Registrant’s telephone number, including area code: (408) 526-4000
Securities registered pursuant to Section 12(b) of the Act: |
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Title of Each Class:each class: | Trading Symbol(s) | Name of Each Exchangeeach exchange on which Registeredregistered |
Common Stock, par value $0.001 per share | CSCO | The NASDAQNasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
_____________________________________ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x☒ Yes o☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o☐ Yes x☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x☒ Yes o☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x☒ Yes o☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ☒ | | | Accelerated filer | | ☐ |
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Non-accelerated filer | | ☐ | | | Smaller reporting company | | ☐ |
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Large accelerated filer | | x | | | Accelerated filerEmerging growth company | | o |
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Non-accelerated filer | | o | (Do not check if a smaller reporting company) | | Smaller reporting company | | o☐ |
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o☐ Yes x☒ No
Aggregate market value of registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock on January 27, 201722, 2021 as reported by the NASDAQNasdaq Global Select Market on that date: $155,020,814,264$189.0 billion
Number of shares of the registrant’s common stock outstanding as of September 1, 2017: 4,951,955,8513, 2021: 4,217,735,917
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement relating to the registrant’s 20172021 Annual Meeting of Shareholders,Stockholders, to be held on December 11, 2017,13, 2021, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.
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| | PART I | | |
Item 1. | | | | |
Item 1A. | | | | |
Item 1B. | | | | |
Item 2. | | | | |
Item 3. | | | | |
Item 4. | | | | |
| | PART II | | |
Item 5. | | | | |
Item 6. | | | | |
Item 7. | | | | |
Item 7A. | | | | |
Item 8. | | | | |
Item 9. | | | | |
Item 9A. | | | | |
Item 9B. | | | | |
| | PART III | | |
Item 10. | | | | |
Item 11. | | | | |
Item 12. | | | | |
Item 13. | | | | |
Item 14. | | | | |
| | PART IV | | |
Item 15. | | | | |
Item 16. | | | | |
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This Annual Report on Form 10-K, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” "momentum," “seeks,” “estimates,” “continues,” “endeavors,” “strives,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, future responses to and effects of the COVID-19 pandemic, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under “Item 1A. Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
PART I
General
Cisco designs and sells a broad range of technologies that have been poweringpower the Internet since 1984. AcrossInternet. We are integrating our platforms across networking, security, collaboration, applications and the cloud,cloud. These platforms are designed to help our evolving intent-based technologies are constantly learningcustomers manage more users, devices and adaptingthings connecting to their networks. This will enable us to provide customers with a highly secure, intelligent platform for their digital business.
We conduct our business globally and manage our business by geography. Our business is organized into the following three geographic segments: Americas; Europe, Middle East, and Africa (EMEA); and Asia Pacific, Japan, and China (APJC). For revenue and other information regarding these segments, see Note 17 to the Consolidated Financial Statements.
Our products and technologies are grouped into the following categories: Switching; Next-Generation Network (NGN) Routing; Collaboration; Data Center; Wireless; Security; Service Provider VideoInfrastructure Platforms; Applications; Security and Other Products. In addition to our product offerings, we provide a broad range of service offerings, including technical support services and advanced services. Increasingly, we are delivering our technologies through software and services. Our customers include businesses of all sizes, public institutions, governments, and service providers, including large webscale providers. These customers often look to us as a strategic partner to help them use information technology (IT) to differentiate themselves and drive positive business outcomes.
We were incorporated inAt our annual meeting of shareholders held on December 10, 2020, shareholders voted to approve changing our state of incorporation from California in December 1984, and ourto Delaware. The reincorporation became effective on January 25, 2021. Our headquarters are in San Jose, California. The mailing address of our headquarters is 170 West Tasman Drive, San Jose, California 95134-1706, and our telephone number at that location is (408) 526-4000. Our website is www.cisco.com. Through a link on the Investor Relations section of our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC): at sec.gov: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports or other information filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. All such filings are available free of charge. The information postedpublished on our website, or any other website referenced herein, is not incorporated into this report.
Strategy and Priorities
As our customers add billions of new connections to their enterprises, we believeand as more applications move to a multicloud environment, the network becomes even more critical. Our customers are navigating change at an unprecedented pace and our mission is becoming more critical than ever.to shape the future of the Internet by inspiring new possibilities for them by helping transform their infrastructure, expand applications and analytics, address their security needs, and empower their teams. We believe that our customers are looking for intelligent networksoutcomes that are data-driven and provide meaningful business value through automation, security, and analytics. Our vision isanalytics across private, hybrid, and multicloud environments.
We are focusing on four customer priorities: Reimagine Applications, Power of Hybrid Work, Transforming Infrastructure and Secure the Enterprise.
Reimagine Applications
In our view, over the next several years, customers will be increasingly writing modern software applications that can run on any hybrid cloud, and will be adding billions of connections to their environments. Customers will need to be able to build
applications quickly, deploy them nearly anywhere, monitor experiences, and act in real time.
We believe we are uniquely positioned to enable successful business outcomes for customers in hybrid and multicloud environments. In our view, networks are increasingly critical to business success and we believe our customers will benefit from the insights and intelligence that we are making accessible through our highly differentiated platforms.
We are continuing our commitment to deliver full stack observability from the application to the infrastructure to give our customers greater insights that enable faster, better decision making. We are doing this through adding key elements to our portfolio, such as: infrastructure optimization with Intersight, network monitoring with technology from our acquisition of ThousandEyes, application performance monitoring with AppDynamics, as well as our security innovations.
Power of Hybrid Work
Our customers’ communications continue to evolve as we move to a digital, cloud-based world. As our customers’ people are an important competitive advantage to them, their teams need effective and simple ways to work better together and to interact with their customers to build better relationships and increase collaboration. As an example, we believe our collaboration portfolio, which includes our subscription-based Webex conferencing platform, is at the center of our customers’ strategy for enabling their teams to be more productive and secure.
With the future of work being hybrid, we are focused on delivering highly secure intelligent, platform forcollaboration experiences regardless of whether workers are physically at home or in the office. During fiscal 2021, we have added a significant number of new features, including digital businesses. Our strategic priorities include acceleratingsignage, touchless calls, room capacity alerts, and environmental sensors to help enable a safer return to the office. We also extended our paceWebex suite of innovation, increasing the value of the network,devices through our new desk camera and delivering technology the waydesk hub solutions.
Transforming Infrastructure
In an increasingly digital and connected world, our customers wantare looking to consume it.modernize and transform their infrastructure. Our strategy began with Software-Defined Access (SD-Access) technology, one of our leading enterprise architectures and continued with the launch of our Catalyst 9000 series of switches.
Accelerating Innovation — EnablingNetwork Automation
In June 2017, we announcedSince the initial development of new network product offerings that feature whatlaunch, we referhave continued to as “intuitive” networking technology. The intuitive networktransform our enterprise access portfolio by bringing together several technologies to form the only integrated architecture with built-in simplicity, automation and security at the foundation. This architecture is an intent-based networking platform designed to be intelligent,enable our customers to securely connect their users and devices to applications and data over any network, to applications and data, no matter where they are.
We have introduced several innovations that extend our networking capabilities to wireless and enterprise routing products, including Software-Defined Wide Area Network (SD-WAN) and Internet of Things (IoT) edge platforms. Our SD-WAN solutions are designed to provide direct branch to cloud connectivity, enabling the workforce to access their software-as-a-service (SaaS) applications and workloads in an optimized and highly secure powered by “intent”manner. We have continued to expand our SD-WAN offering, through our Cloud OnRamp integrations with several webscale providers to deliver predictable and informed by “context”—features by which the intuitive network aims to constantly learn, adapt, automate and protect in order to optimize network operations and defend against an evolving cyber threat landscape. highly secure application experiences.
To further our innovation in this area, we are applying the latest technologies, such as machine learning and advanced analytics, to operate and define the network. From a security standpoint, these newenhance network capabilities. These network product network offerings are designed to enable customers to detect cybersecurity threats, even in encrypted traffic, andtraffic. As such, we have created, what is in our view, the only network that is designed for security while maintaining privacy.
Our new Catalyst 9000 seriescustomers are operating in multicloud environments with private, public and hybrid clouds. For the data center, our strategy is to deliver multicloud architectures that bring policy and operational consistency, regardless of switches represent the initial foundation ofwhere applications or data reside, by extending our intent-based networking capabilities and provide highly differentiated advancements in security, programmability, and performance, while lowering operating costs by innovating at the hardware and software layer. These network switches form the foundation for Cisco’s Software-Defined Access (SD-Access) technology, one of our leading enterprise architectures. These offerings are designed to provide a single, highly secure network fabric that helps ensure policy consistency, enables faster launches of new business services and significantly improves issue resolution times while being open and extendable. SD-Access, built on the principles of Cisco Digital Networking Architecture (DNA), provides what we see as a transformational shift in the building and managing of networks.
We have also been focusing on furthering our innovation with respect to the move toward more programmable, flexible, and virtual networks, sometimes called software-defined networking (SDN). This transition is focused on providing a virtualized network environment that is designed to enable flexible, application-driven customization of network infrastructures. Our Application Centric Infrastructure (ACI) solutions deliver centralized application-driven policy automation, management, and visibilityour hyperconverged offerings.
In fiscal 2020, we announced details of both physicalour technology strategy for the Internet for the Future aimed at addressing the broad adoption of multicloud and virtual environments asapplication environments. We continue to make significant investments in the development of software, silicon and optics — which we believe are the building blocks for the Internet for the Future.
We introduced Cisco Silicon One, a single system.unified silicon architecture, as well as the Cisco 8000 carrier-class router family built on Cisco Silicon One and our operating system, Cisco IOS XR7. We have also expanded our Cisco Silicon One platform from a routing focused solution to one which addresses the webscale switching market. We also launched a new routed optical networking solution integrating our routers and pluggable optics from our recent acquisition of Acacia, which further helps to deliver cost savings to our customers.
IncreasingSecure the Value ofEnterprise
With the Network
Unlocking the Power of Data.Werapid growth in modern applications, more distributed work environments, and increasing cyber-attacks, we believe the growth of intelligent networks and intent-based networks illustrate the increasing value of the network. Our customers are increasingly using technology and specifically networks to grow their businesses, drive efficiencies, and more effectively compete. We believe data is one of an organization's most strategic assets and this data is increasingly distributed across every organization and ecosystem, on customer premises, at the edge of the network, and in the cloud. As the number ofrequires new devices connected to the Internet grows, we believe the network will play an even more critical role in enabling our customers to aggregate, automate, and draw actionable insights from this highly distributed data, where there is a premium onor enhanced security and speed. We believe this is driving our customers to adopt entirely new IT architectures and organizational structures and, more specifically, to seek network deployment solutions that deliver greater agility, productivity, security and other advanced network capabilities.
Deploy Security Everywhere. We believe that security is the top IT priority for many of our customers.architectures. Our security strategy is focused on delivering a unified threat-centric securitysimple and
effective cyber-security architecture combining network, cloud and endpoint-based solutions. Through this approach,solutions that recognizes the critical importance of data privacy.
Our comprehensive security portfolio offers simplified protection for any workload on any cloud while minimizing the attack surface and automating security policies across an organization’s hybrid cloud footprint. This extends to our secure access service edge (SASE) framework and Zero Trust architecture, where we intend to provide securityhave developed a cloud-delivered stack across the entire attack continuum before, during,Umbrella, a secure Internet gateway, Meraki, SD-WAN, and afterViptela. We are also delivering unified detection and response capabilities built on Cisco SecureX, our new cloud-native platform, which is a cyberattackbuilt-in platform that connects our Cisco Secure portfolio and our customers’ infrastructure.
Our strategy is to help our customers shortenconnect, secure, and automate in order to accelerate their digital agility in a cloud-first world. To execute on our strategy and address our customer priorities, we are focusing on the time between threat detectionfollowing six strategic pillars:
•Secure, Agile Networks — Build networking solutions with built-in simplicity, security, agility and response.automation that can be consumed as-a-service.
•Optimized Application Experiences — Enabling greater speed, agility and scale of cloud-native applications.
•Hybrid Work — Deliver highly secure access, a Multi-Cloud World. Oursafer workplace and collaboration experiences for the hybrid workforce.
•Internet for the Future — Transform connectivity by efficiently meeting the ever-growing demand for low-latency and higher speeds.
•End-to-End Security — Build simple, integrated, and high efficacy end-to-end security solutions, delivered on-premise or in the cloud.
•Capabilities at the Edge — Develop new capabilities for a distributed world while enhancing the developer experience and extending enterprise and carrier networks.
We are also accelerating our efforts to enable the delivery of network functionality as a service as our customers are operatingincreasingly want to consume our technologies in multi-cloud environmentsflexible ways. We have made the initial step with private, public,our new as-a-service portfolio, Cisco Plus, and our first offer, Cisco Plus hybrid clouds. Our cloud, strategy iswhich combines our data center compute, networking and storage portfolio. Cisco Plus includes our plans to deliver solutionsnetworking-as-a-service, which is designed to simplify, secure,unify networking, security and transform how customers work in this multi-cloud world to maximize business benefits. Our cloud strategy encompasses moving workloadsobservability across private and public clouds, consuming software-as-a-service (SaaS)access, wide area network (WAN), and writing modern applications that can run on any hybrid cloud. We are focused on enabling simple, intelligent, automated and highly secure clouds by delivering infrastructure and cloud-based SaaS offerings including WebEx, Meraki cloud networking, and certain other ofdomains.
Transforming our Security and Collaboration offerings. We believe that customers and partners view our approach to the cloud as differentiated and unique, recognizing that we offer a solution for all cloud environments, including private, hybrid, and public clouds.
We believe that in the next several years we will see a significant expansion of technology as customers add billions of new connections to their enterprises. In our view, the network has never been more critical to business success and we believe our customers will benefit from the insights and intelligence we are making accessible through our highly differentiated platforms.
Delivering Technology the Way Our Customers Want to Consume ItBusiness Model
We are transforming our offerings to meet the evolving needs of our customers. As part of the transformation of our business, we have continued to make strides during fiscal 2017 in evolving our offerings. We are shifting to develop and sell more software and subscription-based offerings, which we expect will increase the amount of our recurring revenue. The Catalyst 9000 series of switches are an example of how we are beginning to shift more of our core business to a subscription-based model. Historically, our various networking technology products have aligned with their respective product categories. However, increasingly our offerings are crossing multiple product categories. As our core networking evolves,offerings evolve, we expect we will add more common software features across our core networking platforms. With respect to the disaggregation of hardware and software and how our customers want to consume our technology, weWe are increasing the amount of software offerings that we provide.provide and the proportion of subscription software offerings. We have various types of software arrangements including system software, on-premise software, hybrid software and SaaS offerings. In terms of monetization, our software offerings that fall into the broad categories of subscription arrangements, including SaaS and term licenses, and perpetual licenses.
As part of the transformation of our business, we continued to make strides during fiscal 2021 to develop and sell more software and subscription-based offerings. We are also focused on the entire customer lifecycle to drive expansion and renewals. We will continue to invest in network-as-a-service offerings to provide our customers with flexibility in how they want to utilize our technologies.
For a discussion of the risks associated with our strategy, see “Item 1A. Risk Factors,” including the risk factor entitled “We depend upon the development of new products and services, and enhancements to existing products and services, and if we fail to predict and respond to emerging technological trends and customers’ changing needs, our operating results and market share may suffer.” For information regarding sales of our major products and services, see Note 1719 to the Consolidated Financial Statements.
Products and Services
AsOur products and services are grouped into the following categories:
Infrastructure Platforms
Infrastructure Platforms consist of the end of fiscal 2017, we categorized our current offerings into several categories:
Switching
Switching is an integralcore networking technology used in campuses (including branch offices), traditional data centers, and private and public cloud data centers. Switches are used within buildings in local-area networks (LANs), and across great distances in wide-area networks (WANs). Our switching products connect end users, workstations, IP phones, wireless access points, and servers and also function as aggregators on LANs and WANs. Our switching systems employ several widely used technologies including Ethernet, Power over Ethernet (PoE), Fibre Channel over Ethernet (FCoE), Packet over Synchronous Optical Network, and Multiprotocol Label Switching.
Individually, our suite of switching, routing, wireless, and data center products is designed to offer the performance and features required for nearly any customer need, from traditional small workgroups, wiring closets, and network cores to highly virtualized and converged corporate data centers. Working together with our wireless access solutions, these switches are the building blocks of an integrated network that delivers scalable and advanced functionality solutions protecting, optimizing, and growing as customers' business needs evolve.
Many of our switches are designed to support advanced serviceswork together to deliver networking capabilities and transport and/or store data. These technologies consist of both hardware and software offerings that allow organizationshelp our customers build networks, automate, orchestrate, integrate, and digitize data. We believe it is critical for us to becontinue to deliver continuous value to our customers. We continued to make progress in shifting more efficient when using one switchof our business to software and subscriptions across our core networking portfolio, and in expanding our software
offerings. Our objective is to continue moving to cloud-managed solutions across our enterprise networking portfolio. We started with our Nexus 9000 series of switches for multiplethe data center, which along with ACI, provide enhancements in security, programmability and performance while lowering operating costs. Our Cisco Catalyst 9000 series of switches were developed for security, mobility, IoT, and the cloud. These switches formed the foundation for our leading enterprise architectures, built on the principles of Cisco DNA. We continued to expand on this technology by extending SD-Access and Cisco DNA Center across our enterprise networking functions rather than using multiple switchesportfolio and by extending ACI to accomplish the same outcome.public and private cloud. In addition, we now have a unified operating system and policy management platform for our enterprise networking portfolio to drive simplicity and consistency across our customers’ networks.
Our Switching products are used by customers in bothportfolio encompasses campus environments (including branch offices) and data centers. Both our data center and campus portfolios are comprised of fixed and modular configuration offerings, with certain offerings available in either. Key product platforms within our Switching product category, in which we also include storage products, are as follows:
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Campus Switches | | Data Center Switches | | Storage |
Fixed Configuration: | | Fixed Configuration: | | Cisco MDS Series: |
• Cisco Catalyst 2960 Series | | • Cisco Nexus 2000 Series | | • Cisco MDS 9000 |
• Cisco Catalyst 3650 Series | | • Cisco Nexus 3000 Series | | |
• Cisco Catalyst 3850 Series | | • Cisco Nexus 3500 Series | | |
• Cisco Catalyst 4500-X Series | | • Cisco Nexus 5000 Series | | |
• Cisco Catalyst 6800 Series | | • Cisco Nexus 6000 Series | | |
• Cisco Catalyst 9300 Series | | • Cisco Nexus 9200 Series | | |
• Cisco Catalyst 9500 Series | | • Cisco Nexus 9300 Series | | |
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Modular Configuration: | | Modular Configuration: | | |
• Cisco Catalyst 4500-E Series | | • Cisco Nexus 7000 Series | | |
• Cisco Catalyst 6500-E Series | | • Cisco Nexus 7700 Series | | |
• Cisco Catalyst 6800 Series | | • Cisco Nexus 9500 Series | | |
• Cisco Catalyst 9400 Series | | | | |
Our Campus Switching portfolio consists of the Cisco Catalyst brand and is used by large enterprisesswitching as well as small and medium-sized businesses, providing adata center switching offerings. Our campus switching offerings provide the foundation for converged data, voice, video, and Internet of Things (IoT)IoT services. These switches offer enhanced security and reliability and are designed to scale efficiently as our customers grow. Our Campus Switching portfolio is available in both fixed and modular configurations.
In fiscal 2017, we introducedWithin campus switching are our Cisco Catalyst 9000 series of switches which are the next generation in thethat include hardware with embedded software, along with a software subscription referred to as Cisco Catalyst family of campus switches including, enterprise LAN access, aggregation, and core switches. Developed for security, IoT, and the cloud, these network switches form the foundation for Cisco's SD-Access technology, one of our leading enterprise architectures. SD-Access, built on the principles ofDNA. Cisco DNA provides what we see as a transformational shift in the building and managing of networks. By decoupling network functions from hardware, SD-Access is designed to provide a single, highly secure network fabric that helps ensure policy consistency, enable faster launches of new business services and significantly improve issue resolution times while being open and extendable. The new Cisco Catalyst 9000 series of switches enhance our Network-as-a-Sensor capabilities through behavioral analytics enabled by Encrypted Traffic Analytics (ETA) for malware identification even on encrypted traffic. ETA is designed to provide over 99% efficiency for identifying malware on encrypted traffic without the complexities involved with decryption. With security top of mind for many customers, these capabilities provideautomation, analytics and control throughsecurity features and can be centrally monitored, managed, and configured. With the expansion of WiFi-6, we have expanded our portfolio to include multigigabit technology in our switches in order to manage higher bandwidth and manage network for threat mitigation before, during, and after an attack.
speed. Our Data Center Switching portfolio consists of the Cisco Nexus brand of switches and is used across all customer segments ranging from small and medium-sized business, to large enterprises, service providers, and cloud providers. These switchesdata center switching offerings provide the foundation for mission critical data centers with high availability, scalability, and security across traditional data centers and private and public cloud data centers. Our CiscoWe continue to add deeper and broader visibility and analytics across our networks and applications, enabling us to deliver better experiences for our customers. We are also expanding our Nexus Data Center Switching9000 portfolio is availablewith 400G speed capability in both fixed and modular configurations.order to support growing bandwidth demands for our customers.
Our Cisco Nexus 9000 Series is designed to deliver high performance and density, low latency, and power efficiency in a range of form factors. The switches operate in Cisco NX-OS Software or ACI modes with our Cloud Scale ASIC technology. They are designed for both traditional and fully automated data center deployments.
The ACI solution in our Data Center SwitchingRouting portfolio consists of the Cisco Nexus 9000 Series Switches, Cisco Application Policy Infrastructure Controllers (APIC) and accompanying centralized policy management capabilities, integrated physical and virtual infrastructure, and an open ecosystem of network, storage, management, and orchestration vendors. We have successfully integrated new technologies with the Cisco ACI solution, such as our Cisco CloudCenter platform. Our Cisco Tetration Analytics platform is designed to deliver real-time visibility across the data center using hardware and software sensors to provide behavior-based application insight using deep forensic-based analysis.
NGN Routing
Next-Generation Networking (NGN) Routing technology is fundamental to the foundation of the Internet. This category of technologies interconnects public and private wireline and mobile networks, for mobile,delivering highly secure and reliable connectivity to campus, data voice,center and video applications.branch networks. Our NGN Routing portfolio of hardware and software solutions consists primarily of physical and virtual routers, and routing and optical systems. Our solutions are designed to meet the scale, reliability, and security needs of our customers. OurWe introduced the principles of Cisco DNA into our routing portfolio is differentiated from thoseby integrating SD-WAN into our offerings. We recently launched the Cisco 8000 portfolio, a family of our competitors through advanced capabilities, which we sometimes refer to as “intelligence,” that our products provide at each layer of the network infrastructure to deliver performance in transmitting information and media-rich applications.
We offer a broad range of hardware and software solutions, from core network infrastructure and mobile networkhigh density, low power next generation routing solutions for service providers and enterprises, to access routers for branch offices and for telecommuters and consumers at home. Key product areas within our NGN Routing category are as follows:
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High-End Routers | | Midrange and Low-End Routers | | Other NGN Routing |
Cisco Aggregation Services Routers (ASRs): | | Cisco Integrated Services Routers (ISRs): | | Optical networking products: |
• Cisco ASR 900 and 920 Series | | • Cisco 800 Series ISR | | • Cisco NCS 1000 Series |
• Cisco ASR 1000 Series | | • Cisco 1900 Series ISR | | • Cisco NCS 2000 Series |
• Cisco ASR 5000 and 5500 Series | | • Cisco 2900 Series ISR | | • Cisco NCS 4000 Series |
• Cisco ASR 9000 Series | | • Cisco 3900 Series ISR | | |
| | • Cisco 4200 Series ISR | | |
Cisco Carrier Routing Systems (CRS): | | • Cisco 4300 Series ISR | | Cable access/Infrastructure products: |
• Cisco CRS-3 | | • Cisco 4400 Series ISR | | • Cisco CBR Series |
• Cisco CRS-X | | | | • Cable modem termination systems (CMTS) |
Cisco Network Convergence System (NCS): | | | | • Hybrid fiber coaxial (HFC) access network products |
• Cisco NCS 6000 Series | | | | • Quadrature amplitude modulation (QAM) |
• Cisco NCS 5000 Series | | | | |
• Cisco NCS 5500 Series | | | | |
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During fiscal 2017, we continued to focusplatforms focused on our high-end routing products, mainly the ASR 9000, NCS5500,customers’ evolution to support 100G and CRS, driven by the bandwidth and capacity needs of our customers. We saw continued adoption of the newer products in our NCS portfolio, including the NCS5500 and the NCS1000 product family in the optical networking space. Our portfolio is designed to address the needs of web-scale customers which are large cloud companies that deliver user services on a massive scale as well as service providers that seek more advanced features.
400G connectivity speeds.
Our NCS1000 series enables data center interconnectWireless portfolio provides indoor and outdoor wireless coverage designed for web-scale customers, in a compact form-factor perfectly suited to their operational environments. We have also increased focus on modernizing our network infrastructure and developing new software technologies in our Cisco IOS XR operating system designed to simplify how customers manage, operate and automate their network infrastructure to reduce their costs as networks grow. These solutions are examplesseamless roaming use of our intent to continue to combine application-specific integrated circuits (ASICs), information systems, and software to develop NGN Routing products and services aligned with the needs of our customers.
Collaboration
Our strategy is to make collaboration more effective, comprehensive, and less complex by creating innovative solutions through combining the power of software, hardware, and the network. We offer a portfolio of solutions which can be delivered from the cloud, premises or hybrid environments, and which integrate voice, video, and messaging on fixeddata applications. These products include wireless access points that are standalone, controller appliance-based, switch-converged, and mobile networks across a wide range of devices/endpoints such as mobile phones, tablets, desktopMeraki cloud-managed offerings. Our Cisco DNA and laptop computers, video unitsCisco DNA Spaces location-based services provide network assurance and collaboration appliances. Key product areas withinautomation for our Collaboration categorycustomers’ wireless networks. Our Catalyst and Meraki WiFi-6 based access points are as follows:designed for high-density public or private environments to improve speed, performance, and capacity for wireless networking in both homes and enterprises.
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Unified Communications | | Conferencing | | Collaboration Endpoints | | Business Messaging |
• Internet Protocol (IP) phones | | • Cisco WebEx | | • Collaboration desk endpoints | | • Cisco Spark |
• Call control | | • Cisco TelePresence Server | | • Collaboration room endpoints | | |
• Call center and messaging | | •
Cisco TelePresence Conductor | | • Immersive systems | | |
• Software-based instant-messaging (IM) clients | | | | • Cisco Spark Board | | |
• Communication gateways and unified communication | | | | | | |
We include all of our SaaS revenue from WebEx within Conferencing. We continued to expand our Collaboration portfolio during fiscal 2017 with the launch of Cisco Spark Board, a cloud-based collaboration appliance combining whiteboarding, presentations and videoconferencing integrated with our cloud-based Cisco Spark applications. We acquired MindMeld, Inc. to bring artificial intelligence capabilities into our collaboration portfolio focused on the future of conversational user interfaces. We also announced new partnering arrangements with Salesforce.com and delivered integrations on previously announced partnerships with Apple. For on-premises collaboration markets, new innovations that have recently come to market include the BE4K call management platform focused on medium-sized businesses and our Cisco Meeting Server for on-premises conferencing. While the revenue from these expanded offerings, investments, and partnerships was not material during fiscal 2017, we believe they provide opportunities for future business expansion.
Our Data Center
The portfolio incorporates various technologies and solutions including the Cisco Unified Computing System, (Cisco UCS) combinesHyperFlex, our hyperconverged offering, and software management capabilities, which combine computing, networking, and storage infrastructure with management and virtualization forto deliver agility, simplicity, and scale. Our architecture provides a programmable, policy-driven infrastructure, that customers can optimize for traditional workloads, data analytics and cloud-native applications, all part of a common operating environment with an open application program interface (API) for broad interoperability and automation. Key product areas within our Data Center product categoryThese products are as follows:
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Cisco Unified Computing System (Cisco UCS): |
• Cisco UCS B-Series Blade Servers |
• Cisco UCS C-Series Rack Servers |
• Cisco UCS M5 Series Servers |
• Cisco UCS C3260 Storage Optimized Rack Server |
• Cisco UCS Mini branch/remote site computing solution |
• Cisco UCS Fabric Interconnects |
• Cisco UCS Manager and Cisco UCS Director Management Software |
Cisco HyperFlex Systems |
Private and Hybrid Cloud: |
• Cisco ONE Enterprise Cloud Suite (a portion of Cisco ONE is in Data Center) |
Our Data Center product innovations are designed to enable customers to consolidate both physical and virtualized workloads onto a single scalable, centrally managed, and automated system, while still accommodating their unique application requirements. We offer a portfolio of comprehensive solutions designed to preserve customer choice, accelerate business initiatives, reduce risk, and lower the cost of IT.
Cisco UCS C3260, our storage optimized server, brings the Cisco UCS architectural advantages to storage intensive workloads, including big data, object storage, and archiving. At the edge of the network, Cisco UCS Mini is an all-in-one solution optimized for branch and remote office, point-of-sale endpoint locations, and smaller IT environments. Our Cisco UCS M5 Series delivers new systems and software designed to extend the power and simplicity of unified computing for data-intensive workloads, applications at the edge of the network, and the next generation of distributed application architectures. Additionally,
Applications
The Applications product category consists primarily of software-related offerings that utilize the core networking and data center platforms to provide their functions. Our Applications portfolio includes our collaboration products as well as our Applications Monitoring and IoT software offerings. Our offerings within the Applications portfolio are primarily delivered as software-as-a-service, but also includes perpetual software licenses as well as hardware offerings.
Our Collaboration strategy is to power hybrid work by reimagining employee and customer experiences to be more inclusive and engaging by providing technology that enables distributed teams to collaborate effortlessly. We offer end-to-end collaboration solutions that can be delivered from the cloud, on-premise or within hybrid cloud environments allowing customers to transition their collaboration solutions from on-premise to the cloud. These Webex solutions can be purchased on a stand-alone basis or as part of the Webex Suite that integrates voice, video, messaging, calling, polling, and event solutions enabled across a wide range of devices and endpoints such as mobile phones, tablets, desktop and laptop computers, video units, and collaboration appliances. Artificial intelligence (AI) and machine learning capabilities are embedded across the Webex portfolio, providing collaboration experiences that integrate people insights, relationship and audio intelligence to help improve productivity.
Our Webex Cloud Contact Center solution, combined with the products from our recent IMImobile acquisition, creates a customer experience as-a-service offering (CXaaS), which leverages technology, including AI, experience management, collaboration tools, omnichannel capabilities, and programmability, for customization.
Our Webex devices portfolio has also been expanded to include comprehensive remote work devices with purpose-built software that embeds AI to help provide smart hybrid workplace experiences, that are both touch free and personalized, assisting with safer returns to the office.
Our analytics solutions seek to help businesses deliver consistently high-quality digital experiences by connecting end-user experience and application performance to business outcomes. Our analytics applications monitor, correlate, analyze, and act on application performance and business performance data in real time. This automated, cross-stack intelligence helps to enable developers, IT operations, and business owners to make mission critical and strategic improvements.
We continue to invest in IoT as we expect the number of connected IoT devices to continue to grow. Our Cisco IoT Control Center helps to enable enterprises to automate the lifecycle of connected devices, including tools designed to automatically and remotely onboard, manage, and monetize their IoT devices.
Security
The Security product category primarily includes our network security, cloud and email security, identity and access management, advanced threat protection, and unified threat management products. Leveraging the built-in Cisco SecureX platform, we provide interoperability with customers’ security infrastructure, including third-party technologies. This results in unified visibility, automation and stronger defenses.
Security continues to be a leading priority for our customers, regardless of size or industry. At the core of our strategy is addressing their number one concern: the complexity of security. We have built SecureX into our Security products to help our customers connect our integrated security portfolio and existing security infrastructure to provide simplicity, visibility, and efficiency. We have also delivered Zero Trust for the workforce, workplace and workloads to help address the security challenges associated with the transition to cloud and remote work.
In fiscal 2021, we continued to invest and innovate in data center infrastructure management and automation software withinsolutions that enable an increasingly hybrid workforce, support our Cisco UCS Manager and UCS Director product offerings.
During fiscal 2017, we introduced HyperFlex (HX) Systems 2.0, a next generation hyperconverged infrastructure solution with innovations in compute, storage and networking including all-flash capabilities and increased performance. The HX Data Platform, a Cisco UCS-based solution, features Dynamic Data Fabric technology that provides the industry-leading performance customers need to simplify more applications in their data centers.
Wireless
Our Wireless products provide indoor and outdoor wireless coverage with seamless roaming for voice, video, and data applications. These products include wireless access points that are standalone, controller-based, switch-converged, and Meraki cloud-managed offerings. These products deliver an optimized user experience over Wi-Fi and leverage the intelligence of the network. Our Wireless solutions portfolio is enhanced with security, analytics, and location-based services through our Connected Mobile Experiences (CMX) technology. Our offerings are designed to provide users with simplified management as well as mobile device troubleshooting and diagnostics that reduce operational cost and maximize flexibility and reliability. We are investing in both merchant, or "off the shelf", silicon and customized chipsets to deliver innovative product functionalitycustomers’ transition to the Wi-Fi market. Key product areas withincloud and help mitigate attackers’ evolving threats and methods. We enhanced our Wireless category are as follows:
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Access Points | | WLAN Controllers | | Connected Mobile Experiences | | Integrated Software Offerings and Other |
Cisco Aironet Series | | Standalone | | Cloud | | Meraki integrated software services |
Meraki Cloud Managed MR Series | | Virtual | | Appliance-based | | |
| | Integrated | | | | |
| | | | | | |
In fiscal 2017, we expandedofferings in SASE by expanding our SASE architecture while simplifying the suite of 802.11ac Wave 2 access points across the Aironetoffering for customers, combining network and Meraki portfolios. Additionally, we introduced what we refer to as "Fast Lane" technology to optimize and simplify Apple, Inc. mobile devices when connected to various Cisco offerings.
Security
We continue to believe security is the top IT priority for many of our customers and that security solutions will help to protect the digital economy. We believe that security will be an enabler that safeguards our customers’ business interests and can thereby create competitive advantage for them. Our approach is designed to provide protection across the entire attack continuum before, during, and afterfunctionality in a cyber-attack andsingle, cloud-native service to help secure access wherever users and applications reside. We continued to enhance our customers shorten the time to threat detection and response. In our view, the escalation of ransomware and other malware events in the past year reveals that organizations are more critically exposed than ever, and we believe that such incidents are manifestations of the long-held concern that "it's not if, but when" a business may fall victim to cyber-attacks.
Our security portfolio is designed to increase capability while reducing complexitycomprehensive zero trust framework, introducing passwordless authentication by delivering simple, open, and automated solutions resulting in more effective security. Our security portfolio spans endpoints, the network, and the cloud. Our offerings cover the following network-related areas: network and data center security, advanced threat protection, web and email security, access and policy, unified threat management, and advisory, integration, and managed services.Duo Security.
Our Cisco AMP Everywhere solution seeks to transform the way customers protect themselves against advanced malware and breaches through integration across our product portfolios. Since its inception, AMP Everywhere has become a fast growing business driver inside Cisco, generating both direct revenue as well as pull-through of other products and services.
In fiscal 2017, we expanded our cloud security offerings by launching the industry's first Secure Internet Gateway (SIG) in the cloud, Cisco Umbrella. Cisco Umbrella was built upon the OpenDNS platform with technology integrated from across the Cisco security portfolio, including capabilities from the Cloud Web Security proxy and Advanced Malware Protection (AMP) file inspection. In addition, we expanded our Next Generation Firewall product portfolio with the new Cisco Firepower 2100 series which provides a firewall, intrusion prevention system (IPS) and URL filtering as well as integration to secure endpoints and new management capabilities.
Service Provider Video
Our Service Provider Video products include end-to-end, digital video systems. These products enable service providers and content originators to deliver entertainment, information, and communication services to consumers and businesses. Key product areas within our Service Provider Video category are as follows:
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Service Provider Video Software and Solutions |
• End-to-end video security solutions |
• Digital headend portfolio for content acquisition and distribution |
• Virtualized video processing (V2P) |
• Cloud-based, SaaS-delivered end-to-end video entertainment solutions |
During fiscal 2017, we continued our push towards a virtualized and SaaS-focused strategy in response to market demand, including customer demand for faster speeds, and video-over-IP solutions through the launch of our Infinite Video Platform. The Infinite Video Platform is a single platform that can serve cable, satellite, and over-the-top devices. This platform is supported by our differentiated video processing, video security and cloud recording technology and is intended to make the video-over-IP experience to be as good as the broadcast video experience.
Other Products
Our Other Products category primarily consists of certainour emerging technologies and other networking products. It includes our continued investment in IoT with the acquisition of Jasper. Through this acquisition we intend to leverage new platforms to help our customers increase their volume of business, or otherwise address their most pressing challenges, in the IoT area. This category also includes application intelligence software platform offerings from our fiscal 2017 acquisition of AppDynamics, Inc. (“AppDynamics”). This solution is offered as an integrated suite of software application and IT infrastructure monitoring and analytics products and it allows us to provide end-to-end visibility and intelligence from the network to the application. These features, combined with security and scale, are designed to enable customers to drive better business outcomes.
ServiceServices
In addition to our product offerings, we provide a broad range of service and support options for our customers, including technicalcustomers. Our overall service and support servicesofferings are combined into one organization, Customer Experience, that is responsible for the end-to-end customer experience.
Our support and advanced services.
Technical supportmaintenance services help our customers ensure their products operate efficiently, remain available, and benefit from the most up-to-date system and application software. These services help customers protect their network investments, manage risk, and minimize downtime for systems running mission-critical applications. A key example is Cisco Smart Services, which leverages the intelligence from the installed base of our products and customer connections to protect and optimize network investmentinvestments for our customers and partners. We are expanding our Technical Serviceshave expanded these offerings from traditional hardware support to include software, solutions, and premium support and outcome based offers.support.
AdvancedWe also provide comprehensive advisory services are part of a comprehensive program that isare focused on providing responsive, preventive, and consultative support of our technologies for specific networking needs. We are investing in and expanding our advancedadvisory services in the areas of software, cloud, security, and analytics, which reflects our strategy of selling customer outcomes. We are focused on three priorities including, leveraging Technology Advisory Servicespriorities: utilizing technology advisory services to drive higher product and services pull-through; Assessmentservices; assessment and Migrationmigration services providing the tools, expertise and methodologies to enable our customers to migrate to new technology platforms; and providing optimization services aligned with customers’ measurable business outcomes.expectations.
We believe this strategy, along with our architectural approach and networking expertise, has the potential to further differentiate us from competitors.
Customers and Markets
Many factors influence the IT, collaboration, and networking requirements of our customers. These include the size of the organization, number and types of technology systems, geographic location, and business applications deployed throughout the customer’s network. Our customer base is not limited to any specific industry, geography, or market segment. In each of the past three fiscal years, no single customer accounted for 10% or more of revenue. Our customers primarily operate in the following markets: enterprise, commercial, service provider, and public sector.
Enterprise
Enterprise businesses are large regional, national, or global organizations with multiple locations or branch offices and typically employ 1,000 or more employees. Many enterprise businesses have unique IT, collaboration, and networking needs within a multivendor environment. We plan to take advantage of the network-as-a-platform strategy to integrate business processes with technology architectures to assist customer growth. We offer service and support packages, financing, and managed network services, primarily through our service provider partners. We sell these products through a network of third-party application and technology vendors and channel partners, as well as selling directly to these customers.
Commercial
WeWithin the commercial market, we define commerciallarge businesses as organizations which typically have fewer than 1,000 employees. We sell to the larger, or midmarket, customers within the commercial market through a combination of our direct sales force and channel partners. These customers typically require the latest advanced technologies that our enterprise customers demand, but with less complexity. Small businesses, or organizations with fewer than 100 employees, require information technologies and communicationcommunications products that are easy to configure, install, and maintain. We sell to these smaller organizations within the commercial market primarily through channel partners.
Service Providers
Service providers offer data, voice, video, and mobile/wireless services to businesses, governments, utilities, and consumers worldwide. This customerThe service provider market category includes regional, national, and international wireline carriers, webscale operators as well as Internet, cable, and wireless providers. We also include media, broadcast, and content providers within our service provider market, as the lines in the telecommunications industry continue to blur between traditional network-based, content-based and application-based services. Service providers use a variety of our routing and switching, optical, security, video, mobility, and network management products systems, and services for their own networks. In addition, many service providers use Cisco data center, virtualization, and collaboration technologies to offer managed or Internet-based services to their business customers. Compared with other customers, service providers are more likely to require network design, deployment, and support services because of the greater scale and higher complexity of their networks, whose requirements are addressed, we believe, by our architectural approach.
Public Sector
PublicThe public sector entities includemarket includes federal, governments, state and local governments, as well as educational institution customers. Many public sector entitiescustomers have unique IT, collaboration, and networking needs within a multivendormulti-vendor environment. We sell to public sector entitiescustomers through a network of third-party application and technology vendors, and channel partners, as well as through direct sales.
Sales Overview
As of the end of fiscal 2017,2021, our worldwide sales and marketing departmentsfunctions consisted of approximately 24,50025,000 employees, including managers, sales representatives, and technical support personnel. We have field sales offices in 95approximately 90 countries, and we sell our products and services both directly and through a variety of channels with support from our salesforce. A substantial portion of our products and services is sold through channel partners, and the remainder is sold through direct sales. Channel partners include systems integrators, service providers, other resellers, and distributors.
Systems integrators and service providers typically sell directly to end users and often provide system installation, technical support, professional services, and other support services in addition to network equipment sales. Systems integrators also typically integrate our products into an overall solution. Some service providers are also systems integrators.
Distributors typicallymay hold inventory and sell to systems integrators, service providers, and other resellers. We refer to sales through distributors as our two-tier system of sales to the end customer. Revenue from two-tier distributors is recognized based on a sell-through method using point of sales information provided by these distributors.sell-in method. These distributors are generallymay be given business terms that allow them to return a limited portion of inventory, receive credits for changes in selling prices, receive certain rebates, and participate in various cooperative marketing programs.
For information regarding risks related to our sales channels, see “Item 1A. Risk Factors,” including the risk factors entitled “Disruption of or changes in our distribution model could harm our sales and margins” and “Our inventory“Inventory management relating to our sales to our two-tier distribution channel is complex, and excess inventory may harm our gross margins.”
For information regarding risks relating to our international operations, see “Item 1A. Risk Factors,” including the risk factors entitled “Our operating results may be adversely affected by unfavorable economic and market conditions and the uncertain geopolitical environment;” “Entrance into new or developing markets exposes us to additional competition and will likely increase demands on our service and support operations;” “Due to the global nature of our operations, political or economic changes or other factors in a specific country or region could harm our operating results and financial condition;” “We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows;” and “Man-made problems such as computer viruses“Cyber-attacks, data breaches or terrorismmalware may disrupt our operations, and harm our operating results and financial condition, and damage our reputation or otherwise materially harm our business; and cyber-attacks or data breaches on our customers’ networks, or in cloud-based services provided by or enabled by us, could result in claims of liability against us, damage our reputation or otherwise materially harm our business,” among others.
Our service offerings complement our products through a range of consulting, technical, project, quality, and software maintenance services, including 24-hour online and telephone support through technical assistance centers.
Financing Arrangements
We provide financing arrangements for certain qualified customers to build, maintain, and upgrade their networks. We believe customer financing is a competitive advantage in obtaining business, particularly for those customers involved in significant infrastructure projects. Our financing arrangements include the following:
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Leases: |
Leases:• Sales-type |
• Sales-type |
• Direct financing |
• Operating |
Loans |
Financed service contracts |
Channels financing arrangements |
End-user financing arrangements |
Product Backlog
Our product backlog at July 29, 2017 was approximately $4.8 billion, an increase of 3% year over year. The product backlog includes orders confirmed for products planned to be shipped within 90 days to customers with approved credit status. Subscription-based sales arrangements are not included in product backlog. Our cycle time between order and shipment is generally short and customers occasionally change delivery schedules. Additionally, orders can be canceled without significant penalties. As a result of these factors, we do not believe that our product backlog, as of any particular date, is necessarily indicative of actual product revenue for any future period.
Acquisitions, Investments, and Alliances
The markets in which we compete require a wide variety of technologies, products, and capabilities. Our growth strategy is based on the components of innovation, which we sometimes refer to as “build, buy, partner, invest, and co-develop".co-develop.” This five-prong approach to how we innovate can be summarized as follows:
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Build | Working within Cisco, with the developer community, or with customers |
Buy | Acquiring or divesting, depending on goals |
Partner | Strategically partnering to further build out the business |
Invest | Making investments in areas where technology is in its infancy or where there is no dominant technology |
Co-develop | Developing new solutions with multi-party teams that may include customers, channel partners, startups, independent software vendors, and academics |
Acquisitions
We have acquired many companies, and we expect to make future acquisitions. Mergers and acquisitions of high-technology companies are inherently risky, especially if the acquired company has yet to generate revenue. No assurance can be given that our previous or future acquisitions will be successful or will not materially adversely affect our financial condition or operating results. Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products and technologies to an inability to do so. The risks associated with acquisitions are more fully discussed in “Item 1A. Risk Factors,” including the risk factor entitled “We have made and expect to continue to make acquisitions that could disrupt our operations and harm our operating results.”
Investments in Privately Held Companies
We make investments in privately held companies that develop technology or provide services that are complementary to our products or that provide strategic value. The risks associated with these investments are more fully discussed in “Item 1A. Risk Factors,” including the risk factor entitled “We are exposed to fluctuations in the market values of our portfolio investments and in interest rates; impairment of our investments could harm our earnings.”
Strategic Alliances
We pursue strategic alliances with other companies in areas where collaboration can produce industry advancement and acceleration ofaccelerate new markets. The objectives and goals of a strategic alliance can include one or more of the following: technology exchange, product development, joint sales and marketing, or new market creation. Companies with which we have added or recently had,expanded strategic alliances during fiscal 2021 and in recent years include the following:
Accenture Ltd; Apple Inc.; AT&T, Equinix Inc.; Cap Gemini S.A.; Citrix Systems, Inc.; Dell Technologies Inc.; LM Ericsson Telephone Company; Fujitsu Limited; Inspur Group Ltd.; Intel Corporation;, Google LLC, International Business Machines Corporation; Italtel SpA; Johnson Controls Inc.;Corporation, Microsoft Corporation; NetApp, Inc.; Optum; Oracle Corporation; Red Hat, Inc.; SAP AG; Sprint Nextel Corporation; Tata ConsultancyCorporation, Samsung Electronics Co., Ltd., and Amazon Web Services Ltd.; VMware, Inc.; Wipro Limited; andLLC, among others.
Companies with which we have strategic alliances in some areas may be competitors in other areas, and in our view this trend may increase. The risks associated with our strategic alliances are more fully discussed in “Item 1A. Risk Factors,” including the risk factor entitled “If we do not successfully manage our strategic alliances, we may not realize the expected benefits from such alliances and we may experience increased competition or delays in product development.”
Competition
We compete in the networking and communications equipment markets, providing products and services for transportingdesigned to transport, and help secure data, voice, and video traffic across intranets, extranets,cloud, private and public networks and the Internet. These markets are characterized by rapid change, converging technologies, and a migration to networking and communications solutions that offer relative advantages. These market factors represent both an opportunity, and a competitive threat to us. We compete with numerous vendors in each product category. The overall number of our competitors providing niche product solutions may increase. Also, the identity and composition of competitors may change as we increase our activity in our newnewer product markets.areas, and in key priority and growth areas. As we continue to expand globally, we may see new competition in different geographic regions. In particular, we have experienced price-focused competition from competitors in Asia, especially from China, and we anticipate this will continue.
Our competitors include(in each case relative to only some of our products or services) include: Amazon Web Services LLC; Arista Networks, Inc.; ARRIS Group,Broadcom Inc.; CommScope Holding Company, Inc.; Check Point Software Technologies Ltd.; CrowdStrike Holdings, Inc.; Dell Technologies Inc.; Extreme Networks,Dynatrace Inc.; F5 Networks, Inc.; FireEye, Inc.; Fortinet, Inc.; Hewlett-Packard Enterprise Company; Huawei Technologies Co., Ltd.; Juniper Networks, Inc.; Lenovo Group Limited; LogMeIn, Inc.; Microsoft Corporation; New Relic, Inc.; Nokia Corporation; Nutanix, Inc.; Palo Alto Networks, Inc.; Symantec Corporation;RingCentral, Inc.; Ubiquiti Networks andInc.; VMware, Inc.; Zoom Video Communications, Inc.; and Zscaler, Inc.; among others.
Some of these companiesour competitors compete across many of our product lines, while others are primarily focused in a specific product area. Barriers to entry are relatively low, and new ventures to create products that do or could compete with our products are regularly formed. In addition, some of our competitors may have greater resources, including technical and engineering resources, than we do. As we expand into new markets, we will face competition not only from our existing competitors but also from other competitors, including existing companies with strong technological, marketing, and sales positions in those markets. We also sometimes face competition from resellers and distributors of our products. Companies with which we have strategic alliances in some areas may be competitors in other areas, and in our view this trend may increase. For example, the enterprise data center is undergoing a fundamental transformation arising from the convergence of technologies, including computing, networking, storage, and software, that previously were segregated within the data center.segregated. Due to several factors, including the availability of highly scalable and general purpose microprocessors, application-specific integrated circuits (ASICs) offering advanced services, standards-based protocols, cloud computing and virtualization, the convergence of technologies within the enterprise data center is spanning multiple,
previously independent, technology segments. Also, some of our current and potential competitors for enterprise data center business have made acquisitions, or announced new strategic alliances, designed to position them to provide end-to-end technology solutions for the enterprise data center. As a result of all of these developments, we face greater competition in the development and sale of enterprise data center technologies, including competition from entities that are among our long-term strategic alliance partners. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us.
The principal competitive factors in the markets in which we presently compete and may compete in the future include:
Theinclude the ability to sell successful business outcomes
Theoutcomes; the ability to provide a broad range of networking and communications products and services
Product performance
Price
Theservices; product performance; price; the ability to introduce new products, including providing continuous new customer value and products with price-performance advantages
Theadvantages; the ability to reduce production costs
Thecosts; the ability to provide value-added features such as security, reliability, and investment protection
Conformanceprotection; conformance to standards
Market presence
Thestandards; market presence; the ability to provide financing
Disruptivefinancing; and disruptive technology shifts and new business modelsmodels.
We also face competition from customers to which we license or supply technology and suppliers from which we transfer technology. The inherent nature of networking requires interoperability. Therefore,As such, we must cooperate and, at the same time, compete with many companies. Any inability to effectively manage these complicated relationships with customers, suppliers, and strategic alliance partners could have a material adverse effect on our business, operating results, and financial condition and accordingly affect our chances of success.
Research and Development
We regularly introduce new products and features to address the requirements of our markets. We allocate our research and development budget among our product categories, which consist of Switching, NGN Routing, Collaboration, Data Center, Wireless,Infrastructure Platforms, Applications, Security, Service Provider Video, and Other Product technologies. Our research and development expenditures were $6.1 billion, $6.3 billion, and $6.2 billion in fiscal 2017, 2016, and 2015, respectively. These expenditures are applied generally to all product areas, with specific areas of focus being identified from time to time. Recent areas of increased focus include but are not limited to, our corenetworking technologies (which encompasses switching, routing, and switching products,wireless technologies within Infrastructure Platforms), conferencing, security, wireless, collaboration,and analytics and IoT products. Our expenditures for research and development costs were expensed as incurred.
The industry in which we compete is subject to rapid technological developments, evolving standards, changes in customer requirements, and new product introductions and enhancements. As a result, our success depends, in part, uponon our ability, on a cost-effective and timely basis, to continue to enhance our existing products and to develop and introduce new products that improve performance and reduce total cost of ownership. To achieve these objectives, our management and engineering personnel work with customers to identify and respond to customer needs, as well as with other innovators of Internet workingnetworking products, including universities, laboratories, and corporations. We also expect to continue to make acquisitions and strategic investments, where appropriate, to provide us with access to new technologies. Nonetheless, there can be no assurance that we will be able to successfully develop products to address new customer requirements and technological changes or that those products will achieve market acceptance.
Manufacturing
We rely on contract manufacturers for all of our manufacturing needs. We presently use a variety of independent third-party companies to provide services related to printed-circuit board assembly, in-circuit test, product repair, and product assembly. Proprietary software onin electronically programmable memory chips is used to configure products that meet customer requirements and to maintain quality control and security. The manufacturing process enables us to configure the hardware and software in unique combinations to meet a wide variety of individual customer requirements. The manufacturing process also uses automated testing equipment and burn-in procedures, as well as comprehensive inspection, testing, and statistical process controls, which are
designed to help ensure the quality and reliability of our products. The manufacturing processes and procedures are generally certified to International Organization for Standardization (ISO) 9001 or ISO 9003 standards.
Our arrangements with contract manufacturers generally provide for quality, cost, and delivery requirements, as well as manufacturing process terms, such as continuity of supply; inventory management; flexibility regarding capacity, quality, and cost management; oversight of manufacturing; and conditions for use of our intellectual property. We have not entered into any significant long-term contracts with any manufacturing service provider. We generally have the option to renew arrangements on an as-needed basis. These arrangements generally do not commit us to purchase any particular amount or any quantities beyond certain amounts covered by orders or forecasts that we submit covering discrete periods of time, defined as less than one year.time.
Patents, Intellectual Property, and Licensing
We seek to establish and maintain our proprietary rights in our technology and products through the use of patents, copyrights, trademarks, and trade secret laws. We have a program to file applications for and obtain patents, copyrights, and trademarks in the United States and in selected foreign countries where we believe filing for such protection is appropriate. We also seek to maintain our trade secrets and confidential information by nondisclosure policies and through the use of appropriate confidentiality agreements. We have obtained a substantial number of patents and trademarks in the United States and in other countries. There can be no assurance, however, that the rights obtained can be successfully enforced against infringing products in every jurisdiction. Although we believe the protection afforded by our patents, copyrights, trademarks, and trade secrets has value, the rapidly changing technology in the networking industry and uncertainties in the legal process make our future success dependent primarily on the innovative skills, technological expertise, and management abilities of our employees rather than on the protection afforded by patent, copyright, trademark, and trade secret laws.
Many of our products are designed to include software or other intellectual property licensed from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, we believe, based upon past experience and standard industry practice, that such licenses generally could be obtained on commercially reasonable terms. Nonetheless, there can be no assurance that the necessary licenses would be available on acceptable terms, if at all. Our inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could have a material adverse effect on our business, operating results, and financial condition. Moreover, inclusion in our products of software or other intellectual property licensed from third parties on a nonexclusive basis can limit our ability to protect our proprietary rights in our products.
The industry in which we compete is characterized by rapidly changing technology, a large number of patents, and frequent claims and related litigation regarding patent and other intellectual property rights. There can be no assurance that our patents and other proprietary rights will not be challenged, invalidated, or circumvented; that others will not assert intellectual property rights to technologies that are relevant to us; or that our rights will give us a competitive advantage. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as the laws of the United States. The risks associated with patents and intellectual property are more fully discussed in “Item 1A. Risk Factors,” including the risk factors entitled “Our proprietary rights may prove difficult to enforce,” “We may be found to infringe on intellectual property rights of others,” and “We rely on the availability of third-party licenses.”
EmployeesEnvironmental Sustainability
EmployeesSustainability and protecting the environment are summarizedboth top priorities for Cisco. We have set long-term goals to address the environmental impacts from our products and business operations.
We strive to reduce the impacts of our operations and supply chain, help our customers decrease greenhouse gas (GHG) emissions, and support our communities experiencing direct effects of a changing climate by, among others:
•Continuing to invest in renewable energy, including investments in solar and wind energy;
•Designing our products and packaging for reuse, repair, recycling, and resource efficiency and managing our equipment for multiple lifecycles;
•Enhancing our Webex and other remote collaboration tools;
•Investing in projects to improve the efficiency of our offices, labs, and data centers worldwide;
•Working with our component suppliers, manufacturing partners, and logistic providers to reduce emissions and set targets for absolute GHG emissions reductions;
•Helping our employees to engage with events and opportunities to raise awareness and create a sense of community around sustainability; and
•Providing critical connectivity in the aftermath of natural disasters.
Talent and Culture
At Cisco, we value our people, our technology, and changing the world for the better with a focus on creating a more inclusive future. Our goal is to attract, retain, and develop talent in order to help our customers connect, secure and automate to accelerate their digital agility in a cloud-first world. Our relationship with our employees is one of mutual benefit, our employees bring talent and ingenuity to everything we do. In turn, we provide employees meaningful careers and development opportunities. As a testament to this, Cisco has been named as follows (approximate numbers):the number one place to work on the “World’s Best Workplaces List” by Great Places to Work and Fortune Magazine for 2019 and 2020.
As of July 31, 2021, we had approximately 79,500 full-time employees and they are categorized as follows:
We have a responsibility to support our employees through times of change and enable them to be their best. We do this by fostering a Conscious Culture. Living a Conscious Culture requires us to act with dignity, respect, fairness, and equity in each of our interactions with one another, building a culture that allows us to become a catalyst for social change. By intentionally creating and cultivating an inclusive work environment where employees can thrive, we believe Cisco is helping to bring about a better world.
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| July 29, 2017 |
Employees by geography: | |
United States | 37,000 |
Rest of world | 35,900 |
Total | 72,900 |
Employees by line item on the Consolidated Statements of Operations: | |
Cost of sales (1)
| 20,300 |
Research and development | 20,800 |
Sales and marketing | 24,500 |
General and administrative | 7,300 |
Total | 72,900 |
Inclusion & Diversity(1)CostInclusion and diversity are core components in our Conscious Culture. Inclusivity is our strength and our priority. We want every employee to feel valued, respected, and heard. We are prioritizing inclusion and diversity across the company, recognizing that connecting people of sales includes manufacturingall experiences and backgrounds allows us to innovate and collaborate. In order to continue accelerating diversity and finding extraordinary talent, we have designed a framework that includes: introducing new tools and technologies to help accurately map the talent market, creating job roles that attract highly qualified diverse candidates, and expanding the diversity within our interview panels.
We currently have a total of 29 Inclusive Communities comprised of 11 Employee Resource Organizations and 18 Employee Networks supporting full-spectrum diversity globally, including gender, ethnicity, race, orientation, age, ability, veteran status, religion, culture, background, as well as varied experiences, strengths, and perspectives. These thriving communities continue to be a source of strength and support services,for employees, and training.they help to foster a more conscious culture by providing opportunities for proximity and learning.
Cisco has signed the CEO Action for Diversity and Inclusion Pledge. The CEO Action for Diversity & Inclusion Pledge is a CEO-driven business commitment to drive measurable action and meaningful change in advancing diversity, equity and inclusion in the workplace. We are delivering on this pledge by accelerating full-spectrum diversity — including gender, age, race, ethnicity, orientation, ability, nationality, religion, veteran status, background, culture, experience, strengths and perspectives. At Cisco, it starts at the top: 46% of our Executive Leadership Team (ELT) are women and 54% are diverse in terms of gender or ethnicity.
Executive OfficersWe publish certain gender diversity and ethnic diversity workforce data annually. Across our global company, we have driven broad improvements in overall workforce diversity. Based on our annual fiscal 2020 data, our global employee base was 27% female and 73% male, and our U.S. employee base was comprised of the Registrantfollowing ethnicities: 51.8% White/Caucasian, 36.5% Asian, 5.8% Hispanic/Latino, 4.1% African American/Black, 1.4% two or more races (Not Hispanic or Latino), and 0.4% additional groups (including American Indian, Alaska Native, Native Hawaiian or Other Pacific Islander).
With respect to social justice, Cisco is taking a stand and partnering across the globe to multiply our positive impact throughout our communities. In September 2020, we announced our Social Justice Beliefs & Actions, which is our blueprint for how Cisco will show up when we see inequality and injustice in the world.
This work is part of a plan for Cisco to drive transformational, generational impact for vulnerable communities. Our Inclusive Future Action Office helps drive progress and excellence in our strategic actions in this area, which are designed to address the broader ecosystem including our employees, partners, customers and suppliers.
At present, our Inclusive Future Action Office is focused on driving impacts through our strategic actions in the African American/Black community, but these actions will be the blueprint for how we help address inequity in communities around the world in the future. We are creating actions that can be replicated and scaled and are designed to cover the full spectrum of diversity, inclusive of gender, generation, race, ethnicity, orientation, ability, nationality and background - the foundation of our Conscious Culture.
Compensation and Benefits
Our total compensation philosophy is designed to attract, reward & retain talent. It provides market competitive, performance-based compensation aligned with each employee’s contribution and impact to the value we drive to our customers, partners and stockholders. We reward and recognize our employees for effecting innovation, collaboration, profitability, and growth within our geographies, product lines, and functions.
Cisco has always been committed to compensating our employees fairly and equitably. We are a founding signer of the White House Equal Pay Pledge and the Parity.org pledge, and we are leading the charge to make fair pay a reality for all employees through the Employers for Pay Equity Consortium. We have also introduced an innovative and inclusive framework that provides us powerful analytics to evaluate our complex compensation system. For example, by using these powerful analytics, we are able to test for pay parity on a regular basis, and when gaps are found, we strive to correct them.
Health & Well-being
We have an ongoing commitment to focus on the health, safety, and well-being of our employees. We provide our employees and their families high-quality, flexible and convenient benefits and resources for their physical, mental, and financial well-being. Since the start of the COVID-19 pandemic, employees have continually had to focus on how to balance careers and personal lives, all while managing their own physical, emotional, and financial health. During fiscal 2021, most of our global workforce was working from home. In addition, we are moving towards a hybrid work model, giving our employees the flexibility to work offsite or onsite Cisco locations. We developed a COVID-19 response and recovery strategy with a focus on both physical and mental health, recognizing the need to create an environment where employees can speak openly about
mental health. In fiscal 2021, we continued to offer employees “A Day for Me,” which were paid days off that allowed for each individual to recharge and rest.
Employee Development
We believe in open-ended, self-directed learning, understanding that each individual knows what skills and resources they need to succeed. We encourage employees to explore job roles outside of their daily work and encourage everyone to harness their strengths and improve the way we all work. Employees choose their own path and we support that choice by providing them tools and resources to help them achieve their career goals.
Employee Engagement
We believe that strong communication is key in our Conscious Culture. This communication includes regular, virtual all hands, which we refer to as a “Cisco Check-In,” and weekly team leader check-ins, which we refer to as a “Team Space Check-In.” Our regular virtual Cisco Check-Ins were initially launched with a focus on sharing medical information at the start of the COVID-19 pandemic. The Cisco Check-Ins have since evolved into a forum where we can discuss much more with our employees, from business updates to social justice to physical and mental health.
In fiscal 2021, we have seen high level of employee engagement. For example, there were approximately 2 million Team Space Check-Ins by our employees in fiscal 2021, reflecting 85% of employees submitting Team Space Check-Ins. Employees also participate in our global Engagement Pulse Survey and the Real Deal Survey. These surveys allow our employees to provide confidential feedback on our culture, company strategy and trust in their direct leaders.
CSR Impact Report
Additional information regarding Cisco's activities related to its people and Corporate Social Responsibility (CSR), as well as our workforce diversity data, can be found in our CSR Impact Report and related supplemental information, which are located on our ESG Reporting Hub at https://www.cisco.com/c/m/en_us/about/csr/esg-hub.html.The contents of our CSR Impact Report and related supplemental information are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC.
Information about our Executive Officers
The following table shows the name, age, and position as of August 31, 20172021 of each of our executive officers:
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Name | | Age | | Position with the Company |
Charles H. Robbins | | 5155 | | Chair and Chief Executive Officer and Director |
John T. ChambersGerri Elliott | | 6865 | | Executive Chairman |
Mark Chandler | | 61 | | Senior Vice President, Legal Services, General Counsel and Chief Compliance Officer |
Chris Dedicoat | | 60 | | Executive Vice President, Worldwide Sales and Field Operations |
David Goeckeler | | 55 | | Executive Vice President and General Manager, SecurityChief Customer and Networking BusinessPartner Officer |
Rebecca JacobyR. Scott Herren | | 5559 | | Senior Vice President and Chief of Operations |
Kelly A. Kramer | | 50 | | Executive Vice President and Chief Financial Officer |
Karen WalkerMaria Martinez | | 5563 | | SeniorExecutive Vice President and Chief MarketingOperating Officer |
Deborah L. Stahlkopf | | 51 | | Executive Vice President and Chief Legal Officer |
Mr. Robbins has served serves as our Chief Executive Officer since July 2015, and as a member of the Board of Directors since May 2015. He2015, and as Chair of the Board since December 2017. Mr. Robbins joined Cisco in December 1997, from which time until March 2002 he held a number of managerial positions within Cisco’s sales organization. Mr. Robbins was promoted to Vice President in March 2002, assuming leadership of Cisco’s U.S. channel sales organization. Additionally, in July 2005, heMr. Robbins assumed leadership of Cisco’s Canada channel sales organization. In December 2007, Mr. Robbins was promoted to Senior Vice President, U.S. Commercial, and, in August 2009 he was appointed Senior Vice President, U.S. Enterprise, Commercial and Canada. In July 2011, Mr. Robbins was named Senior Vice President, Americas. In October 2012, Mr. Robbins was promoted to Senior Vice President, Worldwide Field Operations, in which position he served until assuming the role of Chief Executive Officer. HeMr. Robbins is also a member of the board of directors of BlackRock, Inc (since 2017).
Ms. Elliott joined Cisco in April 2018 and serves as our Executive Vice President and Chief Customer and Partner Officer. Ms. Elliott is a former Executive Vice President of Juniper Networks, Inc. (“Juniper”), where she served as Executive Vice President and Chief Customer Officer from March 2013 to February 2014, Executive Vice President and Chief Sales Officer from July 2011 to March 2013, and Executive Vice President, Strategic Alliances from June 2009 to July 2011. Before joining Juniper, Ms. Elliott held a series of senior executive positions with Microsoft Corporation (“Microsoft”) from 2001-2008, including as Corporate Vice President of Microsoft’s Industry Solutions Group, Worldwide Public Sector and North American Enterprise Sales organizations. Prior to joining Microsoft, Ms. Elliott spent 22 years at International Business Machines Corporation (“IBM”), where she held several senior executive positions both in the U.S. and internationally. Ms. Elliott is a member of the board of directors of BlackRock,Whirlpool Corporation (since 2014) and Marqeta, Inc. (since 2021).
Mr. Chambers has served as a member of the Board of Directors since November 1993. Mr. Chambers, who was appointed Executive Chairman in July 2015, served as Cisco’s Chief Executive Officer from January 1995 until July 2015, and he also served as President from January 1995 to November 2006. HeHerren joined Cisco in December 2020 and serves as our Executive Vice President and Chief Financial Officer. Prior to joining Cisco, Mr. Herren served as Senior Vice President in January 1991 and was promoted to Executive Vice President in June 1994, prior to assuming the roles of President and Chief ExecutiveFinancial Officer in January 1995. Beforeof Autodesk, Inc. (“Autodesk”) since November 2014. Prior to joining Cisco,Autodesk, Mr. Chambers was employed by Wang Laboratories, Inc. for eight years, where, in his last role, he was theHerren served as Senior Vice President of U.S. Operations.
Mr. Chandler joined Cisco in July 1996, upon Cisco’s acquisition of StrataCom,Finance at Citrix Systems, Inc., where he served as General Counsel. He served as Cisco’s Managing Attorney for Europe, the Middle East, and Africa (“Citrix”) from December 1996 until June 1999; as Director, Worldwide Legal Operations from June 1999 until February 2001; and was promotedSeptember 2011 to Vice President, Worldwide Legal Services in February 2001. In October 2001, Mr. Chandler was promoted to Vice President, Legal Services and General Counsel,2014, and in May 2003 he additionally was appointed Secretary, a position he held through November 2015. In February 2006, Mr. Chandler was promoted to Seniorvariety of other leadership roles after joining Citrix in March 2000, including as Vice President and in May 2012 he was appointed Chief Compliance Officer. Before joining StrataCom, Mr. Chandler had served as Vice President, Corporate DevelopmentManaging Director for EMEA and General Counsel of Maxtor Corporation.
Mr. Dedicoat joined Cisco in June 1995 and has held various leadership positions within Cisco’s sales organization. From June 1995 through April 1999, he served as a manager and then as a director within the United Kingdom portion of Cisco’s Europe sales organization, overseeing both commercial and enterprise accounts. In April 1999, Mr. Dedicoat was appointed Vice President, Europe, and in June 2003 he was promoted to Senior Vice President, Europe, serving as Cisco’s lead sales executive for Europe. In July 2011, Mr. Dedicoat was appointed Senior Vice President, EMEA (Europe, Middle East, and Africa). Mr. Dedicoat was appointed to his current position effective July 2015.
Mr. Goeckeler joined Cisco in May 2000, from which time until December 2010 he held a variety of leadership positions within Cisco’s engineering organization, covering such technology focus areas as voice over IP, mobility, video infrastructure and networking. In December 2010, Mr. Goeckeler was promoted to Vice President, Engineering, in which his responsibilities included leading various product and platform-related initiatives within Cisco’s Security Business group. In November 2014, Mr. Goeckeler was promoted to Senior Vice President, Security Business, and in March 2016 he was elevated to Senior Vice President and General Manager of the sameCitrix’s virtualization systems group. In May 2016,Before joining Citrix, Mr. Goeckeler added networking to his oversight responsibilities, assuming the role of Senior Vice President, NetworkingHerren spent over 15 years in senior strategy and Security Business, in which position he served until being appointed to his current position effective July 2017.financial positions at FedEx Corporation and IBM.
Ms. JacobyMartinez joined Cisco in March 1995April 2018 and has held a number of leadership positions with Cisco. She served successively, as a manager, director and vice president within Cisco’s global supply chain organization from March 1995 until November 2003. In November 2003, Ms. Jacoby assumed the role of Vice President, Customer Service and Operations Systems, serving in this capacity until October 2006 when she was appointed Seniorour Executive Vice President and Chief InformationCustomer Experience Officer (CIO)until her appointment as our Executive Vice President and Chief Operating Officer in March 2021. Prior to joining Cisco, Ms. Martinez served in a variety of Cisco.senior executive roles at salesforce.com, inc. (“Salesforce”), including as President, Global Customer Success and Latin America from March 2016 to April 2018; President, Sales and Customer Success from February 2013 to March 2016; Executive Vice President and Chief Growth Officer from February 2012 to February 2013; and as Executive Vice President, Customers for Life from February 2010 to February 2012. Ms. Jacoby held the SVP/CIO position until being promotedMartinez’s experience prior to her current position effective July 2015. SheSalesforce includes serving as Corporate Vice President of Worldwide Services at Microsoft, President and Chief Executive Officer of Embrace Networks, Inc. and various senior leadership roles at Motorola, Inc. and AT&T Inc./Bell Laboratories. Ms. Martinez is a member of the board of directors of S&P Global Inc.McKesson Corporation (since 2019).
Ms. KramerStahlkopfjoined Cisco in January 2012August 2021 and serves as Seniorour Executive Vice President and Chief Legal Officer. Prior to joining Cisco, Ms. Stahlkopf spent 14 years at Microsoft, where she served most recently as Corporate Finance. SheVice President, General Counsel and Corporate Secretary, Corporate, External and Legal Affairs from April 2018 to July 2021. Ms. Stahlkopf also served in that position until October 2014 and served as Cisco’s Senior Vice President, Business Technology and Operations Finance from October 2013 until December 2014. She was appointed to her current position effective January 2015. From January 2009 until she joined Cisco, Ms. Kramer servedother leadership roles at Microsoft, including as Vice President and Chief Financial Officer of GE Healthcare Systems. Ms. Kramer served as Vice President and Chief Financial Officer of GE Healthcare Diagnostic ImagingDeputy General Counsel from August 2007December 2015 to January 2009April 2018 and as Chief Financial Officer of GE Healthcare BiosciencesAssociate General Counsel from January 2006December 2010 to July 2007.December 2015. Prior to that,joining Microsoft, Ms. Kramer held various leadership positions with GE corporateStahlkopf practiced law at Perkins Coie LLP and other GE businesses. She is a member of the board of directors of Gilead Sciences, Inc.Cooley Godward LLP.
Ms. Walker joined Cisco in November 2008, serving from November 2008 through January 2012 as Vice President, Services Marketing. From February 2012 to January 2013, Ms. Walker served as Senior Vice President, Segment, Services and Partner Marketing, and from February 2013 until May 2015 as Senior Vice President, Go To Market. In May 2015, Ms. Walker was promoted to her current position. Ms. Walker joined Cisco from Hewlett-Packard, where she held business and consumer leadership positions including Vice President of Alliances and Marketing for HP Services, and Vice President of Strategy and Marketing for both the Consumer Digital Entertainment and Personal Systems groups.
Set forth below and elsewhere in this report and in other documents we file with the SEC are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report.
OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS, WHICH MAY ADVERSELY AFFECT OUR STOCK PRICERisks Related to our Business and Industry
Our business, results of operations and financial condition have been adversely affected and could in the future be materially adversely affected by the COVID-19 pandemic.
The COVID-19 pandemic and the resulting containment measures have caused economic and financial disruptions globally, including in most of the regions in which we sell our products and services and conduct our business operations. In the second half of fiscal 2020, the COVID-19 pandemic had an impact on our financial results and business operations, with a significant impact in the third quarter of fiscal 2020 on our supply chain where we saw manufacturing challenges and component constraints. We continue to address these supply chain challenges and cost impacts, which we expect will continue at least through the first half of fiscal 2022 and potentially into the second half of fiscal 2022. The magnitude and duration of the disruption, its continuing impact on us, and resulting decline in global business activity is uncertain. These disruptions include the unprecedented actions taken to try to contain the pandemic such as travel bans and restrictions, business closures, and social distancing measures, such as quarantines and shelter-in-place orders.
The COVID-19 pandemic and the responsive measures taken in many countries have adversely affected and could in the future materially adversely affect our business, results of operations and financial condition. Shelter-in-place orders and other measures, including work-from-home and other policies implemented to protect workers, has and could in the future impact our supply chain. Such disruptions may continue, or worsen, in the future. In addition, current and future restrictions or disruptions of transportation, such as reduced availability of air transport, port closures, and increased border controls or closures, can also impact our ability to meet customer demand and could materially adversely affect us. Our customers have also experienced, and may continue to experience, disruptions in their operations, which can result in delayed, reduced, or canceled orders, and increased collection risks, and which may adversely affect our results of operations. The COVID-19 pandemic may also result in long-term changes in customer needs for our products and services in various sectors, along with IT-related capital spending reductions, or shifts in spending focus, that could materially adversely affect us if we are unable to adjust our product and service offerings to match customer needs.
The recent shift to a remote working environment also creates challenges. For example, governmental lockdowns, restrictions or new regulations has and could in the future impact the ability of our employees and vendors to work with the same speed and productivity in certain areas, even as other areas do not see negative impact. The extent and/or duration of ongoing workforce
restrictions and limitations could impact our ability to enhance, develop and support existing products and services, and hold product sales and marketing events to the extent we were able to previously. In addition, malefactors are seeking to use the COVID-19 pandemic to launch new cyber-attacks. The COVID-19 pandemic has also led to increased disruption and volatility in capital markets and credit markets. The pandemic and resulting economic uncertainty could adversely affect our liquidity and capital resources in the future. The inputs into certain of our judgments, assumptions, and estimates considered the economic implications of the COVID-19 pandemic on our critical and significant accounting estimates. The actual results that we experience may differ materially from our estimates. As the COVID-19 pandemic continues to develop, many of our estimates could require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve our estimates may change materially in future periods.
We are continuing to monitor the pandemic and take appropriate actions in accordance with the recommendations and requirements of relevant authorities. The extent of the impact of the COVID-19 pandemic on our operational and financial performance is currently uncertain and will depend on many factors outside our control, including, without limitation, the timing, extent, trajectory and duration of the pandemic, the development and availability of effective treatments and vaccines, the imposition of protective public safety measures, and the impact of the pandemic on the global economy. Potential negative impacts of these external factors include, but are not limited to, material adverse effects on demand for our products and services; our supply chain and sales and distribution channels; collectability of customer accounts; our ability to execute strategic plans; impairments; and our profitability and cost structure. To the extent the COVID-19 pandemic adversely affects our business, results of operations and financial condition, it may also have the effect of exacerbating the other risks discussed in this “Risk Factors” section.
Our operating results may fluctuate in future periods, which may adversely affect our stock price.
Our operating results have been in the past, and will continue to be, subject to quarterly and annual fluctuations as a result of numerous factors, some of which may contribute to more pronounced fluctuations in an uncertain global economic environment. These factors include:
•Fluctuations in demand for our products and services, especially with respect to service providers and Internet businesses, in part due to changes in the global economic environment
•Changes in sales and implementation cycles for our products and reduced visibility into our customers’ spending plans and associated revenue
•Our ability to maintain appropriate inventory levels and purchase commitments
•Price and product competition in the communications and networking industries, which can change rapidly due to technological innovation and different business models from various geographic regions
•The overall movement toward industry consolidation among both our competitors and our customers
•The introduction and market acceptance of new technologies and products, and our success in new and evolving markets, and in emerging technologies, as well as the adoption of new standards
•The transformation of our business to deliver more software and subscription offerings where revenue is recognized over time
•Variations in sales channels, product costs, mix of products sold, or mix of direct sales and indirect sales
•The timing, size, and mix of orders from customers
•Manufacturing and customer lead times
•Fluctuations in our gross margins, and the factors that contribute to such fluctuations
•The ability of our customers, channel partners, contract manufacturers and suppliers to obtain financing or to fund capital expenditures, especially during a period of global credit market disruption or in the event of customer, channel partner, contract manufacturer or supplier financial problems
•Actual events, circumstances, outcomes, and amounts differing from judgments, assumptions, and estimates used in determining the values of certain assets (including the amounts of related valuation allowances), liabilities, and other items reflected in our Consolidated Financial Statements
•How well we execute on our strategy and operating plans and the impact of changes in our business model that could result in significant restructuring charges
•Our ability to achieve targeted cost reductions
•Benefits anticipated from our investments
•Changes in tax laws or accounting rules, or interpretations thereof
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| • | | Fluctuations in demand for our products and services, especially with respect to service providers and Internet businesses, in part due to changes in the global economic environment |
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| • | | Changes in sales and implementation cycles for our products and reduced visibility into our customers’ spending plans and associated revenue |
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| • | | Our ability to maintain appropriate inventory levels and purchase commitments |
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| • | | Price and product competition in the communications and networking industries, which can change rapidly due to technological innovation and different business models from various geographic regions |
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| • | | The overall movement toward industry consolidation among both our competitors and our customers |
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| • | | The introduction and market acceptance of new technologies and products and our success in new and evolving markets, including in our newer product categories such as data center and collaboration and in emerging technologies, as well as the adoption of new standards |
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| • | | The transformation of our business to deliver more software and subscription offerings where revenue is recognized over time |
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| • | | Variations in sales channels, product costs, mix of products sold, or mix of direct sales and indirect sales |
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| • | | The timing, size, and mix of orders from customers |
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| • | | Manufacturing and customer lead times |
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| • | | Fluctuations in our gross margins, and the factors that contribute to such fluctuations, as described below |
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| • | | The ability of our customers, channel partners, contract manufacturers and suppliers to obtain financing or to fund capital expenditures, especially during a period of global credit market disruption or in the event of customer, channel partner, contract manufacturer or supplier financial problems |
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| • | | Actual events, circumstances, outcomes, and amounts differing from judgments, assumptions, and estimates used in determining the values of certain assets (including the amounts of related valuation allowances), liabilities, and other items reflected in our Consolidated Financial Statements |
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| • | | How well we execute on our strategy and operating plans and the impact of changes in our business model that could result in significant restructuring charges |
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| • | | Our ability to achieve targeted cost reductions |
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| • | | Benefits anticipated from our investments in engineering, sales, service, and marketing |
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| • | | Changes in tax laws or accounting rules, or interpretations thereof |
Table of ContentsAs a consequence, operating results for a particular future period are difficult to predict, and, therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our business, results of operations, and financial condition that could adversely affect our stock price.
OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY UNFAVORABLE ECONOMIC AND MARKET CONDITIONS AND THE UNCERTAIN GEOPOLITICAL ENVIRONMENTOur operating results may be adversely affected by unfavorable economic and market conditions and the uncertain geopolitical environment.
Challenging economic conditions worldwide have from time to time contributed, and may continue to contribute, to slowdowns in the communications and networking industries at large, as well as in specific segments and markets in which we operate, resulting in: reduced demand for our products as a result of continued constraints on IT-related capital spending by our customers, particularly service providers, and other customer markets as well; increased price competition for our products, not only from our competitors but also as a consequence of customers disposing of unutilized products; risk of excess and obsolete inventories; risk of supply constraints; risk of excess facilities and manufacturing capacity; and higher overhead costs as a percentage of revenue and higher interest expense.
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| • | | Reduced demand for our products as a result of continued constraints on IT-related capital spending by our customers, particularly service providers, and other customer markets as well |
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| • | | Increased price competition for our products, not only from our competitors but also as a consequence of customers disposing of unutilized products |
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| • | | Risk of excess and obsolete inventories |
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| • | | Risk of supply constraints |
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| • | | Risk of excess facilities and manufacturing capacity |
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| • | | Higher overhead costs as a percentage of revenue and higher interest expense |
The global macroeconomic environment has beencontinues to be challenging and inconsistent. Instabilityinconsistent, and is being significantly impacted by the COVID-19 pandemic. During fiscal 2020 and the first quarter of fiscal 2021, we continued to see a broad-based weakening in the global macroeconomic environment which impacted our commercial and enterprise markets. We also experienced continuing weakness in emerging countries, and we expect ongoing uncertainty in this market. Additionally, instability in the global credit markets, the impact of uncertainty regarding global central bank monetary policy, the instability in the geopolitical environment in many parts of the world including as a result of the recent United Kingdom “Brexit” referendum to withdrawwithdrawal from the European Union, the current economic challenges in China, including global economic ramifications of Chinese economic difficulties, and other disruptions may continue to put pressure on global economic conditions. If global economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate further, we may experience material impacts on our business, operating results, and financial condition.
Our operating results in one or more segments may also be affected by uncertain or changing economic conditions particularly germane to that segment or to particular customer markets within that segment. For example, emerging countries in the aggregate experienced a decline in product orders during fiscal 2017 and certain prior periods.
In addition, reports of certain intelligence gathering methods of the U.S. government could affect customers’ perception of the products of IT companies which design and manufacture products in the United States. Trust and confidence in us as an IT supplier isare critical to the development and growth of our markets. Impairment of that trust, or foreign regulatory actions taken in response
to reports of certain intelligence gathering methods of the U.S. government, could affect the demand for our products from customers outside of the United States and could have an adverse effect on our operating results.
WE HAVE BEEN INVESTING AND EXPECT TO CONTINUE TO INVEST IN KEY PRIORITY AND GROWTH AREAS AS WELL AS MAINTAINING LEADERSHIP IN ROUTING, SWITCHING AND SERVICES, AND IF THE RETURN ON THESE INVESTMENTS IS LOWER OR DEVELOPS MORE SLOWLY THAN WE EXPECT, OUR OPERATING RESULTS MAY BE HARMED
We expectOur revenue for a particular period is difficult to realignpredict, and dedicate resources into key priority and growth areas, such as security, IoT, collaboration, next generation data center, cloud and software, while also focusing on maintaining leadershipa shortfall in routing, switching and services. However, the return on our investmentsrevenue may be lower, or may develop more slowly, than we expect. If we do not achieve the benefits anticipated from these investments (including if our selection of areas for investment does not play out as we expect), or if the achievement of these benefits is delayed,harm our operating results may be adversely affected.
OUR REVENUE FOR A PARTICULAR PERIOD IS DIFFICULT TO PREDICT, AND A SHORTFALL IN REVENUE MAY HARM OUR OPERATING RESULTSresults.
As a result of a variety of factors discussed in this report, our revenue for a particular quarter is difficult to predict, especially in light of a challenging and inconsistent global macroeconomic environment, the significant impacts of the COVID-19 pandemic, and related market uncertainty.
Our revenue may grow at a slower rate than in past periods or decline as it did in the first quarter of fiscal 20172021 and fiscal 2020, and in certain prior periods on a year-over-year basis. Our ability to meet financial expectations could also be adversely affected if the nonlinear sales pattern seen in some of our past quarters recurs in future periods. We have experienced periods of time during which shipments have exceeded net bookings or manufacturing issues have delayed shipments, leading to nonlinearity in shipping patterns. In addition to making it difficult to predict revenue for a particular period, nonlinearity in shipping can increase costs, because irregular shipment patterns result in periods of underutilized capacity and periods in which overtime expenses may be incurred, as well as in potential additional inventory management-related costs. In addition, to the extent that manufacturing issues and any related component shortages result in delayed shipments in the future, and particularly in periods in which our contract manufacturers are operating at higher levels of capacity, it is possible that revenue for a quarter could be adversely affected if such matters occur and are not remediated within the same quarter.
The timing of large orders can also have a significant effect on our business and operating results from quarter to quarter, primarily in the United States and in emerging countries.quarter. From time to time, we receive large orders that have a significant effect on our operating results in the period in which the order is recognized as revenue. The timing of such orders is difficult to predict, and the timing of revenue recognition from such orders may affect period to period changes in revenue. As a result, our operating results could vary materially from quarter to quarter based on the receipt of such orders and their ultimate recognition as revenue.
Inventory management remains an area of focus. We have experienced longer Longer than normal manufacturing lead times in the past which have caused, and in the future could cause, some customers to place the same or a similar order multiple times within our various sales channels and to cancel the duplicative orders upon shipment or receipt of the product, or to also place orders with other vendors with shorter manufacturing lead times. Such multiple ordering (along with other factors) or risk of order cancellation may cause difficulty in predicting our revenue and, as a result, could impair our ability to manage parts inventory effectively. In addition,revenue. Further, our efforts to improve manufacturing lead-time performance may result in corresponding reductions in order backlog. A decline in backlog levels could result in more variability and less predictability in our quarter-to-quarter revenue and operating results. In addition, when facing
component supply-related challenges we have increased our efforts in procuring components in order to meet customer expectations, which in turn contribute to an increase in inventory and purchase commitments. IncreasesFor example, in fiscal 2021, we increased our inventory and purchase commitments in light of the supply chain challenges seen industrywide due to component shortages, caused in part by the COVID-19 pandemic. These increases in our inventory and purchase commitments to shorten lead times could also lead to significant excess and obsolete inventory charges if the demand for our products is less than our expectations.
We plan our operating expense levels based primarily on forecasted revenue levels. These expenses and the impact of long-term commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating results being below expectations because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.
Any of the above factors could have a material adverse impact on our operations and financial results.
WE EXPECT GROSS MARGIN TO VARY OVER TIME, AND OUR LEVEL OF PRODUCT GROSS MARGIN MAY NOT BE SUSTAINABLESupply chain issues, including financial problems of contract manufacturers or component suppliers, or a shortage of adequate component supply or manufacturing capacity that increase our costs or cause a delay in our ability to fulfill orders, could have an adverse impact on our business and operating results, and our failure to estimate customer demand properly may result in excess or obsolete component supply, which could adversely affect our gross margins.
The fact that we do not own or operate the bulk of our manufacturing facilities and that we are reliant on our extended supply chain could have an adverse impact on the supply of our products and on our business and operating results. Financial problems of either contract manufacturers or component suppliers, reservation of manufacturing capacity at our contract manufacturers by other companies, and industry consolidation occurring within one or more component supplier markets, such as the semiconductor market, in each case, could either limit supply or increase costs.
A reduction or interruption in supply, including disruptions on our global supply chain as a result of the COVID-19 pandemic or a significant natural disaster (including as a result of climate change); a significant increase in the price of one or more components; a failure to adequately authorize procurement of inventory by our contract manufacturers; a failure to appropriately cancel, reschedule, or adjust our requirements based on our business needs; or a decrease in demand for our products could materially adversely affect our business, operating results, and financial condition and could materially damage customer relationships. Furthermore, as a result of binding price or purchase commitments with suppliers, we may be obligated to purchase components at prices that are higher than those available in the current market. In the event that we become committed to purchase components at prices in excess of the current market price when the components are actually used, our gross margins could decrease. In addition, vendors may be under pressure to allocate product to certain customers for business, regulatory or political reasons, and/or demand changes in agreed pricing as a condition of supply. Although we have generally secured additional supply or taken other mitigation actions when significant disruptions have occurred, if similar situations occur in the future, they could have a material adverse effect on our business, results of operations, and financial condition.
Our growth and ability to meet customer demands depend in part on our ability to obtain timely deliveries of parts from our suppliers and contract manufacturers. We have experienced component shortages in the past, including shortages caused by manufacturing process issues, that have affected our operations, including longer than normal lead times. There is currently a market shortage of semiconductor and other component supply which has affected, and could further affect, lead times, the cost of that supply, and our ability to meet customer demand for our products if we cannot secure sufficient supply in a timely manner. We expect these supply chain challenges and cost impacts to continue through at least the first half of fiscal 2022 and potentially into the second half of fiscal 2022. Additionally, we may in the future experience a shortage of certain component parts as a result of our own manufacturing issues, manufacturing issues at our suppliers or contract manufacturers, capacity problems experienced by our suppliers or contract manufacturers including capacity or cost problems resulting from industry consolidation, or strong demand for those parts. Growth in the economy is likely to create greater pressures on us and our suppliers to accurately project overall component demand and component demands within specific product categories and to establish optimal component levels and manufacturing capacity, especially for labor-intensive components, components for which we purchase a substantial portion of the supply, or the re-ramping of manufacturing capacity for highly complex products. During periods of shortages or delays the price of components may increase, or the components may not be available at all, and we may also encounter shortages if we do not accurately anticipate our needs. We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed. Accordingly, our revenue and gross margins could suffer until other sources can be developed.
Our operating results would also be adversely affected if, anticipating greater demand than actually develops, we commit to the purchase of more components than we need, which is more likely to occur in a period of demand uncertainties such as we are currently experiencing. There can be no assurance that we will not encounter these problems in the future. Although in many cases we use standard parts and components for our products, certain components are presently available only from a single source or limited sources, and a global economic downturn and related market uncertainty could negatively impact the availability of components from one or more of these sources, especially during times such as we have recently seen when there are supplier constraints based on labor and other actions taken during economic downturns. We may not be able to diversify
sources in a timely manner, which could harm our ability to deliver products to customers and seriously impact present and future sales.
We believe that we may be faced with the following challenges in the future: new markets in which we participate may grow quickly, which may make it difficult to quickly obtain significant component capacity; as we acquire companies and new technologies, we may be dependent on unfamiliar supply chains or relatively small supply partners; and we face competition for certain components that are supply-constrained, from existing competitors, and companies in other markets.
Manufacturing capacity and component supply constraints could continue to be significant issues for us. We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to improve manufacturing lead-time performance and to help ensure adequate component supply, we enter into agreements with contract manufacturers and suppliers that either allow them to procure inventory based upon criteria as defined by us or that establish the parameters defining our requirements. In certain instances, these agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed. When facing component supply-related challenges we have increased our efforts in procuring components in order to meet customer expectations, which in turn contributes to an increase in inventory and purchase commitments. For example, in fiscal 2021, we increased our inventory and purchase commitments in light of the supply chain challenges seen industrywide due to component shortages, caused in part by the COVID-19 pandemic. These increases in our inventory and purchase commitments to shorten lead times could also lead to significant excess and obsolete inventory charges if the demand for our products is less than our expectations. If we fail to anticipate customer demand properly, an oversupply of parts could result in excess or obsolete components that could adversely affect our gross margins. For additional information regarding our purchase commitments with contract manufacturers and suppliers, see Note 14 to the Consolidated Financial Statements.
We expect gross margin to vary over time, and our level of product gross margin may not be sustainable.
Our level of product gross margins declined in fiscal 20172021 and have declined in certain other prior periods on a year-over-year basis, and could decline in future quartersperiods due to adverse impacts from various factors, including:
•Changes in customer, geographic, or product mix, including mix of configurations within each product group |
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| • | | Changes in customer, geographic, or product mix, including mix of configurations within each product group |
•Introduction of new products, including products with price-performance advantages, and new business models including the transformation of our business to deliver more software and subscription offerings
•Our ability to reduce production costs
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| • | | Introduction of new products, including products with price-performance advantages, and new business models including the transformation of our business to deliver more software and subscription offerings |
•Entry into new markets or growth in lower margin markets, including markets with different pricing and cost structures, through acquisitions or internal development |
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| • | | Our ability to reduce production costs |
•Sales discounts |
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| • | | Entry into new markets or growth in lower margin markets, including markets with different pricing and cost structures, through acquisitions or internal development |
•Increases in material, labor or other manufacturing-related costs (i.e. component costs, broker fees, expedited freight and overtime) or higher supply chain logistics costs, any of which could be significant, especially during periods of supply constraints for certain costs, such as those impacting the market for components, including semiconductors and memory•Excess inventory, inventory holding charges, and obsolescence charges |
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| • | | Increases in material, labor or other manufacturing-related costs, which could be significant especially during periods of supply constraints such as those impacting the market for memory components |
•Changes in shipment volume |
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| • | | Excess inventory and inventory holding charges |
•The timing of revenue recognition and revenue deferrals•Increased cost (including those caused by tariffs), loss of cost savings or dilution of savings due to changes in component pricing or charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand or if the financial health of either contract manufacturers or suppliers deteriorates |
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| • | | Changes in shipment volume |
•Lower than expected benefits from value engineering |
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| • | | The timing of revenue recognition and revenue deferrals |
•Increased price competition, including competitors from Asia, especially from China |
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| • | | Increased cost, loss of cost savings or dilution of savings due to changes in component pricing or charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand or if the financial health of either contract manufacturers or suppliers deteriorates |
•Changes in distribution channels |
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| • | | Lower than expected benefits from value engineering |
•Increased warranty or royalty costs |
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| • | | Increased price competition, including competitors from Asia, especially from China |
•Increased amortization of purchased intangible assets, especially from acquisitions |
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| • | | Changes in distribution channels |
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| • | | Increased warranty costs |
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| • | | Increased amortization of purchased intangible assets, especially from acquisitions |
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| • | | How well we execute on our strategy and operating plans |
•How well we execute on our strategy and operating plansChanges in service gross margin may result from various factors such as changes in the mix between technical support services and advanced services, as well as the timing of technical support service contract initiations and renewals and the addition of personnel and other resources to support higher levels of service business in future periods.
SALES TO THE SERVICE PROVIDER MARKET ARE ESPECIALLY VOLATILE, AND WEAKNESS IN ORDERS FROM THIS INDUSTRY MAY HARM OUR OPERATING RESULTS AND FINANCIAL CONDITION
Sales to the service provider market are especially volatile, and weakness in orders from this industry may harm our operating results and financial condition.
Sales to the service provider market have been characterized by large and sporadic purchases, especially relating to our router sales and sales of certain products in our newer product categories such as Data Center, Collaboration,other Infrastructure Platforms and Service Provider Video,Applications products, in addition to longer sales cycles. ProductService provider product orders fromdecreased during the service provider market decreasedfirst quarter of fiscal 2021 and in fiscal 2017,certain prior periods, and at various times in the past, including in recent quarters, we have experienced significant weakness in product orders from service providers. Product orders from the service provider market could continue to decline and, as has been the case in the past, such weakness could persist over extended periods of time given fluctuating market conditions. Sales activity in this industry depends upon the stage of completion of expanding network infrastructures; the availability of funding; and the extent to which service providers are affected by regulatory, economic, and business conditions in the country of operations. Weakness in orders from this industry, including as a result of any slowdown in capital expenditures by service providers (which may be more prevalent during a global economic downturn, or periods of economic, political or regulatory uncertainty), could have a material adverse effect on our business, operating results, and financial condition. Such slowdowns may continue or recur in future periods. Orders from this industry could decline for many reasons other than the competitiveness of our products and services within their respective markets. For example, in the past, many of our service provider customers have been materially and adversely affected by slowdowns in the general economy, by overcapacity, by changes in the service provider market, by regulatory developments, and by constraints on capital availability, resulting in business failures and substantial reductions in spending and expansion plans. These conditions have materially harmed our business and operating results in the past, and some of these or other conditions in the service provider market could affect our business
and operating results in any future period. Finally, service provider customers typically have longer implementation cycles; require a broader range of services, including design services; demand that vendors take on a larger share of risks; often require acceptance provisions, which can lead to a delay in revenue recognition; and expect financing from vendors. All these factors can add further risk to business conducted with service providers.
DISRUPTION OF OR CHANGES IN OUR DISTRIBUTION MODEL COULD HARM OUR SALES AND MARGINSDisruption of or changes in our distribution model could harm our sales and margins.
If we fail to manage distribution of our products and services properly, or if our distributors’ financial condition or operations weaken, our revenue and gross margins could be adversely affected.
A substantial portion of our products and services is sold through our channel partners, and the remainder is sold through direct sales. Our channel partners include systems integrators, service providers, other resellers, and distributors. Systems integrators and service providers typically sell directly to end users and often provide system installation, technical support, professional services, and other support services in addition to network equipment sales. Systems integrators also typically integrate our products into an overall solution, and a number of service providers are also systems integrators. Distributors stock inventory and typically sell to systems integrators, service providers, and other resellers. We refer to sales through distributors as our two-tier system of sales to the end customer. Revenue from distributors is generally recognized based on a sell-through method using information provided by them. These distributors are generally given business terms that allow them to return a portion of inventory, receive credits for changes in selling prices, and participate in various cooperative marketing programs. If sales through indirect channels increase, this may lead to greater difficulty in forecasting the mix of our products and, to a degree, the timing of orders from our customers.
Historically, we have seen fluctuations in our gross margins based on changes in the balance of our distribution channels. Although variability to date has not been significant, thereThere can be no assurance that changes in the balance of our distribution model in future periods would not have an adverse effect on our gross margins and profitability.
Some factors could result in disruption of or changes in our distribution model, which could harm our sales and margins, including the following:
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| • | | We compete with some of our channel partners, including through our direct sales, which may lead these channel partners to use other suppliers that do not directly sell their own products or otherwise compete with them |
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| • | | Some of our channel partners may demand that we absorb a greater share of the risks that their customers may ask them to bear |
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| • | | Some of our channel partners may have insufficient financial resources and may not be able to withstand changes and challenges in business conditions |
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| • | | Revenue from indirect sales could suffer if our distributors’ financial condition or operations weaken |
competition with some of our channel partners, including through our direct sales, which may lead these channel partners to use other suppliers that do not directly sell their own products or otherwise compete with them; some of our channel partners may demand that we absorb a greater share of the risks that their customers may ask them to bear; some of our channel partners may have insufficient financial resources and may not be able to withstand changes and challenges in business conditions; and revenue from indirect sales could suffer if our distributors’ financial condition or operations weaken. In addition, we depend on our channel partners globally to comply with applicable regulatory requirements. To the extent that they fail to do so, that could have a material adverse effect on our business, operating results, and financial condition. Further, sales of our products outside of agreed territories can result in disruption to our distribution channels.
THE MARKETS IN WHICH WE COMPETE ARE INTENSELY COMPETITIVE, WHICH COULD ADVERSELY AFFECT OUR ACHIEVEMENT OF REVENUE GROWTHThe markets in which we compete are intensely competitive, which could adversely affect our achievement of revenue growth.
The markets in which we compete are characterized by rapid change, converging technologies, and a migration to networking and communications solutions that offer relative advantages. These market factors represent a competitive threat to us. We compete with numerous vendors in each product category. The overall number of our competitors providing niche product solutions may increase. Also, the identity and composition of competitors may change as we increase our activity in newer product categories such as data center and collaborationareas, and in key priority and growth areas. For example, as products related to network programmability, such as SDNsoftware defined networking (SDN) products, become more prevalent, we expect to face increased competition from companies that develop networking products based on commoditized hardware, referred to as "white box"“white box” hardware, to the extent customers decide to purchase those product offerings instead of ours. In addition, the growth in demand for technology
delivered as a service enables new competitors to enter the market.
As we continue to expand globally, we may see new competition in different geographic regions. In particular, we have experienced price-focused competition from competitors in Asia, especially from China, and we anticipate this will continue. For information regarding our competitors, see the section entitled “Competition” contained in Item 1. Business of this report.
Some of our competitors compete across many of our product lines, while others are primarily focused in a specific product area. Barriers to entry are relatively low, and new ventures to create products that do or could compete with our products are regularly
formed. In addition, some of our competitors may have greater resources, including technical and engineering resources, than we do. As we expand into new markets, we will face competition not only from our existing competitors but also from other competitors, including existing companies with strong technological, marketing, and sales positions in those markets. We also sometimes face competition from resellers and distributors of our products. Companies with which we have strategic alliances in some areas may be competitors in other areas, and in our view this trend may increase.
For example, the enterprise data center is undergoing a fundamental transformation arising from the convergence of technologies, including computing, networking, storage, and software, that previously were segregated. Due to several factors, including the availability of highly scalable and general purpose microprocessors, ASICs offering advanced services, standards based protocols, cloud computing and virtualization, the convergence of technologies within the enterprise data center is spanning multiple, previously independent, technology segments. Also, some of our current and potential competitors for enterprise data center business have made acquisitions, or announced new strategic alliances, designed to position them to provide end-to-end technology solutions for the enterprise data center. As a result of all of these developments, we face greater competition in the development and sale of enterprise data center technologies, including competition from entities that are among our long-term strategic alliance partners. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us.
The principal competitive factors in the markets in which we presently compete and may compete in the future include:
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| • | | The ability to sell successful business outcomes |
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| • | | The ability to provide a broad range of networking and communications products and services |
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| • | | The ability to introduce new products, including providing continuous new customer value and products with price-performance advantages |
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| • | | The ability to reduce production costs |
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| • | | The ability to provide value-added features such as security, reliability, and investment protection |
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| • | | Conformance to standards |
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| • | | The ability to provide financing |
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| • | | Disruptive technology shifts and new business models |
include the ability to sell successful business outcomes; the ability to provide a broad range of networking and communications products and services; product performance; price; the ability to introduce new products, including providing continuous new customer value and products with price-performance advantages; the ability to reduce production costs; the ability to provide value-added features such as security, reliability, and investment protection; conformance to standards; market presence; the ability to provide financing; and disruptive technology shifts and new business models.We also face competition from customers to which we license or supply technology and suppliers from which we transfer technology. The inherent nature of networking requires interoperability. As such, we must cooperate and at the same time compete with many companies. Any inability to effectively manage these complicated relationships with customers, suppliers, and strategic alliance partners could have a material adverse effect on our business, operating results, and financial condition and accordingly affect our chances of success.
OUR INVENTORY MANAGEMENT RELATING TO OUR SALES TO OUR TWO-TIER DISTRIBUTION CHANNEL IS COMPLEX, AND EXCESS INVENTORY MAY HARM OUR GROSS MARGINSIf we do not successfully manage our strategic alliances, we may not realize the expected benefits from such alliances, and we may experience increased competition or delays in product development.
We have several strategic alliances with large and complex organizations and other companies with which we work to offer complementary products and services and, in the past, have established a joint venture to market services associated with our Cisco Unified Computing System products. These arrangements are generally limited to specific projects, the goal of which is generally to facilitate product compatibility and adoption of industry standards. There can be no assurance we will realize the expected benefits from these strategic alliances or from the joint venture. If successful, these relationships may be mutually beneficial and result in industry growth. However, alliances carry an element of risk because, in most cases, we must compete in some business areas with a company with which we have a strategic alliance and, at the same time, cooperate with that company in other business areas. Also, if these companies fail to perform or if these relationships fail to materialize as expected, we could suffer delays in product development or other operational difficulties. Joint ventures can be difficult to manage, given the potentially different interests of joint venture partners.
Inventory management relating to our sales to our two-tier distribution channel is complex, and excess inventory may harm our gross margins.
We must manage our inventory relating to sales to our distributors effectively, because inventory held by them could affect our results of operations. Our distributors may increase orders during periods of product shortages, cancel orders if their inventory is too high, or delay orders in anticipation of new products. They also may adjust their orders in response to the supply of our products and the products of our competitors that are available to them, and in response to seasonal fluctuations in end-user demand. Revenue to ourOur distributors generally is recognized based on a sell-through method using information provided by them, and they are generally given business terms that allow them to return a portion of inventory, receive credits for changes in selling price, and participate in various cooperative marketing programs. Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements. When facing component supply-related
challenges, we have increased our efforts
in procuring components in order to meet customer expectations. If we ultimately determine that we have excess inventory, we may have to reduce our prices and write down inventory, which in turn could result in lower gross margins.
SUPPLY CHAIN ISSUES, INCLUDING FINANCIAL PROBLEMS OF CONTRACT MANUFACTURERS OR COMPONENT SUPPLIERS, OR A SHORTAGE OF ADEQUATE COMPONENT SUPPLY OR MANUFACTURING CAPACITY THAT INCREASED OUR COSTS OR CAUSED A DELAY IN OUR ABILITY TO FULFILL ORDERS, COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS AND OPERATING RESULTS, AND OUR FAILURE TO ESTIMATE CUSTOMER DEMAND PROPERLY MAY RESULT IN EXCESS OR OBSOLETE COMPONENT SUPPLY, WHICH COULD ADVERSELY AFFECT OUR GROSS MARGINS
The fact that we do not own or operateWe depend upon the bulkdevelopment of our manufacturing facilities and that we are reliant on our extended supply chain could have an adverse impact on the supply of ournew products and onservices, and enhancements to existing products and services, and if we fail to predict and respond to emerging technological trends and customers’ changing needs, our business and operating results:
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| • | | Any financial problems of either contract manufacturers or component suppliers could either limit supply or increase costs |
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| • | | Reservation of manufacturing capacity at our contract manufacturers by other companies, inside or outside of our industry, could either limit supply or increase costs |
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| • | | Industry consolidation occurring within one or more component supplier markets, such as the semiconductor market, could either limit supply or increase costs |
A reduction or interruption in supply; a significant increase in the price of one or more components; a failure to adequately authorize procurement of inventory by our contract manufacturers; a failure to appropriately cancel, reschedule, or adjust our requirements based on our business needs; or a decrease in demand for our products could materially adversely affect our business, operating results and financial condition and could materially damage customer relationships. Furthermore, as a result of binding price or purchase commitments with suppliers, wemarket share may be obligated to purchase components at prices that are higher than those available in the current market. In the event that we become committed to purchase components at prices in excess of the current market price when the components are actually used, our gross margins could decrease. We have experienced longer than normal lead times in the past. Although we have generally secured additional supply or taken other mitigation actions when significant disruptions have occurred, if similar situations occur in the future, they could have a material adverse effect on our business, results of operations, and financial condition. See the risk factor above entitled “Our revenue for a particular period is difficult to predict, and a shortfall in revenue may harm our operating results.”
Our growth and ability to meet customer demands depend in part on our ability to obtain timely deliveries of parts from our suppliers and contract manufacturers. We have experienced component shortages in the past, including shortages caused by manufacturing process issues, that have affected our operations. We may in the future experience a shortage of certain component parts as a result of our own manufacturing issues, manufacturing issues at our suppliers or contract manufacturers, capacity problems experienced by our suppliers or contract manufacturers including capacity or cost problems resulting from industry consolidation, or strong demand in the industry for those parts. Growth in the economy is likely to create greater pressures on us and our suppliers to accurately project overall component demand and component demands within specific product categories and to establish optimal component levels and manufacturing capacity, especially for labor-intensive components, components for which we purchase a substantial portion of the supply, or the re-ramping of manufacturing capacity for highly complex products. During periods of shortages or delays the price of components may increase, or the components may not be available at all, and we may also encounter shortages if we do not accurately anticipate our needs. We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed. Accordingly, our revenue and gross margins could suffer until other sources can be developed. Our operating results would also be adversely affected if, anticipating greater demand than actually develops, we commit to the purchase of more components than we need, which is more likely to occur in a period of demand uncertainties such as we are currently experiencing. There can be no assurance that we will not encounter these problems in the future. Although in many cases we use standard parts and components for our products, certain components are presently available only from a single source or limited sources, and a global economic downturn and related market uncertainty could negatively impact the availability of components from one or more of these sources, especially during times such as we have recently seen when there are supplier constraints based on labor and other actions taken during economic downturns. We may not be able to diversify sources in a timely manner, which could harm our ability to deliver products to customers and seriously impact present and future sales.
We believe that we may be faced with the following challenges in the future:
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| • | | New markets in which we participate may grow quickly, which may make it difficult to quickly obtain significant component capacity |
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| • | | As we acquire companies and new technologies, we may be dependent, at least initially, on unfamiliar supply chains or relatively small supply partners |
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| • | | We face competition for certain components that are supply-constrained, from existing competitors, and companies in other markets |
Manufacturing capacity and component supply constraints could continue to be significant issues for us. We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to improve manufacturing lead-time performance and to help ensure adequate component supply, we enter into agreements with contract manufacturers and suppliers that either allow them to procure inventory based upon criteria as defined by us or that establish the parameters defining our requirements. In certain instances, these agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed. When facing component supply-related challenges we have increased our efforts in procuring components in order to meet customer expectations, which in turn contributes to an increase in purchase commitments. Increases in our purchase commitments to shorten lead times could also lead to excess and obsolete inventory charges if the demand for our products is less than our expectations. If we fail to anticipate customer demand properly, an oversupply of parts could result in excess or obsolete components that could adversely affect our gross margins. For additional information regarding our purchase commitments with contract manufacturers and suppliers, see Note 12 to the Consolidated Financial Statements.
WE DEPEND UPON THE DEVELOPMENT OF NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS, AND IF WE FAIL TO PREDICT AND RESPOND TO EMERGING TECHNOLOGICAL TRENDS AND CUSTOMERS’ CHANGING NEEDS, OUR OPERATING RESULTS AND MARKET SHARE MAY SUFFERsuffer.
The markets for our products and services are characterized by rapidly changing technology, evolving industry standards, new product and service introductions, and evolving methods of building and operating networks. Our operating results depend on our ability to develop and introduce new products and services into existing and emerging markets and to reduce the production costs of existing products. Many ofIf customers do not purchase and/or renew our strategic initiatives and investments we have made, andofferings our architectural approach, are designed to enable the increased use of the network as the platformbusiness could be harmed. The COVID-19 pandemic may also result in long-term changes in customer needs for automating, orchestrating, integrating, and delivering an ever-increasing array of IT-basedour products and services. For example,services in June 2017various sectors, along with IT-related capital spending reductions, or shifts in spending focus, that could materially adversely affect us if we announcedare unable to adjust our Catalyst 9000 series of switches which represent the initial foundation of our intent-based networking capabilities. Other current initiatives include our focus on security; the market transition relatedproduct and service offerings to digital transformation and IoT; the transition in cloud; and the move towards more programmable, flexible and virtual networks.match customer needs.
The process of developing new technology, including intent-based networking, more programmable, flexible and virtual networks, and technology related to other market transitions— such as security, digital transformation and IoT, and cloud— is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We must commit significant resources, including the investments we have been making in our strategic priorities to developing new products and services before knowing whether our investments will result in products and services the market will accept. In particular, if our model of the evolution of networking does not emerge as we believe it will, or if the industry does not evolve as we believe it will, or if our strategy for addressing this evolution is not successful, many of our strategic initiatives and investments may be of no or limited value. For example, if we do not introduce products related to network programmability, such as software-defined-networking products, in a timely fashion, or if product offerings in this market that ultimately succeed are based on technology, or an approach to technology, that differs from ours, such as, for example, networking products based on “white box” hardware, our business could be harmed. Similarly, our business could be harmed if we fail to develop, or fail to develop in a timely fashion, offerings to address other transitions, or if the offerings addressing these other transitions that ultimately succeed are based on technology, or an approach to technology, different from ours. In addition, our business could be adversely affected in periods surrounding our new product introductions if customers delay purchasing decisions to qualify or otherwise evaluate the new product offerings.
Our strategy is to lead our customers in their digital transition with solutions that deliver greater agility, productivity, security and other advanced network capabilities, and that intelligently connect nearly everything that can be connected. Over the last few years, we We have also been transforming our business to move from selling individual products and services to selling products and services integrated into architectures and solutions, and we are seeking to meet the evolving needs of customers which include offering our products and solutions in the manner in which customers wish to consume them. As a part of this transformation, we continue to make changes to how we are organized and how we build and deliver our technology, including changes in our business models with customers. If our strategy for addressing our customer needs, or the architectures and solutions we develop do not meet those needs, or the changes we are making in how we are organized and how we build and deliver or technology is incorrect or ineffective, our business could be harmed.
Furthermore, we may not execute successfully on our vision or strategy because of challenges with regard to product planning and timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors, some of which may also be our strategic alliance partners, providing those solutions before we do and loss of market
share, revenue, and earnings. In addition, the growth in demand for technology delivered as a service enables new competitors to enter the market. The success of new products and services depends on several factors, including proper new product and service definition, component costs, timely completion and introduction of these products and services, differentiation of new products and services from those of our competitors, and market acceptance of these products.products and services. There can be no assurance that we will successfully identify new product and services opportunities, develop and bring new products and services to market in a timely manner, or achieve market acceptance of our products and services or that products, services and technologies developed by others will not render our products, services or technologies obsolete or noncompetitive. The products and technologies in our other product categories and key priority and growth areas may not prove to have the market success we anticipate, and we may not successfully identify and invest in other emerging or new products.products and services.
CHANGES IN INDUSTRY STRUCTURE AND MARKET CONDITIONS COULD LEAD TO CHARGES RELATED TO DISCONTINUANCES OF CERTAIN OF OUR PRODUCTS OR BUSINESSES, ASSET IMPAIRMENTS AND WORKFORCE REDUCTIONS OR RESTRUCTURINGSChanges in industry structure and market conditions could lead to charges related to discontinuances of certain of our products or businesses, asset impairments and workforce reductions or restructurings.
In response to changes in industry and market conditions, we may be required to strategically realign our resources and to consider restructuring, disposing of, or otherwise exiting businesses. Any resource realignment, or decision to limit investment in or dispose of or otherwise exit businesses, may result in the recording of special charges, such as inventory and technology-related write-offs, workforce reduction or restructuring costs, charges relating to consolidation of excess facilities, or claims from third parties who were resellers or users of discontinued products. Our estimates with respect to the useful life or ultimate recoverability of our carrying basis of assets, including purchased intangible assets, could change as a result of such
assessments and decisions. Although in certain instances our supply agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed, our loss contingencies may include liabilities for contracts that we cannot cancel with contract manufacturers and suppliers. Further, our estimates relating to the liabilities for excess facilities are affected by changes in real estate market conditions. Additionally, we are required to perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances, and future goodwill impairment tests may result in a charge to earnings.
In August 2016, we announced We initiated a restructuring plan under which we began taking action in the first quarter of fiscal 2017. In May 2017, we extended the restructuring plan to include additional employees. The implementation of this restructuring plan may be disruptive to our business,2021, which included a voluntary early retirement program, and following completion of the restructuring plan ourwhich has now been substantially completed. Our business may not be more efficient or effective than prior to implementation of the plan. Our restructuring activities, including any related charges and the impact of the related headcount restructurings, could have a material adverse effect on our business, operating results, and financial condition.
OVER THE LONG TERM WE INTEND TO INVEST IN ENGINEERING, SALES, SERVICE AND MARKETING ACTIVITIES, AND THESE INVESTMENTS MAY ACHIEVE DELAYED, OR LOWER THAN EXPECTED, BENEFITS WHICH COULD HARM OUR OPERATING RESULTSOver the long term we intend to invest in engineering, sales, service and marketing activities, and in key priority and growth areas, and these investments may achieve delayed, or lower than expected, benefits which could harm our operating results.
While we intend to focus on managing our costs and expenses, over the long term, we also intend to invest in personnel and other resources related to our engineering, sales, service and marketing functions as we realign and dedicate resources on key priority and growth areas, such as security, IoT, collaboration, next generation data center, cloud,Security and software,Applications, and we also intend to focus on maintaining leadership in routing, switchingInfrastructure Platforms and services.in Services. We are likely to recognize the costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. If we do not achieve the benefits anticipated from these investments (including if our selection of areas for investment does not play out as we expect), or if the achievement of these benefits is delayed, our operating results may be adversely affected.
OUR BUSINESS SUBSTANTIALLY DEPENDS UPON THE CONTINUED GROWTH OF THE INTERNET AND INTERNET-BASED SYSTEMS
A substantial portion ofWe have made and expect to continue to make acquisitions that could disrupt our businessoperations and revenue depends on growth and evolution of the Internet, including the continued development of the Internet and the anticipated market transitions, and on the deployment ofharm our products by customers who depend on such continued growth and evolution. To the extent that an economic slowdown or uncertainty and related reduction in capital spending adversely affect spending on Internet infrastructure, including spending or investment related to anticipated market transitions, we could experience material harm to our business, operating results, and financial condition.
Because of the rapid introduction of new products and changing customer requirements related to matters such as cost-effectiveness and security, we believe that there could be performance problems with Internet communications in the future, which could receive a high degree of publicity and visibility. Because we are a large supplier of networking products, our business, operating results, and financial condition may be materially adversely affected, regardless of whether or not these problems are due to the performance of our own products. Such an event could also result in a material adverse effect on the market price of our common stock independent of direct effects on our business.
WE HAVE MADE AND EXPECT TO CONTINUE TO MAKE ACQUISITIONS THAT COULD DISRUPT OUR OPERATIONS AND HARM OUR OPERATING RESULTSresults.
Our growth depends upon market growth, our ability to enhance our existing products, and our ability to introduce new products on a timely basis. We intend to continue to address the need to develop new products and enhance existing products through acquisitions of other companies, product lines, technologies, and personnel. Acquisitions involve numerous risks, including the following:
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| • | | Difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired companies, particularly companies with large and widespread operations and/or complex products |
•Difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired companies, particularly companies with large and widespread operations and/or complex products |
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| • | | Diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions |
•Diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions |
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| • | | Potential difficulties in completing projects associated with in-process research and development intangibles |
•Potential difficulties in completing projects associated with in-process research and development intangibles |
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| • | | Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions |
•Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions |
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| • | | Initial dependence on unfamiliar supply chains or relatively small supply partners |
•Initial dependence on unfamiliar supply chains or relatively small supply partners |
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| • | | Insufficient revenue to offset increased expenses associated with acquisitions |
•Insufficient revenue to offset increased expenses associated with acquisitions |
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| • | | The potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after announcement of acquisition plans |
•The potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after announcement of acquisition plansAcquisitions may also cause us to:
•Issue common stock that would dilute our current stockholders’ percentage ownership
•Use a substantial portion of our cash resources, or incur debt
•Significantly increase our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition
•Assume liabilities
•Record goodwill and intangible assets that are subject to impairment testing on a regular basis and potential periodic impairment charges
•Incur amortization expenses related to certain intangible assets
•Incur tax expenses related to the effect of acquisitions on our legal structure
•Incur large write-offs and restructuring and other related expenses
•Become subject to intellectual property or other litigation
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| • | | Issue common stock that would dilute our current shareholders’ percentage ownership |
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| • | | Use a substantial portion of our cash resources, or incur debt |
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| • | | Significantly increase our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition |
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| • | | Record goodwill and intangible assets that are subject to impairment testing on a regular basis and potential periodic impairment charges |
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| • | | Incur amortization expenses related to certain intangible assets |
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| • | | Incur tax expenses related to the effect of acquisitions on our intercompany R&D cost sharing arrangement and legal structure |
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| • | | Incur large and immediate write-offs and restructuring and other related expenses |
Mergers and acquisitions of high-technology companies are inherently risky and subject to many factors outside of our control, and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results. Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products and technologies to a failure to do so. Even when an acquired company has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products.
From time to time, we have made acquisitions that resulted in charges in an individual quarter. These charges may occur in any particular quarter, resulting in variability in our quarterly earnings. In addition, our effective tax rate for future periods is uncertain and could be impacted by mergers and acquisitions. Risks related to new product development also apply to acquisitions. See the risk factors above, including the risk factor entitled “We depend upon the development of
Entrance into new productsor developing markets exposes us to additional competition and enhancements to
existing products,will likely increase demands on our service and if we fail to predict and respond to emerging technological trends and customers’ changing needs, our operating results and market share may suffer” for additional information.
ENTRANCE INTO NEW OR DEVELOPING MARKETS EXPOSES US TO ADDITIONAL COMPETITION AND WILL LIKELY INCREASE DEMANDS ON OUR SERVICE AND SUPPORT OPERATIONSsupport operations.
As we focus on new market opportunities and key priority and growth areas, we will increasingly compete with large telecommunications equipment suppliers as well as startup companies. Several of our competitors may have greater resources, including technical and engineering resources, than we do. Additionally, as customers in these markets complete infrastructure deployments, they may require greater levels of service, support, and financing than we have provided in the past, especially in emerging countries. Demand for these types of service, support, or financing contracts may increase in the future. There can be no assurance that we can provide products, service, support, and financing to effectively compete for these market opportunities.
Further, provision of greater levels of services, support and financing by us may result in a delay in the timing of revenue recognition. In addition, entry into other markets has subjected and will subject us to additional risks, particularly to those markets, including the effects of general market conditions and reduced consumer confidence. For example, as we add direct selling capabilities globally to meet changing customer demands, we will face increased legal and regulatory requirements.
INDUSTRY CONSOLIDATION MAY LEAD TO INCREASED COMPETITION AND MAY HARM OUR OPERATING RESULTSIndustry consolidation may lead to increased competition and may harm our operating results.
There has beenis a continuing trend toward industry consolidation in our markets for several years.markets. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. For example, some of our current and potential competitors for enterprise data center business have made acquisitions, or announced new strategic alliances, designed to position them with the ability to provide end-to-end technology solutions for the enterprise data center. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, operating results, and financial condition. Furthermore, particularly in the service provider market, rapid consolidation will lead to fewer customers, with the effect that loss of a major customer could have a material impact on results not anticipated in a customer marketplace composed of more numerous participants.
PRODUCT QUALITY PROBLEMS COULD LEAD TO REDUCED REVENUE, GROSS MARGINS, AND NET INCOMEProduct quality problems could lead to reduced revenue, gross margins, and net income.
We produce highly complex products that incorporate leading-edge technology, including both hardware and software. Software typically contains bugs that can unexpectedly interfere with expected operations. There can be no assurance that our pre-shipment testing programs will be adequate to detect all defects, either ones in individual products or ones that could affect numerous shipments, which might interfere with customer satisfaction, reduce sales opportunities, or affect gross margins. From time to time, we have had to replace certain components and provide remediation in response to the discovery of defects or bugs in products that we had shipped. There can be no assurance that such remediation, depending on the product involved, would not have a material impact. An inability to cure a product defect could result in the failure of a product line, temporary or permanent withdrawal from a product or market, damage to our reputation, inventory costs, or product reengineering expenses, any of which could have a material impact on our revenue, margins, and net income. For example, in the second quarter of fiscal 2017 we recorded a charge to product cost of sales of $125 million related
Due to the expected remediation costs for anticipated failures in future periods of a widely-used component sourced from a third party which is included in severalglobal nature of our products,operations, political or economic changes or other factors in a specific country or region could harm our operating results and in the second quarter of fiscal 2014 we recorded a pre-tax charge of $655 million related to the expected remediation costs for certain products sold in prior fiscal years containing memory components manufactured by a single supplier between 2005 and 2010.
DUE TO THE GLOBAL NATURE OF OUR OPERATIONS, POLITICAL OR ECONOMIC CHANGES OR OTHER FACTORS IN A SPECIFIC COUNTRY OR REGION COULD HARM OUR OPERATING RESULTS AND FINANCIAL CONDITIONfinancial condition.
We conduct significant sales and customer support operations in countries around the world. As such, our growth depends in part on our increasing sales into emerging countries. We also depend on non-U.S. operations of our contract manufacturers, component suppliers and distribution partners. EmergingOur business in emerging countries in the aggregate experienced a decline in orders duringin the first half of fiscal 20172021 and in certain prior periods. We continue to assess the sustainability of any improvements in our business in these countries and there can be no assurance that our investments in these countries will be successful. Our future results could be materially adversely affected by a variety of political, economic or other factors relating to our operations inside and outside the United States, any or all of which could have a material adverse effect on our operating results and financial condition, including the following: impacts from global central bank monetary policy; issues related to the political relationship between the United States and other countries that can affect regulatory matters, affect the willingness of customers in those countries to purchase products from companies headquartered in the United States; andStates or affect our ability to
procure components if a government body were to deny us access to those components; government-related disruptions or shutdowns; the challenging and inconsistent global macroeconomic environment, anyenvironment; foreign currency exchange rates; political or allsocial unrest; economic instability or weakness or natural disasters in a specific country or region, including economic challenges in China and global economic ramifications of Chinese economic difficulties; instability as a result of Brexit; environmental protection regulations (including new laws and regulations related to climate change), trade protection measures such as tariffs, and other legal and regulatory requirements, some of which may affect our ability to import our products to, export our products from, or sell our products in various countries or affect our ability to procure components; political considerations that affect service provider and government spending patterns; health or similar issues, including pandemics or epidemics such as the COVID-19 pandemic which could have a materialcontinue to affect customer purchasing decisions; difficulties in staffing and managing international operations; and adverse effect
tax consequences, including imposition of withholding or other taxes on our operating resultsglobal operations.
We are exposed to the credit risk of some of our customers and financial condition, including, among others, the following:
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| • | | Foreign currency exchange rates |
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| • | | Political or social unrest |
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| • | | Economic instability or weakness or natural disasters in a specific country or region,including the current economic challenges in China and global economic ramifications of Chinese economic difficulties; instability as a result of Brexit; environmental and trade protection measures and other legal and regulatory requirements, some of which may affect our ability to import our products, to export our products from, or sell our products in various countries
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| • | | Political considerations that affect service provider and government spending patterns |
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| • | | Health or similar issues, such as a pandemic or epidemic |
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| • | | Difficulties in staffing and managing international operations |
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| • | | Adverse tax consequences, including imposition of withholding or other taxes on our global operations |
WE ARE EXPOSED TO THE CREDIT RISK OF SOME OF OUR CUSTOMERS AND TO CREDIT EXPOSURES IN WEAKENED MARKETS, WHICH COULD RESULT IN MATERIAL LOSSESto credit exposures in weakened markets, which could result in material losses.
Most of our sales are on an open credit basis, with typical payment terms of 30 days in the United States and, because of local customs or conditions, longer in some markets outside the United States. We monitor individual customer payment capability in granting such open credit arrangements, seek to limit such open credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts. Beyond our open credit arrangements, we have also experienced demands for customer financing and facilitation of leasing arrangements. We expect demand for customer financing to continue, and recently we have been experiencing an increase in this demand as the credit markets have been impacted by the challenging and inconsistent global macroeconomic environment, including increased demand from customers in certain emerging countries.
We believe customer financing is a competitive factor in obtaining business, particularly in serving customers involved in significant infrastructure projects. Our loan financing arrangements may include not only financing the acquisition of our products and services but also providing additional funds for other costs associated with network installation and integration of our products and services.
Our exposure to the credit risks relating to our financing activities described above may increase if our customers are adversely affected by a global economic downturn or periods of economic uncertainty. Although we have programs in place that are designed to monitor and mitigate the associated risk, including monitoring of particular risks in certain geographic areas, thereThere can be no assurance that such programs we have in place to monitor and mitigate credit risks will be effective in reducing our credit risks.
effective. In the past, there have been significant bankruptcies among customers both on open credit and with loan or lease financing arrangements, particularly among Internet businesses and service providers, causing us to incur economic or financial losses. There can be no assurance that additional losses will not be incurred. Although these losses have not been material to date, future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition. A portion of our sales is derived through our distributors. These distributors are generally given business terms that allow them to return a portion of inventory, receive credits for changes in selling prices, and participate in various cooperative marketing programs. We maintain estimated accruals and allowances for such business terms. However, distributors tend to have more limited financial resources than other resellers and end-user customers and therefore represent potential sources of increased credit risk, because they may be more likely to lack the reserve resources to meet payment obligations. Additionally, to the degree that turmoil in the credit markets makes it more difficult for some customers to obtain financing, those customers’ ability to pay could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial condition.
WE ARE EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF OUR PORTFOLIO INVESTMENTS AND IN INTEREST RATES; IMPAIRMENT OF OUR INVESTMENTS COULD HARM OUR EARNINGSWe are exposed to fluctuations in the market values of our portfolio investments and in interest rates; impairment of our investments could harm our earnings.
We maintain an investment portfolio of various holdings, types, and maturities. These securities are generally classified as available-for-sale and, consequently, are recorded on our Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a component of accumulated other comprehensive income (loss), net of tax. Our portfolio includes fixed income securitiesavailable-for-sale debt investments and equity investments, in publicly traded companies, the values of which are subject to market price volatility to the extent unhedged.volatility. If such investments suffer market price declines, as we experienced with some of our investments in the past, we may recognize in earnings the decline in the fair value of our investments below their cost basis when the decline is judged to be other than temporary. For information regarding the sensitivity of and risks associated with the market value of portfoliobasis. Our privately held investments and
interest rates, refer to the section titled “Quantitative and Qualitative Disclosures About Market Risk.” Our investments in private companies are subject to risk of loss of investment capital. These investments are inherently risky because the markets for the technologies or products they have under development are typically in the early stages and may never materialize. We could lose our entire investment in these companies. For information regarding the market risks associated with the fair value of portfolio investments and interest rates, refer to the section titled “Quantitative and Qualitative Disclosures About Market Risk.”
WE ARE EXPOSED TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES THAT COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS AND CASH FLOWSWe are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows.
Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our financial results and cash flows. Historically, our primary exposures have related to nondollar-denominated sales in Japan, Canada, and Australia and certain nondollar-denominated operating expenses and service cost of sales in Europe, Latin America, and Asia, where we sell primarily in U.S. dollars. Additionally, we have exposures torates, including emerging market currencies which can have extreme currency volatility. An increase in the value of the dollar could increase the real cost to our customers of our products in those markets outside the United States where we sell in dollars and a weakened dollar could increase the cost of local operating expenses and procurement of raw materials to the extent that we must purchase components in foreign currencies. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our financial results and cash flows.
Currently,Failure to retain and recruit key personnel would harm our ability to meet key objectives.
Our success has always depended in large part on our ability to attract and retain highly skilled technical, managerial, sales, and marketing personnel. Competition for these personnel is intense, especially in the Silicon Valley area of Northern California. Stock incentive plans are designed to reward employees for their long-term contributions and provide incentives for them to remain with us. Volatility or lack of positive performance in our stock price or equity incentive awards, or changes to our overall compensation program, including our stock incentive program, resulting from the management of share dilution and share-based compensation expense or otherwise, may also adversely affect our ability to retain key employees. As a result of one or more of these factors, we enter into foreignmay increase our hiring in geographic areas outside the United States, which could subject us to additional geopolitical and exchange forward contractsrate risk. The loss of services of any of our key personnel; the inability to retain and optionsattract qualified personnel in the future; or delays in hiring required personnel, particularly engineering and sales personnel,
could make it difficult to reduce the short-term impact of foreign currency fluctuations on certain foreign currency receivables, investments,meet key objectives, such as timely and payables.effective product introductions. In addition, companies in our industry whose employees accept positions with competitors frequently claim that competitors have engaged in improper hiring practices. We have received these claims in the past and may receive additional claims to this effect in the future.
Adverse resolution of litigation or governmental investigations may harm our operating results or financial condition.
We are a party to lawsuits in the normal course of our business. Litigation can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of lawsuits or governmental investigations could have a material adverse effect on our business, operating results, or financial condition. For additional information regarding certain of the matters in which we periodically hedgeare involved, see Note 14 to the Consolidated Financial Statements, subsection (f) “Legal Proceedings.”
Our operating results may be adversely affected and damage to our reputation may occur due to production and sale of counterfeit versions of our products.
As is the case with leading products around the world, our products are subject to efforts by third parties to produce counterfeit versions of our products. While we work diligently with law enforcement authorities in various countries to block the manufacture of counterfeit goods and to interdict their sale, and to detect counterfeit products in customer networks, and have succeeded in prosecuting counterfeiters and their distributors, resulting in fines, imprisonment and restitution to us, there can be no guarantee that such efforts will succeed. While counterfeiters often aim their sales at customers who might not have otherwise purchased our products due to lack of verifiability of origin and service, such counterfeit sales, to the extent they replace otherwise legitimate sales, could adversely affect our operating results.
Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.
Our provision for income taxes is subject to volatility and could be adversely affected by earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates; by changes in the valuation of our deferred tax assets and liabilities; by changes to foreign-derived intangible income, global intangible low-tax income and base erosion and anti-abuse tax laws, regulations, or interpretations thereof; by expiration of or lapses in tax incentives; by transfer pricing adjustments, including the effect of acquisitions on our legal structure; by tax effects of nondeductible compensation; by tax costs related to intercompany realignments; by changes in accounting principles; or by changes in tax laws and regulations, treaties, or interpretations thereof, including changes to the taxation of earnings of our foreign currency cash flows. Our attemptssubsidiaries, the deductibility of expenses attributable to hedge againstforeign income, and the foreign tax credit rules. Significant judgment is required to determine the recognition and measurement attribute prescribed in the accounting guidance for uncertainty in income taxes. The Organisation for Economic Co-operation and Development (OECD), an international association comprised of 38 countries, including the United States, has made changes and is contemplating additional changes to numerous long-standing tax principles. There can be no assurance that these risks may result inchanges and any contemplated changes if finalized, once adopted by countries, will not have an adverse impact on our net income.provision for income taxes. Further, as a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries was subject to reduced tax rates. Our failure to meet these commitments could adversely impact our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition.
OUR PROPRIETARY RIGHTS MAY PROVE DIFFICULT TO ENFORCEOur business and operations are especially subject to the risks of earthquakes, floods, and other natural catastrophic events (including as a result of global climate change).
Our corporate headquarters, including certain of our research and development operations are located in the Silicon Valley area of Northern California, a region known for seismic activity. Additionally, a certain number of our facilities are located near rivers that have experienced flooding in the past. Also certain of our suppliers and logistics centers are located in regions that have been or may be affected by earthquake, tsunami and flooding activity which in the past has disrupted, and in the future could disrupt, the flow of components and delivery of products. In addition, global climate change may result in significant natural disasters occurring more frequently or with greater intensity, such as drought, wildfires, storms, sea-level rise, and flooding. A significant natural disaster, such as an earthquake, a hurricane, volcano, flood or a wildfire, could have a material adverse impact on our business, operating results, and financial condition.
Terrorism and other events may harm our business, operating results and financial condition.
The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to the economies of the United States and other countries and create further uncertainties or otherwise materially harm our business, operating results, and financial condition. Likewise, events such as loss
of infrastructure and utilities services such as energy, transportation, or telecommunications could have similar negative impacts. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or the manufacture or shipment of our products, our business, operating results, and financial condition could be materially and adversely affected.
There can be no assurance that our operating results and financial condition will not be adversely affected by our incurrence of debt.
As of the end of fiscal 2021, we have senior unsecured notes outstanding in an aggregate principal amount of $11.5 billion that mature at specific dates from calendar year 2021 through 2040. We have also established a commercial paper program under which we may issue short-term, unsecured commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of $10.0 billion, and we had no commercial paper notes outstanding under this program as of July 31, 2021. There can be no assurance that our incurrence of this debt or any future debt will be a better means of providing liquidity to us than would our use of our existing cash resources. Further, we cannot be assured that our maintenance of this indebtedness or incurrence of future indebtedness will not adversely affect our operating results or financial condition. In addition, changes by any rating agency to our credit rating can negatively impact the value and liquidity of both our debt and equity securities, as well as the terms upon which we may borrow under our commercial paper program or future debt issuances.
Risks Related to Intellectual Property
Our proprietary rights may prove difficult to enforce.
We generally rely on patents, copyrights, trademarks, and trade secret laws to establish and maintain proprietary rights in our technology and products. Although we have been issued numerous patents and other patent applications are currently pending, there can be no assurance that any of these patents or other proprietary rights will not be challenged, invalidated, or circumvented or that our rights will, in fact, provide competitive advantages to us. Furthermore, many key aspects of networking technology are governed by industrywide standards, which are usable by all market entrants. In addition, there can be no assurance that patents will be issued from pending applications or that claims allowed on any patents will be sufficiently broad to protect our technology. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. The outcome of any actions taken in these foreign countries may be different than if such actions were determined under the laws of the United States. Although we are not dependent on any individual patents or group of patents for particular segments of the business for which we compete, if we are unable to protect our proprietary rights to the totality of the features (including aspects of products protected other than by patent rights) in a market, we may find ourselves at a competitive disadvantage to others who need not incur the substantial expense, time, and effort required to create innovative products that have enabled us to be successful.
WE MAY BE FOUND TO INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF OTHERSWe may be found to infringe on intellectual property rights of others.
Third parties, including customers, have in the past and may in the future assert claims or initiate litigation related to exclusive patent, copyright, trademark, and other intellectual property rights to technologies and related standards that are relevant to us. These assertions have increased over time as a result of our growth and the general increase in the pace of patent claims assertions, particularly in the United States. Because of the existence of a large number of patents in the networking field, the secrecy of some pending patents, and the rapid rate of issuance of new patents, it is not economically practical or even possible to determine in advance whether a product or any of its components infringes or will infringe on the patent rights of others. The asserted claims and/or initiated litigation can include claims against us or our manufacturers, suppliers, or customers, alleging infringement of their proprietary rights with respect to our existing or future products or components of those products. Regardless of the merit of these claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to develop a non-infringing technology or enter into license agreements. Where claims are made by customers, resistance even to unmeritorious claims could damage customer relationships. There can be no assurance that licenses will be available on acceptable terms and conditions, if at all, or that our indemnification by our suppliers will be adequate to cover our costs if a claim were brought directly against us or our customers. Furthermore, because of the potential for high court awards that are not necessarily predictable, it is not unusual to find even arguably unmeritorious claims settled for significant amounts. If any infringement or other intellectual property claim made against us by any third party is successful, if we are required to indemnify a customer with respect to a claim against the customer, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and adversely affected. For additional information regarding our indemnification obligations, see Note 12(g)14(e) to the Consolidated Financial Statements contained in this report.
Our exposure to risks associated with the use of intellectual property may be increased as a result of acquisitions, as we have a lower level of visibility into the development process with respect to such technology or the care taken to safeguard against
infringement risks. Further, in the
past, third parties have made infringement and similar claims after we have acquired technology that had not been asserted prior to our acquisition.
WE RELY ON THE AVAILABILITY OF THIRD-PARTY LICENSESWe rely on the availability of third-party licenses.
Many of our products are designed to include software or other intellectual property licensed from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of these products. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could have a material adverse effect on our business, operating results, and financial condition. Moreover, the inclusion in our products of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability to protect our proprietary rights in our products.
OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED AND DAMAGE TO OUR REPUTATION MAY OCCUR DUE TO PRODUCTION AND SALE OF COUNTERFEIT VERSIONS OF OUR PRODUCTSRisks Related to Cybersecurity and Regulations
As is the case with leading products around the world,Cyber-attacks, data breaches or malware may disrupt our products areoperations, harm our operating results and financial condition, and damage our reputation or otherwise materially harm our business; and cyber-attacks or data breaches on our customers’ networks, or in cloud-based services provided by or enabled by us, could result in claims of liability against us, damage our reputation or otherwise materially harm our business.
We experience cyber-attacks and other attempts to gain unauthorized access to our systems on a regular basis, and we anticipate continuing to be subject to efforts by third parties to produce counterfeit versionssuch attempts. Despite our implementation of our products. While we work diligently with law enforcement authorities in various countries to block the manufacture of counterfeit goods and to interdict their sale, and to detect counterfeit products in customer networks, and have succeeded in prosecuting counterfeiters and their distributors, resulting in fines, imprisonment and restitution to us, there can be no guarantee that such efforts will succeed. While counterfeiters often aim their sales at customers who might not have otherwise purchased our products due to lack of verifiability of origin and service, such counterfeit sales, to the extent they replace otherwise legitimate sales, could adversely affect our operating results.
OUR OPERATING RESULTS AND FUTURE PROSPECTS COULD BE MATERIALLY HARMED BY UNCERTAINTIES OF REGULATION OF THE INTERNET
Currently, few laws or regulations apply directly to access or commerce on the Internet. We could be materially adversely affected by regulation of the Internet and Internet commerce in any country where we operate. Such regulations could include matters such as voice over the Internet or using IP, encryption technology, sales or other taxes on Internet product or service sales, and access charges for Internet service providers. The adoption of regulation of the Internet and Internet commerce could decrease demand forsecurity measures, (i) our products and atservices, and (ii) the same time, increaseservers, data centers, and cloud-based solutions on which our and third-party data is stored, are vulnerable to cyber-attacks, data breaches, malware, and disruptions from unauthorized access, tampering or other theft or misuse, including by employees, malicious actors or inadvertent error. Such events have and could in the costfuture compromise or disrupt access to or the operation of selling our products, whichservices, and networks or those of our customers, or result in the information stored on our systems or those of our customers being improperly accessed, processed, disclosed, lost or stolen. We have not to date experienced a material event; however, the occurrence of any such event in the future could subject us to liability to our customers, suppliers, business partners and others, give rise to legal and/or regulatory action, could damage our reputation or otherwise materially harm our business, and could have a material adverse effect on our business, operating results, and financial condition.
CHANGES IN TELECOMMUNICATIONS REGULATION AND TARIFFS COULD HARM OUR PROSPECTS AND FUTURE SALES
Changes in telecommunications requirements, or regulatory requirements in other industries in which we operate, in the United States or other countries could affect the sales of our products. In particular, we believe that there may be future changes in U.S. telecommunications regulations that could slow the expansion of the service providers’ network infrastructures and materially adversely affect our business, operating results, and financial condition, including "net neutrality" rules to the extent they impact decisions on investment in network infrastructure.
Future changes in tariffs by regulatory agencies or application of tariff requirements to currently untariffed services could affect the sales of our products for certain classes of customers. Additionally, in the United States, our products must comply with various requirements and regulations of the Federal Communications Commission and other regulatory authorities. In countries outside of the United States, our products must meet various requirements of local telecommunications and other industry authorities. Changes in tariffs or failure by us to obtain timely approval of products could have a material adverse effect on our business, operating results, and financial condition.
FAILURE TO RETAIN AND RECRUIT KEY PERSONNEL WOULD HARM OUR ABILITY TO MEET KEY OBJECTIVES
Our success has always depended in large part on our ability to attract and retain highly skilled technical, managerial, sales, and marketing personnel. Competition for these personnel is intense, especially in the Silicon Valley area of Northern California. Stock incentive plans are designed to reward employees for their long-term contributions and provide incentives for them to remain with us. Volatility or lack of positive performance in our stock price or equity incentive awards, or changes to our overall compensation program, including our stock incentive program, resulting from the management of share dilution and share-based compensation expense or otherwise, may also adversely affect our ability to retain key employees. As a result of one or more of these factors, we may increase our hiring in geographic areas outside the United States, which could subject us to additional geopolitical and exchange rate risk. The loss of services of any of our key personnel; the inability to retain and attract qualified personnel in the future; or delays in hiring required personnel, particularly engineering and sales personnel, could make it difficult to meet key objectives, such as timely and effective product introductions. In addition, companies in our industry whose employees accept
positions with competitors frequently claim that competitors have engaged in improper hiring practices. We have received these claims in the past and may receive additional claims to this effect in the future.
ADVERSE RESOLUTION OF LITIGATION OR GOVERNMENTAL INVESTIGATIONS MAY HARM OUR OPERATING RESULTS OR FINANCIAL CONDITION
We are a party to lawsuits in the normal course of our business. Litigation can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. For example, Brazilian authorities have investigated our Brazilian subsidiary and certain of its former employees, as well as a Brazilian importer of our products, and its affiliates and employees, relating to alleged evasion of import taxes and alleged improper transactions involving the subsidiary and the importer. Brazilian tax authorities have assessed claims against our Brazilian subsidiary based on a theory of joint liability with the Brazilian importer for import taxes, interest, and penalties. The asserted claims by Brazilian federal tax authorities which remain are for calendar years 2003 through 2007, and the asserted claims by the tax authorities from the state of Sao Paulo are for calendar years 2005 through 2007. The total asserted claims by Brazilian state and federal tax authorities aggregate to $258 million for the alleged evasion of import and other taxes, $1.5 billion for interest, and $1.2 billion for various penalties, all determined using an exchange rate as of July 29, 2017. We have completed a thorough review of the matters and believe the asserted claims against our Brazilian subsidiary are without merit, and we are defending the claims vigorously. While we believe there is no legal basis for the alleged liability, due to the complexities and uncertainty surrounding the judicial process in Brazil and the nature of the claims asserting joint liability with the importer, we are unable to determine the likelihood of an unfavorable outcome against our Brazilian subsidiary and are unable to reasonably estimate a range of loss, if any. We do not expect a final judicial determination for several years. An unfavorable resolution of lawsuits or governmental investigations could have a material adverse effect on our business, operating results, or financial condition. For additional information regarding certain of the matters in which we are involved, see Item 3, “Legal Proceedings,” contained in Part I of this report.
CHANGES IN OUR PROVISION FOR INCOME TAXES OR ADVERSE OUTCOMES RESULTING FROM EXAMINATION OF OUR INCOME TAX RETURNS COULD ADVERSELY AFFECT OUR RESULTS
Our provision for income taxes is subject to volatility and could be adversely affected by earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates; by changes in the valuation of our deferred tax assets and liabilities; by changes to domestic manufacturing deduction laws, regulations, or interpretations thereof; by expiration of or lapses in tax incentives; by transfer pricing adjustments, including the effect of acquisitions on our intercompany R&D cost sharing arrangement and legal structure; by tax effects of nondeductible compensation; by tax costs related to intercompany realignments; by changes in accounting principles; or by changes in tax laws and regulations, treaties, or interpretations thereof, including possible changes to the taxation of earnings of our foreign subsidiaries, the deductibility of expenses attributable to foreign income, or the foreign tax credit rules. Significant judgment is required to determine the recognition and measurement attribute prescribed in the accounting guidance for uncertainty in income taxes. The Organisation for Economic Co-operation and Development (OECD), an international association comprised of 35 countries, including the United States, has recently made changes to numerous long-standing tax principles. There can be no assurance that these changes, once adopted by countries, will not have an adverse impact on our provision for income taxes. Further, as a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates. Our failure to meet these commitments could adversely impact our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition.
OUR BUSINESS AND OPERATIONS ARE ESPECIALLY SUBJECT TO THE RISKS OF EARTHQUAKES, FLOODS, AND OTHER NATURAL CATASTROPHIC EVENTS
Our corporate headquarters, including certain of our research and development operations are located in the Silicon Valley area of Northern California, a region known for seismic activity. Additionally, a certain number of our facilities are located near rivers that have experienced flooding in the past. Also certain of our suppliers and logistics centers are located in regions that have been or may be affected by earthquake, tsunami and flooding activity which in the past has disrupted, and in the future could disrupt, the flow of components and delivery of products. A significant natural disaster, such as an earthquake, a hurricane, volcano, or a flood, could have a material adverse impact on our business, operating results, and financial condition.
MAN-MADE PROBLEMS SUCH AS CYBER-ATTACKS, DATA PROTECTION BREACHES, COMPUTER VIRUSES OR TERRORISM MAY DISRUPT OUR OPERATIONS, HARM OUR OPERATING RESULTS AND DAMAGE OUR REPUTATION, AND CYBER-ATTACKS OR DATA PROTECTION BREACHES ON OUR CUSTOMERS’ NETWORKS, OR IN CLOUD-BASED SERVICES PROVIDED BY OR ENABLED BY US, COULD RESULT IN LIABILITY FOR US, DAMAGE OUR REPUTATION OR OTHERWISE HARM OUR BUSINESS
Despite our implementation of network security measures, the products and services we sell to customers, and our servers, data centers and the cloud-based solutions on which our data, and data of our customers, suppliers and business partners are stored, are vulnerable to cyber-attacks, data protection breaches, computer viruses, and similar disruptions from unauthorized tampering or human error. Any such event could compromise our networks or those of our customers, and the information stored on our networks or those of our customers could be accessed, publicly disclosed, lost or stolen, which could subject us to liability to our customers, suppliers, business partners and others, and could have a material adverse effecton our business, operating results, and financial condition and may cause damage to our reputation. Efforts to limit the ability of malicious third partiesactors to disrupt the operations of the Internet or undermine our own security efforts may be costly to implement and meet with resistance, and may not be successful. Breaches of network security in our customers’ networks, or in cloud-based services provided by or enabled by us, regardless of whether the breach is attributable to a vulnerability in our products or services, could result in claims of liability foragainst us, damage our reputation or otherwise materially harm our business.
In addition, the continued threatVulnerabilities and critical security defects, prioritization decisions regarding remedying vulnerabilities or security defects, failure of terrorism and heightenedthird-party providers to remedy vulnerabilities or security and military actiondefects, or customers not deploying security releases or deciding not to upgrade products, services or solutions could result in response to this threat, or any future actsclaims of terrorism, may cause further disruptions to the economies of the United States and other countries and create further uncertaintiesliability against us, damage our reputation, or otherwise materially harm our business, operating results,business.
The products and financial condition. Likewise, events such as lossservices we sell to customers, and our cloud-based solutions, inevitably contain vulnerabilities or critical security defects which have not been remedied and cannot be disclosed without compromising security. We also make prioritization decisions in determining which vulnerabilities or security defects to fix and the timing of infrastructurethese fixes. Customers may also need to test security releases before they can be deployed which can delay implementation. In addition, we rely on third-party providers of software and utilitiescloud-based services, such as energy, transportation,and we cannot control the rate at which they remedy vulnerabilities. When customers do not deploy specific releases, or telecommunications could have similar negative impacts. Todecide not to upgrade to the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or the manufacture or shipmentlatest versions of our products, services or cloud-based solutions containing the release, they may be left vulnerable. Vulnerabilities and critical security defects, prioritization errors in remedying vulnerabilities or security defects, failure of third-party providers to remedy vulnerabilities or security defects, or customers not deploying specific releases or deciding not to upgrade products, services or solutions could result in claims of liability against us, damage our reputation or otherwise materially harm our business.
Our business, operating results and financial condition could be materially harmed by regulatory uncertainty applicable to our products and adversely affected.services.
IF WE DO NOT SUCCESSFULLY MANAGE OUR STRATEGIC ALLIANCES, WE MAY NOT REALIZE THE EXPECTED BENEFITS FROM SUCH ALLIANCES AND WE MAY EXPERIENCE INCREASED COMPETITION OR DELAYS IN PRODUCT DEVELOPMENT
We have several strategic alliances with large and complex organizations and other companies withChanges in regulatory requirements applicable to the industries in which we work to offer complementaryoperate, in the United States and in other countries, could materially affect the sales of our products and services. In particular, changes in telecommunications regulations could impact our service provider customers’ purchase of our products and offers, and they could also impact sales of our own regulated offers. In addition, evolving legal requirements restricting or controlling the collection, processing, or cross-border transmission of data, including regulation of cloud-based services, could materially affect our customers’ ability to use, and our ability to sell, our products and offers. Additional areas of uncertainty that could impact sales of our products and offers include laws and regulations related to encryption technology, environmental sustainability (including climate change), export control,
product certification, and national security controls applicable to our supply chain. For example, new laws and regulations in the pastresponse to climate change could result in increased energy efficiency for our products and increased compliance and energy costs. Changes in regulatory requirements in any of these areas could have established a joint venturematerial adverse effect on our business, operating results, and financial condition.
Risks Related to market services associated with our Cisco Unified Computing System products. These arrangements are generally limited to specific projects, the goalOwnership of which is generally to facilitate product compatibility and adoption of industry standards. There can be no assurance we will realize the expected benefits from these strategic alliances or from the joint venture. If successful, these relationshipsOur Stock
Our stock price may be mutually beneficial and result in industry growth. However, alliances carry an element of risk because, in most cases, we must compete in some business areas with a company with which we have a strategic alliance and, at the same time, cooperate with that company in other business areas. Also, if these companies fail to perform or if these relationships fail to materialize as expected, we could suffer delays in product development or other operational difficulties. Joint ventures can be difficult to manage, given the potentially different interests of joint venture partners.
OUR STOCK PRICE MAY BE VOLATILEvolatile.
Historically, our common stock has experienced substantial price volatility, particularly as a result of variations between our actual financial results and the published expectations of analysts and as a result of announcements by our competitors and us. Furthermore, speculation in the press or investment community about our strategic position, financial condition, results of operations, business, security of our products, or significant transactions can cause changes in our stock price. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies, in particular, and that have often been unrelated to the operating performance of these companies. These factors, as well as general economic and political conditions and the announcement of proposed and completed acquisitions or other significant transactions, or any difficulties associated with such transactions, by us or our current or potential competitors, may materially adversely affect the market price of our common stock in the future. Additionally, volatility, lack of positive performance in our stock price or changes to our overall compensation program, including our stock incentive program, may adversely affect our ability to retain key employees, virtually all of whom are compensated, in part, based on the performance of our stock price.
THERE CAN BE NO ASSURANCE THAT OUR OPERATING RESULTS AND FINANCIAL CONDITION WILL NOT BE ADVERSELY AFFECTED BY OUR INCURRENCE OF DEBT
As of the end of fiscal 2017, we have senior unsecured notes outstanding in an aggregate principal amount of $30.5 billion that mature at specific dates from calendar year 2018 through 2040. We have also established a commercial paper program under which we may issue short-term, unsecured commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of $10.0 billion, and we had$3.2 billion commercial paper notes outstanding under this program as of July 29, 2017. The outstanding senior unsecured notes bear fixed-rate interest payable semiannually, except $2.9 billion of the notes which bears interest at a floating rate payable quarterly. The fair value of the long-term debt is subject to market interest rate volatility. The instruments governing the senior unsecured notes contain certain covenants applicable to us and our wholly-owned subsidiaries that may adversely affect our ability to incur certain liens or engage in certain types of sale and leaseback transactions. In addition, we will be required to have available in the United States sufficient cash to service the interest on our debt and repay all of our notes on maturity. There can be no assurance that our incurrence of this debt or any future debt will be a better means of providing liquidity to us than would our use of our existing cash resources, including cash currently held offshore. Further, we cannot be assured that our maintenance of this indebtedness or incurrence of future indebtedness will not adversely affect our operating results or financial condition. In addition, changes by any rating agency to our credit rating can negatively impact the value and liquidity of both our debt and equity securities, as well as the terms upon which we may borrow under our commercial paper program or future debt issuances.
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Item 1B. | Unresolved Staff Comments |
Not applicable.None.
Our corporate headquarters are located at an owned site in San Jose, California, in the United States of America. The locations of our headquarters by geographic segment are as follows:
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Americas | | EMEA | | APJC |
San Jose, California, USA | | Amsterdam, Netherlands | | Singapore |
In addition to our headquarters site, we own additional sites in the United States, which include facilities in the surrounding areas of San Jose, California; Research Triangle Park, North Carolina; Richardson, Texas; and Lawrenceville, Georgia; and Boxborough, Massachusetts.Georgia. We also own land for expansion in some of these locations. In addition, we lease office space in many U.S. locations.
Outside the United States our operations are conducted primarily in leased sites, such as our Globalisation Centre East campus in Bangalore, India.sites. Other significant sites (in addition to the two non-U.S. headquarters locations) are located in Australia, Belgium, Canada, China, France, Germany, India, Israel, Japan, Mexico, Poland, and the United Kingdom.
We believe that our existing facilities, including both owned and leased, are in good condition and suitable for the conduct of our business. For additional information regarding obligations under operating leases, see Note 12 to the Consolidated Financial Statements.
BrazilBrazilian authorities have investigated our Brazilian subsidiaryFor a description of pending legal proceedings in which we are involved, see Note 14 “Commitments and certain of its former employees, as well as a Brazilian importer of our products, and its affiliates and employees, relating to alleged evasion of import taxes and alleged improper transactions involving the subsidiary and the importer. Brazilian tax authorities have assessed claims against our Brazilian subsidiary based on a theory of joint liability with the Brazilian importer for import taxes, interest, and penalties. In addition to claims asserted by the Brazilian federal tax authorities in prior fiscal years, tax authorities from the Brazilian state of Sao Paulo have asserted similar claims on the same legal basis in prior fiscal years.
The asserted claims by Brazilian federal tax authorities that remain are for calendar years 2003 through 2007, and the asserted claims by the tax authorities from the state of Sao Paulo are for calendar years 2005 through 2007. The total asserted claims by Brazilian state and federal tax authorities aggregate to $258 million for the alleged evasion of import and other taxes, $1.5 billion for interest, and $1.2 billion for various penalties, all determined using an exchange rate as of July 29, 2017. We have completed a thorough reviewContingencies - (f) Legal Proceedings” of the matters and believe the asserted claims against our Brazilian subsidiary are without merit, and we are defending the claims vigorously. While we believe there is no legal basis for the alleged liability, dueNotes to the complexities and uncertainty surrounding the judicial processConsolidated Financial Statements included in Brazil and the nature of the claims asserting joint liability with the importer, we are unable to determine the likelihood of an unfavorable outcome against our Brazilian subsidiary and are unable to reasonably estimate a range of loss, if any. We do not expect a final judicial determination for several years.
SRI International On September 4, 2013, SRI International, Inc. (“SRI”) asserted patent infringement claims against us in the U.S. District Court for the District of Delaware, accusing our products and services in the area of network intrusion detection of infringing two U.S. patents. SRI sought monetary damages of at least a reasonable royalty and enhanced damages. The trial on these claims began on May 2, 2016 and on May 12, 2016, the jury returned a verdict finding willful infringement of the asserted patents. The jury awarded SRI damages of $23.7 million. On May 25, 2017, the Court awarded SRI enhanced damages and attorneys’ fees, entered judgment in the new amount of $57.0 million, and ordered an ongoing royalty of 3.5% through the expiration of the patents in 2018. We have appealed to the United States Court of Appeals for the Federal Circuit on various grounds. We believe we have strong arguments to overturn the jury verdict and/or reduce the damages award. While the ultimate outcome of the case may still result in a loss, we do not expect it to be material.
SSL SSL Services, LLC (“SSL”) has asserted claims for patent infringement against us in the U.S. District Court for the Eastern District of Texas. The proceeding was instituted on March 25, 2015. SSL alleges that our AnyConnect products that include Virtual Private Networking functions infringed a U.S. patent owned by SSL. SSL seeks money damages from us. On August 18, 2015, we petitioned the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office to review whether the patent SSL has asserted against us is valid over prior art. On February 23, 2016, a PTAB multi-judge panel found a reasonable likelihood that we would prevail in showing that SSL’s patent claims are unpatentable and instituted proceedings. On June 28, 2016, in light of the PTAB's decision to review the patent's validity, the district court issued an order staying the district court case pending the final written decision from the PTAB. On February 22, 2017, following a hearing, the PTAB issued its Final Written Decision that the patent's claims are unpatentable. SSL has filed a notice that it intends to appeal this decision to the Court of Appeals for the Federal Circuit. We believe we have strong arguments that our products do not infringe and the patent is invalid. If we do not prevail and a jury were to find that our AnyConnect products infringe, we believe damages, as appropriately measured, would be immaterial. Due to uncertainty surrounding patent litigation processes, we are unable to reasonably estimate the ultimate outcomeItem 8 of this litigation at this time.Annual Report on Form 10-K, which is incorporated herein by reference.
Straight Path On September 24, 2014, Straight Path IP Group, Inc. (“Straight Path”) asserted patent infringement claims against us in the U.S. District Court for the Northern District of California, accusing our 9971 IP Phone, Unified Communications Manager working in conjunction with 9971 IP Phones, and Video Communication Server products of infringement. All of the asserted patents have expired, so Straight Path seeks monetary damages for the alleged past infringement. We believe we have strong non-infringement and other defenses. A jury trial is scheduled for December 4, 2017. If we do not prevail and a jury were to find that our products infringe, we believe damages, as appropriately measured, would be immaterial. Due to uncertainty surrounding patent litigation processes, we are unable to reasonably estimate the ultimate outcome of this litigation at this time.
DXC Technology On August 21, 2015, Cisco and Cisco Systems Capital Corporation (“Cisco Capital”) filed an action in Santa Clara County Superior Court for declaratory judgment and breach of contract against HP Inc. (“HP”) regarding a services agreement for management services of a third party’s network. HP prepaid the service agreement through a financing arrangement with Cisco Capital. HP terminated its agreement with us, and pursuant to the terms of the service agreement with HP, we determined the credit HP was entitled to receive under the agreement. HP disputed our credit calculation and contended that we owe a larger credit to HP than we had calculated. In December 2015, we filed an amended complaint which dropped the breach of contract claim in light of HP’s continuing payments to Cisco Capital under the financing arrangement. On January 19, 2016, HP Inc. filed a counterclaim for breach of contract simultaneously with its answer to the amended complaint. The court has set a trial date of November 6, 2017. DXC Technology Corporation (“DXC”) reported that it is the party in interest in this matter pursuant to the Separation and Distribution Agreement between the then Hewlett-Packard Co. and Hewlett Packard Enterprise Company (“HPE") and the subsequent Separation and Distribution Agreement between HPE and DXC. On August 30, 2017, Cisco and DXC attended a court ordered mediation and, on September 1, 2017, the parties jointly informed the court that they are continuing to discuss the details of a business resolution to the dispute. We are unable to reasonably estimate the ultimate outcome of this litigation due to uncertainty surrounding the litigation process. However, we do not anticipate that our obligation, if any, regarding the final outcome of the dispute would be material.
In addition, we are subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including intellectual property litigation. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows. For additional information regarding intellectual property litigation, see “Part II, Item 1A. Risk Factors-We may be found to infringe on intellectual property rights of others” herein.
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Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
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(a) | Cisco common stock is traded on the NASDAQ Global Select Market under the symbol CSCO. Information regarding quarterly cash dividends declared on Cisco’s common stock during fiscal 2017 and 2016 may be found in Supplementary Financial Data on page 118 of this report. There were 42,344registered shareholders as of September 1, 2017. The high and low common stock sales prices per share for each period were as follows:
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(a)Cisco common stock is traded on the Nasdaq Global Select Market under the symbol CSCO. There were 36,408registered stockholders as of September 3, 2021. |
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| FISCAL 2017 | | FISCAL 2016 |
Fiscal Quarter | High | | Low | | High | | Low |
First quarter | $ | 31.95 |
| | $ | 29.86 |
| | $ | 29.38 |
| | $ | 23.03 |
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Second quarter | $ | 31.89 |
| | $ | 29.12 |
| | $ | 29.49 |
| | $ | 22.47 |
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Third quarter | $ | 34.53 |
| | $ | 30.42 |
| | $ | 28.70 |
| | $ | 22.46 |
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Fourth quarter | $ | 34.60 |
| | $ | 30.37 |
| | $ | 31.15 |
| | $ | 25.81 |
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(c) | Issuer purchases of equity securities (in millions, except per-share amounts): |
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Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
April 30, 2017 to May 27, 2017 | 5 |
| | $ | 31.64 |
| | 5 |
| | $ | 12,747 |
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May 28, 2017 to June 24, 2017 | 16 |
| | $ | 31.67 |
| | 16 |
| | $ | 12,222 |
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June 25, 2017 to July 29, 2017 | 17 |
| | $ | 31.55 |
| | 17 |
| | $ | 11,697 |
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Total | 38 |
| | $ | 31.61 |
| | 38 |
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(c)Issuer purchases of equity securities (in millions, except per-share amounts): | | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
May 2, 2021 to May 29, 2021 | 5 | | | $ | 52.50 | | | 5 | | | $ | 8,477 | |
May 30, 2021 to June 26, 2021 | 4 | | | $ | 53.50 | | | 4 | | | $ | 8,240 | |
June 27, 2021 to July 31, 2021 | 6 | | | $ | 53.82 | | | 6 | | | $ | 7,940 | |
Total | 15 | | | $ | 53.30 | | | 15 | | | |
On September 13, 2001, we announced that our Board of Directors had authorized a stock repurchase program. As of July 29, 2017, our Board of Directors had authorized the repurchase of up to $112 billion of common stock under this program. During fiscal 2017, we repurchased and retired 118 million shares of our common stock at an average price of $31.38 per share for an aggregate purchase price of $3.7 billion. As of July 29, 2017, we had repurchased and retired 4.7 billion shares of our common stock at an average price of $21.30 per share for an aggregate purchase price of $100.3 billion since inception of the stock repurchase program, and31, 2021, the remaining authorized amount for stock repurchases under this program was $11.7is approximately $7.9 billion with no termination date.
For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of shares withheld to meet applicable tax withholding requirements. Although these withheld shares are not issued or considered common stock repurchases under our stock repurchase program and therefore are not included in the preceding table, they are treated as common stock repurchases in our financial statements as they reduce the number of shares that would have been issued upon vesting (see Note 1315 to the Consolidated Financial Statements).
Stock Performance Graph
The information contained in this Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent that Cisco specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934.Act.
The following graph shows a five-year comparison of the cumulative total shareholderstockholder return on Cisco common stock with the cumulative total returns of the S&P 500 Index, and the S&P Information Technology Index. The graph tracks the performance of a $100 investment in the Company’s common stock and in each of the indexes (with the reinvestment of all dividends) on the date specified. ShareholderStockholder returns over the indicated period are based on historical data and should not be considered indicative of future shareholderstockholder returns.
Comparison of 5-Year Cumulative Total Return Among Cisco Systems, Inc.,
the S&P 500 Index, and the S&P Information Technology Index
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| July 2016 | | July 2017 | | July 2018 | | July 2019 | | July 2020 | | July 2021 |
Cisco Systems, Inc. | $ | 100.00 | | | $ | 106.89 | | | $ | 149.02 | | | $ | 203.37 | | | $ | 172.26 | | | $ | 212.11 | |
S&P 500 | $ | 100.00 | | | $ | 116.13 | | | $ | 134.99 | | | $ | 147.86 | | | $ | 160.26 | | | $ | 222.51 | |
S&P Information Technology | $ | 100.00 | | | $ | 130.17 | | | $ | 168.84 | | | $ | 196.81 | | | $ | 254.67 | | | $ | 374.44 | |
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| July 2012 | | July 2013 | | July 2014 | | July 2015 | | July 2016 | | July 2017 |
Cisco Systems, Inc. | $ | 100.00 |
| | $ | 167.41 |
| | $ | 175.84 |
| | $ | 198.08 |
| | $ | 220.38 |
| | $ | 235.57 |
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S&P 500 | $ | 100.00 |
| | $ | 124.81 |
| | $ | 149.03 |
| | $ | 159.89 |
| | $ | 170.86 |
| | $ | 198.42 |
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S&P Information Technology | $ | 100.00 |
| | $ | 111.14 |
| | $ | 145.84 |
| | $ | 160.62 |
| | $ | 176.85 |
| | $ | 230.20 |
|
|
| | | | |
Item 6. | Selected Financial Data |
Five Years Ended July 29, 2017 (in millions, except per-share amounts)
|
| | | | | | | | | | | | | | | | | | | |
Years Ended | July 29, 2017 | | July 30, 2016 (1)(2) | | July 25, 2015 (1) | | July 26, 2014 (3) | | July 27, 2013 (4) |
Revenue | $ | 48,005 |
| | $ | 49,247 |
| | $ | 49,161 |
| | $ | 47,142 |
| | $ | 48,607 |
|
Net income | $ | 9,609 |
| | $ | 10,739 |
| | $ | 8,981 |
| | $ | 7,853 |
| | $ | 9,983 |
|
Net income per share—basic | $ | 1.92 |
| | $ | 2.13 |
| | $ | 1.76 |
| | $ | 1.50 |
| | $ | 1.87 |
|
Net income per share—diluted | $ | 1.90 |
| | $ | 2.11 |
| | $ | 1.75 |
| | $ | 1.49 |
| | $ | 1.86 |
|
Shares used in per-share calculation—basic | 5,010 |
| | 5,053 |
| | 5,104 |
| | 5,234 |
| | 5,329 |
|
Shares used in per-share calculation—diluted | 5,049 |
| | 5,088 |
| | 5,146 |
| | 5,281 |
| | 5,380 |
|
Cash dividends declared per common share | $ | 1.10 |
| | $ | 0.94 |
| | $ | 0.80 |
| | $ | 0.72 |
| | $ | 0.62 |
|
Net cash provided by operating activities | $ | 13,876 |
| | $ | 13,570 |
| | $ | 12,552 |
| | $ | 12,332 |
| | $ | 12,894 |
|
| July 29, 2017 | | July 30, 2016 | | July 25, 2015 | | July 26, 2014 | | July 27, 2013 |
Cash and cash equivalents and investments | $ | 70,492 |
| | $ | 65,756 |
| | $ | 60,416 |
| | $ | 52,074 |
| | $ | 50,610 |
|
Total assets | $ | 129,818 |
| | $ | 121,652 |
| | $ | 113,373 |
| | $ | 105,070 |
| | $ | 101,138 |
|
Debt | $ | 33,717 |
| | $ | 28,643 |
| | $ | 25,354 |
| | $ | 20,845 |
| | $ | 16,158 |
|
Deferred revenue | $ | 18,494 |
| | $ | 16,472 |
| | $ | 15,183 |
| | $ | 14,142 |
| | $ | 13,423 |
|
| |
(1)
| In the second quarter of fiscal 2016, Cisco completed the sale of the SP Video CPE Business. As a result, revenue from this portion of the Service Provider Video product category will not recur in future periods. The sale resulted in a pre-tax gain of $253 million net of certain transaction costs. The years ended July 30, 2016 and July 25, 2015 include SP Video CPE Business revenue of $504 million and $1,846 million, respectively. |
| |
(2)
| In fiscal 2016 Cisco recognized total tax benefits of $593 million for the following: i) the Internal Revenue Service (IRS) and Cisco settled all outstanding items related to Cisco’s federal income tax returns for fiscal 2008 through fiscal 2010, as a result of which Cisco recorded a net tax benefit of $367 million ii) the Protecting Americans from Tax Hikes Act of 2015 reinstated the U.S. federal R&D tax credit permanently, as a result of which Cisco recognized tax benefits of $226 million of which $81 million related to fiscal 2015 R&D expenses. |
| |
(3)
| In the second quarter of fiscal 2014, Cisco recorded a pre-tax charge of $655 million to product cost of sales, which corresponds to $526 million, net of tax, for the expected remediation cost for certain products sold in prior fiscal years containing memory components manufactured by a single supplier between 2005 and 2010. See Note 12(f) to the Consolidated Financial Statements. |
| |
(4)
| In the second quarter of fiscal 2013, the IRS and Cisco settled all outstanding items related to Cisco’s federal income tax returns for fiscal 2002 through fiscal 2007. As a result of the settlement, Cisco recorded a net tax benefit of $794 million. Also during the second quarter of fiscal 2013, the American Taxpayer Relief Act of 2012 reinstated the U.S. federal R&D tax credit, retroactive to January 1, 2012. As a result, Cisco recognized tax benefits of $184 million in fiscal 2013, of which $72 million related to fiscal 2012 R&D expenses. |
No other factors materially affected the comparability of the information presented above.
|
| |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This Annual Report on Form 10-K, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “momentum,” “seeks,” “estimates,” “continues,” “endeavors,” “strives,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, future responses to and effects of the COVID-19 pandemic, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those under “Part I, Item 1A. Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
OVERVIEW
Cisco designs and sells a broad range of technologies that have been poweringpower the Internet since 1984. AcrossInternet. We are integrating our platforms across networking, security, collaboration, applications and the cloud,cloud. These platforms are designed to help our evolving intent-based technologies are constantly learningcustomers manage more users, devices and adaptingthings connecting to their networks. This will enable us to provide customers with a highly secure, intelligent platform for their digital business.
A summary of our results is as follows (in millions, except percentages and per-share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Years Ended | |
| July 31, 2021 | | July 25, 2020 | | Variance | | July 31, 2021 | | July 25, 2020 | | Variance | |
Revenue | $ | 13,126 | | | $ | 12,154 | | | 8 | % | | $ | 49,818 | | | $ | 49,301 | | | 1 | % | |
Gross margin percentage | 63.6 | % | | 63.2 | % | | 0.4 | | pts | 64.0 | % | | 64.3 | % | | (0.3) | | pts |
Research and development | $ | 1,713 | | | $ | 1,565 | | | 9 | % | | $ | 6,549 | | | $ | 6,347 | | | 3 | % | |
Sales and marketing | $ | 2,448 | | | $ | 2,218 | | | 10 | % | | $ | 9,259 | | | $ | 9,169 | | | 1 | % | |
General and administrative | $ | 521 | | | $ | 494 | | | 5 | % | | $ | 2,152 | | | $ | 1,925 | | | 12 | % | |
Total R&D, sales and marketing, general and administrative | $ | 4,682 | | | $ | 4,277 | | | 9 | % | | $ | 17,960 | | | $ | 17,441 | | | 3 | % | |
Total as a percentage of revenue | 35.7 | % | | 35.2 | % | | 0.5 | | pts | 36.1 | % | | 35.4 | % | | 0.7 | | pts |
Amortization of purchased intangible assets included in operating expenses | $ | 79 | | | $ | 33 | | | 139 | % | | $ | 215 | | | $ | 141 | | | 52 | % | |
Restructuring and other charges included in operating expenses | $ | 8 | | | $ | 127 | | | (94) | % | | $ | 886 | | | $ | 481 | | | 84 | % | |
Operating income as a percentage of revenue | 27.2 | % | | 26.7 | % | | 0.5 | | pts | 25.8 | % | | 27.6 | % | | (1.8) | | pts |
Interest and other income (loss), net | $ | 160 | | | $ | 59 | | | 171 | % | | $ | 429 | | | $ | 350 | | | 23 | % | |
Income tax percentage | 19.4 | % | | 20.3 | % | | (0.9) | | pts | 20.1 | % | | 19.7 | % | | 0.4 | | pts |
Net income | $ | 3,009 | | | $ | 2,636 | | | 14 | % | | $ | 10,591 | | | $ | 11,214 | | | (6) | % | |
Net income as a percentage of revenue | 22.9 | % | | 21.7 | % | | 1.2 | | pts | 21.3 | % | | 22.7 | % | | (1.4) | | pts |
Earnings per share—diluted | $ | 0.71 | | | $ | 0.62 | | | 15 | % | | $ | 2.50 | | | $ | 2.64 | | | (5) | % | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Years Ended | |
| July 29, 2017 | | July 30, 2016 | | Variance | | July 29, 2017 | | July 30, 2016 | | Variance | |
Revenue (1) | $ | 12,133 |
| | $ | 12,638 |
| | (4.0 | )% | | $ | 48,005 |
| | $ | 49,247 |
| | (2.5 | )% | |
Gross margin percentage | 62.2 | % | | 63.1 | % | | (0.9 | ) | pts | 63.0 | % | | 62.9 | % | | 0.1 |
| pts |
Research and development | $ | 1,499 |
| | $ | 1,601 |
| | (6.4 | )% | | $ | 6,059 |
| | $ | 6,296 |
| | (3.8 | )% | |
Sales and marketing | $ | 2,318 |
| | $ | 2,443 |
| | (5.1 | )% | | $ | 9,184 |
| | $ | 9,619 |
| | (4.5 | )% | |
General and administrative | $ | 495 |
| | $ | 533 |
| | (7.1 | )% | | $ | 1,993 |
| | $ | 1,814 |
| | 9.9 | % | |
Total R&D, sales and marketing, general and administrative | $ | 4,312 |
| | $ | 4,577 |
| | (5.8 | )% | | $ | 17,236 |
| | $ | 17,729 |
| | (2.8 | )% | |
Total as a percentage of revenue | 35.5 | % | | 36.2 | % | | (0.7 | ) | pts | 35.9 | % | | 36.0 | % | | (0.1 | ) | pts |
Amortization of purchased intangible assets included in operating expenses | $ | 58 |
| | $ | 82 |
| | (29.3 | )% | | $ | 259 |
| | $ | 303 |
| | (14.5 | )% | |
Restructuring and other charges included in operating expenses | $ | 142 |
| | $ | 13 |
| | 992.3 | % | | $ | 756 |
| | $ | 268 |
| | 182.1 | % | |
Operating income as a percentage of revenue | 25.0 | % | | 26.1 | % | | (1.1 | ) | pts | 24.9 | % | | 25.7 | % | | (0.8 | ) | pts |
Income tax percentage | 23.8 | % | | 17.1 | % | | 6.7 |
| pts | 21.8 | % | | 16.9 | % | | 4.9 |
| pts |
Net income | $ | 2,424 |
| | $ | 2,813 |
| | (13.8 | )% | | $ | 9,609 |
| | $ | 10,739 |
| | (10.5 | )% | |
Net income as a percentage of revenue | 20.0 | % | | 22.3 | % | | (2.3 | ) | pts | 20.0 | % | | 21.8 | % | | (1.8 | ) | pts |
Earnings per share—diluted | $ | 0.48 |
| | $ | 0.56 |
| | (14.3 | )% | | $ | 1.90 |
| | $ | 2.11 |
| | (10.0 | )% | |
Fiscal 20172021 Compared with Fiscal 2016—Financial Performance2020
In fiscal 20172021, we delivered solid profitabilitygrowth in revenue in a very challenging environment. As customers have accelerated their digitization and strong operating cash flows.cloud investments stemming from the COVID-19 pandemic, we focused on executing and innovating to support and assist that transition. In the second half of fiscal 2021, we began to see customers prepare for office re-openings and hybrid work by increasing investments in their technologies. Total revenue increased by 1% compared with fiscal 2020. Our product revenue reflected growth in Security, partially offset by declines in Applications. Infrastructure Platforms was flat. We continued to make progress in the transition of our business model delivering increased software and subscriptions. We remain focused on accelerating innovation across our portfolio, and we believe that we have made continued progress on our strategic priorities. We continue to operate in a challenging macroeconomic and highly competitive environment, which has impacted, in particular, our NGN Routing and Switching areas. We saw weakness in the service provider customer market and we expect ongoing uncertainty in that area. In addition, we continued to see weakness in emerging countries in the aggregate. We experienced solid revenue growth in Security and Wireless, and we continued to make progress in the transition of our business model to increased software and subscriptions which is part of our strategy.environment. While the overall environment remains uncertain, we continue to aggressively invest in priority areas to drivewith the objective of driving profitable growth over the long term.
Total revenue decreased by 3% compared with fiscal 2016. Within total revenue, product revenue decreased 4% whilewas flat and service revenue increased by 3%4%. In the second quarter of fiscal 2016, we completed the sale of our SP Video CPE Business. Total company revenue for fiscal 2017 decreased 2% not including revenue from SP Video CPE products for fiscal 2016. Additionally, fiscal 2017Fiscal 2021 had 5253 weeks, compared with 5352 weeks in fiscal 2016,2020, thus our results for fiscal 20172021 reflect one lessan extra week compared with fiscal 2016.2020. We estimate that the additionala majority of our revenue associated withincrease was attributable to the extra weekweek. In fiscal 2021, total software revenue was approximately $265 million.$15.0 billion across all product areas and service, an increase of 7%. Within total software revenue, subscription revenue increased 15%. Total gross margin increaseddecreased by 0.10.3 percentage points. Product gross margin decreased by 0.2 percentage points, due to lower productivity benefits largely driven by ongoing costs related to supply chain constraints. The effect of pricing erosion was moderate. We have partnered with several of our key suppliers utilizing our volume purchasing and extending supply coverage, including revising supplier arrangements, to address supply chain challenges. As a percentage of revenue, research and development, sales and marketing, and general and administrative expenses, collectively, decreasedincreased by 0.10.7 percentage points. The total impact associated with the extra week on our cost of sales and operating expenses was approximately $150 million (excluding the impact of share-based compensation expense). Operating income as a percentage of revenue decreased by 0.81.8 percentage points, driven primarily by an increase inpoints. We incurred restructuring and other charges related to the restructuring action announcedof $886 million, which resulted in August 2016. Diluteda decrease of 6% in net income and a decrease of 5% in diluted earnings per share decreased by 10%, driven by an 11% decrease in net income. Net income was impacted by a higher effective tax rate, as compared with fiscal 2016, primarily due to the recognition of $448 million of net benefits to the provision for income taxes in fiscal 2016. These benefits were comprised of a settlement with the IRS of outstanding items related to the audit of our federal income tax returns covering the period from fiscal 2008 through fiscal 2010 and the permanent reinstatement of the U.S. federal R&D tax credit.share.
In terms of our geographic segments, revenue from the Americas decreased $1.0by $0.1 billion, driven in large part by lower product revenue in the Unites States. EMEA revenue decreasedincreased by $0.3 billion led by a productand revenue decline in the United Kingdom. Revenue in our APJC segment increased by $0.1 billion, led by service revenue growth in this segment. We saw revenue declines in many emerging countries across the world during fiscal 2017.$0.4 billion. The “BRICM” countries experienced a product revenue decline of 7%6% in the aggregate, driven by declinesa decrease in the emerging countries of Mexico, China and Brazil of 28%, 12% and 7%, respectively, partially offset by increased product revenue in Russia and Indiaacross each of 20% and 11%, respectively.the BRICM countries with the exception of India.
From a customer market standpoint, we experienced product revenue growth in the public sector and service provider markets partially offset by declines in the service providerenterprise and the public sectorcommercial markets. As fiscal 2021 progressed, we saw improvement in business momentum in our customer markets, and,which we believe was related to a lesser extent, in the commercial market. Product revenue in the enterprise market was flat. The decline in the service provider market was driven in part by the sale of the SP Video CPE Business as well as ongoing weakness in the service provider market.an improving global macroeconomic environment.
From a product category perspective, total company product revenue decreased 4%. This decrease was ledflat year over year, driven by growth in revenue in Security of 7%, offset by a product revenue decreases in Switching and NGN Routing of 5% and 4%, respectively. The decline in salesApplications of our Switching products1%. Infrastructure Platforms was primarily due to lower salesflat.
Fourth Quarter Snapshot
For the fourth quarter of fiscal 2017,2021, as compared with the fourth quarter of fiscal 2016,2020, total revenue decreasedincreased by 4%8%. Within the total revenue, product revenue decreased 5% whileincreased by 10% and service revenue increased by 1%3%. With regard to our geographic segment performance, on a year-over-year basis, revenue in the Americas, EMEA and EMEA each decreasedAPJC increased by 6%8%, while APJC had revenue growth of 6%. and 13%, respectively. From a product category perspective, totalwe experienced product revenue decrease was drivengrowth in Infrastructure Platforms and Security, offset by revenue decreases from Switching and NGN Routing products, with each decreasing 9% year over year.declines in Applications. Total gross margin decreasedincreased by 0.90.4 percentage points.points, driven by productivity benefits, and to a lesser extent, favorable product mix, partially offset by pricing erosion. As a percentage of revenue, research and development, sales and marketing, and general and administrative expenses collectively decreasedincreased by 0.70.5 percentage points. Operating income as a percentage of revenue decreasedincreased by 1.10.5 percentage points. DilutedNet income increased by 14% and diluted earnings per share decreasedincreased by 14%15%.
COVID-19 Pandemic Response Summary
During this extraordinary time, our priority has been supporting our employees, customers, partners and communities, while positioning Cisco for the future. 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. The actions we have taken and are taking include:
Employees
•Most of our global workforce is working from home.
•Seamless transition to work from home with a long-standing flexible work policy, and we build the prior year, primarilytechnologies that allow organizations to stay connected, secure and productive.
•For the remainder 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
•Provided a variety of free offers and trials for our Webex and security technologies as they dramatically shifted entire workforces to be remote.
Communities
•Committed significant funds to support both global and local pandemic response efforts.
•Provided technology and financial support for non-profits, first responders, and governments.
•Donated personal protective equipment to hospital workers including N95 masks and face shields 3D-printed by Cisco volunteers around the world.
We are moving towards a result of a 14% decrease in net income.hybrid work model, giving our employees the flexibility to work offsite or at onsite Cisco locations.
Strategy and Priorities
As our customers add billions of new connections to their enterprises, we believeand as more applications move to a multicloud environment, the network becomes even more critical. Our customers are navigating change at an unprecedented pace and our mission is becoming more critical than ever.to shape the future of the Internet by inspiring new possibilities for them by helping transform their infrastructure, expand applications and analytics, address their security needs, and empower their teams. We believe that our customers are looking for intelligent networksoutcomes that are data-driven and provide meaningful business value through automation, security, and analytics.analytics across private, hybrid, and multicloud environments. Our visionstrategy is to deliver a highly secure, intelligent, platform for digital businesses. Our strategic priorities include accelerating our pace of innovation, increasing the value of the network, and delivering technology the wayhelp our customers wantconnect, secure, and automate in order to consume it.accelerate their digital agility in a cloud-first world.
For a full discussion of our strategy and focus areas,priorities, see Item“Item 1. Business.”
Other Key Financial Measures
The following is a summary of our other key financial measures for fiscal 20172021 compared with fiscal 20162020 (in millions, except annualized inventory turns)millions):
| | | | | | | | | | | | | | |
| | Fiscal 2021 | | Fiscal 2020 |
Cash and cash equivalents and investments | | $24,518 | | $29,419 |
Cash provided by operating activities | | $15,454 | | $15,426 |
Deferred revenue | | $22,164 | | $20,446 |
Repurchases of common stock—stock repurchase program | | $2,902 | | $2,619 |
Dividends paid | | $6,163 | | $6,016 |
Inventories | | $1,559 | | $1,282 |
|
| | | | |
| | Fiscal 2017 | | Fiscal 2016 |
Cash and cash equivalents and investments | | $70,492 | | $65,756 |
Cash provided by operating activities | | $13,876 | | $13,570 |
Deferred revenue | | $18,494 | | $16,472 |
Repurchases of common stock—stock repurchase program | | $3,706 | | $3,918 |
Dividends | | $5,511 | | $4,750 |
Inventories | | $1,616 | | $1,217 |
Annualized inventory turns | | 12.3 | | 14.6 |
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 2 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The accounting policies described below are significantly affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements, and actual results could differ materially from the amounts reported based on these policies.
The inputs into certain of our judgments, assumptions and estimates considered the economic implications of the COVID-19 pandemic on our critical and significant accounting estimates. The COVID-19 pandemic did not have a material impact on our significant judgments, assumptions and estimates that are reflected in our results for fiscal 2021. These estimates include: goodwill and identified purchased intangible assets and income taxes, among other items. The actual results that we experience may differ materially from our estimates. As the COVID-19 pandemic continues, many of our estimates could require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve our estimates may change materially in future periods.
Revenue Recognition
Revenue is recognized when allWe enter into contracts with customers that can include various combinations of the following criteria have been met:
Persuasive evidence of an arrangement exists. Contracts, Internet commerce agreements,products and customer purchase ordersservices which are generally used todistinct and accounted for as separate performance obligations. As a result, our contracts may contain multiple performance obligations. We determine the existence of an arrangement.
Delivery has occurred. Shipping documents and customer acceptance, when applicable,whether arrangements are used to verify delivery. For software, delivery is considered to have occurred upon unrestricted license access and license term commencement, when applicable.
The fee is fixed or determinable. We assessdistinct based on whether the fee is fixedcustomer can benefit from the product or determinable basedservice on the payment terms associatedits own or together with the transactionother resources that are readily available and whether our commitment to transfer the sales price is subjectproduct or service to refund or adjustment.
Collectibility is reasonably assured. We assess collectibility based primarily on the creditworthiness of the customer is separately identifiable from other obligations in the contract. We classify our hardware, perpetual software licenses, and SaaS as determineddistinct performance obligations. Term software licenses represent multiple obligations, which include software licenses and software maintenance. In transactions where we deliver hardware or software, we are typically the principal and we record revenue and costs of goods sold on a gross basis.
We recognize revenue upon transfer of control of promised goods or services in a contract with a customer in an amount that reflects the consideration we expect to receive in exchange for those products or services. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment, electronic delivery (or when the software is available for download by credit checksthe customer), or once title and analysis, as wellrisk of loss has transferred to the customer. Transfer of control can also occur over time for software maintenance and services as the customer’s payment history.
In instances where final acceptance ofcustomer receives the product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met. When a sale involves multiple deliverables, such as sales of products that include services, the multiple deliverables are evaluated to determine the unit of accounting, and the entire fee from the arrangement is allocated to each unit of accounting based on the relative selling price. Revenue is recognized when the revenue recognition criteria for each unit of accounting are met. For hosting arrangements, we recognize revenue ratablybenefit over the hosting period, while usagecontract term. Our hardware and perpetual software licenses are distinct performance obligations where revenue is recognized based on utilization. Software subscriptionupfront upon transfer of control. Term software licenses include multiple performance obligations where the term licenses are recognized upfront upon transfer of control, with the associated software maintenance revenue is deferred and recognized ratably over the subscriptioncontract term upon deliveryas services and software updates are provided. SaaS arrangements do not include the right for the customer to take possession of the first productsoftware during the term, and commencement of the term.
The amount oftherefore have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term as the customer consumes the services. On our product sales, we record consideration from shipping and handling on a gross basis within net product sales. We record our revenue net of any associated sales taxes.
Revenue is allocated among these performance obligations in a given periodmanner that reflects the consideration that we expect to be entitled to for the promised goods or services based on standalone selling prices (SSP). SSP is affected by ourestimated for each distinct performance obligation and judgment as to whether an arrangement includes multiple deliverables and, if so, our valuation of the units of accounting. Our multiple element arrangements may contain only deliverables within the scope of Accounting Standards Codification (ASC) 605, Revenue Recognition, deliverables within the scope of ASC 985-605, Software-Revenue Recognition, or a combination of both. According to the accounting guidance prescribedbe required in ASC 605, we use vendor-specific objectivetheir determination. The best evidence of sellingSSP is the observable price (VSOE) for each of those units, when available. We determine VSOE based on our normal pricing and discounting practices for the specifica product or service when sold separately.we sell the goods separately in similar circumstances and to similar customers. In determining VSOE,instances where SSP is not directly observable, we requiredetermine SSP using information that a substantial majority of the historical standalone transactions have the selling prices for a product or service fall within a reasonably narrow pricing range, generally evidenced by approximately 80% of such historical standalone transactions falling within plus or minus 15% of the median rates. When VSOE does not exist, we apply the selling price hierarchy to applicable multiple-deliverable arrangements. Under the selling price hierarchy, third-party evidence of selling price (TPE) will be considered if VSOE does not exist,may include market conditions and estimated selling price (ESP) will be used if neither VSOE nor TPE is available. Generally, we are not ableother observable inputs.
We assess relevant contractual terms in our customer contracts to determine TPE because our go-to-market strategy differs from that of othersthe transaction price. We apply judgment in our markets,identifying contractual terms and determining the extent of our proprietary technology varies among comparable products or services from those of our peers. In determining ESP, we apply significant judgmenttransaction price as we weigh a variety of factors, based on the characteristics of the deliverable. We typically arrive at an ESP for a product or service that is not sold separately by considering company-specific factors such as geographies, competitive landscape, internal costs, profitability objectives, pricing practices used to establish bundled pricing, and existing portfolio pricing and discounting.
As our business and offerings evolve over time, our pricing practices may be required to be modified accordingly, which could result in changes in selling prices, including both VSOEestimate variable consideration when determining the amount of revenue to recognize. Variable consideration includes potential contractual penalties and ESP, in subsequent periods. There were no material impacts during fiscal 2017, nor do we currently expect a material impact in the next 12 months on our revenue recognition due to any changes in our VSOE, TPE, or ESP.
We make sales to distributors which we refer to as two-tier sales to the end customer. Revenue from two-tier distributors is recognized based on a sell-through method using point-of-sale information provided by these distributors. Distributors participate in various rebate, cooperative marketing and other incentive programs that we offer to our distributors, channel partners and customers. When determining the amount of revenue to recognize, we maintain estimated accrualsestimate the expected usage of these programs, applying the expected value or most likely estimate and allowances for these programs.update the estimate at each reporting period as actual utilization becomes available. We also consider the customers' right of return in determining the transaction price, where applicable. If actual credits received by distributors under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue could be adversely affected.
Allowances for Receivables and Sales Returns
The allowances for receivables were as follows (in millions, except percentages):
|
| | | | | | | | |
| | July 29, 2017 |
| | July 30, 2016 |
|
Allowance for doubtful accounts | | $ | 211 |
| | $ | 249 |
|
Percentage of gross accounts receivable | | 3.9 | % | | 4.1 | % |
Allowance for credit loss—lease receivables | | $ | 162 |
| | $ | 230 |
|
Percentage of gross lease receivables (1) | | 5.5 | % | | 6.6 | % |
Allowance for credit loss—loan receivables | | $ | 103 |
| | $ | 97 |
|
Percentage of gross loan receivables | | 2.3 | % | | 2.8 | % |
(1)Calculated as allowance for credit loss on lease receivables as a percentage of gross lease receivables and residual value before unearned income.
The allowance for doubtful accounts is based on our assessment of the collectibility of customer accounts. We regularly review the adequacy of these allowances by considering internal factors such as historical experience, credit quality and age of the receivable balances as well as external factors such as economic conditions that may affect a customer’s ability to pay as well as historical and expected default frequency rates, which are published by major third-party credit-rating agencies and are updated on a quarterly basis. We also consider the concentration of receivables outstanding with a particular customer in assessing the adequacy of our allowances for doubtful accounts. If a major customer’s creditworthiness deteriorates, if actual defaults are higher than our historical experience, or if other circumstances arise, our estimates of the recoverability of amounts due to us could be overstated, and additional allowances could be required, which could have an adverse impact on our operating results.
The allowance for credit loss on financing receivables is also based on the assessment of collectibility of customer accounts. We regularly review the adequacy of the credit allowances determined either on an individual or a collective basis. When evaluating the financing receivables on an individual basis, we consider historical experience, credit quality and age of receivable balances, and economic conditions that may affect a customer’s ability to pay. When evaluating financing receivables on a collective basis, we use expected default frequency rates published by a major third-party credit-rating agency as well as our own historical loss rate in the event of default, while also systematically giving effect to economic conditions, concentration of risk and correlation. Determining expected default frequency rates and loss factors associated with internal credit risk ratings, as well as assessing factors such as economic conditions, concentration of risk, and correlation, are complex and subjective. Our ongoing consideration of all these factors could result in an increase in our allowance for credit loss in the future, which could adversely affect our operating results. Both accounts receivable and financing receivables are charged off at the point when they are considered uncollectible.
A reserve for future sales returns is established based on historical trends in product return rates. The reserve for future sales returns as of July 29, 2017 and July 30, 2016 was $122 million and $126 million, respectively, and was recorded as a reduction of our accounts receivable and revenue. If the actual future returns were to deviate from the historical data on which the reserve had been established, our revenue could be adversely affected.
Inventory Valuation and Liability for Purchase Commitments with Contract Manufacturers and Suppliers
Inventory is written down based on excess and obsolete inventories, determined primarily by future demand forecasts. Inventory write-downs are measured as the difference between the cost of the inventory and market, based upon assumptions about future demand, and are chargedSee Note 3 to the provisionConsolidated Financial Statements for inventory, which is a componentmore details.
We record a liability for firm, noncancelable, and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory. As of July 29, 2017, the liability for these purchase commitments was $162 million, compared with $159 million as of July 30, 2016, and was included in other current liabilities.
Our provision for inventory was $74 million, $65 million, and $54 million in fiscal 2017, 2016, and 2015, respectively. The provision for the liability related to purchase commitments with contract manufacturers and suppliers was $124 million, $134 million, and $102 million in fiscal 2017, 2016, and 2015, respectively. If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to increase our inventory write-downs, and our liability for purchase commitments with contract manufacturers and suppliers, and accordingly our profitability, could be adversely affected. We regularly evaluate our exposure for inventory write-downs and the adequacy of our liability for purchase commitments.
Inventory and supply chain management remain areas of focus as we balance the need to maintain supply chain flexibility to help ensure competitive lead times with the risk of inventory obsolescence, particularly in light of current macroeconomic uncertainties and conditions and the resulting potential for changes in future demand forecast.
Loss Contingencies and Product Warranties
We are subject to the possibility of various losses arising in the ordinary course of business. We consider the likelihood of impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate information available to us to determine whether such accruals should be made or adjusted and whether new accruals are required.
Third parties, including customers, have in the past and may in the future assert claims or initiate litigation related to exclusive patent, copyright, trademark, and other intellectual property rights to technologies and related standards that are relevant to us. These assertions have increased over time as a result of our growth and the general increase in the pace of patent claims assertions, particularly in the United States. If any infringement or other intellectual property claim made against us by any third party is successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and adversely affected.
In fiscal 2014, we recorded a charge to product cost of sales of $655 million resulting from failures related to products containing memory components manufactured by a single supplier between 2005 and 2010. We perform regular assessments of the sufficiency of this liability and reduced the amount by $74 million and $164 million in fiscal 2016 and fiscal 2015, respectively based on updated analyses. During the second quarter of fiscal 2017, we further reduced the liability by $141 million to reflect lower than expected defects, actual usage history, and estimated lower future remediation costs as more of the impacted products age and near the end of the support period covered by the remediation program. In addition, during the second quarter of fiscal 2017, we recorded a $125 million charge to product cost of sales related to the expected remediation costs for anticipated failures in future periods of a widely-used component sourced from a third party which is included in several of our products. The liabilities related to the supplier component remediation matters as of July 29, 2017 and July 30, 2016 was $174 million and $276 million, respectively.
Estimating these liabilities is complex and subjective, and if we experience changes in a number of underlying assumptions and estimates such as a change in claims compared with our expectations, or if the cost of servicing these claims is different than expected, our estimated liabilities for these matters may be impacted.
Our products are generally covered by a warranty for periods ranging from 90 days to five years, and for some products we provide a limited lifetime warranty. We accrue for warranty costs as part of our cost of sales based on associated material costs, technical support labor costs, and associated overhead. Material cost is estimated based primarily upon historical trends in the volume of product returns within the warranty period and the cost to repair or replace the equipment. Technical support labor cost is estimated based primarily upon historical trends in the rate of customer cases and the cost to support the customer cases within the warranty period. Overhead cost is applied based on estimated time to support warranty activities.
If we experience an increase in warranty claims compared with our historical experience, or if the cost of servicing warranty claims is greater than expected, our profitability could be adversely affected.
Fair Value Measurements
Our fixed income and publicly traded equity securities, collectively, are reflected in the Consolidated Balance Sheets at a fair value of $58.8 billion as of July 29, 2017, compared with $58.1 billion as of July 30, 2016. Our fixed income investment portfolio, as of July 29, 2017, consisted primarily of high quality investment-grade securities. See Note 8 to the Consolidated Financial Statements.
As described more fully in Note 2 to the Consolidated Financial Statements, a valuation hierarchy is based on the level of independent, objective evidence available regarding the value of the investments. It encompasses three classes of investments: Level 1 consists of securities for which there are quoted prices in active markets for identical securities; Level 2 consists of securities for which observable inputs other than Level 1 inputs are used, such as quoted prices for similar securities in active markets or quoted prices for identical securities in less active markets and model-derived valuations for which the variables are derived from, or corroborated by, observable market data; and Level 3 consists of securities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value.
Our Level 2 securities are valued using quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data. We use inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from independent pricing vendors, quoted market prices, or other sources to determine the ultimate fair value of our assets and liabilities. We use such pricing data as the primary input, to which we have not made any material adjustments during fiscal 2017 and 2016, to make our assessments and determinations as to the ultimate valuation of our investment portfolio. We are ultimately responsible for the financial statements and underlying estimates.
The inputs and fair value are reviewed for reasonableness, may be further validated by comparison to publicly available information, and could be adjusted based on market indices or other information that management deems material to its estimate of fair value. The assessment of fair value can be difficult and subjective. However, given the relative reliability of the inputs we use to value our investment portfolio, and because substantially all of our valuation inputs are obtained using quoted market prices for similar or identical assets, we do not believe that the nature of estimates and assumptions affected by levels of subjectivity and judgment was material to the valuation of the investment portfolio as of July 29, 2017.Level 3 assets do not represent a significant portion of our total assets measured at fair value on a recurring basis as of July 29, 2017 and July 30, 2016.
Other-than-Temporary Impairments
We recognize an impairment charge when the declines in the fair values of our fixed income or publicly traded equity securities below their cost basis are judged to be other than temporary. The ultimate value realized on these securities, to the extent unhedged, is subject to market price volatility until they are sold.
If the fair value of a debt security is less than its amortized cost, we assess whether the impairment is other than temporary. An impairment is considered other than temporary if (i) we have the intent to sell the security, (ii) it is more likely than not that we will be required to sell the security before recovery of its entire amortized cost basis, or (iii) we do not expect to recover the entire amortized cost of the security. If an impairment is considered other than temporary based on (i) or (ii) described in the prior sentence, the entire difference between the amortized cost and the fair value of the security is recognized in earnings. If an impairment is considered other than temporary based on condition (iii), the amount representing credit loss, defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security, will be recognized in earnings, and the amount relating to all other factors will be recognized in other comprehensive income (OCI). In estimating the amount and timing of cash flows expected to be collected, we consider all available information, including past events, current conditions, the remaining payment terms of the security, the financial condition of the issuer, expected defaults, and the value of underlying collateral.
For publicly traded equity securities, we consider various factors in determining whether we should recognize an impairment charge, including the length of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the issuer, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
We also have investments in privately held companies, some of which are in the startup or development stages. As of July 29, 2017, our investments in privately held companies were $983 million, compared with $1,003 million as of July 30, 2016, and were included in other assets. We monitor these investments for events or circumstances indicative of potential impairment, and we make appropriate reductions in carrying values if we determine that an impairment charge is required, based primarily on the financial condition and near-term prospects of these companies. These investments are inherently risky because the markets for the technologies or products these companies are developing are typically in the early stages and may never materialize.
Goodwill and Purchased Intangible Asset Impairments
Our methodology for allocating the purchase price relating to purchase acquisitions is determined through established valuation techniques. Goodwill represents a residual value as of the acquisition date, which in most cases results in measuring goodwill as an excess of the purchase consideration transferred plus the fair value of any noncontrolling interest in the acquired company over the fair value of net assets acquired, including contingent consideration. We perform goodwill impairment tests on an annual basis in the fourth fiscal quarter and between annual tests in certain circumstances for each reporting unit. The assessment of fair value for goodwill and purchased intangible assets is based on factors that market participants would use in an orderly transaction in accordance with the new accounting guidance for the fair value measurement of nonfinancial assets.
The goodwill recorded in the Consolidated Balance Sheets as of July 29, 2017 and July 30, 2016 was $29.8 billion and $26.6 billion, respectively. The increase in goodwill during fiscal 2017 was due in large part to our acquisition of AppDynamics. In response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill. There was no impairment of goodwill in fiscal 2017, 2016,2021, 2020, and 2015.2019. For the annual impairment testing in fiscal 2017,2021, the excess of the fair value over the carrying value for each of our reporting units was$46.8 $80.3 billion for the Americas, $25.1$73.0 billion for EMEA, and $20.9$33.2 billion for APJC.
During the fourth quarter of fiscal 2017,2021, we performed a sensitivity analysis for goodwill impairment with respect to each of our respective reporting units and determined that a hypothetical 10% decline in the fair value of each reporting unit would not result in an impairment of goodwill for any reporting unit.
The fair value of acquired technology and patents, as well as acquired technology under development, is determined at acquisition date primarily using the income approach, which discounts expected future cash flows to present value. The discount rates used in the present value calculations are typically derived from a weighted-average cost of capital analysis and then adjusted to reflect risks inherent in the development lifecycle as appropriate. We consider the pricing model for products related to these acquisitions to be standard within the high-technology communications industry, and the applicable discount rates represent the rates that market participants would use for valuation of such intangible assets.
We make judgments about the recoverability of purchased intangible assets with finite lives whenever events or changes in circumstances indicate that an impairment may exist. Recoverability of purchased intangible assets with finite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. We review indefinite-lived intangible assets for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Our impairment charges related to purchased intangible assets were $47 million, $74 million, and $175 million during fiscal 2017, 2016, and 2015, respectively. Our ongoing consideration of all the factors described previously could result in additional impairment charges in the future, which could adversely affect our net income.
Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. Our effective tax rates differ from the statutory rate, primarily due to the tax impact of state taxes, foreign operations, R&D tax credits, domestic manufacturingforeign-derived intangible income deductions, global intangible low-taxed income, tax audit settlements, nondeductible compensation, international realignments, and transfer pricing adjustments. Our effective tax rate was 21.8%20.1%, 16.9%19.7%, and 19.8%20.2% in fiscal 2017, 2016,2021, 2020, and 2015,2019, respectively.
Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties.
Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
Our provision for income taxes is subject to volatility and could be adversely impacted by earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates; by changes in the valuation of our deferred tax assets and liabilities; by changes to domestic manufacturingforeign-derived intangible income deduction, global intangible low-tax income and base erosion and anti-abuse tax laws, regulations, or interpretations thereof; by expiration of or lapses in tax incentives; by transfer pricing adjustments, including the effect of acquisitions on our intercompany R&D cost-sharing arrangement and legal structure; by tax effects of nondeductible compensation; by tax costs related to intercompany realignments; by changes in accounting principles; or by changes in tax laws and regulations, treaties, or interpretations thereof, including possible changes to the taxation of earnings of our foreign subsidiaries, the deductibility of expenses attributable to foreign income, orand the foreign tax credit rules. Significant judgment is required to determine the recognition and measurement attributes prescribed in the accounting guidance for uncertainty in income taxes. The Organisation for Economic Co-operation and Development (OECD), an international association comprised of 3538 countries, including the United States, has recently made changes and is contemplating additional changes to numerous long-standing tax principles. There can be no assurance that these changes and any contemplated changes if finalized, once adopted by countries, will not have an adverse impact on our provision for income taxes. As a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries iswas subject to reduced tax rates. Our failure to meet these commitments could adversely impact our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service (IRS) and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse impact on our operating results and financial condition.
RESULTS OF OPERATIONS
A discussion regarding our financial condition and results of operations for fiscal 2021 compared to fiscal 2020 is presented below. A discussion regarding our financial condition and results of operations for fiscal 2020 compared to fiscal 2019 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended July 25, 2020, filed with the SEC on September 3, 2020.
Revenue
The following table presents the breakdown of revenue between product and service (in millions, except percentages):
| | | | Years Ended | | 2017 vs. 2016 | | 2016 vs. 2015 | | Years Ended | | 2021 vs. 2020 |
| | July 29, 2017 | | July 30, 2016 | | July 25, 2015 | | Variance in Dollars | | Variance in Percent | | Variance in Dollars | | Variance in Percent | | July 31, 2021 | | July 25, 2020 | | July 27, 2019 | | Variance in Dollars | | Variance in Percent |
Revenue: | | | | | | | | | | | | | | | Revenue: | | | | | | | | | | |
Product | | $ | 35,705 |
| | $ | 37,254 |
| | $ | 37,750 |
| | $ | (1,549 | ) | | (4.2 | )% | | $ | (496 | ) | | (1.3 | )% | Product | | $ | 36,014 | | | $ | 35,978 | | | $ | 39,005 | | | $ | 36 | | | — | % |
Percentage of revenue | | 74.4 | % | | 75.6 | % | | 76.8 | % | | |
| | |
| | |
| | |
| Percentage of revenue | | 72.3 | % | | 73.0 | % | | 75.1 | % | | | | |
Service | | 12,300 |
| | 11,993 |
| | 11,411 |
| | 307 |
| | 2.6 | % | | 582 |
| | 5.1 | % | Service | | 13,804 | | | 13,323 | | | 12,899 | | | 481 | | | 4 | % |
Percentage of revenue | | 25.6 | % | | 24.4 | % | | 23.2 | % | | |
| | |
| | |
| | |
| Percentage of revenue | | 27.7 | % | | 27.0 | % | | 24.9 | % | | | | |
Total | | $ | 48,005 |
| | $ | 49,247 |
| | $ | 49,161 |
| | $ | (1,242 | ) | | (2.5 | )% | | $ | 86 |
| | 0.2 | % | Total | | $ | 49,818 | | | $ | 49,301 | | | $ | 51,904 | | | $ | 517 | | | 1 | % |
We manage our business primarily on a geographic basis, organized into three geographic segments. Our revenue, which includes product and service for each segment, is summarized in the following table (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | 2021 vs. 2020 |
| | July 31, 2021 | | July 25, 2020 | | July 27, 2019 | | Variance in Dollars | | Variance in Percent |
Revenue: | | | | | | | | | | |
Americas | | $ | 29,161 | | | $ | 29,291 | | | $ | 30,927 | | | $ | (130) | | | — | % |
Percentage of revenue | | 58.5 | % | | 59.4 | % | | 59.6 | % | | | | |
EMEA | | 12,951 | | | 12,659 | | | 13,100 | | | 292 | | | 2 | % |
Percentage of revenue | | 26.0 | % | | 25.7 | % | | 25.2 | % | | | | |
APJC | | 7,706 | | | 7,352 | | | 7,877 | | | 354 | | | 5 | % |
Percentage of revenue | | 15.5 | % | | 14.9 | % | | 15.2 | % | | | | |
Total | | $ | 49,818 | | | $ | 49,301 | | | $ | 51,904 | | | $ | 517 | | | 1 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | 2017 vs. 2016 | | 2016 vs. 2015 |
| | July 29, 2017 | | July 30, 2016 | | July 25, 2015 | | Variance in Dollars | | Variance in Percent | | Variance in Dollars | | Variance in Percent |
Revenue: | | | | | | | | | | | | | | |
Americas | | $ | 28,351 |
| | $ | 29,392 |
| | $ | 29,626 |
| | $ | (1,041 | ) | | (3.5 | )% | | $ | (234 | ) | | (0.8 | )% |
Percentage of revenue | | 59.1 | % | | 59.7 | % | | 60.3 | % | | | | | | | | |
EMEA | | 12,004 |
| | 12,302 |
| | 12,348 |
| | (298 | ) | | (2.4 | )% | | (46 | ) | | (0.4 | )% |
Percentage of revenue | | 25.0 | % | | 25.0 | % | | 25.1 | % | | | | | | | | |
APJC | | 7,650 |
| | 7,553 |
| | 7,187 |
| | 97 |
| | 1.3 | % | | 366 |
| | 5.1 | % |
Percentage of revenue | | 15.9 | % | | 15.3 | % | | 14.6 | % | | | | | | | | |
Total | | $ | 48,005 |
| | $ | 49,247 |
| | $ | 49,161 |
| | $ | (1,242 | ) | | (2.5 | )% | | $ | 86 |
| | 0.2 | % |
Fiscal 2017 Compared with Fiscal 2016Amounts may not sum and percentages may not recalculate due to rounding.
Total revenue decreasedin fiscal 2021 increased by 3%. Total company revenue not including SP Video CPE products decreased 2%.1% compared with fiscal 2020. Product revenue decreased by 4% whilewas flat and service revenue increased by 3%4%. Fiscal 2017 had 52 weeks, compared with 53 weeks in fiscal 2016, thus our results for fiscal 2017 reflect one less extra week. We estimate that the additional revenue associated with the extra week was approximately $265 million, $200 million of which was from our services subscriptions, and $65 million from our SaaS offerings such as WebEx, and a small amount from product distribution. Our total revenue declinedreflected growth in theEMEA and APJC. Americas and EMEA geographic segments, whilewas flat. Product revenue grew in our APJC geographic segment. Thefor the emerging countries of BRICM, in the aggregate, experienced a 7%6% product revenue decline, with revenue declinesdecreases in Mexico, China, and Brazil partially offset by increases ineach of these countries with the other two BRICM countries.exception of India.
In addition to the impact of macroeconomic factors, including a reducedthe IT spending environment and reductions inthe level of spending by government entities, revenue by segment in a particular period may be significantly impacted by several factors related to revenue recognition, including the complexity of transactions such as multiple-element arrangements;multiple performance obligations; the mix of financing arrangements provided to channel partners and customers; and final acceptance of the product, system, or solution, among other factors. In addition, certain customers tend to make large and sporadic purchases, and the revenue related to these transactions may also be affected by the timing of revenue recognition, which in turn would impact the revenue of the relevant segment. As has been the case in certain emerging countries from time to time, customers require greater levels
Fiscal 2016 Compared with Fiscal 2015
Total revenue was flat. Total company revenue not including SP Video CPE products increased 3%. Product revenue decreased by 1% in total, but increased by 2% for product revenue not including SP Video CPE products. Service revenue increased by 5%. Fiscal 2016 had 53 weeks, compared with 52 weeks in fiscal 2015, thus our results for fiscal 2016 reflect an extra week, the impact of which is discussed above. Our total revenue grew in our APJC geographic segment, while revenue declined in the Americas and EMEA geographic segments. The emerging countries of BRICM, in the aggregate, experienced 3% product revenue growth, with growth in China, India and Mexico, partially offset by decreases in the other two BRICM countries. Our revenue in fiscal 2016 was adversely affected by the depreciation of certain currencies relative to the U.S. dollar and especially currencies in certain emerging countries, although the indirect effects are difficult to measure.
Product Revenue by Segment
The following table presents the breakdown of product revenue by segment (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | 2021 vs. 2020 |
| | July 31, 2021 | | July 25, 2020 | | July 27, 2019 | | Variance in Dollars | | Variance in Percent |
Product revenue: | | | | | | | | | | |
Americas | | $ | 20,688 | | | $ | 21,006 | | | $ | 22,754 | | | $ | (318) | | | (2) | % |
Percentage of product revenue | | 57.5 | % | | 58.4 | % | | 58.3 | % | | | | |
EMEA | | 9,805 | | | 9,647 | | | 10,246 | | | 158 | | | 2 | % |
Percentage of product revenue | | 27.2 | % | | 26.8 | % | | 26.3 | % | | | | |
APJC | | 5,521 | | | 5,326 | | | 6,005 | | | 195 | | | 4 | % |
Percentage of product revenue | | 15.3 | % | | 14.8 | % | | 15.4 | % | | | | |
Total | | $ | 36,014 | | | $ | 35,978 | | | $ | 39,005 | | | $ | 36 | | | — | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | 2017 vs. 2016 | | 2016 vs. 2015 |
| | July 29, 2017 | | July 30, 2016 | | July 25, 2015 | | Variance in Dollars | | Variance in Percent | | Variance in Dollars | | Variance in Percent |
Product revenue: | | | | | | | | | | | | | | |
Americas | | $ | 20,487 |
| | $ | 21,663 |
| | $ | 22,231 |
| | $ | (1,176 | ) | | (5.4 | )% | | $ | (568 | ) | | (2.6 | )% |
Percentage of product revenue | | 57.4 | % | | 58.1 | % | | 58.9 | % | | | | | | | | |
EMEA | | 9,369 |
| | 9,682 |
| | 9,882 |
| | (313 | ) | | (3.2 | )% | | (200 | ) | | (2.0 | )% |
Percentage of product revenue | | 26.2 | % | | 26.0 | % | | 26.2 | % | | | | | | | | |
APJC | | 5,849 |
| | 5,909 |
| | 5,637 |
| | (60 | ) | | (1.0 | )% | | 272 |
| | 4.8 | % |
Percentage of product revenue | | 16.4 | % | | 15.9 | % | | 14.9 | % | | | | | | | | |
Total | | $ | 35,705 |
| | $ | 37,254 |
| | $ | 37,750 |
| | $ | (1,549 | ) | | (4.2 | )% | | $ | (496 | ) | | (1.3 | )% |
During the second quarter of fiscal 2016, we completed the sale of our SP Video CPE Business.As a result, revenue from this portion of the Service Provider Video product category willAmounts may not recur in future periods. SP Video CPE Business revenue was $504 millionsum and $1,846 million for fiscal 2016 and 2015, respectively.percentages may not recalculate due to rounding.
Americas
Fiscal 2017 Compared with Fiscal 2016
The 5% decrease in productProduct revenue in the Americas segment decreased by 2%. The product revenue decrease was driven by declines in the service provider, public sectorenterprise and commercial markets. Product revenue in the enterprise market was flat. The product revenue decrease in the service provider market was driven in large partmarkets, partially offset by the absence of product sales related to our SP Video CPE Business in fiscal 2017. We had $378 million in product sales related to our SP Video CPE Business in fiscal 2016 in this segment. The product revenue declinegrowth in the public sector market was due primarily to lower sales to state and local governments and to the U.S. federal government.service provider markets. From a country perspective, product revenue decreased by 5%1% in the United States, 28%18% in Mexico, and 7%9% in Brazil, partially offset by ana product revenue increase of 2%4% in Canada.
Fiscal 2016 Compared with Fiscal 2015EMEA
The decrease in product revenue for the Americas segment was driven by a decline of $1,146 million in product sales related to our SP Video CPE Business. Product revenue not including SP Video CPE products increased for the Americas segment. From a customer markets perspective, the decreaseincrease in product revenue in the AmericasEMEA segment of 3%2% was leddriven by a significant declinegrowth in the service provider market driven by the sale of the SP Video CPE Business. We experienced product revenue growth in the commercial,and public sector and enterprise markets. The product revenue growth in the public sector market was due primarily to higher sales to state and local governments, partially offset by lower sales to the U.S. federal government.From a country perspective, product revenue decreased by 34% in Brazil and 24% in Canada partially offset by a slight increase in the United States and an increase of 3% in Mexico.
EMEA
Fiscal 2017 Compared with Fiscal 2016
Product revenue in the EMEA segment decreased by 3%, driven by a decline in the service provider market and, to a lesser extent, declines in the public sector and enterprise markets. Product revenue in the commercial market was flat. The product revenue decrease in the service provider market was driven in part by the absence of product sales related to our SP Video CPE Business in fiscal 2017. We had $108 million in product sales related to our SP Video CPE Business in fiscal 2016 in this segment. Product revenue from emerging countries within EMEA and product revenue for the remainder of the EMEA segment each decreased by 3%.
Fiscal 2016 Compared with Fiscal 2015
The decrease in product revenue of 2%, or $200 million, for the EMEA segment was driven by a decline of $164 million in product sales related to our SP Video CPE Business. From a customer market perspective, the decrease was driven by product revenue declines in the service provider, public sector and enterprise markets, partially offset by product revenue growthdeclines in the commercial market. The decline in sales to the service provider market was due primarily to the sale of the SP Video CPE Business.and enterprise markets. Product revenue from emerging countries within EMEA decreased by 11%7%, led by a decline in Russia of 31%. Productand product revenue for the remainder of the EMEA segment, which primarily consists of countries in Western Europe, increased by 1%4%.
APJC
Fiscal 2017 Compared with Fiscal 2016
Product revenue in the APJC segment decreased by 1%. The product revenue decrease was led by declines in the service provider and public sector markets, partially offset by product revenue growth in the commercial market. Product revenue in the enterprise market was flat. From a country perspective, product revenue decreased by 12% in China, driven by a decrease in sales of Service Provider Video software and solutions products, while product revenue increased by 11% in India, 9% in Australia and 2% in Japan. Product sales for this geographic segment were adversely impacted by an $18 million decrease in product sales related to the absence of our SP Video CPE Business.
Fiscal 2016 Compared with Fiscal 2015
The increase in product revenue in the APJC segment of 5% was led by solid growth in the service provider market and, to a lesser extent, growth in the enterprise, public sector and commercial markets. From a country perspective, product revenue increased by 22%4% in China, driven by an increase in sales of Service Provider Video software and solutions products, and 18% in India,Germany, partially offset by declines in the United Kingdom and France by 1% and 2%, respectively.
APJC
Product revenue in the APJC segment increased by 4%, driven by growth in the public sector, service provider and enterprise markets, partially offset by declines in the commercial market. From a country perspective, product revenue decreases of 7%increased in Japan, Australia and 5% in Australia. Product revenue for this geographic segment was adversely impactedIndia by 11%, 6% and 3%, respectively, partially offset by a $32 million decreasedecline of 4% in product revenue related to the saleChina.
Product Revenue by Groups of Similar ProductsCategory
In addition to the primary view on a geographic basis, we also prepare financial information related to groups of similar productsproduct categories and customer markets for various purposes. OurWe report our product categories consist ofrevenue in the following categories: Switching; NGN Routing; Collaboration; Data Center; Wireless; Security; Service Provider Video;Infrastructure Platforms, Applications, Security, and Other Products.
The following table presents product revenue for groups of similar productsby category (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | 2021 vs. 2020 |
| | July 31, 2021 | | July 25, 2020 | | July 27, 2019 | | Variance in Dollars | | Variance in Percent |
Product revenue: | | | | | | | | | | |
Infrastructure Platforms | | $ | 27,109 | | | $ | 27,219 | | | $ | 30,184 | | | $ | (110) | | | — | % |
Applications | | 5,504 | | | 5,568 | | | 5,803 | | | (64) | | | (1) | % |
Security | | 3,382 | | | 3,158 | | | 2,822 | | | 224 | | | 7 | % |
Other Products | | 19 | | | 33 | | | 196 | | | (14) | | | (43) | % |
Total | | $ | 36,014 | | | $ | 35,978 | | | $ | 39,005 | | | $ | 36 | | | — | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | 2017 vs. 2016 | | 2016 vs. 2015 |
| | July 29, 2017 | | July 30, 2016 | | July 25, 2015 | | Variance in Dollars | | Variance in Percent | | Variance in Dollars | | Variance in Percent |
Product revenue: | | | | | | | | | | | | | | |
Switching | | $ | 13,949 |
| | $ | 14,700 |
| | $ | 14,712 |
| | $ | (751 | ) | | (5.1 | )% | | $ | (12 | ) | | (0.1 | )% |
Percentage of product revenue | | 39.1 | % | | 39.4 | % | | 39.0 | % | | |
| | |
| | |
| | |
|
NGN Routing | | 7,831 |
| | 8,133 |
| | 8,343 |
| | (302 | ) | | (3.7 | )% | | (210 | ) | | (2.5 | )% |
Percentage of product revenue | | 21.9 | % | | 21.8 | % | | 22.1 | % | | |
| | |
| | |
| | |
|
Collaboration | | 4,278 |
| | 4,352 |
| | 4,004 |
| | (74 | ) | | (1.7 | )% | | 348 |
| | 8.7 | % |
Percentage of product revenue | | 12.0 | % | | 11.7 | % | | 10.6 | % | | |
| | |
| | |
| | |
|
Data Center | | 3,228 |
| | 3,365 |
| | 3,219 |
| | (137 | ) | | (4.1 | )% | | 146 |
| | 4.5 | % |
Percentage of product revenue | | 9.0 | % | | 9.0 | % | | 8.5 | % | | |
| | |
| | |
| | |
|
Wireless | | 2,766 |
| | 2,640 |
| | 2,551 |
| | 126 |
| | 4.8 | % | | 89 |
| | 3.5 | % |
Percentage of product revenue | | 7.7 | % | | 7.1 | % | | 6.8 | % | | |
| | |
| | |
| | |
|
Security | | 2,153 |
| | 1,969 |
| | 1,747 |
| | 184 |
| | 9.3 | % | | 222 |
| | 12.7 | % |
Percentage of product revenue | | 6.0 | % | | 5.3 | % | | 4.6 | % | | |
| | |
| | |
| | |
|
Service Provider Video (1) | | 946 |
| | 1,734 |
| | 2,941 |
| | (788 | ) | | (45.4 | )% | | (1,207 | ) | | (41.0 | )% |
Percentage of product revenue | | 2.7 | % | | 4.7 | % | | 7.8 | % | | |
| | |
| | |
| | |
|
Other | | 554 |
| | 361 |
| | 233 |
| | 193 |
| | 53.5 | % | | 128 |
| | 54.9 | % |
Percentage of product revenue | | 1.6 | % | | 1.0 | % | | 0.6 | % | | |
| | |
| | |
| | |
|
| | $ | 35,705 |
| | $ | 37,254 |
| | $ | 37,750 |
| | $ | (1,549 | ) | | (4.2 | )% | | $ | (496 | ) | | (1.3 | )% |
(1) During the second quarter of fiscal 2016, we completed the sale of the SP Video CPE Business. As a result, fiscal 2016 includes only four months of product revenue from SP Video CPE Business. SP Video CPE Business revenue was $504 millionAmounts may not sum and $1,846 million for fiscal 2016 and 2015, respectively.
Certain reclassificationspercentages may not recalculate due to rounding. Prior period amounts have been made to the prior period amountsreclassified to conform to the current period’s presentation.
Switching
Fiscal 2017 Compared with Fiscal 2016Infrastructure Platforms
The decreaseInfrastructure Platforms product category represents our core networking offerings related to switching, routing, wireless, and the data center. Infrastructure Platforms revenue was flat compared to fiscal 2020, with growth in routing and wireless, offset by declines in switching and data center. This was the product area most impacted by the COVID-19 pandemic environment in the first half of fiscal 2021. Switching revenue declined in both campus switching and data center switching, although we had strong revenue growth in our Switching product category of 5%, or $751 million, was driven primarily by a decrease in sales of Switching products used in campus environments, which comprise the majority of our Switching portfolio.Catalyst 9000 Series, Meraki switching offerings and Nexus 9000 Series. We believe this was driven both by the uncertainty in the macro environment which led to a slowdown in customer spending, as well as by a highly competitive landscape. These impacts were partially offset byexperienced an increase in sales of routing products, with growth primarily in the service provider market. Wireless had strong growth driven by our ACI portfolio which is included in ourMeraki and WiFi-6 products. Revenue from data center switching portfolio.
In terms of subcategories, the decrease in revenue from our modular switches of 18%, or $784 million and the decrease in sales of storage products of 22%, or $95 million were partially offset by increased revenue from our LAN fixed-configuration switches of 1%, or $128 million. Revenue from our modular switches decreaseddeclined driven by lower sales of most of the Cisco Catalyst Series Switches and Cisco Nexus 7000 Series Switches, partially offset by growth in Cisco Nexus 9500 Series Switches within this product category. Revenue from LAN fixed-configuration switches increased due to higher sales ofcontinued market contraction impacting primarily our Cisco Nexus 9300 Series Switches, Cisco Catalyst 3650 Series Switches and Cisco Catalyst 3850 Series Switches, partially offset by a decrease in sales of certain other products in this portfolio.servers products.
Fiscal 2016 Compared with Fiscal 2015Applications
We believe the flat revenue in our SwitchingThe Applications product category was driven in large part by the uncertainty in the macro environment which led to a slowdown in customer spending. This led to flat revenue inincludes our Switching products used in campus environments which comprise the majority of revenue within this product category. We also experienced decreased revenue from storage products.
These impacts were offset by an increase in sales of our Switching products used in data centers, reflecting strength in our ACI portfolio.
In terms of subcategories, the increase in revenue from LAN fixed-configuration switches of 5%, or $452 million was substantially offset by decreased revenue from our modular switches of 8%, or $375 million,collaboration offerings (unified communications, Cisco TelePresence and the decreased revenue from storage products of 17%, or $89 million. Revenue from our LAN-fixed configuration switches increased due primarily to higher sales of our Cisco Catalyst 3850 Series Switches, Cisco Catalyst 3650 Series Switches, Cisco Nexus 9300 Series Switchesconferencing) as well as IoT and Cisco Nexus 3000 Series Switches, partially offset by a decrease in sales of certain other products in this portfolio. Decreased revenue from our modular switches was due primarily to lower sales of most of our Cisco Catalyst Series Switches and also due to lower sales of our Cisco Nexus 7000 Series Switches, partially offset by sales growth in Cisco Nexus 9500 Series Switches within this product category.
NGN Routing
Fiscal 2017 Compared with Fiscal 2016
AppDynamics analytics software offerings. Revenue in our NGN RoutingApplications product category decreased by 4%1%, or $302$64 million, driven by an 8%, or $211 million, decreasewith a decline in revenue from our midrange and low-end router products and a 5%, or $208 million, decrease in revenue from our high-end router products. These declines were partially offset by a 10%, or $117 million, increase in revenue from other NGN Routing products. Revenue from our midrange and low-end router products decreased due to lower sales of our Cisco ISR products and certain of our access router products. The decrease in revenue from high-end router products was driven by a decrease in revenue from our mobility products within our ASRs and from our CRS products. Revenue from other NGN Routing products increased due to higher sales of cable access products and certain optical networking products.
Fiscal 2016 Compared with Fiscal 2015
We believe a cautious service provider capital expenditure spending environment negatively impacted sales in NGN Routing. Revenue in this product category decreased by 3%, or $210 million, driven by an 8%, or $378 million, decrease in revenue from our high-end router products partially offset by a 12%, or $126 million, increase in revenue from what we categorize as other NGN Routing products and a 2%, or $42 million, increase in revenue from our mid-range and low-end router products. Revenue from high-end router products decreased due to a decrease in revenue from most of our high-end router products, partially offset by higher sales of our CRS-X products. Revenue from other NGN Routing products increased due to higher sales of optical networking products. The revenue increase in the mid-range and low-end routers was primarily driven by higher sales of Cisco ISR products.
Collaboration
Fiscal 2017 Compared with Fiscal 2016
Revenue from our Collaboration product category decreased by 2%, or $74 million, driven by a decrease in sales of Cisco Unified Communications and Cisco TelePresence products, partially offset by continueddouble digit growth in Conferencing revenue. The decrease in Unified Communications revenue was driven primarily by decreased revenue from phones. Revenue from Cisco TelePresence products declined due to lower revenue from endpoint products. TheIoT software offerings and growth in Conferencing revenue resulted from higher usage and recurring SaaS revenue from WebEx, which we include as product revenue in this category. We continue to increase the amount of deferred revenue and the proportion of recurring revenue related to our Collaboration product category.
Fiscal 2016 Compared with Fiscal 2015
Revenue from our Collaboration product category increased by 9%, or $348 million, driven by growth across the various subcategories within this product category. The growth in Conferencing revenue resulted from higher usage and recurring revenue from WebEx. Revenue from Cisco TelePresence products grew due to higher revenue in infrastructure and endpoint products as a result of new product introductions. The increase in Unified Communications revenue was driven by higher software revenue.
Data Center
Fiscal 2017 Compared with Fiscal 2016
Revenue in our Data Center product category decreased by 4%, or $137 million, driven by a decrease in sales of our Cisco Unified Computing System products, with declines in the commercial, enterprise and public sector markets partially offset by growth in the service provider market. We believe that both the uncertainty in the macro environment and the continued market transition with computing workloads shifting from blade server systems to rack-based systems continued to affect customer spending. The decrease in sales of our Cisco Unified Computing System products was partially offset by an increase in sales of our hyperconverged offering, HyperFlex.
Fiscal 2016 Compared with Fiscal 2015
The increase in revenue in our Data Center product category of 5%, or $146 million, was primarily driven by an increase in sales of our Cisco Unified Computing System products, with growth across all geographic segments and most of the customer markets. We believe the uncertainty in the macro environment led to a slowdown of customer spending for products in this category and we are seeing a market transition with computing workloads shifting from blade server systems to rack-based systems.
Wireless
Fiscal 2017 Compared with Fiscal 2016
Revenue in our Wireless product category increased by 5%, or $126 million, due primarily to continued growth in sales of Meraki products within this product category, and an increase in sales of certain of our access point products, partially offset by a decrease in sales of our controller products. We continue to increase the amount of deferred revenue and the proportion of recurring revenue related to our Wireless product category.
Fiscal 2016 Compared with Fiscal 2015
Revenue in our Wireless product category increased by 3%, or $89 million, due primarily to continued growth in sales of Meraki products within this category, partially offset by a decrease in sales of our controllers products.Webex.
Security
Fiscal 2017 Compared with Fiscal 2016
Revenue in our Security product category increased 9%7%, or $184 million, driven by higher sales of unified threat management products, advanced threat security products, and web security products. We continue to increase the amount of deferred revenue and the proportion of recurring revenue related to our Security product category.
Fiscal 2016 Compared with Fiscal 2015
$224 million. Revenue in our Security product category increased 13%, or $222 million, driven by higher sales of advanced threat security, web security and unified threat management products.
Service Provider Video
Fiscal 2017 Compared with Fiscal 2016
The decrease in revenue from our Service Provider Video product categorycloud security portfolio reflected strong double-digit growth and continued momentum with our Duo and Umbrella offerings.
Fiscal 2016 Compared with Fiscal 2015
The decrease in revenue from our Service Provider Video product category of 41%, or $1,207 million, was driven by a decrease in product sales of $1,342 million related to our SP Video CPE Business which we sold during the second quarter of fiscal 2016. This decrease was partially offset by an increase in revenue from certain cable access products and an increase in revenue from our video software and solutions products, particularly in China.
Other Products
The increase in revenue in our Other Products category for fiscal 2017 was in large part due to increased revenue from our IoT products, driven by our fiscal 2016 Jasper acquisition. The acquisition of AppDynamics in the third quarter of fiscal 2017 also contributed to the increase in revenue in this product category. The increase in revenue for fiscal 2016 was due to increased revenue from data and analytics offerings, from our cloud-related offerings and from our IoT products, driven by our Jasper acquisition.
Service Revenue by Segment
The following table presents the breakdown of service revenue by segment (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended | | 2021 vs. 2020 |
| July 31, 2021 | | July 25, 2020 | | July 27, 2019 | | Variance in Dollars | | Variance in Percent |
Service revenue: | | | | | | | | | |
Americas | $ | 8,472 | | | $ | 8,285 | | | $ | 8,173 | | | $ | 187 | | | 2 | % |
Percentage of service revenue | 61.4 | % | | 62.2 | % | | 63.4 | % | | | | |
EMEA | 3,146 | | | 3,012 | | | 2,854 | | | 134 | | | 4 | % |
Percentage of service revenue | 22.8 | % | | 22.6 | % | | 22.1 | % | | | | |
APJC | 2,186 | | | 2,026 | | | 1,872 | | | 160 | | | 8 | % |
Percentage of service revenue | 15.8 | % | | 15.2 | % | | 14.5 | % | | | | |
Total | $ | 13,804 | | | $ | 13,323 | | | $ | 12,899 | | | $ | 481 | | | 4 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended | | 2017 vs. 2016 | | 2016 vs. 2015 |
Years Ended | July 29, 2017 | | July 30, 2016 | | July 25, 2015 | | Variance in Dollars | | Variance in Percent | | Variance in Dollars | | Variance in Percent |
Service revenue: | | | | | | | | | | | | | |
Americas | $ | 7,864 |
| | $ | 7,729 |
| | $ | 7,395 |
| | $ | 135 |
| | 1.7 | % | | $ | 334 |
| | 4.5 | % |
Percentage of service revenue | 63.9 | % | | 64.4 | % | | 64.8 | % | | | | | | | | |
EMEA | 2,635 |
| | 2,620 |
| | 2,466 |
| | 15 |
| | 0.6 | % | | 154 |
| | 6.2 | % |
Percentage of service revenue | 21.4 | % | | 21.9 | % | | 21.6 | % | | | | | | | | |
APJC | 1,801 |
| | 1,644 |
| | 1,550 |
| | 157 |
| | 9.5 | % | | 94 |
| | 6.1 | % |
Percentage of service revenue | 14.7 | % | | 13.7 | % | | 13.6 | % | | | | | | | | |
Total | $ | 12,300 |
| | $ | 11,993 |
| | $ | 11,411 |
| | $ | 307 |
| | 2.6 | % | | $ | 582 |
| | 5.1 | % |
Fiscal 2017 Compared with Fiscal 2016Amounts may not sum and percentages may not recalculate due to rounding.
Service revenue grew 3%. Excluding the $200 million of additional revenue as a result of the extra weekincreased 4%, driven by growth in fiscal 2016, service revenue grew 4%.our maintenance business and solution support offerings. Service revenue grew across all of our geographic segments. Technical support services revenue increased by 3% and advanced services revenue increased by 1%. Technical support services revenue increased across all geographic segments. The increase in technical support services revenue was driven by contract initiations and renewals associated with product sales and an increase in software support offerings. Advanced services revenue, which relates to professional services for specific customer network needs, had solid revenue growth in our APJC segment, declined slightly in our EMEA segment and was flat in our Americas segment.
Fiscal 2016 Compared with Fiscal 2015
Service revenue grew 5%, which includes a $200 million, or 2%, year-over-year increase as a result of the impact ofbenefited from the extra week in fiscal 2016. Service revenue had solid growth across all of our geographic segments. Technical support services revenue increased by 5% and advanced services revenue increased by 7%. Technical support services revenue increased across all geographic segments. Renewals and technical support service contract initiations associated with product sales provided an installed base of equipment being serviced which, in concert with new service offerings, were the primary factors driving the revenue increases. Advanced services revenue grew across all geographic segments.2021.
Gross Margin
The following table presents the gross margin for products and services (in millions, except percentages):
| | | AMOUNT | | PERCENTAGE | | AMOUNT | | PERCENTAGE |
Years Ended | July 29, 2017 | | July 30, 2016 | | July 25, 2015 | | July 29, 2017 | | July 30, 2016 | | July 25, 2015 | Years Ended | July 31, 2021 | | July 25, 2020 | | July 27, 2019 | | July 31, 2021 | | July 25, 2020 | | July 27, 2019 |
Gross margin: | | | | | | | | | | | | Gross margin: | | | | | | | | | | | |
Product | $ | 22,006 |
| | $ | 23,093 |
| | $ | 22,373 |
| | 61.6 | % | | 62.0 | % | | 59.3 | % | Product | $ | 22,714 | | | $ | 22,779 | | | $ | 24,142 | | | 63.1 | % | | 63.3 | % | | 61.9 | % |
Service | 8,218 |
| | 7,867 |
| | 7,308 |
| | 66.8 | % | | 65.6 | % | | 64.0 | % | Service | 9,180 | | | 8,904 | | | 8,524 | | | 66.5 | % | | 66.8 | % | | 66.1 | % |
Total | $ | 30,224 |
| | $ | 30,960 |
| | $ | 29,681 |
| | 63.0 | % | | 62.9 | % | | 60.4 | % | Total | $ | 31,894 | | | $ | 31,683 | | | $ | 32,666 | | | 64.0 | % | | 64.3 | % | | 62.9 | % |
Product Gross Margin
Fiscal 2017 Compared with Fiscal 2016
The following table summarizes the key factors that contributed to the change in product gross margin percentage from fiscal 20162020 to fiscal 2017:
|
| | | | | | | |
| | Product Gross Margin Percentage |
Fiscal 20162020 | | 62.063.3 | % |
Product pricingProductivity (1) | | (2.10.8 | )% |
Product pricing | | (1.2) | % |
Mix of products sold | | (0.30.6 | )% |
Supplier component remediation adjustmentLegal and indemnification charge | | (0.1(0.1) | )% |
OtherOthers | | (0.1(0.3) | )% |
Productivity (1) Fiscal 2021 | | 1.463.1 | % |
SP Video CPE Business impact | | 0.8 | % |
Fiscal 2017 | | 61.6 | % |
(1)Productivity includes overall manufacturing-related costs, such as component costs, warranty expense, provision for inventory, freight, logistics, shipment volume, and other items not categorized elsewhere.
Product gross margin decreased by 0.40.2 percentage points as compared with fiscal 2016. The decrease in product gross margin was largely due to unfavorable impacts from productdriven by pricing lower productivity benefits, and unfavorable product mix,erosion, partially offset by a benefit from the divestiturefavorable product mix and lower productivity benefits. The effect of the lower margin SP Video CPE business in fiscal 2016.
The negative pricing impacterosion was moderate driven by typical market factors and impacted each of our geographic segments and customer markets. While productivity was positive to overall product gross margin, the benefit was lower than the prior year as thesesegments. Productivity improvements were adversely impacted by an increase in the cost of certain memory components which are currently constrained. We expect the higherongoing costs related to supply chain constraints. The favorable mix was driven by changes in the constraintproportion of products sold from each of our product categories.
During fiscal 2021, we continued to manage through supply chain challenges seen industry wide due to component shortages, caused in part by the COVID-19 pandemic. These challenges resulted in increased costs (i.e. component costs, broker fees,
expedited freight and overtime) which had a negative impact on product gross margin, and extended lead times to us and our customers. We have partnered with several of our key suppliers utilizing our volume purchasing and extending supply coverage, including revising supplier arrangements, to address supply chain challenges. We believe these memoryactions will enable us to optimize our access to critical components, including semiconductors. We expect these supply chain challenges to continue to impact productivity inthrough at least the near term. In addition, productivity was negatively impacted by decreases in core routingfirst half of fiscal 2022 and switching revenue which limited our ability to generate cost savings. potentially into the second half of fiscal 2022.
Productivity improvements were driven by memory cost savings and other cost reductions including value engineering efforts (e.g. component redesign, board configuration, test processes and transformation processes), lower warranty expenses and continued operational efficiency in manufacturing operations. The decrease in product gross margin was also due to an unfavorable mix of products sold driven by negative mix impacts from our NGN Routing, Switching and IoT products.
Fiscal 2016 Compared with Fiscal 2015
The following table summarizes the key factors that contributed to the change in product gross margin percentage from fiscal 2015 to fiscal 2016:
|
| | | |
| | Product Gross Margin Percentage |
Fiscal 2015 | | 59.3 | % |
Productivity (1)
| | 3.3 | % |
SP Video CPE Business impact | | 1.5 | % |
Amortization of purchased intangible assets | | 0.6 | % |
Rockstar patent portfolio charge | | 0.5 | % |
Product pricing | | (2.2 | )% |
Mix of products sold | | (0.8 | )% |
Supplier component remediation charge/adjustment | | (0.2 | )% |
Fiscal 2016 | | 62.0 | % |
Product gross margin increased by 2.7 percentage points compared with fiscal 2015. The increase in product gross margin was due in large part to productivity improvements, which were driven primarily by value engineering efforts; favorable component pricing; and continued operational efficiency in manufacturing operations. Our product gross margin also benefited from the sale during the second quarter of fiscal 2016 of our lower margin SP Video CPE Business, lower amortization expense and impairment charges related to acquisition-related intangible assets, and a $188 million charge to product cost of sales recorded in the first quarter of fiscal 2015 related to the Rockstar Consortium patent portfolio.
The various factors contributing to the product gross margin increase were partially offset by unfavorable impacts from product pricing, which were driven by typical market factors and impacted each of our geographic segments and customer markets, an unfavorable mix of products sold and the lower supplier component remediation adjustment. The unfavorable mix of products sold was due to a negative mix impact from our Cisco Unified Computing System products, higher sales of Service Provider Video products (not including the CPE Business) and an unfavorable mix within Switching products.
Service Gross Margin
Fiscal 2017 Compared with Fiscal 2016
Our service gross margin percentage increaseddecreased by 1.20.3 percentage points primarily due to higher sales volume, decreasedheadcount-related and delivery costs, favorable mixpartially offset by higher sales volume and to a lesser extent, lower share-based compensation expense. These benefits tofavorable mix of service gross margin were partially offset by increased headcount-related costs.offerings.
Our service gross margin normally experiences some fluctuations due to various factors such as the timing of contract initiations in our renewals, our strategic investments in headcount, and the resources we deploy to support the overall service business. Other factors include the mix of service offerings, as the gross margin from our advanced services is typically lower than the gross margin from technical support services.
Fiscal 2016 Compared with Fiscal 2015
Service gross margin percentage increased by 1.6 percentage points due to higher sales volume and decreased headcount-related costs. These benefits to gross margin were partially offset by increased partner delivery costs and increased outside services costs.
Gross Margin by Segment
The following table presents the total gross margin for each segment (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | AMOUNT | | PERCENTAGE |
Years Ended | | July 31, 2021 | | July 25, 2020 | | July 27, 2019 | | July 31, 2021 | | July 25, 2020 | | July 27, 2019 |
Gross margin: | | | | | | | | | | | | |
Americas | | $ | 19,499 | | | $ | 19,547 | | | $ | 20,338 | | | 66.9 | % | | 66.7 | % | | 65.8 | % |
EMEA | | 8,466 | | | 8,304 | | | 8,457 | | | 65.4 | % | | 65.6 | % | | 64.6 | % |
APJC | | 4,949 | | | 4,688 | | | 4,683 | | | 64.2 | % | | 63.8 | % | | 59.5 | % |
Segment total | | 32,914 | | | 32,538 | | | 33,479 | | | 66.1 | % | | 66.0 | % | | 64.5 | % |
Unallocated corporate items (1) | | (1,020) | | | (855) | | | (813) | | | | | | | |
Total | | $ | 31,894 | | | $ | 31,683 | | | $ | 32,666 | | | 64.0 | % | | 64.3 | % | | 62.9 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | AMOUNT | | PERCENTAGE |
Years Ended | | July 29, 2017 | | July 30, 2016 | | July 25, 2015 | | July 29, 2017 | | July 30, 2016 | | July 25, 2015 |
Gross margin: | | | | | | | | | | | | |
Americas | | $ | 18,284 |
| | $ | 18,986 |
| | $ | 18,638 |
| | 64.5 | % | | 64.6 | % | | 62.9 | % |
EMEA | | 7,855 |
| | 7,998 |
| | 7,731 |
| | 65.4 | % | | 65.0 | % | | 62.6 | % |
APJC | | 4,741 |
| | 4,620 |
| | 4,313 |
| | 62.0 | % | | 61.2 | % | | 60.0 | % |
Segment total | | 30,880 |
| | 31,604 |
| | 30,682 |
| | 64.3 | % | | 64.2 | % | | 62.4 | % |
Unallocated corporate items (1) | | (656 | ) | | (644 | ) | | (1,001 | ) | | | | | | |
Total | | $ | 30,224 |
| | $ | 30,960 |
| | $ | 29,681 |
| | 63.0 | % | | 62.9 | % | | 60.4 | % |
(1)The unallocated corporate itemsinclude the effects of amortization and impairments of acquisition-related intangible assets, share-based compensation expense, significant litigation settlements and other contingencies, charges related to asset impairments and restructurings, and certain other charges. We do not allocate these items to the gross margin for each segment because management does not include such information in measuring the performance of the operating segments.
Fiscal 2017 Compared with Fiscal 2016Amounts may not sum and percentages may not recalculate due to rounding.
The Americas segmentWe experienced a slight gross margin percentage decreaseincrease in our Americas segment due to negative impacts fromfavorable product mix and productivity improvements, partially offset by pricing and product mix,erosion.
Gross margin in our EMEA segment decreased due to pricing erosion, partially offset by productivity improvements and, the sale of the lower margin SP Video CPE Business. The unfavorable mix impact was driven by NGN Routing, Switching and IoT products.
Theto a lesser extent, favorable product mix. Lower service gross margin percentage increasealso contributed to the decrease in our EMEA segment was due primarily to higher service gross margin. Productthe gross margin in this segment also increased slightly due to the impact of productivity improvements, the sale of the lower margin SP Video CPE Business and a favorable product mix, partially offset by unfavorable impacts from pricing.geographic segment.
The APJC segment gross margin percentage increased due primarily to higher service gross margin. Product gross margin in this segment decreasedincrease was due to negative impacts from pricingproductivity improvements and favorable product mix, partially offset by productivity improvements. The unfavorable mix impact was driven by our Cisco Unified Computing System products.pricing erosion.
The gross margin percentage for a particular segment may fluctuate, and period-to-period changes in such percentages may or may not be indicative of a trend for that segment.
Fiscal 2016 Compared with Fiscal 2015The Americas segment experienced a gross margin percentage increase due primarily to the sale
The gross margin percentage increase in our EMEA segment was due primarily to the impact of productivity improvements in this geographic segment and the sale of the SP Video CPE Business. Partially offsetting these favorable impacts to gross margin were negative impacts from pricing and an unfavorable product mix. The unfavorable mix of products sold was due primarily to increased revenue from our lower margin Cisco Unified Computing System products. Higher service gross margin also contributed to the increase in the overall gross margin in this geographic segment.
Our APJC segment gross margin percentage increased due to productivity improvements, partially offset by unfavorable impacts from pricing and mix. The mix impact was driven primarily by higher sales from our Service Provider Video products (not including the SP Video CPE Business) and unfavorable mix within our NGN Routing products.
Research and Development (“R&D”), Sales and Marketing, and General and Administrative (“G&A”) Expenses
R&D, sales and marketing, and G&A expenses are summarized in the following table (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | 2021 vs. 2020 |
| | July 31, 2021 | | July 25, 2020 | | July 27, 2019 | | Variance in Dollars | | Variance in Percent |
Research and development | | $ | 6,549 | | | $ | 6,347 | | | $ | 6,577 | | | $ | 202 | | | 3 | % |
Percentage of revenue | | 13.1 | % | | 12.9 | % | | 12.7 | % | | | | |
Sales and marketing | | 9,259 | | | 9,169 | | | 9,571 | | | 90 | | | 1 | % |
Percentage of revenue | | 18.6 | % | | 18.6 | % | | 18.4 | % | | | | |
General and administrative | | 2,152 | | | 1,925 | | | 1,827 | | | 227 | | | 12 | % |
Percentage of revenue | | 4.3 | % | | 3.9 | % | | 3.5 | % | | | | |
Total | | $ | 17,960 | | | $ | 17,441 | | | $ | 17,975 | | | $ | 519 | | | 3 | % |
Percentage of revenue | | 36.1 | % | | 35.4 | % | | 34.6 | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | 2017 vs. 2016 | | 2016 vs. 2015 |
| | July 29, 2017 | | July 30, 2016 | | July 25, 2015 | | Variance in Dollars | | Variance in Percent | | Variance in Dollars | | Variance in Percent |
Research and development | | $ | 6,059 |
| | $ | 6,296 |
| | $ | 6,207 |
| | $ | (237 | ) | | (3.8 | )% | | $ | 89 |
| | 1.4 | % |
Percentage of revenue | | 12.6 | % | | 12.8 | % | | 12.6 | % | | | | | | | | |
Sales and marketing | | 9,184 |
| | 9,619 |
| | 9,821 |
| | (435 | ) | | (4.5 | )% | | (202 | ) | | (2.1 | )% |
Percentage of revenue | | 19.1 | % | | 19.5 | % | | 20.0 | % | | | | | | | | |
General and administrative | | 1,993 |
| | 1,814 |
| | 2,040 |
| | 179 |
| | 9.9 | % | | (226 | ) | | (11.1 | )% |
Percentage of revenue | | 4.2 | % | | 3.7 | % | | 4.1 | % | | | | | | | | |
Total | | $ | 17,236 |
| | $ | 17,729 |
| | $ | 18,068 |
| | $ | (493 | ) | | (2.8 | )% | | $ | (339 | ) | | (1.9 | )% |
Percentage of revenue | | 35.9 | % | | 36.0 | % | | 36.8 | % | | | | | | | | |
Our fiscal 2017 had one less week compared with fiscal 2016, whichFiscal 2021 had an extra week. We estimate that theweek compared to fiscal 2020. The extra week in fiscal 20162021 contributed approximately $116 million ofto the year-over-year decreaseincrease in total operatingheadcount-related expenses (not including share-based compensation expense).in our R&D, sales and marketing, and G&A expenses.
R&D Expenses
Fiscal 2017 Compared with Fiscal 2016
R&D expenses decreased primarilyincreased due to lowerhigher headcount-related expenses, higher share-based compensation expense, higher acquisition-related costs and higher contracted services lower headcount-related expenses, lower discretionary spending, and lower acquisition-related costs, partially offset by higher share-based compensation expense. Lower headcount- related expenses were due to efficiencies related to our restructuring actions and the extra week in fiscal 2016.lower discretionary spending.
We continue to invest in R&D in order to bring a broad range of products to market in a timely fashion. If we believe that we are unable to enter a particular market in a timely manner with internally developed products, we may purchase or license technology from other businesses, or we may partner with or acquire businesses as an alternative to internal R&D.
Fiscal 2016 Compared with Fiscal 2015
R&D expenses increased primarily due to higher headcount-related expenses attributable in part to the impact of the extra week in fiscal 2016 and, to a lesser extent, higher share-based compensation expense. These increases were partially offset by lower acquisition-related costs and lower discretionary spending.
Sales and Marketing Expenses
Fiscal 2017 Compared with Fiscal 2016
Sales and marketing expenses decreased due to lower headcount-related expenses, lower contracted services, lower discretionary spending, lower acquisition-related costs and, to a lesser extent, lower share-based compensation expense. Lower headcount-related expenses were due to efficiencies related to our restructuring actions. The extra week in fiscal 2016 also contributed to the decrease in headcount-related expenses.
Fiscal 2016 Compared with Fiscal 2015
Sales and marketing expenses decreased due to lower discretionary spending and lower headcount-related expenses. The aforementioned items benefited from foreign exchange rates during fiscal 2016. Lower share-based compensation expense also contributed to the decrease.
G&A Expenses
Fiscal 2017 Compared with Fiscal 2016
G&A expenses increased primarily due to the $253 million pre-tax gain from the sale of our SP Video CPE Business recorded during fiscal 2016 and, to a lesser extent, higher share-based compensation expense. These increases were partially offset by lower headcount-related expenses, and lower contracted services. The extra week in fiscal 2016 contributed to the decreased headcount-related expense.
Fiscal 2016 Compared with Fiscal 2015
G&A expenses decreased primarily due to the $253 million pre-tax gain from the sale of our SP Video CPE Business and, to a lesser extent, lowerhigher contracted services spending and lowerhigher share-based compensation expense, partially offset by lower discretionary spending.
G&A Expenses
G&A expenses increased due to the impact from the gain recognized on the sale of property in fiscal 2020 and higher headcount-related expenses. The extra week in fiscal 2016 contributed to the increased headcount-related expenses.
Effect of Foreign Currency
In fiscal 2017,2021, foreign currency fluctuations, net of hedging, decreasedincreased the combined R&D, sales and marketing, and G&A expenses by approximately $77$214 million, or 0.4%1.2%, compared with fiscal 2016. In fiscal 2016, foreign currency fluctuations, net of hedging, decreased the combined R&D, sales and marketing, and G&A expenses by approximately $567 million, or 3.1%, compared with fiscal 2015.
Share-Based Compensation Expense
The following table presents share-based compensation expense (in millions):
|
| | | | | | | | | | | | |
Years Ended | | July 29, 2017 | | July 30, 2016 | | July 25, 2015 |
Cost of sales—product | | $ | 85 |
| | $ | 70 |
| | $ | 50 |
|
Cost of sales—service | | 134 |
| | 142 |
| | 157 |
|
Share-based compensation expense in cost of sales | | 219 |
| | 212 |
| | 207 |
|
Research and development | | 529 |
| | 470 |
| | 448 |
|
Sales and marketing | | 542 |
| | 545 |
| | 559 |
|
General and administrative | | 236 |
| | 205 |
| | 228 |
|
Restructuring and other charges | | 3 |
| | 26 |
| | (2 | ) |
Share-based compensation expense in operating expenses | | 1,310 |
| | 1,246 |
| | 1,233 |
|
Total share-based compensation expense | | $ | 1,529 |
| | $ | 1,458 |
| | $ | 1,440 |
|
The increase in share-based compensation expense for fiscal 2017, as compared with fiscal 2016, was due primarily to higher expense related to equity awards assumed with respect to our recent acquisitions.
The increase in share-based compensation expense for fiscal 2016, as compared with fiscal 2015, was due primarily to the timing of restricted stock unit (RSU) grants and the impact of the extra week in fiscal 2016, partially offset by lower net expense associated with accelerated and modified awards.2020.
Amortization of Purchased Intangible Assets
The following table presents the amortization of purchased intangible assets (in millions): | | Years Ended | | July 29, 2017 | | July 30, 2016 | | July 25, 2015 | Years Ended | | July 31, 2021 | | July 25, 2020 | | July 27, 2019 |
Amortization of purchased intangible assets: | | | | | | | Amortization of purchased intangible assets: | | | | | | |
Cost of sales | | $ | 556 |
| | $ | 577 |
| | $ | 814 |
| Cost of sales | | $ | 716 | | | $ | 659 | | | $ | 624 | |
Operating expenses | | | | | | | Operating expenses | | 215 | | | 141 | | | 150 | |
Amortization of purchased intangible assets | | 259 |
| | 303 |
| | 359 |
| |
Restructuring and other charges | | 38 |
| | — |
| | — |
| |
Total | | $ | 853 |
| | $ | 880 |
| | $ | 1,173 |
| Total | | $ | 931 | | | $ | 800 | | | $ | 774 | |
Amortization of purchased intangible assets decreasedThe increase in fiscal 2017, as compared with fiscal 2016, due to certain purchased intangible assets having become fully amortized and lower impairment charges in fiscal 2017, partially offset by amortization of purchased intangible assets was due largely to the amortization of purchased intangibles from our recent acquisitions.
Restructuring and Other Charges
The following table presents restructuring and other charges (in millions): | | | | | | | | | | | | | | | | | | | | |
Years Ended | | July 31, 2021 | | July 25, 2020 | | July 27, 2019 |
Restructuring and other charges included in operating expenses | | $ | 886 | | | $ | 481 | | | $ | 322 | |
In August 2016,the first quarter of fiscal 2021, we announcedinitiated a restructuring plan, that will impact upwhich included a voluntary early retirement program, in order to 6,600 employees, with estimatedrealign the organization and enable further investment in key priority areas. The total pretax charges ofare estimated to be approximately $850$900 million. In connection with this restructuring plan, we incurred charges of $756$881 millionduring fiscal 2017. These2021. We substantially completed the Fiscal 2021 Plan in fiscal 2021 and do not expect any remaining charges were related primarily to severance and other one-time termination benefits and other associated costs. We expect the restructuring actionthis plan to be substantially completed bymaterial. We estimate the end of the first quarter of fiscal 2018. We expect to reinvest substantially all of theFiscal 2021 Plan will generate cost savings from the restructuring action in our key priority areas such as security, IoT, collaboration, next generation data center and cloud. As a result, the overall cost savings from the restructuring action are not expected to be material for future periods.of approximately $1.0 billion on an annualized basis.
In connection with a restructuring action announced in August 2014, weWe incurred total restructuring and other charges of $267$886 million and $489in fiscal 2021. We incurred charges of $881 million related to the restructuring plan initiated during fiscal 20162021 and 2015, respectively. These charges werethe remainder of which was related primarily to severance and other one-time termination benefits and other associated costs. We completed thisthe restructuring plan at the end ofannounced during fiscal 2016.2020.
Operating Income
The following table presents our operating income and our operating income as a percentage of revenue (in millions, except percentages): | | | | | | | | | | | | | | | | | | | | |
Years Ended | | July 31, 2021 | | July 25, 2020 | | July 27, 2019 |
Operating income | | $ | 12,833 | | | $ | 13,620 | | | $ | 14,219 | |
Operating income as a percentage of revenue | | 25.8 | % | | 27.6 | % | | 27.4 | % |
|
| | | | | | | | | | | | |
Years Ended | | July 29, 2017 | | July 30, 2016 | | July 25, 2015 |
Operating income | | $ | 11,973 |
| | $ | 12,660 |
| | $ | 10,770 |
|
Operating income as a percentage of revenue | | 24.9 | % | | 25.7 | % | | 21.9 | % |
For fiscal 2017, as compared with fiscal 2016, operatingOperating income decreased by 5%6%, and as a percentage of revenue operating income decreased by 0.81.8 percentage points. These decreaseschanges resulted primarily from an increase infrom: higher restructuring and other charges related to the restructuring action announced in August 2016 and the $253 million pre-tax gain from the sale of our SP Video CPE Business recorded in fiscal 2016.
For fiscal 2016, as compared with fiscal 2015, operating income increased by 18%, and as a percentage of revenue operating income increased by 3.8 percentage points. The increase resulted from the following: a gross margin percentage increase, driven in partdecrease (driven by the sale of the lower margin SP Video CPE Business during fiscal 2016; the $253 million pre-tax gain from the sale of our SP Video CPE Business;pricing erosion, partially offset by productivity improvements and product mix), partially offset by a decrease in restructuring and other charges related to the restructuring action announced in August 2014.revenue increase.
Interest and Other Income (Loss), Net
Interest Income (Expense), Net The following table summarizes interest income and interest expense (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| Years Ended | | 2017 vs. 2016 | | 2016 vs. 2015 |
| July 29, 2017 | | July 30, 2016 | | July 25, 2015 | | Variance in Dollars | | Variance in Dollars |
Interest income | $ | 1,338 |
| | $ | 1,005 |
| | $ | 769 |
| | $ | 333 |
| | $ | 236 |
|
Interest expense | (861 | ) | | (676 | ) | | (566 | ) | | (185 | ) | | (110 | ) |
Interest income (expense), net | $ | 477 |
| | $ | 329 |
| | $ | 203 |
| | $ | 148 |
| | $ | 126 |
|
Fiscal 2017 Compared with Fiscal 2016 | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended | | 2021 vs. 2020 |
| July 31, 2021 | | July 25, 2020 | | July 27, 2019 | | Variance in Dollars |
Interest income | $ | 618 | | | $ | 920 | | | $ | 1,308 | | | $ | (302) | |
Interest expense | (434) | | | (585) | | | (859) | | | 151 | |
Interest income (expense), net | $ | 184 | | | $ | 335 | | | $ | 449 | | | $ | (151) | |
Interest income increaseddecreased driven by an increase in our portfoliolower interest rates and lower average balances of cash cash equivalents, and fixed income investments as well as higher yields on our portfolio.available-for-sale debt investments. The increasedecrease in interest expense was driven by highera lower average debt balances which includes commercial paper notesbalance and the impact of higherlower effective interest rates on floating-rate senior notes and interest rate swaps associated with fixed-rate senior notes. rates.
Fiscal 2016 Compared with Fiscal 2015
Interest income increased driven by an increase in our portfolio of cash, cash equivalents, and fixed income investments as well as higher yields on our portfolio of cash and investments. The increase in interest expense was driven by higher average debt balances and the impact of higher effective interest rates on floating-rate senior notes and interest rate swaps associated with fixed-rate senior notes.
Other Income (Loss), Net The components of other income (loss), net, are summarized as follows (in millions): |
| | | | | | | | | | | | | | | | | | | |
| Years Ended | | 2017 vs. 2016 | | 2016 vs. 2015 |
| July 29, 2017 | | July 30, 2016 | | July 25, 2015 | | Variance in Dollars | | Variance in Dollars |
Gains (losses) on investments, net: | | | | | | | | | |
Publicly traded equity securities | $ | (45 | ) | | $ | 33 |
| | $ | 116 |
| | $ | (78 | ) | | $ | (83 | ) |
Fixed income securities | (42 | ) | | (34 | ) | | 41 |
| | (8 | ) | | (75 | ) |
Total available-for-sale investments | (87 | ) | | (1 | ) | | 157 |
| | (86 | ) | | (158 | ) |
Privately held companies | (46 | ) | | (35 | ) | | 82 |
| | (11 | ) | | (117 | ) |
Net gains (losses) on investments | (133 | ) | | (36 | ) | | 239 |
| | (97 | ) | | (275 | ) |
Other gains (losses), net | (30 | ) | | (33 | ) | | (11 | ) | | 3 |
| | (22 | ) |
Other income (loss), net | $ | (163 | ) | | $ | (69 | ) | | $ | 228 |
| | $ | (94 | ) | | $ | (297 | ) |
Fiscal 2017 Compared with Fiscal 2016
The change in total net gains (losses) on available-for-sale investments was driven by $74 million of impairment charges on publicly traded equity securities. | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended | | 2021 vs. 2020 |
| July 31, 2021 | | July 25, 2020 | | July 27, 2019 | | Variance in Dollars |
Gains (losses) on investments, net: | | | | | | | |
Available-for-sale debt investments | $ | 53 | | | $ | 42 | | | $ | (13) | | | $ | 11 | |
Marketable equity investments | 6 | | | (5) | | | (3) | | | 11 | |
Privately held investments | 266 | | | 95 | | | 6 | | | 171 | |
Net gains (losses) on investments | 325 | | | 132 | | | (10) | | | 193 | |
Other gains (losses), net | (80) | | | (117) | | | (87) | | | 37 | |
Other income (loss), net | $ | 245 | | | $ | 15 | | | $ | (97) | | | $ | 230 | |
The change in net gains (losses) on investments in privately held companies was primarily due to higher impairment charges on investments in privately held companies, partially offset by higher realized gains on investments in privately held companies.
The change in other gains (losses), net was driven by lower donation expense partially offset by impacts from customer lease terminations, foreign exchange and equity derivatives.
Fiscal 2016 Compared with Fiscal 2015
The change in total net gains (losses) on available-for-sale debt investments was primarily attributable to lowerhigher realized gains on publicly traded equity securities and net losses on fixed income securities in fiscal 2016 compared to net gains in fiscal 2015 as a result of market conditions, and the timing of sales of these securities.
investments. The change in net gains (losses) on marketable equity investments was attributable to market value fluctuations and the timing of recognition of gains and losses. The change in net gains (losses) on privately held companiesinvestments was primarily due to a gain of $126 million related to the reorganization of our investment in VCE, which was recorded in fiscal 2015.
higher net unrealized gains and lower impairment charges, partially offset by lower realized gains. The change in other gains (losses), net was primarily driven by higherlower donation expensesexpense and net unfavorable foreign exchangefavorable impacts from our equity derivatives, partially offset by higher gainsunfavorable impacts from customer lease terminations.foreign exchange.
Provision for Income Taxes
Our provision for income taxes is subject to volatility and could be adversely impacted by earnings being lower than anticipated in countries that have lower tax rates, higher than anticipated in countries that have higher tax rates, and expiration of or lapses in tax incentives. Our provision for income taxes does not include provisions for U.S. income taxes and foreign withholding taxes associated with the repatriation of undistributed earnings of certain foreign subsidiaries that we intend to reinvest indefinitely in our foreign subsidiaries. If these earnings were distributed from the foreign subsidiaries to the United States in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, we would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Further, as a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates. Our failure to meet these commitments could adversely impact our provision for income taxes.
Fiscal 2017 Compared with Fiscal 2016
The provision for income taxes resulted in an effective tax rate of 21.8%20.1% for fiscal 2017,2021, compared with 16.9%19.7% for fiscal 2016.2020. The net 4.90.4 percentage pointpoints increase in the effective tax ratesrate was primarily due to a decrease in the recognition oftax benefit from foreign income taxed at other than U.S. rates, offset by an increase in foreign-derived intangible income deduction and a net benefit to the provision for income taxesdecrease in fiscal 2016 related to our settlement with the IRS of all outstanding items covering fiscal 2008 through fiscal 2010 and reinstatement of the U.S. federal R&D tax credit on December 18, 2015.state taxes.
For a full reconciliation of our effective tax rate to the U.S. federal statutory rate of 35%21% and for further explanation of our provision for income taxes, see Note 1618 to the Consolidated Financial Statements.
Fiscal 2016 Compared with Fiscal 2015
The provision for income taxes resulted in an effective tax rate
LIQUIDITY AND CAPITAL RESOURCES
The following sections discuss the effects of changes in our balance sheet, our capital allocation strategy including stock repurchase program and dividends, our contractual obligations, and certain other commitments and activities on our liquidity and capital resources.
Balance Sheet and Cash Flows
Cash and Cash Equivalents and Investments The following table summarizes our cash and cash equivalents and investments (in millions):
| | | July 29, 2017 | | July 30, 2016 | | Increase (Decrease) | | July 31, 2021 | | July 25, 2020 | | Increase (Decrease) |
Cash and cash equivalents | $ | 11,708 |
| | $ | 7,631 |
| | $ | 4,077 |
| Cash and cash equivalents | $ | 9,175 | | | $ | 11,809 | | | $ | (2,634) | |
Fixed income securities | 57,077 |
| | 56,621 |
| | 456 |
| |
Publicly traded equity securities | 1,707 |
| | 1,504 |
| | 203 |
| |
Available-for-sale debt investments | | Available-for-sale debt investments | 15,206 | | | 17,610 | | | (2,404) | |
Marketable equity securities | | Marketable equity securities | 137 | | | — | | | 137 | |
Total | $ | 70,492 |
| | $ | 65,756 |
| | $ | 4,736 |
| Total | $ | 24,518 | | | $ | 29,419 | | | $ | (4,901) | |
The net increasedecrease in cash and cash equivalents and investments from fiscal 20162020 to fiscal 20172021 was primarily driven by net cash paid for acquisitions and divestitures of $7.0 billion, cash returned to stockholders in the resultform of repurchases of common stock of $2.9 billion under the stock repurchase program and cash provided by operating activitiesdividends of $13.9$6.2 billion, and anet decrease in debt of $3.0 billion, net increase in debtrestricted cash of $5.3$0.8 billion, and capital expenditures of $0.7 billion. These sourcesuses of cash were partially offset by cash returnedprovided by operating activities of $15.5 billion.
In addition to shareholderscash requirements in the formnormal course of cash dividendsbusiness, we have approximately $0.7 billion of $5.5 billion and repurchases of common stock of $3.7 billion under the stock repurchase program, net cash paidU.S. transition tax on accumulated earnings for acquisitions of $3.3 billion, the timing of settlements of investments and other of $1.1 billion and capital expenditures of $1.0 billion.
Our total in cash and cash equivalents and investments held by various foreign subsidiaries was $67.5and $2.5 billion and $59.8 billion as of long-term debt outstanding at July 29, 2017 and July 30, 2016, respectively. Under current tax laws and regulations, if these assets were to be distributed31, 2021 that will mature within the next 12 months from the foreign subsidiaries to the United States in the formbalance sheet date. See further discussion of dividends or otherwise, we would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits)liquidity and foreign withholding taxes. The balance of cashfuture payments under “Contractual Obligations” and cash equivalents“Liquidity and investments available in the United States as of July 29, 2017 and July 30, 2016 was $3.0 billion and $5.9 billion, respectively.Capital Resource Requirements” below.
We maintain an investment portfolio of various holdings, types, and maturities. We classify our investments as short-term investments based on their nature and their availability for use in current operations. We believe the overall credit quality of our portfolio is strong, with our cash equivalents and our fixed incomeavailable-for-sale debt investment portfolio consisting primarily of high quality investment-grade securities. We believe that our strong cash and cash equivalents and investments position is critical at this time of uncertainty due to the COVID-19 pandemic and allows us to use our cash resources for strategic investments to gain access to new technologies, for acquisitions, for customer financing activities, for working capital needs, and for the repurchase of shares of common stock and payment of dividends as discussed below.
Securities Lending We periodically engage in securities lending activities with certain of our available-for-sale debt investments. These transactions are accounted for as a secured lending of the securities, and the securities are typically loaned only on an overnight basis. We require collateral equal to at least 102% of the fair market value of the loaned security and that the collateral be in the form of cash or liquid, high-quality assets. We engage in these secured lending transactions only with highly creditworthy counterparties, and the associated portfolio custodian has agreed to indemnify us against collateral losses. We did not experience any losses in connection with the secured lending of securities during the periods presented.
Free Cash Flow and Capital Allocation As part of our capital allocation strategy, we intend to return a minimum of 50% of our free cash flow annually to our shareholdersstockholders through cash dividends and repurchases of common stock.
We define free cash flow as net cash provided by operating activities less cash used to acquire property and equipment. The following table reconciles our net cash provided by operating activities to free cash flow (in millions):
| | Years Ended | July 29, 2017 | | July 30, 2016 | | July 25, 2015 | Years Ended | July 31, 2021 | | July 25, 2020 | | July 27, 2019 |
Net cash provided by operating activities | $ | 13,876 |
| | $ | 13,570 |
| | $ | 12,552 |
| Net cash provided by operating activities | $ | 15,454 | | | $ | 15,426 | | | $ | 15,831 | |
Acquisition of property and equipment | (964 | ) | | (1,146 | ) | | (1,227 | ) | Acquisition of property and equipment | (692) | | | (770) | | | (909) | |
Free cash flow | $ | 12,912 |
| | $ | 12,424 |
| | $ | 11,325 |
| Free cash flow | $ | 14,762 | | | $ | 14,656 | | | $ | 14,922 | |
We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, the rate at which products are shipped during the quarter (which we refer to as shipment linearity), the timing and collection of accounts receivable and financing receivables, inventory and supply chain management, deferred revenue excess tax benefits resulting from share-based compensation, and the timing and amount of tax and other payments. For additional discussion, see “Part I, Item 1A. Risk Factors” in this report.
We consider free cash flow to be a liquidity measure that provides useful information to management and investors because of our intent to return a stated percentage of free cash flow to shareholdersstockholders in the form of dividends and stock repurchases. We further regard free cash flow as a useful measure because it reflects cash that can be used to, among other things, invest in our business, make strategic acquisitions, repurchase common stock, and pay dividends on our common stock, after deducting capital investments. A limitation of the utility of free cash flow as a measure of financial performance and liquidity is that the free cash flow does not represent the total increase or decrease in our cash balance for the period. In addition, we have other required uses of cash, including repaying the principal of our outstanding indebtedness. Free cash flow is not a measure calculated in accordance with U.S. generally accepted accounting principles and should not be regarded in isolation or as an alternative for net incomecash provided by operating activities or any other measure calculated in accordance with such principles, and other companies may calculate free cash flow in a different manner than we do.
The following table summarizes the dividends paid and stock repurchases (in millions, except per-share amounts):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | DIVIDENDS | | STOCK REPURCHASE PROGRAM | | TOTAL |
Years Ended | | Per Share | | Amount | | Shares | | Weighted-Average Price per Share | | Amount | | Amount |
July 29, 2017 | | $ | 1.10 |
| | $ | 5,511 |
| | 118 |
| | $ | 31.38 |
| | $ | 3,706 |
| | $ | 9,217 |
|
July 30, 2016 | | $ | 0.94 |
| | $ | 4,750 |
| | 148 |
| | $ | 26.45 |
| | $ | 3,918 |
| | $ | 8,668 |
|
July 25, 2015 | | $ | 0.80 |
| | $ | 4,086 |
| | 155 |
| | $ | 27.22 |
| | $ | 4,234 |
| | $ | 8,320 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | DIVIDENDS | | STOCK REPURCHASE PROGRAM | | TOTAL |
Years Ended | | Per Share | | Amount | | Shares | | Weighted-Average Price per Share | | Amount | | Amount |
July 31, 2021 | | $ | 1.46 | | | $ | 6,163 | | | 64 | | | $ | 45.48 | | | $ | 2,902 | | | $ | 9,065 | |
July 25, 2020 | | $ | 1.42 | | | $ | 6,016 | | | 59 | | | $ | 44.36 | | | $ | 2,619 | | | $ | 8,635 | |
July 27, 2019 | | $ | 1.36 | | | $ | 5,979 | | | 418 | | | $ | 49.22 | | | $ | 20,577 | | | $ | 26,556 | |
Any future dividends are subject to the approval of our Board of Directors.
The remaining authorized amount for stock repurchases under this program is approximately $7.9 billion, with no termination date.
Accounts Receivable, Net The following table summarizes our accounts receivable, net (in millions):
|
| | | | | | | | | | | |
| July 29, 2017 | | July 30, 2016 | | Increase (Decrease) |
Accounts receivable, net | $ | 5,146 |
| | $ | 5,847 |
| | $ | (701 | ) |
| | | | | | | | | | | | | | | | | |
| July 31, 2021 | | July 25, 2020 | | Increase (Decrease) |
Accounts receivable, net | $ | 5,766 | | | $ | 5,472 | | | $ | 294 | |
Our accounts receivable net, as of July 29, 2017 decreased31, 2021 increased by approximately 12%5% compared with the end of fiscal 2016, primarily due to service and product billings being more linear in the fourth quarter of fiscal 2017 compared with the fourth quarter of fiscal 2016.2020.
Inventory Supply Chain The following table summarizes our inventories and purchase commitments with contract manufacturers and suppliers (in millions, except annualized inventory turns)millions):
|
| | | | | | | | | | | |
| July 29, 2017 | | July 30, 2016 | | Increase (Decrease) |
Inventories | $ | 1,616 |
| | $ | 1,217 |
| | $ | 399 |
|
Annualized inventory turns | 12.3 |
| | 14.6 |
| | (2.3 | ) |
Purchase commitments with contract manufacturers and suppliers | $ | 4,640 |
| | $ | 3,896 |
| | $ | 744 |
|
| | | | | | | | | | | | | | | | | |
| July 31, 2021 | | July 25, 2020 | | Increase (Decrease) |
Inventories | $ | 1,559 | | | $ | 1,282 | | | $ | 277 | |
Inventory as of July 29, 201731, 2021 increased by 33%22% from our inventory balance at the end of fiscal 2016, and for the same period purchase commitments with contract manufacturers and suppliers increased by approximately 19%. On a combined basis, inventories and purchase commitments with contract manufacturers and suppliers increased by 22% compared with the end of fiscal 2016.2020. The increase in inventory was primarily due to an increase in raw materials, due to securing memory supply which is currently constrained and higher levels of manufacturedpartially offset by a decrease in finished goods in support of current order activity. The increase in purchase commitments with contract manufacturers and suppliers was due to securing memory supply and procuring key components for specific product areas. We believe our inventory and purchase commitments levels are in line with our current demand forecasts.
Our finished goods consist of distributor inventory and deferred cost of sales and manufactured finished goods. Distributor inventory and deferred cost of sales are related to unrecognized revenue on shipments to distributors and retail partners as well as shipments to customers. Manufactured finished goods consist primarily of build-to-order and build-to-stock products.
We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with contract manufacturers and suppliers that allow them to procure inventory based upon criteria as defined by us or that establish the parameters defining our requirements and our commitment to securing manufacturing capacity.
Our purchase commitments are for short-term product manufacturing requirements as well as for commitments to suppliers to secure manufacturing capacity. Certain of our purchase commitments with contract manufacturers and suppliers relate to arrangements to secure long-term supply and pricing for certain product components for multi-year periods. A significant portion of our reported purchase commitments arising from these agreements are firm, noncancelable, and unconditional commitments. In certain instances, these agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed. OurWe believe our inventory and purchase commitments are for short-term product manufacturing requirements as well as forin line with our current demand forecasts.
The following table summarizes our purchase commitments with contract manufacturers and suppliers (in millions):
| | | | | | | | | | | |
Commitments by Period | July 31, 2021 | | July 25, 2020 |
Less than 1 year | $ | 6,903 | | | $ | 3,994 | |
1 to 3 years | 1,806 | | | 412 | |
3 to 5 years | 1,545 | | | — | |
Total | $ | 10,254 | | | $ | 4,406 | |
The increase in purchase commitments with contract manufacturers and suppliers compared with the end of fiscal 2020 was due to suppliersarrangements to secure manufacturing capacity.long-term supply and pricing for certain product components for multi-year periods. We have partnered with several of our key suppliers utilizing our volume purchasing and extending supply coverage, including revising supplier arrangements, to address supply chain challenges.
Inventory and supply chain management remain areas of focus as we balance the need to maintain supply chain flexibility to help ensure competitive lead times with the risk of inventory obsolescence because of rapidly changing technology and customer requirements. We believe the amount of our inventory and purchase commitments is appropriate for our revenue levels.
Financing Receivables and Guarantees The following table summarizes our financing receivables (in millions):
| | | | | | | | | | | | | | | | | |
| July 31, 2021 | | July 25, 2020 | | Increase (Decrease) |
Lease receivables, net | $ | 1,697 | | | $ | 2,088 | | | $ | (391) | |
Loan receivables, net | 5,117 | | | 5,856 | | | (739) | |
Financed service contracts, net | 2,450 | | | 2,821 | | | (371) | |
Total, net | $ | 9,264 | | | $ | 10,765 | | | $ | (1,501) | |
|
| | | | | | | | | | | |
| July 29, 2017 | | July 30, 2016 | | Increase (Decrease) |
Lease receivables, net | $ | 2,650 |
| | $ | 3,070 |
| | $ | (420 | ) |
Loan receivables, net | 4,457 |
| | 3,349 |
| | 1,108 |
|
Financed service contracts, net | 2,487 |
| | 2,011 |
| | 476 |
|
Total, net | $ | 9,594 |
| | $ | 8,430 |
| | $ | 1,164 |
|
Financing ReceivablesOur financing arrangements include leases, loans, and financed service contracts. Lease receivables include sales-type and direct-financing leases. Arrangements related to leases are generally collateralized by a security interest in the underlying assets. Our loan receivables include customerscustomer financing for purchases of our hardware, software and services and also may include additional funds for other costs associated with network installation and integration of our products and services. We also provide financing to certain qualified customers for long-term service contracts, which primarily relate to technical support services. The majority of the revenue from these financed service contracts is deferred and is recognized ratably over the period during which the services are performed. Financing receivables increaseddecreased by 14% primarily due to a 33% increase in loan receivables driven by an increase in financing for software arrangements.We expect to continue to expand the use of our financing programs in the near term..
Financing GuaranteesIn the normal course of business, third parties may provide financing arrangements to our customers and channel partners under financing programs. The financing arrangements to customers provided by third parties are related to leases and loans and typically have terms of up to three years. In some cases, we provide guarantees to third parties for these lease and loan arrangements. The financing arrangements to channel partners consist of revolving short-term financing provided by third parties, generally with payment terms generally ranging from 60 to 90 days. In certain instances, these financing arrangements result in a transfer of our receivables to the third party. The receivables are derecognized upon transfer, as these transfers qualify as true sales, and we receive payments for the receivables from the third party based on our standard payment terms.
The volume of channel partner financing was $27.0$26.7 billion, $26.9 billion, and $25.9$29.6 billion in fiscal 2017, 2016,2021, 2020, and 2015,2019, respectively. These financing arrangements facilitate the working capital requirements of the channel partners, and in some cases, we guarantee a portion of these arrangements. The balance of the channel partner financing subject to guarantees was $1.0$1.3 billion and $1.1 billion as of July 29, 201731, 2021 and July 30, 2016,25, 2020, respectively. We could be called upon to make payments under these guarantees in the event of nonpayment by the channel partners or end-user customers. Historically, our payments under these arrangements have been immaterial. Where we provide a guarantee, we defer the revenue associated with the channel partner and end-user financing arrangement in accordance with revenue recognition policies, or we record a liability for the fair value of the guarantees. In either case, the deferred revenue is recognized as revenue when the guarantee is removed. As of July 29, 2017,31, 2021, the total maximum potential future payments related to these guarantees was approximately $314$160 million, of which approximately $134$21 million was recorded as deferred revenue.
Borrowings
Senior NotesThe following table summarizes the principal amount of our senior notes (in millions):
| | | | | | | | | | | | | | | | | |
| Maturity Date | | July 31, 2021 | | July 25, 2020 |
Senior notes: | | | | | |
Fixed-rate notes: | | | | | |
2.20% | February 28, 2021 | | $ | — | | | $ | 2,500 | |
2.90% | March 4, 2021 | | — | | | 500 | |
1.85% | September 20, 2021 | | 2,000 | | | 2,000 | |
3.00% | June 15, 2022 | | 500 | | | 500 | |
2.60% | February 28, 2023 | | 500 | | | 500 | |
2.20% | September 20, 2023 | | 750 | | | 750 | |
3.625% | March 4, 2024 | | 1,000 | | | 1,000 | |
3.50% | June 15, 2025 | | 500 | | | 500 | |
2.95% | February 28, 2026 | | 750 | | | 750 | |
2.50% | September 20, 2026 | | 1,500 | | | 1,500 | |
5.90% | February 15, 2039 | | 2,000 | | | 2,000 | |
5.50% | January 15, 2040 | | 2,000 | | | 2,000 | |
Total | | | $ | 11,500 | | | $ | 14,500 | |
|
| | | | | | | | | | |
| Maturity Date | | July 29, 2017 | | July 30, 2016 | |
Senior notes: | | | | | | |
Floating-rate notes: | | | | | | |
Three-month LIBOR plus 0.28% | March 3, 2017 | (1) | $ | — |
| | $ | 1,000 |
| |
Three-month LIBOR plus 0.60% | February 21, 2018 | | 1,000 |
| | 1,000 |
| |
Three-month LIBOR plus 0.31% | June 15, 2018 | | 900 |
| | 900 |
| |
Three-month LIBOR plus 0.50% | March 1, 2019 | | 500 |
| | 500 |
| |
Three-month LIBOR plus 0.34% | September 20, 2019 | (2) | 500 |
| | — |
| |
Fixed-rate notes: | | | | | | |
1.10% | March 3, 2017 | (1) | — |
| | 2,400 |
| |
3.15% | March 14, 2017 | (1) | — |
| | 750 |
| |
1.40% | February 28, 2018 | | 1,250 |
| | 1,250 |
| |
1.65% | June 15, 2018 | | 1,600 |
| | 1,600 |
| |
4.95% | February 15, 2019 | | 2,000 |
| | 2,000 |
| |
1.60% | February 28, 2019 | | 1,000 |
| | 1,000 |
| |
2.125% | March 1, 2019 | | 1,750 |
| | 1,750 |
| |
1.40% | September 20, 2019 | (2) | 1,500 |
| | — |
| |
4.45% | January 15, 2020 | | 2,500 |
| | 2,500 |
| |
2.45% | June 15, 2020 | | 1,500 |
| | 1,500 |
| |
2.20% | February 28, 2021 | | 2,500 |
| | 2,500 |
| |
2.90% | March 4, 2021 | | 500 |
| | 500 |
| |
1.85% | September 20, 2021 | (2) | 2,000 |
| | — |
| |
3.00% | June 15, 2022 | | 500 |
| | 500 |
| |
2.60% | February 28, 2023 | | 500 |
| | 500 |
| |
2.20% | September 20, 2023 | (2) | 750 |
| | — |
| |
3.625% | March 4, 2024 | | 1,000 |
| | 1,000 |
| |
3.50% | June 15, 2025 | | 500 |
| | 500 |
| |
2.95% | February 28, 2026 | | 750 |
| | 750 |
| |
2.50% | September 20, 2026 | (2) | 1,500 |
| | — |
| |
5.90% | February 15, 2039 | | 2,000 |
| | 2,000 |
| |
5.50% | January 15, 2040 | | 2,000 |
| | 2,000 |
| |
Total | | | $ | 30,500 |
| | $ | 28,400 |
| |
(1) In March 2017, we repaid senior notes with an aggregate principal amount of $4.15 billion upon maturity.
(2) In September 2016, we issued senior notes for an aggregate principal amount of $6.25 billion.
Interest is payable semiannually on each class of the senior fixed-rate notes, each of which is redeemable by us at any time, subject to a make-whole premium. Interest is payable quarterly on the floating-rate notes. We were in compliance with all debt covenants as of July 29, 2017.31, 2021.
Our $2.0 billion senior fixed-rate notes with a maturity date of September 20, 2021 were redeemed on August 20, 2021, pursuant to our par call redemption option. The redemption price was equal to 100% of the principal amount plus any accrued and unpaid interest to, but excluding, August 20, 2021.
Commercial Paper Effective March 31, 2017, we increased our borrowing capacity under our We have a short-term debt financing program in which up to $10.0 billion is available through the issuance of commercial paper program from $3.0 billion to $10.0 billion.notes. We use the proceeds from the issuance of commercial paper notes for general corporate purposes. We had $3.2 billion and no commercial paper notes outstanding as of July 29, 201731, 2021 and July 30, 2016, respectively.25, 2020.
Credit FacilitiesFacility On May 15, 2015,13, 2021, we entered into a 5-year credit agreement with certain institutional lenders that provides for a $3.0 billion unsecured revolving credit facility that is scheduled to expire on May 15, 2020.13, 2026. The credit agreement is structured as an amendment and restatement of our 364-day credit agreement which would have terminated on May 14, 2021. As of July 31, 2021, we were in compliance with the required interest coverage ratio and the other covenants, and we had not borrowed any funds under the credit agreement. Any advances under the 5-year credit agreement will accrue interest at rates that are equal to, based on certain conditions, either (a) with respect to loans in U.S. dollars, (i) LIBOR or (ii) the Base Rate (to be defined as the highest of (a)(x) the Bank of America prime rate, (y) the Federal Funds rate plus 0.50% and (z) a daily rate equal to one-month LIBOR plus 1.0%), (b) Bank of America’s “prime rate” as announced from timewith respect to time, orloans in Euros, EURIBOR, (c) LIBOR, orwith respect to loans in Yen, TIBOR and (d) with respect to loans in Pounds Sterling, SONIA plus a comparable or successor rate that is approved by the Administrative Agent (“Eurocurrency Rate”), for an interest period of one month plus 1.00%, or (ii) the Eurocurrency Rate,credit spread adjustment, plus a margin that is based on our senior debt credit ratings as published by Standard & Poor’s Financial Services, LLC and Moody’s Investors Service, Inc., provided that in no event will the Eurocurrency Rateinterest rate be less than zero.0.0%. We will pay a quarterly commitment fee during the term of the 5-year credit agreement which may vary depending on our senior debt credit ratings. In addition, the 5-year credit agreement incorporates certain sustainability-linked metrics. Specifically, our applicable interest rate and commitment fee are subject to upward or downward adjustments if we achieve, or fail to achieve, certain specified targets based on two key performance indicator metrics: (i) social impact and (ii) foam reduction. We may also, upon the agreement of either the then-existing lenders or additional lenders not currently parties to the agreement, increase the commitments under the credit facility by up to an additional $2.0 billion and/orand, at our option, extend the expiration datematurity of the credit facility for an additional year up to May 15, 2022.
In addition, on March 30, 2017 we entered into a 364-Day credit agreement with certain institutional lenders that provides for a $2.0 billion unsecured revolving credit facility that is scheduled to expire on March 29, 2018.two times. The credit agreement also provides us the option to, for a fee, convert any borrowings outstanding thereunder on March 29, 2018 to a term loan maturing no later than March 29, 2019. The interest rate applicable to outstanding balances under the credit agreement will be based on either (i) the higher of (a) the rates on overnight Federal Funds transactions with members of the Federal Reserve System (i.e., Federal Funds rate) plus 0.50%, (b) Bank of America’s “prime rate” as announced from time to time or (c) LIBOR for an interest period of one month plus 1.00%, or (ii) LIBOR plus a margin that is based on our senior debt credit ratings as published by S&P Global Rating, a business unit of Standard & Poor’s Financial Services LLC, and Moody’s Investors Service, Inc.
These credit agreements requirerequires that we comply with certain covenants, including that we maintain an interest coverage ratiosratio as defined in these agreements. Asthe agreement.
Remaining Performance Obligations The following table presents the breakdown of remaining performance obligations (in millions):
| | | | | | | | | | | | | | | | | |
| July 31, 2021 | | July 25, 2020 | | Increase (Decrease) |
Product | $ | 13,270 | | | $ | 11,261 | | | $ | 2,009 | |
Service | 17,623 | | | 17,093 | | | 530 | |
Total | $ | 30,893 | | | $ | 28,354 | | | $ | 2,539 | |
Total remaining performance obligations increased 9% in compliance with the required interest coverage ratiosfiscal 2021. Remaining performance obligations for product and the other covenants,service increased 18% and we had not borrowed any funds under these credit facilities.3%, respectively, compared to fiscal 2020.
Deferred Revenue The following table presents the breakdown of deferred revenue (in millions):
| | | | | | | | | | July 31, 2021 | | July 25, 2020 | | Increase (Decrease) |
| July 29, 2017 | | July 30, 2016 | | Increase (Decrease) | |
Product | | Product | $ | 9,416 | | | $ | 7,895 | | | $ | 1,521 | |
Service | $ | 11,302 |
| | $ | 10,621 |
| | $ | 681 |
| Service | 12,748 | | | 12,551 | | | 197 | |
Product: | | | | |
|
| |
Deferred revenue related to recurring software and subscription offers | 4,971 |
| | 3,308 |
| | 1,663 |
| |
Other product deferred revenue | 2,221 |
| | 2,543 |
| | (322 | ) | |
Total product deferred revenue | 7,192 |
| | 5,851 |
| | 1,341 |
| |
Total | $ | 18,494 |
| | $ | 16,472 |
| | $ | 2,022 |
| Total | $ | 22,164 | | | $ | 20,446 | | | $ | 1,718 | |
Reported as: | | | | | | Reported as: | | | | | |
Current | $ | 10,821 |
| | $ | 10,155 |
| | $ | 666 |
| Current | $ | 12,148 | | | $ | 11,406 | | | $ | 742 | |
Noncurrent | 7,673 |
| | 6,317 |
| | 1,356 |
| Noncurrent | 10,016 | | | 9,040 | | | 976 | |
Total | $ | 18,494 |
| | $ | 16,472 |
| | $ | 2,022 |
| Total | $ | 22,164 | | | $ | 20,446 | | | $ | 1,718 | |
Total deferred revenue increased 12%8% in fiscal 2017. Deferred2021. The increase in deferred product revenue increased 23%of 19% was primarily due to increased deferrals related to our recurring software and subscription offers.offerings. The portion of productincrease in deferred revenue related to recurring software and subscription offers grew 50%, to $5.0 billion, as of July 29, 2017. Wireless, Security, and Collaboration were the key product category contributors to this product deferred revenue growth during the fiscal year. Deferred service revenue increased 6%was driven by the timing and amountimpact of multiyear arrangements and our focus on contract renewals, andpartially offset by amortization of deferred service contract attach rates.revenue.
Contractual Obligations
The impact of contractual obligations on our liquidity and capital resources in future periods should be analyzed in conjunction with the factors that impact our cash flows from operations discussed previously. In addition, we plan for and measure our liquidity and capital resources through an annual budgeting process. The following table summarizes our contractual obligations at July 29, 201731, 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| PAYMENTS DUE BY PERIOD |
July 31, 2021 | Total | | Less than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | More than 5 Years |
Operating leases | $ | 1,245 | | | $ | 355 | | | $ | 474 | | | $ | 197 | | | $ | 219 | |
Purchase commitments with contract manufacturers and suppliers | 10,254 | | | 6,903 | | | 1,806 | | | 1,545 | | | — | |
Other purchase obligations | 1,074 | | | 584 | | | 336 | | | 96 | | | 58 | |
Senior notes | 11,500 | | | 2,500 | | | 2,250 | | | 1,250 | | | 5,500 | |
Transition tax payable | 6,910 | | | 727 | | | 2,091 | | | 4,092 | | | — | |
Other long-term liabilities | 1,428 | | | — | | | 291 | | | 160 | | | 977 | |
Total by period | $ | 32,411 | | | $ | 11,069 | | | $ | 7,248 | | | $ | 7,340 | | | $ | 6,754 | |
Other long-term liabilities (uncertainty in the timing of future payments) | 2,490 | | | | | | | | | |
Total | $ | 34,901 | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| PAYMENTS DUE BY PERIOD |
July 29, 2017 | Total | | Less than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | More than 5 Years |
Operating leases | $ | 1,237 |
| | $ | 417 |
| | $ | 467 |
| | $ | 210 |
| | $ | 143 |
|
Purchase commitments with contract manufacturers and suppliers | 4,640 |
| | 4,620 |
| | 20 |
| | — |
| | — |
|
Other purchase obligations | 1,987 |
| | 750 |
| | 867 |
| | 284 |
| | 86 |
|
Senior notes | 30,500 |
| | 4,750 |
| | 11,250 |
| | 5,500 |
| | 9,000 |
|
Other long-term liabilities | 1,179 |
| | — |
| | 209 |
| | 99 |
| | 871 |
|
Total by period | $ | 39,543 |
| | $ | 10,537 |
| | $ | 12,813 |
| | $ | 6,093 |
| | $ | 10,100 |
|
Other long-term liabilities (uncertainty in the timing of future payments) | 1,521 |
| | | | | | | | |
Total | $ | 41,064 |
| | | | | | | | |
Operating Leases For more information on our operating leases, see Note 128 to the Consolidated Financial Statements.
Purchase Commitments with Contract Manufacturers and Suppliers We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. Our purchase commitments are for short-term product manufacturing requirements as well as for commitments to suppliers to secure manufacturing capacity. Certain of our purchase commitments with contract manufacturers and suppliers relate to arrangements to secure long-term pricing for certain product components for multi-year periods. A significant portion of our reported estimated purchase
commitments arising from these agreements are firm, noncancelable, and unconditional commitments. We record a liability for firm, noncancelable, and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory. See further discussion in “Inventory Supply Chain.” As of July 29, 2017, the liability for these purchase commitments was $162 million and is recorded in other current liabilities and is not included in the preceding table.
Other Purchase Obligations Other purchase obligations represent an estimate of all contractual obligations in the ordinary course of business, other than operating leases and commitments with contract manufacturers and suppliers, for which we have not received the goods or services. Purchase orders are not included in the preceding table as they typically represent our authorization to purchase rather than binding contractual purchase obligations.
Long-Term Debt The amount of long-term debt in the preceding table represents the principal amount of the respective debt instruments. See Note 1012 to the Consolidated Financial Statements.
Transition Tax Payable Transition tax payable represents future cash tax payments associated with the one-time U.S. transition tax on accumulated earnings of foreign subsidiaries as a result of the Tax Cuts and Jobs Act (“the Tax Act”). See Note 18 to the Consolidated Financial Statements.
Other Long-Term Liabilities Other long-term liabilities primarily include noncurrent income taxes payable, accrued liabilities for deferred compensation, deferred tax liabilities, and certain other long-term liabilities. Due to the uncertainty in the timing of future payments, our noncurrent income taxes payable of approximately $1,250 million$2.4 billion and deferred tax liabilities of $271$134 million were presented as one aggregated amount in the total column on a separate line in the preceding table. Noncurrent income taxes payable include uncertain tax positions (seepositions. See Note 1618 to the Consolidated Financial Statements).Statements.
Other Commitments
In connection with our acquisitions, we have agreed to pay certain additional amounts contingent upon the achievement of certain agreed-upon technology, development, product, or other milestones or the continued employment with us of certain employees of the acquired entities. See Note 1214 to the Consolidated Financial Statements.
Insieme Networks, Inc.In fiscal 2012, we made an investment in Insieme, an early stage company focused on research and development in the data center market. This investment included $100 million of funding and a license to certain of our technology. During fiscal 2014, we acquired the remaining interests in Insieme, at which time the former noncontrolling interest holders became eligible to receive up to two milestone payments, which were determined using agreed-upon formulas based primarily on revenue for certain of Insieme’s products. The former noncontrolling interest holders earned the maximum amount related to these two milestone payments and were paid approximately $441 million and $389 million during fiscal 2017 and fiscal 2016, respectively. During fiscal 2017, 2016, and 2015, we recorded compensation expense of $47 million, $160 million and $207 million, respectively, related to these milestone payments. We do not expect a material amount of future compensation expense or further milestone payments related to this acquisition.
Other Funding CommitmentsWe also have certain funding commitments primarily related to our investments in privately held companies and venture funds,investments, some of which aremay be based on the achievement of certain agreed-upon milestones, and some of which are required to be funded on demand. The funding commitments were $216 million$0.2 billion and $0.3 billion as of July 29, 2017, compared with $222 million as of 31, 2021 and July 30, 2016.25, 2020, respectively.
Off-Balance Sheet Arrangements
We consider our investments in unconsolidated variable interest entities to be off-balance sheet arrangements. In the ordinary course of business, we have investments in privately held companies including venture fundsinvestments and provide financing to certain customers. Certain of these investments are considered to be variable interest entities. We evaluate on an ongoing basis our investments in these privately held companiesinvestments and customer financings, and we have determined that as of July 29, 201731, 2021 there were no material unconsolidated variable interest entities.
On an ongoing basis, we reassess our investments in privately held companiesinvestments and customer financings to determine if they are variable interest entities and if we would be regarded as the primary beneficiary pursuant to the applicable accounting guidance. As a result of this ongoing assessment, we may be required to make additional disclosures or consolidate these entities. Because we may not control these entities, we may not have the ability to influence these events.
We provide financing guarantees, which are generally for various third-party financing arrangements extended to our channel partners and end-user customers. We could be called upon to make payments under these guarantees in the event of nonpayment by the channel partners or end-user customers. See the previous discussion of these financing guarantees under “Financing Receivables and Guarantees.”
Securities Lending
We periodically engage in securities lending activities with certain of our available-for-sale investments. These transactions are accounted for as a secured lending of the securities, and the securities are typically loaned only on an overnight basis. The average daily balance of securities lending for fiscal 2017 and 2016 was $0.7 billion and $0.6 billion, respectively. We require collateral equal to at least 102% of the fair market value of the loaned security and that the collateral be in the form of cash or liquid, high-quality assets. We engage in these secured lending transactions only with highly creditworthy counterparties, and the associated portfolio custodian has agreed to indemnify us against collateral losses. As of July 29, 2017 and July 30, 2016, we had no outstanding securities lending transactions. We believe these arrangements do not present a material risk or impact to our liquidity requirements.
Liquidity and Capital Resource Requirements
While the COVID-19 pandemic has not materially impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets. The pandemic and resulting economic uncertainty could adversely affect our liquidity and capital resources in the future. Based on past performance and current expectations, we believe our cash and cash equivalents, investments, cash generated from operations, and ability to access capital markets and committed credit lines will satisfy, through at least the next 12 months, our liquidity requirements, both in total and domestically, including the following: working capital needs, capital expenditures, investment requirements, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on debt, pending acquisitions, future customer financings, and other liquidity requirements associated with our operations. There are no other transactions, arrangements, or relationships with unconsolidated entities or other persons that are reasonably likely to materially affect the liquidity and the availability of, as well as our requirements for, capital resources.
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Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Our financial position is exposed to a variety of risks, including interest rate risk, equity price risk, and foreign currency exchange risk. We have seen an increase in these risks and related uncertainties with increased volatility in the financial markets in the current environment with the COVID-19 pandemic.
Interest Rate Risk
Fixed Income SecuritiesAvailable-for-Sale Debt Investments We maintain an investment portfolio of various holdings, types, and maturities. Our primary objective for holding fixed income securitiesavailable-for-sale debt investments is to achieve an appropriate investment return consistent with preserving principal and managing risk. At any time, a sharp rise in market interest rates could have a material adverse impact on the fair value of our fixed incomeavailable-for-sale debt investment portfolio. Conversely, declines in interest rates as has also happened recently, including the impact from lower credit spreads, could have a material adverse impact on interest income for our investment portfolio. We may utilize derivative instruments designated as hedging instruments to achieve our investment objectives. We had no outstanding hedging instruments for our fixed income securitiesavailable-for-sale debt investments as of July 29, 2017.31, 2021. Our fixed incomeavailable-for-sale debt investments are held for purposes other than trading. Our fixed incomeavailable-for-sale debt investments are not leveraged as of July 29, 2017.31, 2021. We monitor our interest rate and credit risks, including our credit exposures to specific rating categories and to individual issuers. We believe the overall credit quality of our portfolio is strong.
The following tables present the hypothetical fair values of our fixed income securities,available-for-sale debt investments, including the hedging effects when applicable, as a result of selected potential market decreases and increases in interest rates. The market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”)(BPS), plus 100 BPS, and plus 150 BPS. Due to the low interest rate environment at the end of fiscal 2016, we did not believe a parallel shift of minus 100 BPS or minus 150 BPS was relevant. The hypothetical fair values as of July 29, 201731, 2021 and July 30, 201625, 2020 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| VALUATION OF SECURITIES GIVEN AN INTEREST RATE DECREASE OF X BASIS POINTS | | FAIR VALUE AS OF JULY 31, 2021 | | VALUATION OF SECURITIES GIVEN AN INTEREST RATE INCREASE OF X BASIS POINTS |
| (150 BPS) | | (100 BPS) | | (50 BPS) | | 50 BPS | | 100 BPS | | 150 BPS |
Available-for-sale debt investments | $15,537 | | $15,427 | | $15,317 | | $15,206 | | $15,096 | | $14,986 | | $14,875 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| VALUATION OF SECURITIES GIVEN AN INTEREST RATE DECREASE OF X BASIS POINTS | | FAIR VALUE AS OF JULY 25, 2020 | | VALUATION OF SECURITIES GIVEN AN INTEREST RATE INCREASE OF X BASIS POINTS |
| (150 BPS) | | (100 BPS) | | (50 BPS) | | 50 BPS | | 100 BPS | | 150 BPS |
Available-for-sale debt investments | $17,877 | | $17,788 | | $17,699 | | $17,610 | | $17,522 | | $17,433 | | $17,344 |
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| | | | | | | | | | | | | |
| VALUATION OF SECURITIES GIVEN AN INTEREST RATE DECREASE OF X BASIS POINTS | | FAIR VALUE AS OF JULY 29, 2017 | | VALUATION OF SECURITIES GIVEN AN INTEREST RATE INCREASE OF X BASIS POINTS |
| (150 BPS) | | (100 BPS) | | (50 BPS) | | 50 BPS | | 100 BPS | | 150 BPS |
Fixed income securities | $58,728 | | $58,177 | | $57,627 | | $57,077 | | $56,527 | | $55,977 | | $55,426 |
|
| | | | | | | | | | | | | |
| VALUATION OF SECURITIES GIVEN AN INTEREST RATE DECREASE OF X BASIS POINTS | | FAIR VALUE AS OF JULY 30, 2016 | | VALUATION OF SECURITIES GIVEN AN INTEREST RATE INCREASE OF X BASIS POINTS |
| (150 BPS) | | (100 BPS) | | (50 BPS) | | 50 BPS | | 100 BPS | | 150 BPS |
Fixed income securities | N/A | | N/A | | $57,074 | | $56,621 | | $56,168 | | $55,715 | | $55,262 |
Financing Receivables As of July 29, 2017,31, 2021, our financing receivables had a carrying value of $9.6$9.3 billion, compared with $8.4$10.8 billion as of July 30, 2016.25, 2020. As of July 29, 2017,31, 2021, a hypothetical 50 BPS increase or decrease in market interest rates would change the fair value of our financing receivables by a decrease or increase of approximately $0.1 billion, respectively.
Debt As of July 29, 2017,31, 2021, we had $30.5$11.5 billion in principal amount of senior fixed-rate notes outstanding, which consisted of $2.9 billion floating-rate notes and $27.6 billion fixed-rate notes.outstanding. The carrying amount of the senior notes was $30.5$11.5 billion, and the related fair value based on market prices was $32.1$13.7 billion. As of July 29, 2017,31, 2021, a hypothetical 50 BPS increase or decrease in market interest rates would change the fair value of the fixed-rate debt, excluding the $6.8$2.0 billion of hedged debt, by a decrease or increase of approximately $0.6$0.4 billion, respectively. However, this hypothetical change in interest rates would not impact the interest expense on the fixed-rate debt that is not hedged.
Equity Price Risk
Marketable Equity InvestmentsThe fair value of our marketable equity investments in publicly traded companies is subject to market price volatility. We may hold equity securities for strategic purposes or to diversify our overall investment portfolio. Our equity portfolio consists of securities with characteristics that most closely match the Standard & Poor’s 500 Index or NASDAQ Composite Index. These equity securities are held for purposes other than trading. To manage our exposure to changes inAs of July 31, 2021, the total fair value of certainour investments in marketable equity securities we may enter into equity derivatives designated as hedging instruments.
Publicly Traded Equity Securities The following tables present the hypothetical fair values of publicly tradedwas $137 million. We had no outstanding marketable equity securities as a result of selected potential decreases and increases in the price of each equity security in the portfolio, excluding hedged equity securities, if any. Potential fluctuations in the price of each equity security in the portfolio of plus or minus 10%, 20%, and 30% were selected based on potential near-term changes in those security prices. The hypothetical fair values as of July 29, 2017 and July 30, 2016 are as follows (in millions):25, 2020.
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| VALUATION OF SECURITIES GIVEN AN X% DECREASE IN EACH STOCK’S PRICE | | FAIR VALUE AS OF JULY 29, 2017 | | VALUATION OF SECURITIES GIVEN AN X% INCREASE IN EACH STOCK’S PRICE |
| (30)% | | (20)% | | (10)% | | 10% | | 20% | | 30% |
Publicly traded equity securities | $1,195 | | $1,366 | | $1,536 | | $1,707 | | $1,878 | | $2,048 | | $2,219 |
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| VALUATION OF SECURITIES GIVEN AN X% DECREASE IN EACH STOCK’S PRICE | | FAIR VALUE AS OF JULY 30, 2016 | | VALUATION OF SECURITIES GIVEN AN X% INCREASE IN EACH STOCK’S PRICE |
| (30)% | | (20)% | | (10)% | | 10% | | 20% | | 30% |
Publicly traded equity securities | $1,053 | | $1,203 | | $1,354 | | $1,504 | | $1,654 | | $1,805 | | $1,955 |
Investments in Privately Held Companies We have also invested in privately held companies.Investments These investments are recorded in other assets in our Consolidated Balance Sheets and are accounted for using primarily either the cost or the equity method.Sheets. As of July 29, 2017,31, 2021, the total carrying amount of our investments in privately held companiesinvestments was $983 million,$1.5 billion, compared with $1,003 million$1.3 billion at July 30, 2016.25, 2020. Some of the privately heldthese companies in which we invested are in the startup or development stages. These investments are inherently risky because the markets for the technologies or products these companies are developing are typically in the early stages and may never materialize. We could lose our entire investment in these companies. Our evaluation of investments in privately held companiesinvestments is based on the fundamentals of the businesses invested in, including, among other factors, the nature of their technologies and potential for financial return.
Foreign Currency Exchange Risk
Our foreign exchange forward and option contracts outstanding at fiscal year-end are summarized in U.S. dollar equivalents as follows (in millions): | | | July 29, 2017 | | July 30, 2016 | | July 31, 2021 | | July 25, 2020 |
| Notional Amount | | Fair Value | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
Forward contracts: | | | | | | | | Forward contracts: | | | | | | | |
Purchased | $ | 2,562 |
| | $ | 39 |
| | $ | 3,079 |
| | $ | (41 | ) | Purchased | $ | 2,441 | | | $ | (14) | | | $ | 2,441 | | | $ | 1 | |
Sold | $ | 729 |
| | $ | (2 | ) | | $ | 651 |
| | $ | — |
| Sold | $ | 1,698 | | | $ | 12 | | | $ | 1,874 | | | $ | 4 | |
Option contracts: | | | | | | | | |
Purchased | $ | 528 |
| | $ | 7 |
| | $ | 688 |
| | $ | 4 |
| |
Sold | $ | 486 |
| | $ | (1 | ) | | $ | 620 |
| | $ | (10 | ) | |
At July 31, 2021 and July 25, 2020, we had no option contracts outstanding.
We conduct business globally in numerous currencies. The direct effect of foreign currency fluctuations on revenue has not been material because our revenue is primarily denominated in U.S. dollars. However, if the U.S. dollar strengthens relative to other currencies, such strengthening could have an indirect effect on our revenue to the extent it raises the cost of our products to non-U.S. customers and thereby reduces demand. A weaker U.S. dollar could have the opposite effect. However, the precise indirect effect of currency fluctuations is difficult to measure or predict because our revenue is influenced by many factors in addition to the impact of such currency fluctuations.
Approximately 70% of our operating expenses are U.S.-dollar denominated. In fiscal 2017,2021, foreign currency fluctuations, net of hedging, decreasedincreased our combined R&D, sales and marketing, and G&A expenses by approximately $77$214 million, or 0.4%1.2%, as compared with fiscal 2016. In fiscal 2016, foreign currency fluctuations, net of hedging, decreased our combined R&D, sales and marketing, and G&A expenses by approximately $567 million, or 3.1%, as compared with fiscal 2015.2020. To reduce variability in operating expenses and service cost of sales caused by non-U.S.-dollar denominated operating expenses and costs, we may hedge certain forecasted foreign currency transactions with currency options and forward contracts. These hedging programs are not designed to provide foreign currency protection over long time horizons. In designing a specific hedging approach, we consider several factors, including offsetting exposures, significance of exposures, costs associated with entering into a particular hedge instrument, and potential effectiveness of the hedge. The gains and losses on foreign exchange contracts mitigate the effect of currency movements on our operating expenses and service cost of sales.
We also enter into foreign exchange forward and option contracts to reduce the short-term effects of foreign currency fluctuations on receivables and payables that are denominated in currencies other than the functional currencies of the entities. The market risks associated with these foreign currency receivables investments, and payables relate primarily to variances from our forecasted foreign currency transactions and balances. We do not enter into foreign exchange forward or option contracts for speculative purposes.
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Item 8. | Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and ShareholdersStockholders of Cisco Systems, Inc.:
In our opinion,Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Cisco Systems, Inc. and its subsidiaries (the “Company”) as of July 31, 2021 and July 25, 2020, and the related consolidated statements of operations, of comprehensive income, of cash flowsequity and of equity present fairly, in all material respects, the financial position of Cisco Systems, Inc. and its subsidiaries at July 29, 2017 and July 30, 2016, and the results of their operations and their cash flows for each of the three years in the period ended July 29, 201731, 2021, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended July 31, 2021 appearing under Item 15 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of July 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of July 31, 2021 and July 25, 2020, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2021 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 29, 2017,31, 2021, based on criteria established in Internal Control—Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations ofCOSO.
Changes in Accounting Principles
As discussed in Note 2 to the Treadway Commission (COSO). consolidated financial statements, the Company changed the manner in which it accounts for leases in 2020 and the manner in which it accounts for revenue from contracts with customers in 2019.
Basis for Opinions
The Company’sCompany's management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements on the financial statement schedule, and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to theconsolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition — identification of contractual terms in certain customer arrangements
As described in Note 2 to the consolidated financial statements, management assesses relevant contractual terms in its customer arrangements to determine the transaction price and recognizes revenue upon transfer of control of the promised goods or services in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Management applies judgment in determining the transaction price which is dependent on the contractual terms. In order to determine the transaction price, management may be required to estimate variable consideration when determining the amount of revenue to recognize. For the year ended July 31, 2021, the Company’s total revenue was $49.8 billion.
The principal considerations for our determination that performing procedures relating to the identification of contractual terms in certain customer arrangements is a critical audit matter are the significant judgment by management in identifying contractual terms due to the volume and customized nature of the Company’s customer arrangements. This in turn led to significant auditor judgment and effort in performing procedures to evaluate whether the contractual terms used in the determination of the transaction price and the timing of revenue recognition were appropriately identified and determined by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including those related to the identification of contractual terms in customer arrangements that impact the determination of the transaction price and revenue recognition. These procedures also included, among others, (i) testing the completeness and accuracy of management’s identification of the contractual terms by examining customer arrangements on a test basis, and (ii) testing management’s process for determining the appropriate amount and timing of revenue recognition based on the contractual terms identified in the customer arrangements.
/s/ PricewaterhouseCoopers LLP
San Jose, California
September 7, 20179, 2021
We have served as the Company’s auditor since 1988.
Reports of Management
Statement of Management's Responsibility
Cisco’s management has always assumed full accountability for maintaining compliance with our established financial accounting policies and for reporting our results with objectivity and the highest degree of integrity. It is critical for investors and other users of the Consolidated Financial Statements to have confidence that the financial information that we provide is timely, complete, relevant, and accurate. Management is responsible for the fair presentation of Cisco’s Consolidated Financial Statements, prepared in accordance with accounting principles generally accepted in the United States of America, and has full responsibility for their integrity and accuracy.
Management, with oversight by Cisco’s Board of Directors, has established and maintains a strong ethical climate so that our affairs are conducted to the highest standards of personal and corporate conduct. Management also has established an effective system of internal controls. Cisco’s policies and practices reflect corporate governance initiatives that are compliant with the listing requirements of NASDAQNasdaq and the corporate governance requirements of the Sarbanes-Oxley Act of 2002.
We are committed to enhancing shareholderstockholder value and fully understand and embrace our fiduciary oversight responsibilities. We are dedicated to ensuring that our high standards of financial accounting and reporting, as well as our underlying system of internal controls, are maintained. Our culture demands integrity, and we have the highest confidence in our processes, our internal controls and our people, who are objective in their responsibilities and who operate under the highest level of ethical standards.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for Cisco. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management (with the participation of the principal executive officer and principal financial officer) conducted an evaluation of the effectiveness of Cisco’s internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that Cisco’s internal control over financial reporting was effective as of July 29, 2017.31, 2021. PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the effectiveness of Cisco’s internal control over financial reporting and has issued a report on Cisco’s internal control over financial reporting, which is included in their report on the preceding page.pages.
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/S/ CHARLES H. ROBBINS | | /S/ KELLY A. KRAMERR. SCOTT HERREN |
Charles H. Robbins | | Kelly A. KramerR. Scott Herren |
Chair and Chief Executive Officer and Director | | Executive Vice President and Chief Financial Officer |
September 7, 20179, 2021 | | September 7, 20179, 2021 |
CISCO SYSTEMS, INC.
Consolidated Balance Sheets
(in millions, except par value)
| | | July 29, 2017 | | July 30, 2016 | | July 31, 2021 | | July 25, 2020 |
ASSETS | | | | ASSETS | | | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 11,708 |
| | $ | 7,631 |
| Cash and cash equivalents | $ | 9,175 | | | $ | 11,809 | |
Investments | 58,784 |
| | 58,125 |
| Investments | 15,343 | | | 17,610 | |
Accounts receivable, net of allowance for doubtful accounts of $211 at July 29, 2017 and $249 at July 30, 2016 | 5,146 |
| | 5,847 |
| |
Accounts receivable, net of allowance of $109 at July 31, 2021 and $143 at July 25, 2020 | | Accounts receivable, net of allowance of $109 at July 31, 2021 and $143 at July 25, 2020 | 5,766 | | | 5,472 | |
Inventories | 1,616 |
| | 1,217 |
| Inventories | 1,559 | | | 1,282 | |
Financing receivables, net | 4,856 |
| | 4,272 |
| Financing receivables, net | 4,380 | | | 5,051 | |
Other current assets | 1,593 |
| | 1,627 |
| Other current assets | 2,889 | | | 2,349 | |
Total current assets | 83,703 |
| | 78,719 |
| Total current assets | 39,112 | | | 43,573 | |
Property and equipment, net | 3,322 |
| | 3,506 |
| Property and equipment, net | 2,338 | | | 2,453 | |
Financing receivables, net | 4,738 |
| | 4,158 |
| Financing receivables, net | 4,884 | | | 5,714 | |
Goodwill | 29,766 |
| | 26,625 |
| Goodwill | 38,168 | | | 33,806 | |
Purchased intangible assets, net | 2,539 |
| | 2,501 |
| Purchased intangible assets, net | 3,619 | | | 1,576 | |
Deferred tax assets | 4,239 |
| | 4,299 |
| Deferred tax assets | 4,360 | | | 3,990 | |
Other assets | 1,511 |
| | 1,844 |
| Other assets | 5,016 | | | 3,741 | |
TOTAL ASSETS | $ | 129,818 |
| | $ | 121,652 |
| TOTAL ASSETS | $ | 97,497 | | | $ | 94,853 | |
LIABILITIES AND EQUITY |
| |
| LIABILITIES AND EQUITY | | | |
Current liabilities: |
| |
| Current liabilities: | |
Short-term debt | $ | 7,992 |
| | $ | 4,160 |
| Short-term debt | $ | 2,508 | | | $ | 3,005 | |
Accounts payable | 1,385 |
| | 1,056 |
| Accounts payable | 2,362 | | | 2,218 | |
Income taxes payable | 98 |
| | 517 |
| Income taxes payable | 801 | | | 839 | |
Accrued compensation | 2,895 |
| | 2,951 |
| Accrued compensation | 3,818 | | | 3,122 | |
Deferred revenue | 10,821 |
| | 10,155 |
| Deferred revenue | 12,148 | | | 11,406 | |
Other current liabilities | 4,392 |
| | 6,072 |
| Other current liabilities | 4,620 | | | 4,741 | |
Total current liabilities | 27,583 |
| | 24,911 |
| Total current liabilities | 26,257 | | | 25,331�� | |
Long-term debt | 25,725 |
| | 24,483 |
| Long-term debt | 9,018 | | | 11,578 | |
Income taxes payable | 1,250 |
| | 925 |
| Income taxes payable | 8,538 | | | 8,837 | |
Deferred revenue | 7,673 |
| | 6,317 |
| Deferred revenue | 10,016 | | | 9,040 | |
Other long-term liabilities | 1,450 |
| | 1,431 |
| Other long-term liabilities | 2,393 | | | 2,147 | |
Total liabilities | 63,681 |
| | 58,067 |
| Total liabilities | 56,222 | | | 56,933 | |
Commitments and contingencies (Note 12) |
| |
| |
Commitments and contingencies (Note 14) | | Commitments and contingencies (Note 14) | 0 | | 0 |
Equity: | | | | Equity: | |
Cisco shareholders’ equity: | | | | |
Preferred stock, no par value: 5 shares authorized; none issued and outstanding | — |
| | — |
| |
Common stock and additional paid-in capital, $0.001 par value: 20,000 shares authorized; 4,983 and 5,029 shares issued and outstanding at July 29, 2017 and July 30, 2016, respectively | 45,253 |
| | 44,516 |
| |
Retained earnings | 20,838 |
| | 19,396 |
| |
Accumulated other comprehensive income (loss) | 46 |
| | (326 | ) | |
Total Cisco shareholders’ equity | 66,137 |
| | 63,586 |
| |
Noncontrolling interests | — |
| | (1 | ) | |
Cisco stockholders’ equity: | | Cisco stockholders’ equity: | |
Preferred stock, $0.001 par value: 5 shares authorized; none issued and outstanding | | Preferred stock, $0.001 par value: 5 shares authorized; none issued and outstanding | — | | | — | |
Common stock and additional paid-in capital, $0.001 par value: 20,000 shares authorized; 4,217 and 4,237 shares issued and outstanding at July 31, 2021 and July 25, 2020, respectively | | Common stock and additional paid-in capital, $0.001 par value: 20,000 shares authorized; 4,217 and 4,237 shares issued and outstanding at July 31, 2021 and July 25, 2020, respectively | 42,346 | | | 41,202 | |
Accumulated deficit | | Accumulated deficit | (654) | | | (2,763) | |
Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (417) | | | (519) | |
Total equity | 66,137 |
| | 63,585 |
| Total equity | 41,275 | | | 37,920 | |
TOTAL LIABILITIES AND EQUITY | $ | 129,818 |
| | $ | 121,652 |
| TOTAL LIABILITIES AND EQUITY | $ | 97,497 | | | $ | 94,853 | |
See Notes to Consolidated Financial Statements.
CISCO SYSTEMS, INC.
Consolidated Statements of Operations
(in millions, except per-share amounts)
| | Years Ended | July 29, 2017 | | July 30, 2016 | | July 25, 2015 | Years Ended | July 31, 2021 | | July 25, 2020 | | July 27, 2019 |
REVENUE: | | | | | | REVENUE: | | | | | |
Product | $ | 35,705 |
|
| $ | 37,254 |
| | $ | 37,750 |
| Product | $ | 36,014 | | | $ | 35,978 | | | $ | 39,005 | |
Service | 12,300 |
|
| 11,993 |
| | 11,411 |
| Service | 13,804 | | | 13,323 | | | 12,899 | |
Total revenue | 48,005 |
|
| 49,247 |
| | 49,161 |
| Total revenue | 49,818 | | | 49,301 | | | 51,904 | |
COST OF SALES: |
|
|
| | | COST OF SALES: | | | | | |
Product | 13,699 |
|
| 14,161 |
| | 15,377 |
| Product | 13,300 | | | 13,199 | | | 14,863 | |
Service | 4,082 |
|
| 4,126 |
| | 4,103 |
| Service | 4,624 | | | 4,419 | | | 4,375 | |
Total cost of sales | 17,781 |
|
| 18,287 |
| | 19,480 |
| Total cost of sales | 17,924 | | | 17,618 | | | 19,238 | |
GROSS MARGIN | 30,224 |
|
| 30,960 |
| | 29,681 |
| GROSS MARGIN | 31,894 | | | 31,683 | | | 32,666 | |
OPERATING EXPENSES: |
|
|
| | | OPERATING EXPENSES: | |
Research and development | 6,059 |
|
| 6,296 |
| | 6,207 |
| Research and development | 6,549 | | | 6,347 | | | 6,577 | |
Sales and marketing | 9,184 |
|
| 9,619 |
| | 9,821 |
| Sales and marketing | 9,259 | | | 9,169 | | | 9,571 | |
General and administrative | 1,993 |
|
| 1,814 |
| | 2,040 |
| General and administrative | 2,152 | | | 1,925 | | | 1,827 | |
Amortization of purchased intangible assets | 259 |
|
| 303 |
| | 359 |
| Amortization of purchased intangible assets | 215 | | | 141 | | | 150 | |
Restructuring and other charges | 756 |
|
| 268 |
| | 484 |
| Restructuring and other charges | 886 | | | 481 | | | 322 | |
Total operating expenses | 18,251 |
|
| 18,300 |
| | 18,911 |
| Total operating expenses | 19,061 | | | 18,063 | | | 18,447 | |
OPERATING INCOME | 11,973 |
|
| 12,660 |
| | 10,770 |
| OPERATING INCOME | 12,833 | | | 13,620 | | | 14,219 | |
Interest income | 1,338 |
|
| 1,005 |
| | 769 |
| Interest income | 618 | | | 920 | | | 1,308 | |
Interest expense | (861 | ) |
| (676 | ) | | (566 | ) | Interest expense | (434) | | | (585) | | | (859) | |
Other income (loss), net | (163 | ) |
| (69 | ) | | 228 |
| Other income (loss), net | 245 | | | 15 | | | (97) | |
Interest and other income (loss), net | 314 |
|
| 260 |
| | 431 |
| Interest and other income (loss), net | 429 | | | 350 | | | 352 | |
INCOME BEFORE PROVISION FOR INCOME TAXES | 12,287 |
|
| 12,920 |
| | 11,201 |
| INCOME BEFORE PROVISION FOR INCOME TAXES | 13,262 | | | 13,970 | | | 14,571 | |
Provision for income taxes | 2,678 |
|
| 2,181 |
| | 2,220 |
| Provision for income taxes | 2,671 | | | 2,756 | | | 2,950 | |
NET INCOME | $ | 9,609 |
|
| $ | 10,739 |
| | $ | 8,981 |
| NET INCOME | $ | 10,591 | | | $ | 11,214 | | | $ | 11,621 | |
|
|
| |
|
| | | | | | | | |
Net income per share: |
|
| |
|
| | | Net income per share: | |
Basic | $ | 1.92 |
|
| $ | 2.13 |
| | $ | 1.76 |
| Basic | $ | 2.51 | | | $ | 2.65 | | | $ | 2.63 | |
Diluted | $ | 1.90 |
|
| $ | 2.11 |
| | $ | 1.75 |
| Diluted | $ | 2.50 | | | $ | 2.64 | | | $ | 2.61 | |
Shares used in per-share calculation: |
|
|
|
|
| | | Shares used in per-share calculation: | | | | | |
Basic | 5,010 |
|
| 5,053 |
| | 5,104 |
| Basic | 4,222 | | | 4,236 | | | 4,419 | |
Diluted | 5,049 |
|
| 5,088 |
| | 5,146 |
| Diluted | 4,236 | | | 4,254 | | | 4,453 | |
|
|
|
|
|
| | | |
Cash dividends declared per common share | $ | 1.10 |
|
| $ | 0.94 |
| | $ | 0.80 |
| |
See Notes to Consolidated Financial Statements.
CISCO SYSTEMS, INC.
Consolidated Statements of Comprehensive Income
(in millions)
|
| | | | | | | | | | | |
Years Ended | July 29, 2017 | | July 30, 2016 | | July 25, 2015 |
Net income | $ | 9,609 |
| | $ | 10,739 |
| | $ | 8,981 |
|
Available-for-sale investments: | | | | | |
Change in net unrealized gains and losses, net of tax benefit (expense) of $74, $(49), and $14 for fiscal 2017, 2016, and 2015, respectively | (89 | ) | | 92 |
| | (12 | ) |
Net (gains) losses reclassified into earnings, net of tax expense (benefit) of $(37), $0, and $57 for fiscal 2017, 2016, and 2015, respectively | 50 |
| | 1 |
| | (100 | ) |
| (39 | ) | | 93 |
| | (112 | ) |
Cash flow hedging instruments: | | | | | |
Change in unrealized gains and losses, net of tax benefit (expense) of $(5), $7, and $19 for fiscal 2017, 2016, and 2015, respectively | 17 |
| | (59 | ) | | (140 | ) |
Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $(5), $(4), and $(18) for fiscal 2017, 2016, and 2015, respectively | 74 |
| | 16 |
| | 136 |
|
| 91 |
| | (43 | ) | | (4 | ) |
Net change in cumulative translation adjustment and actuarial gains and losses, net of tax benefit (expense) of $(13), $(42), and $63 for fiscal 2017, 2016, and 2015, respectively | 321 |
| | (447 | ) | | (498 | ) |
Other comprehensive income (loss) | 373 |
| | (397 | ) | | (614 | ) |
Comprehensive income | 9,982 |
| | 10,342 |
| | 8,367 |
|
Comprehensive (income) loss attributable to noncontrolling interests | (1 | ) | | 10 |
| | (2 | ) |
Comprehensive income attributable to Cisco Systems, Inc. | $ | 9,981 |
| | $ | 10,352 |
| | $ | 8,365 |
|
| | | | | | | | | | | | | | | | | |
Years Ended | July 31, 2021 | | July 25, 2020 | | July 27, 2019 |
Net income | $ | 10,591 | | | $ | 11,214 | | | $ | 11,621 | |
Available-for-sale investments: | | | | | |
Change in net unrealized gains and losses, net of tax benefit (expense) of $46, $(84), and $(101) for fiscal 2021, 2020, and 2019, respectively | (95) | | | 336 | | | 459 | |
Net (gains) losses reclassified into earnings, net of tax expense (benefit) of $15, $21, and $6 for fiscal 2021, 2020, and 2019, respectively | (38) | | | (21) | | | 19 | |
| (133) | | | 315 | | | 478 | |
Cash flow hedging instruments: | | | | | |
Change in unrealized gains and losses, net of tax benefit (expense) of $(4), $0, and $0 for fiscal 2021, 2020, and 2019, respectively | 16 | | | 7 | | | — | |
Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $3, $0, and $0 for fiscal 2021, 2020, and 2019, respectively | (11) | | | 1 | | | (3) | |
| 5 | | | 8 | | | (3) | |
Net change in cumulative translation adjustment and actuarial gains and losses, net of tax benefit (expense) of $(2), $(5), and $15 for fiscal 2021, 2020, and 2019, respectively | 230 | | | (50) | | | (250) | |
Other comprehensive income | 102 | | | 273 | | | 225 | |
Comprehensive income | $ | 10,693 | | | $ | 11,487 | | | $ | 11,846 | |
See Notes to Consolidated Financial Statements.
CISCO SYSTEMS, INC.
Consolidated Statements of Cash Flows
(in millions)
| | | | | | | | | | | | | | | | | |
Years Ended | July 31, 2021 | | July 25, 2020 | | July 27, 2019 |
Cash flows from operating activities: | | | | | |
Net income | $ | 10,591 | | | $ | 11,214 | | | $ | 11,621 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation, amortization, and other | 1,862 | | | 1,808 | | | 1,897 | |
Share-based compensation expense | 1,761 | | | 1,569 | | | 1,570 | |
Provision (benefit) for receivables | (6) | | | 93 | | | 40 | |
Deferred income taxes | (384) | | | (38) | | | (350) | |
(Gains) losses on divestitures, investments and other, net | (354) | | | (138) | | | (24) | |
Change in operating assets and liabilities, net of effects of acquisitions and divestitures: | | | | | |
Accounts receivable | (107) | | | (107) | | | (84) | |
Inventories | (244) | | | 84 | | | 131 | |
Financing receivables | 1,577 | | | (797) | | | (249) | |
Other assets | (797) | | | 96 | | | (955) | |
Accounts payable | (53) | | | 141 | | | 87 | |
Income taxes, net | (549) | | | (322) | | | 312 | |
Accrued compensation | 643 | | | (78) | | | 277 | |
Deferred revenue | 1,560 | | | 2,011 | | | 1,407 | |
Other liabilities | (46) | | | (110) | | | 151 | |
Net cash provided by operating activities | 15,454 | | | 15,426 | | | 15,831 | |
Cash flows from investing activities: | | | | | |
Purchases of investments | (9,328) | | | (9,212) | | | (2,416) | |
Proceeds from sales of investments | 3,373 | | | 5,631 | | | 7,388 | |
Proceeds from maturities of investments | 8,409 | | | 7,975 | | | 12,928 | |
Acquisitions, net of cash and cash equivalents acquired and divestitures | (7,038) | | | (327) | | | (2,175) | |
Purchases of investments in privately held companies | (175) | | | (190) | | | (148) | |
Return of investments in privately held companies | 194 | | | 224 | | | 159 | |
Acquisition of property and equipment | (692) | | | (770) | | | (909) | |
Proceeds from sales of property and equipment | 28 | | | 179 | | | 22 | |
Other | (56) | | | (10) | | | (12) | |
Net cash (used in) provided by investing activities | (5,285) | | | 3,500 | | | 14,837 | |
Cash flows from financing activities: | | | | | |
Issuances of common stock | 643 | | | 655 | | | 640 | |
Repurchases of common stock - repurchase program | (2,877) | | | (2,659) | | | (20,717) | |
Shares repurchased for tax withholdings on vesting of restricted stock units | (636) | | | (727) | | | (862) | |
Short-term borrowings, original maturities of 90 days or less, net | (5) | | | (3,470) | | | 3,446 | |
Issuances of debt | — | | | — | | | 2,250 | |
Repayments of debt | (3,000) | | | (6,720) | | | (6,780) | |
Dividends paid | (6,163) | | | (6,016) | | | (5,979) | |
Other | (1) | | | 51 | | | 113 | |
Net cash used in financing activities | (12,039) | | | (18,886) | | | (27,889) | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | (1,870) | | | 40 | | | 2,779 | |
Cash, cash equivalents, and restricted cash, beginning of fiscal year | 11,812 | | | 11,772 | | | 8,993 | |
Cash, cash equivalents, and restricted cash, end of fiscal year | $ | 9,942 | | | $ | 11,812 | | | $ | 11,772 | |
| | | | | |
Supplemental cash flow information: | | | | | |
Cash paid for interest | $ | 438 | | | $ | 603 | | | $ | 892 | |
Cash paid for income taxes, net | $ | 3,604 | | | $ | 3,116 | | | $ | 2,986 | |
|
| | | | | | | | | | | |
Years Ended | July 29, 2017 | | July 30, 2016 | | July 25, 2015 |
Cash flows from operating activities: | | | | | |
Net income | $ | 9,609 |
| | $ | 10,739 |
| | $ | 8,981 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
| |
| | |
Depreciation, amortization, and other | 2,286 |
| | 2,150 |
| | 2,442 |
|
Share-based compensation expense | 1,526 |
| | 1,458 |
| | 1,440 |
|
Provision for receivables | (8 | ) | | (9 | ) | | 134 |
|
Deferred income taxes | (124 | ) | | (194 | ) | | (23 | ) |
Excess tax benefits from share-based compensation | (153 | ) | | (129 | ) | | (128 | ) |
(Gains) losses on divestitures, investments and other, net | 154 |
| | (317 | ) | | (258 | ) |
Change in operating assets and liabilities, net of effects of acquisitions and divestitures: |
| |
| | |
Accounts receivable | 756 |
| | (404 | ) | | (413 | ) |
Inventories | (394 | ) | | 315 |
| | (116 | ) |
Financing receivables | (1,038 | ) | | (150 | ) | | (634 | ) |
Other assets | 15 |
| | (37 | ) | | (370 | ) |
Accounts payable | 311 |
| | (65 | ) | | 87 |
|
Income taxes, net | 60 |
| | (300 | ) | | 53 |
|
Accrued compensation | (110 | ) | | (101 | ) | | 7 |
|
Deferred revenue | 1,683 |
| | 1,219 |
| | 1,275 |
|
Other liabilities | (697 | ) | | (605 | ) | | 75 |
|
Net cash provided by operating activities | 13,876 |
| | 13,570 |
| | 12,552 |
|
Cash flows from investing activities: | | | | | |
Purchases of investments | (42,702 | ) | | (46,760 | ) | | (43,975 | ) |
Proceeds from sales of investments | 28,827 |
| | 28,778 |
| | 20,237 |
|
Proceeds from maturities of investments | 12,143 |
| | 14,115 |
| | 15,293 |
|
Acquisition of businesses, net of cash and cash equivalents acquired | (3,324 | ) | | (3,161 | ) | | (326 | ) |
Proceeds from business divestiture | — |
| | 372 |
| | — |
|
Purchases of investments in privately held companies | (222 | ) | | (256 | ) | | (222 | ) |
Return of investments in privately held companies | 203 |
| | 91 |
| | 288 |
|
Acquisition of property and equipment | (964 | ) | | (1,146 | ) | | (1,227 | ) |
Proceeds from sales of property and equipment | 7 |
| | 41 |
| | 22 |
|
Other | 39 |
| | (191 | ) | | (178 | ) |
Net cash used in investing activities | (5,993 | ) | | (8,117 | ) | | (10,088 | ) |
Cash flows from financing activities: | | | | | |
Issuances of common stock | 708 |
| | 1,127 |
| | 2,016 |
|
Repurchases of common stock - repurchase program | (3,685 | ) | | (3,909 | ) | | (4,324 | ) |
Shares repurchased for tax withholdings on vesting of restricted stock units | (619 | ) | | (557 | ) | | (502 | ) |
Short-term borrowings, original maturities less than 90 days, net | 2,497 |
| | (4 | ) | | (4 | ) |
Issuances of debt | 6,980 |
| | 6,978 |
| | 4,981 |
|
Repayments of debt | (4,151 | ) | | (3,863 | ) | | (508 | ) |
Excess tax benefits from share-based compensation | 153 |
| | 129 |
| | 128 |
|
Dividends paid | (5,511 | ) | | (4,750 | ) | | (4,086 | ) |
Other | (178 | ) | | 150 |
| | (14 | ) |
Net cash used in financing activities | (3,806 | ) | | (4,699 | ) | | (2,313 | ) |
Net increase in cash and cash equivalents | 4,077 |
| | 754 |
| | 151 |
|
Cash and cash equivalents, beginning of fiscal year | 7,631 |
| | 6,877 |
| | 6,726 |
|
Cash and cash equivalents, end of fiscal year | $ | 11,708 |
| | $ | 7,631 |
| | $ | 6,877 |
|
| | | | | |
Supplemental cash flow information: | | | | | |
Cash paid for interest | $ | 897 |
|
| $ | 859 |
| | $ | 760 |
|
Cash paid for income taxes, net | $ | 2,742 |
|
| $ | 2,675 |
| | $ | 2,190 |
|
See Notes to Consolidated Financial Statements.
CISCO SYSTEMS, INC.
Consolidated Statements of Equity
(in millions, except per-share amounts) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock and Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Cisco Shareholders’ Equity | | Non-controlling Interests | | Total Equity |
BALANCE AT JULY 26, 2014 | 5,107 |
| | $ | 41,884 |
| | $ | 14,093 |
| | $ | 677 |
| | $ | 56,654 |
| | $ | 7 |
| | $ | 56,661 |
|
Net income | | | | | 8,981 |
| | | | 8,981 |
| | | | 8,981 |
|
Other comprehensive income (loss) | | | | | | | (616 | ) | | (616 | ) | | 2 |
| | (614 | ) |
Issuance of common stock | 153 |
| | 2,016 |
| | | | | | 2,016 |
| | | | 2,016 |
|
Repurchase of common stock | (155 | ) | | (1,291 | ) | | (2,943 | ) | | | | (4,234 | ) | | | | (4,234 | ) |
Shares repurchased for tax withholdings on vesting of restricted stock units | (20 | ) | | (502 | ) | | | | | | (502 | ) | | | | (502 | ) |
Cash dividends declared ($0.80 per common share) | | | | | (4,086 | ) | | | | (4,086 | ) | | | | (4,086 | ) |
Tax effects from employee stock incentive plans | | | 41 |
| | | | | | 41 |
| | | | 41 |
|
Share-based compensation | | | 1,440 |
| | | | | | 1,440 |
| | | | 1,440 |
|
Purchase acquisitions and other | | | 4 |
| | | | | | 4 |
| | | | 4 |
|
BALANCE AT JULY 25, 2015 | 5,085 |
| | $ | 43,592 |
| | $ | 16,045 |
| | $ | 61 |
| | $ | 59,698 |
| | $ | 9 |
| | $ | 59,707 |
|
Net income | | | | | 10,739 |
| | | | 10,739 |
| | | | 10,739 |
|
Other comprehensive income (loss) | | | | | | | (387 | ) | | (387 | ) | | (10 | ) | | (397 | ) |
Issuance of common stock | 113 |
| | 1,127 |
| | | | | | 1,127 |
| | | | 1,127 |
|
Repurchase of common stock | (148 | ) | | (1,280 | ) | | (2,638 | ) | | | | (3,918 | ) | | | | (3,918 | ) |
Shares repurchased for tax withholdings on vesting of restricted stock units | (21 | ) | | (557 | ) | | | | | | (557 | ) | | | | (557 | ) |
Cash dividends declared ($0.94 per common share) | | | | | (4,750 | ) | | | | (4,750 | ) | | | | (4,750 | ) |
Tax effects from employee stock incentive plans | | | 30 |
| | | | | | 30 |
| | | | 30 |
|
Share-based compensation | | | 1,458 |
| | | | | | 1,458 |
| | | | 1,458 |
|
Purchase acquisitions and other | | | 146 |
| | | | | | 146 |
| | | | 146 |
|
BALANCE AT JULY 30, 2016 | 5,029 |
| | $ | 44,516 |
| | $ | 19,396 |
| | $ | (326 | ) | | $ | 63,586 |
| | $ | (1 | ) | | $ | 63,585 |
|
Net income | | | | | 9,609 |
| | | | 9,609 |
| | | | 9,609 |
|
Other comprehensive income (loss) | | | | | | | 372 |
| | 372 |
| | 1 |
| | 373 |
|
Issuance of common stock | 92 |
| | 708 |
| | | | | | 708 |
| | | | 708 |
|
Repurchase of common stock | (118 | ) | | (1,050 | ) | | (2,656 | ) | | | | (3,706 | ) | | | | (3,706 | ) |
Shares repurchased for tax withholdings on vesting of restricted stock units | (20 | ) | | (619 | ) | | | | | | (619 | ) | | | | (619 | ) |
Cash dividends declared ($1.10 per common share) | | | | | (5,511 | ) | | | | (5,511 | ) | | | | (5,511 | ) |
Tax effects from employee stock incentive plans | | | (10 | ) | | | | | | (10 | ) | | | | (10 | ) |
Share-based compensation | | | 1,540 |
| | | | | | 1,540 |
| | | | 1,540 |
|
Purchase acquisitions and other | | | 168 |
| | | | | | 168 |
| | | | 168 |
|
BALANCE AT JULY 29, 2017 | 4,983 |
| | $ | 45,253 |
| | $ | 20,838 |
| | $ | 46 |
| | $ | 66,137 |
| | $ | — |
| | $ | 66,137 |
|
Supplemental Information
In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of July 29, 2017, the Company’s Board of Directors had authorized an aggregate repurchase of up to $112 billion of common stock under this program with no termination date. For additional information regarding stock repurchase, see Note 13 to the Consolidated Financial Statements. The stock repurchases since the inception of this program and the related impacts on Cisco shareholders’ equity are summarized in the following table (in millions):
|
| | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock and Additional Paid-In Capital | | Retained Earnings | | Total Cisco Shareholders’ Equity |
Repurchases of common stock under the repurchase program | 4,709 |
| | $ | 24,945 |
| | $ | 75,358 |
| | $ | 100,303 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock and Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Total Equity |
BALANCE AT JULY 28, 2018 | 4,614 | | | $ | 42,820 | | | $ | 1,233 | | | $ | (849) | | | $ | 43,204 | |
Net income | | | | | 11,621 | | | | | 11,621 | |
Other comprehensive income (loss) | | | | | | | 225 | | | 225 | |
Issuance of common stock | 71 | | | 640 | | | | | | | 640 | |
Repurchase of common stock | (418) | | | (3,902) | | | (16,675) | | | | | (20,577) | |
Shares repurchased for tax withholdings on vesting of restricted stock units | (17) | | | (862) | | | | | | | (862) | |
Cash dividends declared ($1.36 per common share) | | | | | (5,979) | | | | | (5,979) | |
Effect of adoption of accounting standards | | | | | 3,897 | | | (168) | | | 3,729 | |
Share-based compensation | | | 1,570 | | | | | | | 1,570 | |
BALANCE AT JULY 27, 2019 | 4,250 | | | $ | 40,266 | | | $ | (5,903) | | | $ | (792) | | | $ | 33,571 | |
Net income | | | | | 11,214 | | | | | 11,214 | |
Other comprehensive income (loss) | | | | | | | 273 | | | 273 | |
Issuance of common stock | 61 | | | 655 | | | | | | | 655 | |
Repurchase of common stock | (59) | | | (561) | | | (2,058) | | | | | (2,619) | |
Shares repurchased for tax withholdings on vesting of restricted stock units | (15) | | | (727) | | | | | | | (727) | |
Cash dividends declared ($1.42 per common share) | | | | | (6,016) | | | | | (6,016) | |
Share-based compensation | | | 1,569 | | | | | | | 1,569 | |
BALANCE AT JULY 25, 2020 | 4,237 | | | $ | 41,202 | | | $ | (2,763) | | | $ | (519) | | | $ | 37,920 | |
Net income | | | | | 10,591 | | | | | 10,591 | |
Other comprehensive income (loss) | | | | | | | 102 | | | 102 | |
Issuance of common stock | 58 | | | 643 | | | | | | | 643 | |
Repurchase of common stock | (64) | | | (625) | | | (2,277) | | | | | (2,902) | |
Shares repurchased for tax withholdings on vesting of restricted stock units | (14) | | | (636) | | | | | | | (636) | |
Cash dividends declared ($1.46 per common share) | | | | | (6,166) | | | | | (6,166) | |
Effect of adoption of accounting standard | | | | | (38) | | | | | (38) | |
Share-based compensation | | | 1,761 | | | | | | | 1,761 | |
Other | | | 1 | | | (1) | | | | | — | |
BALANCE AT JULY 31, 2021 | 4,217 | | | $ | 42,346 | | | $ | (654) | | | $ | (417) | | | $ | 41,275 | |
See Notes to Consolidated Financial Statements.
CISCO SYSTEMS, INC.
Notes to Consolidated Financial Statements
1.Basis of Presentation
The fiscal year for Cisco Systems, Inc. (the “Company”“Company,” “Cisco,” “we,” “us,” or “Cisco”“our”) is the 52 or 53 weeks ending on the last Saturday in July. Fiscal 2017 and fiscal 2015 were each 52-week fiscal years, while fiscal 20162021 was a 53-week fiscal year.year, and each of fiscal 2020 and fiscal 2019 were 52-week fiscal years. The Consolidated Financial Statements include theour accounts and those of Cisco and itsour subsidiaries. All intercompany accounts and transactions have been eliminated. The Company conductsWe conduct business globally and isare primarily managed on a geographic basis in the following three3 geographic segments: the Americas; Europe, Middle East, and Africa (EMEA); and Asia Pacific, Japan, and China (APJC).
At our annual meeting of shareholders held on December 10, 2020, shareholders voted to approve changing our state of incorporation from California to Delaware. The Company consolidates its investments in a venture fund managed by SOFTBANK Corp.reincorporation became effective January 25, 2021.
Our consolidated financial statements include our accounts and its affiliates (“SOFTBANK”) as this is aentities consolidated under the variable interest entity and the Company is the primary beneficiary.voting models. The noncontrolling interests attributed to SOFTBANKthese investments, if any, are presented as a separate component from the Company’sour equity in the equity section of the Consolidated Balance Sheets. SOFTBANK'sThe share of earnings attributable to the earnings in the venture fundnoncontrolling interests are not presented separately in the Consolidated Statements of Operations as these amounts are not material for any of the fiscal periods presented.
Certain reclassifications have been made to the amounts for prior years in order to conform to the current year’s presentation. The Company hasWe have evaluated subsequent events through the date that the financial statements were issued.
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2. | Summary of Significant Accounting Policies |
2.Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents The Company considers We consider all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions.
(b) Available-for-Sale Debt Investments The Company classifies its We classify our investments in both fixed income securities and publicly traded equity securities as available-for-sale debt investments. Fixed income securitiesOur available-for-sale debt investments primarily consist of U.S. government, securities, U.S. government agency, securities, non-U.S. government and agency securities, corporate debt, securities, and U.S. agency mortgage-backed securities. These available-for-sale debt investments are primarily held in the custody of a major financial institution. A specific identification method is used to determine the cost basis of fixed income and public equity securitiesavailable-for-sale debt investments sold. These investments are recorded in the Consolidated Balance Sheets at fair value. Unrealized gains and losses on these investments to the extent the investments are unhedged, are included as a separate component of accumulated other comprehensive income (AOCI), net of tax. The Company classifies itsWe classify our investments as current based on the nature of the investments and their availability for use in current operations.
(c) Other-than-TemporaryEquity Instruments Our equity investments are accounted for as follows:
•Marketable equity securities have readily determinable fair value (RDFV) that are measured and recorded at fair value through income.
•Non-marketable equity securities do not have RDFV and are measured using a measurement alternative recorded at cost less any impairment, plus or minus changes resulting from qualifying observable price changes. For certain of these securities, we have elected to apply the net asset value (NAV) practical expedient. The NAV is the estimated fair value of these investments.
•Equity method investments are securities we do not control, but are able to exert significant influence over the investee. These investments are measured at cost less any impairment, plus or minus our share of equity method investee income or loss.
(d) Impairments onof Investments When For our available-for-sale debt securities in an unrealized loss position, we determine whether a credit loss exists. In this assessment, among other factors, we consider the extent to which the fair value of a debt security is less than itsthe amortized cost, it is deemed impaired, andany changes to the Company will assess whether the impairment is other than temporary. An impairment is considered other than temporary if (i) the Company has the intent to sellrating of the security (ii) it is more likely than not that the Company will be requiredby a rating agency, and adverse conditions specifically related to sell the security before recovery of the entire amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security. If impairmentfactors indicate a credit loss exists, an allowance for credit loss is consideredrecorded to other than temporary based on condition (i) or (ii) described earlier,income (loss), net, limited by the entire difference betweenamount that the fair value is less than the amortized cost and thebasis. The amount of fair value of the debt security is recognized in earnings. If an impairment is considered other than temporary based on condition (iii), the amount representing credit losses (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security) will be recognized in earnings, and the amountchange relating to all other factors will be recognized in other comprehensive income (OCI).
The Company recognizes an impairment charge on publicly tradedWe hold non-marketable equity securities when a decline in the fair value of a security below the respective cost basis is judged to beand other than temporary. The Company considers various factors in determining whether a decline in the fair value of these investments is other than temporary, including the length of time and extent to which the fair value of the security has been less than the Company’s cost basis, the financial condition and near-term prospects of the issuer, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Investments in (“privately held companiesinvestments”) which are included in other assets in the Consolidated Balance Sheets and are accounted for using either the cost or equity method. The Company monitorsSheets. We monitor these investments for impairments and makesmake reductions in carrying values if the Company determineswe determine that an impairment charge is required based primarily on the financial condition and near-term prospects of these companies.
(d)(e) Inventories Inventories are stated at the lower of cost or market.net realizable value. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company providesWe provide inventory write-downs based on excess and obsolete inventories determined primarily by future demand forecasts. The write-down is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. In addition, the Company recordswe record a liability for firm, noncancelable, and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of the Company’sour future demand forecasts consistent with itsour valuation of excess and obsolete inventory.
(e)(f) Allowance for Doubtful Accounts Receivable, Contract Assets and Financing Receivables We estimate our allowances for credit losses using relevant available information from internal and external sources, related to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. When assessing for credit losses, we determine collectibility by pooling our assets with similar characteristics.
The allowanceallowances for doubtful accounts iscredit losses are each measured on a collective basis when similar risk characteristics exist. Our internal credit risk ratings are categorized as 1 through 10, with the lowest credit risk rating representing the highest quality. Our assets within each internal credit risk rating share similar risk characteristics and therefore are assessed as one portfolio segment for credit loss. Assets that do not share risk characteristics are evaluated on an individual basis. The allowances for credit losses are each measured by multiplying the exposure probability of default, the probability the asset will default within a given time frame, by the loss given default rate, the percentage of the asset not expected to be collected due to default, based on the Company’s assessmentpool of assets.
Probability of default rates are published quarterly by third-party credit agencies. Adjustments to our internal credit risk ratings may take into account including, but not limited to, various customer-specific factors, the potential sovereign risk of the collectibility ofgeographic locations in which the customer accounts. The Companyis operating and macroeconomic conditions. These factors are updated regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, economic conditionsor when facts and circumstances indicate that may affect a customer’s ability to pay, and expected default frequency rates. Trade receivables are written off at the point when they are considered uncollectible.an update is deemed necessary.
(f)(g) Financing Receivables and Guarantees The Company provides We provide financing arrangements, including leases, financed service contracts, and loans, for certain qualified end-user customers to build, maintain, and upgrade their networks. Lease receivables primarily represent sales-type and direct-financing leases. Leases have on average a four-year term and are usually collateralized by a security interest in the underlying assets. Loan receivables include customers financing purchases of the Company'sour hardware, software and services and also may include additional funds for other costs associated with network installation and integration of the Company'sour products and services. Loan receivables generally have terms of up to three years.years on average. Financed service contracts typically have terms of one year to three years and primarily relate to technical support services.
The Company determines the adequacy of its allowance for credit loss by assessing the risks and losses inherent in its financing receivables by portfolio segment. The portfolio segment is based on the types of financing offered by the Company to its customers: lease receivables, loan receivables, and financed service contracts.
The Company assesses the allowance for credit loss related to financing receivables on either an individual or a collective basis. The Company considers various factors in evaluating lease and loan receivables and the earned portion of financed service contracts for possible impairment on an individual basis. These factors include the Company’s historical experience, credit quality and age of the receivable balances, and economic conditions that may affect a customer’s ability to pay. When the evaluation indicates that it is probable that all amounts due pursuant to the contractual terms of the financing agreement, including scheduled interest payments, are unable to be collected, the financing receivable is considered impaired. All such outstanding amounts, including any accrued interest, are assessed and fully reserved at the customer level. The Company’s internal credit risk ratings are categorized as 1 through 10, with the lowest credit risk rating representing the highest quality financing receivables. Typically, the Company also considers financing receivables with a risk rating of 8 or higher to be impaired and will include them in the individual assessment for allowance. The Company evaluates the remainder of its financing receivables portfolio for impairment on a collective basis and records an allowance for credit loss at the portfolio segment level. When evaluating the financing receivables on a collective basis, the Company uses historical default rates and expected default frequency rates published by major third-party credit-rating agencies as well as its own historical loss rate in the event of default, while also systematically giving effect to economic conditions, concentration of risk, and correlation.
Expected default frequency rates and historical default rates are published quarterly by major third-party credit-rating agencies, and the internal credit risk rating is derived by taking into consideration various customer-specific factors and macroeconomic conditions. These factors, which include the strength of the customer’s business and financial performance, the quality of the customer’s banking relationships, the Company’s specific historical experience with the customer, the performance and outlook of the customer’s industry, the customer’s legal and regulatory environment, the potential sovereign risk of the geographic locations in which the customer is operating, and independent third-party evaluations, are updated regularly or when facts and circumstances indicate that an update is deemed necessary.
Financing receivables are written off at the point when they are considered uncollectible, and all outstanding balances, including any previously earned but uncollected interest income, will be reversed and charged against the allowance for credit loss. The Company does not typically have any partially written-off financing receivables.
Outstanding financing receivables that are aged 31 days or more from the contractual payment date are considered past due. The Company doesWe do not accrue interest on financing receivables that are considered impaired or more than 90120 days past due unless either the receivable has not been collected due to administrative reasons or the receivable is well secured and in the process of collection. Financing receivables may be placed on nonaccrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain. After a financing receivable has been categorized as nonaccrual, interest will be recognized when cash is received. A financing receivable may be returned to accrual status after all of the customer’s delinquent balances of principal and interest have been settled, and the customer remains current for an appropriate period.
The Company facilitatesWe facilitate arrangements for third-party financing extended to channel partners, consisting of revolving short-term financing, generally with payment terms ranging from 60 to 90 days. In certain instances, these financing arrangements result in a transfer of the Company’sour receivables to the third party. The receivables are derecognized upon transfer, as these transfers qualify as true sales, and the Company receiveswe receive a payment for the receivables from the third party based on the Company’sour standard payment terms. These financing arrangements facilitate the working capital requirements of the channel partners, and, in some cases, the Company guaranteeswe guarantee a portion of these arrangements. The CompanyWe also providesprovide financing guarantees for third-party financing arrangements extended to end-user customers related to leases and loans, which typically have terms of up to three years. The CompanyWe could be called upon to make payments under these guarantees in the event of nonpayment by the channel partners or end-user customers. Deferred revenue relating to these financing arrangements is recorded in accordance with revenue recognition policies or for the fair value of the financing guarantees.
(g)(h) Leases We lease real estate, information technology (IT) and other equipment and vehicles. We also have arrangements with certain suppliers and contract manufacturers which includes the leasing of dedicated space and equipment costs. Our leases have the option to extend or terminate the lease when it is reasonably certain that we will exercise that option.
As a lessee, we determine if an arrangement is a lease at commencement. Our ROU lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments related to the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use incremental borrowing rates based on information available at the commencement date to determine the present value of our lease payments. Certain of our lease agreements contain variable lease payments. Our variable lease payments can fluctuate depending on the level of activity or the cost of certain services where we have elected to combine lease and non-lease components. While these payments are not included as part of our lease liabilities, they are recognized as variable lease expense in the period they are incurred.
We provide leasing of our equipment and complementary third-party products primarily through our channel partners and distributors, for which the income arising from these leases is recognized through interest income. As a lessor, we determine if an arrangement is a lease at inception. We provide leasing arrangements for our equipment to certain qualified customers. Our lease portfolio primarily consists of sales-type leases. We allocate the consideration in a bundled contract with our customers based on relative standalone selling prices of our lease and non-lease components. The residual value on our leased equipment is determined at the inception of the lease based on an analysis of estimates of the value of equipment, market factors and historical customer behavior. Residual value estimates are reviewed on a periodic basis and other-than-temporary declines are expensed in the period they occur. Our leases generally provide an end-of-term option for the customer to extend the lease under mutually-agreed terms, return the leased equipment, or purchase the equipment for either the then-market value of the equipment or a pre-determined purchase price. If a customer chooses to terminate their lease prior to the original end of term date, the customer is required to pay all remaining lease payments in full.
We adopted Accounting Standards Codification (ASC) 842 at the beginning of fiscal 2020 and applied it at the beginning of the period of adoption and did not restate prior periods. For additional information, see Note 8.
(i) Depreciation and Amortization Property and equipment are stated at cost, less accumulated depreciation or amortization, whenever applicable. Depreciation and amortization expenses for property and equipment were approximately $1.1$0.8 billion, $0.9 billion, and $1.0 billion and $1.1 billionfor fiscal 2017, 2016,2021, 2020, and 2015,2019, respectively. Depreciation and amortization are computed using the straight-line method, generally over the following periods:
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Asset Category | | Period |
Buildings | | 25 years |
Building improvements | | 10 years |
Leasehold improvements | | Shorter of remaining lease term or up to 10 years |
Computer equipment and related software | | 30 to 36 months |
Production, engineering, and other equipment | | Up to 5 years |
Operating lease assets | | Based on lease term |
Furniture and fixtures | | 5 years |
(h)(j) Business Combinations The Company allocates We allocate the fair value of the purchase consideration of itsour acquisitions to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development (IPR&D), based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset’s estimated useful life. Acquisition-related expenses and related restructuring costs are recognized separately from the business combination and are expensed as incurred.
(i)(k) Goodwill and Purchased Intangible Assets Goodwill is tested for impairment on an annual basis in the fourth fiscal quarter and, when specific circumstances dictate, between annual tests. When impaired, the carrying value of goodwill is written down to fair value. The goodwill impairment test involves a two-step process. The first step, identifyingIdentifying a potential impairment comparesconsists of comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. If necessary, the second step to measure the impairment loss would be to compare the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets. See “Long-Lived Assets” for the Company’sour policy regarding impairment testing of purchased intangible assets with finite lives. Purchased intangible assets with indefinite lives are assessed for potential impairment annually or when events or circumstances indicate that their carrying amounts might be impaired.
(j)(l) Long-Lived Assets Long-lived assets that are held and used by the Companyus are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability of long-lived assets is based on an estimate of the undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is
based on the difference between the fair value of the asset and its carrying value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
(k)(m) Fair Value Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be either recorded or disclosed at fair value, the Company considerswe consider the principal or most advantageous market in which itwe would transact, and itwe also considersconsider assumptions that market participants would use when pricing the asset or liability.
The accounting guidance for fair value measurement requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The fair value hierarchy is as follows:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. We use inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of assets or liabilities.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. The fair values are determined based on model-based techniques such as discounted cash flow models using inputs that we could not corroborate with market data.
(l)(n) Derivative Instruments The Company recognizes We recognize derivative instruments as either assets or liabilities and measuresmeasure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For a derivative instrument designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of AOCI and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For a derivative instrument designated as a net investment hedge of the Company’sour foreign operations, the gain or loss is recorded in the cumulative translation adjustment within AOCI together with the offsetting loss or gain of the hedged exposure of the underlying foreign operations. Any ineffective portion of the net investment hedges is reported in earnings during the period of change. For derivative instruments that are not designated as accounting hedges, changes in fair value are recognized in earnings in the period of change. The Company recordsWe record derivative instruments in the statements of cash flows to operating, investing, or financing activities consistent with the cash flows of the hedged item.
Hedge effectiveness for foreign exchange forward contracts used as cash flow hedges is assessed by comparing the change in the fair value of the hedge contract with the change in the fair value of the forecasted cash flows of the hedged item. Hedge effectiveness for equity forward contracts and foreign exchange net investment hedge forward contracts is assessed by comparing changes in fair value due to changes in spot rates for both the derivative and the hedged item. For foreign exchange option contracts, hedge effectiveness is assessed based on the hedging instrument’s entire change in fair value. Hedge effectiveness for interest rate swaps is assessed by comparing the change in fair value of the swap with the change in the fair value of the hedged item due to changes in the benchmark interest rate.
(m)(o) Foreign Currency Translation Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of AOCI. Income and expense accounts are translated at average exchange rates during the year. Remeasurement adjustments are recorded in other income (loss), net. The effect of foreign currency exchange rates on cash and cash equivalents was not material for any of the fiscal years presented.
(n)(p) Concentrations of Risk Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company seeksWe seek to mitigate itsour credit risks by spreading such risks across multiple counterparties and monitoring the risk profiles of these counterparties.
We perform ongoing credit evaluations of itsour customers and, with the exception of certain financing transactions, doesdo not require collateral from itsour customers. The Company receivesWe receive certain of itsour components from sole suppliers. Additionally, the Company relieswe rely on a limited number of contract manufacturers and suppliers to provide manufacturing services for itsour products. The inability of a contract manufacturer or supplier to fulfill our supply requirements of the Company could materially impact future operating results.
(o)(q) Revenue Recognition The Company recognizes revenue when persuasive evidence We enter into contracts with customers that can include various combinations of an arrangement exists, delivery has occurred,products and services which are generally distinct and accounted for as separate performance obligations. As a result, our contracts may contain multiple performance obligations. We determine whether arrangements are distinct based on whether the fee is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance ofcustomer can benefit from the product system, or solutionservice on its own or together with other resources that are readily available and whether our commitment to transfer the product or service to the customer is specifiedseparately identifiable from other obligations in the contract. We classify our hardware, perpetual software licenses, and SaaS as distinct performance obligations. Term software licenses represent multiple obligations, which include software licenses and software maintenance. In transactions where we deliver hardware or software, we are typically the principal and we record revenue and costs of goods sold on a gross basis. We refer to our term software licenses, security software licenses, SaaS, and associated service arrangements as subscription offers.
We recognize revenue upon transfer of control of promised goods or services in a contract with a customer in an amount that reflects the consideration we expect to receive in exchange for those products or services. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment, electronic delivery (or when the software is available for download by the customer), or once title and risk of loss has transferred to the customer. Transfer of control can also occur over time for software maintenance and services as the customer revenue is deferred until all acceptance criteria have been met. For hosting arrangements,receives the Company recognizes revenue ratablybenefit over the hosting period, while usagecontract term. Our hardware and perpetual software licenses are distinct performance obligations where revenue is recognized based on utilization. Software subscriptionupfront upon transfer of control. Term software licenses include multiple performance obligations where the term licenses are recognized upfront upon transfer of control, with the associated software maintenance revenue is deferred and recognized ratably over the subscriptioncontract term upon deliveryas services and software updates are provided. SaaS arrangements do not include the right for the customer to take possession of the first productsoftware during the term, and commencement of the term. Technical support and consulting servicestherefore have one distinct performance obligation which is satisfied over time with revenue is deferred and recognized ratably over the period during whichcontract term as the services arecustomer consumes the services. On our product sales, we record consideration from shipping and handling on a gross basis within net product sales. We record our revenue net of any associated sales taxes.
An allowance for future sales returns is established based on historical trends in product return rates. The allowance for future sales returns as of July 31, 2021 and July 25, 2020 was $55 million and $79 million, respectively, and was recorded as a reduction of our accounts receivable and revenue.
Significant Judgments
Revenue is allocated among these performance obligations in a manner that reflects the consideration that we expect to be performed, whichentitled to for the promised goods or services based on standalone selling prices (SSP). SSP is typically from oneestimated for each distinct performance obligation and judgment may be required in their determination. The best evidence of SSP is the observable price of a product or service when we sell the goods separately in similar circumstances and to three years. Transactional advanced services revenuesimilar customers. In instances where SSP is recognized upon delivery or completion of performance milestones.
The Company uses distributorsnot directly observable, we determine SSP using information that typically stock inventory and sell to systems integrators, service providers,may include market conditions and other resellers. The Company refersobservable inputs.
We assess relevant contractual terms in our customer contracts to thisdetermine the transaction price. We apply judgment in identifying contractual terms and determining the transaction price as its two-tier saleswe may be required to estimate variable consideration when determining the end customer. Revenue from distributors is recognized based on a sell-through method using point-of-sale information provided by the distributors. Distributorsamount of revenue to recognize. Variable consideration includes potential contractual penalties and other partners participate in various rebate, cooperative marketing and other incentive programs that we offer to our distributors, channel partners and customers. When determining the Company maintains estimated accruals and allowances for these programs. The ending liability foramount of revenue to recognize, we estimate the expected usage of these programs, was includedapplying the expected value or most likely estimate and update the estimate at each reporting period as actual utilization becomes available. We also consider the customers' right of return in other current liabilities,determining the transaction price, where applicable.
We assess certain software licenses, such as for security software, that contain critical updates or upgrades which customers can download throughout the contract term. Without these updates or upgrades, the functionality of the software would diminish over a relatively short time period. These updates or upgrades provide the customer the full functionality of the purchased security software licenses and are required to maintain the balancesecurity license's utility as the risks and threats in the environment are rapidly changing. In these circumstances, the revenue from these software arrangements is recognized as a single performance obligation satisfied over the contract term.
We adopted ASC 606 at the beginning of fiscal 2019 using the modified retrospective method to those contracts that were not completed as of July 29, 2017 and July 30, 2016 was $1.0 billion and $1.1 billion, respectively. The Company accrues for warranty costs, sales returns, and other allowances based on its historical experience. Shipping and handling fees billed to customers are included in revenue, with28, 2018. For the associated costs included in cost of sales.additional information, see Note 3.
Many of the Company’s products have both software and non-software components that function together to deliver the products’ essential functionality. The Company also provides technical support and advanced services. The Company has a broad customer base that encompasses virtually all types of public and private entities, including enterprise businesses, service providers, and commercial customers. The Company and its salesforce are not organized by product divisions, and the Company’s products and services can be sold standalone or together in various combinations across the Company’s geographic segments or customer markets. For example, service provider arrangements are typically larger in scale with longer deployment schedules and involve the delivery of a variety of product technologies, including high-end routing, video and network management software, and other product technologies along with technical support and advanced services. The Company’s enterprise and commercial arrangements are unique for each customer and smaller in scale and may include network infrastructure products such as routers and switches or collaboration technologies such as Unified Communications and Cisco TelePresence systems products along with technical support services.
The Company enters into revenue arrangements that may consist of multiple deliverables of its product and service offerings due to the needs of its customers. For example, a customer may purchase routing products along with a contract for technical support services. This arrangement would consist of multiple elements, with the products delivered in one reporting period and the technical support services delivered across multiple reporting periods. Another customer may purchase networking products along with advanced service offerings, in which all the elements are delivered within the same reporting period. In addition, distributors purchase products or technical support services on a standalone basis for resale to an end user or for purposes of stocking certain products, and these transactions would not result in a multiple-element arrangement. The Company considers several factors when reviewing multiple purchases made by the same customer within a short time frame in order to identify multiple-element arrangements, including whether the deliverables are closely interrelated, whether the deliverables are essential to each other’s functionality, whether payment terms are linked, whether the customer is entitled to a refund or concession if another purchase is not completed satisfactorily, and/or whether the purchases were negotiated together as one overall arrangement.
In many instances, products are sold separately in standalone arrangements as customers may support the products themselves or purchase support on a time-and-materials basis. Advanced services are sometimes sold in standalone engagements such as general consulting, network management, or security advisory projects, and technical support services are sold separately through renewals of annual contracts. The Company determines its vendor-specific objective evidence (VSOE) based on its normal pricing and discounting practices for products or services when sold separately. VSOE determination requires that a substantial majority of the historical standalone transactions has the selling prices for a product or service that fall within a reasonably narrow pricing range, generally evidenced by approximately 80% of such historical standalone transactions falling within plus or minus 15% of the median rates. In addition, the Company considers the geographies in which the products or services are sold, major product and service groups and customer classifications, and other environmental or marketing variables in determining VSOE.
When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements, which may be due to the Company infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history, such as in the case of certain newly introduced product categories, the Company attempts to determine the selling price of each element based on third-party evidence of selling price (TPE). TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy differs from that of its peers, and its offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a standalone basis. Therefore, the Company is typically not able to determine TPE.
When the Company is unable to establish fair value using VSOE or TPE, the Company uses estimated selling prices (ESP) in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were regularly sold on a standalone basis. ESP is generally used for new or highly proprietary offerings and solutions or for offerings not priced within a reasonably narrow range. The Company determines ESP for a product or service by considering multiple factors, including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices. The determination of ESP is made through consultation with and formal approval by the Company’s management, taking into consideration the go-to-market strategy.
The Company regularly reviews VSOE, TPE, and ESP and maintains internal controls over the establishment and updates of these estimates. There were no material impacts during the fiscal year, nor does the Company currently expect a material impact in the near term from changes in VSOE, TPE, or ESP.
The Company’s arrangements with multiple deliverables may include one or more software deliverables that are subject to the software revenue recognition guidance. In these cases, revenue for the software is generally recognized upon shipment or electronic delivery and granting of the license. The revenue for these multiple-element arrangements is allocated to the software deliverables and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the applicable accounting guidance. In the circumstances where the Company cannot determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverables, ESP is used for the purposes of performing this allocation. VSOE is required to allocate the revenue between multiple software deliverables. If VSOE is available for the undelivered software elements, the Company applies the residual method; where VSOE is not available, software revenue is either recognized when all software elements have been delivered or recognized ratably when post-contract support is the only undelivered software element remaining.
(p)(r) Advertising Costs The Company expenses We expense all advertising costs as incurred. Advertising costs included within sales and marketing expenses were approximately $209$268 million, $186$187 million, and $202$204 million for fiscal 2017, 2016,2021, 2020, and 2015,2019, respectively.
(s) Share-Based Compensation Expense The Company measures We measure and recognizesrecognize the compensation expense for all share-based awards made to employees and directors, including employee stock options, restricted stock units (RSUs), PRSUs,performance-based restricted stock units (PRSUs), and employee stock purchases related to the Employee Stock Purchase Plan (Employee Stock Purchase Rights) based on estimated fair values. The fair value of employee stock options is estimated on the date of grant using a lattice-binomial option-pricing model (Lattice-Binomial Model) or the Black-Scholes model, and for employee stock purchase rights the Company estimateswe estimate the fair value using the Black-Scholes model. The fair value for time-based stock awards and stock awards that are contingent upon the achievement of financial performance metrics is based on the grant date share price reduced by the present value of the expected dividend yield prior to vesting. The fair value of market-based stock awards is estimated using an option-pricing model on the date of grant. Share-based compensation expense is reduced for forfeitures.
(r)(t) Software Development Costs Software development costs, including costs to develop software sold, leased, or otherwise marketed, that are incurred subsequent to the establishment of technological feasibility are capitalized if significant. Costs incurred during the application development stage for internal-use software are capitalized if significant. Capitalized software development costs are amortized using the straight-line amortization method over the estimated useful life of the applicable software. Such software development costs required to be capitalized have not been material to date.
(s)(u) Income Taxes Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
The Company accountsWe account for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company classifiesWe classify the liability for unrecognized tax benefits as current to the extent that the Company anticipateswe anticipate payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
(t)(v) Computation of Net Incomeper Share Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Diluted shares outstanding includes the dilutive effect of in-the-money options, unvested restricted stock, and restricted stock units. The dilutive effect of such equity awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options and the amount of compensation cost for future service that the Company haswe have not yet recognized and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are collectively assumed to be used to repurchase shares.
(u)(w) Consolidation of Variable Interest Entities The Company uses a qualitative Our approach in assessing the consolidation requirement for variable interest entities. The approachentities focuses on identifying which enterprise has the power to direct the activities that most significantly impact the variable interest entity’s economic performance and which enterprise has the obligation to absorb losses or the right to receive benefits from the variable interest entity. In the eventShould we conclude that the Company iswe are the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity will be included in the Company’sour Consolidated Financial Statements.
(v)(x) Use of Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for the following, among others:
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▪ | Allowances for accounts receivable, sales returns, and financing receivables |
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▪ | Inventory valuation and liability for purchase commitments with contract manufacturers and suppliers |
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▪ | Loss contingencies and product warranties |
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▪ | Fair value measurements and other-than-temporary impairments |
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▪ | Goodwill and purchased intangible asset impairments |
▪Revenue recognition
▪Allowances for accounts receivable, sales returns, and financing receivables
▪Inventory valuation and liability for purchase commitments with contract manufacturers and suppliers
▪Loss contingencies and product warranties
▪Fair value measurements
▪Goodwill and purchased intangible asset impairments
▪Income taxes
The inputs into certain of our judgments, assumptions, and estimates considered the economic implications of the COVID-19 pandemic on our critical and significant accounting estimates. The actual results experienced by the Companyus may differ materially from management’sour estimates. As the COVID-19 pandemic continues, many of our estimates could require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve our estimates may change materially in future periods.
(y) New Accounting Updates Recently Adopted
Consolidation of Certain Types of Legal Entities In February 2015, the FASB issued an accounting standard update that changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The accounting standard update became effective for the Company beginning in the first quarter of fiscal 2017. The application of this accounting standard update did not have any impact on the Company's Consolidated Balance Sheet or Statement of Operations upon adoption, but the Company has provided additional disclosures in Note 8 pursuant to this accounting standard update.
(x) Recent Accounting Standards or Updates Not Yet Effective as of Fiscal Year End
Revenue Recognition In May 2014, the FASB issued a new accounting standard related to revenue recognition. The new standard will supersede nearly all U.S. GAAP on revenue recognition and eliminate industry-specific guidance. The underlying principle of the new standard is to recognize revenue when a customer obtains control of promised goods or services at an amount that reflects the consideration that is expected to be received in exchange for those goods or services. It also requires increased disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers.
The standard allows two methods of adoption: i) retrospectively to each prior period presented (“full retrospective method”), or ii) retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption ("modified retrospective method"). Cisco will adopt the new standard using the modified retrospective method at the beginning of its first quarter of fiscal 2019.
Cisco is on schedule in establishing new accounting policies, implementing systems and processes (including more extensive use of estimates), and internal controls necessary to support the requirements of the new standard. Cisco has completed its preliminary assessment of the financial statement impact of the new standard, as discussed below, and will continue to update that assessment as more information becomes available.
The new standard will primarily impact Cisco’s revenue recognition for software arrangements and sales to two-tier distributors. In both areas, the new standard will accelerate the recognition of revenue. The table below details both the current and expected revenue recognition timing in these areas:
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| | Current Revenue Standard | | New Revenue Standard |
Software arrangements: | | | | |
Perpetual software licenses | | Upfront | | Upfront |
Term software licenses | | Ratable | | Upfront |
Security software licenses | | Ratable | | Ratable |
Enterprise license agreements | | Ratable | | Upfront |
Software support services | | Ratable | | Ratable |
Software-as-a-service | | Ratable | | Ratable |
Two-tier distribution | | Sell-Through | | Sell-In |
Cisco expects that the new standard will not have a material impact on total revenue in the year of adoption based on two factors: i) revenue will be accelerated consistent with the changes in timing as indicated in the preceding table, largely offset by ii) the reduction of revenue from software arrangements where revenue was previously deferred in prior periods and recognized ratably over time as required under the current standard. This preliminary assessment is based on the types and number of revenue arrangements currently in place. The exact impact of the new standard will be dependent on facts and circumstances at adoption and could vary from quarter to quarter.
In addition to the above revenue recognition timing impacts, the new standard will require incremental contract acquisition costs (such as sales commissions) for customer contracts to be capitalized and amortized over the contract period. Currently, these costs are expensed as incurred.
Cisco will be required to record cumulative effect adjustments to retained earnings upon adopting the new standard at the beginning of fiscal 2019. The most significant of these adjustments will be to reduce product deferred revenue and increase retained earnings at the date of adoption to reflect revenue that would have been already recognized under the new standard related to existing arrangements. There will also be an adjustment to increase accounts receivable and reduce inventories related to the changes in revenue recognition on sales to two-tier distributors. Lastly, an adjustment will be recorded to establish an asset and increase retained earnings related to the requirement to capitalize incremental contract acquisition costs for customer contracts.
Financial Instruments In January 2016, the FASB issued an accounting standard update that changes the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The accounting standard update will be effective for Cisco beginning in the first quarter of fiscal 2019, and early adoption is permitted. The most significant impact of this accounting standard update for Cisco is that it will require the remeasurement of equity investments at fair value with the changes recorded to the income statement. While Cisco is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements, Cisco expects that this accounting standard update will increase the variability of other income (loss), net.
Leases In February 2016, the FASB issued an accounting standard update related to leases requiring lessees to recognize operating and financing lease liabilities on the balance sheet, as well as corresponding right-of-use assets. The new lease standard also makes some changes to lessor accounting and aligns key aspects of the lessor accounting model with the revenue recognition standard. In addition, disclosures will be required to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The accounting standard update will be effective for Cisco beginning in the first quarter of fiscal 2020 on a modified retrospective basis, and early adoption is permitted. Cisco is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.
Share-Based Compensation In March 2016, the FASB issued an accounting standard update that impacts the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the Consolidated Statements of Cash Flows. The accounting standard update became effective for Cisco beginning in the first quarter of fiscal 2018. Cisco does not expect that this accounting standard update will have a material impact on its Consolidated Financial Statements, but this accounting standard update is expected to slightly increase the variability of the provision for income taxes.
Credit Losses of Financial InstrumentsIn June 2016, the FASB issued an accounting standard update that requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The accountingWe adopted this standard update will be effective for Ciscoat the beginning in theof our first quarter of fiscal 2021, applied it at the beginning of the period of adoption and did not restate prior periods. The standard primarily impacts our financial assets measured at amortized cost and available-for-sale debt securities. The standard did not have a material impact on a modified retrospective basis,our consolidated financial statements upon adoption.
(z) Recent Accounting Standards or Updates Not Yet Effective as of Fiscal Year End
Reference Rate Reform In March 2020, the FASB issued an accounting standard update and early adoption in fiscal 2020 is permitted. Cisco issubsequent amendments that provide optional expedients and exceptions to the current guidance on contract modification and hedging relationships to ease the financial reporting burden of the expected market transition from the London InterBank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This accounting standard update was effective upon issuance and may be applied prospectively through December 31, 2022. We are currently evaluating the impact of this accounting standard update on itsour Consolidated Financial Statements.
Classification
3.Revenue
(a)Disaggregation of Cash Flow ElementsIn August 2016,Revenue
We disaggregate our revenue into groups of similar products and services that depict the FASB issued an accounting standard update relatednature, amount, and timing of revenue and cash flows for our various offerings. The sales cycle, contractual obligations, customer requirements, and go-to-market strategies differ for each of our product categories, resulting in different economic risk profiles for each category.
The following table presents this disaggregation of revenue (in millions):
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Years Ended | July 31, 2021 | | July 25, 2020 | | July 27, 2019 |
Revenue: | | | | | |
Infrastructure Platforms | $ | 27,109 | | | $ | 27,219 | | | $ | 30,184 | |
Applications | 5,504 | | | 5,568 | | | 5,803 | |
Security | 3,382 | | | 3,158 | | | 2,822 | |
Other Products | 19 | | | 33 | | | 196 | |
Total Product | 36,014 | | | 35,978 | | | 39,005 | |
Services | 13,804 | | | 13,323 | | | 12,899 | |
Total (1) | $ | 49,818 | | | $ | 49,301 | | | $ | 51,904 | |
Amounts may not sum due to rounding. We have made certain reclassifications to the classification of certain cash receipts and cash payments onproduct revenue amounts for prior years to conform to the statement of cash flows. The accounting standard update will be effective for Cisco beginning incurrent year’s presentation.
(1) During the firstsecond quarter of fiscal 2019, on a retrospective basis, and early adoption is permitted. Cisco is currently evaluatingwe completed the impact of this accounting standard update on its Consolidated Statements of Cash Flows.
Income Taxes on Intra-Entity Transfers of AssetsIn October 2016, the FASB issued an accounting standard update that requires recognitiondivestiture of the income tax consequencesService Provider Video Software Solutions (SPVSS) business. Total revenue includes SPVSS business revenue of intra-entity transfers$168 million for fiscal 2019.
Infrastructure Platforms consist of assets (other than inventory) atour core networking technologies of switching, routing, wireless, and data center products that are designed to work together to deliver networking capabilities and transport and/or store data. These technologies consist of both hardware and software offerings, including software licenses and software-as-a-service (SaaS), that help our customers build networks, automate, orchestrate, integrate, and digitize data. We are shifting and expanding more of our business to software and subscriptions across our core networking portfolio. Our hardware and perpetual software in this category are distinct performance obligations where revenue is recognized upfront upon transfer of control. Term software licenses are multiple performance obligations where the transaction date.term license is recognized upfront upon transfer of control with the associated software maintenance revenue recognized ratably over the contract term. SaaS arrangements in this category have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term.
Applications consists of offerings that utilize the core networking and data center platforms to provide their functions. The accountingproducts consist primarily of software offerings, including software licenses and SaaS, as well as hardware. Our perpetual software and hardware in this category are distinct performance obligations where revenue is recognized upfront upon transfer of control. Term software licenses are multiple performance obligations where the term license is recognized upfront upon transfer of control with the associated software maintenance revenue recognized ratably over the contract term. SaaS arrangements in this category have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term.
Security primarily includes our network security, cloud and email security, identity and access management, advanced threat protection, and unified threat management products. These products consist of both hardware and software offerings, including software licenses and SaaS. Updates and upgrades for the term software licenses are critical for our software to perform its intended commercial purpose because of the continuous need for our software to secure our customers' network environments against frequent threats. Therefore, security software licenses are generally represented by a single distinct performance obligation with revenue recognized ratably over the contract term. Our hardware and perpetual software in this category are distinct performance obligations where revenue is recognized upfront upon transfer of control. SaaS arrangements in this category have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term.
Other Products primarily includes our emerging technologies products. These products include both hardware and software licenses. Our offerings in this category are distinct performance obligations where revenue is recognized upfront upon transfer of control.
In addition to our product offerings, we provide a broad range of service and support options for our customers, including technical support services and advanced services. Technical support services represent the majority of these offerings which are distinct performance obligations that are satisfied over time with revenue recognized ratably over the contract term. Advanced services are distinct performance obligations that are satisfied over time with revenue recognized as services are delivered.
The sales arrangements as discussed above are typically made pursuant to customer purchase orders based on master purchase or partner agreements. Cash is received based on our standard update will be effectivepayment terms which is typically 30 days. We provide financing arrangements to customers for Cisco beginning in the first quarterall of fiscal 2019 on a modified retrospective basis,our hardware, software and early adoptionservice offerings. Refer to Note 9 for additional information. For these arrangements, cash is permitted. Cisco is currently evaluating the impacttypically received over time.
(b)Contract Balances
Accounts receivable, net was $5.8 billion as of this accounting standard update on its Consolidated Financial Statements.
Restricted Cash in StatementJuly 31, 2021 compared to $5.5 billion as of Cash Flow In November 2016, the FASB issued an accounting standard update that provides guidanceJuly 25, 2020, as reported on the classificationConsolidated Balance Sheets.
Contract assets consist of unbilled receivables and presentationare recorded when revenue is recognized in advance of changesscheduled billings to our customers. These amounts are primarily related to software and service arrangements where transfer of control has occurred but we have not yet invoiced. As of July 31, 2021 and July 25, 2020, our contract assets for these unbilled receivables, net of allowances, were $1.4 billion and $1.2 billion, respectively, and were included in restricted cash and cash equivalents in the statement of cash flows. The accounting standard update will be effective for Cisco beginning in the first quarter of fiscal 2019 using a retrospective
transition method to each period presented, and early adoption is permitted. Cisco does not expect that this accounting standard update will have a material impact on its Consolidated Statements of Cash Flows.
Definition of a BusinessIn January 2017, the FASB issued an accounting standard update that clarifies the definition of a business to help companies evaluate whether acquisition or disposal transactions should be accounted for as asset groups or as businesses. The accounting standard update will be effective for Cisco beginning in the first quarter of fiscal 2019 on a prospective basis. The impact of this accounting standard update will be fact dependent, but Cisco expects that some transactions that were previously accounted for as business combinations or disposal transactions will be accounted for as asset purchases or asset sales under the accounting standard update.
Simplifying the Test for Goodwill Impairment In January 2017, the FASB issued an accounting standard update that removes Step 2 of the goodwill impairment test, which requires the assessment of fair value of individualother current assets and liabilities of a reporting unit to measure goodwill impairments. Goodwill impairment will now be the amountother assets.
Gross contract assets by which a reporting unit's carrying value exceeds its fair value. The accounting standard update will be effective for Cisco beginning in the first quarter of fiscal 2021 on a prospective basis, and early adoption is permitted. Cisco does not expect that this accounting standard update will impact its Consolidated Financial Statements.our internal risk ratings are summarized as follows (in millions):
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3. | Acquisitions and DivestituresJuly 31, 2021 |
1 to 4 | $ | 521 | |
(a)5 to 6 | Acquisition Summary770 | |
7 and Higher | 166 | |
Total | $ | 1,457 | |