01—Abstract
Summary
Summary of the 10-K filed September 11, 2009. Cited figures are marked; the original filing is the authoritative source.
Cisco's fiscal 2009 10-K (fiscal year ended July 25, 2009) shows a year of deliberate contraction under macroeconomic stress.
Net sales fell 8.7% to $36.1 billiona from $39.5 billion, with product sales down 12.0% and service revenue up 8.5% to $7.0 billion. Net income declined 24% to $6.1 billion and diluted EPS fell 20% to $1.05. Gross margin held reasonably steady at 63.9% versus 64.1%, and operating expenses fell 1.5% in absolute dollars, though they rose as a share of revenue.
Management reduced costs through an enhanced early retirement program and workforce reductions of just over 2,000 employees, and headcount fell by 584. Balance-sheet strength is a central investor point. Cash, cash equivalents and investments rose to $35.0 billionb from $26.2 billion, helped by $4.0 billion of new senior notes issued in February 2009.
Operating cash flow was $9.9 billionc, down from $12.1 billion. Cisco repurchased 202 million shares for $3.6 billion, and $4.8 billion remained under its $62 billion authorization. Long-term debt rose to $10.3 billion.
Roughly $29.1 billiond of the cash and investments sits offshore, which creates a repatriation tax consideration. The filing also flags several risks. Service provider capital spending slowed, and high-end router sales fell about $1.1 billion.
A $174 million tax charge followed a Ninth Circuit ruling (Xilinx), and a $550 million reduction to additional paid-in capital was recorded. Brazilian authorities have asserted import-tax claims with potential joint liability, and no loss range can be estimated. Management says the U.S. and select emerging countries will benefit from investment in market adjacencies such as the enterprise data center, collaboration and video, and it notes that backlog fell to $3.9 billion from $4.8 billion, which is a leading indicator to watch.
02—Key points
Key Highlights
- Net sales declined 8.7% to $36.1 billion; product revenue fell 12.0% while service revenue grew 8.5% to $7.0 billion, improving revenue mix quality
- Net income fell 24% to $6.1 billion and diluted EPS fell 20% to $1.05, reflecting lower sales and reduced interest and other income
- Gross margin was stable at 63.9% (vs. 64.1%), though product margin dipped to 64.0% from 64.8% due to pricing and discounts
- Cash and investments rose to $35.0 billion, supported by a $4.0 billion senior notes issuance; operating cash flow declined to $9.9 billion from $12.1 billion
- Backlog fell to $3.9 billion from $4.8 billion, and management noted only one sequential quarterly revenue increase (Q4) during the year
- Share repurchases totaled $3.6 billion (202 million shares at $17.89), with $4.8 billion remaining under the $62 billion authorization
- Risk items include a $174 million tax charge and $550 million APIC reduction from the Xilinx ruling, plus unresolved Brazilian import-tax claims
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Cisco Systems, Inc. kept $0.17.
- Revenue$36.12B100.0%
- Cost of revenue−$13.02B36.1%
- Gross profit$23.09B63.9%
- Operating costs−$15.77B43.7%
- Operating income$7.32B20.3%
- Interest, other & tax−$1.19B3.3%
- Net income$6.13B17.0%
Where FY2009 revenue went
$36.12B- Operating costs: $15.77B, 44% of revenue
- Cost of revenue: $13.02B, 36% of revenue
- Net income: $6.13B, 17% of revenue
- Interest, other & tax: $1.19B, 3.3% of revenue
Kept 17% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed September 11, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $36.12B$39.54B | −8.7% |
| Cost of Revenue | $13.02B$14.19B | −8.2% |
| Gross Profit | $23.09B$25.35B | −8.9% |
| Operating Expenses | $15.77B$15.90B | −0.8% |
| Operating Income | $7.32B$9.44B | −22.5% |
| Interest Expense | $346.00M$319.00M | +8.5% |
| Net Income | $6.13B$8.05B | −23.8% |
| EPS (Basic) | $1.05$1.35 | −22.2% |
| EPS (Diluted) | $1.05$1.31 | −19.8% |
| Shares Outstanding (Basic) | 5.83B5.99B | −2.6% |
| Shares Outstanding (Diluted) | 5.86B6.16B | −5.0% |
05—Questions
Frequently Asked Questions
Why did Cisco's revenue and earnings decline in fiscal 2009?
The global economic downturn reduced IT capital spending, particularly among service providers, enterprises and commercial customers. Product sales fell 12.0% across all five geographic theaters, with the largest drops in high-end routers and modular switches. Net income fell 24% as lower sales and reduced interest and other income outweighed cost reductions.
Is Cisco's balance sheet strong enough to weather a prolonged downturn?
Based on this filing, yes. Cash and investments reached $35.0 billion, up from $26.2 billion, and management says the portfolio's weighted-average credit rating exceeds AA. Cisco raised $4.0 billion of senior notes in February 2009 and has no borrowings under its $2.9 billion revolving credit facility. Long-term debt, however, rose to $10.3 billion, and about $29.1 billion of cash is held outside the U.S., which may create repatriation taxes if distributed.
What does the falling backlog and the Q4 sequential revenue uptick signal for future results?
Backlog declined to $3.9 billion from $4.8 billion, and the filing notes that backlog is not necessarily indicative of future sales because of short order cycles. Q4 showed the only sequential revenue increase of the year, but management says it cannot determine whether the economic stabilization is sustainable. Investors should treat the outlook as uncertain.
What are the most significant legal and tax risks disclosed?
Brazilian authorities have asserted import-tax claims against Cisco for 2003 and 2004, with potential claims for 2005 through 2007, and Cisco believes they lack merit but cannot estimate a loss range. A Ninth Circuit ruling in Xilinx v. Commissioner led to a $174 million tax charge and a $550 million reduction in additional paid-in capital, and that case is subject to further appeal.
What is Cisco's strategy for returning to growth?
Management is directing investment toward market adjacencies, including enterprise data center virtualization (Unified Computing System and Nexus products), video and collaboration (TelePresence, WebEx), consumer and home networking, and the United States and select emerging markets such as India and China. The filing cautions that these investments may take longer to pay off or may yield lower returns than expected, and that operating expenses rose as a share of revenue even though they fell in absolute dollars.
06—Continue