Cisco Increases Loss Reserves to $275 Mln in Fiscal 1st Quarter
12/15/00 12:34:00 PM
Source: Bloomberg News
URL: cnetinvestor.com
Washington, Dec. 15 (Bloomberg) -- Cisco Systems Inc., the biggest computer networking equipment maker, set aside $275 million during its first fiscal quarter to cover losses from unpaid customer bills and other items, more than tripling the amount earmarked a year earlier.
The bigger loss reserve, reported in a quarterly filing with the Securities and Exchange Commission, reinforces concerns by some analysts that Cisco and other equipment makers, such as Nortel Networks Corp. and Lucent Technologies Inc., could suffer because of cash shortages at telecommunications carriers and Internet service providers on which they rely for sales.
Cisco has been pushing to sell more networking products to telecommunications carriers, helping the San Jose, California, company keep up the annual sales growth of 50 percent or more that has been among its chief attractions to investors. As some telecommunications customers are running short of cash and having trouble paying suppliers, it has helped build a growing pile of unpaid customer bills.
''In general, Cisco's balance sheet showed a lot more signs of stress than it did the quarter before,'' said Paul Sagawa, an analyst at Bernstein Investment Research & Management.
Cisco shares fell $1.50 to $49.44 in late trading, and have dropped 40 percent since hitting a record $82 on March 27.
Loss Reserves Grow With Sales
Claudia Ceniceros, a Cisco spokeswoman, said the reserve covers losses on inventories, investments and accounts receivable. She said these losses increased because Cisco is doing more business than last year. Cisco in its quarterly filing said customers that account ''for a significant proportion of our sales'' generally have a right to return inventory or get credits if prices change.
The company had discussed the reserve during its first quarter conference call with analysts, Ceniceros said. Analysts say the company warned that loss provisions would grow without providing specific numbers.
One analyst expressed little concern about the $275 million figure, given that Cisco had $6.39 billion in cash and short term investments when the first quarter ended.
The $275 million reserve ''is such a small number for them,'' said Lehman Brothers Inc. analyst Tim Luke. ''In the overall context of Cisco, it's not something I'm worried about.''
Cisco's cash flow statement listed the $275 million provision for losses during the first quarter ended Oct. 28, compared with $75 million for the same period of 1999. While Cisco's income statement didn't break out the loss reserve as a separate item, the provision effectively cut first quarter profit, said John Elliott, an accounting professor at Cornell University's Johnson Graduate School of Management.
Cisco isn't alone in facing the prospect of unpaid bills. Another supplier, fiber optic equipment maker Ciena Corp., of Linthicum, Maryland, also increased its provision for doubtful accounts -- to $19.2 million in its fourth quarter from $250,000 a year earlier.
Credit Problems
Credit problems are presenting challenges in many industries. Large banks have seen a 38 percent increase in delinquent loans during the past 12 months, the Federal Deposit Insurance Corp. said this week. The Bank of England warned yesterday that rising debt at U.S. and European telephone companies threatens the stability of world stock and credit markets.
The Bloomberg U.S. Telecommunication Services Index has fallen almost 38 percent this year. Many manufacturers who supply telecommunications companies have done worse, with the Bloomberg U.S. Telecommunications Equipment Index falling 44 percent so far in 2000.
Cisco faces challenges because it increasingly relies on sales to service providers, such as long-distance carriers to Internet access providers and wireless companies, which now provide 40 percent of its sales. In the past, the company got most of its business from what it calls enterprises, or large corporate clients.
Financing Sales
Many telephone carriers require their suppliers to provide financing for purchases. Cisco, Nortel, Lucent and other suppliers provide credit to generate business and keep sales growing.
''They are very large companies and they have some pretty significant requirements'' for meeting sales growth targets, Seth Spalding, an analyst at Epoch Partners, said of Cisco and Nortel. ''They would have pressure to ship to'' telecommunications carriers ''that don't have the best ability to pay.''
In particular, financial woes have increased among Internet service providers and telecommunications carriers who compete with the regional Bells to provide local telephone service. ICG Communications Inc., in filing for bankruptcy protection last month, said it owed Cisco almost $18 million.
Altogether, Cisco has about $625 million of outstanding customer loans and commitments to lend a total of $2.4 billion, according to Epoch, a San Francisco-based investment bank. In comparison, Lucent, a Murray Hill, New Jersey, maker of phone equipment, had a total of $7.7 billion in loan commitments at June 30, including $1.5 billion of actual loans.
At the same time, Cisco's accounts receivable grew to $2.89 billion on Oct. 28 from $2.29 billion on July 29. Growth in accounts receivable can be a danger sign, signifying that a company is having to extend looser credit terms to complete sales. At the same time, such growth is often simply explained by a jump in sales.
Financing a Must
At Cisco, a little bit of both factors has come into play, according to the quarterly report. Sales grew 66 percent during the first quarter, compared to just 26 percent for receivables. However, Cisco said that the growing receivables also stemmed in part from ''conditions in a number of markets resulting in longer payment terms.''
Nevertheless, providing financing to customers is a must for competing in sales to telecommunications companies, analysts said. Larry Carter, Cisco's chief financial officer, recently told analysts that the company expects overall financing to double over the next year, according to an Epoch report.
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