Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Stock Farmer who wrote (58406)	3/12/2002 2:11:14 AM
From: Stock Farmer	Read Replies (2) \| Respond to of 77400

Error: [EDIT: Did it again...!!] Meant "Accounts Receivable" not "Accounts Payable" in example ref cash flow. AP is a contribution of 273 in the other direction :) John

To: Stock Farmer who wrote (58406)	3/12/2002 2:17:14 AM
From: Eric	Respond to of 77400

John It sure is an interesting 10-Q! Still digesting it but it looks pretty good from what I've seen so far. Eric

To: Stock Farmer who wrote (58406)	3/12/2002 2:21:19 AM
From: JeffT	Read Replies (1) \| Respond to of 77400

Good analysis John..... Jeff

To: Stock Farmer who wrote (58406)	3/12/2002 11:34:23 AM
From: RetiredNow	Read Replies (1) \| Respond to of 77400

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$. Wrong, John. I took their 6 months cash flow and subtracted out the prior quarters 3 months of cash flows. So I calculated Q2s cash flows correctly. Second, your mindmeld-cash-flow calculation of 1.941 B$ includes changes in working capital. Which as a CPA you'll note is hardly something we can count on as a continuing item. As far as changes in working capital, that is part of ongoing operations. Should we strip out all sources of cash, John? Perhaps to satisfy you, we should say for Cisco, take out all sources of cash including cash from true operations for zero cash flows each quarter? LOL. Please, now you are just being ridiculous. 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. Wrong again. I went back 6 years and Cisco has averaged 19% adjusted cash flows to sales over that period. Revenue deferrals should not be backed out because over a 6 year timeframe, those smooth out. You are getting so nitpicky, that you are beginning to distort figures to justify your own conclusions. Might I suggest forming conclusions based on the facts as you find them instead? Chicken before the egg? :) Rather remarkable structure does not exactly look like "arms length" deals however Not armslength! That's ridiculous as well. They disclose everything for you and you still don't like it. What they are doing with these companies is extremely shrewd. They have taken a prove-it-to-me-before-I-buy-approach, as well they should. I wish all companies were this smart when it comes to acquisitions. As far as options to purchase, that is a very smart way to limit your downside and leverage your upside potential, especially when coupled with the goals and targets the potential acquisition has to meet. If you are selling me a company and I tell you I'm not going to buy it all right now. I'll buy 20%, then I want you to prove the business and products to me. Then if all goes well and you meet mutually agreed on goals, I'll buy the other 80%. Sure since I now own 20% we have a much closer working relationship, but does that mean that the whole transaction isn't at arms length? Of course not! This is the way smart businesses acquire other companies. I'm surprised you take issue with this.

To: Stock Farmer who wrote (58406)	3/13/2002 9:26:25 AM
From: RetiredNow	Read Replies (4) \| Respond to of 77400

Ok John, you've provided enough incentive for me to go through my attic to dredge up my old finance book from grad school more than a decade ago. Here's a quote from Brealy & Myers (copyright 1988) Principles of Corporate Finance: "To summarize, we can think of a stock's value as representing either (1) the present value of the stream of expected future dividends, or (2) the present value of free cash flow, or (3) the present value of average future earnings under a no-growth policy plus the present value of growth opportunities." You and I have taken the #2 approach to valuation based on free cash flows. Furthermore, Brealy & Myers say, "Cash not retained and reinvested in the business is often known as free cash flow: Free cash flow = revenue - costs - investment" So from that, I think you and I can get a good proxy for free cash flows by taking net income and adding back depreciation, amortization, and investments in PP&E. Further into the book, Brealy & Myers say, "[when estimating cash flows] Do Not Forget Working Capital Requirements. Net working capital is the difference between a company's short term assets and liabilities...Most project entail an additional investment in working capital. This investment should, therefore, be recognized in your cash-flow forecasts. By the same token, when the project comes to an end, you can usually recover some of the investment. This is treated as a cash inflow." Brealy & Myers directly contradict your assertion that net working capital should not be included in free cash flow: "...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". So I'm not too sure what the problem is here. One the one hand in your post, you say that I should not include net working capital in my free cash flow estimate, yet I see in your post that you did include it. Either way, I've gone back to the definitive source and it should be included, as I originally suspected. Also, in my analysis, I was actually being overly conservative in reducing cash flows by all the items that I reduced it by. For instance, a very strong argument could be made for including all the tax benefits from stock options exercise on an ongoing basis, because the dilution would be reflected in the growth of the o/s share number anyway. So if I'm going to reflect dilution there, then I should reflect the associated benefit the company is getting in the cash flows. You can't have it both ways. Either ignore o/s share growth from option grants and exclude the tax benefit, or ignore the benefit but caluclate no growth in o/s shares. I think the problem with your logic is that you are allowing yourself to get too convoluted in your thinking. For instance, you keep talking about misplaced money from equity financing. I don't see any misplaced money. It's all there in cash and investments and retained earnings. Many businesses consistently manage to show accumulated net income, which is less than cash inflows. They do this by maximizing tax benefits. The whole goal of a business is to show as little taxable net income as possible to minimize the tax obligation. Stock options have been a great vehicle for this. As a result, what many tech companies have in their financials is a reduced retained earnings number and a lot of cash sitting on the books. You can't fault tech companies for using the tax laws to their advantage and that is just what Cisco, Microsoft and a host of other did.