I've spent a bit more time tonight on this. I'd like to repeat, first, that I have no bias in this driven by personal interest, because I don't own CSCO, and never have. Further, I'm not casting aspersions on Haim and his individual analysis, only trying to present another view.
Re. doubled op expenses, yes...and no. Briefly, their pro forma statements, which focus totally on the operating side of their business - ie. excluding investment income, and excluding the accounting costs of acquisitions (that's a big step for lots of people right there, the realization of accounting costs versus what most of us intuitively think of as costs) - show their operating expenses, Q4 2000 over Q4 1999, show a 63% growth year over year compared to a 61% revenue growth. The reason operating expenses appear to have doubled when you look at the non-pro forma statements is almost entirely due to the costs of their heavy acquisitions this year compared to last, or at least the increased cost of the acquisitions in 2000.
The posts you link to from Haim are a personal analysis method: he removes from the financials the positive effects of the gains on CSCO's investments because they aren't part of the core operating business of CSCO and may not continue...but leaves in the effects of the company's aggressive acquisition strategy...which it can be argued are not part of the core operating business of CSCO and will continue only so long as CSCO pursues this acquisition strategy. In other words, if CSCO chose to discontinue the aggressive acquisitions and spend time consolidating the companies it has already acquired, working at growing the business now through leveraging what it's bought...those charges would drop dramatically.
If you look at the pro forma statements, which is a picture of CSCO without the effect of either its gains on investments or the costs of its acquisitions, the company is maintaining a very consistent, very impressive, growth: revenue grew 61% this quarter over the same quarter last year, and operating income grew 55%. The difference in the growth rates is due primarily to a slightly lower gross margin (59% growth versus 61% revenue growth) and for some reason substantially higher General and Admin (72% growth, though the number itself isn't very big compared to others on the I/S).
In Message 14184318, Haim says
"More important the operating profits are shrinking. From 23.6 % last year to 17.1% this year.
So their sales were up as they sold their products cheaper. Maybe they learned to do business from AMZN".
In fact, this conclusion is erroneous. The measure of whether a company is selling at a discount in order to boost sales is in gross margin (revenue less direct cost of goods sold). Certainly you don't include intangible expenses like amortization! CSCO's sales were up 61% and their direct cost of sales (ie. cost of the goods they sold: manufacturing costs or in the case of any OEM products the purchase cost) up 63%. Gross margin grew only slightly slower than revenues...so they haven't been lowering prices to increase sales at the expense of profits.
In Message 14184208, he says:
"Also payable rose by 2.5 Billion and other assets by around $4 billion which completely wipes out any profit CSCO reported"
Accounts payables and other - in fact, ANY - assets are cash flow items, either uses of or sources of cash depending on whether they're increases or decreases over past periods. They don't 'wipe out' profits in any sense. For example, I could increase my Accounts Payable - ie. I owe my vendors more money - because I pay my bills slower this year or because I grew this year and have to buy more stuff; both would increase my AP. Neither of these has, ipso facto, an impact on my profits and CERTAINLY neither 'wipes out' any profit.
I'm sorry this has been so long, but I felt it was important to address your concerns.
IMO, the keys here are:
1. Cisco continues to grow at an impressive rate, and I don't think there's evidence in these numbers to demonstrate the Internet infrastructure growth rate is falling
2. Cisco's aggressive acquisition strategy will have a huge impact on the bottom bottom line, the number that rolls over to retained earnings, if either the market itself or Cisco's investment acumen takes a dive for any length of time and it's unable to continue to realize large investment gains
3. Cisco has to execute flawlessly in order to realize enough value from the huge acquisition investments it's made to make these huge write-off expenses worth while. These companies will have to start being accretive to revenue and NI, like they have to expenses <gg>
Sorry for the exceptionally long post. Man, and all for something I don't even own! LOL
Regards
WUWT |
