mindmeld - an interesting response. Sorry if I touched a nerve.
How about showing us all where the heck do mindmeld-cash-flows of 1.941 B$ come from, and what (if anything) to they have to do with the ability of operations to increase shareholder assets?
Plainly, speaking, I couldn't figure out how you got 1.941 B$ in the first place.
I am at least resting entirely on objective facts, and my calculations are clear.
Factoring out Q1 contributions, in Q2 the company had 2,007 M$ cash flow from operations (all sources). Of which 667 M$ came from changes to working capital components and another 204 M$ from various tax adjustments and provisions to existing shareholder assets The remaining 1,136 M$ is additive to shareholder assets.
Obviously, in order to come up with 1,941 M$ you selected cash-flow consequences of liquidating certain assets as being meaningful to shareholders and selected others to be meaningless. Net-net to the tune of 805 M$. Care to explain in detail which you chose, and which you excluded, and (in particular) why?
Especially in light of your observation: As far as changes in working capital, that is part of ongoing operations. Rhetorical devices omitted ;)
Clearly you excluded some of these costs. Yet you ridicule someone else for merely using a different criteria? Tsk tsk. Somewhat unvulcan.
If you want to compute some number that measures an admixture of increases in shareholder assets and liquidation of existing assets, well, go ahead. But it's not exactly meaningful.
For example, operating cash flows of 2,007 M$ or 42% of revenues. Of which 667 M$ or 14% of revenues came from liquidation of working capital assets. As an exercise in curiosity, perhaps compute how much more revenue Cisco can earn at this rate before all working capital assets are entirely liquidated. Then what?
I suggest a balancing -14% un-liquidation is not unreasonble at some time in the future. Therefore the current rate of cash generation is representative of future rates only if we proactively average the +14% with the expected -14%. Which is to say, factor out the 14%
Otherwise we must expect a changing ratio of working capital to revenue. Which implies greater or lesser business efficiency.
I am being objective and trying to create a measure of the company's measurable contribution to shareholder assets that matter. Otherwise we might just as well measure "goodwill flow". Instead, I search for sources of cash.
Changes to working capital are hardly "sources of cash" any more than a sponge is a "source of water". Reducing the asset "Accounts Receivable" and increasing the asset "Cash" doesn't have much bearing on an increased wealth of shareholders. The projection of which is the whole point of any kind of meaningful cash flow analysis.
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? :)
Huh?
Something that is positive this period but averages out in the long run (e.g. can be expected to be similarly negative in some future period) should not be backed out in an estimate of long-term average? LOL... OK, if you say so.
As for facts, well here are the facts. FY's '95 through '01, plus first two quarters in FY 02, Cisco has earned 83,613 M$ in revenue. Give or take a few millions.
Let's take your suggestion on its surface that the company generated 19% of this as some sort of measure of contribution to the business from operations. That's 15,886 M$.
And note 20,603 M$ from equity financing. That's also a fact.
Take the absolutely factual assets net of liabilities of 28,143 M$. Excluding that 20,603 M$ in equity financing, leaves 7,540 M$ that the business has accumulated. Out of 15,886 M$ that you suggest it's generated?
OK.
So you think we should conclude that management gave shareholders 0% return on equity financing and on top of that managed to misplace 53% of 19% of revenues?
Either it wasn't all there in the first place (my suggestion to you), or management managed to squander it along the way.
Wouldn't it be more objective to note that neglecting any return on equity financing, then management has kept 100% of 9% of revenues? I rounded up to 10% to be generous.
I suggest that having something that doesn't stick around isn't worth any more than having nothing in the first place. Furthermore, if you sum up the last ten years of rigorous free cash flow calculations I suggest, you're going to get remarkably close to 7.5 B$. Which is another way of saying sum of free cash flows equals what the business contributes to shareholder equity.
It's not as if I'm making this up or anything. Have you forgotten all of your finance training?
As far as the not-arms-lengthedness of acquisitions, once again I suggest you forget about a role as a cheerleader for a second. Take a step back as an objective outsider.
You have presented a theoretical postulate, where increased cost to shareholders is supposedly justified by reduced risk. At what point does the certainty of the extra cost outweigh the uncertainty of the risk? 'Cause as a shareholder, it's your money. If the R&D could have been had for $1.00 on the dollar and yet to avoid a phantom risk you paid $2 on the dollar... well, you could have swallowed twice the risk and come out even.
Going further, if it is in the interest of insiders to inflate the perceived value of risk avoidance, what's to stop the risk-avoidance cost being bid up as high as management can bear? Which turns out to be quite high when it's other-people's money on the one hand versus the "one screw-up ruins a thousand atta-boys" on the other.
So when you see that the objectivity of a third-party transaction is impaired by non-arms-length deals, then it is more than reasonable to construct alternative tests. Otherwise, how do you ensure that management is bearing an appropriate level of risk?
It's our money. We have the right to ask questions. If we don't, who the heck does?
So, I have not yet passed judgement on whether or not Cisco's practice of paying a premium for "proven" R&D is the most effective use of shareholder dollars.
And note, I'm not talking about the value of purchasing external R&D. I'm talking about the practice of trading off risk for cost in that purchase decision - e.g. picking up 100% at a low valuation but high risk versus 20% of low plus 80% of high valuation at a lower (non-zero) risk.
IMHO it's not about absolutes, but risk/reward tradeoffs. The questions "do we have the right balance point?", and (more important) "why are we so confident?" are essential.
John |
