Cisco Systems, Inc. 2015 Annual Report Annual Report 2015 Letters to Shareholders To Our Shareholders, Fiscal 2015 was a great year for Cisco. As we marked A Winning Differentiated Strategy our thirtieth anniversary year, we witnessed the inflection point in the next wave of the Internet. This next wave will Our strong financial performance and our market leadership have five to ten times the impact of the first. As fifty billion in most areas clearly show that our vision and strategy are devices come online and connect over the next few years, working. Our differentiation comes from our ability to deliver the network and Cisco have never been more relevant or integrated architectures at scale, with speed and with more strategic. In our view, it is clear that the opportunities security. These architectures combine multiple industry- ahead are even brighter than those of our past. leading technologies, services, and software with unique go-to-market models and partnerships. We bring these At Cisco, we believe much of our success has come from architectures to market in solutions that deliver business our ability to lead market transitions. More than five years outcomes to our customers. In our view, this architectural ago, we saw the impact that connecting people, processes, approach allows us to deliver value greater than the sum data, and things would have on organizations and countries. of the parts and is enabling us to pull away from the Today, across the board, our customers’ top priority is to competition and gain wallet and market share. use technology to drive growth and productivity, manage risk, and gain competitive advantage. In this digital world, We believe that an architectural approach is essential when data, and the insights it provides, is our customers’ most it comes to tackling our customers’ top concern: security. strategic asset. It is increasingly distributed across every As everything in their world becomes digital, our customers part of their organization and ecosystem. Their ability to want a player who can step up to be their trusted partner secure, aggregate, automate, and analyze the data, at across the board. We believe no one is better positioned speed, will ultimately define their success. Customers are than Cisco because, in our view, the only way to protect adopting entirely new IT architectures and organizational enterprises is via the network. Our strategy in security structures to capture this opportunity, and we believe only is to embed threat-centric security everywhere across Cisco, and only the network, can deliver the highly secure, the extended network. We are also building a substantial highly distributed, and intelligent infrastructure and solutions software subscription business in security, based on our required in today’s dynamic, digital world. Sourcefire technology, with software accounting for 42% of our total security revenue in fiscal 2015. As we reflect on this past year, we are pleased with how we executed on both our business and financial strategy Collaboration is another business that is demonstrating and how we are innovating what we build and how we go to our software progress through strong growth in deferred market to lead our customers in their digital transitions. revenue. Two years since we decided to overhaul our collaboration portfolio with a new generation of products, Revenue for fiscal 2015 increased 4% year over year to a we achieved year-over-year product deferred revenue record $49.2 billion. The rapid adoption of our subscription- growth of over 20% in the fourth quarter, on the strength based and software offerings is driving more predictable, of our subscription and software-as-a-service businesses. recurring revenue streams across the business. We We are seeing even stronger momentum from Meraki, succeeded in driving growth and expanding our margins, which exited fiscal 2015 with an annualized revenue run while growing our profits more quickly than revenues and rate of approximately $740 million, based on fourth quarter generating strong cash flows. performance, as customers adopt new cloud-based consumption models. We remain highly focused on creating value through ongoing expense management and returning capital to you, In fiscal 2015, we started to see good early traction with our shareholders. For fiscal 2015, our capital returned to our new Cisco ONE Software bundles. We are seeing these shareholders totaled $8.3 billion, comprising $4.2 billion in offerings drive strategic, multiyear customer relationships share buybacks and $4.1 billion in dividends. We are firmly with enterprise license agreements, as well as an increase committed to continuing our capital allocation strategy in customer infrastructure spend. We are also seeing the of returning a minimum of 50% of our free cash flow to expansion of our total addressable market to encompass shareholders annually. data and analytics. Cisco Systems, Inc. 1 Annual Report 2015 Letter to Shareholders Our portfolio of cloud assets, including Sourcefire, Meraki, in our current business. Our mergers and acquisitions WebEx, and Cisco Spark, is enabling us to deliver our approach will remain balanced: maintaining discipline in technology in the ways our customers want to buy it in the light of market conditions while making key strategic moves future. We intend to take this foundation and replicate it that cement our competitive differentiation for the future. across our entire portfolio. Financial Highlights Solid Execution For fiscal 2015, revenue was $49.2 billion, an increase At Cisco, we have always made the tough choices to be of 4% compared with fiscal 2014, reflecting refreshes positioned for where the market is going and challenged across almost every product area and effective resource ourselves to reinvent in order to create long-term value reallocations to growth areas. Product revenue was $37.8 for shareholders. Over the past year, we have continued to billion, and service revenue was $11.4 billion, both also drive change in our business as we prioritized the elements increasing 4% year over year. Deferred revenue was $15.2 of our portfolio—cloud, security, collaboration, automation, billion, increasing 7%, due largely to increased software and analytics—that are driving the most value for our and subscription offerings, which we expect will continue customers. to grow in the overall mix. At the end of the year, recurring revenue accounted for 46% of our product deferred We have made significant changes in our engineering revenue. Net income was $9.0 billion, up 14% from fiscal organization to foster cross-functional development, and we 2014, while earnings per share on a fully diluted basis were have continued the integration of our product and services $1.75, up 17% year over year. sales teams into a unified sales force to create a more solutions-centric approach in our go-to-market and partner Our balance sheet remains strong, with total assets at the engagements. We are building more agile, small teams that end of fiscal 2015 of $113.5 billion, representing an 8% are working jointly with our customers to develop solutions increase from fiscal 2014. Cash, cash equivalents, and to help them achieve their business outcomes. investments were $60.4 billion, and we generated $12.6 billion in cash flows from operating activities during the During the year, we continued to optimize our portfolio year. with strategic acquisitions as well as some divestments. To strengthen our security business, we acquired Neohapsis, With respect to our fiscal 2015 revenue performance a provider of security consulting services, and, in the fourth by geographic segment, the Americas increased by quarter, we announced our intention to acquire OpenDNS, a 7% year over year; Europe, the Middle East, and Africa cloud-based security company. (EMEA) increased by 3%; and Asia Pacific, Japan, and China (APJC) declined by 2%. The challenges we have We also expanded our cloud offerings by acquiring been experiencing in emerging countries persisted, and Metacloud and Piston Cloud Computing, which will help we expect this volatility to continue for some time. We us build our OpenStack capabilities. Our strategy with saw good growth in our Commercial, Public Sector, and Intercloud is to deliver integrated, secure, hybrid cloud Enterprise customer markets throughout the year, with solutions to enable our customers to easily consume cloud particular strength in the United States. We also saw services on demand. an improvement in revenue from our Service Provider customer market in the last half of fiscal 2015, following In the fourth quarter, we announced an exclusive agreement more than a year of negative growth due to market to sell the client premises equipment portion of our Service consolidation and regulatory challenges. We believe we are Provider Video business to Technicolor, as we refocus well positioned with our service provider customers and are our investments and accelerate our momentum in service focused on growing our wallet share with them. provider video toward cloud, security, and software-based services. From a technology perspective, we executed very well in several key areas. Revenue in fiscal 2015 for the We plan to continue to build, buy, partner, invest, and Data Center category increased 22% year over year, co-innovate with our customers in order to seize market with the continued market leadership of the Cisco UCS transitions in new markets as well as extend our leadership platform. Security was another area of strength, growing 2 Cisco Systems, Inc. Annual Report 2015 Letter to Shareholders revenue by 12% and demonstrating the relevance and ideas, we believe we are establishing an unbeatable power of an integrated security architecture in the market position in the market and are on track to achieve our aim of today. Wireless grew 11%, driven by continued Meraki becoming the number-one IT company. momentum. In Collaboration, the refresh of our product line accelerated growth to 5%.