Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

OVERVIEW

Cisco 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 EndedSix Months Ended
January 28, 2023January 29, 2022% VarianceJanuary 28, 2023January 29, 2022% Variance
Revenue$13,592$12,7207%$27,224$25,6206%
Gross margin percentage62.0%63.3%(1.3)pts61.6%62.8%(1.2)pts
Research and development$1,855$1,67011%$3,636$3,3847%
Sales and marketing$2,384$2,2665%$4,775$4,5275%
General and administrative$582$5447%$1,147$1,0955%
Total research and development, sales and marketing, general and administrative$4,821$4,4808%$9,558$9,0066%
Total as a percentage of revenue35.5%35.2%0.3pts35.1%35.2%(0.1)pts
Amortization of purchased intangible assets included in operating expenses$71$79(10)%$142$163(13)%
Restructuring and other charges included in operating expenses$243$3NM$241$8NM
Operating income as a percentage of revenue24.2%27.4%(3.2)pts25.1%27.0%(1.9)pts
Interest and other income (loss), net$123$1166%$58$335(83)%
Income tax percentage18.8%17.5%1.3pts21.0%18.0%3.0pts
Net income$2,773$2,973(7)%$5,443$5,953(9)%
Net income as a percentage of revenue20.4%23.4%(3.0)pts20.0%23.2%(3.2)pts
Earnings per share—diluted$0.67$0.71(6)%$1.32$1.41(6)%

Percentages may not recalculate due to rounding.

NM — Not meaningful

CISCO SYSTEMS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

In the second quarter of fiscal 2023, we delivered strong results with growth in revenue. We remain focused on delivering innovation across our technologies to assist our customers in executing on their digital transformations. We have, and continue to take, multiple steps in order to mitigate the component shortages and deliver products to our customers in order to address supply constraints seen industry-wide. We did see further improvements in supply constraints during the second quarter of fiscal 2023. However, we expect the constraints to continue and the duration is uncertain. 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.

Total revenue increased by 7% compared with the second quarter of fiscal 2022. Within total revenue, product revenue increased by 9% and service revenue increased by 2%. In the second quarter of fiscal 2023, total software revenue was $4.2 billion across all product areas and service, an increase of 10%. Within total software revenue, subscription revenue increased 15%. Total gross margin decreased by 1.3 percentage points. Product gross margin decreased by 1.6 percentage points, largely driven by increased costs related to supply constraints, partially offset by favorable pricing and product mix. As a percentage of revenue, research and development, sales and marketing, and general and administrative expenses, collectively, increased by 0.3 percentage points. Operating income as a percentage of revenue decreased by 3.2 percentage points. We incurred restructuring and other charges of $243 million in the second quarter of fiscal 2023. Diluted earnings per share decreased 6%, driven by a decrease of 7% in net income, partially offset by a decrease in diluted share count of 89 million shares.

In terms of our geographic segments, revenue from the Americas increased $679 million, EMEA revenue increased by $164 million and APJC revenue increased by $29 million. Although total revenue increased, we saw a decline in product demand compared to the second quarter of fiscal 2022. The decline was against the comparable prior year period in which we experienced unusually high demand. We did see an increase in product demand compared to the first quarter of fiscal 2023.

From a customer market standpoint, we experienced product revenue growth in each of our customer markets.

From a product category perspective, the product revenue increase of 9% was driven by growth in revenue for Secure, Agile Networks of 14%; End-to-End Security of 7%; and Optimized Application Experiences of 11%; partially offset by product revenue declines in Internet for the Future of 1% and Collaboration of 10%.

CISCO SYSTEMS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Total revenue increased 6%, with product revenue increasing 8% and service revenue increasing 1%. Total gross margin decreased 1.2 percentage points due to increased costs related to supply constraints, partially offset by favorable pricing, and to a lesser extent, favorable impacts from product mix. As a percentage of revenue, research, and development, sales and marketing, and general and administrative expenses collectively decreased by 0.1 percentage points. Operating income as a percentage of revenue decreased by 1.9 percentage points. We incurred restructuring and other charges of $241 million in the first six months of fiscal 2023. Diluted earnings per share decreased 6%, driven by a decrease of 9% in net income, partially offset by a decrease in diluted share count of 107 million shares.

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. In this dynamic environment, we believe their priorities are to reimagine applications, power hybrid work, transform infrastructure, and secure the enterprise. Our strategy is to help our customers connect, secure, and automate to accelerate their digital agility in a cloud-first world. We are committed to driving a trusted customer experience, through our innovation, choice, and people.

For additional discussion of our strategy and priorities, see Item 1. Business in our Annual Report on Form 10-K for the fiscal year ended July 30, 2022.

Other Key Financial Measures

The following is a summary of our other key financial measures for the second quarter of fiscal 2023 (in millions):

January 28, 2023July 30, 2022
Cash and cash equivalents and investments$22,061$19,267
Remaining performance obligations$31,772$31,539
Inventories$3,140$2,568
Six Months Ended
January 28, 2023January 29, 2022
Cash provided by operating activities$8,701$5,888
Repurchases of common stock—stock repurchase program$1,758$5,080
Dividends paid$3,120$3,102

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 in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 30, 2022, 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.

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.

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 net realizable value, 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.

CISCO SYSTEMS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

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 $92 million and $45 million for the first six months of fiscal 2023 and 2022, respectively. The provision for the liability related to purchase commitments with contract manufacturers and suppliers was $199 million and $80 million for the first six months of fiscal 2023 and 2022, 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. While we saw further improvements in the second quarter of fiscal 2023, 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—Supply Constraints Impact and Risks” 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 in the United States. If any infringement or other intellectual property claim made against us by any third party is successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and adversely affected.

Goodwill and Purchased Intangible Asset Impairments

Our methodology for allocating the purchase price relating to purchase acquisitions is determined through established valuation techniques. Goodwill represents a residual value as of the acquisition date, which in most cases results in measuring goodwill as an excess of the purchase consideration transferred plus the fair value of any noncontrolling interest in the acquired company over the fair value of net assets acquired, including contingent consideration. We perform goodwill impairment tests on an annual basis in the fourth fiscal quarter and between annual tests in certain circumstances for each reporting unit. The assessment of fair value for goodwill and purchased intangible assets is based on factors that market participants would use in an orderly transaction in accordance with the new accounting guidance for the fair value measurement of nonfinancial assets.

In response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill. There was no impairment of goodwill in each of the first six months of fiscal 2023 and 2022.

The fair value of acquired technology and patents, as well as acquired technology under development, is determined at acquisition date primarily using the income approach, which discounts expected future cash flows to present value. The discount rates used in the present value calculations are typically derived from a weighted-average cost of capital analysis and then adjusted to reflect risks inherent in the development lifecycle as appropriate. We consider the pricing model for products related to these acquisitions to be standard within the high-technology communications industry, and the applicable discount rates represent the rates that market participants would use for valuation of such intangible assets.

We make judgments about the recoverability of purchased intangible assets with finite lives whenever events or changes in circumstances indicate that an impairment may exist. Recoverability of purchased intangible assets with finite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. We review indefinite-lived intangible assets for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business

CISCO SYSTEMS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

strategy and our internal forecasts. 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 in the United States and numerous foreign jurisdictions. Our effective tax rates differ from the statutory rate, primarily due to the tax impact of state taxes, foreign operations, R&D tax credits, foreign-derived intangible income deductions, global intangible low-taxed income, tax audit settlements, nondeductible compensation, and international realignments. Our effective tax rate was 18.8% and 17.5% in the second quarter of fiscal 2023 and 2022, respectively, and 21.0% and 18.0% in the first six months of fiscal 2023 and 2022, 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, including the United States, has made changes and is contemplating additional changes to numerous long-standing tax principles. There can be no assurance that these 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.

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 EndedSix Months Ended
January 28, 2023January 29, 2022Variance in DollarsVariance in PercentJanuary 28, 2023January 29, 2022Variance in DollarsVariance in Percent
Revenue:
Product$10,155$9,353$8029%$20,400$18,882$1,5188%
Percentage of revenue74.7%73.5%74.9%73.7%
Service3,4373,367702%6,8246,738861%
Percentage of revenue25.3%26.5%25.1%26.3%
Total$13,592$12,720$8727%$27,224$25,620$1,6046%

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 EndedSix Months Ended
January 28, 2023January 29, 2022Variance in DollarsVariance in PercentJanuary 28, 2023January 29, 2022Variance in DollarsVariance in Percent
Revenue:
Americas$7,825$7,146$6799%$15,738$14,706$1,0327%
Percentage of revenue57.6%56.2%57.8%57.4%
EMEA3,7283,5641645%7,4046,8675378%
Percentage of revenue27.4%28.0%27.2%26.8%
APJC2,0392,010291%4,0824,046361%
Percentage of revenue15.0%15.8%15.0%15.8%
Total$13,592$12,720$8727%$27,224$25,620$1,6046%

Amounts may not sum and percentages may not recalculate due to rounding.

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

Total revenue increased by 7%. Product revenue increased by 9% and service revenue increased by 2%. Our total revenue reflected growth across each of our geographic segments.

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.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Total revenue increased by 6%. Product revenue increased by 8% and service revenue increased by 1%. Our total revenue reflected growth across each of our geographic segments.

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 EndedSix Months Ended
January 28, 2023January 29, 2022Variance in DollarsVariance in PercentJanuary 28, 2023January 29, 2022Variance in DollarsVariance in Dollars
Product revenue:
Americas$5,728$5,127$60112%$11,574$10,649$9259%
Percentage of product revenue56.4%54.8%56.8%56.4%
EMEA2,9172,7601576%5,8035,27353010%
Percentage of product revenue28.7%29.5%28.4%27.9%
APJC1,5101,466443%3,0232,961622%
Percentage of product revenue14.9%15.7%14.8%15.7%
Total$10,155$9,353$8029%$20,400$18,882$1,5188%

Amounts may not sum and percentages may not recalculate due to rounding.

Americas

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

Product revenue in the Americas segment increased by 12%, with growth across all customer markets. From a country perspective, product revenue increased in the United States, Canada, Brazil and Mexico by 11%, 9%, 44% and 11%, respectively.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Product revenue in the Americas segment increased by 9%, with growth across all customer markets. From a country perspective, product revenue increased in the United States, Canada, Brazil and Mexico by 8%, 11%, 29% and 17%, respectively.

EMEA

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

Product revenue in the EMEA segment increased by 6%, driven by growth in the public sector, enterprise and commercial markets, partially offset by a decline in the service provider market. From a country perspective, product revenue increased in Germany and France by 24% and 28%, respectively. Product revenue in the United Kingdom was flat.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Product revenue in the EMEA segment increased by 10%, driven by growth in the public sector, commercial and enterprise markets, partially offset by a decline in the service provider market. From a country perspective, product revenue increased in Germany, the United Kingdom and France by 22%, 3% and 29%, respectively.

APJC

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

Product revenue in the APJC segment increased by 3%, driven by growth in the commercial and public sector markets, partially offset by a decline in the enterprise market. The service provider market in this geographic segment was flat. From a country perspective, product revenue increased in India, Australia and China by 59%, 4% and 20%, respectively, partially offset by a decline in Japan of 12%.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Product revenue in the APJC segment increased by 2%, driven by growth in the commercial and public sector markets, partially offset by declines in the enterprise and service provider markets. From a country perspective, product revenue increased in India and China by 49% and 27%, respectively, partially offset by declines in Japan and Australia of 11% and 2%, respectively.

CISCO SYSTEMS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

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.

The following table presents product revenue by category (in millions, except percentages):

Three Months EndedSix Months Ended
January 28, 2023January 29, 2022Variance in DollarsVariance in PercentJanuary 28, 2023January 29, 2022Variance in DollarsVariance in Percent
Product revenue:
Secure, Agile Networks$6,746$5,899$84714%$13,430$11,867$1,56313%
Internet for the Future1,3061,322(16)(1)%2,6162,695(79)(3)%
Collaboration9581,067(109)(10)%2,0442,176(132)(6)%
End-to-End Security943883607%1,9141,7781368%
Optimized Application Experiences1991801911%393361329%
Other Products32125%45(1)(17)%
Total$10,155$9,353$8029%$20,400$18,882$1,5188%

Amounts may not sum and percentages may not recalculate due to rounding.

Secure, Agile Networks

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

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 14%, or $847 million, with growth across the portfolio except servers. Revenue grew in campus switching, primarily driven by strong growth in our Catalyst 9000 series and Meraki switching offerings. Data center switching revenue declined, although we had revenue growth in our Nexus 9000 series. Enterprise routing had strong growth primarily driven by our Catalyst 8000 series, SD-WAN and IoT routing offerings. Wireless had strong double-digit growth driven by our WiFi-6 products and Meraki offerings.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Revenue from the Secure, Agile Networks product category increased by 13%, or $1.6 billion, with growth across the portfolio except servers. Revenue grew in campus switching primarily driven by growth in our Catalyst 9000 series and Meraki switching offerings. Data center switching revenue declined, although we had revenue growth in our Nexus 9000 series. The increase in enterprise routing was primarily driven by growth in our Catalyst 8000 series and SD-WAN offerings. Wireless had strong double-digit growth driven by our WiFi-6 products and Meraki offerings.

Internet for the Future

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

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 decreased by 1%, or $16 million, primarily driven by declines in our Optical and Edge portfolio, partially offset by growth in our Cisco 8000 series offerings. We also saw growth in the webscale provider market.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Revenue in our Internet for the Future product category decreased by 3%, or $79 million, primarily driven by declines in our Cable, Optical and Edge portfolio, partially offset by growth in our Cisco 8000 series offerings. We also saw growth in the webscale provider market.

Collaboration

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

The Collaboration product category consists of our Collaboration Devices, Meetings, Calling and contact center offerings. Revenue in our Collaboration product category decreased by 10%, or $109 million, primarily driven by declines in Meetings and Collaboration Devices, partially offset by growth in our contact center offerings.

CISCO SYSTEMS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Revenue in our Collaboration product category decreased by 6%, or $132 million, primarily driven by declines in Meetings and Collaboration Devices.

End-to-End Security

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

Revenue in our End-to-End Security product category increased 7%, or $60 million primarily driven by growth in our Unified Threat Management and Zero Trust offerings.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Revenue in our End-to-End Security product category increased 8%, or $136 million primarily driven by growth in our Unified Threat Management and Zero Trust offerings. The growth in our Zero Trust portfolio was driven by strong growth in our Duo offerings.

Optimized Application Experiences

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

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 11%, or $19 million, driven by growth in our ThousandEyes offerings.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Revenue in our Optimized Application Experiences product category increased 9%, or $32 million, driven by growth in our ThousandEyes offerings.

Service Revenue by Segment

The following table presents the breakdown of service revenue by segment (in millions, except percentages):

Three Months EndedSix Months Ended
January 28, 2023January 29, 2022Variance in DollarsVariance in PercentJanuary 28, 2023January 29, 2022Variance in DollarsVariance in Percent
Service revenue:
Americas$2,097$2,019$784%$4,164$4,057$1073%
Percentage of service revenue61.0%60.0%61.0%60.2%
EMEA81280481%1,6011,5947—%
Percentage of service revenue23.6%23.9%23.5%23.7%
APJC529544(15)(3)%1,0591,086(27)(2)%
Percentage of service revenue15.4%16.1%15.5%16.1%
Total$3,437$3,367$702%$6,824$6,738$861%

Amounts may not sum and percentages may not recalculate due to rounding.

Service revenue increased 2% in the second quarter of fiscal 2023 compared with the second quarter of fiscal 2022, primarily driven by revenue growth in our solution support offerings and maintenance business, partially offset by declines in our advisory services and software support offerings. Service revenue increased in the Americas and EMEA segments, partially offset by a decline in the APJC segment for the second quarter of fiscal 2023.

Service revenue increased 1% in the first six months of fiscal 2023 compared to the first six months of fiscal 2022, primarily driven by revenue growth in our solution support offerings and maintenance business, offset by declines in our advisory services and software support offerings. Service revenue increased in the Americas segment, partially offset by a decline in the APJC segment for the first six months of fiscal 2023. Service revenue for the EMEA segment was flat.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Gross Margin

The following table presents the gross margin for products and services (in millions, except percentages):

Three Months EndedSix Months Ended
AMOUNTPERCENTAGEAMOUNTPERCENTAGE
January 28, 2023January 29, 2022January 28, 2023January 29, 2022January 28, 2023January 29, 2022January 28, 2023January 29, 2022
Gross margin:
Product$6,117$5,78460.2%61.8%$12,183$11,64059.7%61.6%
Service2,3102,26567.2%67.3%4,5904,46267.3%66.2%
Total$8,427$8,04962.0%63.3%$16,773$16,10261.6%62.8%

Product Gross Margin

The following table summarizes the key factors that contributed to the change in product gross margin percentage for the second quarter and first six months of fiscal 2023, as compared with the corresponding prior year periods:

Product Gross Margin Percentage
Three Months EndedSix Months Ended
Fiscal 202261.8%61.6%
Productivity (1)(4.3)%(4.4)%
Product pricing1.3%1.4%
Mix of products sold0.9%0.5%
Others0.5%0.6%
Fiscal 202360.2%59.7%

(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 January 28, 2023 Compared with Three Months Ended January 29, 2022

Product gross margin decreased by 1.6 percentage points primarily driven by negative impacts from productivity, largely driven by increased costs related to supply constraints from component and other costs. These impacts were partially offset by favorable pricing and product mix. The favorable pricing was primarily driven by price increases implemented during fiscal 2022. These benefits are recognized as we ship our products. We implemented the price increases to partially offset increases in commodity and other costs.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Product gross margin decreased by 1.9 percentage points primarily driven by negative impacts from productivity, largely driven by increased costs related to supply constraints from component, freight, logistics and other costs. These impacts were partially offset by favorable pricing. The benefit we saw from favorable pricing was primarily driven by price increases implemented during fiscal 2022. We also saw benefits from product mix.

Supply Constraints Impacts and Risks

While we saw further improvements in the second quarter of fiscal 2023, 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; and 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. As a result, in order to secure supply to meet customer

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

demand, we have increased our inventory balances, inventory purchase commitments, and inventory deposits and prepayments (see “Liquidity and Capital Resources—Inventory Supply Chain”), 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 January 28, 2023 Compared with Three Months Ended January 29, 2022

Our service gross margin percentage decreased by 0.1 percentage points primarily due to higher headcount-related and delivery costs, partially offset by higher sales volume 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 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.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Service gross margin increased by 1.1 percentage points primarily due to favorable mix of service offerings, higher sales volume and lower headcount-related and delivery costs.

Gross Margin by Segment

The following table presents the total gross margin for each segment (in millions, except percentages):

Three Months EndedSix Months Ended
AMOUNTPERCENTAGEAMOUNTPERCENTAGE
January 28, 2023January 29, 2022January 28, 2023January 29, 2022January 28, 2023January 29, 2022January 28, 2023January 29, 2022
Gross margin:
Americas$4,920$4,61162.9%64.5%$9,904$9,48662.9%64.5%
EMEA2,4692,38166.2%66.8%4,7954,50964.8%65.7%
APJC1,2981,33763.6%66.5%2,5712,65463.0%65.6%
Segment total8,6878,32863.9%65.5%17,26916,64963.4%65.0%
Unallocated corporate items (1)(260)(279)(496)(547)
Total$8,427$8,04962.0%63.3%$16,773$16,10261.6%62.8%

(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 January 28, 2023 Compared with Three Months Ended January 29, 2022

We experienced a gross margin percentage decrease in our Americas segment due to negative impacts from productivity, partially offset by favorable pricing and favorable product mix.

Gross margin in our EMEA segment decreased primarily due to negative impacts from productivity, partially offset by favorable pricing and favorable product mix.

The APJC segment gross margin percentage decrease was primarily due to negative impacts from productivity, and to a lesser extent, unfavorable impacts from product mix, partially offset by favorable pricing and higher service gross margin.

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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

The Americas segment had a gross margin percentage decrease driven by negative impacts from productivity, partially offset by favorable pricing and favorable product mix.

The gross margin percentage decrease in our EMEA segment was primarily due to negative impacts from productivity, and to a lesser extent, unfavorable impacts from product mix, partially offset by favorable pricing.

The APJC segment gross margin percentage decrease was driven by negative impacts from productivity and unfavorable impacts from pricing, partially offset by favorable product mix.

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 EndedSix Months Ended
January 28, 2023January 29, 2022Variance in DollarsVariance in PercentJanuary 28, 2023January 29, 2022Variance in DollarsVariance in Percent
Research and development$1,855$1,670$18511%$3,636$3,384$2527%
Percentage of revenue13.6%13.1%13.4%13.2%
Sales and marketing2,3842,2661185%4,7754,5272485%
Percentage of revenue17.5%17.8%17.5%17.7%
General and administrative582544387%1,1471,095525%
Percentage of revenue4.3%4.3%4.2%4.3%
Total$4,821$4,480$3418%$9,558$9,006$5526%
Percentage of revenue35.5%35.2%35.1%35.2%

R&D Expenses

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

R&D expenses increased due to higher headcount-related expenses, higher share-based compensation expense and higher discretionary spending, partially offset by lower contracted services spending.

We continue to invest in R&D in order to bring a broad range of products to market in a timely fashion. If we believe that we are unable to enter a particular market in a timely manner with internally developed products, we may purchase or license technology from other businesses, or we may partner with or acquire businesses as an alternative to internal R&D.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

R&D expenses increased due to higher headcount-related expenses, higher discretionary spending and higher share-based compensation expense, partially offset by lower contracted services spending.

Sales and Marketing Expenses

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

Sales and marketing expenses increased primarily due to higher headcount-related expenses, higher share-based compensation expense and higher discretionary spending, partially offset by lower contracted services spending.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Sales and marketing expenses increased primarily due to higher headcount-related expenses, higher discretionary spending and higher share-based compensation expense, partially offset by lower contracted services spending.

G&A Expenses

For each of the second quarter and first six months of fiscal 2023, G&A expenses increased due to higher headcount-related expenses, higher discretionary spending and higher share-based compensation expense, partially offset by lower contracted services spending and lower acquisition and divestitures related costs.

CISCO SYSTEMS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Effect of Foreign Currency

In the second quarter of fiscal 2023, foreign currency fluctuations, net of hedging, decreased the combined R&D, sales and marketing, and G&A expenses by approximately $121 million, or 3.2%, compared with the second quarter of fiscal 2022.

In the first six months of fiscal 2023, foreign currency fluctuations, net of hedging, decreased the combined R&D, sales and marketing, and G&A expenses by approximately $263 million, or 2.9%, compared with the first six months of fiscal 2022.

Amortization of Purchased Intangible Assets

The following table presents the amortization of purchased intangible assets including impairment charges (in millions):

Three Months EndedSix Months Ended
January 28, 2023January 29, 2022January 28, 2023January 29, 2022
Amortization of purchased intangible assets:
Cost of sales$158$201$316$403
Operating expenses7179142163
Total$229$280$458$566

For each of the second quarter and first six months of fiscal 2023, the decrease in amortization of purchased intangible assets was primarily due to certain purchased intangible assets that became fully amortized, partially offset by amortization of purchased intangibles from our recent acquisitions.

Restructuring and Other Charges

In the second quarter of fiscal 2023, we announced a restructuring plan in order to rebalance the organization and enable further investment in key priority areas. This rebalancing includes talent movement options and restructuring. Additionally, we have begun optimizing our real estate portfolio, aligned to the broader hybrid work strategy. The total pretax charges are estimated to be approximately $600 million and is expected to impact approximately 5% of our global workforce. In connection with this restructuring plan, we incurred charges of $243 million in the second quarter and the first six months of fiscal 2023. We expect the plan to be substantially completed by the end of the first quarter of fiscal 2024. We expect to reinvest substantially all of the cost savings from this restructuring plan in our key priority areas. As a result, the overall cost savings from this restructuring plan are not expected to be material for future periods.

Operating Income

The following table presents our operating income and our operating income as a percentage of revenue (in millions, except percentages):

Three Months EndedSix Months Ended
January 28, 2023January 29, 2022January 28, 2023January 29, 2022
Operating income$3,292$3,487$6,832$6,925
Operating income as a percentage of revenue24.2%27.4%25.1%27.0%

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

Operating income decreased by 6%, and operating income as a percentage of revenue decreased by 3.2 percentage points. These changes resulted primarily due to a gross margin percentage decrease (driven by negative impacts from productivity partially offset by favorable pricing and favorable product mix) and higher restructuring and other charges, partially offset by a revenue increase.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

Operating income decreased by 1%, and operating income as a percentage of revenue decreased by 1.9 percentage points. These changes resulted primarily from a gross margin percentage decrease (driven by negative impacts from productivity, partially offset by favorable pricing, and to a lesser extent, favorable product mix) and higher restructuring and other charges, partially offset by a revenue increase.

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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 EndedSix Months Ended
January 28, 2023January 29, 2022Variance in DollarsJanuary 28, 2023January 29, 2022Variance in Dollars
Interest income$219$111$108$388$232$156
Interest expense(107)(88)(19)(207)(177)(30)
Interest income (expense), net$112$23$89$181$55$126

For the each of the second quarter and first six months of fiscal 2023, the increase in interest income was driven by higher average balance of cash and available-for-sale debt investments and higher interest rates. The increase in interest expense was primarily driven by higher interest rates, partially offset 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 EndedSix Months Ended
January 28, 2023January 29, 2022Variance in DollarsJanuary 28, 2023January 29, 2022Variance in Dollars
Gains (losses) on investments, net:
Available-for-sale debt investments$(3)$10$(13)$(9)$16$(25)
Marketable equity investments19(18)37(2)(13)11
Privately held investments19121(102)(73)326(399)
Net gains (losses) on investments35113(78)(84)329(413)
Other gains (losses), net(24)(20)(4)(39)(49)10
Other income (loss), net$11$93$(82)$(123)$280$(403)

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

The decrease in our other income (loss), net was primarily driven by lower unrealized gains on our privately held investments and changes in net gains (losses) on available-for-sale debt investments and marketable equity investments.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

The decrease in our other income (loss), net was primarily driven by realized and unrealized losses on our privately held investments.

Provision for Income Taxes

Three Months Ended January 28, 2023 Compared with Three Months Ended January 29, 2022

The provision for income taxes resulted in an effective tax rate of 18.8% for the second quarter of fiscal 2023 compared with 17.5% for the second quarter of fiscal 2022. The increase in the effective tax rate was primarily due to a decrease in stock based compensation windfall and the impact of new U.S. foreign tax credit regulations effective for fiscal 2023. The increase was partially offset by a U.S. foreign-derived intangible income deduction benefit driven by the capitalization and amortization of R&D expenses effective for fiscal 2023 as required by the Tax Cuts and Jobs Act.

Six Months Ended January 28, 2023 Compared with Six Months Ended January 29, 2022

The provision for income taxes resulted in an effective tax rate of 21.0% for the first six months of fiscal 2023 compared with 18.0% for the first six months of fiscal 2022. The increase in the effective tax rate was primarily due to an increase in net discrete tax expenses, a decrease in stock based compensation windfall, and the impact of new U.S. foreign tax credit regulations effective for fiscal 2023. The increase was partially offset by a U.S. foreign-derived intangible income deduction benefit driven by the capitalization and amortization of R&D expenses effective for fiscal 2023 as required by the Tax Cuts and Jobs Act.

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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.

Balance Sheet and Cash Flows

Cash and Cash Equivalents and Investments The following table summarizes our cash and cash equivalents and investments (in millions):

January 28, 2023July 30, 2022Increase (Decrease)
Cash and cash equivalents$9,009$7,079$1,930
Available-for-sale debt investments12,77211,947825
Marketable equity securities28024139
Total$22,061$19,267$2,794

The net increase in cash and cash equivalents and investments in the first six months of fiscal 2023 was primarily driven by cash provided by operating activities of $8.7 billion. This source of cash was partially offset by cash returned to stockholders in the form of repurchases of common stock of $1.8 billion and cash dividends of $3.1 billion, a net decrease of debt of $0.6 billion and capital expenditures of $0.3 billion.

In the second quarter of fiscal 2023, we deferred our federal tax payment due to the IRS tax relief related to the California floods. We expect our cash paid for income taxes for the second half of fiscal 2023 to increase as a result of payment of the previously deferred second quarter federal tax payment and the effects of capitalization and amortization of R&D expenses as required by the Tax Cuts and Jobs Act.

We maintain an investment portfolio of various holdings, types, and maturities. We classify our investments as short-term investments based on their nature and their availability for use in current operations. We believe the overall credit quality of our portfolio is strong, with our cash equivalents and our available-for-sale debt investment portfolio consisting primarily of high quality investment-grade securities. We believe that our strong cash and cash equivalents and investments position allows us to use our cash resources for strategic investments to gain access to new technologies, for acquisitions, for customer financing activities, for working capital needs, and for the repurchase of shares of common stock and payment of dividends as discussed below.

Securities Lending We periodically engage in securities lending activities with certain of our available-for-sale debt investments. These transactions are accounted for as a secured lending of the securities, and the securities are typically loaned only on an overnight basis. We require collateral equal to at least 102% of the fair market value of the loaned security and that the collateral be in the form of cash or liquid, high-quality assets. We engage in these secured lending transactions only with highly creditworthy counterparties, and the associated portfolio custodian has agreed to indemnify us against collateral losses. We did not experience any losses in connection with the secured lending of securities during the periods presented. As of January 28, 2023 and July 30, 2022, we had no outstanding securities lending transactions.

Free Cash Flow and Capital Allocation As part of our capital allocation strategy, we target to return a minimum of 50% of our free cash flow annually to our stockholders through cash dividends and repurchases of common stock.

We define free cash flow as net cash provided by operating activities less cash used to acquire property and equipment. The following table reconciles our net cash provided by operating activities to free cash flow (in millions):

Six Months Ended
January 28, 2023January 29, 2022
Net cash provided by operating activities$8,701$5,888
Acquisition of property and equipment(346)(232)
Free cash flow$8,355$5,656

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, the rate at which products are shipped during the quarter (which we refer to as shipment linearity), the timing and collection of accounts receivable and financing receivables, inventory and supply chain management,

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

deferred revenue, and the timing and amount of tax and other payments. For additional discussion, see “Part II, Item 1A. Risk Factors” in this report.

We consider free cash flow to be a liquidity measure that provides useful information to management and investors because of our intent to return a stated percentage of free cash flow to stockholders in the form of dividends and stock repurchases. We further regard free cash flow as a useful measure because it reflects cash that can be used to, among other things, invest in our business, make strategic acquisitions, repurchase common stock, and pay dividends on our common stock, after deducting capital investments. A limitation of the utility of free cash flow as a measure of financial performance and liquidity is that the free cash flow does not represent the total increase or decrease in our cash balance for the period. In addition, we have other required uses of cash, including repaying the principal of our outstanding indebtedness. Free cash flow is not a measure calculated in accordance with U.S. generally accepted accounting principles and should not be regarded in isolation or as an alternative for net cash provided by operating activities or any other measure calculated in accordance with such principles, and other companies may calculate free cash flow in a different manner than we do.

The following table summarizes the dividends paid and stock repurchases (in millions, except per-share amounts):

DIVIDENDSSTOCK REPURCHASE PROGRAM
Quarter EndedPer ShareAmountSharesWeighted-Average Price per ShareAmountTOTAL
Fiscal 2023
January 28, 2023$0.38$1,56026$47.72$1,256$2,816
October 29, 2022$0.38$1,56012$43.76502$2,062
Fiscal 2022
July 30, 2022$0.38$1,56754$44.02$2,402$3,969
April 30, 2022$0.38$1,5555$54.20$252$1,807
January 29, 2022$0.37$1,54182$58.36$4,824$6,365
October 30, 2021$0.37$1,5615$56.49$256$1,817

On February 15, 2023, our Board of Directors declared a quarterly dividend of $0.39 per common share to be paid on April 26, 2023 to all stockholders of record as of the close of business on April 5, 2023. Any future dividends are subject to the approval of our Board of Directors.

The remaining authorized amount for stock repurchases under this program is approximately $13.4 billion, with no termination date.

Accounts Receivable, Net The following table summarizes our accounts receivable, net (in millions):

January 28, 2023July 30, 2022Increase (Decrease)
Accounts receivable, net$5,237$6,622$(1,385)

Our accounts receivable net, as of January 28, 2023 decreased by approximately 21%, as compared with the end of fiscal 2022, primarily due to timing and amount of product and service billings in the second quarter of fiscal 2023 compared with the fourth quarter of fiscal 2022.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Inventory Supply Chain The following table summarizes our inventories and inventory purchase commitments with contract manufacturers and suppliers (in millions):

January 28, 2023July 30, 2022July 31, 2021Variance vs. July 30, 2022Variance vs. July 31, 2021
Inventories$3,140$2,568$1,559$572$1,581
Inventory purchase commitments$10,951$12,964$10,254$(2,013)$697
Inventory deposits and prepayments$1,688$1,484$162$204$1,526

The following table summarizes our inventory purchase commitments with contract manufacturers and suppliers by period (in millions):

January 28, 2023July 30, 2022July 31, 2021Variance vs. July 30, 2022Variance vs. July 31, 2021
Less than 1 year$8,651$9,954$6,903$(1,303)$1,748
1 to 3 years1,6932,2401,806(547)(113)
3 to 5 years6077701,545(163)(938)
Total$10,951$12,964$10,254$(2,013)$697

Inventory as of January 28, 2023 increased by 22% and 101% from our inventory balances at the end of fiscal 2022 and fiscal 2021, respectively. Inventory purchase commitments with contract manufacturers and suppliers decreased by 16% and increased by 7% from our balances at the end of fiscal 2022 and fiscal 2021, respectively. The decrease in inventory purchase commitments as compared with the end of fiscal 2022 was primarily due to fulfillment of customer demand as our supply availability improved and our continued efforts to work with contract manufacturers and suppliers to optimize our inventory and purchase commitments position. We increased our balances in prior fiscal years in order to address significant supply constraints seen industry-wide. The increases were primarily due to arrangements to secure supply and pricing for certain product components and commitments with contract manufacturers to meet customer demand and to address extended lead times, as well as advance payments with suppliers to secure future supply, as a result of the supply constraints. We have partnered with several of our key suppliers utilizing our volume purchasing and extending supply coverage, including revising supplier arrangements. As discussed, our risks of future material excess and obsolete inventory and related losses are further outlined in the Result of Operations—Product Gross Margin section.

We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with contract manufacturers and suppliers that allow them to procure inventory based upon criteria as defined by us or that establish the parameters defining our requirements and our commitment to securing manufacturing capacity.

Our inventory purchase commitments are for short-term product manufacturing requirements as well as for commitments to suppliers to secure manufacturing capacity. Certain of our inventory purchase commitments with contract manufacturers and suppliers relate to arrangements to secure supply and pricing for certain product components for multi-year periods. A significant portion of our reported purchase commitments arising from these agreements are firm, noncancelable, and unconditional commitments. In certain instances, these agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed.

Inventory and supply chain management remain areas of focus as we balance the need to maintain supply chain flexibility to help ensure competitive lead times with the risk of inventory obsolescence because of supply constraints, rapidly changing technology and customer requirements. We believe the amount of our inventory and inventory purchase commitments is appropriate for our current and expected customer demand and revenue levels.

Financing Receivables and Guarantees The following table summarizes our financing receivables (in millions):

January 28, 2023July 30, 2022Increase (Decrease)
Loan receivables, net$6,042$6,739$(697)
Lease receivables, net1,0691,175(106)
Total, net$7,111$7,914$(803)

CISCO SYSTEMS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Financing Receivables Our financing arrangements include loans and leases. Our loan receivables include customer financing for purchases of our hardware, software and services (including technical support and advanced services), and also may include additional funds for other costs associated with network installation and integration of our products and services. Lease receivables include sales-type leases. Arrangements related to leases are generally collateralized by a security interest in the underlying assets. Financing receivables decreased by 10%, as compared with the end of fiscal 2022.

Financing Guarantees In the normal course of business, third parties may provide financing arrangements to our customers and channel partners under financing programs. The financing arrangements provided by third parties are related to leases and loans and typically have terms of up to three years. In some cases, we provide guarantees to third parties for these lease and loan arrangements. The financing arrangements to channel partners consist of revolving short-term financing provided by third parties, with payment terms generally ranging from 60 to 90 days. In certain instances, these financing arrangements result in a transfer of our receivables to the third party. The receivables are derecognized upon transfer, as these transfers qualify as true sales, and we receive payments for the receivables from the third party based on our standard payment terms.

The volume of channel partner financing was $15.1 billion and $13.4 billion for the first six months of fiscal 2023 and 2022, respectively. These financing arrangements facilitate the working capital requirements of the channel partners, and in some cases, we guarantee a portion of these arrangements. The balance of the channel partner financing subject to guarantees was $1.6 billion and $1.4 billion as of January 28, 2023 and July 30, 2022, respectively. We could be called upon to make payments under these guarantees in the event of nonpayment by the channel partners. Historically, our payments under these arrangements have been immaterial. Where we provide a guarantee, we defer the revenue associated with the channel partner financing arrangement in accordance with revenue recognition policies, or we record a liability for the fair value of the guarantees. In either case, the deferred revenue is recognized as revenue when the guarantee is removed. As of January 28, 2023, the total maximum potential future payments related to these guarantees was approximately $180 million, of which approximately $35 million was recorded as deferred revenue.

Borrowings

Senior Notes The following table summarizes the principal amount of our senior notes (in millions):

Maturity DateJanuary 28, 2023July 30, 2022
Senior notes:
Fixed-rate notes:
2.60%February 28, 2023$500$500
2.20%September 20, 2023750750
3.625%March 4, 20241,0001,000
3.50%June 15, 2025500500
2.95%February 28, 2026750750
2.50%September 20, 20261,5001,500
5.90%February 15, 20392,0002,000
5.50%January 15, 20402,0002,000
Total$9,000$9,000

Interest is payable semiannually on each class of the senior fixed-rate notes, each of which is redeemable by us at any time, subject to a make-whole premium. We were in compliance with all debt covenants as of January 28, 2023.

Commercial Paper We have a short-term debt financing program in which up to $10.0 billion is available through the issuance of commercial paper notes. We use the proceeds from the issuance of commercial paper notes for general corporate purposes. We had no commercial paper notes outstanding as of January 28, 2023 and $0.6 billion in commercial paper outstanding as of July 30, 2022.

Credit Facility On May 13, 2021, we entered into a 5-year credit agreement with certain institutional lenders that provides for a $3.0 billion unsecured revolving credit facility that is scheduled to expire on May 13, 2026. As of January 28, 2023, we were in compliance with the required interest coverage ratio and the other covenants, and we had not borrowed any funds under the credit agreement.

CISCO SYSTEMS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Any advances under the 5-year credit agreement will accrue interest at rates that are equal to, based on certain conditions, either (a) with respect to loans in U.S. dollars, (i) LIBOR or (ii) the Base Rate (to be defined as the highest of (x) the Bank of America prime rate, (y) the Federal Funds rate plus 0.50% and (z) a daily rate equal to one-month LIBOR plus 1.0%), (b) with respect to loans in Euros, EURIBOR, (c) with respect to loans in Yen, TIBOR and (d) with respect to loans in Pounds Sterling, SONIA plus a credit spread adjustment, plus a margin that is based on our senior debt credit ratings as published by Standard & Poor’s Financial Services, LLC and Moody’s Investors Service, Inc., provided that in no event will the interest rate be less than 0.0%. We will pay a quarterly commitment fee during the term of the 5-year credit agreement which may vary depending on our senior debt credit ratings. In addition, the 5-year credit agreement incorporates certain sustainability-linked metrics. Specifically, our applicable interest rate and commitment fee are subject to upward or downward adjustments if we achieve, or fail to achieve, certain specified targets based on two key performance indicator metrics: (i) social impact and (ii) foam reduction. We may also, upon the agreement of either the then-existing lenders or additional lenders not currently parties to the agreement, increase the commitments under the credit facility by up to an additional $2.0 billion and, at our option, extend the maturity of the facility for an additional year up to two times. The credit agreement requires that we comply with certain covenants, including that we maintain an interest coverage ratio as defined in the agreement.

Remaining Performance Obligations The following table presents the breakdown of remaining performance obligations (in millions):

January 28, 2023July 30, 2022Increase (Decrease)
Product$14,517$14,090$427
Service17,25517,449(194)
Total$31,772$31,539$233
Short-term RPO$16,865$16,936$(71)
Long-term RPO14,90714,603304
Total$31,772$31,539$233

Total remaining performance obligations as of January 28, 2023 increased 1% compared to the end of fiscal 2022. Remaining performance obligations for product increased by 3% compared to the end of fiscal 2022. Remaining performance obligations for service decreased 1%. We expect approximately 53% of total remaining performance obligations to be recognized as revenue over the next 12 months.

Deferred Revenue The following table presents the breakdown of deferred revenue (in millions):

January 28, 2023July 30, 2022Increase (Decrease)
Product$10,679$10,427$252
Service13,24812,837411
Total$23,927$23,264$663
Reported as:
Current$13,109$12,784$325
Noncurrent10,81810,480338
Total$23,927$23,264$663

Total deferred revenue increased 3% compared to the end of fiscal 2022. The increase in deferred product revenue was primarily due to increased deferrals related to our recurring software offerings. The increase in deferred service revenue of 3% was driven by the impact of contract renewals, partially offset by amortization of deferred service revenue.

Contractual Obligations

Transition Tax Payable

The income tax payable outstanding as of January 28, 2023 for the U.S. transition tax on accumulated earnings for foreign subsidiaries is $5.5 billion. Approximately $1.4 billion is payable in less than one year and $4.1 billion is payable between 1 to 3 years.

For our Contractual Obligations see our Annual Report on Form 10-K for the fiscal year ended July 30, 2022.

CISCO SYSTEMS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Other Commitments

In connection with our acquisitions, we have agreed to pay certain additional amounts contingent upon the achievement of certain agreed-upon technology, development, product, or other milestones or the continued employment with us of certain employees of the acquired entities. See Note 14 to the Consolidated Financial Statements.

We also have certain funding commitments primarily related to our privately held investments, some of which may be based on the achievement of certain agreed-upon milestones or are required to be funded on demand. The funding commitments were $0.3 billion and $0.4 billion as of January 28, 2023 and July 30, 2022, respectively.

In the ordinary course of business, we have privately held investments and provide financing to certain customers. Certain of these investments are considered to be variable interest entities. We evaluate on an ongoing basis our privately held investments and customer financings, and we have determined that as of January 28, 2023 there were no material unconsolidated variable interest entities.

On an ongoing basis, we reassess our privately held investments and customer financings to determine if they are variable interest entities and if we would be regarded as the primary beneficiary pursuant to the applicable accounting guidance. As a result of this ongoing assessment, we may be required to make additional disclosures or consolidate these entities. Because we may not control these entities, we may not have the ability to influence these events.

We provide financing guarantees, which are generally for various third-party financing arrangements extended to our channel partners. We could be called upon to make payments under these guarantees in the event of nonpayment by the channel partners. See the previous discussion of these financing guarantees under “Financing Receivables and Guarantees.”

Liquidity and Capital Resource Requirements

Based on past performance and current expectations, we believe our cash and cash equivalents, investments, cash generated from operations, and ability to access capital markets and committed credit lines will satisfy, through at least the next 12 months, our liquidity requirements, both in total and domestically, including the following: working capital needs (including inventory and other supply related payments), capital expenditures, investment requirements, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on debt, pending acquisitions, future customer financings, and other liquidity requirements associated with our operations. We expect increased payments related to inventory and other supply related payments through at least the next 12 months. There are no other transactions, arrangements, or relationships with unconsolidated entities or other persons that are reasonably likely to materially affect the liquidity and the availability of, as well as our requirements for, capital resources.

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