Cisco Systems to cut 5,500 jobs, Q4 revenue falls

NEW DELHI: US technology giant Cisco has reported revenues for its fiscal fourth quarter to July down 2 % to $12.6 billion from $12.8 billion.

However, the company's net profit rose to $2.8 billion in the fourth quarter ended July 30, from $2.3 billion, a year earlier.

"Cisco today reported fourth quarter and fiscal year results for the period ended July 30, 2016. Cisco reported fourth quarter revenue of $12.6 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.8 billion or $0.56 per share, and non-GAAP net income of $3.2 billion or $0.63 per share,"  a statement said.

"We had another strong quarter, wrapping up a great year. I am particularly pleased with our performance in priority areas including security, data center switching, collaboration, services as well as our overall performance, with revenues up 2% in Q4 excluding the SP Video CPE business," said Chuck Robbins, CEO of Cisco.

"We continue to execute well in a challenging macro environment. Despite slowing in our Service Provider business and Emerging Markets after three consecutive quarters of growth, the balance of the business was healthy with 5% order growth. This growth and balance demonstrates the strength of our diverse portfolio. Our product deferred revenue from software and subscriptions grew 33% showing the continued momentum of our business model transformation," he added.

Reconciliations between net income, EPS and other measures on a GAAP and non-GAAP basis are provided in the tables located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."

"We delivered another solid quarter and a good fiscal year, expanding both our gross margins and operating margins," said Kelly Kramer, Cisco executive vice president and chief financial officer.

"Our strong operational discipline has enabled us to drive growth and margin improvement as we continue to invest in key priority areas such as security, IoT, collaboration, next generation data center and cloud, while also delivering shareholder value," added Kramer.

Restructuring Plan

Today's market requires Cisco and our customers to be decisive, move with greater speed and drive more innovation than we've seen in our history. Today, we announced a restructuring enabling us to optimize our cost base in lower growth areas of our portfolio and further invest in key priority areas such as security, IoT, collaboration, next generation data center and cloud. We expect to reinvest substantially all of the cost savings from these actions back into these businesses and will continue to aggressively invest to focus on our areas of future growth. The restructuring will eliminate up to 5,500 positions, representing approximately 7 percent of our global workforce, and we will take action under this plan beginning in the first quarter of fiscal 2017.

Financial Summary

All comparative percentages are on a year-over-year basis unless otherwise noted.

All revenue, non-GAAP, and geographic financial information in the "Q4 FY 2016 Highlights" and "FY 2016 Highlights" sections are presented excluding the SP Video CPE Business for prior periods as it was divested during the second quarter of fiscal 2016 on November 20, 2015.

Q4 FY 2016 Highlights

Revenue -- Total revenue was $12.6 billion, up 2%, with product revenue up 1% and service revenue up 5%. Revenue by geographic segment was: Americas up 3%, EMEA up 3%, and APJC down 2%. Product revenue growth was led by Security at 16%. Collaboration, Wireless and Switching product revenue increased by 6%, 5%, and 2%, respectively. Service Provider Video, NGN Routing and Data Center product revenue decreased by 12%, 6%, and 1%, respectively.

Gross Margin -- On a GAAP basis, total gross margin and product gross margin were 63.1% and 62.2%, respectively. The increase in the product gross margin compared with 59.0% in the fourth quarter of fiscal 2015 was primarily due to continued productivity improvements, the divestiture of the SP Video CPE Business, and to a lesser extent product mix, partially offset by pricing.

Non-GAAP total gross margin and product gross margin were 64.6% and 63.9%, respectively. The increase in non-GAAP product gross margin compared with 63.2% in the fourth quarter of fiscal 2015 was primarily due to continued productivity improvement and to a lesser extent product mix, partially offset by pricing.

GAAP service margin was 66.0% and non-GAAP service gross margin was 67.0%.

Total gross margins by geographic segment were: 64.9% for the Americas, 65.2% for EMEA and 62.5% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.7 billion, down 4%. Non-GAAP operating expenses were $4.2 billion, up 1%, and were 33.2% of revenue. Headcount compared with the end of the third quarter of fiscal 2016 increased by 607 to 73,711, driven by additional headcount from investments in key growth areas.

Operating Income -- GAAP operating income was $3.3 billion, up 15%, with GAAP operating margin of 26.1%. Non-GAAP operating income was $4.0 billion, up 7%, with non-GAAP operating margin at 31.4%.

Provision for Income Taxes -- The GAAP tax provision rate was 17.1%, reflecting certain tax benefits related to prior-year periods. The non-GAAP tax provision rate was 21.4% which excludes these tax benefits related to prior-year periods.

Net Income and EPS -- On a GAAP basis, net income was $2.8 billion and EPS was $0.56. On a non-GAAP basis, net income was $3.2 billion, an increase of 7%, and EPS was $0.63, an increase of 9%.

Cash Flow from Operating Activities -- was $3.8 billion for the fourth quarter of fiscal 2016, compared with $3.1 billion for the third quarter of fiscal 2016, and compared with $4.1 billion for the fourth quarter of fiscal 2015.

FY 2016 Highlights

Revenue -- Total revenue was $48.7 billion, an increase of 3%.

Net Income and EPS -- On a GAAP basis, net income was $10.7 billion and EPS was $2.11. On a non-GAAP basis, net income was $12.0 billion, an increase of 7%, and EPS was $2.36, an increase of 8%.

Cash Flow from Operating Activities -- was $13.6 billion for fiscal 2016, compared with $12.6 billion for fiscal 2015.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- were $65.8 billion at the end of the fourth quarter of fiscal 2016, compared with $63.5 billion at the end of the third quarter of fiscal 2016, and compared with $60.4 billion at the end of fiscal 2015. The total cash and cash equivalents and investments available in the United States at the end of the fourth quarter of fiscal 2016 were $5.9 billion.

Deferred Revenue -- was $16.5 billion, up 8% in total, with deferred product revenue up 8%, driven largely by subscription-based and software offerings, and deferred service revenue was up 9%. Cisco continued to build a greater mix of recurring revenue as reflected in the increase in deferred revenue.

Product Backlog -- was approximately $4.6 billion at the end of fiscal 2016, an increase of 1% compared with the balance at the end of fiscal 2015 (excluding the SP Video CPE Business).

Days Sales Outstanding in Accounts Receivable (DSO) -- was 42 days at the end of the fourth quarter of fiscal 2016, compared with 38 days at the end of the fourth quarter of fiscal 2015.

Capital Allocation -- In the fourth quarter of fiscal 2016, Cisco declared and paid a cash dividend of $0.26 per common share, or $1.3 billion. For the full fiscal year, Cisco declared and paid cash dividends of $0.94 per common share, or $4.8 billion.

For the fourth quarter of fiscal 2016, Cisco repurchased approximately 28 million shares of common stock under its stock repurchase program at an average price of $28.70 per share for an aggregate purchase price of $800 million. For the full fiscal year, Cisco repurchased approximately 148 million shares of common stock under its stock repurchase program at an average price of $26.45 per share for an aggregate purchase price of $3.9 billion.

As of July 30, 2016, Cisco had repurchased and retired 4.6 billion shares of Cisco common stock at an average price of $21.04 per share for an aggregate purchase price of approximately $96.6 billion since the inception of the stock repurchase program. The remaining authorized amount for stock repurchases under this program is approximately $15.4 billion with no termination date.

For the full fiscal year, Cisco returned $8.7 billion to shareholders through share buybacks and dividends, which represented approximately 70% of free cash flow.

Acquisitions -- In Q4 FY 2016, we announced our intent to acquire CloudLock Inc., which closed in early Q1 FY 2017. The CloudLock acquisition will further enhance Cisco's security portfolio and build on Cisco's Security Everywhere strategy, designed to provide protection from the cloud to the network to the endpoint and also aligns with our strategy to deliver more cloud based subscription services.

Business Outlook for Q1 FY 2017

On November 20, 2015, during the second quarter of fiscal 2016, Cisco completed its divestiture of the SP Video CPE Business. In order to provide a clear view of Cisco's continuing expected financial performance, the revenue outlook for the first quarter of fiscal 2017 is normalized to exclude the SP Video CPE Business for the first quarter of fiscal 2016. The corresponding revenue in the first quarter of fiscal 2016 for the SP Video CPE Business was $411 million.

Cisco expects to achieve the following results for the first quarter of fiscal 2017:
Q1 FY 2017
Revenue (normalized to exclude SP Video CPE Business for Q1 FY2016) -1% to 1% growth Y/Y
Non-GAAP gross margin rate 63% - 64%
Non-GAAP operating margin rate 29% - 30%
Non-GAAP tax provision rate 22%
Non-GAAP EPS $0.58 - $0.60
Cisco estimates that GAAP EPS will be $0.42 to $0.47 which is lower than non-GAAP EPS by $0.13 to $0.16 per share in the first quarter of fiscal 2017.

A reconciliation between the Business Outlook for Q1 FY 2017 on a GAAP and non-GAAP basis is provided in the table entitled "GAAP to non-GAAP Business Outlook for Q1 FY 2017" located in the section entitled "Reconciliations of GAAP to non-GAAP Measures."