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

To: RetiredNow who wrote (57039)	2/4/2002 11:11:56 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 77397

mindmeld - we are having an abnormally difficult time melding the minds over this one. You write a post containing "My guess is that margins are down primarily because of inventory liquidation", and claim a response as "misdirection"? Cheeky. You decline to respond to my other on-topic reply "Reduced demand, secondary market, increased competition... (and so on)... any number of things are putting pressure on the top line even before we get to product mix, price/volume sales channel tradeoffs, inventory reduction and distribution of fixed versus variable costs... (and so on, to name a few)... ". So as you can see I've been on the page that gross margin is being pressured by a number of forces. Rather misdirecting to imply otherwise. And as for this: I still don't see any proof that the secondary markets are taking their toll on Cisco's margins. . Geez.. how about opening your eyes? Go to e-bay. Enter "Cisco". Click. View. Takes a second. Try cgi.ebay.com Three of those AS5300 gizmos. Five of these AS12000 series gizmos: cgi.ebay.com Last I heard, these things aren't precisely in the 300 baud modem category, and just one of the vendors is quoting 30 millions plus in inventory. Unlikely that's at "list" prices new. That's just e-bay. The real money's not so brazen. It's not proof, but it's the best you get. Or perhaps I should ask the same of you. Care to offer some proof that the secondary market isn't having an effect on margins? You can't. And so you resort to 'dramatic effect' and 'embarrassing misdirection', and hold up another's view as your own and your own view as someone else's. All for dramatic effect, perhaps. But hardly a high-integrity approach. But despite being somewhat oddly at odds with yourself, and spinning like a top, at least you are perhaps on the verge of waking up to some facts. And so I don't mind that you laugh apparently at my expense... After all, you are mocking a shadow of your own creation. If that's how you come to see what's plain to most people, I don't mind at all. I will gladly part with the sleeves off my vest. Still on the track and not easily deflected by dramatic antics. A summary to date. We have a post to the thread of a news article to the effect that secondary markets are a threat to vendors such as Cisco. We have your rather dramatic and duplicate (but abbreviated) rant in response, to the effect that secondary markets are nothing to worry about and that Cisco won't see their margins squeezed irretrievably. Summed up here Message 16999305 We have my rejoinder that secondary markets are indeed a source of competition (substitutes being the essence of competition, and the real thing being a rather good substitute), and that competition puts pressure on margins. Pretty much summed up here: Message 16999917 You then toss chaff into the air with great dramatic effect. Absurd claims that what's on the market is equivalent to 300 baud modem technology. Reading list notwithstanding, claiming that the appropriate response is "innovate or die", and on the other hand that there is negligible effect after all. For example informing us of your opinion that inventory effects are the real effect of margin erosion here: Message 17003423 Only to exclaim a turn of the earth later with a sudden "AHA!" how "elementary" it is that price competition would take its toll on margins: Message 17010692 The whole thing is laughable. Reminds me of the dialogue we had about the impact of stock options - all along you asserting they were negligible until the facts leapt up and bit you in the face. In this case we are talking about margin erosion due to price competition. To which the secondary market is but a contributor. Please notice my careful choice of stance, which has been quite consistent: a contributor, not the cause. You seem to want to dismiss the secondary market as irrelevant. I maintain that it is supportive of long-term systemic effects to the detriment of gross margins. Which for a company priced relatively higher than when it had GM's of 64% and was growing at 50% p/a has got to be something to pause about. Not to be glibly dismissed with a superficial rant. Simply put, I contend that the the availability of cheap and identical substitutes is bad for pricing leverage, whether or not the availability is actually involved in servicing a demand. For example, just being able to buy an unopened box of top-end router on the cheap gives the customer pricing leverage over the salesperson who's trying to push the new gear. Whether or not the cheap stuff even moves. One brand-new never-out-of-the-box used router on sale for a fraction of list is all it takes to depress the price for the product line. Salesperson gives something away to make the sale, maybe an extra 10% off list, whatever... Which gets chocked up to "the competition". As an aside, It turns out to be worse if the used thing doesn't move. Just sits there chewing discounts off the price of stuff going out the door rather than causing one salesperson somewhere to lose one sale. Which is why companies routinely raid the grey market. Turns out it's often cheaper to buy back the used stuff (and crush it) than suffer the margin impairment across a product line. And then there is the "innovate or die" response. Which innovation, people tend to forget, is not free. As those of us who have bled on the leading edge of tech innovation know, it also has exponentially decreasing marginal returns on investment. So anything which forces more of this costly response is hardly something to stuff in the benefit column or sweep away as negligible. Far better to be in the position to "innovate for success" than in a rearguard "innovate or die" situation. Net margins carrying a certain degree of importance in the real world... despite what the wizards of pro-forma would have us believe. So for these reasons and more, I'm merely suggesting you should not dismiss the secondary market so offhandedly. Which suggestion is not an assertion that the secondary market is of primary importance. Is this the only cause for a plunge in margins? No. At least I don't think so. Is it the primary reason? No again. Feel free to construct false opinions of mine against which to argue. But no matter how dramatic, it's still pointless. The issue here is that many external factors are lining up to create a not-good effect for the company. As long as there is a grey market in the company's gear there will be deleterious effects on margins. Usually a grey market takes time to form and doesn't entrench itself, but also usually once one has formed it turns out to be notoriously difficult to get rid of. One has formed in Cisco gear. It's very active and very healthy. Unusually so, although that is a product of the current times. Unfortunately, once the dust settles and whatever recovery asserts itself, it is not clear that the grey market won't continue to nibble away at margins. If it was clear that the grey market would vanish... well, I too would suggest we just brush it off as another amongst many transient effects. But that's not at all clear. History would teach us that the thing is like crab-grass: hard to kill in an environmentally friendly chemical free way. As I mentioned before, a percent here and a percent there and you're talking nickles per share. Considering that Cisco never earned more than $0.50 per share in its most peak bubblicious period, well nickles per share is not exactly immaterial. When volumes recover in late 2002 and in 2003, margins will recover. So you maintain that Cisco will see gross margins in the 64% range within 12-18 months? If so, I suggest you are dreaming in technicolor. But really there's no sense debating further, time will prove one of us right. See you in 18 months I suppose. But as for your request for proof that the secondary market is corrosive to margins? Actually, I have gone farther than you have gone to prove the converse. When you ask for standards of proof for competing theories that are higher than those imposed on your own perceptions, the technical term for that is "closed mindedness". Hardly deserving of the moniker "mindmeld". John