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Table of Contents

 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
_____________________________________
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 26, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
          
For the transition period from              to             
Commission file number 0-18225 
_____________________________________
ciscologo20.jpg
CISCO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California
 
77-0059951
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
170 West Tasman Drive
San Jose, California 95134
(Address of principal executive office and zip code)
(408) 526-4000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and formal fiscal year, if changed since last report.)
_____________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
CSCO
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No    
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
  
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  No 
Number of shares of the registrant’s common stock outstanding as of November 14, 2019: 4,242,262,570
____________________________________ 

1

Table of Contents

Cisco Systems, Inc.
Form 10-Q for the Quarter Ended October 26, 2019
INDEX
 
 
 
 
Page
Part I
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
Part II.
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 


2

Table of Contents

PART I. FINANCIAL INFORMATION 
Item 1.
Financial Statements (Unaudited)
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
(Unaudited)
 
October 26, 2019
 
July 27, 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,587

 
$
11,750

Investments
19,448

 
21,663

Accounts receivable, net of allowance for doubtful accounts of $136 as of each October 26, 2019 and July 27, 2019
4,878

 
5,491

Inventories
1,344

 
1,383

Financing receivables, net
5,026

 
5,095

Other current assets
2,433

 
2,373

Total current assets
41,716

 
47,755

Property and equipment, net
2,669

 
2,789

Financing receivables, net
4,831

 
4,958

Goodwill
33,578

 
33,529

Purchased intangible assets, net
2,107

 
2,201

Deferred tax assets
3,963

 
4,065

Other assets
3,628

 
2,496

TOTAL ASSETS
$
92,492

 
$
97,793

LIABILITIES AND EQUITY

 

Current liabilities:

 

Short-term debt
$
4,000

 
$
10,191

Accounts payable
2,016

 
2,059

Income taxes payable
794

 
1,149

Accrued compensation
2,735

 
3,221

Deferred revenue
10,646

 
10,668

Other current liabilities
4,406

 
4,424

Total current liabilities
24,597

 
31,712

Long-term debt
14,497

 
14,475

Income taxes payable
8,919

 
8,927

Deferred revenue
7,956

 
7,799

Other long-term liabilities
2,100

 
1,309

Total liabilities
58,069

 
64,222

Commitments and contingencies (Note 14)

 

Equity:
 
 
 
Cisco shareholders’ equity:
 
 
 
Preferred stock, no par value: 5 shares authorized; none issued and outstanding

 

Common stock and additional paid-in capital, $0.001 par value: 20,000 shares authorized; 4,241 and 4,250 shares issued and outstanding at October 26, 2019 and July 27, 2019, respectively
40,321

 
40,266

Accumulated deficit
(5,083
)
 
(5,903
)
Accumulated other comprehensive loss
(815
)
 
(792
)
Total equity
34,423

 
33,571

TOTAL LIABILITIES AND EQUITY
$
92,492

 
$
97,793

See Notes to Consolidated Financial Statements.

3

Table of Contents

CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share amounts)
(Unaudited) 
 
Three Months Ended
 
October 26, 2019
 
October 27, 2018
REVENUE:
 
 
 
Product
$
9,878

 
$
9,890

Service
3,281

 
3,182

Total revenue
13,159


13,072

COST OF SALES:



Product
3,524

 
3,799

Service
1,171

 
1,127

Total cost of sales
4,695


4,926

GROSS MARGIN
8,464

 
8,146

OPERATING EXPENSES:



Research and development
1,666

 
1,608

Sales and marketing
2,480

 
2,410

General and administrative
519

 
211

Amortization of purchased intangible assets
36

 
34

Restructuring and other charges
184

 
78

Total operating expenses
4,885


4,341

OPERATING INCOME
3,579


3,805

Interest income
273

 
344

Interest expense
(178
)
 
(221
)
Other income (loss), net
12

 
(19
)
Interest and other income (loss), net
107


104

INCOME BEFORE PROVISION FOR INCOME TAXES
3,686


3,909

Provision for income taxes
760

 
360

NET INCOME
$
2,926


$
3,549




 


Net income per share:


 


Basic
$
0.69


$
0.78

Diluted
$
0.68


$
0.77

Shares used in per-share calculation:





Basic
4,246

 
4,565

Diluted
4,273

 
4,614

See Notes to Consolidated Financial Statements.

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Table of Contents

CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
 
Three Months Ended
 
October 26, 2019
 
October 27, 2018
Net income
$
2,926

 
$
3,549

Available-for-sale investments:
 
 
 
Change in net unrealized gains and losses, net of tax benefit (expense) of $(14) and $13 for the first quarter of fiscal 2020 and fiscal 2019, respectively
73

 
5

Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $5 and $0 for the first quarter of fiscal 2020 and fiscal 2019, respectively
(5
)
 
6


68

 
11

Cash flow hedging instruments:
 
 
 
Change in unrealized gains and losses, net of tax benefit (expense) of $1 for each of the first quarter of fiscal 2020 and fiscal 2019

 
(3
)
Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $0 for each of the first quarter of fiscal 2020 and fiscal 2019

 



 
(3
)
Net change in cumulative translation adjustment and actuarial gains and losses net of tax benefit (expense) of $0 and $(1) for the first quarter of fiscal 2020 and fiscal 2019, respectively
(91
)
 
(209
)
Other comprehensive loss
(23
)
 
(201
)
Comprehensive income
2,903

 
3,348

Comprehensive (income) loss attributable to noncontrolling interests

 

Comprehensive income attributable to Cisco Systems, Inc.
$
2,903

 
$
3,348

See Notes to Consolidated Financial Statements.



5

Table of Contents

CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
Three Months Ended

October 26, 2019
 
October 27, 2018
Cash flows from operating activities:
 
 
 
Net income
$
2,926

 
$
3,549

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and other
461

 
465

Share-based compensation expense
395

 
403

Provision for receivables
50

 
8

Deferred income taxes
81

 
(72
)
(Gains) losses on divestitures, investments and other, net
(8
)
 
7

Change in operating assets and liabilities, net of effects of acquisitions and divestitures:

 

Accounts receivable
515

 
892

Inventories
34

 
(34
)
Financing receivables
146

 
273

Other assets
59

 
(295
)
Accounts payable
(45
)
 
(153
)
Income taxes, net
(330
)
 
(437
)
Accrued compensation
(473
)
 
(348
)
Deferred revenue
158

 
(309
)
Other liabilities
(382
)
 
(186
)
Net cash provided by operating activities
3,587

 
3,763

Cash flows from investing activities:
 
 
 
Purchases of investments
(2,028
)
 
(484
)
Proceeds from sales of investments
2,342

 
2,805

Proceeds from maturities of investments
1,966

 
2,541

Acquisitions and divestitures
(163
)
 
(1,964
)
Purchases of investments in privately held companies
(54
)
 
(29
)
Return of investments in privately held companies
57

 
16

Acquisition of property and equipment
(202
)
 
(212
)
Proceeds from sales of property and equipment
4

 
2

Net cash provided by investing activities
1,922

 
2,675

Cash flows from financing activities:
 
 
 
Issuances of common stock
2

 
8

Repurchases of common stockrepurchase program
(784
)
 
(5,076
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(194
)
 
(318
)
Short-term borrowings, original maturities of 90 days or less, net
(3,470
)
 

Repayments of debt
(2,720
)
 

Dividends paid
(1,486
)
 
(1,500
)
Other
(16
)
 
(59
)
Net cash used in financing activities
(8,668
)
 
(6,945
)
Net decrease in cash, cash equivalents, and restricted cash
(3,159
)
 
(507
)
Cash, cash equivalents, and restricted cash, beginning of period
11,772

 
8,993

Cash, cash equivalents, and restricted cash, end of period
$
8,613

 
$
8,486

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
204

 
$
271

Cash paid for income taxes, net
$
1,009

 
$
869




See Notes to Consolidated Financial Statements.

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Table of Contents

CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except per-share amounts)
(Unaudited)
Three Months Ended October 26, 2019
Shares of
Common
Stock
 
Common Stock
and
Additional
Paid-In Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total Cisco
Shareholders’
Equity
 
Non-controlling
Interests
 
Total Equity
BALANCE AT JULY 27, 2019
4,250

 
$
40,266

 
$
(5,903
)
 
$
(792
)
 
$
33,571

 
$

 
$
33,571

Net income
 
 
 
 
2,926

 
 
 
2,926

 
 
 
2,926

Other comprehensive loss
 
 
 
 
 
 
(23
)
 
(23
)
 
 
 
(23
)
Issuance of common stock
11

 
2

 
 
 
 
 
2

 
 
 
2

Repurchase of common stock
(16
)
 
(148
)
 
(620
)
 
 
 
(768
)
 
 
 
(768
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(4
)
 
(194
)
 
 
 
 
 
(194
)
 
 
 
(194
)
Cash dividends declared ($0.35 per common share)
 
 
 
 
(1,486
)
 
 
 
(1,486
)
 
 
 
(1,486
)
Share-based compensation
 
 
395

 
 
 
 
 
395

 
 
 
395

BALANCE AT OCTOBER 26, 2019
4,241

 
$
40,321

 
$
(5,083
)
 
$
(815
)
 
$
34,423

 
$

 
$
34,423



Three Months Ended October 27, 2018
Shares of
Common
Stock
 
Common Stock
and
Additional
Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total Cisco
Shareholders’
Equity
 
Non-controlling
Interests
 
Total  Equity
BALANCE AT JULY 28, 2018
4,614

 
$
42,820

 
$
1,233

 
$
(849
)
 
$
43,204

 
$

 
$
43,204

Net income
 
 
 
 
3,549

 
 
 
3,549

 
 
 
3,549

Other comprehensive loss
 
 
 
 
 
 
(201
)
 
(201
)
 

 
(201
)
Issuance of common stock
19

 
8

 
 
 
 
 
8

 
 
 
8

Repurchase of common stock
(109
)
 
(1,016
)
 
(4,010
)
 
 
 
(5,026
)
 
 
 
(5,026
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(7
)
 
(318
)
 
 
 
 
 
(318
)
 
 
 
(318
)
Cash dividends declared ($0.33 per common share)
 
 
 
 
(1,500
)
 
 
 
(1,500
)
 
 
 
(1,500
)
Effect of adoption of accounting standards
 
 
 
 
3,897

 
(168
)
 
3,729

 
 
 
3,729

Share-based compensation
 
 
403

 
 
 
 
 
403

 
 
 
403

BALANCE AT OCTOBER 27, 2018
4,517

 
$
41,897

 
$
3,169

 
$
(1,218
)
 
$
43,848

 
$

 
$
43,848






See Notes to Consolidated Financial Statements.


7

Table of Contents

CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
Basis of Presentation
The fiscal year for Cisco Systems, Inc. (the “Company,” “Cisco,” “we,” “us,” or “our”) is the 52 or 53 weeks ending on the last Saturday in July. Fiscal 2020 and fiscal 2019 are each 52-week fiscal years. The Consolidated Financial Statements include our accounts and those of our subsidiaries. All intercompany accounts and transactions have been eliminated. We conduct business globally and are primarily managed on a geographic basis in the following three geographic segments: the Americas; Europe, Middle East, and Africa (EMEA); and Asia Pacific, Japan, and China (APJC).
We have prepared the accompanying financial data as of October 26, 2019 and for the first quarter of fiscal 2020 and fiscal 2019, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The July 27, 2019 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, we believe that the disclosures are adequate to make the information presented not misleading. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended July 27, 2019.
Our consolidated financial statements include our accounts and entities consolidated under the variable interest and voting models. The noncontrolling interests attributed to these investments, if any, are presented as a separate component from our equity in the equity section of the Consolidated Balance Sheets. The share of earnings attributable to the noncontrolling interests are not presented separately in the Consolidated Statements of Operations as these amounts are not material for any of the fiscal periods presented.
In the opinion of management, all normal recurring adjustments necessary to present fairly the consolidated balance sheet as of October 26, 2019, the results of operations, the statements of comprehensive income, the statements of cash flows and the statements of equity for the first quarter of fiscal 2020 and fiscal 2019, as applicable, have been made. The results of operations for the first quarter of fiscal 2020 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Certain reclassifications have been made to the amounts in prior periods in order to conform to the current period’s presentation. We have evaluated subsequent events through the date that the financial statements were issued.

2.
Recent Accounting Pronouncements
(a)
New Accounting Updates Recently Adopted
Leases In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 842, Leases, a new standard requiring lessees to recognize operating and finance lease liabilities on the balance sheet, as well as corresponding right-of-use (ROU) assets. This standard also made some changes to lessor accounting and aligns key aspects of the lessor accounting model with the revenue recognition standard. In addition, new disclosures are required to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASC 842 requires adoption using the modified retrospective approach, with the option of applying the requirements of the standard either i) retrospectively to each prior comparative reporting period presented, or ii) retrospectively at the beginning of the period of adoption. We adopted this standard at the beginning of our first quarter of fiscal 2020 and applied it at the beginning of the period of adoption and did not restate prior periods. We adopted ASC 842 on July 28, 2019 which resulted in the recognition of $1.2 billion of operating lease ROU assets included in other assets and $1.2 billion of operating lease liabilities included in other current liabilities and other long-term liabilities. There were no transition adjustments recorded from the adoption of ASC 842 as a lessor.
We have elected to apply the package of practical expedients permitted under the transition guidance within ASC 842 which does not require reassessment of initial direct costs, classification of a lease and definition of a lease. We also elected additional practical expedients which resulted in: i) allowing us not to reassess the accounting treatment for existing or expired land easements in transition; ii) combining lease and non-lease components and iii) not recording leases with an initial term of less than 12 months on our Consolidated Balance Sheet.
As a lessee, we determine if an arrangement is a lease at commencement. Our ROU lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments related to the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use incremental borrowing rates based on information available at the commencement date to determine the present value of our lease payments.

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Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


As a lessor, we determine if an arrangement is a lease at inception. We provide leasing arrangements for our equipment to certain qualified customers. Our lease portfolio primarily consists of sales-type leases. We allocate the consideration in a bundled contract with our customers based on relative standalone selling prices of our lease and non-lease components. The residual value on our leased equipment is determined at the inception of the lease based on an analysis of estimates of the value of equipment, market factors and historical customer behavior. Residual value estimates are reviewed on a periodic basis and other-than-temporary declines are expensed in the period they occur. Our leases generally provide an end-of-term option for the customer to extend the lease under mutually-agreed terms, return the leased equipment, or purchase the equipment for either the then-market value of the equipment or a pre-determined purchase price. If a customer chooses to terminate their lease prior to the original end of term date, the customer is required to pay all remaining lease payments in full.
For additional information, see Note 8.
(b)
Recent Accounting Standards or Updates Not Yet Effective
Credit Losses of Financial Instruments In June 2016, the FASB issued an accounting standard update that requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The accounting standard update will be effective for us beginning in the first quarter of fiscal 2021 on a modified retrospective basis. We are currently evaluating the impact of this accounting standard update on our Consolidated Financial Statements.

3.
Revenue
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 software-as-a-service (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 refer to our term software licenses, security software licenses, SaaS, and associated service arrangements as subscription offers.
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 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.
Significant Judgments
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 apply judgment in determining the transaction price as we may be required to estimate variable consideration when determining the amount of revenue to recognize. Variable consideration includes contractual potential penalties and various rebate, cooperative marketing and other incentive programs that we offer to our distributors, 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.

9

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


We assess certain software licenses, such as for security software, that contain critical updates or upgrades which customers can download throughout the contract term. Without these updates or upgrades, the functionality of the software would diminish over a relatively short time period. These updates or upgrades provide the customer the full functionality of the purchased security software licenses and are required to maintain the security license's utility as the risks and threats in the environment are rapidly changing. In these circumstances, the revenue from these software arrangements is recognized as a single performance obligation satisfied over the contract term.
(a)
Disaggregation of Revenue
We disaggregate our revenue into groups of similar products and services that depict the nature, amount, and timing of revenue and cash flows for our various offerings. The sales cycle, contractual obligations, customer requirements, and go-to-market strategies differ for each of our product categories, resulting in different economic risk profiles for each category. The following table presents this disaggregation of revenue (in millions):
 
Three Months Ended
 
October 26,
2019
 
October 27,
2018
Revenue:
 
 
 
Infrastructure Platforms
$
7,538

 
$
7,622

Applications
1,499

 
1,419

Security
815

 
670

Other Products
26

 
178

Total Product
9,878

 
9,890

Services
3,281

 
3,182

Total (1)
$
13,159

 
$
13,072

Amounts may not sum due to rounding.
(1) During the second quarter of fiscal 2019, we completed the divestiture of the Service Provider Video Software Solutions (“SPVSS”) business. Total revenue includes SPVSS business revenue of $168 million for the first quarter of fiscal 2019.
Infrastructure Platforms consist of our core networking technologies of switching, routing, wireless, and data center products that are designed to work together to deliver networking capabilities and transport and/or store data. These technologies consist of both hardware and software offerings, including software licenses and SaaS, that help our customers build networks, automate, orchestrate, integrate, and digitize data. We are shifting and expanding more of our business to software and subscriptions across our core networking portfolio. Our hardware and perpetual software in this category are distinct performance obligations where revenue is recognized upfront upon transfer of control. Term software licenses are multiple performance obligations where the term license is recognized upfront upon transfer of control with the associated software maintenance revenue recognized ratably over the contract term. SaaS arrangements in this category have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term.
Applications consists of offerings that utilize the core networking and data center platforms to provide their functions. The products consist primarily of software offerings, including software licenses and SaaS, as well as hardware. Our perpetual software and hardware in this category are distinct performance obligations where revenue is recognized upfront upon transfer of control. Term software licenses are multiple performance obligations where the term license is recognized upfront upon transfer of control with the associated software maintenance revenue recognized ratably over the contract term. SaaS arrangements in this category have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term.
Security primarily includes our network security, cloud and email security, identity and access management, advanced threat protection, and unified threat management products. These products consist of both hardware and software offerings, including software licenses and SaaS. Updates and upgrades for the term software licenses are critical for our software to perform its intended commercial purpose because of the continuous need for our software to secure our customers' network environments against frequent threats. Therefore, security software licenses are generally represented by a single distinct performance obligation with revenue recognized ratably over the contract term. Our hardware and perpetual software in this category are distinct performance obligations where revenue is recognized upfront upon transfer of control. SaaS arrangements in this category have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term.

10

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Other Products primarily includes our cloud and system management products. These products include both hardware and software licenses. Our offerings in this category are distinct performance obligations where revenue is recognized upfront upon transfer of control.
In addition to our product offerings, we provide a broad range of service and support options for our customers, including technical support services and advanced services. Technical support services represent the majority of these offerings which are distinct performance obligations that are satisfied over time with revenue recognized ratably over the contract term. Advanced services are distinct performance obligations that are satisfied over time with revenue recognized as services are delivered.
The sales arrangements as discussed above are typically made pursuant to customer purchase orders based on master purchase or partner agreements. Cash is received based on our standard payment terms which is typically 30 days. We provide financing arrangements to customers for all of our hardware, software and service offerings. Refer to Note 9 for additional information. For these arrangements, cash is typically received over time.
(b)
Contract Balances
Accounts receivable, net was $4.9 billion as of October 26, 2019 compared to $5.5 billion as of July 27, 2019, as reported on the Consolidated Balance Sheet.
Contract assets consist of unbilled receivables and are recorded when revenue is recognized in advance of scheduled billings to our customers. These amounts are primarily related to software and service arrangements where transfer of control has occurred but we have not yet invoiced. As of October 26, 2019 and July 27, 2019, our contract assets for these unbilled receivables were $954 million and $860 million, respectively, and were included in other current assets and other assets.
Contract liabilities consist of deferred revenue. Deferred revenue was $18.6 billion as of October 26, 2019 compared to $18.5 billion as of July 27, 2019. We recognized approximately $3.7 billion of revenue during the first quarter of fiscal 2020, that was included in the deferred revenue balance at July 27, 2019.
(c)
Remaining Performance Obligations
Remaining Performance Obligations (RPO) are comprised of deferred revenue plus unbilled contract revenue. As of October 26, 2019, the aggregate amount of RPO was $24.9 billion, comprised of $18.6 billion of deferred revenue and $6.3 billion of unbilled contract revenue. We expect approximately 56% of this amount to be recognized as revenue over the next year. As of July 27, 2019, the aggregate amount of RPO was $25.3 billion, comprised of $18.5 billion of deferred revenue and $6.8 billion of unbilled contract revenue. Unbilled contract revenue represents noncancelable contracts for which we have not invoiced, have an obligation to perform, and revenue has not yet been recognized in the financial statements.
(d)
Capitalized Contract Acquisition Costs
We capitalize direct and incremental costs incurred to acquire contracts, primarily sales commissions, for which the associated revenue is expected to be recognized in future periods. We incur these costs in connection with both initial contracts and renewals. These costs are initially deferred and typically amortized over the term of the customer contract which corresponds to the period of benefit. Deferred sales commissions were $707 million and $750 million as of October 26, 2019 and July 27, 2019, respectively, and were included in other current assets and other assets. The amortization expense associated with these costs was $116 million and $112 million for the first quarter of fiscal 2020 and fiscal 2019, respectively, and was included in sales and marketing expenses.

4.
Acquisitions and Divestitures
We completed four acquisitions during the first quarter of fiscal 2020. A summary of the allocation of the total purchase consideration is presented as follows (in millions):
 
Purchase Consideration
 
Net Tangible Assets Acquired (Liabilities Assumed)
 
Purchased Intangible Assets
 
Goodwill
Total acquisitions (four in total)
$
182

 
$
(9
)
 
$
108

 
$
83

The total purchase consideration related to acquisitions completed during the first quarter of fiscal 2020 consisted of cash consideration. The total cash and cash equivalents acquired from these acquisitions was approximately $10 million. Total transaction costs related to acquisition and divestiture activities were $5 million and $10 million for the first quarter of fiscal 2020 and 2019, respectively. These transaction costs were expensed as incurred in general and administrative expenses (“G&A”) in the Consolidated Statements of Operations.

11

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The goodwill generated from acquisitions completed during the first quarter of fiscal 2020 is primarily related to expected synergies. The goodwill is generally not deductible for income tax purposes.
The Consolidated Financial Statements include the operating results of each acquisition from the date of acquisition. Pro forma results of operations and the revenue and net income subsequent to the acquisition date for the acquisitions completed during the first quarter of fiscal 2020 have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to our financial results.
Pending Acquisition of Acacia Communications On July 9, 2019, we announced our intent to acquire Acacia Communications, Inc. (“Acacia”), a public fabless semiconductor company that develops, manufactures and sells high-speed coherent optical interconnect products that are designed to transform communications networks through improvements in performance, capacity and cost.
Under the terms of the agreement, we have agreed to pay total consideration of approximately $2.6 billion, net of cash and marketable securities, to acquire Acacia. The acquisition is expected to close during the second half of fiscal 2020, subject to customary closing conditions and regulatory approvals. Upon close of the acquisition, revenue from Acacia will be included in our Infrastructure Platforms product category.

5.
Goodwill and Purchased Intangible Assets
(a)
Goodwill
The following table presents the goodwill allocated to our reportable segments as of October 26, 2019 and during the first quarter of fiscal 2020 (in millions):
 
 
 
 
 
 
 
 
 
Balance at July 27, 2019
 
Acquisitions
 
Other
 
Balance at October 26, 2019
Americas
$
21,120

 
$
62

 
$
(21
)
 
$
21,161

EMEA
7,977

 
17

 
(8
)
 
7,986

APJC
4,432

 
4

 
(5
)
 
4,431

Total
$
33,529

 
$
83

 
$
(34
)
 
$
33,578


“Other” in the table above primarily consists of foreign currency translation as well as immaterial purchase accounting adjustments.
(b)
Purchased Intangible Assets
The following table presents details of our intangible assets acquired through acquisitions completed during the first quarter of fiscal 2020 (in millions, except years):
 
FINITE LIVES
 
INDEFINITE LIVES
 
TOTAL
 
TECHNOLOGY
 
CUSTOMER
RELATIONSHIPS
 
OTHER
 
IPR&D
 
 
Weighted-
Average Useful
Life (in Years)
 
Amount
 
Weighted-
Average Useful
Life (in Years)
 
Amount
 
Weighted-
Average Useful
Life (in Years)
 
Amount
 
Amount
 
Amount
Total acquisitions (four in total)
5.0
 
$
108

 

 
$

 

 
$

 

 
$
108



12

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CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The following tables present details of our purchased intangible assets (in millions): 
October 26, 2019
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
3,342

 
$
(2,062
)
 
$
1,280

Customer relationships
 
749

 
(273
)
 
476

Other
 
41

 
(26
)
 
15

Total purchased intangible assets with finite lives
 
4,132

 
(2,361
)
 
1,771

In-process research and development, with indefinite lives
 
336

 

 
336

       Total
 
$
4,468

 
$
(2,361
)
 
$
2,107

 
July 27, 2019
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
3,270

 
$
(1,933
)
 
$
1,337

Customer relationships
 
840

 
(331
)
 
509

Other
 
41

 
(22
)
 
19

Total purchased intangible assets with finite lives
 
4,151

 
(2,286
)
 
1,865

In-process research and development, with indefinite lives
 
336

 

 
336

       Total
 
$
4,487

 
$
(2,286
)
 
$
2,201


Purchased intangible assets include intangible assets acquired through acquisitions as well as through direct purchases or licenses.
The following table presents the amortization of purchased intangible assets, including impairment charges (in millions):
 
Three Months Ended
 
October 26, 2019
 
October 27, 2018
Amortization of purchased intangible assets:
 
 
 
Cost of sales
$
166

 
$
151

Operating expenses
36

 
34

Total
$
202

 
$
185


The estimated future amortization expense of purchased intangible assets with finite lives as of October 26, 2019 is as follows (in millions):
Fiscal Year
Amount
2020 (remaining nine months)
$
579

2021
$
586

2022
$
328

2023
$
187

2024
$
89

Thereafter
$
2




13

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


6.
Restructuring and Other Charges
We initiated a restructuring plan during fiscal 2018 (the “Fiscal 2018 Plan”) in order to realign the organization and enable further investment in key priority areas with estimated pretax charges of approximately $600 million. These aggregate pretax charges are primarily cash-based and consist of employee severance and other one-time termination benefits, and other associated costs. In connection with the Fiscal 2018 Plan, we have incurred charges of $184 million for the first quarter of fiscal 2020, and have incurred cumulative charges of $614 million. We do not expect to incur significant charges under the Fiscal 2018 Plan in the future and expect this plan to be substantially completed in the first half of fiscal 2020.
The following tables summarize the activities related to the restructuring and other charges (in millions):
 
 
FISCAL 2017 AND PRIOR PLANS
 
FISCAL 2018 PLAN
 
 
 
 
Employee Severance
 
Other
 
Employee
Severance
 
Other
 
Total
Liability as of July 27, 2019
 
$

 
$
5

 
$
22

 
$
6

 
$
33

Charges
 

 

 
175

 
9

 
184

Cash payments
 

 

 
(154
)
 
(1
)
 
(155
)
Non-cash items
 

 
(2
)
 

 
(13
)
 
(15
)
Liability as of October 26, 2019
 
$

 
$
3

 
$
43

 
$
1

 
$
47

 
 
FISCAL 2017 AND PRIOR PLANS
 
FISCAL 2018 PLAN
 
 
 
 
Employee
Severance
 
Other
 
Employee
Severance
 
Other
 
Total
Liability as of July 28, 2018
 
$
41

 
$
13

 
$
19

 
$

 
$
73

Charges
 

 

 
54

 
24

 
78

Cash payments
 
(10
)
 
(1
)
 
(52
)
 
(1
)
 
(64
)
Non-cash items
 

 

 

 
(23
)
 
(