OK, John, you posed the questions, let's see if I can answer them.
<<Question One: Outlook? Chambers' has declared zero visibility, and earnings are due in a couple of weeks. What skeletons still lurk? Will those who argued against the clear evidence of the inventory problem argue even more strenuously against less obvious problems? Rumors abound of hefty charges. How close to a billion will it be? Over how many quarters?>>
There are no other skeletons than what we know. It's clear in the financials. Skeletons = impending investment markdowns, bad debt, inventory obsolescence, severance charges, and further dilution due to more options allocations to employees to keep them happy. My guess is at least $1 B total to as much as $1.7 B over the next 2 quarters. If they are smart, this quarter.
<<Question Two: Cash Flow? The company is making noises that sound to these untrained ears like "cash flow sucks". Sucks like the sound of that whirlpool in the drain of the tub. Desperate measures are not the stuff of prosperous times. Nor preparatory either. The company is not preparing itself for a surge of growth. Not when it's laying off talent. Or am I missing something here?>>
They are laying off the bottom 10% and I say good riddance, especially when there is so much top 10% talent out there for much cheaper since the tables have turned in the talent pool out there with all the other company layoffs. When business fluctuates, it's smart to have your employee base fluctuate too. As to cashflows, as they whittle down Inventory and A/R, this will improve. Also, they are a profitable company, so they will continue to increase their cash hoard.
<<Question Three: Business Health? The Business Model has fundamentally shifted. For those who care, my breakdown: Selling Internet Gear, Investment Banking and Selling Slices. These last two sideline businesses which should command the PE of a bank and something less than zero respectively have been subsidizing the growth of the first. And their "E" contributions are being fully factored into the "P" as though it's all core. And are evaporating faster than you can say "underwater stock options". So, how well does the Core business stand on its own?>>
Quite well and getting better. If you haven't noticed many of Cisco's so called nimbler, smaller adversaries are hurting just as much. This is a prime opportunity for Cisco to gain good market share and/or buy it from their ailing, smaller brethren. As for Investment Banking, I say keep it up. No VC is better and gauging what markets have a high probability of panning out in the IP arena better than Cisco. They have people like Mike Volpi who's job is long term strategy and investing to grow markets. Cisco is an expert at this. Without Cisco's help, many markets don't have a chance to mature, which is a lost opportunity to the whole economy not just Cisco. What would you rather they do? Put their cash under the mattress? As a shareholder, I'd rather they give it back to me as dividends, so I can invest it myself, if they can't put it to good use.
<<Question Four: Customer Environment? The core business has run into a brick wall. Not due to the company, but because every IT manager in North America and most of those in Europe has suddenly been disempowered by a cash-conscious board of directors of their own. It is hard to double the amount of money you spend on CSCO gear in such a climate. Easier to cut it in half. Hmmm... let's rub a few neurons together... can we estimate how that might effect CSCO's revenues?>>
No doubt about that. We are seeing the slowdown right now because of it. Does that mean that the fundamentals of Cisco have changed? Some might argue yes. As a long term holder, I argue no. In a year to two years, this slowdown will turn around. Cisco will turnaround with the rebound. Does that sound like a company whose fundamentals have changed? No way. If Chambers and Volpi leave or if ILLEGAL accounting irregularities show up or if they drop from 1 or 2 in every market segment to 4 or 5, then I'd say it's time to abandon ship. But since we all know this is due to the economy and fallout in the telecom market, I say, those with patience will be rewarded if they buy at these levels
<<Question Five: Emerging New markets? This is where the growth must come from. Not only growth to grow the top line, but also to make up for shrinkage in established markets. CSCO is now so big that a small percentage shrinkage in its current markets dominates a 100% share of projected nearby market segments. Good thing they bought all those startups. Shame about all that competition out there. What's the next hundred-billion dollar market CSCO is going to totally dominate if it isn't Optical and it isn't CRM?>>
Good question. Could be anything. Wireless? True optical routers and switches with no electrical inbetween? Look it doesn't matter. The bottome line is that Cisco has placed its bet with IP. That means that as the Internet grows, so does Cisco. Are you going to bet against the Internet? I won't. The next big thing is a continuation of the old thing. The Internet's IP traffic is set to explode. If you think it has exploded already, just you wait. When everyone stops using their TVs because they can get full screen video over their laptops, which are in turn fully wireless, then I'll say it looks like Internet growth may not continue at these exponential rates anymore. But that's BS too, because we all know that information has been growing at an exponential rate for centuries and it will continue to do so. That information will find its way on the Internet and that will benefit Cisco. They are just riding the tidal wave and it's hard to lose.
<<Question Six: Growth strategy? What is it, if not acquisition. Even that is not going so well. Monterey for example, turned out to be a $3M a person recruiting campaign. There are cheaper headhunters out there. Particularly when companies are laying off talent. With new standards for purchase accounting, companies can still sweep costs under the rug... but the bulge of dust is a lot more visible. So how are we going to see growth, anyway?>>
You hit the nail on the head. Cisco realizes this. They don't dwell on sunk costs or past mistakes like accountants like to. When they realize something won't work, they cut their losses and move on. In addition, they also have slowed down their acquisition strategy which was used in large part as a means to ramp up headcount quick. Now they can afford to cut the bottom 10% and when business picks back up, be more choosy about who they hire and pay less for those they do hire. Sounds like a great gift to me. They are basicly using this downturn to return to their lean and mean roots. I like it from a long term perspective.
<<Question Seven: Any other questions?>>
Yes. Once they announce their long awaited write-offs and after this quarter ends in early May (because they might miss this quarter), how can you not jump in? They are poised for a breakaway. What's even better is that so many people are negative now, that contrarian is definitely the way to go. The masses always lag the smart money. I've laid my chips down and I'm going with Cisco. I bet I'll double my money within 2 years and probably triple it within 3-4 years. That's one hell of a return. It may not be much to the newbie investors who racked up 10 baggers in 1999, but to this old hack, the type of returns I expect from Cisco are nothing truly short of amazing when compared to history prior to the dotcom bubble era. Good luck all! |
