01—Abstract
Summary
Summary of the 10-K filed October 26, 1995. Cited figures are marked; the original filing is the authoritative source.
Cisco Systems' fiscal 1995 10-K (year ended July 30, 1995) shows a company in hypergrowth with strong profitability.
Net sales rose 59.2% to $1.979 billiona from $1.243 billion, and net income grew 33.7% to $421.0 million, or $1.52 per share. Gross margin held at a high 67.4%, operating income reached $642.9 million, and the company ended the year with $1.38 billion in shareholders' equity and $1.76 billion in total assets. Growth came from routers, the Cisco 7000 and 2500 families, and early traction in high-speed switching and ATM.
Investors should weigh several caveats. Management explicitly guided that revenue growth would slow in future periods, that gross margins would decline as lower-margin remote access and switching products grow faster than core routers, and that R&D and sales spending as a share of sales would rise. Fiscal 1995 also included a one-time $95.8 millionb purchased R&D charge from the LightStream ATM acquisition, which depressed the second quarter's earnings.
Quarterly results have shown volatility, and the company flagged that its operating results depend heavily on timely new product introductions and on semiconductor supply, which has been tight. Balance-sheet strength is a clear positive. Cash, short-term investments, and long-term investments together grew substantially, the company has no borrowings against a $100 millionc credit line, and it repurchased about 2.1 million shares during the year.
Pending acquisitions of Grand Junction Networks (pooling of interests, about 5.0 million shares) and Combinet (about 2.0 million shares) would expand its Fast Ethernet and remote access offerings. The stock is volatile and has never paid a cash dividend.
02—Key points
Key Highlights
- Net sales increased 59.2% to $1,978.9 million in fiscal 1995, up from $1,243.0 million in fiscal 1994.
- Net income rose 33.7% to $421.0 million, or $1.52 per share, despite a $95.8 million purchased R&D charge tied to the LightStream acquisition.
- Gross margin improved to 67.4% from 66.8%, aided by lower material costs and a decline in warranty expense to 1.5% of sales, though management expects margins to decline going forward.
- Operating income reached $642.9 million, and total assets grew to $1,757.3 million, with shareholders' equity of $1,378.7 million.
- International sales were 42.4% of net sales, and Cisco claims 80% or more of Internet routers are its products.
- Management expects future sales growth to slow, citing longer sales cycles and customers deferring purchases, and expects R&D and sales expenses to rise as a percentage of revenue.
- Pending acquisitions of Grand Junction Networks (about 5.0 million shares) and Combinet (about 2.0 million shares), both to be accounted for as poolings of interests, will expand Fast Ethernet and remote access capabilities.
03—Questions
Frequently Asked Questions
How fast did Cisco grow in fiscal 1995, and is that growth expected to continue?
Net sales grew 59.2% to $1.98 billion. Management, however, stated that it expects future net sales to grow more slowly than in prior periods, and that quarter-to-quarter growth may be significantly below historical rates as customers lengthen their buying cycles.
Did the LightStream acquisition hurt fiscal 1995 earnings?
Yes, in part. The January 1995 purchase of LightStream for $120 million in cash included a $95.8 million charge for purchased research and development, which was expensed in the second quarter and made that quarter's net income significantly lower than the prior quarter. Excluding it, earnings would have been considerably higher.
Will gross margins stay at current levels?
Management expects gross margins to decline over time. Gross margin rose to 67.4% in fiscal 1995, but the company expects lower-margin remote access and high-speed switching products to grow faster than its higher-margin core router business, and it cannot guarantee that manufacturing efficiencies will offset this shift.
How strong is Cisco's balance sheet and cash position?
Very strong. Cash and equivalents reached $204.8 million, with short-term investments of $234.7 million and long-term investments of $403.9 million. The company had no borrowings under its $100 million credit line, which runs through April 1998, and it repurchased about 2.1 million shares for $69.9 million during the year.
What are the main risks investors should consider?
Key risks include volatile quarterly results, dependence on successfully launching new products such as ATM and high-speed switching, reliance on single or limited-source components (particularly semiconductors, which were in short supply and raising prices), intense competition from more than 70 vendors in some segments, and the integration risks of its frequent acquisitions. The stock has also experienced substantial price volatility.
04—Continue