How fast did Cisco grow in fiscal 1996, and was profitability keeping pace?

Net sales grew 83.5% to $4.10 billion, and net income grew about 100% to $913 million. Operating margin was roughly 34%, which indicates that profitability scaled with revenue. Note that the StrataCom merger was accounted for as a pooling of interests, so prior-year figures were restated to include StrataCom's results.

Yes, management expects gross margins to keep declining. Gross margin fell from 66.7% to 65.6% in 1996, and the company said that faster growth in lower-margin remote access and high-speed switching products, along with component price pressure, would continue to weigh on margins. R&D spending is also expected to rise as a share of sales.

What is the impact of the pending acquisitions?

The Telebit MICA purchase, at $200 million in cash, is expected to close in October 1996 and will trigger a charge for purchased R&D that could significantly lower net income for the quarter. The Netsys deal, at about $79 million in stock, is expected to close by November 1996 and will be accounted for as a purchase. Management also said it expects to keep pursuing acquisitions to enter new markets.

What are the biggest risks to the stock?

The filing highlights quarter-to-quarter volatility in results, the possibility that net sales growth will slow, dependence on successful new product development, and component shortages for ASICs and other specialized parts. It also cites the risk that Proposition 211 on California's November 1996 ballot could raise securities-litigation exposure and make it harder to attract directors. Finally, the company is in litigation over a planned San Jose land purchase that is needed for expansion.

Does Cisco pay dividends, and how did the share price perform?

Cisco has never paid cash dividends and has no plans to do so. The stock traded between $26.12 and $58.75 during fiscal 1996, and the fourth-quarter high was $58.75. Shareholders' equity reached $2.82 billion, and about 653 million shares were outstanding as of October 4, 1996.

CSCO 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed October 25, 1996. Cited figures are marked; the original filing is the authoritative source.

Cisco Systems' fiscal 1996 10-K (year ended July 28, 1996) shows a company in hyper-growth.

Net sales rose 83.5% to $4.10 billion^a from $2.23 billion, and net income more than doubled to $913.3 million, or $1.37 per share, up from $0.72. Operating income reached $1.40 billion, and operating margins held near 34%, with gross margin at 65.6%, down modestly from 66.7% as lower-margin Access and Workgroup products gained share. Management explicitly warned that gross margins will keep declining and that sales growth will slow, so investors should expect the pace of 1996 to be hard to repeat.

The balance sheet is strong. Cash, short-term investments and investments totaled $1.87 billion^b, there are no borrowings under a $100 million credit line, and shareholders' equity grew to $2.82 billion. Results are inflated by the pooling-of-interests accounting used for the July 1996 StrataCom merger, which issued about 76.4 million shares and restated prior periods.

Several acquisitions are pending, including a $200 million^c cash purchase of Telebit's MICA assets and an approximately $79 million stock deal for Netsys. Management flagged that the Telebit charge for purchased R&D could depress net income in the following quarter.

The main risks cited are customer concentration risk, component shortages (particularly ASICs), integration of StrataCom, the outcome of litigation over the San Jose land purchase, and Proposition 211 on California's November 1996 ballot, which could increase securities-fraud lawsuits against the company. Cisco's share price ranged from $26 to $59^d during fiscal 1996, and the company pays no dividends.

02—Key points

Key Highlights

Net sales grew 83.5% to $4.096 billion in fiscal 1996, driven by the Cisco 7500 series, Access products and ATM WAN switching from StrataCom.
Net income rose 100% to $913.3 million ($1.37 per share), with operating income of $1.40 billion.
Gross margin slipped to 65.6% from 66.7%, as the mix shifted toward lower-margin Access and Workgroup products, and management expects further erosion.
International sales rose to 48.2% of net sales from 41.7%, with Japan growing fastest.
Cash and investments totaled $1.87 billion at year-end, with no borrowings on a $100 million credit facility; $115.6 million of stock was repurchased before the program was terminated in October 1996.
Pending deals include a $200 million cash purchase of Telebit's MICA assets and an approximately $79 million stock acquisition of Netsys. The Telebit charge could significantly reduce next-quarter earnings.
Risk factors include component shortages, integration of the 76.4 million-share StrataCom merger, San Jose land litigation, and California Proposition 211 on the November 1996 ballot.

03—Questions

Frequently Asked Questions

How fast did Cisco grow in fiscal 1996, and was profitability keeping pace?
Net sales grew 83.5% to $4.10 billion, and net income grew about 100% to $913 million. Operating margin was roughly 34%, which indicates that profitability scaled with revenue. Note that the StrataCom merger was accounted for as a pooling of interests, so prior-year figures were restated to include StrataCom's results.
Are margins at risk?
Yes, management expects gross margins to keep declining. Gross margin fell from 66.7% to 65.6% in 1996, and the company said that faster growth in lower-margin remote access and high-speed switching products, along with component price pressure, would continue to weigh on margins. R&D spending is also expected to rise as a share of sales.
What is the impact of the pending acquisitions?
The Telebit MICA purchase, at $200 million in cash, is expected to close in October 1996 and will trigger a charge for purchased R&D that could significantly lower net income for the quarter. The Netsys deal, at about $79 million in stock, is expected to close by November 1996 and will be accounted for as a purchase. Management also said it expects to keep pursuing acquisitions to enter new markets.
What are the biggest risks to the stock?
The filing highlights quarter-to-quarter volatility in results, the possibility that net sales growth will slow, dependence on successful new product development, and component shortages for ASICs and other specialized parts. It also cites the risk that Proposition 211 on California's November 1996 ballot could raise securities-litigation exposure and make it harder to attract directors. Finally, the company is in litigation over a planned San Jose land purchase that is needed for expansion.
Does Cisco pay dividends, and how did the share price perform?
Cisco has never paid cash dividends and has no plans to do so. The stock traded between $26.12 and $58.75 during fiscal 1996, and the fourth-quarter high was $58.75. Shareholders' equity reached $2.82 billion, and about 653 million shares were outstanding as of October 4, 1996.

04—Continue

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