UBS Warburg on CSCOs 10Q filed last night-- Not bad-
________________________________________________________________________
CSCO: A QUICK READ OF THE 10Q
Summary:
Cisco filed their 10Q for the January quarter last night. The document did
not appear to provide any additional information regarding guidance for the
current April quarter or fiscal year with the exception that operating
expenses are likely to increase. The latest cost cutting measures, however,
make us feel that operating expenses will be kept in check. The 10Q also
provided some additional information regarding the impact to gross margins
from inventory reserves, cumulative exposure to vendor financing loans and
the cumulative amount of inventory financing. The analysis suggests a
conservative assessment of these items. The impact of inventory provisions
was higher than we thought, the amount of vendor financing exposure was less
than we thought, and the amount of inventory financing was in line with our
views.
Highlights:
The 10Q states that both R&D and S&M expenses are likely to rise in absolute
dollars in the future. We are not modeling these to increase in the next two
quarters, but rather to decrease given the workforce reductions and other
cost cutting measures (e.g. travel restrictions, etc) that Cisco has enacted
during the April quarter. A rise in absolute expenses would be a surprise to
us.
Provisions for inventory were $195M in the January quarter, which
represented a negative hit to gross margin of 3.2% (reported gross margin
including this provision was 61.8%). This compares to inventory provisions
of $143M in the October 2000 quarter, which represented a 2.1% hit to gross
margin. Thus, as we mentioned in our note yesterday, the increasing level of
inventories is negatively impacting gross margin. As a comparison, the
impact of inventory provisions in the first half of fiscal 2000 was 1.9%.
Outstanding structured loans, net of reserves, was only $186M. In our note
yesterday, we mentioned that outstanding structured loans was closer to
$735M, this does not account for reserves. Thus, the actual risk to Cisco on
structured loans is only $186M, which is less than we had thought and a
relatively small amount.
Inventory financing was $645M, up from only $25M at the end of July 2000.
Inventory financing likely represents inventory that Cisco has negotiated
with contract manufacturers to keep for Cisco. While the increase from July
is significant, it is not surprising to us given the financial statements of
EMS companies like Solectron and Flextronics. The high level of inventory
financing has also probably impacted gross margin for Cisco. |
