The FINANCIAL — Cisco on November 16 reported first quarter results for the period ended October 29, 2016.
Cisco reported first quarter revenue of $12.4 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.3 billion or $0.46 per share, and non-GAAP net income of $3.1 billion or $0.61 per share, according to Cisco.
“We had a good quarter despite a challenging global business environment and we performed well in our priority areas,” said Chuck Robbins, CEO, Cisco. “We are leading our customers in their digital transition by providing them with highly secure, automated, and intelligent solutions in the ways they want to consume them. Our innovation pipeline is robust and we are well positioned for the future.”
Reconciliations between net income, EPS and other measures on a GAAP and non-GAAP basis are provided in the tables located in the section entitled “Reconciliations of GAAP to non-GAAP Measures.”
“We executed well in Q1 delivering profitable growth, and saw strong adoption of our subscription-based and software offerings as we transition our business to a more recurring revenue model,” said Kelly Kramer, CFO, Cisco. “We will invest in key growth areas and continue to focus on delivering shareholder value.”
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 “Q1 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.
Q1 FY 2017 Highlights
Revenue — Total revenue was $12.4 billion, up 1%, with product revenue down 1% and service revenue up 7%. Revenue by geographic segment was: Americas down 1%, EMEA flat, and APJC up 6%. Product revenue performance was led by Security and NGN Routing which increased 11% and 6%, respectively. Switching decreased 7%, Collaboration and Data Center each decreased 3%, and Wireless and Service Provider Video each decreased 2%.
Gross Margin — On a GAAP basis, total gross margin and product gross margin were 63.8% and 63.4%, respectively. The increase in the product gross margin compared with 60.9% in the first quarter of fiscal 2016 was primarily due to continued productivity improvements and the divestiture of the SP Video CPE Business, partially offset by pricing and to a lesser extent product mix.
Non-GAAP total gross margin and product gross margin were 65.2% and 64.8%, respectively. The increase in non-GAAP product gross margin compared with 64.5% in the first quarter of fiscal 2016 was primarily due to continued productivity improvements, partially offset by pricing and to a lesser extent product mix.
GAAP service margin was 65.1% and non-GAAP service gross margin was 66.2%.
Total gross margins by geographic segment were: 64.9% for the Americas, 66.8% for EMEA and 63.5% for APJC.
Operating Expenses — On a GAAP basis, operating expenses were $5.0 billion, up 5%, driven in large part by higher restructuring charges in the first quarter of fiscal 2017. Non-GAAP operating expenses were $4.2 billion, up 1%, and were 33.6% of revenue. Headcount compared with the end of the fourth quarter of fiscal 2016 decreased by 1,326 to 72,385, driven by our fiscal 2017 restructuring actions that began in the first quarter, offset by additional headcount primarily from our investments in key growth areas.
Operating Income — GAAP operating income was $2.9 billion, down 7%, with GAAP operating margin of 23.3%. Non-GAAP operating income was $3.9 billion, up 1%, with non-GAAP operating margin at 31.6%.
Provision for Income Taxes — The GAAP tax provision rate was 21.4%. 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 $0.46. On a non-GAAP basis, net income was $3.1 billion, an increase of 3%, and EPS was $0.61, an increase of 3%.
Cash Flow from Operating Activities — was $2.7 billion, a decrease of 1% compared with $2.8 billion for the first quarter of fiscal 2016.
Balance Sheet and Other Financial Highlights
Cash and Cash Equivalents and Investments — were $71.0 billion at the end of the first quarter of fiscal 2017, 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 first quarter of fiscal 2017 were $10.4 billion.
Deferred Revenue — was $17.0 billion, up 12% in total, with deferred product revenue up 19%, driven largely by subscription-based and software offerings. Deferred service revenue was up 8%. The portion of product deferred revenue related to recurring and subscription businesses grew 48%.
Capital Allocation — In the first quarter of fiscal 2017, Cisco declared and paid a cash dividend of $0.26 per common share, or $1.3 billion. For the first quarter of fiscal 2017, Cisco repurchased approximately 32 million shares of common stock under its stock repurchase program at an average price of $31.12 per share for an aggregate purchase price of $1.0 billion.
As of October 29, 2016, Cisco had repurchased and retired 4.6 billion shares of Cisco common stock at an average price of $21.11 per share for an aggregate purchase price of approximately $97.6 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $14.4 billion with no termination date.
Acquisitions
During the first quarter of fiscal 2017, Cisco completed the following acquisitions:
CloudLock, Inc. — a privately held company, to further enhance Cisco’s security portfolio and build on Cisco’s Security Everywhere strategy, designed to provide protection from the cloud to the network to the endpoint and also aligns with our strategy to deliver more cloud-based subscription services.
ContainerX, Inc. — an early stage company which was focused on developing enterprise-class container management technology that works across a range of platforms.
Heroik Labs, Inc. — doing business as Worklife. Worklife, a privately held company, provides software to improve meeting productivity.
Business Outlook for Q2 FY 2017
On November 20, 2015, during the second quarter of fiscal 2016, Cisco completed its divestiture of the SP Video CPE Business. In order to provide a clear view of Cisco’s continuing expected financial performance, the revenue outlook for the second quarter of fiscal 2017 is normalized to exclude the SP Video CPE Business for the second quarter of fiscal 2016. The corresponding revenue in the second quarter of fiscal 2016 for the SP Video CPE Business was $93 million.
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