Which product areas drove growth, and which lagged?

Advanced technologies grew 32.1% to $4.4 billion, led by enterprise IP communications, home networking, and security. Switches, the largest product category at $10.1 billion, grew 12.5%. Routers grew only 1.7% to $5.5 billion, reflecting weaker midrange and low-end router sales, and the company noted that high-end router sales are large and sporadic, tied to service provider purchasing.

Why did gross margin decline, and is this a concern?

Gross margin fell to 67.2% from 68.6%. Product margin declined due to a higher mix of lower-margin switching and home networking products, pricing reductions and discounts, and higher warranty and inventory provisions, partly offset by lower component costs and higher volumes. Service margin fell as Cisco invested in advanced services. Management expects product margins may not be sustainable, so continued pressure is a risk investors should monitor.

How is Cisco returning cash to shareholders, and how much capacity remains?

Cisco repurchased and retired 540 million shares for $10.2 billion in fiscal 2005 at an average of $18.95. Cumulative repurchases since September 2001 total $27.2 billion, with $7.8 billion remaining under the $35 billion authorization. The company has never paid cash dividends and has no plans to do so, so buybacks are its primary capital return mechanism.

What risks and accounting changes should investors watch going forward?

Key risks include volatile and sporadic service provider spending, price-focused competition from Asia and especially China, component supply constraints, and reliance on distributors in a two-tier channel. Beginning in fiscal 2006, Cisco adopts SFAS 123(R), which requires expensing stock options and is expected to reduce diluted EPS by about $0.12 to $0.14. Reorganized geographic reporting segments starting in fiscal 2006 will also change how results are presented.

CSCO 10-K FY2005 Annual Report — Revenue, Net Income, EPS

Q: How did Cisco perform financially in fiscal 2005?

Cisco grew net sales 12.5% to $24.8 billion and net income to $5.7 billion, with diluted EPS of $0.87 versus $0.62 in fiscal 2004. Fiscal 2004 included a $567 million non-cash cumulative accounting charge, so the year-over-year comparison is flattered. Operating income rose to $7.4 billion from $6.3 billion, and operating cash flow was $7.6 billion.

01—Abstract

Summary

Summary of the 10-K filed September 19, 2005. Cited figures are marked; the original filing is the authoritative source.

Cisco Systems' fiscal 2005 10-K (fiscal year ended July 30, 2005) reported a strong year of top-line and earnings growth.

Net sales rose 12.5% to $24.8 billion^a from $22.0 billion, and net income increased about 30% to $5.7 billion, or $0.87 diluted EPS versus $0.62 in fiscal 2004 (fiscal 2004 included a $567 million non-cash cumulative accounting charge). Growth was broad-based across theaters, led by switches (up 12.5%) and advanced technologies (up 32.1%), while routers grew only 1.7%. Operating income rose to $7.4 billion, and operating cash flow reached $7.6 billion.

Margins moved in the wrong direction. Gross margin fell to 67.2%^b from 68.6%, with product gross margin down 1.3 points on lower-margin switching and home networking mix and pricing pressure, and service gross margin down 1.8 points due to investment in advanced services. Management also flagged price-focused competitors from Asia, particularly China, and sales in China and Japan were weak.

Operating expenses declined as a share of revenue (36.3% versus 39.0%), which supported profitability despite the margin pressure. Capital allocation was dominated by buybacks: Cisco repurchased $10.2 billion^c (540 million shares) in fiscal 2005, bringing cumulative repurchases to $27.2 billion, with $7.8 billion remaining under a $35 billion authorization.

Cash and investments fell to $16.1 billion^d from $19.3 billion as a result. The filing also highlights risks, including dependence on service provider spending, which the company calls volatile, inventory and channel complexity, component supply constraints, and pending accounting changes (SFAS 123(R) expensing of stock options beginning fiscal 2006, expected to reduce diluted EPS by about $0.12 to $0.14).

02—Key points

Key Highlights

Net sales grew 12.5% to $24.8 billion; switches (+12.5% to $10.1 billion) and advanced technologies (+32.1% to $4.4 billion) drove growth, while routers rose only 1.7%
Net income rose to $5.7 billion ($0.87 diluted EPS) from $4.4 billion ($0.62), though fiscal 2004 included a $567 million non-cash accounting charge
Gross margin declined to 67.2% from 68.6%, with product margin down 1.3 points and service margin down 1.8 points due to mix, pricing, and advanced services investment
Operating expenses fell to 36.3% of net sales from 39.0%, and R&D spending was $3.3 billion, or 13.4% of sales
Cisco returned capital through $10.2 billion in buybacks (540 million shares at $18.95 average), with $7.8 billion of authorization remaining; the company has never paid cash dividends
Operating cash flow was $7.6 billion, while cash and investments declined to $16.1 billion from $19.3 billion, driven by buybacks and $911 million of acquisitions
Key risks include volatile service provider demand, price competition from Asia and China, component supply constraints, and stock option expensing under SFAS 123(R) beginning fiscal 2006

03—Questions

Frequently Asked Questions

How did Cisco perform financially in fiscal 2005?
Cisco grew net sales 12.5% to $24.8 billion and net income to $5.7 billion, with diluted EPS of $0.87 versus $0.62 in fiscal 2004. Fiscal 2004 included a $567 million non-cash cumulative accounting charge, so the year-over-year comparison is flattered. Operating income rose to $7.4 billion from $6.3 billion, and operating cash flow was $7.6 billion.
Which product areas drove growth, and which lagged?
Advanced technologies grew 32.1% to $4.4 billion, led by enterprise IP communications, home networking, and security. Switches, the largest product category at $10.1 billion, grew 12.5%. Routers grew only 1.7% to $5.5 billion, reflecting weaker midrange and low-end router sales, and the company noted that high-end router sales are large and sporadic, tied to service provider purchasing.
Why did gross margin decline, and is this a concern?
Gross margin fell to 67.2% from 68.6%. Product margin declined due to a higher mix of lower-margin switching and home networking products, pricing reductions and discounts, and higher warranty and inventory provisions, partly offset by lower component costs and higher volumes. Service margin fell as Cisco invested in advanced services. Management expects product margins may not be sustainable, so continued pressure is a risk investors should monitor.
How is Cisco returning cash to shareholders, and how much capacity remains?
Cisco repurchased and retired 540 million shares for $10.2 billion in fiscal 2005 at an average of $18.95. Cumulative repurchases since September 2001 total $27.2 billion, with $7.8 billion remaining under the $35 billion authorization. The company has never paid cash dividends and has no plans to do so, so buybacks are its primary capital return mechanism.
What risks and accounting changes should investors watch going forward?
Key risks include volatile and sporadic service provider spending, price-focused competition from Asia and especially China, component supply constraints, and reliance on distributors in a two-tier channel. Beginning in fiscal 2006, Cisco adopts SFAS 123(R), which requires expensing stock options and is expected to reduce diluted EPS by about $0.12 to $0.14. Reorganized geographic reporting segments starting in fiscal 2006 will also change how results are presented.

04—Continue

← View all 10-K filings