01—Abstract
Summary
Summary of the 10-K filed October 22, 1997. Cited figures are marked; the original filing is the authoritative source.
Cisco Systems' fiscal 1997 10-K (year ended July 26, 1997) shows a company growing rapidly but with signs of a slowing growth rate.
Net sales rose 57.2% to $6.44 billiona from $4.10 billion, and net income climbed 14.8% to $1.05 billion, or $1.52 per share. Those reported figures were depressed by $508.4 million of purchased research and development charges from acquisitions, while a $152.7 million realized gain on the sale of a minority stock investment partially offset them. Excluding these nonrecurring items, pro forma net income would have been about $1.41 billion, or $2.05 per share, per the filing's selected financial data.
The filing also flags several warning signs. Gross margin edged down to 65.2%b from 65.6%, driven by a shift toward lower-margin access and switching products for small and medium-sized businesses, and management expects further margin compression. Sales growth slowed in Japan, France, and Germany, and the international share of sales fell to 43.5% from 48.2%.
Days sales outstanding rose to 60 from 44, and accounts receivable grew 87.9%c against 57.2% sales growth. Management also noted that sales tend to cluster in the last month of each quarter, which makes quarterly results hard to predict. Balance sheet strength remains a clear positive.
Cash, short-term investments, and long-term investments totaled $2.5 billiond, shareholders' equity reached $4.29 billion, and the company carries no borrowings under its $500 million credit line. Management believes existing resources will cover working capital and capital expenditure needs through fiscal 1998. Risk factors highlighted by the company include competition from larger telecom equipment makers such as Lucent, Ericsson, and Nortel, industry consolidation, Year 2000 spending diversion, and dependence on acquisitions to fill product gaps.
02—Key points
Key Highlights
- Net sales grew 57.2% to $6.44 billion in fiscal 1997, up from $4.10 billion in fiscal 1996.
- Reported net income was $1.05 billion ($1.52 per share), but this included $508.4 million in purchased R&D charges and a $152.7 million realized investment gain; pro forma EPS excluding these items was $2.05.
- Gross margin slipped to 65.2% from 65.6%, as mix shifted toward lower-margin small and medium-business access and switching products, and management expects continued pressure.
- International sales fell to 43.5% of net sales from 48.2%, with slower growth in Japan, France, and Germany.
- Receivables rose 87.9% against 57.2% sales growth, and days sales outstanding increased to 60 from 44, a potential collection or quality-of-revenue concern.
- Cash and investments totaled $2.5 billion, shareholders' equity was $4.29 billion, and the $500 million credit line was undrawn.
- R&D spending reached $698.2 million (10.8% of sales), and the company has never paid cash dividends.
03—Questions
Frequently Asked Questions
Why did reported net income look weaker than the sales growth would suggest?
Fiscal 1997 net income of $1.05 billion included $508.4 million of purchased research and development expense tied to acquisitions such as Telebit, Netsys, Skystone, Ardent, and Global Internet Software Group, which are expensed immediately. This was partly offset by a $152.7 million realized gain on selling a minority stock stake. Excluding these nonrecurring items, pro forma net income was about $1.41 billion, or $2.05 per share.
Is Cisco's gross margin under pressure?
Yes. Gross margin declined modestly to 65.2% from 65.6%, and management expects it to keep falling because lower-margin access and switching products for small and medium-sized businesses are growing faster than the higher-margin core router and enterprise switching lines. Component price volatility and greater use of indirect distribution channels could add further pressure.
Are there concerns about the quality of sales growth or collections?
The filing shows receivables up 87.9% versus 57.2% sales growth, with days sales outstanding rising to 60 from 44. Management also noted that a disproportionate share of sales occurs in the last month of each quarter, which can make results less predictable. Investors may want to monitor collections and quarter-end sales patterns in future filings.
How strong is Cisco's financial position?
Cisco had about $2.5 billion in cash and investments at fiscal year-end, $4.29 billion in shareholders' equity, and a $500 million unsecured credit facility with no borrowings. Management said these resources, plus operating cash flow of $1.44 billion, should cover working capital and capital expenditure needs through fiscal 1998.
What are the main risks highlighted in the filing?
Key risks include intense competition from larger telecom equipment vendors such as Lucent, Ericsson, and Nortel as Cisco expands into voice and video; industry consolidation; reliance on acquisitions and strategic alliances with companies such as Microsoft and Intel; slower international growth; the Year 2000 problem diverting customer IT spending; and exposure to earthquakes given the Silicon Valley headquarters.
04—Continue