CISCO SYSTEMS, INC. Forward-Looking Statements
This Quarterly Report on Form 10-Q, 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 II, 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. 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, 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 Nine Months Ended April 30, May 1, April 30, May 1, 2022 2021 % Variance 2022 2021 % Variance Revenue$ 12,835 $ 12,803 - %$ 38,455 $ 36,692 5 % Gross margin percentage 63.3 % 63.9 % (0.6) pts 63.0 % 64.2 % (1.2)
pts
Research and development$ 1,708 $ 1,697 1 %$ 5,092 $ 4,836 5 % Sales and marketing$ 2,209 $ 2,317 (5) %$ 6,736 $ 6,811 (1) % General and administrative$ 517 $ 603 (14) %$ 1,612 $ 1,631 (1) % Total research and development, sales and marketing, general and administrative$ 4,434 $ 4,617 (4) %$ 13,440 $ 13,278 1 % Total as a percentage of revenue 34.5 % 36.1 % (1.6) pts 34.9 % 36.2 % (1.3)
pts
Amortization of purchased intangible assets included in operating expenses$ 77 $ 61 26 %$ 240 $ 136 76 % Restructuring and other charges included in operating expenses $ -$ 42 (100) %$ 8 $ 878 (99) % Operating income as a percentage of revenue 28.1 % 27.1 % 1.0 pts 27.4 % 25.2 % 2.2 pts Interest and other income (loss), net$ 191 $ 126 52 %$ 526 $ 269 96 % Income tax percentage 19.9 % 20.3 % (0.4) pts 18.7 % 20.4 % (1.7) pts Net income$ 3,044 $ 2,863 6 %$ 8,997 $ 7,582 19 % Net income as a percentage of revenue 23.7 % 22.4 % 1.3 pts 23.4 % 20.7 % 2.7
pts
Earnings per share-diluted$ 0.73 $ 0.68 7 %$ 2.14 $ 1.79 20 % 43
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Three Months Ended
In the third quarter of fiscal 2022, we delivered solid profitability in a challenging environment impacted by supply constraints and theRussia andUkraine war. We remain focused on delivering innovation across our technologies to assist our customers in executing on their digital transformation. Total revenue was flat compared with the third quarter of fiscal 2021. We continue to be negatively impacted by supply constraints seen industry-wide due to component shortages. The duration of such impacts is uncertain. We are taking multiple steps in order to mitigate the component shortages and deliver products to our customers. We also saw additional unanticipated challenges with COVID-19 related lockdowns inChina which began in late March through the end of the third quarter of fiscal 2022, resulting in a further severe shortage of certain critical components. These furtherChina -related supply challenges prevented us from shipping products to customers at the levels we originally anticipated, which had a negative impact on our revenue for the third quarter of fiscal 2022. We expect these furtherChina -related supply challenges we experienced in the third quarter of fiscal 2022 to continue at least into the fourth quarter of fiscal 2022. 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 increased by 3% and service revenue decreased by 8%. The third quarter of fiscal 2022 had 13 weeks, compared with 14 weeks in the third quarter of fiscal 2021. The total additional revenue associated with the extra week in the third quarter of fiscal 2021 was approximately 3% of revenue growth in the prior year period. TheRussia andUkraine war had a negative impact to our total revenue of approximately 2% in the third quarter of fiscal 2022. The combined negative impact of the extra week in the third quarter of fiscal 2021 and theRussia andUkraine war to total revenue, product revenue and service revenue was 5%, 3% and 8%, respectively. In the third quarter of fiscal 2022, total software revenue was$3.7 billion across all product areas and service, a decrease of 3%. Within total software revenue, subscription revenue decreased 1%. Total gross margin decreased by 0.6 percentage points. Product gross margin decreased by 0.8 percentage points, largely driven by increased costs related to supply constraints. As a percentage of revenue, research and development, sales and marketing, and general and administrative expenses, collectively, decreased by 1.6 percentage points due in large part to the impact of the extra week in the third quarter of fiscal 2021. The total impact associated with the extra week in the third quarter of fiscal 2021 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 increased by 1.0 percentage points. Diluted earnings per share increased 7%, driven by a 6% increase in net income and a decrease in diluted share count of 68 million shares. In terms of our geographic segments, revenue from theAmericas increased$376 million , EMEA revenue decreased by$212 million and APJC revenue decreased by$131 million . From a customer market standpoint, we experienced product revenue growth in the commercial and service provider markets, offset by a product revenue decline in the public sector market. The enterprise market was flat. From a product category perspective, the product revenue increase of 3% was driven by growth in revenue for Secure, Agile Networks of 4%; Internet for the Future of 6%; End-to-End Security of 7%; and Optimized Application Experiences of 8%; partially offset by a product revenue decline in Collaboration of 7%.
InMarch 2022 , in connection with the Russian invasion ofUkraine ,Cisco announced its intention to stop business operations inRussia andBelarus for the foreseeable future. Those operations inRussia andBelarus included sales, services and related support functions. We continue to assess and monitor the dynamic situation in the region closely in order to determine any further operational decisions. The safety of our employees is our top priority. We are providing relocation and financial assistance to certain impacted employees, among other humanitarian assistance. Our business operations inRussia ,Belarus andUkraine , collectively, comprised approximately 1% of our total revenue for the year endedJuly 31, 2021 and less than 0.2% of our total assets at the end of fiscal 2021. As a result of these events, we have not recognized revenue in these countries effectiveMarch 2022 . The negative impact to total revenue was approximately$200 million for the third quarter of fiscal 2022, which includes committed revenue we would have otherwise recognized, charges for uncollectible receivables, and other items. Further, we also assessed the risk to the recoverability of our assets and other potential financial exposures in these countries. We have reserved for the non-recoverability of substantially all of our assets inRussia andBelarus . As a result, we recognized certain non-recurring charges of$67 million in cost of sales and operating expenses in the third quarter of fiscal 2022 related to non-recoverability of certain assets and special personnel-related charges in order to support impacted employees. 44
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
The ongoing effect of the
Nine Months Ended
Total revenue increased 5%, with product revenue increasing 8% and service revenue decreasing 3%. Total gross margin decreased 1.2 percentage points due to increased costs related to supply constraints, partially offset by favorable pricing. As a percentage of revenue, research, and development, sales and marketing, and general and administrative expenses collectively decreased by 1.3 percentage points. Operating income as a percentage of revenue increased by 2.2 percentage points. Diluted earnings per share increased 20%, driven by a 19% increase in net income, primarily driven by higher revenue and lower restructuring and other charges.
COVID-19 Pandemic
During the COVID-19 pandemic, our priority has been supporting our employees, customers, partners and communities, while positioningCisco 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.
We have moved towards a hybrid work model in certain countries, giving our
employees the flexibility to work offsite or at onsite
Strategy and Priorities
As our customers add billions of new connections to their enterprises, and 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 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 outcomes that are data-driven and provide meaningful business value through automation, security, and analytics across private, hybrid, and multicloud environments. Our strategy is to help our customers connect, secure, and automate in order to accelerate their digital agility in a cloud-first world.
For additional discussion of our strategy and priorities, see Item 1. Business
in our Annual Report on Form 10-K for the year ended
Other Key Financial Measures
The following is a summary of our other key financial measures for the third quarter of fiscal 2022 (in millions):
April 30 ,July 31, 2022 2021
Cash and cash equivalents and investments
$ 30,205 $ 30,893 Inventories$ 2,231 $ 1,559 Nine Months Ended April 30, May 1, 2022 2021 Cash provided by operating activities$ 9,549 $ 10,950 Repurchases of common stock-stock repurchase program$ 5,332 $ 2,111 Dividends paid$ 4,657 $ 4,601 45
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted inthe 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 in our Annual Report on Form 10-K for the year endedJuly 31, 2021 , as updated as applicable in Note 2 to the Consolidated Financial Statements herein, 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, including the associated impact of supply constraints, 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 the third quarter and first nine months of fiscal 2022. These estimates are listed in our Annual Report on Form 10-K for the year endingJuly 31, 2021 , and 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
We enter into contracts with customers that can include various combinations of
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 customer can benefit from the product or service 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 separately
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 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 receives the benefit over the contract term. Our
hardware and perpetual software licenses are distinct performance obligations
where revenue is recognized upfront 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 recognized ratably over the contract term as services and
software updates are provided. SaaS arrangements do not include the right for
the customer to take possession of the software during the term, and therefore
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 manner 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 estimated 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
similar customers. In instances where SSP is not directly observable, we
determine SSP using information that may include market conditions and other
observable inputs.
We assess relevant contractual terms in our customer contracts to determine the
transaction price. We apply judgment in identifying contractual terms and
determining the transaction price as we may be required to estimate variable
consideration when determining the amount of revenue to recognize. Variable
consideration includes potential contractual penalties and 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 estimate the expected usage of these programs, applying
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 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.
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)See Note 3 to the Consolidated Financial Statements for more details.
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 charged to the provision for inventory, which is a component of our 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. 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. Our provision for inventory was$72 million and$91 million for the first nine months of fiscal 2022 and 2021, respectively. The provision for the liability related to purchase commitments with contract manufacturers and suppliers was$130 million and$35 million for the first nine months of fiscal 2022 and 2021, respectively. If there were to be a sudden and significant decrease in demand for our products, if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, or if supply constraints were to continue, 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. We continue to manage through significant supply constraints seen industry-wide due to component shortages caused, in part, by the COVID-19 pandemic. For further discussion around the Supply Constraints Impacts and Risks, see Result of Operations-Product Gross Margin and Liquidity and Capital Resources-Inventory Supply Chain. Loss Contingencies We are subject to the possibility of various losses arising in the ordinary course of business. We consider the likelihood of 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 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 inthe 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.
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. 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 during the first nine months of fiscal 2022 or the first nine months of fiscal 2021. 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. 47
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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 $15 million for the third quarter and first nine months of fiscal
2022. 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.
Our ongoing consideration of all the factors described previously could result in impairment charges in the future, which could adversely affect our net income.
Income Taxes
We are subject to income taxes inthe 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, foreign-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 19.9% and 20.3% in the third quarter of fiscal 2022 and 2021, respectively, and 18.7% and 20.4% in the first nine months of fiscal 2022 and 2021, 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 foreign-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 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 subsidiaries, the deductibility of expenses attributable to foreign income, and 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 38 countries, includingthe United States , has 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 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 (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. 48
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CISCO SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS Revenue
The following table presents the breakdown of revenue between product and service (in millions, except percentages):
Three Months Ended Nine Months Ended
April 30, May 1, Variance Variance April 30, May 1, Variance Variance
2022 2021 in Dollars in Percent 2022 2021 in Dollars in Percent
Revenue:
Product $ 9,448 $ 9,139 $ 309 3 % $ 28,330 $ 26,298 $ 2,032 8 %
Percentage of revenue 73.6 % 71.4 % 73.7 % 71.7 %
Service 3,387 3,664 (277) (8) % 10,125 10,394 (269) (3) %
Percentage of revenue 26.4 % 28.6 % 26.3 % 28.3 %
Total $ 12,835 $ 12,803 $ 32 - % $ 38,455 $ 36,692 $ 1,763 5 %
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):
Three Months Ended Nine Months Ended
April 30, May 1, Variance Variance April 30, May 1, Variance Variance
2022 2021 in Dollars in Percent 2022 2021 in Dollars in Percent
Revenue:
Americas $ 7,638 $ 7,262 $ 376 5 % $ 22,344 $ 21,430 $ 914 4 %
Percentage of revenue 59.5 % 56.7 % 58.1 % 58.4 %
EMEA 3,271 3,483 (212) (6) % 10,138 9,654 484 5 %
Percentage of revenue 25.5 % 27.2 % 26.4 % 26.3 %
APJC 1,926 2,057 (131) (6) % 5,972 5,608 364 6 %
Percentage of revenue 15.0 % 16.1 % 15.5 % 15.3 %
Total $ 12,835 $ 12,803 $ 32 - % $ 38,455 $ 36,692 $ 1,763 5 %
Amounts may not sum and percentages may not recalculate due to rounding.
Three Months Ended
Total revenue was flat. Product revenue increased by 3% and service revenue decreased by 8%. The third quarter of fiscal 2022 had 13 weeks, compared with 14 weeks in the third quarter of fiscal 2021, thus our results for the third quarter of fiscal 2022 reflect one less week compared with the third quarter of fiscal 2021. The total additional revenue associated with the extra week in the third quarter of fiscal 2021 was approximately 3% of revenue growth in the prior year period. Our total revenue reflected growth in theAmericas segment, offset by declines in the EMEA and APJC segments. InMarch 2022 , in connection with the Russian invasion ofUkraine ,Cisco announced its intention to stop business operations inRussia andBelarus for the foreseeable future. Our business operations inRussia ,Belarus andUkraine , collectively, comprised approximately 1% of our total revenue for the year endedJuly 31, 2021 . As a result of these events, we have not recognized revenue in these countries effectiveMarch 2022 . The negative impact to total revenue was approximately$200 million for the third quarter of fiscal 2022, which includes committed revenue we would have otherwise recognized, charges for uncollectible receivables, and other items. In addition to the impact of macroeconomic factors, including the IT spending environment and the 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 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.
Nine Months Ended
Total revenue increased by 5%. Product revenue increased by 8% and service revenue decreased by 3%. Our total revenue reflected growth across each of our geographic segments.
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)Product Revenue by Segment
The following table presents the breakdown of product revenue by segment (in millions, except percentages):
Three Months Ended Nine Months Ended
April 30, May 1, Variance Variance April 30, May 1, Variance Variance
2022 2021 in Dollars in Percent 2022 2021 in Dollars in Percent
Product revenue:
Americas $ 5,573 $ 5,014 $ 559 11 % $ 16,223 $ 15,031 $ 1,192 8 %
Percentage of product
revenue 59.0 % 54.8 % 57.3 % 57.2 %
EMEA 2,492 2,647 (155) (6) % 7,765 7,295 470 6 %
Percentage of product
revenue 26.4 % 29.0 % 27.4 % 27.7 %
APJC 1,383 1,478 (95) (6) % 4,343 3,972 371 9 %
Percentage of product
revenue 14.6 % 16.2 % 15.3 % 15.1 %
Total $ 9,448 $ 9,139 $ 309 3 % $ 28,330 $ 26,298 $ 2,032 8 %
Amounts may not sum and percentages may not recalculate due to rounding.
Three Months Ended
Product revenue in theAmericas segment increased by 11%, with growth across all customer markets. From a country perspective, product revenue increased inthe United States andMexico by 14% and 8%, respectively, partially offset by declines inCanada andBrazil of 3% and 18%, respectively.
Nine Months Ended
Product revenue in theAmericas segment increased by 8%, driven by growth across all customer markets. From a country perspective, product revenue increased inthe United States ,Canada andMexico by 9%, 5% and 9%, respectively, partially offset by a decline of 3% inBrazil .
EMEA
Three Months Ended
Product revenue in the EMEA segment decreased by 6%, driven by declines in the public sector, enterprise and service provider markets, partially offset by growth in the commercial market.Russia ,Belarus andUkraine , collectively, had a negative impact of approximately 7% on product revenue in the EMEA segment. From a country perspective, product revenue decreased in theUnited Kingdom by 8%, partially offset by growth of 8% inGermany .
Nine Months Ended
Product revenue in the EMEA segment increased by 6%, with growth in the
commercial, enterprise and service provider markets, partially offset by a
decline in the public sector market.
APJC
Three Months Ended
Product revenue in the APJC segment decreased by 6%, driven by declines in the service provider and public sector markets, partially offset by growth in the commercial and enterprise markets. From a country perspective, product revenue decreased inJapan ,Australia andIndia by 19%, 3% and 30%, respectively, partially offset by growth of 14% inChina . 50
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Nine Months Ended
Product revenue in the APJC segment increased by 9%, with growth in the enterprise and commercial markets, partially offset by declines in the service provider and public sector markets. From a country perspective, product revenue increased inAustralia andChina by 19% and 15%, respectively, partially offset by a decline of 10% inJapan . Product revenue inIndia was flat.
Product Revenue by Category
In addition to the primary view on a geographic basis, we also prepare financial
information related to product categories and customer markets for various
purposes. Effective fiscal 2022, we began reporting our product revenue in the
following categories: Secure, Agile Networks; Internet for the Future;
Collaboration; End-to-End Security; Optimized Application Experiences; and Other
Products. This change will better align our product categories with our
strategic priorities.
The following table presents product revenue by category (in millions, except
percentages):
Three Months Ended Nine Months Ended
April 30, May 1, Variance Variance April 30, May 1, Variance Variance
2022 2021 in Dollars in Percent 2022 2021 in Dollars in Percent
Product revenue:
Secure, Agile Networks $ 5,869 $ 5,620 $ 249 4 % $ 17,735 $ 16,543 $ 1,192 7 %
Internet for the
Future 1,324 1,249 75 6 % 4,021 3,121 900 29 %
Collaboration 1,132 1,220 (88) (7) % 3,308 3,580 (272) (8) %
End-to-End Security 938 876 62 7 % 2,716 2,559 157 6 %
Optimized Application
Experiences 183 170 13 8 % 544 483 61 13 %
Other Products 2 5 (3) (58) % 7 11 (4) (32) % Total$ 9,448 $ 9,139 $ 309 3 %$ 28,330 $ 26,298 $ 2,032 8 %
Amounts may not sum and percentages may not recalculate due to rounding.
Secure, Agile Networks
Three Months Ended
The Secure, Agile Networks product category represents our core networking offerings related to switching, enterprise routing, wireless, and compute. Secure, Agile Networks revenue increased by 4%, or$249 million , with growth across the portfolio except enterprise routing. Revenue grew in both campus switching and data center switching. This was primarily driven by strong growth in our Catalyst 9000 series, Nexus 9000 series and Meraki switching offerings. We experienced a decrease in sales of our enterprise routing products primarily driven by declines in our Access and Edge offerings, partially offset by growth in our SD-WAN offerings. Wireless had double-digit growth driven by our WiFi-6 products and Meraki offerings. Revenue from compute grew primarily driven by our servers.
Nine Months Ended
Revenue from the Secure, Agile Networks product category increased 7%, or$1.2 billion , with growth across the portfolio except enterprise routing. Revenue grew in both campus switching and data center switching, primarily driven by growth in our Catalyst 9000 series, Nexus 9000 series and Meraki switching offerings. The decrease in enterprise routing was primarily driven by declines in our Access offerings, partially offset by growth in our Edge and SD-WAN offerings. Wireless had strong double-digit growth driven by our WiFi-6 products and Meraki offerings. Revenue from compute grew primarily driven by our servers.
Internet for the Future
Three Months Ended
The Internet for the Future product category includes our routed optical networking, public 5G, silicon and optics offerings. Revenue in our Internet for the Future product category increased by 6%, or$75 million , primarily driven by growth in our Acacia, Optical, Optics and Core portfolio. The growth in Core was driven by strength in ourCisco 8000 series offerings. 51
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Nine Months Ended
Revenue in our Internet for the Future product category increased 29%, or$900 million , driven by growth in ourCisco 8000, NCS 5500 and ASR 9000 series offerings. We also saw a benefit from our acquisition of Acacia in the third quarter of fiscal 2021. Collaboration
Three Months Ended
The Collaboration product category consists of our Collaboration Devices, Meetings, Calling and contact center offerings. Revenue in our Collaboration product category decreased by 7%, or$88 million , driven by declines in our Meetings, Calling and Contact Center offerings, partially offset by growth in our Communication Platform as a Service (CPaaS) offerings.
Nine Months Ended
Revenue in our Collaboration product category decreased by 8%, or$272 million , with declines in our Collaboration Devices, Meetings, Calling and Contact Center offerings, partially offset by growth in our CPaaS offerings.
End-to-End Security
Three Months Ended
Revenue in our End-to-End Security product category increased 7%, or$62 million primarily driven by growth in our Network Security, zero-trust portfolio, and Unified Threat Management offerings. The double-digit growth in our zero-trust portfolio was driven by continued momentum with our Duo offerings.
Nine Months Ended
Revenue in our End-to-End Security product category increased by 6%, or
Optimized Application Experiences
Three Months Ended
The Optimized Application Experiences product category includes our full stack observability and cloud-native platforms offerings. Revenue in our Optimized Application Experiences product category increased 8%, or$13 million , driven by growth in ourThousandEyes and Intersight offerings.
Nine Months Ended
Revenue in our Optimized Application Experiences product category increased by
13%, or
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)Service Revenue by Segment
The following table presents the breakdown of service revenue by segment (in millions, except percentages):
Three Months Ended Nine Months Ended
April 30, May 1, Variance Variance April 30, May 1, Variance Variance
2022 2021 in Dollars in Percent 2022 2021 in Dollars in Percent
Service revenue:
Americas $ 2,064 $ 2,248 $ (184) (8) % $ 6,122 $ 6,399 $ (277) (4) %
Percentage of service
revenue 60.9 % 61.4 % 60.5 % 61.6 %
EMEA 778 836 (58) (7) % 2,373 2,359 14 1 %
Percentage of service
revenue 23.0 % 22.8 % 23.4 % 22.7 %
APJC 544 579 (35) (6) % 1,629 1,636 (7) - %
Percentage of service
revenue 16.1 % 15.8 % 16.1 % 15.7 %
Total $ 3,387 $ 3,664 $ (277) (8) % $ 10,125 $ 10,394 $ (269) (3) %
Amounts may not sum and percentages may not recalculate due to rounding.
Service revenue decreased 8% in the third quarter of fiscal 2022 compared with the third quarter of fiscal 2021, primarily driven by the impact of the extra week in the third quarter of fiscal 2021 and the negative impact from theRussia andUkraine war. The combined negative impact of the extra week in the third quarter of fiscal 2021 and theRussia andUkraine war was approximately 8% to service revenue for the third quarter of fiscal 2022. Service revenue declined across each of our geographic segments. Service revenue decreased 3% in the first nine months of fiscal 2022 compared to the first nine months of fiscal 2021 primarily driven by declines in our maintenance business, software support offerings and advisory services partially offset by growth in our solution support offerings. The extra week in the third quarter of fiscal 2021 also contributed to the decrease in service revenue for the first nine months of fiscal 2022. Service revenue decreased in theAmericas segment, partially offset by growth in the EMEA segment for the first nine months of fiscal 2022. The APJC segment was flat.
Gross Margin
The following table presents the gross margin for products and services (in millions, except percentages):
Three Months Ended Nine Months Ended
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
April 30, May 1, April 30, May 1,
2022 2021 2022 2021 2022 2021 2022 2021
Gross margin:
Product $ 5,842 $ 5,717 61.8 % 62.6 % $ 17,482 $ 16,626 61.7 % 63.2 %
Service 2,279 2,468 67.3 % 67.4 % 6,741 6,924 66.6 % 66.6 %
Total $ 8,121 $ 8,185 63.3 % 63.9 % $ 24,223 $ 23,550 63.0 % 64.2 %
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Product Gross Margin
The following table summarizes the key factors that contributed to the change in
product gross margin percentage for the third quarter and first nine months of
fiscal 2022, as compared with the corresponding prior year periods:
Product Gross Margin Percentage
Nine Months
Three Months Ended Ended
Fiscal 2021 62.6 % 63.2 %
Productivity (1) (2.6) % (1.9) %
Product pricing 1.6 % 0.5 %
Mix of products sold 0.2 % - %
Legal and indemnification charge - % 0.2 %
Others - % (0.3) %
Fiscal 2022 61.8 % 61.7 %
(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.
Three Months Ended
Product gross margin decreased by 0.8 percentage points primarily driven by negative impacts from productivity, largely driven by increased costs related to supply constraints from freight, expedites, and component costs. TheRussia andUkraine war also had a negative 0.6 percentage points impact on our product gross margin, which is included in the negative impacts from productivity. These impacts were partially offset by favorable pricing.
Nine Months Ended
Product gross margin decreased by 1.5 percentage points primarily driven by negative impacts from productivity, largely driven by increased costs related to supply chain constraints from freight, expedites, and component costs, partially offset by favorable pricing.
Supply Constraints Impacts and Risks
We continue to manage through significant supply constraints seen industry-wide due to component shortages caused, in part, by the COVID-19 pandemic, and for which the duration of such constraints is uncertain. These shortages have resulted in increased costs (i.e., component and other commodity costs, freight, expedite fees, etc.) which have had a negative impact on our product gross margin and have resulted in extended lead times for us and our customers. We have taken a number of steps in order to mitigate the supply constraint related impacts including: partnering with several of our key suppliers utilizing our volume purchasing ability and extending supply coverage, including, in certain cases, revising supplier arrangements; paying significantly higher component and logistics costs to secure supply; modifying our product designs in order to leverage alternate suppliers, where possible; continually optimizing our inventory build and customer delivery plans; among others. We believe these actions are helping us to optimize our access to critical components and meet customer demand for our products. We continue to see solid demand across the majority of our portfolio. As a result, in order to secure supply to meet customer demand, we have increased our inventory balances and inventory purchase commitments (see Liquidity and Capital Resources-Inventory Supply Chain section), which, in turn, has increased our supply chain exposure. Additionally, in certain situations, we have prepaid or made deposits with suppliers to secure future supply. These actions significantly increase the risk of future material excess and obsolete inventory and related losses if customer demand were to suddenly and significantly decrease in future periods. While we believe we are taking the right strategic and operational actions to address the supply situation, we recognize the increased risks.
Service Gross Margin
Three Months Ended
Our service gross margin percentage decreased by 0.1 percentage points primarily due to lower sales volume, partially offset by lower headcount-related and delivery costs and favorable mix of service 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
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)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.
Nine Months Ended
Service gross margin was flat primarily due to favorable mix and lower delivery costs offset by lower sales volume.
Gross Margin by Segment
The following table presents the total gross margin for each segment (in millions, except percentages):
Three Months Ended Nine Months Ended
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
April 30, May 1, April 30, May 1, April 30, May 1, April 30, May 1,
2022 2021 2022 2021 2022 2021 2022 2021
Gross margin:
Americas $ 4,952 $ 4,831 64.8 % 66.5 % $ 14,438 $ 14,383 64.6 % 67.1 %
EMEA 2,154 2,283 65.9 % 65.6 % 6,664 6,322 65.7 % 65.5 %
APJC 1,279 1,331 66.4 % 64.7 % 3,934 3,599 65.9 % 64.2 %
Segment total 8,386 8,445 65.3 % 66.0 % 25,035 24,303 65.1 % 66.2 %
Unallocated corporate
items (1) (265) (260) (812) (753)
Total $ 8,121 $ 8,185 63.3 % 63.9 % $ 24,223 $ 23,550 63.0 % 64.2 %
(1) The unallocated corporate items include 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.
Amounts may not sum and percentages may not recalculate due to rounding.
Three Months Ended
We experienced a gross margin percentage decrease in ourAmericas segment due to negative impacts from productivity and unfavorable impacts from product mix, partially offset by favorable pricing. Gross margin in our EMEA segment increased slightly primarily due to favorable pricing and favorable impacts from product mix, partially offset by negative impacts from productivity. Higher service gross margin also contributed to the increase in the gross margin in this geographic segment. The APJC segment gross margin percentage increase was due to favorable impacts from product mix and favorable pricing, partially offset by negative impacts from productivity.
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.
Nine Months Ended
The
The slight gross margin percentage increase in our EMEA segment was primarily due to higher service gross margin in this geographic segment and favorable product mix, partially offset by negative impacts from productivity.
The APJC segment gross margin percentage increase was driven by favorable product mix and favorable pricing, partially offset by negative impacts from productivity.
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)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):
Three Months Ended Nine Months Ended
April 30, May 1, Variance Variance April 30, May 1, Variance Variance
2022 2021 in Dollars in Percent 2022 2021 in Dollars in Percent
Research and development $ 1,708 $ 1,697 $ 11 1 % $ 5,092 $ 4,836 $ 256 5 %
Percentage of revenue 13.3 % 13.3 % 13.2 % 13.2 %
Sales and marketing 2,209 2,317 (108) (5) % 6,736 6,811 (75) (1) %
Percentage of revenue 17.2 % 18.1 % 17.5 % 18.6 %
General and administrative 517 603 (86) (14) % 1,612 1,631 (19) (1) %
Percentage of revenue 4.0 % 4.7 % 4.2 % 4.4 %
Total $ 4,434 $ 4,617 $ (183) (4) % $ 13,440 $ 13,278 $ 162 1 %
Percentage of revenue 34.5 % 36.1 % 34.9 % 36.2 %
Our third quarter of fiscal 2022 had one less week compared with the corresponding period of fiscal 2021 which had an extra week.
R&D Expenses
Three Months Ended
R&D expenses increased slightly due to higher share-based compensation expense, partially offset by lower contracted services spending and lower headcount-related expenses. The extra week in the third quarter of fiscal 2021 contributed to the decrease in headcount-related expenses. 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.
Nine Months Ended
R&D expenses increased primarily due to higher headcount-related expenses, higher contracted services spending, higher share-based compensation expense and higher acquisition-related costs, partially offset by lower discretionary spending.
Sales and Marketing Expenses
Three Months Ended
Sales and marketing expenses decreased due to lower headcount-related expenses, driven by lower variable compensation expense, and lower contracted services spending, partially offset by higher discretionary spending. The extra week in the third quarter of fiscal 2021 contributed to the decrease in headcount-related expenses.
Nine Months Ended
Sales and marketing expenses decreased primarily due to lower headcount-related expenses and lower contracted services spending, partially offset by higher discretionary spending. The extra week in the first nine months of fiscal 2021 contributed to the decrease in headcount-related expenses.
G&A Expenses
Three Months Ended
G&A expenses decreased due to lower headcount-related expenses, lower contracted services spending, lower discretionary spending and lower acquisition and divestitures related costs, partially offset by certain non-recurring charges recognized due to theRussia andUkraine war. The extra week in the third quarter of fiscal 2021 contributed to the decrease in headcount-related expenses. 56
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Nine Months Ended
G&A expenses decreased due to lower contracted services spending, lower headcount-related expenses, partially offset by higher acquisition and divestiture related costs and certain non-recurring charges recognized due to theRussia andUkraine war. The extra week in the first nine months of fiscal 2021 contributed to the decrease in headcount-related expenses.
Effect of Foreign Currency
In the third quarter of fiscal 2022, foreign currency fluctuations, net of hedging, decreased the combined R&D, sales and marketing, and G&A expenses by approximately$51 million , or 1.1%, compared with the third quarter of fiscal 2021. In the first nine months of fiscal 2022, foreign currency fluctuations, net of hedging, decreased the combined R&D, sales and marketing, and G&A expenses by approximately$50 million , or 0.4%, compared with the first nine months of fiscal 2021.
Amortization of Purchased Intangible Assets
The following table presents the amortization of purchased intangible assets including impairment charges (in millions):
Three Months Ended Nine Months Ended
April 30, May 1, April 30, May 1,
2022 2021 2022 2021
Amortization of purchased intangible assets:
Cost of sales $ 180 $ 187 $ 583 $ 513
Operating expenses 92 61 255 136
Total $ 272 $ 248 $ 838 $ 649
For each of the third quarter and first nine months of fiscal 2022, the increase
in amortization of purchased intangible assets was due largely to the
amortization of purchased intangibles from our recent acquisitions and
impairment charges of $15 million recorded in the third quarter and first nine
months of fiscal 2022. The impairment charges were primarily due to declines in
estimated fair value resulting from reductions in or the elimination of expected
future cash flows associated with certain of our technology and IPR&D intangible
assets.
Restructuring and Other Charges
We initiated a restructuring plan in fiscal 2021, which included a voluntary
early retirement program, in order to realign the organization and enable
further investment in key priority areas. The total pretax charges were
estimated to be approximately
Operating Income
The following table presents our operating income and our operating income as a percentage of revenue (in millions, except percentages):
Three Months Ended Nine Months Ended
April 30, May 1, April 30, May 1,
2022 2021 2022 2021
Operating income $ 3,610 $ 3,465 $ 10,535 $ 9,258
Operating income as a percentage of revenue 28.1 % 27.1 % 27.4 % 25.2 %
Three Months Ended
Operating income increased by 4%, and operating income as a percentage of revenue increased by 1.0 percentage points. These changes resulted primarily from a decrease in operating expenses.
Nine Months Ended
Operating income increased by 14%, and operating income as a percentage of
revenue increased by 2.2 percentage points. These changes resulted primarily
from a revenue increase and lower restructuring and other charges partially
offset by a gross margin percentage decrease (driven by negative impacts from
productivity partially offset by favorable pricing).
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)Interest and Other Income (Loss), Net
Interest Income (Expense), Net The following table summarizes interest income and interest expense (in millions):
Three Months Ended Nine Months Ended
April 30, May 1, Variance April 30, May 1, Variance
2022 2021 in Dollars 2022 2021 in Dollars
Interest income $ 115 $ 153 $ (38) $ 347 $ 488 $ (141)
Interest expense (90) (111) 21 (267) (336) 69
Interest income (expense),
net $ 25 $ 42 $
(17)
For each of the third quarter and first nine months of fiscal 2022, the decrease in interest income was driven by lower interest rates and lower average balances of cash and available-for-sale debt investments. The decrease in interest expense was driven by a lower average debt balance.
Other Income (Loss), Net The components of other income (loss), net, are summarized as follows (in millions):
Three Months Ended Nine Months Ended
April 30, May 1, Variance April 30, May 1, Variance
2022 2021 in Dollars 2022 2021 in Dollars
Gains (losses) on investments,
net:
Available-for-sale debt
investments $ 2 $ 22
(19) 2 (21) (32) 1 (33)
Privately held investments 166 95 71 492 120 372
Net gains (losses) on investments 149 119 30 478 167 311
Other gains (losses), net 17 (35) 52 (32) (50) 18
Other income (loss), net $ 166 $ 84 $ 82 $ 446 $ 117 $ 329 Three Months Ended
The change in net gains (losses) on available-for-sale debt investment was primarily attributable to lower realized gains as a result of market conditions, and the timing of sales of these 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 investments was primarily due to higher net realized gains and higher net unrealized gains. The change in other gains (losses), net was primarily driven by favorable impacts from foreign exchange.
Nine Months Ended
The change in net gains (losses) on available-for-sale debt investments was primarily attributable to lower realized gains as a result of market conditions, and the timing of sales of these 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 investments was primarily due to higher net realized gains and higher net unrealized gains. The change in other gains (losses), net was primarily driven by favorable impacts from foreign exchange, partially offset by higher donation expense and impacts from our equity derivatives.
Provision for Income Taxes
Three Months Ended
The provision for income taxes resulted in an effective tax rate of 19.9% for
the third quarter of fiscal 2022 compared with 20.3% for the third quarter of
fiscal 2021. The decrease in the effective tax rate was primarily due to a
decrease in nondeductible acquisition-related costs in the third quarter of
fiscal 2022 as compared to the third quarter of fiscal 2021.
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Nine Months Ended
The provision for income taxes resulted in an effective tax rate of 18.7% for
the first nine months of fiscal 2022 compared with 20.4% for the first nine
months of fiscal 2021. The decrease in the effective tax rate was primarily due
to an increase in the tax benefit from share-based compensation windfall and a
decrease in audit settlement expense in the first nine months of fiscal 2022 as
compared to the first nine months of fiscal 2021.
Our effective tax rate will increase or decrease based upon the tax effect of
the difference between the share-based compensation expenses and the benefits
taken on our tax returns. We recognize excess tax benefits on a discrete basis
and therefore anticipate the effective tax rate to vary from quarter to quarter
depending on our share price in each period.
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CISCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)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.
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