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

To: Adam Nash who wrote (44685)	12/17/2000 12:08:02 PM
From: The Phoenix	Read Replies (1) \| Respond to of 77400

Some idle thoughts... It appears that there is an incessant focus on consolidated earnings and an associated suggestion that Cisco is in trouble because conolidated earnings are flat. However I think as investors we need to look much deeper. We have to understand not only top line issues - but also where the money is going. If company X is making .11 cents in earnings and has a PE of 100 is it the same as company Y who also is making .11 cents and has a PE of 100? To really understand this one has to look to see where the money is going - how expenses are either a drain on the company as a going concern or a tool to fuel future growth. Cisco, in comparison to it's competitors spends more on R&D and S&M as a percentage of sales. Cisco has also taken to writing down more Goodwill and in process R&D that it has ever done in the past.... reducing further consolidated earnings. The facts are ... Cisco's top line revenue growth continues to accelerate.. Q200 over Q299 was 52.9% yoy Q300 over Q399 was 55.1% yoy Q400 over Q499 was 60.8% yoy Q101 over Q100 was 66.4% yoy INCOME before expenses and gains - that is before we include costs for fueling the current company and future growth... Q200 over Q299 was 51.5% yoy Q300 over Q399 was 54.0% yoy Q400 over Q499 was 59.4% yoy Q101 over Q100 was 63.8% yoy In fact if you look at earnings/share using income before expenses and investment gains EPS would look like Q299 $0.25 Q399 $0.27 Q499 $0.31 Q100 $0.34 Q200 $0.38 Q300 $0.42 Q400 $0.49 Q101 $0.55 Now that we have reviewed the top line what about expenses and gains??? So... all these revenues, income... and acceleration.. but flat earnings on the consolidated statement??? Where's all this money going??? Read on... I think the most troubling issue last year to many anaysts was the fact that Cisco's QoQ R&D expenses were growing faster the Cisco QoQ revenue growth. THis has come into line where they are now about equal - right around 15%. Cisco continue to pump more money into R&D and S&M than any competitor in it's class as it continues to attempt to extend their influence into other markets and new product categories. As part of this effort Cisco continues to remain aquisitive and this further affects the conolidated statement in the form of significant increases in goodwill and in-process R&D. In fact these two items have more than doubled if you compare the most recent 4 quarters with the previous 4 quarters and are responsible for a short term drain on earnings of $2B over the past 4 quarters. Again, one can assume these are a COB or an investment to promote future growth into new markets.. the fact however remains that these are funds that are being turned back into the business and provide some with the perception that earnings growth is flattening. The truth actually is that Cisco prefers to operate the company as a going concern and plan for future growth by turning these funds back into the company. Some folks will point to recent investment gains as a prop for the most recent two quarters of Cisco's earnings. The truth however is that these investment gains don't even equal half of the Goodwill and In-Process R&D expenses that Cisco has incurred in the same period. In effect what is going on here is Cisco is re-investing gains from minority investments and then ADDING "matching funds" from operations in order to continue to fuel new technologies, new businesses, and new ideas that will propel Cisco into new markets. The bottom line here is that earnings that some have used on this thread of .11, .09, .11, .11 over the past 4 quarters are a compiliation of many things going on within the company... One that looks only at these numbers without understanding where they came from is doing themselves a disservice. Cisco's trajectory looks pretty stable... this past quarter QoQ sales and earnings growth slowed which at first was a concern but then I the same thing happened in Q100 as well.. This upcoming quarter should be very telling but remember you have to look beyond the consolidated bottom line to get the real picture. If not you're not looking at the health of the company. An analogy might be... if you gave two people $1000 to start a company and both showed gains at the end of the year of $100 but one fellow spent all his funds on furniture, salaries for office staff and none on R&D and the other worked from home and spent all his funds on R&D and/or S&M to find/attack new markets in which the business would grow and prosper... who did the better job? Who will be better off next year and the years following??? The fellow that squanders his funding on capital that doesn't generate new opportunities or the fellow that uses all his funds to find new markets???? OG