Hi Mindmeld, what an amazing 10-Q.
Exemplary disclosure. I wish all companies were as forthcoming in quarterly filings. So it might seem unfair that we use this information to pick apart the company and ask nasty prickly questions...
... but then, that's what it's for.
So, here goes.
First, on cash flow, you wrote this: Operating cash flows from true operations, meaning I excluded provisions for doubtful accounts and inventories, tax benefits from employee stock options, restructuring costs, and net (gains)/losses from investments, came out to a whopping $1.941 billion for Q2'02. That represents 40% of sales of $4.816 billion. That is a stellar result, folks
Well, technically it's only half as stellar. The company presented a six month cash flow, not a three month cash flow, so your 1.941 B$ of mindmeld-cash-flow is over revenues of 9.264 B$.
Second, your mindmeld-cash-flow calculation of 1.941 B$ includes changes in working capital. Which as a CPA you'll note is hardly something we can count on as a continuing item. For example, you see a contribution of 256 M$ from accounts payable. There's only 1,150 M$ of that source of cash flow remaining, by which time the balance sheet would show AP of $0. Etc, etc, etc.
A very rigorous calculation of free cash flow does however give us something very close to your 20% "long term sustainable value" if this current quarter is representative of ongoing activities. So you pulled out your wet finger and actually got the right number. Are you sure you had the right Star-Trek character in mind? You seem to resemble more Bones than Spock IMHO <VBG>
And whilst I risk great damage to my reputation to praise the company, must say that 20% free cash flow to revenue is pretty darn good. Indeed, it's about 2x what we're used to (long term it's been about 10% which is also in line with 1H values). Adjusting for use of "free" components and deferred revenue takes us closer to 10% than 20% however. So my caution here is that the dilithium crystals are straining and she canna take much more.
For those who are interested in the detailed calculations, easily seen if we restructure cash flow from operations as below:
1H 02 1Q 02 2Q 02
Net Income 392 -268 660
Depreciation & Amortization 935 459 476
Amortization of In-process R&D 25 25 0
----- ----- -----
Subtotal (cash from ongoing operations) 1,352 216 1,136
Provisions (doubtful accounts, inventory) 57 -3 60
Tax adjustments -396 -497 101
Investment Losses & Provision for losses 1,014 971 43
Changes to Working Capital 1,364 697 667
----- ----- -----
Subtotal (cash from asset fluctuation) 2,039 1,168 871
===== ===== =====
Total 3,391 1,384 2,007
Purchase Property, Plant and Equipment -482 -292 -190
===== ===== =====
Free Cash Flow 870 -76 946
Free Cash Flow / Revenues 9.4% -1.7% 19.6%
Cash flow due to equity financing has swung from positive to negative as we expected, now that stock option cash flow is drying up.
The loss of 2.5 Billion dollars of un-earned cash per half is a lot of belt to tighten. And employees have got to be feeling the pinch. Approximately 104 M$ worth of stock option compensation is less than 3% of what they earned in the first half of FY 2001 (estimated at 4.8 B$!).
Again, details for those interested.
Company View
1H 02 1H 01 Delta
Tax Benefit from Stock Options 49 1,662 -1,613
Sale of Shares 384 698 -314
Repurchase of Shares (601) - -601
===== ===== =====
Total equity financing to Cisco (168) 2,360 -2,528
Employee View
1H 02 1H 01 Delta
Company's Tax Benefit = 35% 49 1,662 -1,613
Employee Gain on Exercise =100% 140 4,748 -4,608
Finally two points of note:
Care to know who is buying shares at $15 besides Jacob and yourself and Uncle Frank? Well, it's Cisco. About 40 Million at about 600 M$ makes about $15 a share.
And finally, I note the very earnings-efficient way Cisco has effectively purchased four more companies. The interlocking call/put option structure is effectively a collar, which makes it a purchase but not a purchase and so 100% of costs do not hit the income statement. Rather remarkable structure does not exactly look like "arms length" deals however. Not saying Cisco is guilty of this, but these kinds of deals can quite effectively launder R&D expenditure off the earnings statement and onto the balance sheet. Reserving comment until I know the details. I suggest we watch the news wires for this. Not just at Cisco, but elsewhere. Looks like Enron is forcing more dirty laundry out into the open. Might be the best 40 B$ that the US stock market ever spent.
John |
