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 identified below 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 help to power, secure, and draw insights from the Internet. We are integrating artificial intelligence (AI) into our product portfolios across networking, security, collaboration and observability to simplify how our technology is delivered, managed and optimized and to help customers maximize the business value of their technology investments and accelerate their digital transformation.

A summary of our results is as follows (in millions, except percentages and per-share amounts):

Three Months EndedSix Months Ended
January 25, 2025January 27, 2024% VarianceJanuary 25, 2025January 27, 2024% Variance
Revenue$13,991$12,7919%$27,832$27,4591%
Gross margin percentage65.1%64.2%0.9pts65.5%64.7%0.8pts
Research and development$2,299$1,94318%$4,585$3,85619%
Sales and marketing$2,672$2,4589%$5,424$4,9649%
General and administrative$752$64217%$1,547$1,31418%
Total research and development, sales and marketing, general and administrative$5,723$5,04313%$11,556$10,13414%
Total as a percentage of revenue40.9%39.4%1.5pts41.5%36.9%4.6pts
Restructuring and other charges included in operating expenses$10$12(19)%$675$135NM
Operating income as a percentage of revenue22.3%24.2%(1.9)pts19.7%26.8%(7.1)pts
Interest and other income (loss), net$(226)$65NM$(317)$231NM
Income tax percentage15.9%16.7%(0.8)pts0.3%17.5%(17.2)pts
Net income$2,428$2,634(8)%$5,139$6,272(18)%
Net income as a percentage of revenue17.4%20.6%(3.2)pts18.5%22.8%(4.3)pts
Earnings per share—diluted$0.61$0.65(6)%$1.28$1.54(17)%

NM – Not Meaningful

Percentages may not recalculate due to rounding.

CISCO SYSTEMS, INC.

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

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

In the second quarter of fiscal 2025, we delivered strong revenue growth across all geographies and solid margins as we saw a positive demand environment. Total revenue increased by 9% compared with the second quarter of fiscal 2024. Excluding Splunk, total revenue decreased 1% compared with the second quarter of fiscal 2024. Within total revenue, product revenue increased by 11% and services revenue increased by 6%. In the second quarter of fiscal 2025, total software revenue was $5.5 billion across all product areas and services, an increase of 33%, primarily driven by the contribution of Splunk. Total subscription revenue increased 23%, primarily driven by the contribution of Splunk.

Total gross margin increased by 0.9 percentage points. Product gross margin increased by 1.0 percentage points, largely driven by benefits from Splunk and productivity improvements, partially offset by pricing erosion. As a percentage of revenue, research and development, sales and marketing, and general and administrative expenses, collectively, increased by 1.5 percentage points. Operating income as a percentage of revenue decreased by 1.9 percentage points primarily driven by incremental operating expenses from Splunk and higher amortization of purchased intangible assets in the second quarter of fiscal 2025. Diluted earnings per share decreased 6%, driven by a decrease of 8% in net income, partially offset by a decrease in diluted share count of 68 million shares.

In terms of our geographic segments, revenue from the Americas increased by $692 million, EMEA revenue increased by $371 million and APJC revenue increased by $136 million. From a customer market standpoint, we experienced product revenue growth across all of our customer markets. From a product category perspective, the product revenue increase of 11% was driven by a growth in Security of 117%, Observability of 47% and Collaboration of 1%. This growth was partially offset by a product revenue decline in Networking of 3%. The product revenue growth in Security and Observability were each driven in large part by the contribution of Splunk.

While we continue to operate in a highly competitive environment and the overall macroeconomic environment remains challenging and uncertain, we plan to continue to invest in key priority areas with the objective of driving profitable growth over the long term. We remain focused on delivering innovation across our technologies to assist our customers in executing on their digital transformations and on accelerating innovation across our portfolio. We believe that we are making progress on our strategic priorities.

CISCO SYSTEMS, INC.

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

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

Total revenue increased 1%, with product revenue flat and service revenue increasing 6%. Total gross margin increased 0.8 percentage points due to benefits from Splunk, 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 4.6 percentage points. Operating income as a percentage of revenue decreased by 7.1 percentage points primarily due to incremental operating expenses from Splunk, restructuring and other charges of $675 million and higher amortization of purchased intangibles in the first six months of fiscal 2025. Diluted earnings per share decreased 17%, driven by a decrease of 18% in net income, partially offset by a decrease in diluted share count of 71 million shares.

Strategy and Priorities

Across the globe, businesses and organizations of every size are leveraging Cisco technology to transform and drive better outcomes and experiences. We also help customers navigate emerging technological shifts. Our strategy is to securely connect everything to make those desired outcomes and experiences possible for our customers.

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 27, 2024.

Other Key Financial Measures

The following is a summary of our other key financial measures for the second quarter of fiscal 2025 (in millions):

January 25, 2025July 27, 2024
Cash and cash equivalents and investments$16,853$17,854
Remaining performance obligations$41,268$41,048
Inventories$2,927$3,373
Total debt$31,038$30,962
Six Months Ended
January 25, 2025January 27, 2024
Cash provided by operating activities$5,902$3,179
Repurchases of common stock—stock repurchase program$3,239$2,506
Dividends paid$3,185$3,163

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 27, 2024, 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 end 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 $381 million and $258 million for the first six months of fiscal 2025 and 2024, respectively. The provision (benefit) from the liability related to purchase commitments with contract manufacturers and suppliers was a benefit of $24 million and a provision of $128 million for the first six months of fiscal 2025 and 2024, 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 or 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 chain impacts and risks, see “—Results of Operations—Gross Margin—Supply Chain 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.

Valuation of Goodwill and Purchased Intangible Assets

Goodwill

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 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 2025 and 2024.

Purchased Intangible Assets

The accounting for acquisitions requires significant estimates and judgments in the valuation of purchased intangible assets. Critical estimates used in the valuation of purchased intangible assets include, but are not limited to, the amount and timing of expected future cash flows, useful lives and discount rates. While our estimates of fair value are based on assumptions that are believed to be reasonable, these assumptions are inherently uncertain and unpredictable and would not reflect unanticipated events and circumstances that may occur.

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 group to the future undiscounted cash flows the asset group 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 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

CISCO SYSTEMS, INC.

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

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.

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 15.9% and 16.7% in the second quarter of fiscal 2025 and 2024, respectively and 0.3% and 17.5% in the first six months of fiscal 2025 and 2024, 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. If 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, including a Pillar Two framework that imposes a minimum tax rate of 15% in each taxing jurisdiction, 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 services (in millions, except percentages):

Three Months EndedSix Months Ended
January 25, 2025January 27, 2024Variance in DollarsVariance in PercentJanuary 25, 2025January 27, 2024Variance in DollarsVariance in Percent
Revenue:
Product$10,234$9,232$1,00211%$20,348$20,371$(23)—%
Percentage of revenue73.1%72.2%73.1%74.2%
Services3,7573,5591986%7,4847,0883966%
Percentage of revenue26.9%27.8%26.9%25.8%
Total$13,991$12,791$1,2009%$27,832$27,459$3731%

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

Excluding Splunk, total revenue for the second quarter and first six months of fiscal 2025 decreased by 1% and 8%, respectively, as compared with the corresponding periods of fiscal 2024.

We manage our business primarily on a geographic basis, organized into three geographic segments. Our revenue, which includes product and services for each segment, is summarized in the following table (in millions, except percentages):

Three Months EndedSix Months Ended
January 25, 2025January 27, 2024Variance in DollarsVariance in PercentJanuary 25, 2025January 27, 2024Variance in DollarsVariance in Percent
Revenue:
Americas$8,202$7,510$6929%$16,454$16,532$(78)—%
Percentage of revenue58.6%58.7%59.2%60.2%
EMEA3,8553,48437111%7,4447,1482964%
Percentage of revenue27.6%27.2%26.7%26.0%
APJC1,9341,7981368%3,9343,7791554%
Percentage of revenue13.8%14.1%14.1%13.8%
Total$13,991$12,791$1,2009%$27,832$27,459$3731%

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

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

Total revenue increased by 9%. Product revenue increased by 11% and services revenue increased by 6%. 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 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 25, 2025 Compared with Six Months Ended January 27, 2024

Total revenue increased by 1%. Product revenue was flat and services revenue increased by 6%. Our total revenue reflected growth in the EMEA and APJC segments. Total revenue was flat in the Americas segment.

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 25, 2025January 27, 2024Variance in DollarsVariance in PercentJanuary 25, 2025January 27, 2024Variance in DollarsVariance in Percent
Product revenue:
Americas$5,947$5,346$60111%$11,950$12,197$(247)(2)%
Percentage of product revenue58.1%57.9%58.7%59.9%
EMEA2,9262,63828811%5,6125,4781342%
Percentage of product revenue28.6%28.6%27.6%26.9%
APJC1,3601,2481129%2,7862,696903%
Percentage of product revenue13.3%13.5%13.7%13.2%
Total$10,234$9,232$1,00211%$20,348$20,371$(23)—%

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

Americas

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

Product revenue in the Americas segment increased by 11%, with growth in the enterprise and service provider and cloud markets, partially offset by a decline in the public sector market. From a country perspective, product revenue increased in the United States and Canada by 12% and 9%, respectively, partially offset by declines in Brazil and Mexico of 3% and 19%, respectively.

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

Product revenue in the Americas segment decreased by 2%, with declines in the public sector and service provider and cloud markets, partially offset by growth in the enterprise market. From a country perspective, product revenue decreased in the United States and Mexico by 2% and 21%, respectively, partially offset by growth in product revenue in Canada and Brazil of 6% and 7%, respectively.

EMEA

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

Product revenue in the EMEA segment increased by 11%, with growth in the public sector and enterprise markets, partially offset by a decline in the service provider and cloud market. From a country perspective, product revenue increased in Germany, the United Kingdom and France by 11%, 8% and 14%, respectively.

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

Product revenue in the EMEA segment increased by 2%, driven by growth in the public sector and enterprise markets, partially offset by a decline in the service provider and cloud market. From a country perspective, product revenue increased in Germany by 5%, and by 10% in each of the United Kingdom and France.

APJC

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

Product revenue in the APJC segment increased by 9%, with growth across each of our customer markets. From a country perspective, product revenue increased in Japan, Australia, India and China by 10%, 16%, 23% and 23%, respectively.

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

Product revenue in the APJC segment increased by 3%, with growth in the public sector and service provider and cloud markets. Product revenue in the enterprise market was flat. From a country perspective, product revenue increased in Japan, Australia, India and China by 14%, 17%, 5% and 8%, 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 25, 2025January 27, 2024Variance in DollarsVariance in PercentJanuary 25, 2025January 27, 2024Variance in DollarsVariance in Percent
Product revenue
Networking$6,850$7,081$(231)(3)%$13,603$15,904$(2,301)(14)%
Security2,1119731,138117%4,1291,9842,145108%
Collaboration99698971%2,0812,106(25)(1)%
Observability2771888947%53537815742%
Total$10,234$9,232$1,00211%$20,348$20,371$(23)—%

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

Networking

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

The Networking product category consists of our core networking technologies of switching, routing, wireless, and servers. Revenue from the Networking product category decreased by 3%, or $231 million, as the second quarter of fiscal 2024 included the remaining elevated levels of product shipments. We experienced a revenue decline in Servers, partially offset by growth in Wireless and Switching.

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

Revenue from the Networking product category decreased by 14%, or $2.3 billion. Revenue declined in both campus switching and data center switching, primarily driven by declines 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. We also saw a decline in Internet Infrastructure and Servers.

Security

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

The Security product category consists of our Network Security, Identity and Access Management, SASE and Threat Intelligence, Detection, and Response offerings. Revenue in our Security product category increased by 117%, or $1.1 billion, primarily driven by Threat Intelligence, Detection, and Response offerings, which includes the offerings from Splunk, and growth in our SASE and Network Security offerings. Excluding Splunk, product revenue in the Security product category increased 4%.

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

Revenue from the Security product category increased by 108%, or $2.1 billion, primarily driven by Threat Intelligence, Detection, and Response offerings, which includes the offerings from Splunk, and to a lesser extent, growth in our SASE and Network Security offerings. Excluding Splunk, product revenue in the Security product category increased 3%.

Collaboration

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

The Collaboration product category consists of our Webex Suite, Collaboration Devices, Contact Center and CPaaS offerings. Revenue in our Collaboration product category increased by 1%, or $7 million, primarily driven by growth in our Contact Center, CPaaS and Collaboration Devices offerings, partially offset by declines in our On-Prem Webex Suite offerings.

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

Revenue from our Collaboration product category decreased by 1%, or $25 million, primarily driven by declines in our On-Prem Webex Suite offerings, partially offset by growth in our Contact Center and CPaaS offerings.

CISCO SYSTEMS, INC.

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

Observability

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

The Observability product category consists of our network assurance, monitoring and analytics and observability suite offerings. Revenue in our Observability product category increased 47%, or $89 million, primarily driven by our Observability Suite offerings. Excluding Splunk, revenue in the Observability product category increased 3%.

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

Revenue from the Observability product category increased by 42%, or $157 million, driven by primarily by our Observability Suite offerings. Excluding Splunk, revenue in the Observability product category increased 2%.

Services Revenue by Segment

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

Three Months EndedSix Months Ended
January 25, 2025January 27, 2024Variance in DollarsVariance in PercentJanuary 25, 2025January 27, 2024Variance in DollarsVariance in Percent
Services revenue:
Americas$2,255$2,164$914%$4,505$4,335$1704%
Percentage of service revenue60.0%60.8%60.2%61.2%
EMEA9298468310%1,8321,67016210%
Percentage of service revenue24.7%23.8%24.5%23.6%
APJC573550234%1,1481,084646%
Percentage of service revenue15.3%15.4%15.3%15.2%
Total$3,757$3,559$1986%$7,484$7,088$3966%

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

Services revenue increased 6% in the second quarter of fiscal 2025 compared with the second quarter of fiscal 2024, primarily driven by Splunk and advisory services. Services revenue increased across all of our geographic segments for the second quarter of fiscal 2025.

Services revenue increased 6% in the first six months of fiscal 2025 compared to the first six months of fiscal 2024, primarily driven by Splunk and revenue growth in our solution support offerings, network support offerings and advisory services. Services 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 25, 2025January 27, 2024January 25, 2025January 27, 2024January 25, 2025January 27, 2024January 25, 2025January 27, 2024
Gross margin:
Product$6,521$5,78963.7%62.7%$13,109$12,97164.4%63.7%
Services2,5902,42868.9%68.2%5,1234,80368.5%67.8%
Total$9,111$8,21765.1%64.2%$18,232$17,77465.5%64.7%

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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 2025, as compared with the corresponding prior year periods:

Product Gross Margin Percentage
Three Months EndedSix Months Ended
Fiscal 202462.7%63.7%
Productivity (1)1.5%0.8%
Product pricing(1.5)%(1.7)%
Mix of products sold2.5%3.2%
Amortization of purchased intangible assets(1.4)%(1.5)%
Others(0.1)%(0.1)%
Fiscal 202563.7%64.4%

(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 25, 2025 Compared with Three Months Ended January 27, 2024

Product gross margin increased by 1.0 percentage points primarily driven by favorable product mix largely due to benefits from Splunk and productivity benefits, partially offset by negative impacts from pricing and the amortization of purchased intangible assets primarily related to Splunk.

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

Product gross margin increased by 0.7 percentage points primarily driven by benefits from Splunk, favorable product mix, and productivity benefits, driven by an import duty benefit, partially offset by negative impacts from pricing and the amortization of purchased intangible assets primarily related to Splunk.

Supply Chain Impacts and Risks

In past periods, we took multiple actions in order to mitigate component shortages and address significant supply constraints. These supply constraints resulted in the need to secure long-term supply and increased inventory supply chain balances compared to historical levels. This in turn has significantly increased our supply chain exposure, which has resulted in negative impacts to our product gross margin in recent periods and may result in further negative impacts in future periods. This exposure includes potential material excess and obsolete or other charges if product demand significantly decreases for a sustained duration, we are unable to generate demand for certain products planned for development, or we are unable to mitigate the remaining supply chain exposures.

Services Gross Margin

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

Our services gross margin percentage increased by 0.7 percentage points primarily due to higher sales volume and lower delivery costs, partially offset by higher headcount-related costs and an unfavorable mix of service offerings.

Our services 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 25, 2025 Compared with Six Months Ended January 27, 2024

Services gross margin percentage increased by 0.7 percentage points primarily due to higher sales volume and lower delivery costs, partially offset by higher headcount-related costs and an unfavorable mix of service offerings.

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

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 25, 2025January 27, 2024January 25, 2025January 27, 2024January 25, 2025January 27, 2024January 25, 2025January 27, 2024
Gross margin:
Americas$5,545$4,93267.6%65.7%$11,285$10,90168.6%65.9%
EMEA2,7502,37371.3%68.1%5,2724,91970.8%68.8%
APJC1,3201,22668.3%68.2%2,6482,55467.3%67.6%
Segment total9,6148,53268.7%66.7%19,20418,37369.0%66.9%
Unallocated corporate items (1)(503)(315)(972)(599)
Total$9,111$8,21765.1%64.2%$18,232$17,77465.5%64.7%

(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 25, 2025 Compared with Three Months Ended January 27, 2024

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

Gross margin percentage in our EMEA segment increased primarily due to favorable product mix, productivity improvements and higher services gross margin, partially offset by pricing erosion.

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

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

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

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

The APJC segment gross margin percentage decrease was primarily driven by pricing erosion, 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 25, 2025January 27, 2024Variance in DollarsVariance in PercentJanuary 25, 2025January 27, 2024Variance in DollarsVariance in Percent
Research and development$2,299$1,943$35618%$4,585$3,856$72919%
Percentage of revenue16.4%15.2%16.5%14.0%
Sales and marketing2,6722,4582149%5,4244,9644609%
Percentage of revenue19.1%19.2%19.5%18.1%
General and administrative75264211017%1,5471,31423318%
Percentage of revenue5.4%5.0%5.6%4.8%
Total$5,723$5,043$68013%$11,556$10,134$1,42214%
Percentage of revenue40.9%39.4%41.5%36.9%

CISCO SYSTEMS, INC.

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

R&D Expenses

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

R&D expenses increased due to incremental expenses from Splunk, higher headcount-related expenses, higher cash compensation from acquisitions, higher share-based compensation expense, and higher discretionary 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 25, 2025 Compared with Six Months Ended January 27, 2024

R&D expenses increased due to incremental expenses from Splunk, higher headcount-related expenses, higher cash compensation from acquisitions, higher share-based compensation expense and higher discretionary spending.

Sales and Marketing Expenses

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

Sales and marketing expenses increased primarily due to incremental expenses from Splunk, higher headcount-related expenses, higher cash compensation from acquisitions and higher discretionary spending, partially offset by lower contracted services spending.

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

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

G&A Expenses

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

G&A expenses increased primarily due to incremental expenses from Splunk, higher headcount-related expenses and higher share-based compensation expense.

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

G&A expenses increased due to incremental expenses from Splunk, higher headcount-related expenses, higher share-based compensation expense and higher acquisition and divestitures related costs, partially offset by lower contracted services spending.

Effect of Foreign Currency

In the second quarter of fiscal 2025, foreign currency fluctuations, net of hedging, decreased the combined R&D, sales and marketing, and G&A expenses by approximately $20 million, or 0.4%, compared with the second quarter of fiscal 2024.

In the first six months of fiscal 2025, foreign currency fluctuations, net of hedging, decreased the combined R&D, sales and marketing, and G&A expenses by approximately $11 million, or 0.1%, compared with the first six months of fiscal 2024.

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 25, 2025January 27, 2024January 25, 2025January 27, 2024
Amortization of purchased intangible assets:
Cost of sales$340$180$665$366
Operating expenses26566530133
Total$605$246$1,195$499

For each of the second quarter and first six months of fiscal 2025, the increase in amortization of purchased intangible assets was primarily due to amortization of purchased intangibles from our recent acquisitions, including the acquisition of Splunk, and impairment charges of $19 million. The increase was partially offset by certain purchased intangible assets that became

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

fully amortized. The impairment charges were as a result of declines in estimated fair value resulting from the reductions in or the elimination of expected future cash flows associated with certain technology intangible assets.

Restructuring and Other Charges

In the first quarter of fiscal 2025, we announced a restructuring plan in order to allow us to invest in key growth opportunities and drive more efficiencies in our business. This restructuring plan is expected to impact approximately 7% of our global workforce with estimated pre-tax charges of approximately $1 billion. In connection with this restructuring plan, we incurred charges of $10 million and $675 million in the second quarter and first six months of fiscal 2025. We expect this plan to be substantially completed by the end of fiscal 2025.

We expect to reinvest substantially all of the cost savings from this restructuring plan in our key growth opportunities. As a result, the overall cost savings from this restructuring plan is 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 25, 2025January 27, 2024January 25, 2025January 27, 2024
Operating income$3,113$3,096$5,471$7,372
Operating income as a percentage of revenue22.3%24.2%19.7%26.8%

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

Operating income increased by 1%, and operating income as a percentage of revenue decreased by 1.9 percentage points. The increase in operating income was primarily due to a revenue increase partially offset by higher operating expenses, including incremental expenses from Splunk, and higher amortization of purchased intangible assets. The decrease in operating income as a percentage of revenue was primarily due to an operating expenses percentage increase.

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

Operating income decreased by 26%, and operating income as a percentage of revenue decreased by 7.1 percentage points. These changes resulted primarily from incremental expenses from Splunk, higher restructuring and other charges and higher amortization of purchased intangible assets, partially offset by a revenue increase and gross margin percentage increase (driven by favorable product mix and productivity improvements, partially offset by pricing erosion).

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 25, 2025January 27, 2024Variance in DollarsJanuary 25, 2025January 27, 2024Variance in Dollars
Interest income$238$324$(86)$524$684$(160)
Interest expense(404)(120)(284)(822)(231)(591)
Interest income (expense), net$(166)$204$(370)$(298)$453$(751)

For each of the second quarter and first six months of fiscal 2025, the decrease in interest income was driven by a lower average balance of cash and available-for-sale debt investments and lower interest rates. The increase in interest expense was primarily driven by the issuances of senior notes and commercial paper.

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

Other Income (Loss), Net The components of other income (loss), net, are summarized as follows (in millions):

Three Months EndedSix Months Ended
January 25, 2025January 27, 2024Variance in DollarsJanuary 25, 2025January 27, 2024Variance in Dollars
Gains (losses) on investments, net:
Available-for-sale debt investments$(20)$(23)$3$(45)$(43)$(2)
Marketable equity investments2162(41)451629
Privately held investments(27)(150)12347(155)202
Net gains (losses) on investments(26)(111)8547(182)229
Other gains (losses), net(34)(28)(6)(66)(40)(26)
Other income (loss), net$(60)$(139)$79$(19)$(222)$203

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

The change in our other income (loss), net was primarily driven by lower impairment charges on our privately held investments partially offset by lower gains on our marketable equity investments.

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

The change in our other income (loss), net was primarily driven by lower impairment charges on our privately held investments, and higher unrealized gains on our privately held investments and marketable equity investments.

Provision for Income Taxes

Three Months Ended January 25, 2025 Compared with Three Months Ended January 27, 2024

The provision for income taxes resulted in an effective tax rate of 15.9% for the second quarter of fiscal 2025 compared with an effective tax rate of 16.7% for the second quarter of fiscal 2024. The decrease in the effective tax rate was primarily due to an increase in the U.S. federal research tax credit benefit.

Six Months Ended January 25, 2025 Compared with Six Months Ended January 27, 2024

The provision for income taxes resulted in an effective tax rate of 0.3% for the first six months of fiscal 2025 compared with 17.5% for the first six months of fiscal 2024. The decrease in the effective tax rate was primarily due to a $720 million benefit related to a U.S. Tax Court opinion issued during the first quarter of fiscal 2025 regarding the U.S. taxation of deemed foreign dividends in the transition year of the Tax Cuts and Jobs Act (our fiscal 2018) and an increase in the U.S. federal research tax credit 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 25, 2025July 27, 2024Increase (Decrease)
Cash and cash equivalents$8,556$7,508$1,048
Available-for-sale debt investments7,9589,865(1,907)
Marketable equity securities339481(142)
Total$16,853$17,854$(1,001)

The net decrease in cash and cash equivalents and investments in the first six months of fiscal 2025 was primarily driven by cash returned to stockholders in the form of repurchases of common stock of $3.2 billion and cash dividends of $3.2 billion, capital expenditures of $0.4 billion and net cash paid for acquisitions and divestitures of $0.3 billion. These uses of cash were partially offset by net cash provided by operating activities of $5.9 billion.

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 25, 2025 and July 27, 2024, 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 25, 2025January 27, 2024
Net cash provided by operating activities$5,902$3,179
Acquisition of property and equipment(427)(304)
Free cash flow$5,475$2,875

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.

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

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 2025
January 25, 2025$0.40$1,59321$58.58$1,236$2,829
October 26, 2024$0.40$1,59240$49.56$2,003$3,595
Fiscal 2024
July 27, 2024$0.40$1,60643$46.80$2,002$3,608
April 27, 2024$0.40$1,61526$49.22$1,256$2,871
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

On February 12, 2025, our Board of Directors declared a quarterly dividend of $0.41 per common share to be paid on April 23, 2025, to all stockholders of record as of the close of business on April 3, 2025. Future dividends will be subject to the approval of our Board of Directors.

On February 12, 2025, our Board of Directors authorized a $15 billion increase to the stock repurchase program. The remaining authorized amount for stock repurchases under this program, including the additional authorization, is approximately $17 billion, with no termination date.

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

January 25, 2025July 27, 2024Increase (Decrease)
Accounts receivable, net$5,669$6,685$(1,016)

Our accounts receivable net, as of January 25, 2025 decreased by approximately 15%, as compared with the end of fiscal 2024, primarily due to timing and amount of product and service billings in the second quarter of fiscal 2025 compared with the fourth quarter of fiscal 2024.

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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 25, 2025July 27, 2024July 29, 2023Variance vs. July 27, 2024Variance vs. July 29, 2023
Inventories$2,927$3,373$3,644$(446)$(717)
Inventory purchase commitments$5,824$5,158$7,253$666$(1,429)
Inventory deposits and prepayments$1,003$973$1,109$30$(106)

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

January 25, 2025July 27, 2024July 29, 2023Variance vs. July 27, 2024Variance vs. July 29, 2023
Less than 1 year$5,054$3,952$5,270$1,102$(216)
1 to 3 years6811,0851,783(404)(1,102)
3 to 5 years89121200(32)(111)
Total$5,824$5,158$7,253$666$(1,429)

Inventory as of January 25, 2025 decreased by 13% and inventory purchase commitments with contract manufacturers and suppliers increased by 13% from our balances at the end of fiscal 2024. The combined increase in our inventory and inventory purchase commitments was 3% as compared with the end of fiscal 2024.

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 are entered into directly with suppliers and relate to fixed-dollar commitments 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 25, 2025July 27, 2024Increase (Decrease)
Loan receivables, net$5,378$5,808$(430)
Lease receivables, net93690630
Total, net$6,314$6,714$(400)

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 6% as compared with the end of fiscal 2024.

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

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

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 $12.2 billion and $14.8 billion for the first six months of fiscal 2025 and 2024, 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 $1.2 billion as of January 25, 2025 and July 27, 2024, 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 25, 2025, the total maximum potential future payments related to these guarantees was approximately $125 million, of which approximately $13 million was recorded as deferred revenue.

Borrowings

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

Maturity DateJanuary 25, 2025July 27, 2024
Senior notes:
Fixed-rate notes:
3.50%June 15, 2025$500$500
4.90%February 26, 20261,0001,000
2.95%February 28, 2026750750
2.50%September 20, 20261,5001,500
4.80%February 26, 20272,0002,000
4.85%February 26, 20292,5002,500
4.95%February 26, 20312,5002,500
5.05%February 26, 20342,5002,500
5.90%February 15, 20392,0002,000
5.50%January 15, 20402,0002,000
5.30%February 26, 20542,0002,000
5.35%February 26, 20641,0001,000
Total$20,250$20,250

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 25, 2025.

Commercial Paper We have a short-term debt financing program in which up to $15.0 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 $10.9 billion in commercial paper notes outstanding as of each of January 25, 2025 and July 27, 2024.

Credit Facility 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 25, 2025, 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 25, 2025July 27, 2024Increase (Decrease)
Product$20,321$20,055$266
Services20,94720,993(46)
Total$41,268$41,048$220
Short-term RPO$21,017$20,882$135
Long-term RPO20,25120,16685
Total$41,268$41,048$220

Total remaining performance obligations as of January 25, 2025 increased 1% compared to the end of fiscal 2024. Remaining performance obligations for product increased by 1% compared to the end of fiscal 2024. Remaining performance obligations for services were flat. We expect approximately 51% 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 25, 2025July 27, 2024Increase (Decrease)
Product$13,033$13,219$(186)
Services14,76215,256(494)
Total$27,795$28,475$(680)
Reported as:
Current$15,999$16,249$(250)
Noncurrent11,79612,226(430)
Total$27,795$28,475$(680)

Total deferred revenue decreased 2% compared to the end of fiscal 2024. The decrease in deferred product revenue of 1% was primarily due to lower business volume. The decrease in deferred services revenue of 3% was driven by lower business volume and ongoing amortization of deferred services revenue.

Contractual Obligations

Transition Tax Payable

The income tax payable outstanding as of January 25, 2025 for the U.S. transition tax on accumulated earnings for foreign subsidiaries was $1.6 billion, which is payable in the second quarter of fiscal 2026.

For our Contractual Obligations see our Annual Report on Form 10-K for the fiscal year ended July 27, 2024.

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 continued employment with us of certain employees of the acquired entities. See Note 4 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 as of each of January 25, 2025 and July 27, 2024.

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 25, 2025 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. 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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