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

To: RetiredNow who wrote (57438)	2/9/2002 12:11:30 PM
From: hdl	Respond to of 77400

thank u 4 doing the work and sharing it with us

To: RetiredNow who wrote (57438)	2/9/2002 1:12:05 PM
From: JeffT	Respond to of 77400

Great job of research. I think your opinion that "Cisco is fundamentally sound and getting stronger every quarter" is right on target. They are a huge generator of cash and I agree they seem to be good stewards of it these days. I think the market expressed a great deal of disappointment last week that Cisco's outlook was so uncertain. The market hates that. I am hopeful that JC was just being cautious, as he implied in the CC, because he was burned so badly when his industry fell apart before his eyes and he did not see it until it had already happened. That's where some of that excess inventory came from that we have discussed so much. Again, good job! Jeff

To: RetiredNow who wrote (57438)	2/9/2002 1:33:43 PM
From: kvkkc1	Read Replies (1) \| Respond to of 77400

One other thing that will help is that during this quarter, I believe, they should finish paying the 12 months of severance pay to the 20% of those they laid off. That should reduce operating costs by a good bit. If I'm wrong on the timing, then it should definitely end during the 4th quarter of CSCO's FY02.

To: RetiredNow who wrote (57438)	2/9/2002 1:48:21 PM
From: Qualified Opinion	Read Replies (3) \| Respond to of 77400

Mindmeld, benefit from reversal of the inventory write off on GAAP Earnings was around $672 million, after taxes, in the last three quarters. Check footnotes at the bottom of the Income Statement > Link: investor.cisco.com;

To: RetiredNow who wrote (57438)	2/11/2002 12:31:26 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Multi Part Reply Part 1 Mindmeld, great work. A good solid basis for an effective discussion. Point by point I've assembled a few observations. Split into several posts so we can track the different threads. Goodwill My numbers agree with yours. The 4'th quarter of FY 01, Cisco wrote down 298 M$ of goodwill (1,055 through 4Q - 757 through 3Q), plus a charge of 289 M$. Since then, zero. All recorded properly according to GAAP. In this I think the entire thread would agree. However, some of what I was introducing earlier seems to have fallen into a gap, wedged open by a tangential focus on GAAP. In evaluating economic impact, the issue isn't whether or not the numbers are recorded according to GAAP. No, it's all nice and clean and properly presented accounting treatment, so a complete waste of electrons to argue otherwise. Cisco has always conformed quite neatly to GAAP. Instead, there are two subtle and elusive points here. Firstly, that from an economic standpoint a change in accounting principles does not make a company more or less profitable. Just changes the relationship between accounting profit and economic profit. Which are two different things. After all, there are ways of accumulating wealth that present zero profit (e.g. spend every cent of revenue in excess of cost on R&D), and ways of presenting profit that don't reflect any actual accumulation of wealth (e.g. sale of previously written off inventory). Like juggling, it all depends on what balls are in the air when the snapshot is taken of what's in the hands. Folks like me who assess an investment based on wealth creation try to peer through such tricks of the strobe light. And in so doing, occasionally run afoul of accountants, so it might seem :o) A thick skin and a sense of humor helps. Appears my skin could use some thickening and my humor some thinning. Sorry 'bout all that. Anyway, just on the surface, the difference between the new GAAP and the old GAAP makes for $0.02 in reported earnings, to the company's credit. Second, like the value of Inventory, the carrying value of Goodwill is an estimate, arrived at by management and dependant upon the assumptions they feed into generally accepted GIGO functions. Rather than worry about whether the output of the GIGO function finds itself properly recorded on the books, it is more useful to test the implications of management's assumptions relative to what we observe elsewhere. First we might note that the 4,666 B$ in Goodwill was almost entirely accumulated in the bubble years of FY '99, '00 and '01. And we might calculate the amount written down as recognition of "oops" set in at 587/4,666 = 12%. Meanwhile back at the ranch during this time, JDSU recognized an "oops" in the order of 90% of its bubble acquired goodwill. Check Nortel. And other rapaciously acquisitive competitors in the space. We don't need to look only at the books, we only have to look around us. Most of the Cisco kibble startups that had the misfortune of not being eaten have vanished entirely into the big blue sky as a consequence of vanishing VC financing. Leaving behind only ex-employees with startup experience on their circulating resumes, nearly-new gear available on eBay, and investors who are now applying "Due Diligence" with something that is beginning to resemble diligence. Ed Forrest recently did us all a favor and posted a very useful article about warning signs of increased investment risk. One of which was management's implied judgement being notably different with respect to industry. All around Cisco, goodwill has been imploding. But internally it was written off at less than the rate it was being written down before management's oft cited and optimisticly expected V-shaped recovery of 2H 2001 failed to arrive. So the numbers on their face suggest that with the exception of the normal rate of depreciation employed before pooling was eliminated, what Cisco purchased at the height of the bubble is still worth just about what it was at the height of the bubble. In the opinion of management. I'm not suggesting there is any risk in the accounting. I'm suggesting there may be risk embedded in management's opinion.

To: RetiredNow who wrote (57438)	2/11/2002 12:31:40 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Multi Part Reply Part 2: On Inventory While we're on the subject of questioning management's ability to estimate value, I don't grok how you get 90% of supposedly zero worth inventory actually turned out to be worth zero. Not so long ago, management informed us that $2,220 Millions of Inventory was worth zero and subtracted this amount from earnings and thus from shareholder equity. Then they sold $121 Million of stuff worth zero (benefit to shareholder equity), used another $283 Million of stuff worth zero instead of buying/making more (benefit to shareholder equity) and bartered 447 million of stuff worth zero against future pending accounts payable (reduction in contractual future debit [=benefit] to shareholder equity)... Looks to me like the only stuff really worth zero (no benefit to shareholder equity) was the 555 million that was scrapped. By my math, management was correct about 555 out of 2200, or 25%. You mentioned that using inventory is a benefit to earnings, but "not materially". Perhaps. If we agree to call 15-20% of something being "not materially" then we agree. By that measure, Cisco's stock price hasn't changed materially in the last week, eh? Nevertheless, Cisco will have to grow economic profit by 15% in order to show the same accounting profit next quarter for the same revenue.

To: RetiredNow who wrote (57438)	2/11/2002 12:31:54 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Multi Part Reply Part 3: Options & Shares Stock Options We started our little debate here many moons ago by noting the degree to which Cisco's cash flow was dependent on stock options. Speculating that without as much of this poorly understood option cash flooding in, we would start to see how much the business is actually contributing in terms of cash flow. That 21 Billion dollar pile of cash, where did it come from? Because the real question for folks who would value an entity with a pile of twenty someodd billion in equity at 130 $Billion is "where's the remaining hundred and some odd billion going to come from?" As long as the answer looks like "the same place where the last twenty someodd came from", count me out. See "Additional paid in capital" Message 17043618 So you are right on in terms of looking at the degree to which investment gains and losses are contributing to income and cash flow. Get the option smoke out of the way and more folks will be able to clearly see how big the real fire is. Those who took the care and subtracted it in the first place had a bit of a head start. Contrary to your view of my concerns, I am not concerned that options are currently a big inflator. I am concerned that folks still haven't yet figured out the size of the thing that was being inflated. OS Shares. You mention that it's good news that the company is finally taming dilution. And we are agreed. Partially. As good as this is, beneath the surface the appropriate question is: at what cost. Burning $250 Mil of shareholder equity to retire $250 Mil worth shares at a Price:Equity ratio of almost 5:1 is not exactly great leverage. But this bed was made years ago, so perhaps management is making the best of a very bad situation. At least they weren't buying back in at much higher bubble prices. Quantify the issue another way. In the 10-K they disclosed 481 Million stock options issued with strike prices between $0.00 and $18.57. If these are all exercised at a weighted average price of $20 the net inflow to the company will be approximately 6.4 Billion in terms of cash from exercise and tax benefit. The cost to retire these extra shares at the same weighted average $20 will be 9.6 B$, for a net pending liability of 3.2 Billion. Which when added to the size of the outstanding goodwill is about the same size as Cisco's lifetime retained earnings. Which must certainly be "material". The cost becomes less material only as the share price drops, and vice versa. Unfortunately. For folks holding shares, that is.

To: RetiredNow who wrote (57438)	2/11/2002 12:32:05 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Multi Part Reply Part 4: Additional Paid In Capital Except for the math (I would use a different path and probably therefore come up with a different number) we are in agreement as to the qualitative problem: the business seems to have vanished a lot of shareholder cash contribution. How about we pause for a second and compare the amount that you say vanished to the total profits the business has ever generated. Both values are approximately 7 Billions. Give or take some fraction that is "not material". If I take your money, misplace a whole pile, and bring in a similar sized pile of profit, how much profit have I really generated for you? And then, if half of that pile of profit is set aside to offset the "goodwill" into which I converted some more of your contribution along the way, now how much profit have I really really generated? And then if I've promised shares of whatever's left over to me and my closest buddies that will cost you the other half of that profit to buy off... well... me and my buddies are richer and you aren't. And then I might say: "Don't blame me, first, I'm just doing my job. Second, I've reported what I've been doing quite openly according to GAAP all along. Now, we're going to make more revenue and record more earnings next quarter, so can I please have more of those options?" What a sweet job that would be.

To: RetiredNow who wrote (57438)	2/11/2002 12:32:20 AM
From: Stock Farmer	Respond to of 77400

Multi Part Reply Part 5: Deferred Revenue & Guesses Deferred Revenue Deferred revenue used in 2Q was about 15% of reported earnings. At least going by the preliminary financials in Cisco's press release. If the use of deferred revenue goes to zero, then at constant revenues their economic earnings will have to increase by 15% in order for accounting earnings to remain flat in Q3. Guesses I'm guessing when the veneer is peeled off we see more of the same Cisco. Improving. Yes. But a tiger doesn't change its stripes overnight. Not without shedding an awful pile of fur. I note from the press release that Shareholder Equity increased by only 1.0 Billions. So if you are right and Operating Cash Flow was 2 Billions, then the other Billion still managed to vaporize somewhere.

To: RetiredNow who wrote (57438)	2/11/2002 12:32:35 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Multi Part Reply Part (last): Conclusion Part 1: Message 17043615 Part 2: Message 17043616 Part 3: Message 17043617 Part 4: Message 17043618 Part 5: Message 17043619 Here is a company entrenched in the buildout of the Internet. Which is gathering revenue at a healthy clip and poised to keep growing this revenue at a reasonable clip. Plus the biggest pile of cash & equivalents of all of its competitors. Plus stealing market share. All good news. As shareholders we have the opportunity to grab one seven billionth of this good news at close to $18. Pretty much as many of these as we can afford. The question at hand is: yes, or no? Which is not easy. Because on the other side of the ledger, this same company that has managed to gather an impressive 7(ish) Billion in retained earnings, has (by your calculations) managed to misplace a similar 7(ish) billion in cash that shareholders have shipped into it from time to time. Nets to not materially different from zero over the life of the company. If this is the ongoing trend, then $18 for a slice of something generating zero isn't precisely the best deal going. So we need to see a change. More than just a change, though. Enough to offset a bit of bow wave. 'Cause the company's facing an expense that could be half of what it's ever earned if it wants to hold dilution to 0% against all of the outstanding stock options, assuming the stock price barely goes anywhere and no more options are issued. More if it does. And less if it tanks. Unfortunately. Also carrying goodwill on the order of the other half of what it's ever earned. Which puts it at the starting gate. Hopefully on a new track. What's the track look like? EPS rate of $0.36 gives us nearly 50 PE... If we factor out the use of inventory and the deferred revenue cookie jar 'cause neither of these can go on forever... well, that's EPS rate closer to $0.24 pushing PE up into the 70's. Well, maybe revenue and earnings are going to pick up and the company's going to be able to really retain its retained earnings. Put it all together and I guess we could hang on and hope for a V-as-in-Very-shaped recovery... that's certainly one possible interpretation. John. P.S. Disclosure: no position. Not short, not long. Nor paid to articulate these views.