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

To: RetiredNow who wrote (57905)	2/23/2002 8:08:37 AM
From: Dave	Read Replies (3) \| Respond to of 77400

Mindmeld and John, Would it be possible for both of you to post your Excel spreadsheets so I could review?

To: RetiredNow who wrote (57905)	2/23/2002 9:30:33 AM
From: hueyone	Read Replies (1) \| Respond to of 77400

<<Why do the Wall Street analysts think nothing of it? (Impact from Stock Options)>> It is the same old story that Wall Street "analysts" are salesman first and "analysts" second. They only "think of something" of it when it suits their purpose. Nevertheless, as technology crashed over the last couple of years, I think there has been a lot of attention paid to the impact of options both by major financial media as well as brokerage houses. Too bad they didn't pay attention while technology was skyrocketing. For example there was this study from Merrill Lynch's leading technology analyst in June, 2001 suggesting that options were impacting tech companies cash flow to a "stunning extent". Message 15974615 And remember this June, 2001 article in Fortune magazine called "Options Sleight of Hand"? It drew quite a bit of interest on SI at the time. fortune.com (Click on the tables at the end of the article and scroll down to options impact on new economy companies). Kudos to you and John Shannon for keeping a close watch on this very important subject. Best, Huey

To: RetiredNow who wrote (57905)	2/23/2002 12:18:12 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Mindmeld, no problem. Two juicy points. About you and me being 'the only ones' to see this whole stock option stuff. Well, this isn't true. I have been merely relentlessly in your face about it for about a year and a half now. Other less dogged individuals have come and gone. And to tell you the truth, if I hadn't derived entertainment value from the whole push & pull with you, I don't think we'd have got nearly as far down the path. And it wouldn't be "you and me and others on this thread" being the smart guys, you must admit that it would have been merely "me and not-as-many-others and not to the same degree". Multiply our interaction by a hundred million or so. Spice it up by the fact that not everyone is as willing as you to listen to folks that aren't as persistent as me (and vice versa) and I think you have the answer right there. As to the analysts covering the stock... let's be realistic. Have you ever walked by a used car dealership? How many of them have a copy of "LemonAid" lying around as reading material? Like used car salesmen and carnival barkers, sell side analysts in the secondary market have a job to do. Move the inventory. Don't ever mistake that for ferreting out facts. Finally, these guys also know another truth. That their job is not to determine what something is worth from an economic perspective, but to determine what folks are going to pay for it. Because that's the only way anyone makes any money. In your DCF model Careful with the phrase "Cisco generated xxx in cash" by looking at the cash flow statement. You're the accountant. You know that "Cash flow" is merely the measure of how much cash flowed into or out of the cash account. Lets say JohnCo had revenues last quarter of 100 million and costs of 90 million for a reported profit of 10 million. Let's say JohnCo does this every quarter, steady state. Cash generation of the business is 10 M (we hope). But maybe one month I decide to pay my bills a little late. So my AP goes up by 10M (let's say). My operating cash flow will zip up to 20 M$ that month 'cause of that regular 10M in profit, plus the 10M of cash that didn't go out the door. Of course, next month when I pay what I owe my cash flow will be down by 10M to show zero... Or if I have been prudent, I will have a variety of accounts tucked into the business cycle where I will have stashed value for a rainy day. I can convert these to cash at any time to gain "cash flow" without actually increasing value for shareholders. If I'm a financial engineer and I expect next quarter to take off and this quarter to be dull, I can temporarily borrow cash flow by "squeezing the business". So predicting next quarter cash flow from this quarter cash flow is dangerous. We need to take a kind of long-term average, or we open ourselves up to wide swings. I suspect when we peel open Cisco's 10Q you are going to see a lot of their reported cash flow will have come from this kind of sponge-squeezing. Or if you want, I can explain it another way as well. Let's go back to JohnCo. Looks like a profitable business. 10M$ per quarter profit on the books, shows up as cash flow. All hunky dory according to GAAP. What's this, there's 2 M$ of this as tax benefit from stock options? Oh, that's not too bad, only 20% of cash flow (we say). Factor that out and we've got 8 M$ per month in juicy profits. Not a problem. (we say). Oops. Not correct. Forgot something. That $2 actually is 35% of the difference in value between what shareholders parted with and what employees paid. So really my shareholder cost was 5.71 M$ and the IRS gave me 2 M$ so my net actual profit isn't 10 M it's (10 - 5.71 + 2) = 6.29 M. Then tack onto this that maybe some of my revenue came from selling inventory that cost me nothing. Immediately boosting cash flow for an equivalent amount of sales made from costly-inventory by an amount dependent on gross margin. Let's say JohnCo's gross margins were about 50% and his inventory benefit was about 2 M$ or 10% of cash flows. The extra 1 M$ is indeed real cash profit this quarter. But it's a one-time effect unless we think next quarter we're going to use the same amount of zero cost inventory. So as a shareholder you would say "thank you" for the dollar this quarter and factor it out of your ongoing projections: JohnCo needs to grow profits by a buck in order to show the same cash flow next quarter. So really we have to start our growth clock at $5.29 Then maybe some of my revenue came from deferred revenues. Another million, let's say. Same effect as zero-cost inventory. Back the growth clock off by another $0.50 to be fair. So JohnCo's reported cash flow of 10 M$ is actually equivalent to real profits closer to 5 M$ on an ongoing basis. And that's assuming none of this 10 M$ reported cash flow came from adjustments in AP and AR and reserves and preserves and so on and so forth. JohnCo and CisCo are not dissimilar this quarter from the perspective of ratios. Intentionally. But I bet you already figured that out. Anyway, while you might look and see 3-4 B$, after applying some adjustments and looking back over history and factoring in other effects, I think you'll find things closer to 1-2 B$ John.