CISCO SYSTEMS INC

Previous wording

This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “momentum,” “seeks,” “estimates,” “continues,” “endeavors,” “strives,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those under “Part II, Item 1A. Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

Current wording

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.

Previous wording

Total revenue decreased by 13% compared with the third quarter of fiscal 2023. In March 2024, we completed the acquisition of Splunk, which contributed $413 million in total revenue for the third quarter of fiscal 2024. Within total revenue, product revenue decreased by 19% and service revenue increased by 6%. In the third quarter of fiscal 2024, total software revenue was $4.5 billion across all product areas and service, an increase of 5%, driven by the contribution of Splunk. Within total software revenue, subscription revenue increased 17%, driven in large part by the contribution of Splunk.

Current wording

In the first quarter of fiscal 2025, we saw improvement in product demand across the majority of our geographic segments and customer markets reflecting normalizing demand patterns. We believe our customers have largely completed the installation of products from the elevated level of product shipments seen during fiscal 2024. Total revenue decreased by 6% compared with the first quarter of fiscal 2024. Excluding Splunk, total revenue decreased 14% compared with the first quarter of fiscal 2024. Within total revenue, product revenue decreased by 9% and services revenue increased by 6%. In the first quarter of fiscal 2025, total software revenue was $5.5 billion across all product areas and services, an increase of 24%, primarily driven by the contribution of Splunk. Total subscription revenue increased 21%, primarily driven by the contribution of Splunk.

Previous wording

Total gross margin increased by 1.7 percentage points. Product gross margin increased by 0.8 percentage points, largely driven by favorable product mix 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 6.1 percentage points. Operating income as a percentage of revenue decreased by 9.9 percentage points primarily driven by restructuring and other charges of $542 million and higher amortization of purchased intangible assets in the third quarter of fiscal 2024. Diluted earnings per share decreased 41%, driven by a decrease of 41% in net income, partially offset by a decrease in diluted share count of 50 million shares.

Current wording

Total gross margin increased by 0.7 percentage points. Product gross margin increased by 0.6 percentage points, largely driven by benefits from Splunk, favorable product mix 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 7.4 percentage points. Operating income as a percentage of revenue decreased by 12.2 percentage points primarily driven by incremental operating expenses from Splunk, higher restructuring and other charges of $665 million and higher amortization of purchased intangible assets in the first quarter of fiscal 2025. Diluted earnings per share decreased 24%, driven by a decrease of 25% in net income, partially offset by a decrease in diluted share count of 74 million shares.

Previous wording

In terms of our geographic segments, revenue from the Americas decreased by $1.3 billion, EMEA revenue decreased by $348 million and APJC revenue decreased by $258 million. From a customer market standpoint, we experienced product revenue declines across all of our customer markets. From a product category perspective, the product revenue decrease of 19% was driven by a decline in revenue in Networking of 27%. This decline was partially offset by product revenue growth in Security of 36% and Observability of 27%, each driven in large part by the contribution of Splunk. Product revenue in Collaboration was flat.

Current wording

In terms of our geographic segments, revenue from the Americas decreased by $0.8 billion, EMEA revenue decreased by $76 million and APJC revenue increased by $19 million. From a customer market standpoint, we experienced product revenue declines across all of our customer markets. From a product category perspective, the product revenue decrease of 9% was driven by a decline in revenue in Networking of 23% and Collaboration of 3%. This decline was partially offset by product revenue growth in Security of 100% and Observability of 36%, each driven in large part by the contribution of Splunk.

Previous wording

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. We continue to operate in a challenging macroeconomic and highly competitive environment and while the overall environment remains uncertain, we continue to invest in priority areas with the objective of driving profitable growth over the long term.

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

Our provision for inventory was $90 million and $82 million for the third quarter of fiscal 2024 and 2023, respectively, and $348 million and $174 million for the first nine months of fiscal 2024 and 2023, respectively. The provision for the liability related to purchase commitments with contract manufacturers and suppliers was $85 million and $134 million for the third quarter of fiscal 2024 and 2023, respectively, and $213 million and $333 million for the first nine months of fiscal 2024 and 2023, respectively. If there were to be a sudden and significant decrease in demand for our products, if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, or if supply constraints were to continue, we could be required to increase our inventory write-downs, and our liability for purchase commitments with contract manufacturers and suppliers, and accordingly our profitability, could be adversely affected. We regularly evaluate our exposure for inventory write-downs and the adequacy of our liability for purchase commitments. For further discussion around the Supply Constraints Impacts and Risks, see “—Results of Operations—Gross Margin—Supply Constraints Impacts and Risks” and “—Liquidity and Capital Resources—Inventory Supply Chain.”

Current wording

Our provision for inventory was $207 million and $133 million for the first quarter 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 $6 million and a provision of $43 million for the first quarter 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.”

Previous wording

Goodwill and Purchased Intangible Asset Impairments

Current wording

Valuation of Goodwill and Purchased Intangible Assets

Previous wording

Our methodology for allocating the purchase price relating to purchase acquisitions is determined through established valuation techniques. Goodwill represents a residual value as of the acquisition date, which in most cases results in measuring goodwill as an excess of the purchase consideration transferred plus the fair value of any noncontrolling interest in the acquired company over the fair value of net assets acquired, including contingent consideration. We perform goodwill impairment tests on an annual basis in the fourth fiscal quarter and between annual tests in certain circumstances for each reporting unit. The assessment of fair value for goodwill and purchased intangible assets is based on factors that market participants would use in an orderly transaction in accordance with the new accounting guidance for the fair value measurement of nonfinancial assets.

Current wording

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.

Previous wording

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 nine months of fiscal 2024 and 2023.

Current wording

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 quarter of fiscal 2025 and 2024.

Previous wording

The accounting for acquisitions requires significant estimates and judgments when allocating the purchase price to the estimated fair values of assets acquired and liabilities assumed at the acquisition date. Critical estimates used in the valuation of 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.

Current wording

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.

Previous wording

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 to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Our ongoing consideration of all the factors described previously could result in impairment charges in the future, which could adversely affect our net income.

Current wording

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 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.

Previous wording

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 15.6% and 18.8% in the third quarter of fiscal 2024 and 2023, respectively, and 17.1% and 20.2% in the first nine months of fiscal 2024 and 2023, respectively.

Current wording

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 a benefit of 19.6% and a tax provision of 18.1% in the first quarter of fiscal 2025 and 2024, respectively.

Previous wording

Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

Current wording

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.

Previous wording

Our provision for income taxes is subject to volatility and could be adversely impacted by earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates; by changes in the valuation of our deferred tax assets and liabilities; by changes to foreign-derived intangible income deduction, global intangible low-tax income and base erosion and anti-abuse tax, research and development capitalization and amortization, and corporate alternative minimum tax laws, regulations, or interpretations thereof; by expiration of or lapses in tax incentives; by transfer pricing adjustments, including the effect of acquisitions on our legal structure; by tax effects of nondeductible compensation; by tax costs related to intercompany realignments; by changes in accounting principles; or by changes in tax laws and regulations, treaties, or interpretations thereof, including changes to the taxation of earnings of our foreign subsidiaries, the deductibility of expenses attributable to foreign income, and the foreign tax credit rules. Significant judgment is required to determine the recognition and measurement attributes prescribed in the accounting guidance for uncertainty in income taxes. The Organisation for Economic Co-operation and Development (OECD), an international association comprised of 38 countries, including the United States, has made changes and is contemplating additional changes to numerous long-standing tax principles. There can be no assurance that these changes and any contemplated changes if finalized, once adopted by countries, will not have an adverse impact on our provision for income taxes. As a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries was subject to reduced tax rates. Our failure to meet these commitments could adversely impact our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service (IRS) and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse impact on our operating results and financial condition.

Current wording

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.

Previous wording

The following table presents the breakdown of revenue between product and service (in millions, except percentages):

Current wording

The following table presents the breakdown of revenue between product and services (in millions, except percentages):

Previous wording

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

Current wording

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):

Previous wording

Total revenue decreased by 13%. Product revenue decreased by 19% and service revenue increased by 6%. Our total revenue reflected declines across each of our geographic segments.

Current wording

Total revenue decreased by 6%. Product revenue decreased by 9% and services revenue increased by 6%. Our total revenue reflected declines in the Americas and EMEA segment, partially offset by growth in the APJC segment.

Previous wording

Product revenue in the EMEA segment decreased by 8%, driven by declines in the enterprise and service provider and cloud markets, partially offset by growth in the public sector market. From a country perspective, product revenue decreased in the United Kingdom, Germany, and France by 9%, 12% and 12%, respectively.

Current wording

Product revenue in the EMEA segment decreased by 5%, with declines across each of our customer markets. From a country perspective, product revenue decreased in the Netherlands and Switzerland by 24% and 20%, respectively, partially offset by growth in the United Kingdom and France of 12% and 6%, respectively. Product revenue in Germany was flat.

Previous wording

Product revenue in the APJC segment decreased by 14%, with declines across each of the customer markets. From a country perspective, product revenue decreased in Japan, India, Australia, and China by 14%, 11%, 12% and 37%, respectively.

Current wording

Product revenue in the APJC segment decreased by 2%, with declines across each of our customer markets. From a country perspective, product revenue decreased in India and China by 7% and 4%, respectively, partially offset by growth of 18% in each of Japan and Australia.

Previous wording

In addition to the primary view on a geographic basis, we also prepare financial information related to product categories and customer markets for various purposes. Effective in the first quarter of fiscal 2024, we began reporting our product revenue in the following categories: Networking, Security, Collaboration, and Observability and conformed our product revenue for prior periods to the current period presentation.

Current wording

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.

Previous wording

Revenue from the Networking product category decreased by 11%, or $2.7 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 and Meraki offerings. We also saw a revenue decline in routed optical networking.

Current wording

The Networking product category consists of our core networking technologies of switching, routing, wireless, and servers. Revenue from the Networking product category decreased by 23%, or $2.1 billion. Revenue declined across the portfolio as a result of product shipments returning to normalized levels during the quarter from the elevated levels of product shipments we experienced in prior quarters. 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 offerings. We also saw a revenue decline in internet infrastructure.

Previous wording

The Collaboration product category consists of our Meetings, Collaboration Devices, Calling, Contact Center and CPaaS offerings. Revenue in our Collaboration product category was flat, primarily driven by growth in our Calling and Contact Center offerings, offset by a decline in Meetings and Collaboration Devices.

Current wording

The Collaboration product category consists of our Webex Suite, Collaboration Devices, Contact Center and CPaaS offerings. Revenue in our Collaboration product category decreased by 3%, or $32 million, primarily driven by declines in our On-Prem Webex Suite and Collaboration Devices offerings, partially offset by growth in our Contact Center and CPaaS offerings.

Previous wording

Service revenue increased 6% in the third quarter of fiscal 2024 compared with the third quarter of fiscal 2023, primarily driven by revenue growth in our solution support offerings, software support offerings, maintenance business and advisory services. The acquisition of Splunk also contributed to the growth in service revenue in the third quarter of fiscal 2024. Service revenue increased across each of our geographic segments for the third quarter of fiscal 2024. Service revenue grew 4%, not including the contribution from Splunk.

Current wording

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

Previous wording

The following table summarizes the key factors that contributed to the change in product gross margin percentage for the third quarter and first nine months of fiscal 2024, as compared with the corresponding prior year periods:

Current wording

The following table summarizes the key factors that contributed to the change in product gross margin percentage for the first quarter of fiscal 2025, as compared with the corresponding prior year periods:

Previous wording

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

Current wording

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.

Previous wording

Our service gross margin percentage increased by 3.8 percentage points primarily due to lower headcount-related costs and higher sales volume, partially offset by unfavorable mix of service offerings and to a lesser extent, higher delivery costs.

Current wording

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

Previous wording

Our service gross margin normally experiences some fluctuations due to various factors such as the timing of contract initiations in our renewals, our strategic investments in headcount, and the resources we deploy to support the overall service business. Other factors include the mix of service offerings, as the gross margin from our advanced services is typically lower than the gross margin from technical support services.

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

The APJC segment gross margin percentage decrease was primarily due to pricing erosion, and to a lesser extent, unfavorable product mix, partially offset by positive impacts from productivity improvements.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

In the first nine months of fiscal 2024, foreign currency fluctuations, net of hedging, increased the combined R&D, sales and marketing, and G&A expenses by approximately $46 million, or 0.3%, compared with the first nine months of fiscal 2023.

Current wording

In the first quarter of fiscal 2025, foreign currency fluctuations, net of hedging, increased the combined R&D, sales and marketing, and G&A expenses by approximately $8 million, or 0.2%, compared with the first quarter of fiscal 2024.

Previous wording

For each of the third quarter and first nine months of fiscal 2024, the increase in amortization of purchased intangible assets was primarily due to amortization of purchased intangibles from our recent acquisitions, including $187 million for the third quarter and first nine months of fiscal 2024 due to the acquisition of Splunk, and impairment charges of $139 million and $145 million for the third quarter and first nine months of fiscal 2024, respectively. The increase was partially offset by certain purchased intangible assets that became fully amortized. The impairment charges were primarily due to declines in estimated fair value resulting from reductions in or the elimination of expected future cash flows associated with certain of our IPR&D intangible assets.

Current wording

For the first quarter 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. The increase was partially offset by certain purchased intangible assets that became fully amortized.

Previous wording

In the third quarter of fiscal 2024, we initiated a restructuring plan in order to realign the organization and enable further investment in key priority areas. This restructuring plan will impact approximately 5% of our global workforce, with estimated pretax charges of up to approximately $800 million. In connection with this restructuring plan, we incurred charges of $542 million in the third quarter and the first nine months of fiscal 2024. We expect this plan to be substantially completed during the first half of fiscal 2025.

Current wording

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 $665 million in the first quarter of fiscal 2025. We expect this plan to be substantially completed by the end of fiscal 2025.

Previous wording

We expect to reinvest substantially all of the cost savings from these restructuring plans in our key priority areas. As a result, the overall cost savings from these restructuring plans are not expected to be material for future periods.

Current wording

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.

Previous wording

Operating income decreased by 44%, and operating income as a percentage of revenue decreased by 9.9 percentage points. These changes resulted primarily from a revenue decrease, higher restructuring and other charges and higher amortization of purchased intangible assets, partially offset by a gross margin percentage increase (driven by favorable product mix and productivity improvements, partially offset by pricing erosion).

Current wording

Operating income decreased by 45%, and operating income as a percentage of revenue decreased by 12.2 percentage points. These changes were primarily from a revenue decrease, incremental expenses from Splunk, higher restructuring and other charges and higher amortization of purchased intangible assets, partially offset by a gross margin percentage increase (driven by favorable product mix and productivity improvements, partially offset by pricing erosion).

Previous wording

For the third quarter and first nine months of fiscal 2024, the increase in interest income was driven by higher average balance of cash and available-for-sale debt investments and higher interest rates. The increase in interest expense was primarily driven by higher interest rates and the issuance of senior notes and commercial paper issued in the third quarter of fiscal 2024. We incurred incremental net interest expense of approximately $150 million for the third quarter and first nine months of fiscal 2024 to finance the acquisition of Splunk. We expect lower interest income in future periods due to lower average balance of cash and available-for-sale debt investments and higher interest expense due to a higher balance of debt.

Current wording

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

Previous wording

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

Current wording

The change in our other income (loss), net was primarily driven by net gains on our privately held investments and marketable equity investments and unfavorable impacts from foreign exchange.