empower their
teams. We believe that our customers are looking for outcomes that are
data-driven and provide meaningful business value through automation, security,
and analytics across private, hybrid, and multicloud environments. Our strategy
is to help our customers connect, secure, and automate in order to accelerate
their digital agility in a cloud-first world.
For additional discussion of our strategy and priorities, see Item 1. Business
in our Annual Report on Form 10-K for the year ended July 31, 2021 .
Other Key Financial Measures
The following is a summary of our other key financial measures for the first
quarter of fiscal 2022 (in millions):
October 30 , July 31,
2021 2021
Cash and cash equivalents and investments
$ 30,135 $ 30,893 Inventories$ 1,832 $ 1,559 Three Months Ended October 30, October 24, 2021 2020 Cash provided by operating activities$ 3,427 $ 4,096 Repurchases of common stock-stock repurchase program$ 256 $ 800 Dividends paid$ 1,561 $ 1,520 43
--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires us
to make judgments, assumptions, and estimates that affect the amounts reported
in the Consolidated Financial Statements and accompanying notes. Note 2 to the
Consolidated Financial Statements in our Annual Report on Form 10-K for the year
ended July 31, 2021 , as updated as applicable in Note 2 to the Consolidated
Financial Statements herein, describes the significant accounting policies and
methods used in the preparation of the Consolidated Financial Statements. The
accounting policies described below are significantly affected by critical
accounting estimates. Such accounting policies require significant judgments,
assumptions, and estimates used in the preparation of the Consolidated Financial
Statements, and actual results could differ materially from the amounts reported
based on these policies.
The inputs into certain of our judgments, assumptions, and estimates considered
the economic implications of the COVID-19 pandemic on our critical and
significant accounting estimates. The COVID-19 pandemic did not have a material
impact on our significant judgments, assumptions and estimates that are
reflected in our results for the first quarter of fiscal 2022. These estimates
are listed in our Annual Report on Form 10-K for the year ending July 31, 2021 ,
and include: goodwill and identified purchased intangible assets and income
taxes, among other items. The actual results that we experience may differ
materially from our estimates. As the COVID-19 pandemic continues, many of our
estimates could require increased judgment and carry a higher degree of
variability and volatility. As events continue to evolve our estimates may
change materially in future periods.
Revenue Recognition
We enter into contracts with customers that can include various combinations of
products and services which are generally distinct and accounted for as separate
performance obligations. As a result, our contracts may contain multiple
performance obligations. We determine whether arrangements are distinct based on
whether the customer can benefit from the product or service on its own or
together with other resources that are readily available and whether our
commitment to transfer the product or service to the customer is separately
identifiable from other obligations in the contract. We classify our hardware,
perpetual software licenses, and SaaS as distinct performance obligations. Term
software licenses represent multiple obligations, which include software
licenses and software maintenance. In transactions where we deliver hardware or
software, we are typically the principal and we record revenue and costs of
goods sold on a gross basis.
We recognize revenue upon transfer of control of promised goods or services in a
contract with a customer in an amount that reflects the consideration we expect
to receive in exchange for those products or services. Transfer of control
occurs once the customer has the contractual right to use the product, generally
upon shipment, electronic delivery (or when the software is available for
download by the customer), or once title and risk of loss has transferred to the
customer. Transfer of control can also occur over time for software maintenance
and services as the customer receives the benefit over the contract term. Our
hardware and perpetual software licenses are distinct performance obligations
where revenue is recognized upfront upon transfer of control. Term software
licenses include multiple performance obligations where the term licenses are
recognized upfront upon transfer of control, with the associated software
maintenance revenue recognized ratably over the contract term as services and
software updates are provided. SaaS arrangements do not include the right for
the customer to take possession of the software during the term, and therefore
have one distinct performance obligation which is satisfied over time with
revenue recognized ratably over the contract term as the customer consumes the
services. On our product sales, we record consideration from shipping and
handling on a gross basis within net product sales. We record our revenue net of
any associated sales taxes.
Revenue is allocated among these performance obligations in a manner that
reflects the consideration that we expect to be entitled to for the promised
goods or services based on standalone selling prices (SSP). SSP is estimated for
each distinct performance obligation and judgment may be required in their
determination. The best evidence of SSP is the observable price of a product or
service when we sell the goods separately in similar circumstances and to
similar customers. In instances where SSP is not directly observable, we
determine SSP using information that may include market conditions and other
observable inputs.
We assess relevant contractual terms in our customer contracts to determine the
transaction price. We apply judgment in identifying contractual terms and
determining the transaction price as we may be required to estimate variable
consideration when determining the amount of revenue to recognize. Variable
consideration includes potential contractual penalties and various rebate,
cooperative marketing and other incentive programs that we offer to our
distributors, channel partners and customers. When determining the amount of
revenue to recognize, we estimate the expected usage of these programs, applying
the expected value or most likely estimate and update the estimate at each
reporting period as actual utilization becomes available. We also consider the
customers' right of return in determining the transaction price, where
applicable. If actual credits received by distributors under these programs were
to deviate significantly from our estimates, which are based on historical
experience, our revenue could be adversely affected.
See Note 3 to the Consolidated Financial Statements for more details.
44--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Inventory Valuation and Liability for Purchase Commitments with Contract
Manufacturers and Suppliers
Inventory is written down based on excess and obsolete inventories, determined
primarily by future demand forecasts. Inventory write-downs are measured as the
difference between the cost of the inventory and market, based upon assumptions
about future demand, and are charged to the provision for inventory, which is a
component of our cost of sales. At the point of the loss recognition, a new,
lower cost basis for that inventory is established, and subsequent changes in
facts and circumstances do not result in the restoration or increase in that
newly established cost basis.
We record a liability for firm, noncancelable, and unconditional purchase
commitments with contract manufacturers and suppliers for quantities in excess
of our future demand forecasts consistent with the valuation of our excess and
obsolete inventory.
Our provision for inventory was $22 million and $29 million for the first
quarter of fiscal 2022 and 2021, respectively. The provision for the liability
related to purchase commitments with contract manufacturers and suppliers was
$47 million and $32 million for the first quarter of fiscal 2022 and 2021,
respectively. If there were to be a sudden and significant decrease in demand
for our products, if there were a higher incidence of inventory obsolescence
because of rapidly changing technology and customer requirements, or if supply
constraints were to continue, we could be required to increase our inventory
write-downs, and our liability for purchase commitments with contract
manufacturers and suppliers, and accordingly our profitability, could be
adversely affected. We regularly evaluate our exposure for inventory write-downs
and the adequacy of our liability for purchase commitments. We continue to
manage through significant supply constraints seen industry wide due to
component shortages caused, in part, by the COVID-19 pandemic. For further
discussion around the Supply Constraints Impacts and Risks, see Result of
Operations-Product Gross Margin and Liquidity and Capital Resources-Inventory
Supply Chain.
Loss Contingencies
We are subject to the possibility of various losses arising in the ordinary
course of business. We consider the likelihood of the incurrence of a liability,
as well as our ability to reasonably estimate the amount of loss, in determining
loss contingencies. An estimated loss contingency is accrued when it is probable
that a liability has been incurred and the amount of loss can be reasonably
estimated. We regularly evaluate information available to us to determine
whether such accruals should be made or adjusted and whether new accruals are
required.
Third parties, including customers, have in the past and may in the future
assert claims or initiate litigation related to exclusive patent, copyright,
trademark, and other intellectual property rights to technologies and related
standards that are relevant to us. These assertions have increased over time as
a result of our growth and the general increase in the pace of patent claims
assertions, particularly in the United States . If any infringement or other
intellectual property claim made against us by any third party is successful, or
if we fail to develop non-infringing technology or license the proprietary
rights on commercially reasonable terms and conditions, our business, operating
results, and financial condition could be materially and adversely affected.
Goodwill and Purchased Intangible Asset Impairments
Our methodology for allocating the purchase price relating to purchase
acquisitions is determined through established valuation techniques. Goodwill
represents a residual value as of the acquisition date, which in most cases
results in measuring goodwill as an excess of the purchase consideration
transferred plus the fair value of any noncontrolling interest in the acquired
company over the fair value of net assets acquired, including contingent
consideration. We perform goodwill impairment tests on an annual basis in the
fourth fiscal quarter and between annual tests in certain circumstances for each
reporting unit. The assessment of fair value for goodwill and purchased
intangible assets is based on factors that market participants would use in an
orderly transaction in accordance with the new accounting guidance for the fair
value measurement of nonfinancial assets.
In response to changes in industry and market conditions, we could be required
to strategically realign our resources and consider restructuring, disposing of,
or otherwise exiting businesses, which could result in an impairment of
goodwill. There was no impairment of goodwill in each of the first quarters of
fiscal 2022 and 2021.
The fair value of acquired technology and patents, as well as acquired
technology under development, is determined at acquisition date primarily using
the income approach, which discounts expected future cash flows to present
value. The discount rates used in the present value calculations are typically
derived from a weighted-average cost of capital analysis and then adjusted to
reflect risks inherent in the development lifecycle as appropriate. We consider
the pricing model for products related to these acquisitions to be standard
within the high-technology communications industry, and the applicable discount
rates represent the rates that market participants would use for valuation of
such intangible assets.
We make judgments about the recoverability of purchased intangible assets with
finite lives whenever events or changes in circumstances indicate that an
impairment may exist. Recoverability of purchased intangible assets with finite
lives is measured
45--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
by comparing the carrying amount of the asset to the future undiscounted cash
flows the asset is expected to generate. We review indefinite-lived intangible
assets for impairment annually or whenever events or changes in circumstances
indicate that the asset might be impaired. If the asset is considered to be
impaired, the amount of any impairment is measured as the difference between the
carrying value and the fair value of the impaired asset. Assumptions and
estimates about future values and remaining useful lives of our purchased
intangible assets are complex and subjective. They can be affected by a variety
of factors, including external factors such as industry and economic trends, and
internal factors such as changes in our business strategy and our internal
forecasts.
Our ongoing consideration of all the factors described previously could result
in impairment charges in the future, which could adversely affect our net
income.
Income Taxes
We are subject to income taxes in the United States and numerous foreign
jurisdictions. Our effective tax rates differ from the statutory rate, primarily
due to the tax impact of state taxes, foreign operations, R&D tax credits,
foreign-derived intangible income deductions, global intangible low-taxed
income, tax audit settlements, nondeductible compensation, international
realignments, and transfer pricing adjustments. Our effective tax rate was 18.5%
and 18.9% in the first quarter of fiscal 2022 and 2021, respectively.
Significant judgment is required in evaluating our uncertain tax positions and
determining our provision for income taxes. Although we believe our reserves are
reasonable, no assurance can be given that the final tax outcome of these
matters will not be different from that which is reflected in our historical
income tax provisions and accruals. We adjust these reserves in light of
changing facts and circumstances, such as the closing of a tax audit or the
refinement of an estimate. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences will impact the
provision for income taxes in the period in which such determination is made.
The provision for income taxes includes the impact of reserve provisions and
changes to reserves that are considered appropriate, as well as the related net
interest and penalties.
Significant judgment is also required in determining any valuation allowance
recorded against deferred tax assets. In assessing the need for a valuation
allowance, we consider all available evidence, including past operating results,
estimates of future taxable income, and the feasibility of tax planning
strategies. In the event that we change our determination as to the amount of
deferred tax assets that can be realized, we will adjust our valuation allowance
with a corresponding impact to the provision for income taxes in the period in
which such determination is made.
Our provision for income taxes is subject to volatility and could be adversely
impacted by earnings being lower than anticipated in countries that have lower
tax rates and higher than anticipated in countries that have higher tax rates;
by changes in the valuation of our deferred tax assets and liabilities; by
changes to foreign-derived intangible income deduction, global intangible
low-tax income and base erosion and anti-abuse tax laws, regulations, or
interpretations thereof; by expiration of or lapses in tax incentives; by
transfer pricing adjustments, including the effect of acquisitions on our legal
structure; by tax effects of nondeductible compensation; by tax costs related to
intercompany realignments; by changes in accounting principles; or by changes in
tax laws and regulations, treaties, or interpretations thereof, including
changes to the taxation of earnings of our foreign subsidiaries, the
deductibility of expenses attributable to foreign income, and the foreign tax
credit rules. Significant judgment is required to determine the recognition and
measurement attributes prescribed in the accounting guidance for uncertainty in
income taxes. The Organisation for Economic Co-operation and Development (OECD),
an international association comprised of 38 countries, including the United
States , has made changes and is contemplating additional changes to numerous
long-standing tax principles. There can be no assurance that these changes and
any contemplated changes if finalized, once adopted by countries, will not have
an adverse impact on our provision for income taxes. As a result of certain of
our ongoing employment and capital investment actions and commitments, our
income in certain countries was subject to reduced tax rates. Our failure to
meet these commitments could adversely impact our provision for income taxes. In
addition, we are subject to the continuous examination of our income tax returns
by the Internal Revenue Service (IRS) and other tax authorities. We regularly
assess the likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of our provision for income taxes. There can be no
assurance that the outcomes from these continuous examinations will not have an
adverse impact on our operating results and financial condition.
46--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
RESULTS OF OPERATIONS
Revenue
The following table presents the breakdown of revenue between product and
service (in millions, except percentages):
Three Months Ended
October 30, October 24, Variance Variance
2021 2020 in Dollars in Percent
Revenue:
Product $ 9,529 $ 8,587 $ 942 11 %
Percentage of revenue 73.9 % 72.0 %
Service 3,371 3,342 29 1 %
Percentage of revenue 26.1 % 28.0 %
Total $ 12,900 $ 11,929 $ 971 8 %
We manage our business primarily on a geographic basis, organized into three
geographic segments. Our revenue, which includes product and service for each
segment, is summarized in the following table (in millions, except percentages):
Three Months Ended
October 30, October 24, Variance Variance
2021 2020 in Dollars in Percent
Revenue:
Americas $ 7,561 $ 7,198 $ 363 5 %
Percentage of revenue 58.6 % 60.4 %
EMEA 3,303 2,964 339 11 %
Percentage of revenue 25.6 % 24.8 %
APJC 2,036 1,767 269 15 %
Percentage of revenue 15.8 % 14.8 %
Total $ 12,900 $ 11,929 $ 971 8 %
Amounts may not sum and percentages may not recalculate due to rounding.
Three Months Ended October 30, 2021 Compared with Three Months Ended October 24,
2020
Total revenue increased by 8%. Product revenue increased by 11% and service
revenue increased by 1%. Our total revenue reflected growth across each of our
geographic segments. Product revenue for the emerging countries of BRICM, in the
aggregate, experienced product revenue growth of 21%, with growth in each of
these countries with the exception of Russia .
In addition to the impact of macroeconomic factors, including the IT spending
environment and the level of spending by government entities, revenue by segment
in a particular period may be significantly impacted by several factors related
to revenue recognition, including the complexity of transactions such as
multiple performance obligations; the mix of financing arrangements provided to
channel partners and customers; and final acceptance of the product, system, or
solution, among other factors. In addition, certain customers tend to make large
and sporadic purchases, and the revenue related to these transactions may also
be affected by the timing of revenue recognition, which in turn would impact the
revenue of the relevant segment.
47--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Product Revenue by Segment
The following table presents the breakdown of product revenue by segment (in
millions, except percentages):
Three Months Ended
October 30, October 24, Variance Variance
2021 2020 in Dollars in Percent
Product revenue:
Americas $ 5,522 $ 5,129 $ 393 8 %
Percentage of product revenue 57.9 % 59.8 %
EMEA 2,513 2,210 303 14 %
Percentage of product revenue 26.4 % 25.7 %
APJC 1,495 1,248 247 20 %
Percentage of product revenue 15.7 % 14.5 %
Total $ 9,529 $ 8,587 $ 942 11 %
Amounts may not sum and percentages may not recalculate due to rounding.
Three Months Ended October 30, 2021 Compared with Three Months Ended October 24,
2020
Americas
Product revenue in the Americas segment increased by 8%, with growth in the
service provider, commercial and enterprise markets, partially offset by a
slight decline in the public sector market. From a country perspective, product
revenue increased in the United States , Canada , Mexico and Brazil by 8%, 22%,
11% and 29%, respectively.
EMEA
Product revenue in the EMEA segment increased by 14%, with growth in all
customer markets. Product revenue from emerging countries within EMEA increased
by 18% and product revenue for the remainder of the EMEA segment, which
primarily consists of countries in Western Europe , increased by 13%. From a
country perspective, product revenue increased by 2% in Germany , 15% in the
United Kingdom and 7% in France .
APJC
Product revenue in the APJC segment increased by 20%, driven by growth in all
customer markets. From a country perspective, product revenue increased in
Australia , China and India by 35%, 20% and 44%, respectively, partially offset
by a decline of 10% in Japan .
48--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Product Revenue by Category
In addition to the primary view on a geographic basis, we also prepare financial
information related to product categories and customer markets for various
purposes. Effective in the first quarter of fiscal 2022, we began reporting our
product revenue in the following categories: Secure, Agile Networks; Hybrid
Work; End-to-End Security; Internet for the Future; Optimized Application
Experiences; and Other Products. This change will better align our product
categories with our strategic priorities.
The following table presents product revenue by category (in millions, except
percentages):
Three Months Ended
October 30, October 24, Variance Variance
2021 2020 in Dollars in Percent
Product revenue:
Secure, Agile Networks $ 5,967 $ 5,434 $ 533 10 %
Hybrid Work 1,109 1,193 (84) (7) %
End-to-End Security 895 861 34 4 %
Internet for the Future 1,374 942 432 46 %
Optimized Application Experiences 181 153 28 18 %
Other Products 3 3 - 9 %
Total $ 9,529 $ 8,587 $ 942 11 %
Amounts may not sum and percentages may not recalculate due to rounding.
Three Months Ended October 30, 2021 Compared with Three Months Ended October 24,
2020
Secure, Agile Networks
The Secure, Agile Networks product category represents our core networking
offerings related to switching, enterprise routing, wireless, and compute.
Secure, Agile Networks revenue increased by 10%, or $533 million , with growth
across the portfolio with the exception of compute. Switching revenue grew in
both campus switching and data center switching. This was primarily driven by
strong growth in our Catalyst 9000 series and Meraki switching offerings. We
experienced an increase in sales of our enterprise routing products driven by
growth in our Edge and SD-WAN offerings. Wireless had strong double-digit growth
driven by our WiFi-6 products and Meraki offerings. Revenue from compute
declined primarily driven by our Hyper Converged offerings.
Hybrid Work
The Hybrid Work product category includes our collaboration and contact center
offerings. Revenue in our Hybrid Work product category decreased by 7%, or $84
million , driven by declines in our Calling, Meetings and Contact Center
offerings, partially offset by growth in our Communication Platform as a Service
(CPaaS) offerings and Collaboration Devices.
End-to-End Security
Revenue in our End-to-End Security product category increased 4%, or $34 million
primarily driven by our cloud-based solutions partially offset by declines in
our perpetual and security hardware offerings. Our zero trust portfolio
reflected strong double-digit growth driven by continued momentum with our Duo
offerings. We also experienced growth in our Unified Threat Management
offerings.
Internet for the Future
The Internet for the Future product category includes our routed optical
networking, public 5G, silicon and optics offerings. Revenue in our Internet for
the Future product category increased by 46%, or $432 million , driven by the
growth in the webscale provider market. This was primarily driven by strong
growth in our Cisco 8000 portfolio, NCS 5500 series and ASR 9000 series
offerings. We also saw a benefit from our acquisition of Acacia.
Optimized Application Experiences
The Optimized Application Experiences product category includes our full stack
observability and cloud-native platforms offerings. Revenue in our Optimized
Application Experiences product category increased 18%, or $28 million , driven
by growth in ThousandEyes and Intersight offerings.
49--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Service Revenue by Segment
The following table presents the breakdown of service revenue by segment (in
millions, except percentages):
Three Months Ended
October 30, October 24, Variance Variance
2021 2020 in Dollars in Percent
Service revenue:
Americas $ 2,039 $ 2,070 $ (31) (1) %
Percentage of service revenue 60.5 % 61.9 %
EMEA 790 754 36 5 %
Percentage of service revenue 23.4 % 22.6 %
APJC 541 519 22 4 %
Percentage of service revenue 16.1 % 15.5 %
Total $ 3,371 $ 3,342 $ 29 1 %
Amounts may not sum and percentages may not recalculate due to rounding.
Service revenue increased 1% in the first quarter of fiscal 2022 driven by
revenue growth in our maintenance business and solution support offerings.
Service revenue increased in the EMEA and APJC segments, partially offset by
lower revenue in the
Gross Margin The following table presents the gross margin for products and services (in millions, except percentages):
Three Months Ended
AMOUNT PERCENTAGE
October 30, October 24, October 30, October 24,
2021 2020 2021 2020
Gross margin:
Product $ 5,856 $ 5,381 61.5 % 62.7 %
Service 2,197 2,200 65.2 % 65.8 %
Total $ 8,053 $ 7,581 62.4 % 63.6 %
Product Gross Margin
The following table summarizes the key factors that contributed to the change in
product gross margin percentage for the first quarter of fiscal 2022, as
compared with the corresponding prior year period:
Product Gross Margin Percentage
Fiscal 2021 62.7 %
Productivity (1) (0.6) %
Product pricing (1.4) %
Mix of products sold 0.4 %
Legal and indemnification charge
0.5 %
Others (0.1) %
Fiscal 2022 61.5 %
(1) Productivity includes overall manufacturing-related costs, such as component
costs, warranty expense, provision for inventory, freight, logistics, shipment
volume, and other items not categorized elsewhere.
50--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Three Months Ended October 30, 2021 Compared with Three Months Ended October 24,
2020
Product gross margin decreased by 1.2 percentage points primarily driven by
lower productivity, largely driven by increased costs related to supply
constraints from freight, expedites, and component costs. We also saw moderate
pricing erosion, partially offset by favorable product mix. The effect of
pricing erosion was moderate driven by typical market factors and primarily
impacted the Americas and EMEA segments. Productivity was adversely impacted by
increased costs related to supply constraints. The favorable mix was driven by
changes in the proportion of products sold from Secure, Agile Networks and
End-to-End Security, partially offset by unfavorable mix in Internet for the
Future and Hybrid Work, as compared to the corresponding period of fiscal 2021.
Supply Constraints Impacts and Risks
We continue to manage through significant supply constraints seen industry wide
due to component shortages caused, in part, by the COVID-19 pandemic. These
shortages have resulted in increased costs (i.e., component and other commodity
costs, freight, expedite fees, etc.) which have had a negative impact on our
product gross margin and have resulted in extended lead times for us and our
customers. We have taken a number of steps in order to mitigate the supply
constraint related impacts including: partnering with several of our key
suppliers utilizing our volume purchasing ability and extending supply coverage,
including, in certain cases, revising supplier arrangements; paying
significantly higher component and logistics costs to secure supply; modifying
our product designs in order to leverage alternate suppliers, where possible;
continually optimizing our inventory build and customer delivery plans; among
others. We believe these actions are helping us to optimize our access to
critical components and meet customer demand for our products. We have recently
seen substantially increased demand for our hardware products. As a result, in
order to secure supply to meet customer demand, we have increased our inventory
balances and inventory purchase commitments (see Liquidity and Capital
Resources-Inventory Supply Chain section), which, in turn, has increased our
supply chain exposure. Additionally, in certain situations, we have prepaid or
made deposits with suppliers to secure future supply. These actions
significantly increase the risk of future material excess and obsolete inventory
and related losses if customer demand were to suddenly and significantly
decrease in future periods. While we believe we are taking the right strategic
and operational actions to address the supply situation, we recognize the
increased risks.
Service Gross Margin
Three Months Ended October 30, 2021 Compared with Three Months Ended October 24,
2020
Our service gross margin percentage decreased by 0.6 percentage points primarily
due to higher headcount-related and delivery costs, partially offset by
favorable mix of service offerings and higher sales volume.
Our service gross margin normally experiences some fluctuations due to various
factors such as the timing of contract initiations in our renewals, our
strategic investments in headcount, and the resources we deploy to support the
overall service business. Other factors include the mix of service offerings, as
the gross margin from our advanced services is typically lower than the gross
margin from technical support services.
51--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)Gross Margin by Segment The following table presents the total gross margin for each segment (in millions, except percentages):
Three Months Ended
AMOUNT PERCENTAGE
October 30, October 24, October 30, October 24,
2021 2020 2021 2020
Gross margin:
Americas $ 4,875 $ 4,847 64.5 % 67.3 %
EMEA 2,128 1,894 64.4 % 63.9 %
APJC 1,317 1,113 64.7 % 63.0 %
Segment total 8,321 7,853 64.5 % 65.8 %
Unallocated corporate items (1) (268) (272)
Total $ 8,053 $ 7,581 62.4 % 63.6 %
(1) The unallocated corporate items include the effects of amortization and impairments of acquisition-related intangible assets, share-based compensation expense, significant litigation settlements and other contingencies, charges related to asset impairments and restructurings, and certain other charges. We do not allocate these items to the gross margin for each segment because management does not include such information in measuring the performance of the operating segments. Amounts may not sum and percentages may not recalculate due to rounding. Three Months EndedOctober 30, 2021 Compared with Three Months EndedOctober 24, 2020 We experienced a gross margin percentage decrease in ourAmericas segment due to pricing erosion, negative impacts from productivity and unfavorable impacts from product mix. Gross margin in our EMEA segment increased due to favorable impacts from productivity improvements and favorable impacts from product mix, partially offset by pricing erosion. Higher service gross margin also contributed to the increase in the gross margin in this geographic segment. The APJC segment gross margin percentage increase was due to favorable impacts from product mix, productivity improvements and favorable pricing. The gross margin percentage for a particular segment may fluctuate, and period-to-period changes in such percentages may or may not be indicative of a trend for that segment. Research and Development ("R&D"), Sales and Marketing, and General and Administrative ("G&A") Expenses R&D, sales and marketing, and G&A expenses are summarized in the following table (in millions, except percentages): Three Months Ended October 30, October 24, Variance Variance 2021 2020 in Dollars in Percent Research and development$ 1,714 $ 1,612 $ 102 6 % Percentage of revenue 13.3 % 13.5 % Sales and marketing 2,261 2,217 44 2 % Percentage of revenue 17.5 % 18.6 % General and administrative 551 544 7 1 % Percentage of revenue 4.3 % 4.6 % Total$ 4,526 $ 4,373 $ 153 3 % Percentage of revenue 35.1 % 36.7 % 52
--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Three Months Ended October 30, 2021 Compared with Three Months Ended October 24,
2020
R&D Expenses
R&D expenses increased due to higher headcount-related expenses, higher
acquisition-related costs, higher share-based compensation expense and higher
contracted services spending.
We continue to invest in R&D in order to bring a broad range of products to
market in a timely fashion. If we believe that we are unable to enter a
particular market in a timely manner with internally developed products, we may
purchase or license technology from other businesses, or we may partner with or
acquire businesses as an alternative to internal R&D.
Sales and Marketing Expenses
Sales and marketing expenses increased due to higher headcount-related expenses
and discretionary spending.
G&A Expenses
G&A expenses increased slightly due to higher discretionary spending and
contracted services spending.
Effect of Foreign Currency
In the first quarter of fiscal 2022, foreign currency fluctuations, net of
hedging, increased the combined R&D, sales and marketing, and G&A expenses by
approximately $19 million , or 0.4%, compared with the first quarter of fiscal
2021.
Amortization of Purchased Intangible Assets
The following table presents the amortization of purchased intangible assets
including impairment charges (in millions):
Three Months Ended
October 30, October 24,
2021 2020
Amortization of purchased intangible assets:
Cost of sales $ 202 $ 170
Operating expenses 84 36
Total $ 286 $ 206
For the first quarter of fiscal 2022, the increase in amortization of purchased
intangible assets was due largely to the amortization of purchased intangibles
from our recent acquisitions.
Restructuring and Other Charges
We initiated a restructuring plan in fiscal 2021, which included a voluntary
early retirement program, in order to realign the organization and enable
further investment in key priority areas. The total pretax charges are estimated
to be approximately $900 million . In connection with this restructuring plan, we
have incurred cumulative charges of $887 million and substantially completed
this plan in fiscal 2021.
Operating Income
The following table presents our operating income and our operating income as a
percentage of revenue (in millions, except percentages):
Three Months Ended
October 30, October 24,
2021 2020
Operating income $ 3,438 $ 2,570
Operating income as a percentage of revenue 26.7 % 21.5 %
Three Months EndedOctober 30, 2021 Compared with Three Months EndedOctober 24, 2020 Operating income increased by 34%, and operating income as a percentage of revenue increased by 5.2 percentage points. These changes resulted primarily from a revenue increase and lower restructuring and other charges partially offset by a gross margin percentage decrease (driven by lower productivity and pricing erosion, partially offset by favorable product mix). 53
--------------------------------------------------------------------------------
Table of Contents
CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Interest and Other Income (Loss), Net
Interest Income (Expense), Net The following table summarizes interest income
and interest expense (in millions):
Three Months Ended
October 30, October 24, Variance
2021 2020 in Dollars
Interest income $ 121 $ 174 $ (53)
Interest expense (89) (112) 23
Interest income (expense), net
(30)
For the first quarter of fiscal 2022, the decrease in interest income was driven
by lower interest rates and lower average balances of cash and
available-for-sale debt investments. The decrease in interest expense was driven
by a lower average debt balance.
Other Income (Loss), Net The components of other income (loss), net, are
summarized as follows (in millions):
Three Months Ended
October 30, October 24, Variance
2021 2020 in Dollars
Gains (losses) on investments, net:
Available-for-sale debt investments $ 6 $ 15 $ (9)
Marketable equity investments 5 (1) 6
Privately held investments 205 42 163
Net gains (losses) on investments 216 56 160
Other gains (losses), net (29) (7) (22)
Other income (loss), net $ 187 $ 49 $ 138
Three Months Ended October 30, 2021 Compared with Three Months Ended October 24,
2020
The change in net gains (losses) on available-for-sale debt investments was
primarily attributable to lower realized gains as a result of market conditions,
and the timing of sales of these investments. The change in net gains (losses)
on marketable equity investments was attributable to market value fluctuations
and the timing of recognition of gains and losses. The change in net gains
(losses) on privately held investments was primarily due to higher net
unrealized gains and higher net realized gains. The change in other gains
(losses), net was primarily driven by higher donation expense.
Provision for Income Taxes
Three Months Ended October 30, 2021 Compared with Three Months Ended October 24,
2020
The provision for income taxes resulted in an effective tax rate of 18.5% for
the first quarter of fiscal 2022 compared with 18.9% for the first quarter of
fiscal 2021. The decrease in the effective tax rate was primarily due to an
increase in the tax benefit from share-based compensation windfall in the first
quarter of fiscal 2022 as compared to the first quarter of fiscal 2021.
54--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
