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, 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 product portfolios across networking, security, collaboration, applications and the cloud to create highly secure, intelligent platforms for our customers’ digital businesses. 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 27, 2024January 28, 2023% VarianceJanuary 27, 2024January 28, 2023% Variance
Revenue$12,791$13,592(6)%$27,459$27,2241%
Gross margin percentage64.2%62.0%2.2pts64.7%61.6%3.1pts
Research and development$1,943$1,8555%$3,856$3,6366%
Sales and marketing$2,458$2,3843%$4,964$4,7754%
General and administrative$642$58210%$1,314$1,14715%
Total research and development, sales and marketing, general and administrative$5,043$4,8215%$10,134$9,5586%
Total as a percentage of revenue39.4%35.5%3.9pts36.9%35.1%1.8pts
Restructuring and other charges included in operating expenses$12$243(95)%$135$241(44)%
Operating income as a percentage of revenue24.2%24.2%—pts26.8%25.1%1.7pts
Interest and other income (loss), net$65$123(47)%$231$58NM
Income tax percentage16.7%18.8%(2.1)pts17.5%21.0%(3.5)pts
Net income$2,634$2,773(5)%$6,272$5,44315%
Net income as a percentage of revenue20.6%20.4%0.2pts22.8%20.0%2.8pts
Earnings per share—diluted$0.65$0.67(3)%$1.54$1.3217%

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 27, 2024 Compared with Three Months Ended January 28, 2023

Total revenue decreased by 6% compared with the second quarter of fiscal 2023. Within total revenue, product revenue decreased by 9% and service revenue increased by 4%. In the second quarter of fiscal 2024, total software revenue was flat at $4.2 billion across all product areas and service. Within total software revenue, subscription revenue increased 5%.

In the second quarter of fiscal 2024, we saw customers more closely scrutinizing spend given the high level of uncertainty in the macroeconomic environment. Additionally, our customers and third-party resellers are continuing to implement elevated levels of product shipments from recent quarters, which we believe contributed to the decline in product demand. For the product categories in which we can measure customer inventory absorption, we are seeing steady progress. However, we believe we are an additional one to two quarters away from full implementation of product shipments, which is longer than we initially expected. We saw this dynamic primarily with our service provider and cloud customers and enterprise customers. We believe these impacts on product demand may continue through at least the end of fiscal 2024.

Total gross margin increased by 2.2 percentage points. Product gross margin increased by 2.5 percentage points, largely driven by productivity improvements and favorable product mix, partially offset by pricing erosion. As a percentage of revenue, research and development, sales and marketing, and general and administrative expenses, collectively, increased by 3.9 percentage points. Operating income as a percentage of revenue was flat driven by higher product gross margin offset by higher operating expenses in the second quarter of fiscal 2024. Diluted earnings per share decreased 3%, driven by a decrease of 5% in net income, partially offset by a decrease in diluted share count of 43 million shares.

In terms of our geographic segments, revenue from the Americas decreased by $315 million, EMEA revenue decreased by $244 million and APJC revenue decreased by $241 million. From a customer market standpoint, we experienced product revenue declines in the enterprise and service provider and cloud markets, partially offset by growth in the public sector market. From a product category perspective, the product revenue decrease of 9% was driven by a decline in revenue in Networking of 12%. This decline was partially offset by product revenue growth in Security of 3%, Collaboration of 3% and Observability of 16%.

We remain focused on delivering innovation across our technologies to assist our customers in executing on their digital transformations. Further, we continued to make progress in the transition of our business model by delivering increased software subscription revenue. We remain focused on accelerating innovation across our portfolio, and we believe that we are making 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 invest in priority areas with the objective of driving profitable growth over the long term.

CISCO SYSTEMS, INC.

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

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

Total revenue increased 1%, with product revenue flat and service revenue increasing 4%. Total gross margin increased 3.1 percentage points due to productivity improvements, favorable product mix and favorable pricing. As a percentage of revenue, research and development, sales and marketing, and general and administrative expenses, collectively, increased by 1.8 percentage points. Operating income as a percentage of revenue increased by 1.7 percentage points. We incurred restructuring and other charges of $135 million in the first six months of fiscal 2024. Diluted earnings per share increased 17%, driven by an increase of 15% in net income, partially offset by a decrease in diluted share count of 36 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 transform infrastructure, secure the enterprise, power hybrid work, reimagine applications, and drive toward sustainability. Our strategy is to securely connect everything. We are committed to driving a trusted customer experience, through our innovation, solutions, 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 29, 2023.

Other Key Financial Measures

The following is a summary of our other key financial measures for the second quarter of fiscal 2024 (in millions):

January 27, 2024July 29, 2023
Cash and cash equivalents and investments$25,671$26,146
Remaining performance obligations$35,656$34,868
Inventories$3,209$3,644
Six Months Ended
January 27, 2024January 28, 2023
Cash provided by operating activities$3,179$8,701
Repurchases of common stock—stock repurchase program$2,506$1,758
Dividends paid$3,163$3,120

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 29, 2023, 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 $258 million and $92 million for the first six months of fiscal 2024 and 2023, respectively. The provision for the liability related to purchase commitments with contract manufacturers and suppliers was $128 million and $199 million for the first six months of fiscal 2024 and 2023, 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. For further discussion around the Supply Constraints Impacts and Risks, see “—Results of Operations—Gross Margin—Supply Constraints Impacts 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 2024 and 2023.

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

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

CISCO SYSTEMS, INC.

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

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 16.7% and 18.8% in the second quarter of fiscal 2024 and 2023, respectively, and 17.5% and 21.0% in the first six months of fiscal 2024 and 2023, 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, research and development capitalization and amortization, and corporate alternative minimum 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 27, 2024January 28, 2023Variance in DollarsVariance in PercentJanuary 27, 2024January 28, 2023Variance in DollarsVariance in Percent
Revenue:
Product$9,232$10,155$(923)(9)%$20,371$20,400$(29)—%
Percentage of revenue72.2%74.7%74.2%74.9%
Service3,5593,4371224%7,0886,8242644%
Percentage of revenue27.8%25.3%25.8%25.1%
Total$12,791$13,592$(801)(6)%$27,459$27,224$2351%

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 27, 2024January 28, 2023Variance in DollarsVariance in PercentJanuary 27, 2024January 28, 2023Variance in DollarsVariance in Percent
Revenue:
Americas$7,510$7,825$(315)(4)%$16,532$15,738$7945%
Percentage of revenue58.7%57.6%60.2%57.8%
EMEA3,4843,728(244)(7)%7,1487,404(256)(3)%
Percentage of revenue27.2%27.4%26.0%27.2%
APJC1,7982,039(241)(12)%3,7794,082(303)(7)%
Percentage of revenue14.1%15.0%13.8%15.0%
Total$12,791$13,592$(801)(6)%$27,459$27,224$2351%

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

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

Total revenue decreased by 6%. Product revenue decreased by 9% and service revenue increased by 4%. Our total revenue reflected declines 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 the timing of revenue recognition for complex transactions with multiple performance obligations. 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 27, 2024 Compared with Six Months Ended January 28, 2023

Total revenue increased by 1%. Product revenue was flat and service revenue increased by 4%. Our total revenue reflected growth in the Americas segment, partially offset by declines in the EMEA and APJC 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 27, 2024January 28, 2023Variance in DollarsVariance in PercentJanuary 27, 2024January 28, 2023Variance in DollarsVariance in Percent
Product revenue:
Americas$5,346$5,728$(382)(7)%$12,197$11,574$6235%
Percentage of product revenue57.9%56.4%59.9%56.8%
EMEA2,6382,917(279)(10)%5,4785,803(325)(6)%
Percentage of product revenue28.6%28.7%26.9%28.4%
APJC1,2481,510(262)(17)%2,6963,023(327)(11)%
Percentage of product revenue13.5%14.9%13.2%14.8%
Total$9,232$10,155$(923)(9)%$20,371$20,400$(29)—%

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

Americas

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

Product revenue in the Americas segment decreased by 7%, with declines in the service provider and cloud and enterprise markets, partially offset by growth in the public sector market. From a country perspective, product revenue decreased in the United States, Canada and Brazil by 6%, 14% and 14%, respectively, partially offset by growth in product revenue in Mexico of 6%.

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

Product revenue in the Americas segment increased by 5%, with growth in the public sector market, partially offset by a decline in the service provider and cloud market. Product revenue in the enterprise market was flat. From a country perspective, product revenue increased in the United States and Mexico by 6% and 5%, respectively, partially offset by declines in product revenue in Canada and Brazil of 7% and 3%, respectively.

EMEA

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

Product revenue in the EMEA segment decreased by 10%, driven by declines in the enterprise and service provider and cloud markets, partially offset by growth in the public sector market. From a country perspective, product revenue decreased in Germany, the United Kingdom and France by 20%, 13% and 8%, respectively.

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

Product revenue in the EMEA segment decreased by 6%, driven by declines in the enterprise and service provider and cloud markets, partially offset by growth in the public sector market. From a country perspective, product revenue decreased in Germany, the United Kingdom and France by 10%, 9% and 14%, respectively.

APJC

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

Product revenue in the APJC segment decreased by 17%, with declines across each of the customer markets. From a country perspective, product revenue decreased in Japan, Australia, India and China by 19%, 7%, 27% and 39%, respectively.

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

Product revenue in the APJC segment decreased by 11%, with declines across each of the customer markets. From a country perspective, product revenue decreased in Japan, Australia, India and China by 16%, 6%, 7% and 39%, 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. Effective in the first quarter of fiscal 2024, we began reporting our product revenue in the following categories: Networking, Security, Collaboration, and Observability and conformed our product revenue for prior periods to the current period presentation.

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

Three Months EndedSix Months Ended
January 27, 2024January 28, 2023Variance in DollarsVariance in PercentJanuary 27, 2024January 28, 2023Variance in DollarsVariance in Percent
Product Revenue
Networking$7,081$8,092$(1,011)(12)%$15,904$16,123$(219)(1)%
Security973943303%1,9841,914704%
Collaboration989958313%2,1062,044623%
Observability1881622616%3783195918%
Total$9,232$10,155$(923)(9)%$20,371$20,400$(29)—%

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

Networking

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

The Networking product category represents our core networking technologies of switching, routing, wireless, 5G, silicon, optics solutions and compute products. Revenue from the Networking product category decreased by 12%, or $1.0 billion. Revenue declined in both campus switching and data center switching, as well as in wireless and routed optical networking. The revenue declines in the Networking product category were primarily in the enterprise and service provider and cloud markets.

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

Revenue from the Networking product category decreased by 1%, or $219 million. Revenue grew in both campus switching and data center switching, primarily driven by growth in our Catalyst 9000 series and Nexus 9000 series offerings. We experienced a revenue decline in enterprise routing, although we saw revenue growth in our SD-WAN offerings. The decrease in wireless was primarily driven by our WiFi-6 products and Meraki offerings. We also saw a revenue decline in routed optical networking, although we saw revenue growth in our Cisco 8000 series offerings.

Security

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

The Security product category consists of our Cloud and Application Security, Industrial Security, Network Security, and User and Device Security offerings. Revenue in our Security product category increased by 3%, or $30 million, primarily driven by double-digit growth in our Zero Trust offerings.

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

Revenue from the Security product category increased by 4%, or $70 million, primarily driven by growth in our Zero Trust and Threat Intelligence, Detection and Response offerings.

Collaboration

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

The Collaboration product category consists of our Meetings, Collaboration Devices, Calling, Contact Center and CPaaS offerings. Revenue in our Collaboration product category increased by 3%, or $31 million, primarily driven by growth in our Collaboration Devices and Calling offerings, partially offset by a decline in Meetings.

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

Revenue from our Collaboration product category increased by 3%, or $62 million, primarily driven by growth in Calling and Collaboration Devices, partially offset by a decline in Meetings.

CISCO SYSTEMS, INC.

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

Observability

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

The Observability product category consists of our full stack observability offerings. Revenue in our Observability product category increased 16%, or $26 million, driven by growth across the portfolio, including double-digit growth in our ThousandEyes offerings.

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

Revenue from the Observability product category increased by 18%, or $59 million, driven by primarily 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 27, 2024January 28, 2023Variance in DollarsVariance in PercentJanuary 27, 2024January 28, 2023Variance in DollarsVariance in Percent
Service revenue:
Americas$2,164$2,097$673%$4,335$4,164$1714%
Percentage of service revenue60.8%61.0%61.2%61.0%
EMEA846812344%1,6701,601694%
Percentage of service revenue23.8%23.6%23.6%23.5%
APJC550529214%1,0841,059252%
Percentage of service revenue15.4%15.4%15.2%15.5%
Total$3,559$3,437$1224%$7,088$6,824$2644%

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

Service revenue increased 4% in the second quarter of fiscal 2024 compared with the second quarter of fiscal 2023, primarily driven by revenue growth in our solution support and advisory services, partially offset by declines in our software support offerings. Service revenue increased across each of our geographic segments for the second quarter of fiscal 2024.

Service revenue increased 4% in the first six months of fiscal 2024 compared to the first six months of fiscal 2023, primarily driven by revenue growth in our solution support offerings, advisory services and maintenance business, partially offset by declines in our software support offerings. Service revenue increased across each of our geographic segments.

Gross Margin

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

Three Months EndedSix Months Ended
AMOUNTPERCENTAGEAMOUNTPERCENTAGE
January 27, 2024January 28, 2023January 27, 2024January 28, 2023January 27, 2024January 28, 2023January 27, 2024January 28, 2023
Gross margin:
Product$5,789$6,11762.7%60.2%$12,971$12,18363.7%59.7%
Service2,4282,31068.2%67.2%4,8034,59067.8%67.3%
Total$8,217$8,42764.2%62.0%$17,774$16,77364.7%61.6%

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 second quarter and first six months of fiscal 2024, as compared with the corresponding prior year periods:

Product Gross Margin Percentage
Three Months EndedSix Months Ended
Fiscal 202360.2%59.7%
Productivity (1)2.6%2.7%
Product pricing(0.5)%0.6%
Mix of products sold1.0%1.1%
Others(0.6)%(0.4)%
Fiscal 202462.7%63.7%

(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 27, 2024 Compared with Three Months Ended January 28, 2023

Product gross margin increased by 2.5 percentage points primarily driven by productivity improvements, largely driven by lower freight, logistics and components costs, and favorable product mix. These impacts were partially offset by pricing erosion.

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

Product gross margin increased by 4.0 percentage points primarily driven by productivity improvements, largely driven by lower freight, logistics and components costs, favorable product mix and favorable pricing.

Supply Constraints Impacts and Risks

In past periods, we took multiple actions in order to mitigate component shortages and address significant supply constraints. Additionally, these supply constraints resulted in significant increased costs (i.e., component and other commodity costs, expedite fees, etc.) which had a negative impact on our product gross margin and resulted in extended lead times for us and our customers. The mitigating actions we took included: partnering with several of our key suppliers utilizing our volume purchasing ability and extending supply coverage, including, in certain cases, revising supplier arrangements; paying and committing to pay in the future significantly higher costs for certain components; modifying our product designs in order to leverage alternate suppliers, where possible; and continually optimizing our inventory build and customer delivery plans, among others. These mitigating actions have resulted in increased inventory supply chain balances compared to historical levels. This in turn has increased our supply chain exposure, which could result in negative impacts to our product gross margin in future periods, including material excess and obsolete charges, if product demand significantly decreases for a sustained duration or we are unable to continue to mitigate the remaining supply chain exposures. We believe these mitigating actions have helped us to optimize our access to critical components and meet customer demand for our products as a result of the component shortages and significant supply constraints we saw in past periods. While we have seen a decrease in our overall inventory supply chain balances in recent periods, these balances continue to be higher as compared to historical levels.

Service Gross Margin

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

Our service gross margin percentage increased by 1.0 percentage points primarily due to higher sales volume and lower delivery costs, partially offset by higher headcount-related costs and unfavorable 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.

CISCO SYSTEMS, INC.

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

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

Service gross margin increased by 0.5 percentage points primarily due to higher sales volume and lower delivery costs, partially offset by higher headcount-related costs and unfavorable mix of service offerings.

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 27, 2024January 28, 2023January 27, 2024January 28, 2023January 27, 2024January 28, 2023January 27, 2024January 28, 2023
Gross margin:
Americas$4,932$4,92065.7%62.9%$10,901$9,90465.9%62.9%
EMEA2,3732,46968.1%66.2%4,9194,79568.8%64.8%
APJC1,2261,29868.2%63.6%2,5542,57167.6%63.0%
Segment total8,5328,68766.7%63.9%18,37317,26966.9%63.4%
Unallocated corporate items (1)(315)(260)(599)(496)
Total$8,217$8,42764.2%62.0%$17,774$16,77364.7%61.6%

(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 27, 2024 Compared with Three Months Ended January 28, 2023

We experienced a gross margin percentage increase in our Americas segment due to positive impacts from productivity improvements, favorable product mix and higher service gross margin, slightly offset by pricing erosion.

Gross margin percentage in our EMEA segment increased primarily due to positive impacts from productivity improvements, and, to a lesser extent, favorable product mix, partially offset by pricing erosion.

The APJC segment gross margin percentage increase was primarily due to positive impacts from productivity improvements and favorable product mix, partially offset by pricing erosion and lower service gross margin.

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

The Americas segment had a gross margin percentage increase driven by positive impacts from productivity improvements, favorable pricing and, to a lesser extent, favorable product mix.

The gross margin percentage increase in our EMEA segment was primarily due to positive impacts from productivity improvements and favorable product mix, partially offset by pricing erosion.

The APJC segment gross margin percentage increase was driven by positive impacts from productivity improvements and favorable product mix, partially offset by pricing erosion.

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 EndedSix Months Ended
January 27, 2024January 28, 2023Variance in DollarsVariance in PercentJanuary 27, 2024January 28, 2023Variance in DollarsVariance in Percent
Research and development$1,943$1,855$885%$3,856$3,636$2206%
Percentage of revenue15.2%13.6%14.0%13.4%
Sales and marketing2,4582,384743%4,9644,7751894%
Percentage of revenue19.2%17.5%18.1%17.5%
General and administrative6425826010%1,3141,14716715%
Percentage of revenue5.0%4.3%4.8%4.2%
Total$5,043$4,821$2225%$10,134$9,558$5766%
Percentage of revenue39.4%35.5%36.9%35.1%

R&D Expenses

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

R&D expenses increased due to higher share-based compensation expense and higher discretionary spending, partially offset by lower headcount-related expenses and 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 27, 2024 Compared with Six Months Ended January 28, 2023

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

Sales and Marketing Expenses

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

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

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

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

G&A Expenses

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

G&A expenses increased due to higher share-based compensation expense, higher discretionary spending, higher acquisition and divestitures related costs, higher headcount-related expenses, and higher contracted services spending.

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

G&A expenses increased due to higher share-based compensation expense, higher discretionary spending, higher acquisition and divestitures related costs, higher headcount-related expenses, and higher contracted services spending.

Effect of Foreign Currency

In the second quarter of fiscal 2024, foreign currency fluctuations, net of hedging, increased the combined R&D, sales and marketing, and G&A expenses by approximately $23 million, or 0.5%, compared with the second quarter of fiscal 2023.

In the first six months of fiscal 2024, foreign currency fluctuations, net of hedging, increased the combined R&D, sales and marketing, and G&A expenses by approximately $49 million, or 0.5%, compared with the first six months of fiscal 2023.

CISCO SYSTEMS, INC.

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

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 27, 2024January 28, 2023January 27, 2024January 28, 2023
Amortization of purchased intangible assets:
Cost of sales$180$158$366$316
Operating expenses6671133142
Total$246$229$499$458

For each of the second quarter and first six months of fiscal 2024, the increase in amortization of purchased intangible assets was primarily due to amortization of purchased intangibles from our recent acquisitions, partially offset by certain purchased intangible assets that became fully amortized.

Restructuring and Other Charges

In the third quarter of fiscal 2024, we initiated a restructuring plan in order to realign the organization and enable further investment in key priority areas. This restructuring plan will impact approximately 5% of our global workforce. The total pretax charges are estimated to be approximately $800 million. We expect this plan to be substantially completed during the first half of fiscal 2025. 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.

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. In connection with this restructuring plan, we incurred charges of $12 million and $135 million in the second quarter and first six months of fiscal 2024 and have incurred cumulative charges of $670 million to date. We completed this restructuring plan in the second 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 27, 2024January 28, 2023January 27, 2024January 28, 2023
Operating income$3,096$3,292$7,372$6,832
Operating income as a percentage of revenue24.2%24.2%26.8%25.1%

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

Operating income decreased by 6%, and operating income as a percentage of revenue was flat. These changes resulted primarily from a revenue decrease partially offset by a gross margin percentage increase (driven by productivity improvements and favorable product mix, partially offset by pricing erosion).

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

Operating income increased by 8%, and operating income as a percentage of revenue increased by 1.7 percentage points. These changes resulted primarily from a revenue increase and gross margin percentage increase (driven by productivity improvements, favorable product mix and favorable pricing), partially offset by higher operating expenses.

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 EndedSix Months Ended
January 27, 2024January 28, 2023Variance in DollarsJanuary 27, 2024January 28, 2023Variance in Dollars
Interest income$324$219$105$684$388$296
Interest expense(120)(107)(13)(231)(207)(24)
Interest income (expense), net$204$112$92$453$181$272

For each of the second quarter and first six months of fiscal 2024, 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 and issuance of commercial paper notes, partially offset by a lower average long-term 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 27, 2024January 28, 2023Variance in DollarsJanuary 27, 2024January 28, 2023Variance in Dollars
Gains (losses) on investments, net:
Available-for-sale debt investments$(23)$(3)$(20)$(43)$(9)$(34)
Marketable equity investments62194316(2)18
Privately held investments(150)19(169)(155)(73)(82)
Net gains (losses) on investments(111)35(146)(182)(84)(98)
Other gains (losses), net(28)(24)(4)(40)(39)(1)
Other income (loss), net$(139)$11$(150)$(222)$(123)$(99)

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

The change in our other income (loss), net was primarily driven by impairment charges 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 27, 2024 Compared with Six Months Ended January 28, 2023

The change in our other income (loss), net was primarily driven by impairment charges on our privately held investments, lower realized losses on our privately held investments, and changes in net gain (losses) on available-for-sale debt investments and marketable equity investments.

Provision for Income Taxes

Three Months Ended January 27, 2024 Compared with Three Months Ended January 28, 2023

The provision for income taxes resulted in an effective tax rate of 16.7% for the second quarter of fiscal 2024 compared with 18.8% for the second quarter of fiscal 2023. The decrease in the effective tax rate was primarily due to an increase in share-based compensation windfall benefit and an increase in the benefit from income taxed at other than U.S. rates, partially offset by a decrease in foreign derived intangible income deduction benefit.

Six Months Ended January 27, 2024 Compared with Six Months Ended January 28, 2023

The provision for income taxes resulted in an effective tax rate of 17.5% for the first six months of fiscal 2024 compared with 21.0% for the first six months of fiscal 2023. The decrease in the effective tax rate was primarily due to an increase in the benefit from income taxed at other than U.S. rates and a decrease in net discrete tax expenses, partially offset by a decrease in foreign derived intangible income deduction benefit.

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.

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 27, 2024July 29, 2023Increase (Decrease)
Cash and cash equivalents$13,715$10,123$3,592
Available-for-sale debt investments11,53015,592(4,062)
Marketable equity securities426431(5)
Total$25,671$26,146$(475)

The net decrease in cash and cash equivalents and investments in the first six months of fiscal 2024 was primarily driven by cash returned to stockholders in the form of cash dividends of $3.2 billion and repurchases of common stock of $2.5 billion, net cash paid for acquisitions and divestitures of $0.9 billion, a net decrease of debt of $0.8 billion and capital expenditures of $0.3 billion. These uses of cash were partially offset by issuance of commercial paper notes, net of $3.9 billion and net cash provided by operating activities of $3.2 billion. The net cash provided by operating activities for the first six months of fiscal 2024 includes the fiscal 2023 federal tax payment of $2.8 billion that was deferred by the IRS as a result of the California floods and the U.S. transition tax payment of $1.4 billion.

In addition to cash requirements in the normal course of business, on September 21, 2023, we announced our intent to acquire Splunk. Under the terms of the agreement, we have agreed to pay $157 per share in cash, representing approximately $28 billion in equity value. See further discussion of liquidity and future payments under “Liquidity and Capital Resource Requirements” below.

We maintain an investment portfolio of various holdings, types, and maturities. We classify our investments as short-term investments based on their nature and their availability for use in current operations. We believe the overall credit quality of our portfolio is strong, with our cash equivalents and our 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 27, 2024 and July 29, 2023, 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 27, 2024January 28, 2023
Net cash provided by operating activities$3,179$8,701
Acquisition of property and equipment(304)(346)
Free cash flow$2,875$8,355

CISCO SYSTEMS, INC.

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

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, the rate at which products are shipped during the quarter (which we refer to as shipment linearity), the timing and collection of accounts receivable and financing receivables, inventory and supply chain management, deferred revenue, 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 2024
January 27, 2024$0.39$1,58325$49.54$1,254$2,837
October 28, 2023$0.39$1,58023$54.53$1,252$2,832
Fiscal 2023
July 29, 2023$0.39$1,58925$50.49$1,254$2,843
April 29, 2023$0.39$1,59325$49.45$1,259$2,852
January 28, 2023$0.38$1,56026$47.72$1,256$2,816
October 29, 2022$0.38$1,56012$43.76$502$2,062

On February 14, 2024, our Board of Directors declared a quarterly dividend of $0.40 per common share to be paid on April 24, 2024, to all stockholders of record as of the close of business on April 4, 2024. Future dividends will be subject to the approval of our Board of Directors.

The remaining authorized amount for stock repurchases under this program is approximately $8.4 billion, with no termination date.

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

January 27, 2024July 29, 2023Increase (Decrease)
Accounts receivable, net$4,884$5,854$(970)

Our accounts receivable net, as of January 27, 2024 decreased by approximately 17%, as compared with the end of fiscal 2023, primarily due to timing and amount of product and service billings in the second quarter of fiscal 2024 compared with the fourth quarter of fiscal 2023.

CISCO SYSTEMS, INC.

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 27, 2024July 29, 2023July 30, 2022Variance vs. July 29, 2023Variance vs. July 30, 2022
Inventories$3,209$3,644$2,568$(435)$641
Inventory purchase commitments$6,193$7,253$12,964$(1,060)$(6,771)
Inventory deposits and prepayments$1,160$1,109$1,484$51$(324)

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

January 27, 2024July 29, 2023July 30, 2022Variance vs. July 29, 2023Variance vs. July 30, 2022
Less than 1 year$4,711$5,270$9,954$(559)$(5,243)
1 to 3 years1,4561,7832,240(327)(784)
3 to 5 years26200770(174)(744)
Total$6,193$7,253$12,964$(1,060)$(6,771)

Inventory as of January 27, 2024 decreased by 12% and inventory purchase commitments with contract manufacturers and suppliers decreased by 15% from our balances at the end of fiscal 2023. The combined decrease of 14% in our inventory and inventory purchase commitments as compared with the end of fiscal 2023 was primarily due to fulfillment of customer demand as overall supply constraints improved and our continued efforts to work with contract manufacturers and suppliers to optimize our inventory and purchase commitment levels.

We began increasing our inventory supply chain balances starting in fiscal 2021 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. 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 27, 2024July 29, 2023Increase (Decrease)
Loan receivables, net$5,797$5,857$(60)
Lease receivables, net1,04397865
Total, net$6,840$6,835$5

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 was flat as compared with the end of fiscal 2023.

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 $14.8 billion and $15.1 billion for the first six months of fiscal 2024 and 2023, 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 $1.3 billion and $1.7 billion as of January 27, 2024 and July 29, 2023, 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 27, 2024, the total maximum potential future payments related to these guarantees was approximately $138 million, of which approximately $23 million was recorded as deferred revenue.

Borrowings

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

Maturity DateJanuary 27, 2024July 29, 2023
Senior notes:
Fixed-rate notes:
2.20%September 20, 2023$—$750
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$7,750$8,500

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 27, 2024.

Commercial Paper Effective February 6, 2024, we increased our borrowing capacity under our commercial paper program from $10.0 billion to $15.0 billion. We use the proceeds from the issuance of commercial paper notes for general corporate purposes. We had $3.9 billion and no commercial paper notes outstanding as of January 27, 2024 and July 29, 2023, respectively. As of February 19, 2024, we had approximately $6.9 billion of commercial paper notes outstanding.

Credit Facility On May 13, 2021, we entered into a 5-year $3.0 billion unsecured revolving credit agreement, as amended on April 18, 2023. On February 2, 2024, we entered into an amended and restated 5-year $5.0 billion unsecured revolving credit agreement. The interest rate for the credit agreement is determined based on a formula using certain market rates. The credit agreement requires that we comply with certain covenants, including that we maintain an interest coverage ratio (defined in the agreement as the ratio of consolidated EBITDA to consolidated interest expense) of not less than 3.0 to 1.0. As of January 27, 2024, we were in compliance with all associated covenants and we had not borrowed any funds under our credit agreement.

CISCO SYSTEMS, INC.

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

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

January 27, 2024July 29, 2023Increase (Decrease)
Product$16,249$15,802$447
Service19,40719,066341
Total$35,656$34,868$788
Short-term RPO$17,930$17,910$20
Long-term RPO17,72616,958768
Total$35,656$34,868$788

Total remaining performance obligations as of January 27, 2024 increased 2% compared to the end of fiscal 2023. Remaining performance obligations for product increased by 3% compared to the end of fiscal 2023. Remaining performance obligations for service increased by 2%. We expect approximately 50% 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 27, 2024July 29, 2023Increase (Decrease)
Product$11,640$11,505$135
Service14,13114,04586
Total$25,771$25,550$221
Reported as:
Current$14,011$13,908$103
Noncurrent11,76011,642118
Total$25,771$25,550$221

Total deferred revenue increased 1% compared to the end of fiscal 2023. The increase in deferred product revenue of 1% was primarily due to increased deferrals related to our recurring software offerings. The increase in deferred service revenue of 1% was driven by the impact of contract renewals, partially offset by ongoing amortization of deferred service revenue.

Contractual Obligations

Transition Tax Payable

The income tax payable outstanding as of January 27, 2024 for the U.S. transition tax on accumulated earnings for foreign subsidiaries was $4.1 billion. Approximately $1.8 billion is payable in fiscal 2025 and $2.3 billion is payable in fiscal 2026.

For our Contractual Obligations see our Annual Report on Form 10-K for the fiscal year ended July 29, 2023.

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. The funding commitments were $0.2 billion and $0.3 billion as of January 27, 2024 and July 29, 2023, 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 27, 2024 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 recently announced our intent to acquire Splunk. Under the terms of the agreement, we have agreed to pay $157 per share in cash, representing approximately $28 billion in equity value. We anticipate this transaction will be financed with a combination of cash and debt. The acquisition is expected to close late in the first quarter or early in the second quarter of calendar year 2024, subject to regulatory approval and other customary closing conditions. 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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