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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: bambs who wrote (43154)	11/8/2000 4:32:07 PM
From: Eski	Read Replies (2) \| Respond to of 77397

Bambs for President.

To: bambs who wrote (43154)	11/8/2000 4:49:05 PM
From: Eski	Read Replies (1) \| Respond to of 77397

11/07/00: 04:04 PM GI_Tracy Cisco's Pro Forma Triumph by Robert Tracy The Bull case for Cisco In line with tradition, Cisco beats the Street by a penny. Cisco reports strong year-over-year growth in revenue of 66% and strong year-over-year growth in earnings (GAAP) of 92%. Cisco increases guidance for FY01 revenue growth in excess of 50% and raises pro forma EPS estimates by $0.02 to $0.05 to bring year in at $0.75 to $0.78. Despite a potential slowdown in domestic demand from possible weakness in the US economy, Cisco is looking to Europe and Asia to pick up the slack. The Bear Case for Cisco Cisco's true profitability has been distorted by the assumption, readily accepted by the mainstream press and the Street, that pro forma earnings are true earnings. Inventories continue to increase when measured by days in inventory (Management says the buildup is deliberate). Share dilution continues, with half of the dilution hidden by restating prior year's share count as each new company is acquired. Revenue growth guidance in excess of 50% is a very aggressive target, especially in an environment of an economic slowdown and credit stringency. The Bottom Line Another miraculous pro-forma earnings report cannot obscure continued deteriorating year-over-year operating margin and the buildup in inventories especially in finished goods. Cisco continues to depend on other income as a contributor to the bottom line. Transformation of the Cisco Investment Holdings FY00 saw a remarkable transformation of Cisco's investment portfolio as the holdings of government bonds decreased and corporate equity and corporate notes increased. Much of the increase in the corporate equity component is attributed to unrealized gains on investments. It is not clear why the government bonds (foreign government, federal, state and local government bonds) have decreased both in absolute terms and as a percentage of the portfolio. Over the fiscal years 1995 through 1999, government bonds represented nearly 80% of the portfolio. Beginning in FY00, government bonds represented only 36%. For 1Q01, the total investment line contracted from $16.25 billion as of 4Q00 to $14.05 billion as of 1Q01. The company did not provide detail as to the break out of the investment line, though it would appear that the $2.2 billion contraction may be related to market adjustments of the portfolio (i.e., unrealized losses). It is not clear whether these unrealized losses are from the equity or the debt investments. GAAP earnings vs. pro forma The overly hyped question all day Monday was "Will Cisco meet or beat the First Call estimate?" As Cisco has traditionally beaten the number by a penny, anything less than that this year would have been considered a potential problem. As the estimate Cisco must meet is a pro forma number, one must ask: How do analysts develop models that estimate a pro forma number? Since the pro forma number is subject to whatever management wants to include or exclude, how can management ever really miss a pro forma number? The pro forma estimate for 1QFY01 was for $0.17 and sure enough Cisco reported $0.18. As can be expected, the pro forma EPS exceeded the GAAP EPS by 64%. The year-over-year growth in EPS per GAAP was greater then the year-over-year pro forma EPS growth. Inventory days are up 30 days (71%) from prior year 1Q00. A detail analysis indicates a dramatic increase in inventory days in raw materials, work in process, and finished goods. The company contends the increase in raw materials is to stockpile key components in a constrained supply environment. The company defends the increase in finished goods as a way to cut lead times. The company's explanation for the build up in raw material and finished goods is plausible. Another plausible explanation for the build in finished goods may be a warehouse of inventory that nobody wants. The build in raw materials and work in process may be due to component shortages or perhaps production difficulties. It is difficult to square hot sales with building inventory. Operating margins continue to decline Operating margin is up 44 basis points from 4Q00, yet operating margin is down 300 basis points from 1Q00. On the other hand, net margin is down 99 basis points from 4Q00 but up 151 basis points from 1Q00. Cisco style margins (ie. earnings excluding in process R&D, amortization of goodwill and other acquisition-related charges, payroll tax on stock options and net gains realized on minority investments) remain relatively flat from 4Q00 to 1Q01 and down from 1Q00. Cisco share dilution continues In one year, Cisco has diluted its share base by over 8%; but the reader of the just-released earnings report sees only 4% dilution. How is this possible? Simple: The base quarter shares are restated to include shares issued for acquisitions. The hidden dilution of 4% is revealed when comparing the 1Q00's diluted shares as originally reported versus the 1Q00's diluted shares as reported in the current quarter's press release. When reviewing the 1Q01 press release, many compare the average diluted number of shares for 1Q01 of 7,580 million with the restated number of shares for 1Q00 of 7,288 million (per the press release) and calculate a share dilution of 4%. However, many analysts overlook the fact that an extra 288 million shares had been added to the 1Q00 number of shares that did not exist last year? Are you sufficiently confused? You are probably not alone, as we are sure most shareholders do not realize there is a hidden dilution in the Cisco accounting. A comparison of the average basic shares to the average diluted shares shows that the dilution between the two, largely a function of employee options, has been increasing. We also see the hidden dilution again. As originally reported in the 1Q00 10-Q, fully diluted share count was 6% higher than basic share count. One year later, this difference has increased to 6.9%. Expect the dilution from employee options to continue as CEO John Chambers said the company would grant new options to employees. In providing guidance for the year forward, Cisco told analyst to expect the share count to grow by 80 million shares every quarter -- excluding any major acquisitions. Given Cisco's history, we bet you'll see more than 320 million shares added over the next year. Editor's note: Certain employees at Grant's Investor may hold a position in Cisco Systems. -------------------------------------------------------------------------------- Do You Yahoo!? Yahoo! Shopping - Thousands of Stores. Millions of Products. All with one Wallet.

To: bambs who wrote (43154)	11/9/2000 2:04:49 PM
From: Tulvio Durand	Read Replies (2) \| Respond to of 77397

Bambs, thanks for the clarification on earnings used for PE computation. However, calling the 11 cents as "real earnings" of the proforma 18 cents Cisco quarterly earnings is not quite right. The difference, 7 cents, represents real earnings from investments and real earnings that were used to purchase other companies. All 18 cents are "real earnings". If you spent your total earnings from stock market investments in buying a new car, would you say you made no "real earnings" from stocks? I think not. Yahoo's computation of PE based on partial earnings totally discounts the company's increased value from invested earnings. A PE based on proforma earnings more truly reflects correct valuation, IMO. Tulvio