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Technology Stocks : Cisco Systems, Inc. (CSCO)

CSCO 71.08

+0.1%

Nov 7 9:30 AM EST

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To: Eric who wrote (51628)	4/17/2001 3:27:20 PM
From: Stock Farmer	Read Replies (2) of 77397

Hi Eric - thank's for the playback. I have reconciled the 2.5 B$ inventory charge. It's not just components though, it's work in progress and finished goods too. It probably won't all go on the scrap heap, in which case the company would be paying for gross margins out of shareholder equity. Recall I was positioning healthy inventory at about 4% of annual sales. Let's say 2001 should hit somewhere around 24 B$, then they should have about 1.0 B$ inventory. Let's assume during Q3 they had production capacity geared to hit 100% of Q2 revenue by end of Q3, but hit only 70% of revenue. That leaves 30% of the output of the machine left over. That unused production becomes "inventory" and is added to the pile left from previous quarters. Which was 2.5 B$ deep. Gross margin 55%, maximum unused capacity should be 55% of revenue shortfall, or 14% of Q2 revenue of 6.2 B$ = 1.1 B$ So if they do nothing, they end up with inventory of 3.6 B$ Write off 2.5 B$ and you have 1.1 B$ left over. A reasonable inventory level to work from. We'll know soon enough. John.

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