cisco-annual-report-2021
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking StatementsThis Annual Report on Form 10-K, including this Management’s Discussion and Analysis of Financial Condition and Resultsof Operations, contains forward-looking statements regarding future events and our future results that are subject to the safeharbors 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 deemedforward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections aboutthe 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 inour businesses, future responses to and effects of the COVID-19 pandemic, and other characterizations of future events orcircumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictionsand 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 anyforward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.OVERVIEWCisco designs and sells a broad range of technologies that power the Internet. We are integrating our platforms across networking,security, collaboration, applications and the cloud. These platforms are designed to help our customers manage more users,devices and things connecting to their networks. This will enable us to provide customers with a highly secure, intelligentplatform for their digital business.A summary of our results is as follows (in millions, except percentages and per-share amounts):July 31,2021Three Months EndedJuly 25,2020 VarianceJuly 31,2021Years EndedJuly 25,2020 VarianceRevenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 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) ptsResearch 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 ptsAmortization of purchased intangible assetsincluded in operating expenses . . . . . . . . . . . . . $ 79 $ 33 139 % $ 215 $ 141 52%Restructuring and other chargesincluded 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) ptsInterest 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 ptsNet 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) ptsEarnings per share—diluted . . . . . . . . . . . . . . . $ 0.71 $ 0.62 15% $ 2.50 $ 2.64 (5)%30
Fiscal 2021 Compared with Fiscal 2020In fiscal 2021, we delivered growth in revenue in a very challenging environment. As customers have accelerated theirdigitization and cloud investments stemming from the COVID-19 pandemic, we focused on executing and innovating tosupport and assist that transition. In the second half of fiscal 2021, we began to see customers prepare for office re-openingsand 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 wasflat. 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 onour strategic priorities. We continue to operate in a challenging macroeconomic and highly competitive environment. Whilethe overall environment remains uncertain, we continue to aggressively invest in priority areas with the objective of drivingprofitable growth over the long term.Within total revenue, product revenue was flat and service revenue increased by 4%. Fiscal 2021 had 53 weeks, compared with52 weeks in fiscal 2020, thus our results for fiscal 2021 reflect an extra week compared with fiscal 2020. We estimate that amajority of our revenue increase was attributable to the extra week. In fiscal 2021, total software revenue was $15.0 billion acrossall product areas and service, an increase of 7%. Within total software revenue, subscription revenue increased 15%. Total grossmargin decreased by 0.3 percentage points. Product gross margin decreased by 0.2 percentage points, due to lower productivitybenefits largely driven by ongoing costs related to supply chain constraints. The effect of pricing erosion was moderate. Wehave partnered with several of our key suppliers utilizing our volume purchasing and extending supply coverage, includingrevising supplier arrangements, to address supply chain challenges. As a percentage of revenue, research and development,sales and marketing, and general and administrative expenses, collectively, increased by 0.7 percentage points. The total impactassociated with the extra week on our cost of sales and operating expenses was approximately $150 million (excluding theimpact of share-based compensation expense). Operating income as a percentage of revenue decreased by 1.8 percentage points.We incurred restructuring and other charges of $886 million, which resulted in a decrease of 6% in net income and a decreaseof 5% in diluted earnings per share.In terms of our geographic segments, revenue from the Americas decreased by $0.1 billion, EMEA revenue increased by$0.3 billion and revenue in our APJC segment increased by $0.4 billion. The “BRICM” countries experienced a product revenuedecline of 6% in the aggregate, driven by a decrease in product revenue across each of the BRICM countries with the exceptionof India.From a customer market standpoint, we experienced product revenue growth in the public sector and service provider marketspartially offset by declines in the enterprise and commercial markets. As fiscal 2021 progressed, we saw improvement in businessmomentum in our customer markets, which we believe was related to an improving global macroeconomic environment.From a product category perspective, total product revenue was flat year over year, driven by growth in revenue in Security of7%, offset by a product revenue decline in Applications of 1%. Infrastructure Platforms was flat.31
- Page 1 and 2: 2021ANNUAL REPORTThe Future of Work
- Page 3 and 4: Introduction tosummary reportThis s
- Page 5 and 6: In collaboration, we continue to in
- Page 7 and 8: Capital allocationDividends paid pe
- Page 9 and 10: LeadershipCisco’s executive leade
- Page 11 and 12: ExecutivecompensationOur pay practi
- Page 13 and 14: The role of the Board of Directors
- Page 15 and 16: Cisco’s efforts to deliver on our
- Page 17 and 18: Cisco’s net zero goal will be sup
- Page 19 and 20: (Mark One)orUNITED STATES SECURITIE
- Page 21 and 22: This Annual Report on Form 10-K, in
- Page 23 and 24: We introduced Cisco Silicon One, a
- Page 25 and 26: range of devices and endpoints such
- Page 27 and 28: For information regarding risks rel
- Page 29 and 30: Research and DevelopmentWe regularl
- Page 31 and 32: Inclusion & DiversityInclusion and
- Page 33 and 34: Mr. Herren joined Cisco in December
- Page 35 and 36: As a consequence, operating results
- Page 37 and 38: We believe that we may be faced wit
- Page 39 and 40: new competitors to enter the market
- Page 41 and 42: assessments and decisions. Although
- Page 43 and 44: components if a government body wer
- Page 45 and 46: There can be no assurance that our
- Page 47 and 48: Risks Related to Ownership of Our S
- Page 49: Stock Performance GraphThe informat
- Page 53 and 54: CRITICAL ACCOUNTING ESTIMATESThe pr
- Page 55 and 56: Significant judgment is required in
- Page 57 and 58: Product Revenue by SegmentThe follo
- Page 59 and 60: Service Revenue by SegmentThe follo
- Page 61 and 62: Research and Development (“R&D”
- Page 63 and 64: Other Income (Loss), Net The compon
- Page 65 and 66: We consider free cash flow to be a
- Page 67 and 68: BorrowingsSenior Notes The followin
- Page 69 and 70: commitments arising from these agre
- Page 71 and 72: Foreign Currency Exchange RiskOur f
- Page 73 and 74: Report of Independent Registered Pu
- Page 75 and 76: Reports of ManagementStatement of M
- Page 77 and 78: CISCO SYSTEMS, INC.Consolidated Sta
- Page 79 and 80: CISCO SYSTEMS, INC.Consolidated Sta
- Page 81 and 82: 1. Basis of PresentationCISCO SYSTE
- Page 83 and 84: As a lessee, we determine if an arr
- Page 85 and 86: We perform ongoing credit evaluatio
- Page 87 and 88: (y) New Accounting Updates Recently
- Page 89 and 90: 4. Acquisitions and Divestitures(a)
- Page 91 and 92: July 25, 2020GrossAccumulatedAmorti
- Page 93 and 94: Property and Equipment, NetJuly 31,
- Page 95 and 96: We provide financing of certain equ
- Page 97 and 98: The following tables present the ag
- Page 99 and 100: The following tables present the br
Fiscal 2021 Compared with Fiscal 2020
In fiscal 2021, we delivered growth in revenue in a very challenging environment. As customers have accelerated their
digitization and 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. While
the overall environment remains uncertain, we continue to aggressively invest in priority areas with the objective of driving
profitable growth over the long term.
Within total revenue, product revenue was flat and service revenue increased by 4%. Fiscal 2021 had 53 weeks, compared with
52 weeks in fiscal 2020, thus our results for fiscal 2021 reflect an extra week compared with fiscal 2020. We estimate that a
majority of our revenue increase was attributable to the extra week. In fiscal 2021, total software revenue was $15.0 billion across
all product areas and service, an increase of 7%. Within total software revenue, subscription revenue increased 15%. Total gross
margin decreased by 0.3 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, increased by 0.7 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 1.8 percentage points.
We incurred restructuring and other charges of $886 million, which resulted in a decrease of 6% in net income and a decrease
of 5% in diluted earnings per share.
In terms of our geographic segments, revenue from the Americas decreased by $0.1 billion, EMEA revenue increased by
$0.3 billion and revenue in our APJC segment increased by $0.4 billion. The “BRICM” countries experienced a product revenue
decline of 6% in the aggregate, driven by a decrease in product revenue across each of 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 enterprise and commercial markets. As fiscal 2021 progressed, we saw improvement in business
momentum in our customer markets, which we believe was related to an improving global macroeconomic environment.
From a product category perspective, total product revenue was flat year over year, driven by growth in revenue in Security of
7%, offset by a product revenue decline in Applications of 1%. Infrastructure Platforms was flat.
31
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