Cisco Systems Inc.

Primary Credit Analyst:

David T Tsui, CFA, CPA, New York (1) 212-438-2138; david.tsui@spglobal.com

Secondary Contact:
Andrew Chang, San Francisco (1) 415-371-5043; andrew.chang@spglobal.com

Table Of Contents

Rationale

Outlook

Our Base-Case Scenario

Company Description

Business Risk

Financial Risk

Liquidity

Other Credit Considerations

Ratings Score Snapshot

Reconciliation

Related Criteria

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Business Risk: STRONG
aa- aa- aa- CORPORATE CREDIT RATING
Vulnerable Excellent

Financial Risk: MINIMAL AA-/Stable/A-1+

Highly leveraged Minimal

Anchor Modifiers Group/Gov't

Rationale

Business Risk: Strong Financial Risk: Minimal

• Leading supplier of networking equipment, with
significant scale and product diversification;
• Strong market share in its core products; and
• Muted growth prospects due to evolving technology
risk in core products and changes in revenue from
the transition to a higher mix of software offerings.
• Minimal financial risk profile with a net cash position
of $70 billion cash and investments and funded debt
of about $34 billion as of fiscal year ended July 29,
2017;
• Strong free operating cash flow (FOCF) generation
of at least $12 billion over the past two fiscal years
and in excess of $12 billion expected in fiscal 2018
and 2019; and
• Conservative financial policy with funding of
shareholder returns from FOCF and net realizable
cash (defined as cash after hypothetical repatriation
taxes less funded debt) of $10 billion to $15 billion.

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Outlook: Stable

The stable outlook reflects S&P Global Ratings' expectation that San Jose, Calif.-based Cisco Systems Inc.'s strong
market position in the network equipment industry will support consistent FOCF generation sufficient for its
shareholder return initiatives, while also maintaining a conservative financial policy.

Downside scenario
Although we view a downgrade as unlikely over the next two years due to Cisco's net cash position, we could
lower the rating if a shift in financial policy to support acquisitions or shareholder returns results in a significant
depletion of its surplus cash, such that adjusted leverage exceeds the 1x area.

Upside scenario
Highly competitive industry conditions and uncertain growth prospects limit the likelihood of an upgrade over the
next two years. We would consider an upgrade if Cisco is able to successfully navigate the transition of its core
networking products to meet industry demands such that the company can achieve sustained revenue growth in
the low- to mid-single-digit percentage area while maintaining its strong market position.

Our Base-Case Scenario

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Assumptions Key Metrics

• Global real GDP growth of 3.6% in 2017 and 2018; (Bil. $) 2017A 2018E 2019E
• U.S. real GDP growth of 2.2% in 2017 and 2.3% in EBITDA margin (%) 33.7 33-34 33.34
2018; FOCF 13.2 12.5-13.5 13-14
• Eurozone real GDP growth of 2% in 2017 and 1.7% Cash and investments 70.5 73-78 78-83
in 2018; Funded debt 33.7 35-40 37-43
• Asia-Pacific real GDP growth of 5.6% in 2017 and
5.3% in 2018; Our adjustments, including operating leases, added
• Global information technology (IT) spending growth about $420 million to EBITDA and about $1.1 billion to
in the low-single-digit percentage area in 2017 and debt between fiscal 2017 and 2019. A--Actual.
2018;
E--Estimate. FOCF--Free operating cash flow.
• Flat revenue growth in the fiscal 2018, as growth in
the security, wireless, collaboration, and service
segments offsets declines in the data center, service
provider video, and switching and routing segments.
• Fiscal 2019 revenue to grow in the low-single digits,
due primarily to better performance from the
switching and routing segments, as macroeconomic
conditions will be relatively better and customers'
capital spending environment improves;
• EBITDA margins to be relatively stable in the
low-30% area in fiscal 2018 and 2019, reflecting
pricing pressure, higher component costs, and the
negative impact from product mix offset by
continued productivity improvements;
• Modest capital expenditures of about $1 billion or
about 2% of revenues in 2016;
• Dividends near $5.7 billion in fiscal 2018 and
increasing modestly thereafter annually;
• Share repurchases of about $3.5 billion in fiscal 2018
and 2019;
• Continued tuck-in acquisitions, modeled at about
$1.5 billion in fiscal 2018 and 2019; and
• New borrowings in excess of $5 billion per year,
given Cisco's modest domestic cash position.

Company Description
Cisco is a provider of internet protocol (IP)-based networking and other products related to the communications and
IT industry worldwide that are used to transport data, voice, and video within buildings, across campuses, and around
the world. Cisco serves businesses of all sizes, including enterprise businesses, public institutions, telecommunications
companies, other service providers, commercial businesses, and personal residences.

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Cisco conducts its business globally and manages its business by geography. Its business is organized into the
following three geographic segments: The Americas (59% of fiscal 2017 revenues), Europe, Middle East, and Africa
(25%), and Asia-Pacific, Japan, and China (16%).

The company classifies its products and technologies into the following segments:

• Switching (29% of Cisco's fiscal 2017 revenue) and NGN Routing (16%), which have been experiencing slowing
growth due to the cautious enterprise and service provider capital expenditure spending environment and also a
pause ahead of the new switching product launch.
• Service (26%), which has seen broad-based revenue growth from technical support services and advanced services
across geographic segments.
• Collaboration (9%), which has been growing broadly across Unified Communication, WebEx, and TelePresence
products.
• Data Center (7%), which has seen its sales decline due to lower demand for blade servers partially offset by
continued strong growth in hyperconverged systems (Hyperflex) an offering introduced in March 2016.
• Wireless (6%), which has seen continued growth in sales of Meraki, the company's cloud networking wired and
wireless networks business.
• Security (4%), which has experienced higher sales of unified threat management, advanced threat security, and Web
security products.
• Service Provider Video (2%), which has experienced significant revenue decline primarily due to Cisco's exit of its
set-top box business in July 2015 and lower service provider capital spending.
• Other (1%).

Business Risk: Strong

Cisco's business risk profile reflects our view of the company's strong market position in its core networking products,
growing software and services businesses, significant scale and product diversification, and strong operating efficiency.

In our view, these strengths mitigate the challenges to Cisco's overall business outlook. Growth prospects remain
somewhat muted over the near term, as the traditional network equipment industry matures and companies continue
to migrate from on-premise data centers to the cloud, a trend behind the slowing growth in Cisco's core switching and
routing product categories (which combined represent about 45% of Cisco's total revenues in fiscal 2017).
Software-defined networking technology poses another long-term threat as it replaces existing networking products.
We expect Cisco to maintain its market position while managing this technology transition. We believe Cisco's growth
prospects will increasingly be attributable to the performance of its collaboration, data center, wireless, security, and
service segments. We expect Cisco to add to its recurring revenue base, which represents about 31% of total revenues,
up from 27% in the year-ago period, with product-related recurring revenue growing 40% on a year-over-year basis in
the fiscal fourth quarter of 2017 to over $1 billion.

In fiscal 2017, Cisco generated sales of $48 billion, down 3% from the year-ago period, as the company faces fierce
competition in its switching business segment from global telecom equipment providers such as HP Enterprise,
Juniper Networks, Huawei Technologies, and Arista Networks. Additionally, enterprise spending in switching has been
slow ahead of Cisco's new switching product launch. Furthermore, revenue lost about 1.5 to 2 percentage points as the

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company transitions certain product sales to a software-as-a-service model, in which Cisco recognizes revenue ratably
as opposed to upfront in product sales. Meanwhile, deferred revenue related to recurring software and subscriptions
grew to $5 billion at the end of fiscal 2017 from about $3 billion a year ago. We view Cisco's profitability, with an
EBITDA margin of about 33% in fiscal 2017, as above average compared with peers.

We also expect acquisitions to contribute to Cisco's growth. Cisco completed seven acquisitions in fiscal 2017 totaling
$3.6 billion. The largest of which was AppDynamics, an application intelligence software company, for $3.3 billion in
March 2017. On July 31, 2017, Cisco completed the acquisition of Viptela, a software-defined wide area network
company, for $610 million. We do not expect the industry dynamics or Cisco's acquisition strategy to meaningfully
affect our view of the company's core business platform or financial profile over the next few years.

Peer comparison
Table 1
CISCO Systems Inc. --Peer Comparison
Cisco Systems International Business Texas Instruments
Company Inc. Oracle Corp. Intel Corp. Machines Corp. Inc.
AA-/Stable/A-1+ AA-/Stable/A-1+ A+/Positive/A-1+ A+/Stable/A-1 A+/Stable/A-1
Rating as of Sept. 12,
2017
RTM* for the Period
Q4 Q4 Q1 Q2 Q1
Reporting date July 29, 2017 May 31, 2017 March 31, 2017 June 30, 2017 March 31, 2017
Revenues 48,005.0 37,728.0 60,481.0 76,760.0 13,764.0
EBITDA 16,175.0 16,900.0 23,436.5 19,128.5 6,357.0
Funds from operations 13,779.0 13,138.3 20,513.0 16,376.5 4,703.0
(FFO)
Capital expenditures 964.0 2,021.0 10,051.0 3,730.0 534.0
Free operating cash flow 13,231.0 12,396.3 11,671.0 12,817.8 4,465.0
Discretionary cash flow 7,720.0 9,507.3 6,745.0 7,427.8 2,702.0
Cash and investments 70,492.0 66,078.0 17,295.0 12,295.0 3,049.0
Adjusted debt 0.0 12,267.2 11,028.4 28,377.2 569.4
Equity 66,137.0 54,246.0 66,844.0 15,958.1 10,639.0

Adjusted ratios
EBITDA margin (%) 33.7 44.8 38.8 24.9 46.2
EBITDA interest 17.4 8.9 26.1 12.9 68.8
coverage (x)
FFO to debt (%) N.M. 107.1 186.0 57.7 825.9
Free operating cash flow N.M. 101.1 105.8 45.2 784.1
to debt (%)
Discretionary cash flow N.M. 77.5 61.2 26.2 474.5
to debt (%)
Return on capital (%) 20.5 22.7 17.7 31.0 45.9
Debt to EBITDA (x) 0.0 0.7 0.5 1.5 0.1
Income before 9,609.0 9,335.0 11,234.0 11,445.0 3,924.0
extraordinary items
FFO cash interest 16.4 9.3 30.4 10.1 54.5
coverage (x)

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Table 1
CISCO Systems Inc. --Peer Comparison (cont.)
Cisco Systems International Business Texas Instruments
Company Inc. Oracle Corp. Intel Corp. Machines Corp. Inc.
AA-/Stable/A-1+ AA-/Stable/A-1+ A+/Positive/A-1+ A+/Stable/A-1 A+/Stable/A-1
Rating as of Sept. 12,
2017
RTM* for the Period
Q4 Q4 Q1 Q2 Q1
Operating cash flow to N.M. 117.5 197.0 58.3 877.9
debt (%)
Surplus cash 50,130.0 47,038.0 17,020.5 9,221.3 3,008.6

*RTM--Rolling 12 months. N.M.- Not meaningful

Financial Risk: Minimal

Cisco's financial risk profile is a key supporting consideration for the rating. We view Cisco's financial policy to be
conservative, with its target of maintaining net realizable cash (defined as cash after hypothetical repatriation taxes less
funded debt) of $10 billion to $15 billion. At the end of fiscal 2017, Cisco had a substantial net cash position, with cash
and investments of about $70 billion, of which about $3 billion was in the U.S., and funded debt of about $34 billion.

Cisco has generated consistently strong FOCF of more than $12 billion over in each of the past two fiscal years and we
expect the company to generate at least $12 billion in each of the next two fiscal years.

However, only a portion of the company's FOCF comes from the U.S. Additionally, as most of its cash and
investments are held in foreign subsidiaries and would be subject to material repatriation tax effects, we expect the
company to continue to access the debt market to help fund its shareholder returns and acquisition needs and to
refinance debt maturities when due. We estimate the costs associated with immediately accessing its total cash and
investments, at the end of fiscal 2017, to be about 29% of its total balance, factoring costs such as the tax effects on the
repatriation of foreign earnings and the tax on investment gains.

The sizeable net cash, investment balance, and robust cash flow generation give Cisco the flexibility to make large
acquisitions or pursue shareholder-friendly initiatives without detracting from overall credit quality. Cisco's surplus
cash position provides substantial debt capacity within the rating. In fiscal 2017, Cisco paid dividends of about $5.5
billion and repurchased stock of about $3.7 billion. The remaining share repurchase authorization was $11.7 billion at
the end of fiscal 2017. Cisco indicated that it targets shareholder returns to be in excess of 50% of FOCF generated.
We expect future shareholder returns to be in line with historical trends.

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Our Base-Case Cash Flow And Capital Structure Scenario

• Our base-case scenario suggests Cisco's credit metrics in fiscal 2018 and 2019 would support a minimal financial
risk profile. We expect Cisco to size and finance share repurchases, dividends, and acquisitions in a manner that
will maintain a significant net cash position;
• Modest capital expenditures of about $1 billion or about 2% of revenues in 2016;
• Dividends near $5.7 billion in fiscal 2018 and increasing modestly thereafter annually;
• Share repurchases of about $3.5 billion in fiscal 2018 and 2019;
• Continued tuck-in acquisitions, modeled at about $1.5 billion in fiscal 2018 and 2019;and
• New borrowings in excess of $5 billion per year, given Cisco's modest domestic cash position.

Financial summary
Table 2
Cisco Systems Inc.--Financial Summary
Industry Sector: High Tech Equipment
--Fiscal year ended July--
2017 2016 2015 2014 2013
Rating history AA-/Stable/A-1+ AA-/Stable/A-1+ AA-/Stable/A-1+ AA-/Stable/A-1+ A+/Stable/A-1+

(Mil. $)
Revenues 48,005.0 49,247.0 49,161.0 47,142.0 48,607.0
EBITDA 16,175.0 16,622.5 15,024.5 13,508.0 15,291.5
Funds from operations (FFO) 13,779.4 14,510.7 12,916.0 11,025.2 14,015.0
Net income from continuing operations 9,609.0 10,739.0 8,981.0 7,853.0 9,983.0
Adjusted cash flow from operations 14,195.4 13,858.7 12,856.0 12,645.2 13,175.0
Capital expenditures 964.0 1,146.0 1,227.0 1,275.0 1,160.0
Free operating cash flow 13,231.4 12,712.7 11,629.0 11,370.2 12,015.0
Discretionary cash flow 7,720.4 7,962.7 7,543.0 7,612.2 8,705.0
Cash and short-term investments 70,492.0 65,756.0 60,416.0 52,074.0 50,610.0
Equity 66,137.0 63,585.0 59,707.0 56,661.0 59,128.0

Adjusted ratios
EBITDA margin (%) 33.7 33.8 30.6 28.7 31.5
Return on capital (%) 20.5 22.1 20.3 17.9 22.0
EBITDA interest coverage (x) 17.4 22.4 23.7 21.3 23.5
FFO cash interest coverage (x) 16.4 17.8 17.8 17.1 21.5

Liquidity: Exceptional
Our short-term rating on Cisco is 'A-1+', principally because of its exceptional liquidity profile. We expect the
company's sources of cash to likely exceed uses by 6x over the next 12 to 24 months and net sources to likely remain
positive, even if EBITDA were to decline by 50%.

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Principal Liquidity Sources Principal Liquidity Uses

• Cash and investments of about $70 billion, of which
$67 billion is held by its foreign subsidiaries, at the
end of fiscal 2017;
• A $10 billion commercial paper program backed by
a $2 billion 364-day revolver expiring March 29,
2018, a $3 billion revolving credit facility maturing in
May 2020, and cash on hand;
• Share issuance of about $700 million in fiscal 2018
and 2019; and
• Expected annual FOCF in excess of $12 billion in
fiscal 2018 and 2019.
• Annual capital spending of about 2% of total
revenue, or about $1 billion in fiscal 2018 and 2019;
• Debt maturities of about $4.8 billion and $5.3 billion
in fiscal 2018 and 2019, respectively;
• Dividends in excess of $5.7 billion in fiscal 2018 and
2019;
• Share repurchases of about $3.5 billion annually; and
• Continued tuck-in acquisitions.

Debt maturities
Table 3
CISCO Systems Inc.--Debt Maturities
(Mil. $)

Fiscal Year Amount

2018 4,750
2019 5,250
2020 6,000
2021 3,000
2022 2,500
Thereafter 9,000
Total 30,500

Other Credit Considerations

Because we consider Cisco's market position and credit metrics to be weaker than those of other 'AA' rated
companies, as a result of intense competition and lower growth prospects in the switching and routing markets, we
lower the initial anchor rating one notch to 'aa-' from 'aa'.

Ratings Score Snapshot

Corporate Credit Rating
AA-/Stable/A-1+

Business risk: Strong

• Country risk: Low
• Industry risk: Moderately high
• Competitive position: Strong

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Financial risk: Minimal

• Cash flow/Leverage: Minimal
Anchor: aa-

Modifiers
• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Financial policy: Neutral (no impact)
• Liquidity: Exceptional (no impact)
• Management and governance: Satisfactory (no impact)
• Comparable rating analysis: Neutral (no impact)
Stand-alone credit profile : aa-

Reconciliation
Table 4
Reconciliation Of Cisco Systems Inc. Reported Amounts With S&P Global Ratings' Adjusted Amounts
--Fiscal year ended July 29, 2017--

Cisco Systems Inc. reported amounts

(Mil. $)
Operating Interest Cash flow from
Debt EBITDA income expense EBITDA operations
Reported 33,717.0 14,259.0 11,973.0 861.0 14,259.0 13,876.0

S&P Global Ratings' adjustments

Interest expense (reported) -- -- -- -- (861.0) --
Interest income (reported) -- -- -- -- 1,338.0 --
Current tax expense (reported) -- -- -- -- (2,802.0) --
Operating leases 1,064.7 390.0 70.6 70.6 319.4 319.4
Surplus cash (50,129.6) -- -- -- -- --
Share-based compensation -- 1,526.0 -- -- 1,526.0 --
expense
Non-operating income (expense) -- -- 1,295.0 -- -- --
Depreciation and amortization -- -- 47.0 -- -- --
impairment charges to reversals
Total adjustments (49,064.9) 1,916.0 1,412.6 70.6 (479.6) 319.4

S&P Global Ratings' adjusted amounts

Interest Funds from Cash flow from

Debt EBITDA EBIT expense operations operations
Adjusted -- 16,175.0 13,385.6 931.6 13,779.4 14,195.4

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Related Criteria
• Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers,
Dec. 16, 2014
• Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
• Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Group Rating Methodology, Nov. 19, 2013
• Criteria - Corporates - Industrials: Key Credit Factors For The Technology Hardware And Semiconductors Industry,
Nov. 19, 2013
• General Criteria: Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And
Sovereign Issuers, May 7, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers,
Nov. 13, 2012
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
• Criteria - Corporates - General: 2008 Corporate Criteria: Rating Each Issue, April 15, 2008

Business And Financial Risk Matrix

Financial Risk Profile

Business Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged

Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+

Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb
Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+
Fair bbb/bbb- bbb- bb+ bb bb- b
Weak bb+ bb+ bb bb- b+ b/b-
Vulnerable bb- bb- bb-/b+ b+ b b-

Ratings Detail (As Of September 18, 2017)

Cisco Systems Inc.
Corporate Credit Rating AA-/Stable/A-1+
Commercial Paper
Local Currency A-1+
Senior Unsecured AA-
Corporate Credit Ratings History
16-Dec-2013 AA-/Stable/A-1+
26-Nov-2013 A+/Watch Pos/A-1+
31-Jan-2011 A+/Stable/A-1+
*Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable
across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and
debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.

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