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Cisco reports Q3 net income of $2.8B on revenue of $12B

SAN JOSE, Calif. – Cisco today reported third quarter results for the period ended April 25, 2020. Cisco reported third quarter revenue of $12.0 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.8 billion or $0.65 per share, and non-GAAP net income of $3.4 billion or $0.79 per share.

"During this extraordinary time, our priority has been supporting our employees, customers, partners and communities, while positioning Cisco for the future," said Chuck Robbins, chairman and CEO of Cisco. "The pandemic has driven organizations across the globe to digitize their operations and support remote workforces at a faster speed and greater scale than ever before. We remain focused on providing the technology and solutions our customers need to accelerate their digital organizations."

"We executed well in Q3 in a very challenging environment, delivering strong margins and non-GAAP EPS growth," said Kelly Kramer, CFO of Cisco. "The resiliency that we have been building into our business model is paying off, with software subscriptions now at 74% of our software revenue, up 9 points year over year. We are focused on driving long-term profitable growth while delivering shareholder value."

COVID-19 Pandemic Response

We have been focused on helping our employees, customers, partners and communities.

Employees

  • 95% of our global workforce working from home.
  • Seamless transition to work from home with a long-standing flexible work policy, and we build the technologies that allow organizations to stay connected, secure and productive.
  • For the 5% who must be in the office to perform their roles, we are focused on their health and safety, and are taking all of the necessary precautions.

Customer and Partners

  • Introduced a variety of free offers and trials for our Webex and security technologies as they dramatically shifted entire workforces to be remote.
  • Announced $2.5 billion in financing with a new Business Resiliency Program through Cisco Capital to offer financial flexibility and support their business continuity. This will help customers and partners access the technology they need now, invest for recovery, and defer most of the payments until early 2021.

Communities

  • Committed nearly $300 million to date to support both global and local pandemic response efforts.
  • Providing technology and financial support for non-profits, first responders, and governments.
  • Donating personal protective equipment to hospital workers including N95 masks and face shields 3D-printed by Cisco volunteers around the world.

Financial Summary

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

Q3 FY 2020 Highlights

Revenue -- Total revenue was $12.0 billion, down 8%, with product revenue down 12% and service revenue up 5%. Revenue by geographic segment was: Americas down 8%, EMEA down 7%, and APJC down 9%. Product revenue was led by growth in Security, up 6%. Infrastructure Platforms was down 15% and Applications was down 5%.

Gross Margin -- On a GAAP basis, total gross margin, product gross margin, and service gross margin were 64.9%, 63.7%, and 67.7%, respectively, as compared with 63.1%, 62.0%, and 66.3%, respectively, in the third quarter of fiscal 2019.

On a non-GAAP basis, total gross margin, product gross margin, and service gross margin were 66.6%, 65.8%, and 68.9%, respectively, as compared with 64.6%, 63.7%, and 67.3%, respectively, in the third quarter of fiscal 2019.

Total gross margins by geographic segment were: 67.8% for the Americas, 65.7% for EMEA and 63.5% for APJC.

Operating Expenses -- On a GAAP basis, operating expenses were $4.4 billion, down 6%, and were 36.4% of revenue. Non-GAAP operating expenses were $3.8 billion, down 9%, and were 31.8% of revenue.

Operating Income -- GAAP operating income was $3.4 billion, down 3%, with GAAP operating margin of 28.5%. Non-GAAP operating income was flat at $4.2 billion, with non-GAAP operating margin at 34.9%.

Provision for Income Taxes -- The GAAP tax provision rate was 19.4%. The non-GAAP tax provision rate was 20.0%.

Net Income and EPS -- On a GAAP basis, net income was $2.8 billion, a decrease of 9%, and EPS was $0.65, a decrease of 6%. On a non-GAAP basis, net income was $3.4 billion, a decrease of 2%, and EPS was $0.79, an increase of 1%.

Cash Flow from Operating Activities -- $4.2 billion for the third quarter of fiscal 2020, a decrease of 2% compared with $4.3 billion for the third quarter of fiscal 2019.

Balance Sheet and Other Financial Highlights

Cash and Cash Equivalents and Investments -- $28.6 billion at the end of the third quarter of fiscal 2020, compared with $33.4 billion at the end of fiscal 2019.

Deferred Revenue -- $18.6 billion, up 7% in total, with deferred product revenue up 17%. Deferred service revenue was up 1%.

Remaining Performance Obligations -- $25.5 billion at the end of the third quarter of fiscal 2020, up 11%.

Capital Allocation -- In the third quarter of fiscal 2020, we returned $2.5 billion to shareholders through share buybacks and dividends. We declared and paid a cash dividend of $0.36 per common share, or $1.5 billion, and repurchased approximately 25 million shares of common stock under our stock repurchase program at an average price of $39.71 per share for an aggregate purchase price of $981 million. The remaining authorized amount for stock repurchases under the program is $10.8 billion with no termination date.

Acquisitions

In the third quarter of fiscal 2020, we closed the acquisition of Exablaze, a privately held designer and manufacturer of advanced network devices aimed at reducing latency and improving network performance.

Guidance for Q4 FY 2020

Cisco expects to achieve the following results for the fourth quarter of fiscal 2020:

Q4 FY 2020

  • Revenue: (8.5)% - (11.5)% decline Y/Y
  • Non-GAAP gross margin rate: 64% - 65%
  • Non-GAAP operating margin rate: 31.5% - 32.5%
  • Non-GAAP tax provision rate: 20%
  • Non-GAAP EPS: $0.72 - $0.74

Cisco estimates that GAAP EPS will be $0.57 to $0.62 in the fourth quarter of fiscal 2020.

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