Cisco Layoffs And Guidance Send Stock Down Despite Earnings Hit

Cisco released its Q4 and fiscal year 2013 earnings on Wednesday, along with plans to lay off 4,000 employees. While the earnings managed to meet analysts’ expectations, the company’s stock is suffering on news of the job cuts.

The layoffs, which the company is calling a “workforce rebalancing” will begin starting next quarter, and will amount to about 5% of Cisco’s workforce.

All Things D’s Arik Hesseldahl spoke with CEO John Chambers, and shares this quote:

“The primary reason is that as a company we’re rebalancing our work force to meet the opportunities.”

The company’s revenue was up 6% year over year at $12.4 billion for the quarter. For the year, it was also up 6% at $48.6 billion.

As of the time of this writing, Cisco shares are at $24.41 (-1.97‎, -7.48%‎).

Here’s the company’s earnings release in its entirety:

SAN JOSE, CA — August 14, 2013 – Cisco (NASDAQ: CSCO)

Q4 Revenue: $12.4 billion (increase of 6% year over year)

Q4 Earnings per Share: $0.42 GAAP; $0.52 non-GAAP

FY 2013 Revenue: $48.6 billion (increase of 6% year over year)

FY 2013 Earnings per Share: $1.86 GAAP; $2.02 non-GAAP

Cisco, the worldwide leader in networking that transforms how people connect, communicate and collaborate, today reported its fourth quarter and fiscal year results for the period ended July 27, 2013. Cisco reported fourth quarter revenue of $12.4 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.3 billion or $0.42 per share, and non-GAAP net income of $2.8 billion or $0.52 per share.

“My confidence in our ability to be the #1 IT Company is increasing. Our fourth quarter was a record on many fronts, with record revenue, and record non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per share. In every case, we exceeded the midpoint of our guidance. We also generated $4 billion in operating cash flow in the quarter, another record,” stated Cisco Chairman and CEO John Chambers.

“Now, more than ever, our customers and our partners want Cisco’s help navigating the inconsistent global landscape successfully. They recognize the benefit of a partner who is not only the leader in their product categories, but can bring technologies and solutions together in an architecture to lower operating costs, reduce time to results, and future proof their investments.”

Q4 GAAP Results

Q4 2013 Q4 2012 Vs. Q4 2012

Revenue $ 12.4 billion $ 11.7 billion 6.2 %

Net Income $ 2.3 billion $ 1.9 billion 18.4 %

Earnings per Share $ 0.42 $ 0.36 16.7 %


Fiscal Year GAAP Results

	FY 2013		FY 2012		Vs. FY 2012
Revenue	$	48.6 billion	$	46.1 billion	5.5	%
Net Income	$	10.0 billion	$	8.0 billion	24.2	%
Earnings per Share	$	1.86	$	1.49	24.8	%


Fiscal Year Non-GAAP Results

	FY 2013		FY 2012		Vs. FY 2012
Net Income	$	10.9 billion	$	10.0 billion	8.5	%
Earnings per Share	$	2.02	$	1.85	9.2	%


CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
(Unaudited)

			Three Months Ended						Fiscal Year Ended
			July 27, 2013			July 28, 2012			July 27, 2013			July 28, 2012
REVENUE:
	Product		$	9,736		$	9,150		$	38,029		$	36,326
	Service			2,681			2,540			10,578			9,735
		Total revenue		12,417			11,690			48,607			46,061
COST OF SALES:
	Product			4,154			3,729			15,541			14,505
	Service			916			876			3,626			3,347
		Total cost of sales		5,070			4,605			19,167			17,852
GROSS MARGIN				7,347			7,085			29,440			28,209
OPERATING EXPENSES:
	Research and development			1,517			1,416			5,942			5,488
	Sales and marketing			2,360			2,417			9,538			9,647
	General and administrative			590			711			2,264			2,322
	Amortization of purchased intangible assets			66			91			395			383
	Restructuring and other charges			—			79			105			304
		Total operating expenses		4,533			4,714			18,244			18,144
OPERATING INCOME				2,814			2,371			11,196			10,065
	Interest income			171			167			654			650
	Interest expense			(143	)		(147	)		(583	)		(596	)
	Other income (loss), net			29			(5	)		(40	)		40
		Interest and other income, net		57			15			31			94

INCOME BEFORE PROVISION FOR INCOME TAXES				2,871			2,386			11,227			10,159
Provision for income taxes				601			469			1,244			2,118
		NET INCOME	$	2,270		$	1,917		$	9,983		$	8,041
Net income per share:
	Basic		$	0.42		$	0.36		$	1.87		$	1.50
	Diluted		$	0.42		$	0.36		$	1.86		$	1.49
Shares used in per-share calculation
	Basic			5,367			5,332			5,329			5,370
	Diluted			5,437			5,354			5,380			5,404
Cash dividends declared per common share			$	0.17		$	0.08		$	0.62		$	0.28


RECONCILIATION OF GAAP TO NON-GAAP NET INCOME
(In millions, except per-share amounts)

			Three Months Ended						Fiscal Year Ended
			July 27, 2013			July 28, 2012			July 27, 2013			July 28, 2012
GAAP net income			$	2,270		$	1,917		$	9,983		$	8,041
	Adjustments to cost of sales:
		Share-based compensation expense		42			54			178			209
		Amortization of acquisition-related intangible assets		153			100			569			376
		Impact to cost of sales from purchase accounting adjustments to inventory		—			—			40			—
		TiVo patent litigation settlement ⁽¹⁾		172			—			172			—
		Other acquisition-related/divestiture costs		1			—			1			—
		Significant asset impairments and restructurings		—			(5	)		—			(31	)
	Total adjustments to GAAP cost of sales			368			149			960			554
	Adjustments to operating expenses:
		Share-based compensation expense		198			313			947			1,192
		Amortization of acquisition-related intangible assets		66			91			395			383
		Other acquisition-related/divestiture costs		59			7			129			36
		Significant asset impairments and restructurings		—			281			55			506
	Total adjustments to GAAP operating expenses			323			692			1,526			2,117
	Total adjustments to GAAP income before provision for income taxes			691			841			2,486			2,671
	Income tax effect of non-GAAP adjustments			(114	)		(231	)		(620	)		(695	)
	Significant tax matters ⁽²⁾			—			—			(983	)		—
	Total adjustments to GAAP provision for income taxes			(114	)		(231	)		(1,603	)		(695	)
Non-GAAP net income			$	2,847		$	2,527		$	10,866		$	10,017

Diluted net income per share:
GAAP			$	0.42		$	0.36		$	1.86		$	1.49
Non-GAAP			$	0.52		$	0.47		$	2.02		$	1.85

(1)		Pursuant to the terms of the previously disclosed settlement and patent license agreement, Cisco paid TiVo a single lump sum of $294 million. During the fourth quarter of fiscal 2013, Cisco recorded a charge of $172 million in connection with this agreement. Non-GAAP net income for the fourth quarter and fiscal year ended July 27, 2013 excluded this charge.

(2)		For the fiscal year ended July 27, 2013, Cisco recorded a net tax benefit of $983 million. This net tax benefit is comprised of an Internal Revenue Service settlement of $794 million, the retroactive reinstatement of the U.S. federal R&D tax credit of $72 million and a tax benefit of $117 million related to prior fiscal years. Non-GAAP net income excluded this net tax benefit of $983 million.

Cisco Layoffs And Guidance Send Stock Down Despite Earnings Hit

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Q4 GAAP Results

	Q4 2013		Q4 2012		Vs. Q4 2012
Revenue	$	12.4 billion	$	11.7 billion	6.2	%
Net Income	$	2.3 billion	$	1.9 billion	18.4	%
Earnings per Share	$	0.42	$	0.36	16.7	%


Q4 Non-GAAP Results

	Q4 2013		Q4 2012		Vs. Q4 2012
Net Income	$	2.8 billion	$	2.5 billion	12.7	%
Earnings per Share	$	0.52	$	0.47	10.6	%


RECONCILIATION OF GAAP TO NON-GAAP EFFECTIVE TAX RATE

	Three Months Ended				Fiscal Year Ended
	July 27, 2013		July 28, 2012		July 27, 2013		July 28, 2012
GAAP effective tax rate	20.9	%	19.7	%	11.1	%	20.8	%
Tax effect of non-GAAP adjustments to net income	(0.8	)%	2.0	%	9.7	%	1.1	%
Non-GAAP effective tax rate	20.1	%	21.7	%	20.8	%	21.9	%


CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)

			July 27, 2013		July 28, 2012
ASSETS
Current assets:
	Cash and cash equivalents		$	7,925	$	9,799
	Investments			42,685		38,917
	Accounts receivable, net of allowance for doubtful accounts of $228 at July 27, 2013 and $207 at July 28, 2012			5,470		4,369
	Inventories			1,476		1,663
	Financing receivables, net			4,037		3,661
	Deferred tax assets			2,616		2,294
	Other current assets			1,312		1,230
		Total current assets		65,521		61,933
Property and equipment, net				3,322		3,402
Financing receivables, net				3,911		3,585
Goodwill				21,919		16,998
Purchased intangible assets, net				3,403		1,959
Other assets				3,115		3,882
TOTAL ASSETS			$	101,191	$	91,759
LIABILITIES AND EQUITY
Current liabilities:
	Short-term debt		$	3,283	$	31
	Accounts payable			1,029		859
	Income taxes payable			192		276
	Accrued compensation			3,378		2,928
	Deferred revenue			9,262		8,852
	Other current liabilities			5,048		4,785
		Total current liabilities		22,192		17,731
Long-term debt				12,928		16,297
Income taxes payable				1,748		1,844
Deferred revenue				4,161		4,028
Other long-term liabilities				1,034		558
Total liabilities				42,063		40,458
Total equity				59,128		51,301
TOTAL LIABILITIES AND EQUITY			$	101,191	$	91,759


CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

					Fiscal Year Ended
					July 27, 2013			July 28, 2012
Cash flows from operating activities:
	Net income				$	9,983		$	8,041
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation, amortization, and other				2,351			2,602
		Share-based compensation expense				1,120			1,401
		Provision for receivables				44			50
		Deferred income taxes				(37	)		(314	)
		Excess tax benefits from share-based compensation				(92	)		(60	)
		Net losses (gains) on investments				9			(31	)
		Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
			Accounts receivable			(1,001	)		272
			Inventories			218			(287	)
			Financing receivables			(723	)		(846	)
			Other assets			(27	)		(674	)
			Accounts payable			164			(7	)
			Income taxes, net			(239	)		418
			Accrued compensation			330			(101	)
			Deferred revenue			598			727
			Other liabilities			196			300
				Net cash provided by operating activities		12,894			11,491

Cash flows from investing activities:
	Purchases of investments					(36,608	)		(41,810	)
	Proceeds from sales of investments					14,799			27,365
	Proceeds from maturities of investments					17,909			12,103
	Acquisition of property and equipment					(1,160	)		(1,126	)
	Acquisition of businesses, net of cash and cash equivalents acquired					(6,766	)		(375	)
	Purchases of investments in privately held companies					(225	)		(380	)
	Return of investments in privately held companies					209			242
	Other					74			166
				Net cash used in investing activities		(11,768	)		(3,815	)

Cash flows from financing activities:
	Issuances of common stock					3,338			1,372
	Repurchases of common stock – repurchase program					(2,773	)		(4,560	)
	Shares repurchased for tax withholdings on vesting of restricted stock units					(330	)		(200	)
	Short-term borrowings, maturities less than 90 days, net					(20	)		(557	)
	Issuances of debt, maturities greater than 90 days					24			—
	Repayments of debt, maturities greater than 90 days					(16	)		—
	Excess tax benefits from share-based compensation					92			60
	Dividends paid					(3,310	)		(1,501	)
	Other					(5	)		(153	)
				Net cash used in financing activities		(3,000	)		(5,539	)
Net (decrease) increase in cash and cash equivalents						(1,874	)		2,137
Cash and cash equivalents, beginning of fiscal year						9,799			7,662
Cash and cash equivalents, end of fiscal year					$	7,925		$	9,799

Cash paid for:
Interest					$	682		$	681
Income taxes, net					$	1,519		$	2,014


ADDITIONAL FINANCIAL INFORMATION
(In millions)
(Unaudited)

				July 27, 2013			July 28, 2012
Cash and Cash Equivalents and Investments:
	Cash and cash equivalents			$	7,925		$	9,799
	Fixed income securities				39,888			37,297
	Publicly traded equity securities				2,797			1,620
			Total	$	50,610		$	48,716
Inventories:
	Raw materials			$	105		$	127
	Work in process				24			35
	Finished goods:
		Distributor inventory and deferred cost of sales			572			630
		Manufactured finished goods			480			597
		Total finished goods			1,052			1,227
	Service-related spares				256			213
	Demonstration systems				39			61
			Total	$	1,476		$	1,663

Property and equipment, net:
	Land, buildings, and building and leasehold improvements			$	4,426		$	4,363
	Computer equipment and related software				1,416			1,469
	Production, engineering, and other equipment				5,721			5,364
	Operating lease assets				326			300
	Furniture and fixtures				497			487
					12,386			11,983
	Less accumulated depreciation and amortization				(9,064	)		(8,581	)
			Total	$	3,322		$	3,402
Other assets:
	Deferred tax assets			$	1,539		$	2,270
	Investments in privately held companies				833			858
	Other				743			754
			Total	$	3,115		$	3,882
Deferred revenue:
	Service			$	9,403		$	9,173
	Product:
		Unrecognized revenue on product shipments and other deferred revenue			3,340			2,975
		Cash receipts related to unrecognized revenue from two-tier distributors			680			732
		Total product deferred revenue			4,020			3,707
			Total	$	13,423		$	12,880
Reported as:
	Current			$	9,262		$	8,852
	Noncurrent				4,161			4,028
			Total	$	13,423		$	12,880


SUMMARY OF SHARE-BASED COMPENSATION EXPENSE
(In millions)

	Three Months Ended				Fiscal Year Ended
	July 27, 2013		July 28, 2012		July 27, 2013			July 28, 2012
Cost of sales – product	$	9	$	14	$	40		$	53
Cost of sales – service		33		40		138			156
Share-based compensation expense in cost of sales		42		54		178			209
Research and development		58		104		286			401
Sales and marketing		101		159		484			588
General and administrative		39		50		175			203
Restructuring and other charges		—		2		(3	)		—
Share-based compensation expense in operating expenses		198		315		942			1,192
Total share-based compensation expense	$	240	$	369	$	1,120		$	1,401
Income tax benefit for share-based compensation	$	53	$	64	$	285		$	335


ACCOUNTS RECEIVABLE AND DSO
(In millions, except DSO)

	July 27, 2013		April 27, 2013		July 28, 2012
Accounts receivable, net	$	5,470	$	4,942	$	4,369
Days sales outstanding in accounts receivable (DSO)		40		37		34


INVENTORY TURNS AND RECONCILIATION OF GAAP TO NON-GAAP
COST OF SALES USED IN INVENTORY TURNS
(In millions, except annualized inventory turns)

		Three Months Ended
		July 27, 2013			April 27, 2013			July 28, 2012
Annualized inventory turns – GAAP			13.8			12.4			11.7
	Cost of sales adjustments		(1.0	)		(0.5	)		(0.4	)
Annualized inventory turns – non-GAAP			12.8			11.9			11.3

GAAP cost of sales		$	5,070		$	4,705		$	4,605
Cost of sales adjustments:
	Share-based compensation expense		(42	)		(44	)		(54	)
	Amortization of acquisition-related intangible assets		(153	)		(146	)		(100	)
	TiVo patent litigation settlement		(172	)		—			—
	Other acquisition-related/divestiture costs		(1	)		—			—
	Significant asset impairments and restructurings		—			—			5
Non-GAAP cost of sales		$	4,702		$	4,515		$	4,456


DIVIDENDS PAID AND REPURCHASE OF COMMON STOCK
(In millions, except dividends paid per common share)

	Three Months Ended								Fiscal Year Ended
	July 27, 2013		April 27, 2013		January 26, 2013		October 27, 2012		July 27, 2013

Dividends paid	$	918	$	905	$	743	$	744	$	3,310
Repurchase of common stock under the stock repurchase program		1,160		860		500		253		2,773
Total	$	2,078	$	1,765	$	1,243	$	997	$	6,083

Dividends paid per common share	$	0.17	$	0.17	$	0.14	$	0.14	$	0.62