Interesting... Maybe the change in accounting was to Cisco's benefit, but it doesn't matter."... no maybes, and it does matter, just not the way people are trying to make out that it doesn't.
For example, according to GAAP rules of a year ago, Cisco would have a spot PE closing on 70. But enter new accounting rules and we have a spot PE near 50. Presto, the stock is less overpriced. So folks like ABN AMRO who for all we know just crank a PE ratio... well perhaps they see their optimistic $25 turn into a $35.
I'm sure it works out by coincidence actually, but it does illustrate the point.
The way it "matters" appears in many guises. Check out the 10-Q where they compare prior results according to the new GAAP treatment.
The point is that to stay GAAP, Cisco had to change. So the underlying assertion that Cisco is playing games to make their numbers look better is patently false. They change when they are required to change by GAAP and they change when Wall Street bitches that they need more info, thus the recent announcement also talking about GAAP income too.
No games asserted. I was the guy who pointed out FASB 142 and wondered if anyone else had noticed. Then went farther. Management was taking the big bath write-downs at a time when the V-shaped recovery was just around the corner, you were mocking bambs for buying gold, and Chambers was talking about resumption of 50% growth. So now when we look back... ?
Forget games. What does common sense tell you might/should be forthcoming at some time in the future???
Now, the rest of your comments are absent the support of underlying facts. Which I have assembled from the 10-K and 10-Q reports as follows.
Cisco had a policy of ammortizing goodwill over 3-5 years.
Given Moore's law and the fact that they were a mere blip relative to their
current size five years ago, that makes a lot of sense.
Something I've never criticized.
Goodwill Ammortization Schedule
FY 00 FY 01 FY 02
OCT 00 JAN 01 APR 01 JUL 01 OCT 01
Goodwill 4,087 4,427 4,696 4,955 4,659 4,666
Ammortized 291 231 256 276 298 0
Impair 289 0*
FY 00 FY 01 TOTAL
Ammortized 291 1,055 1,346
Impaired 289 289
---- ----- -----
Net: 291 1,344 1,635
Net Writedown (00-01) 1,635
*denotes conversion to FASB 142, mandatory review for impairment and
write-down. No impairment identified, none taken
Write Down taken during big bath (from Q3 10-Q)
Acquired Company Impaired Purchased
Monterey Networks, Inc. 108 FY 2000
HyNEX, Ltd. 79 FY 2001
Clarity Wireless, Inc. (Broadband CPE) 53 FY 1999
Other 49
-----
Total $ 289
The following table is extracted from the FY 2001 10-K
Consideration Goodwill and
Including Assumed In-Process Purchased Intangible
Acquired Company Liabilities R&D Expense Assets
FISCAL 2001
IPmobile, Inc. $ 422 $ 181 $ 157
NuSpeed, Inc. 463 164 214
IPCell Technologies, Inc. 213 75 102
PixStream Incorporated 395 67 315
Active Voice Corporation 266 37 250
Radiata, Inc. 211 29 170
Other 903 302 387
Total $2,873 $ 855 $1,595
FISCAL
2000
Monterey Networks, Inc. $ 517 $ 354 $ 154
Optical Sys of Pirelli 2,018 245 1,717
Aironet Wireless, Inc. 835 243 589
Atlantech Technologies 179 63 140
JetCell, Inc. 203 88 137
PentaCom, Ltd. 102 49 40
Qeyton Systems 887 260 567
Other 228 71 15
Total $4,969 $1,373 $3,499
FISCAL
1999
Summa Four, Inc. $ 129 $ 64 $ 29
Clarity Wireless, Inc. 153 94 73
Selsius Systems, Inc. 134 92 41
PipeLinks, Inc. 118 99 11
Amteva Technologies, Inc. 159 81 85
Other 58 41 18
Total $ 751 $ 471 $ 257
Grand Total $8,593 $2,699 $5,351
And: "The remaining purchase price of $423 million, $97 million, and $23 million in
fiscal 2001, 2000, and 1999, respectively, was primarily allocated to tangible
assets and deferred stock-based compensation."
According to the following note in the 10-K, the table does not include some other
2001 purchase transactions, for which explicit goodwill values are not identified.
I don't understand the reason for the separation.
Other Purchase Combinations Completed as of July 28, 2001
In fiscal 2001, the Company acquired Netiverse, Inc.; HyNEX, Ltd.; Komodo
Technology, Inc.; Vovida Networks, Inc.; ExiO Communications, Inc.; and the
broadband subscriber management business of CAIS Software Solutions, Inc. for a
total purchase price of $903 million, paid in common stock and cash. Total
in-process R&D related to these acquisitions amounted to $302 million.
Now, let's review your statements.
You wrote: As far as the comparison to Nortel or JDSU, this is also not a fair comparison. Both those companies did nothing but purchase acquisitions in the bubble years, so they had more to writeoff.
Wrong. I compared percents, not absolute numbers. I compared the degree to which their purchased goodwill was written down to the degree that Cisco's purchased goodwill was written down. Not absolute numbers.
Instead, Cisco did pooling, which means that very little of the bubble valuations were ever recorded, so there wasn't a need to write them off.
Wrong again. First, Cisco did purchases. A lot of them, actually. 9 billions in the last three years.
Indeed, from their 10-K: "There were no transactions accounted for as a pooling of interests in fiscal
2001. "!!!
Furthermore, 5,351 Millions of goodwill was accumulated during the bubble. Even if all 1,635 of the ammortization was only against bubblicious goodwill, they've written off 30%. Compare to JDSU which wrote off 90% of what it acquired, on top of what it had already been depreciating.
Instead, you have the bubble valuations imbedded in a huge o/s share number and a lower retained earnings number. Not "instead", but "also". But that shows up elsewhere.
As far as goodwill still being at bubble levels, I'd say you are wrong. They would have written it down had their been a substantial impairment to the acquisitions using purchase accounting during the bubble years. Yes, that is, if they identified an impairment. Do you recall Chambers' optimism at the time of the big bath? Your own optimism at the time? Optimistic & impairments are often incompatible.
The proof is that in their big bath a couple of quarters ago, they wrote off entire acquisitions like Pixstream
Proves the opposite, actually, when the facts are examined.
If you glance at the table in the Big-Bath disclosure, they never wrote off Pixstream's goodwill. That 289 special charge just took care of Monterey, Hynex, Clarity and 49 Million of other. Which 49 millions aren't quite enough to cover the 315 M$ recorded for Pixstream goodwill.
Is Pixstream still a going concern at Cisco? If it isn't, looks to me like the ghost of its goodwill is still stalking the halls.
How 'bout you try and find where it was removed from the books? I couldn't. Even in 1Q 02 when on adoption of FASB 142 they were required to review goodwill for impairment they found none. I have no explanation for this. Read into it whatever you will.
The evidence to suggest that they might reasonably have done so is pretty compelling: Cisco has booked a whopping lot of goodwill during the bubble, and has not yet declared it as impaired. Not to the same degree as her competitors. If so, we'd be looking at close to 4,500 Millions.
I'm just warning about risk. Feel free to ignore the warning. Maybe my "cynicism" is coloring my expectation, just like your optimism is coloring yours. We can agree to disagree on this point, won't bug me. I don't hold any shares, my capital's not at risk.
Ed posted an interesting question, speculating about the existence of information we're not privy to. IMHO we're privy to it, it's right there in black and white according GAAP. Seems to me there's a bias just argue it all away. |
