10-QPeriod: Q3 FY2011

CISCO SYSTEMS, INC. Quarterly Report for Q3 Ended Apr 30, 2011

Filed May 25, 2011For Securities:CSCO

Summary

Cisco Systems, Inc. reported a 5% increase in net sales for the third quarter of fiscal year 2011 compared to the prior year, reaching $10.87 billion. However, net income saw a significant decrease of 17.6%, falling to $1.81 billion, which translated to a diluted EPS of $0.33, down from $0.37 in the prior year period. This decline was attributed to a 2.6 percentage point decrease in gross margin, largely due to higher sales discounts, unfavorable product pricing, and unfavorable product mix, alongside restructuring charges related to the consumer business. The company announced significant restructuring initiatives in April 2011, including exiting the Flip Video camera product line and a voluntary early retirement program, expecting substantial charges in the fourth quarter. Despite revenue growth in "New Products" and Services, the company experienced a 9% decline in Switches revenue and a 6% drop in public sector sales, signaling ongoing market challenges. The company's balance sheet reflects a strong cash position, with cash and cash equivalents and investments totaling $43.37 billion as of April 30, 2011. Cisco also continued its aggressive share repurchase program, buying back $5.3 billion in common stock in the first nine months of fiscal 2011, and initiated its first quarterly cash dividend of $0.06 per share. Looking ahead, Cisco anticipates a relatively flat revenue for the fourth quarter of fiscal 2011 compared to the prior year, with a continued expectation of lower operating expenses as a percentage of revenue due to restructuring efforts, but acknowledging potential increases in operating expenses as a percentage of revenue due to the slower-than-anticipated cost savings realization.

Financial Highlights

55 data points
Beta

Revenue

$10.87B

61.3% Gross Margin

Net Income

$1.81B

16.6% Net Margin

EPS (Diluted)

$0.33

Total Assets

$85.35B

Cash & Equivalents

$6.63B

Free Cash Flow

$2.70B

Financial Statements
Beta
Revenue$10.87B
Cost of Revenue$4.21B
Gross Profit$6.66B
Operating Expenses$4.48B
Operating Income$2.18B
Interest Expense$153.00M
Net Income$1.81B
EPS (Basic)$0.33
EPS (Diluted)$0.33
Shares Outstanding (Basic)5.51B
Shares Outstanding (Diluted)5.54B

Key Highlights

  • 1Net sales increased 5% year-over-year to $10.87 billion for Q3 FY2011.
  • 2Net income decreased 17.6% year-over-year to $1.81 billion.
  • 3Diluted EPS decreased to $0.33 from $0.37 in the prior year period.
  • 4Gross margin percentage declined by 2.6 percentage points to 61.3%, impacted by discounts, pricing, mix, and restructuring charges.
  • 5The company announced significant restructuring initiatives in April 2011, including exiting the consumer business (Flip Video) and a voluntary early retirement program, anticipating substantial charges.
  • 6Cash, cash equivalents, and investments remained strong at $43.37 billion.
  • 7Cisco initiated its first quarterly cash dividend of $0.06 per share.

Frequently Asked Questions

For the third quarter of fiscal year 2011, Cisco Systems reported a 5% increase in net sales, reaching $10.87 billion. However, net income decreased by 17.6% to $1.81 billion, resulting in diluted earnings per share of $0.33, down from $0.37 in the same period last year. This decline was primarily driven by a decrease in gross margin, impacted by higher sales discounts, unfavorable product pricing, and restructuring charges.

The gross margin percentage for the third quarter of fiscal year 2011 decreased by 2.6 percentage points to 61.3%. This was mainly attributed to higher sales discounts, unfavorable product pricing, an unfavorable product mix (specifically, lower sales of higher-margin switching products), and restructuring and other charges related to the consumer business. These factors were partially offset by lower overall manufacturing costs.

Cisco announced in April 2011 a significant restructuring initiative to simplify its organization and operating model, align its cost structure, and exit underperforming operations. Key actions include exiting the consumer business, specifically the Flip Video cameras product line, and implementing a voluntary early retirement program. The company anticipates incurring substantial charges related to these initiatives in the fourth quarter of fiscal 2011 and expects them to reduce the annualized operating expense run rate by approximately $1 billion.

Cisco maintained a strong financial position, with total cash and cash equivalents and investments amounting to $43.37 billion as of April 30, 2011. This robust liquidity enables the company to pursue strategic investments, acquisitions, customer financing, and return capital to shareholders.