SOURCE: Cisco

Cisco

November 12, 2015 16:05 ET

Cisco Reports First Quarter Earnings

Strong Results and Great Execution in Q1, Guided for Growth in Q2, Well Positioned for Second Half

SAN JOSE, CA--(Marketwired - Nov 12, 2015) - Cisco (NASDAQ: CSCO)

  • Q1 Revenue: $12.7 billion (increase of 4% year over year)
  • Q1 Earnings per Share: $0.48 GAAP; $0.59 non-GAAP
  • Q2 Guidance (normalized to exclude SP Video CPE business):
    • Revenue: 0%-2% growth year over year
    • Non-GAAP Earnings per Share: $0.53 - $0.55

Cisco, the worldwide leader in networking that transforms how people connect, communicate and collaborate, today reported its first quarter results for the period ended October 24, 2015. Cisco reported first quarter revenue of $12.7 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.4 billion or $0.48 per share, and non-GAAP net income of $3.0 billion or $0.59 per share.

"Q1 was a very strong quarter. We are accelerating our ability to deliver on growth opportunities, aggressively driving our cloud business, and delivering continued strength in our deferred product revenue, as we sell more of our portfolio in software and cloud models," said Chuck Robbins, Cisco chief executive officer.

"We guided to solid growth in Q2. Our guidance reflects lower than expected order growth in Q1, driven largely by the uncertainty  of the macro environment and currency impacts. Despite these headwinds, I believe we are executing very well. We are moving very fast to capture new opportunities and I feel good about how we are positioned for the second half of the year."

 
GAAP Results
 
    Q1 2016   Q1 2015   Vs. Q1 2015
Revenue   $ 12.7   billion   $ 12.2   billion   3.6%
Net Income   $ 2.4   billion   $ 1.8   billion   32.9%
Diluted Earnings per Share (EPS)   $ 0.48       $ 0.35       37.1%
 
Non-GAAP Results
 
    Q1 2016   Q1 2015   Vs. Q1 2015
Net Income   $ 3.0   billion   $ 2.8   billion   7.9%
EPS   $ 0.59       $ 0.54       9.3%
                         

A reconciliation between net income and EPS on a GAAP and non-GAAP basis is provided in the table following the Consolidated Statements of Operations. Supplementary information related to other GAAP and non-GAAP measures is also provided in the tables below.

Financial Highlights for Q1 FY16
(All comparative percentages are on a year-over-year basis unless otherwise noted)

Revenue -- Total revenue was $12.7 billion, up 4%. Product revenue increased by 4% and service revenue increased by 1%. Total revenue by geographic segment was: Americas up 4%, and each of EMEA and APJC up 3%. Product revenue growth was led by Data Center and Collaboration at 24% and 17%, respectively. Wireless and Security each grew 7%, Switching grew 5%, NGN Routing decreased 8%, and Service Provider Video decreased 2%.

Gross Margin -- On a non-GAAP basis, total gross margin and product gross margin were 63.2% and 62.3% respectively. The increase in non-GAAP product gross margin as compared to the fourth quarter of fiscal 2015 was driven by continued productivity improvements, partially offset by pricing and to a lesser extent product mix. Non-GAAP service gross margin was 66.2%. Total gross margins by geographic segment were: 63.5% for the Americas, 64.2% for EMEA, and 60.0% for APJC. On a GAAP basis, total gross margin, product gross margin, and service gross margin were at 61.8%, 60.9% and 64.9%, respectively.

Operating Expenses -- Non-GAAP operating expenses were $4.1 billion, down 1%, and at 32.7% of revenue. Headcount increased from the fourth quarter of fiscal 2015 by 230 to 72,063, reflecting additional headcount from acquisitions and investments in key growth areas such as security, cloud and software. On a GAAP basis, operating expenses were $4.8 billion, down 5%.

Operating Income -- Non-GAAP operating income was $3.9 billion, up 8%, with non-GAAP operating margin at 30.5%. GAAP operating income was $3.1 billion, up 31%, with GAAP operating margin of 24.3%.

Provision for Income Taxes -- The non-GAAP tax provision rate was 23.0%. The GAAP tax provision rate was 22.5%.

Net Income and EPS -- On a non-GAAP basis, net income was $3.0 billion, an increase of 8%, and EPS was $0.59, an increase of 9%. On a GAAP basis, net income was $2.4 billion and EPS was $0.48.

Cash Flow from Operating Activities -- was $2.8 billion an increase of 11% compared with $2.5 billion for the first quarter of fiscal 2015.

Cash and Cash Equivalents and Investments -- were $59.1 billion at the end of the first quarter of fiscal 2016, compared with $60.4 billion at the end of fiscal 2015. The total cash and cash equivalents and investments available in the United States at the end of the first quarter of fiscal 2016 was $5.0 billion.

Deferred Revenue -- was $15.2 billion, up 10% in total, with deferred product revenue up 16%, driven largely by subscription based and software offerings, and deferred service revenue up 7%. Cisco continued to build a greater mix of recurring revenue as reflected in deferred revenue.

Days Sales Outstanding in Accounts Receivable (DSO) -- was 34 days at the end of the first quarter of fiscal 2016, compared to 38 days at the end of the fourth quarter of fiscal 2015.

Capital Allocation

In the first quarter of fiscal 2016, Cisco declared and paid a cash dividend of $0.21 per common share, or $1.1 billion. For the first quarter of fiscal 2016, Cisco repurchased approximately 45 million shares of common stock under its stock repurchase program at an average price of $26.83 per share for an aggregate purchase price of $1.2 billion.

As of October 24, 2015, Cisco had repurchased and retired 4.5 billion shares of Cisco common stock at an average price of $20.92 per share for an aggregate purchase price of approximately $93.9 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $3.1 billion with no termination date.

"We delivered a strong first quarter as we executed on our financial model of driving profitable growth, managing our portfolio and delivering shareholder value," said Kelly Kramer, Cisco executive vice president and chief financial officer. "Despite a challenging environment, we are executing very well and making the right investments that position us for future growth. We are continuing our commitment to shareholders as we returned $2.3 billion of our free cash flow back through dividends and share repurchases in Q1."  

Acquisitions

During the first quarter of fiscal 2016, Cisco completed the acquisitions of OpenDNS, MaintenanceNet, and Pawaa Software to further complement its security, services, software, and cloud offerings. These moves are consistent with Cisco's strategy of increasing innovation and R&D investment in growth areas. Cisco also recently announced the acquisitions of Portcullis, ParStream, Lancope, and 1 Mainstream in the security, data analytics and video areas, all of which are expected to close in the second quarter of fiscal 2016.

Business Outlook for the Second Quarter of Fiscal Year 2016
In the fourth quarter of fiscal 2015, Cisco announced an agreement to sell the Client Premises Equipment portion of its Service Provider Video Connected Devices business (CPE business) to Technicolor. The transaction is currently going through regulatory approval and Cisco is working to close it during the second quarter of fiscal 2016. In order to provide a clear view of Cisco's continuing expected financial performance, the guidance for the second quarter of fiscal 2016 is normalized to exclude the CPE business for both the second quarter of fiscal 2016 and the second quarter of fiscal 2015. The corresponding revenue in the second quarter of fiscal 2015 for the CPE business was $361 million.

Cisco expects to achieve the following results for the second quarter of fiscal year 2016:

     
Q2 2016 (normalized to exclude SP Video CPE business)    
Revenue   0% - 2% growth Y/Y
Non-GAAP gross margin rate   62% - 63%
Non-GAAP operating margin rate   28.5% - 29.5%
Non-GAAP tax provision rate   23%
Non-GAAP EPS   $0.53 - $0.55
     

The non-GAAP tax provision rate does not include any effects of a potential reinstatement of the U.S. federal R&D tax credit. If the U.S. federal R&D tax credit is reinstated, Cisco would reflect that benefit in the effective tax rate.

Cisco estimates that GAAP EPS will be lower than non-GAAP EPS by $0.10 to $0.14 cents per share in the second quarter of fiscal 2016 as follows:

     
Q2 2016    
Share-based compensation expense   $0.05 - $0.06
Amortization of purchased intangible assets and other acquisition-related/divestiture costs   0.04 - 0.06
  Subtotal   0.09 - 0.12
Restructuring and other charges   0.01 - 0.02
  Total   $0.10 - $0.14
     

Share-based compensation expense is expected to impact Cisco's results of operations in similar proportions as the first quarter of fiscal 2016. Amortization of purchased intangible assets, and other acquisition-related/divestiture costs will be reported as GAAP operating expenses, cost of sales, or other income/(loss) as applicable.

The range for restructuring and other charges includes a pretax charge of up to $100 million as a result of the restructuring that Cisco announced in August 2014. During the first quarter of fiscal 2016, Cisco recognized pretax restructuring charges of $141 million to the GAAP financial statements related to these actions and expects that the total charges related to these actions will be approximately $700 million for this plan.

Except as noted above, this guidance does not include the effects of the divestiture of the CPE business, and any future acquisitions/divestitures, asset impairments, restructurings, and tax or other events, which may or may not be significant unless specifically stated.

Editor's Notes:

  • Q1 fiscal year 2016 conference call to discuss Cisco's results along with its business outlook will be held on Thursday, November 12, 2015 at 1:30 p.m. Pacific Time. Conference call number is 1-888-848-6507 (United States) or 1-212-519-0847 (international).

  • Conference call replay will be available from 4:00 p.m. Pacific Time, November 12, 2015 to 4:00 p.m. Pacific Time, November 20, 2015 at 1-800-835-5808 (United States) or 1-203-369-3353 (international). The replay will also be available via webcast from November 12, 2015 through January 15, 2016 on the Cisco Investor Relations website at http://investor.cisco.com.

  • Additional information regarding Cisco's financials, as well as a webcast of the conference call with visuals designed to guide participants through the call, will be available at 1:30 p.m. Pacific Time, November 12, 2015. Text of the conference call's prepared remarks will be available within 24 hours of completion of the call. The webcast will include both the prepared remarks and the question-and-answer session. This information, along with the GAAP to non-GAAP reconciliation information, will be available on the Cisco Investor Relations website at http://investor.cisco.com.

 
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
(Unaudited)
 
    Three Months Ended
    October 24,
 2015
  October 25,
 2014
REVENUE:            
  Product   $ 9,844     $ 9,435  
  Service     2,838       2,810  
    Total revenue     12,682       12,245  
COST OF SALES:            
  Product     3,853       3,919  
  Service     997       993  
    Total cost of sales     4,850       4,912  
GROSS MARGIN     7,832       7,333  
OPERATING EXPENSES:            
  Research and development     1,560       1,583  
  Sales and marketing     2,443       2,515  
  General and administrative     539       504  
  Amortization of purchased intangible assets     69       71  
  Restructuring and other charges     142       318  
    Total operating expenses     4,753       4,991  
OPERATING INCOME     3,079       2,342  
  Interest income     225       179  
  Interest expense     (159 )     (139 )
  Other income (loss), net     (8 )     (22 )
    Interest and other income (loss), net     58       18  
INCOME BEFORE PROVISION FOR INCOME TAXES     3,137       2,360  
Provision for income taxes     707       532  
NET INCOME   $ 2,430     $ 1,828  
             
Net income per share:            
  Basic   $ 0.48     $ 0.36  
  Diluted   $ 0.48     $ 0.35  
Shares used in per-share calculation:            
  Basic     5,080       5,112  
  Diluted     5,113       5,156  
             
Cash dividends declared per common share   $ 0.21     $ 0.19  
                 
                 
 
CISCO SYSTEMS, INC.
RECONCILIATION OF GAAP TO NON-GAAP NET INCOME
(In millions, except per-share amounts)
 
    Three Months Ended
    October 24,
 2015
  October 25,
 2014
GAAP net income   $ 2,430     $ 1,828  
  Adjustments to cost of sales:            
    Share-based compensation expense     51       48  
    Amortization of acquisition-related intangible assets     128       181  
    Rockstar patent portfolio charge     --       188  
    Significant asset impairments and restructurings     (1 )     --  
  Total adjustments to GAAP cost of sales     178       417  
  Adjustments to operating expenses:            
    Share-based compensation expense     310       325  
    Amortization of acquisition-related intangible assets     69       71  
    Acquisition-related/divestiture costs     91       101  
    Significant asset impairments and restructurings     142       318  
  Total adjustments to GAAP operating expenses     612       815  
  Total adjustments to GAAP income before provision for income taxes     790       1,232  
  Income tax effect of non-GAAP adjustments     (196 )     (258 )
Non-GAAP net income   $ 3,024     $ 2,802  
             
Diluted net income per share:            
GAAP   $ 0.48     $ 0.35  
Non-GAAP   $ 0.59     $ 0.54  
                 
                 
 
CISCO SYSTEMS, INC.
REVENUE BY SEGMENT
(In millions, except percentages)
 
    Three Months Ended
    October 24, 2015
Revenue:   Amount   Y/Y %
  Americas   $ 7,799   4%
  EMEA     3,087   3%
  APJC     1,796   3%
    Total   $ 12,682   4%
           
           
 
CISCO SYSTEMS, INC.
GROSS MARGIN PERCENTAGE BY SEGMENT
(In percentages)
 
    Three Months Ended
    October 24, 2015
Gross Margin Percentage:    
  Americas   63.5%
  EMEA   64.2%
  APJC   60.0%
     
     
 
CISCO SYSTEMS, INC.
REVENUE FOR GROUPS OF SIMILAR PRODUCTS AND SERVICES
(In millions, except percentages)
 
    Three Months Ended
    October 24, 2015
Revenue:   Amount   Y/Y %
  Switching   $ 4,022   5%
  NGN Routing     1,793   (8)%
  Collaboration     1,115   17%
  Data Center     859   24%
  Service Provider Video     850   (2)%
  Wireless     645   7%
  Security     485   7%
  Other     75   12%
    Product     9,844   4%
    Service     2,838   1%
      Total   $ 12,682   4%
           
           
 
CISCO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
 
    October 24,
 2015
  July 25,
 2015
ASSETS            
Current assets:            
  Cash and cash equivalents   $ 5,758   $ 6,877
  Investments     53,349     53,539
  Accounts receivable, net of allowance for doubtful accounts of $300 at October 24, 2015 and $302 at July 25, 2015     4,712     5,344
  Inventories     1,482     1,627
  Financing receivables, net     4,506     4,491
  Deferred tax assets     2,706     2,915
  Other current assets     1,433     1,490
    Total current assets     73,946     76,283
Property and equipment, net     3,346     3,332
Financing receivables, net     4,037     3,858
Goodwill     24,882     24,469
Purchased intangible assets, net     2,292     2,376
Other assets     3,270     3,163
    TOTAL ASSETS   $ 111,773   $ 113,481
LIABILITIES AND EQUITY            
Current liabilities:            
  Short-term debt   $ 3,027   $ 3,897
  Accounts payable     1,119     1,104
  Income taxes payable     122     62
  Accrued compensation     2,611     3,049
  Deferred revenue     9,821     9,824
  Other current liabilities     5,400     5,687
    Total current liabilities     22,100     23,623
Long-term debt     21,594     21,457
Income taxes payable     1,490     1,876
Deferred revenue     5,341     5,359
Other long-term liabilities     1,263     1,459
    Total liabilities     51,788     53,774
Total equity     59,985     59,707
    TOTAL LIABILITIES AND EQUITY   $ 111,773   $ 113,481
             
             
 
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
    Three Months Ended
    October 24,
 2015
  October 25,
 2014
Cash flows from operating activities:            
  Net income   $ 2,430     $ 1,828  
  Adjustments to reconcile net income to net cash provided by operating activities:            
    Depreciation, amortization, and other     507       599  
    Share-based compensation expense     376       369  
    Provision for receivables     7       43  
    Deferred income taxes     193       236  
    Excess tax benefits from share-based compensation     (73 )     (71 )
    (Gains) losses on investments and other, net     (4 )     29  
    Change in operating assets and liabilities, net of effects of acquisitions and divestitures:            
      Accounts receivable     631       723  
      Inventories     130       (107 )
      Financing receivables     (206 )     (2 )
      Other assets     129       2  
      Accounts payable     4       (5 )
      Income taxes, net     (315 )     (398 )
      Accrued compensation     (434 )     (495 )
      Deferred revenue     (19 )     (328 )
      Other liabilities     (590 )     68  
        Net cash provided by operating activities     2,766       2,491  
             
Cash flows from investing activities:            
  Purchases of investments     (10,823 )     (9,761 )
  Proceeds from sales of investments     6,675       3,450  
  Proceeds from maturities of investments     4,133       3,906  
  Acquisition of businesses, net of cash and cash equivalents acquired     (614 )     (184 )
  Purchases of investments in privately held companies     (78 )     (50 )
  Return of investments in privately held companies     24       42  
  Acquisition of property and equipment     (262 )     (285 )
  Proceeds from sales of property and equipment     6       3  
  Other     (11 )     2  
        Net cash used in investing activities     (950 )     (2,877 )
             
Cash flows from financing activities:            
  Issuances of common stock     385       353  
  Repurchases of common stock--repurchase program     (1,210 )     (1,088 )
  Shares repurchased for tax withholdings on vesting of restricted stock units     (382 )     (342 )
  Short-term borrowings, original maturities less than 90 days, net     (4 )     (4 )
  Repayments of debt     (852 )     (3 )
  Excess tax benefits from share-based compensation     73       71  
  Dividends paid     (1,068 )     (973 )
  Other     123       33  
        Net cash used in financing activities     (2,935 )     (1,953 )
Net decrease in cash and cash equivalents     (1,119 )     (2,339 )
Cash and cash equivalents, beginning of period     6,877       6,726  
Cash and cash equivalents, end of period   $ 5,758     $ 4,387  
             
Supplemental cash flow information:            
Cash paid for interest   $ 264     $ 263  
Cash paid for income taxes, net   $ 828     $ 694  
 Certain reclassifications have been made to prior year amounts to conform to the current year's presentation.
                 
                 
 
CISCO SYSTEMS, INC.
DEFERRED REVENUE
(In millions)
 
    October 24,
 2015
  July 25,
 2015
  October 25,
 2014
Deferred revenue:                  
  Service   $ 9,689   $ 9,757   $ 9,029
  Product:                  
    Unrecognized revenue on product shipments and other deferred revenue     4,888     4,766     4,056
    Cash receipts related to unrecognized revenue from two-tier distributors     585     660     659
    Total product deferred revenue     5,473     5,426     4,715
      Total   $ 15,162   $ 15,183   $ 13,744
Reported as:                  
  Current   $ 9,821   $ 9,824   $ 9,449
  Noncurrent     5,341     5,359     4,295
      Total   $ 15,162   $ 15,183   $ 13,744
                   
                   
   
CISCO SYSTEMS, INC.  
INVENTORIES AND INVENTORY TURNS  
(In millions, except annualized inventory turns)  
   
    October 24,
 2015
    July 25,
 2015
    October 25,
 2014
 
Inventories:                        
  Raw materials   $ 107     $ 114     $ 173  
  Work in process     1       2       3  
  Finished goods:                        
    Distributor inventory and deferred cost of sales     631       610       654  
    Manufactured finished goods     464       593       535  
      Total finished goods     1,095       1,203       1,189  
  Service-related spares     240       258       275  
  Demonstration systems     39       50       36  
      Total   $ 1,482     $ 1,627     $ 1,676  
                         
Annualized inventory turns - GAAP     12.5       12.1       12.0  
Cost of sales adjustments     (0.5 )     (0.6 )     (1.0 )
Annualized inventory turns - non-GAAP     12.0       11.5       11.0  
                         
                         
 
CISCO SYSTEMS, INC.
DIVIDENDS PAID AND REPURCHASES OF COMMON STOCK
(In millions, except per-share amounts)
 
    DIVIDENDS   STOCK REPURCHASE PROGRAM   TOTAL
Quarter Ended   Per Share   Amount   Shares   Weighted-Average Price per Share   Amount   Amount
Fiscal 2016                                  
  October 24, 2015   $ 0.21   $ 1,068   45   $ 26.83   $ 1,207   $ 2,275
                                   
Fiscal 2015                                  
  July 25, 2015   $ 0.21   $ 1,069   35   $ 28.62   $ 1,005   $ 2,074
  April 25, 2015     0.21     1,070   35     28.39     1,008     2,078
  January 24, 2015     0.19     974   44     27.63     1,208     2,182
  October 25, 2014     0.19     973   41     24.58     1,013     1,986
  Total   $ 0.80   $ 4,086   155   $ 27.22   $ 4,234   $ 8,320
                                   
                                   
 
CISCO SYSTEMS, INC.
FREE CASH FLOW
(In millions)
 
    Three Months Ended
    October 24, 2015   October 25, 2014
Net cash provided by operating activities   $ 2,766     $ 2,491  
Acquisition of property and equipment     (262 )     (285 )
Free cash flow   $ 2,504     $ 2,206  
                 
                 
 
CISCO SYSTEMS, INC.
SUPPLEMENTARY INFORMATION - RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES
 
GROSS MARGINS, OPERATING EXPENSES, AND OPERATING MARGINS
(In millions, except percentages)
 
    Three Months Ended
    October 24, 2015
    Product Gross Margin   Service Gross Margin   Total Gross Margin   Operating Expenses   Y/Y   Operating Income   Y/Y
GAAP amount   $ 5,991     $ 1,841     $ 7,832     $ 4,753     (5)%   $ 3,079     31%
GAAP (% of revenue)     60.9 %     64.9 %     61.8 %     37.5 %         24.3 %    
Adjustments to GAAP amounts:                                      
  Share-based compensation expense     13       38       51       310           361      
  Amortization of acquisition-related intangible assets     128       --       128       69           197      
  Acquisition-related/divestiture costs     --       --       --       91           91      
  Significant asset impairments and restructurings     (1 )     --       (1 )     142           141      
Non-GAAP amount   $ 6,131     $ 1,879     $ 8,010     $ 4,141     (1)%   $ 3,869     8%
Non-GAAP (% of revenue)     62.3 %     66.2 %     63.2 %     32.7 %         30.5 %    
                                                 
                                                 
 
EFFECTIVE TAX RATE
(In percentages)
 
    Three Months Ended
    October 24, 2015   October 25, 2014
GAAP effective tax rate   22.5 %   22.5 %
  Tax effect of non-GAAP adjustments to net income   0.5 %   (0.5 )%
Non-GAAP effective tax rate   23.0 %   22.0 %
             
             
 
COST OF SALES USED IN INVENTORY TURNS
(In millions)
 
    Three Months Ended
    October 24, 2015   July 25, 2015   October 25, 2014
GAAP cost of sales   $ 4,850     $ 5,110     $ 4,912  
  Cost of sales adjustments:                  
    Share-based compensation expense     (51 )     (58 )     (48 )
    Amortization of acquisition-related intangible assets     (128 )     (179 )     (181 )
    Rockstar patent portfolio charge     --       --       (188 )
    Significant asset impairments and restructurings     1       (5 )     --  
Non-GAAP cost of sales   $ 4,672     $ 4,868     $ 4,495  
                         
                         

Forward Looking Statements and Non-GAAP Information

This release may be deemed to contain forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events (such as our ability to accelerate on growth opportunities, deliver profitable growth and deliver continued strength in our deferred product revenue, our strategy to drive our cloud business and to transition to software and cloud models, the impact of the macro environment and currency exchange rates on our performance, our financial strength and financial guidance, and our ability to manage our portfolio and strategic investments, and return shareholder value) and the future financial performance of Cisco that involve risks and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including: business and economic conditions and growth trends in the networking industry, our customer markets and various geographic regions; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; the growth and evolution of the Internet and levels of capital spending on Internet-based systems; variations in customer demand for products and services, including sales to the service provider market and other customer markets; the return on our investments in certain priorities, including our foundational priorities, and in certain geographical locations; the timing of orders and manufacturing and customer lead times; changes in customer order patterns or customer mix; insufficient, excess or obsolete inventory; variability of component costs; variations in sales channels, product costs or mix of products sold; our ability to successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses and technologies; our ability to achieve expected benefits of our partnerships; increased competition in our product and service markets, including the data center; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; manufacturing and sourcing risks; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters, and governmental investigations; natural catastrophic events; a pandemic or epidemic; our ability to achieve the benefits anticipated from our investments in sales, engineering, service, marketing and manufacturing activities; our ability to recruit and retain key personnel; our ability to manage financial risk, and to manage expenses during economic downturns; risks related to the global nature of our operations, including our operations in emerging markets; currency fluctuations and other international factors; changes in provision for income taxes, including changes in tax laws and regulations or adverse outcomes resulting from examinations of our income tax returns; potential volatility in operating results; and other factors listed in Cisco's most recent report on Form 10-K filed on September 8, 2015. The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes thereto included in Cisco's most recent report on Form 10-K as it may be amended from time to time. Cisco's results of operations for the three months ended October 24, 2015 are not necessarily indicative of Cisco's operating results for any future periods. Any projections in this release are based on limited information currently available to Cisco, which is subject to change. Although any such projections and the factors influencing them will likely change, Cisco will not necessarily update the information, since Cisco will only provide guidance at certain points during the year. Such information speaks only as of the date of this release.

This release includes non-GAAP net income, non-GAAP gross margins, non-GAAP operating expenses, non-GAAP operating income and margin, non-GAAP effective tax rates, non-GAAP net income per share data, non-GAAP inventory turns and free cash flow for the periods presented. It also includes future estimated ranges for gross margin, operating margin, tax provision rate and EPS on a non-GAAP basis.

These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Cisco believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Cisco's results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate Cisco's results of operations in conjunction with the corresponding GAAP measures.

Cisco believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to its financial condition and its historical and projected results of operations. In addition, Cisco believes that the presentation of non-GAAP inventory turns provides useful information to investors and management regarding financial and business trends relating to inventory management based on the operating activities of the periods presented. Cisco believes that the presentation of free cash flow, which it defines as the net cash provided by operating activities less cash used to acquire property and equipment, to be a liquidity measure that provides useful information to management and investors because of its intent to return a stated percentage of free cash flow to shareholders in the form of dividends and stock repurchases. Cisco further regards free cash flow as a useful measure because it reflects cash that can be used to, among other things, invest in its business, make strategic acquisitions, repurchase common stock, and pay dividends on its common stock, after deducting capital investments.

For its internal budgeting process, Cisco's management uses financial statements that do not include, when applicable, share-based compensation expense, amortization of acquisition-related intangible assets, impact to cost of sales from purchase accounting adjustments to inventory, acquisition-related/divestiture costs, significant asset impairments and restructurings, significant litigation and other contingencies, the income tax effects of the foregoing, and significant tax matters. Cisco's management also uses the foregoing non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the financial results of Cisco. In prior periods, Cisco has excluded other items that it no longer excludes for purposes of its non-GAAP financial measures. From time to time in the future there may be other items that Cisco may exclude for purposes of its internal budgeting process and in reviewing its financial results. For additional information on the items excluded by Cisco from one or more of its non-GAAP financial measures, refer to the Form 8-K regarding this release furnished today to the Securities and Exchange Commission.

About Cisco

Cisco (NASDAQ: CSCO) is the worldwide technology leader that has been making the Internet work since 1984. Our people, products, and partners help society securely connect and seize tomorrow's digital opportunity today. Discover more at thenetwork.cisco.com and follow us on Twitter at @Cisco.

Copyright © 2015 Cisco and/or its affiliates. All rights reserved. Cisco and the Cisco logo are trademarks or registered trademarks of Cisco and/or its affiliates in the U.S. and other countries. To view a list of Cisco trademarks, go to: www.cisco.com/go/trademarks. Third-party trademarks mentioned in this document are the property of their respective owners. The use of the word partner does not imply a partnership relationship between Cisco and any other company. This document is Cisco Public Information.

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