01—Abstract
Summary
Summary of the 10-K filed September 21, 2010. Cited figures are marked; the original filing is the authoritative source.
Cisco Systems' fiscal 2010 Form 10-K (fiscal year ended July 31, 2010, a 53-week year) shows a return to growth after the fiscal 2009 downturn.
Net sales rose about 10.9% to $40.0 billiona, with growth in every geographic theater (U.S. and Canada +12%, Asia Pacific +17%, Japan +11%, Emerging Markets +9%, European Markets +5%). Net income increased about 27% to $7.8 billion and diluted EPS rose to $1.33 from $1.05, aided by a slightly higher gross margin (64.0%), lower operating expenses as a percentage of revenue, and a lower effective tax rate of 17.5%. Management noted the extra week added roughly 1% to revenue growth.
The balance sheet remained strong, with cash and investments of $39.9 billionb against $15.3 billion of debt, after $5.0 billion of new senior notes, $5.3 billion of acquisitions (including Starent, Tandberg and ScanSafe), $7.8 billion of buybacks and $1.0 billion of capex. Operating cash flow was $10.2 billion. Product backlog grew to $4.1 billion, and purchase commitments with contract manufacturers rose to $4.3 billion from $2.0 billion, reflecting supply-chain flexibility but adding potential excess-inventory risk if demand weakens.
Management said it intends to begin paying a cash dividend in fiscal 2011, a notable shift for the company. The filing also flags material risks for investors: management describes the macro environment as uncertain, expects a new class of large, well-funded competitors in enterprise data centers, is making costly investments in market adjacencies (video, collaboration, virtualization/cloud, mobility), and faces a Brazilian tax claim of roughly $1.9 billionc including interest and penalties, which the company considers without merit and has not reserved for.
02—Key points
Key Highlights
- Net sales grew 10.9% to $40.04 billion from $36.12 billion, with growth across all five geographic theaters; the 53-week year added about 1 percentage point.
- Net income rose 26.6% to $7.77 billion, and diluted EPS increased to $1.33 from $1.05.
- Gross margin held near 64.0% (64.2% product, 63.6% service), with operating expenses falling to 39.9% of net sales from 42.0%.
- Cash, cash equivalents and investments reached $39.9 billion, while operating cash flow was $10.2 billion and total debt rose to $15.3 billion after a $5.0 billion bond issue.
- Repurchased 325 million shares for $7.8 billion in fiscal 2010, with $7.0 billion remaining under the $72 billion authorization; management intends to start a cash dividend in fiscal 2011.
- Acquisitions totaling about $5.3 billion (Starent, Tandberg, ScanSafe, CoreOptics) expanded the company into mobile infrastructure, video and cloud-based web security.
- Key risks include a Brazilian import-tax claim of about $1.9 billion including interest and penalties (considered without merit), rising purchase commitments of $4.3 billion, and intensifying competition in enterprise data centers from large, well-financed new entrants.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Cisco Systems, Inc. kept $0.19.
- Revenue$40.04B100.0%
- Cost of revenue−$14.40B36.0%
- Gross profit$25.64B64.0%
- Operating costs−$16.48B41.2%
- Operating income$9.16B22.9%
- Interest, other & tax−$1.40B3.5%
- Net income$7.77B19.4%
Where FY2010 revenue went
$40.04B- Operating costs: $16.48B, 41% of revenue
- Cost of revenue: $14.40B, 36% of revenue
- Net income: $7.77B, 19% of revenue
- Interest, other & tax: $1.40B, 3.5% of revenue
Kept 19% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed September 21, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $40.04B$36.12B | +10.9% |
| Cost of Revenue | $14.40B$13.02B | +10.6% |
| Gross Profit | $25.64B$23.09B | +11.0% |
| Operating Expenses | $16.48B$15.77B | +4.5% |
| Operating Income | $9.16B$7.32B | +25.2% |
| Interest Expense | $623.00M$346.00M | +80.1% |
| Net Income | $7.77B$6.13B | +26.6% |
| EPS (Basic) | $1.36$1.05 | +29.5% |
| EPS (Diluted) | $1.33$1.05 | +26.7% |
| Shares Outstanding (Basic) | 5.73B5.83B | −1.6% |
| Shares Outstanding (Diluted) | 5.85B5.86B | −0.2% |
05—Questions
Frequently Asked Questions
Did Cisco's fiscal 2010 revenue growth come from a broad-based recovery or from a single segment?
The growth was broad-based. Net product sales rose 11.3% and service revenue rose 9.1%, and every theater grew, led by Asia Pacific (+17%) and the United States and Canada (+12%). Switching (+12%) and advanced technologies (+6%) drove product growth, while routers rose only 4%. Management also cited the extra week as adding roughly 1 point of growth.
Is Cisco's 17.5% effective tax rate sustainable?
Part of the drop from 20.3% in fiscal 2009 came from a one-time benefit tied to the Ninth Circuit's Xilinx decision, which reversed a fiscal 2009 charge (about $158 million in fiscal 2010). Recurring drivers include lower-tax foreign earnings (about 19 points of benefit) and reduced rates tied to employment and investment commitments. Those commitments, and possible U.S. changes to the taxation of foreign earnings, could raise the rate in future periods.
Why did purchase commitments more than double, and what does that mean for margins?
Purchase commitments with contract manufacturers and suppliers increased to $4.3 billion from $2.0 billion. Management attributed this to securing supply during longer lead times and expected demand growth. The risk is that if demand falls short, Cisco could face excess and obsolete inventory charges and gross margin pressure. Only $135 million of liability was recorded for commitments above forecast demand.
How significant is the Brazilian tax dispute?
Brazilian authorities have assessed claims against the Brazilian subsidiary, based on joint liability with an importer, totaling about $190 million in import taxes, $85 million in interest and about $1.6 billion in penalties, for calendar years 2003 to 2007. Cisco believes the claims lack merit, intends to defend them vigorously, and says it cannot estimate a range of loss. A final judicial determination is not expected for several years, and no reserve has been recorded.
What does the planned dividend mean for shareholders?
Cisco has never paid a cash dividend, but it stated its intention to begin paying one during fiscal 2011. This signals a shift toward returning cash to shareholders alongside its buyback program, which had $7.0 billion of remaining authorization. Because most of the cash is held offshore ($33.2 billion), any distribution could raise questions about repatriation taxes, which the company notes could apply to foreign earnings.
06—Continue