Cisco's $275M increase in loss reserves is equivalent to nearly 40% of all loans outstanding..... If in fact Cisco does experience a $275M loss.... all already accounted for CSCO's total loan exposure would be reduced to under $400M.
Cisco Increases Loss Reserves to $275 Mln 1st
Quarter (Update1)
By Miles Weiss
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 $2.77 to $48.17, and have dropped more than 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. |
