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

To: RetiredNow who wrote (58481)	3/13/2002 1:04:20 PM
From: hueyone	Read Replies (1) \| Respond to of 77400

What John was asserting was that Cisco was generating current cash flows from their changes in net working capital, which is hogwash. For a well-managed company like Cisco, over the long term, net working capital doesn't swing wildly. The impact on current cash flows from changes in working capital (Operating Assets and Liabilities) for the six months ending January 27, 2001 was negative 1.8991 billion. The impact on current cash flows from changes in working capital for the the six months ending January 26, 2002, is plus 1.364 billion---a 3.26 billion dollar swing. How you could you look at a 3 billion dollar Y/Y swing on the current 10Q and even begin to suggest these changes in working capital do not swing materially or that changes in working capital cannot be very material in generating current cash flow is beyond me. I hope when I get time to study yours and John's entire numbers, that the rest of your numbers and assumptions hold up better than your assertions above<ggg>. Best, Huey

To: RetiredNow who wrote (58481)	3/13/2002 2:53:50 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Mindmeld, we don't agree. I get Free Cash Flow of 946 M$ this quarter. I used the formula: Earnings MINUS depreciation MINUS Capex for PP&E Short term assets and liabilities will always fluctuate. So over the long term, those fluctuations become immaterial to the overall calculation of free cash flows. What John was asserting was that Cisco was generating current cash flows from their changes in net working capital, which is hogwash. Um... two points. Second one first. Caution slinging the label "hogwash" around. I'm asserting that Cisco's cash flow from operations must be offset against changes in non-cash working capital components if we're to be looking at a metric of increased value. Cisco is generating cash flow from changes in non-cash working capital. When you take something like AR and collect it, that generates cash. And then AR goes down. Cash up, AR down. Assets unchanged. Net working capital unchanged. Cash flow positive. No new wealth. Have a nice day. The only way this "increases" the value of the company is if $1.00 of "AR" (net of provisions for doubtful accounts) for example, is not worth $1.00 of Cash. And I don't think you want to go down that road. First point. Short term assets and liabilities will always fluctuate. This is exactly why we do not add the consequences of fluctuation into the overall projection of future profitability. Glancing at a few of the more recent 10Q's, Cisco's working capital has been 5 Billions plus or minus a billion. Ratio of cash to non-cash components of working capital has varied between 1:0.6 and 1:1.16 - pretty much all over the map. These "fluctuations" are of the same order of magnitude as income, depreciation and PP&E expenditures. I am confused with your calculation of 1,941 M$ because it bears no resemblance to free cash flows and is another amongst many other irrelevant numbers when it comes to putting a value on Cisco. The purpose was (I thought) for some valuation exercise. 40% of revenues has not and will not accrue to shareholders. Either in the past, or in the future. Not unless they cough up 30% of revenues like they've done in the past. Which isn't accruing value to shareholders. And if 40% of revenues won't be accruing to shareholders over the next 10 years, what the heck good is a methodology that generates such a meaningless number in the first place? I look at the 20% that a more rigorous science generates, then factor in the effects of booster-spice in the form of free inventory and deferred revenue and glance back at the historical 10%-12% and say "that's more like it". John

To: RetiredNow who wrote (58481)	3/13/2002 10:04:26 PM
From: hueyone	Read Replies (2) \| Respond to of 77400

Mindmeld: I have checked John Shannon's calculation numbers for free cash flow against Cisco's last two 10Qs and in my opinion his 946 million number is precisely correct. I also firmly believe John’s 946 million free cash flow number is a much more useful number than your 1.941 billion adjusted cash flow from operations number for valuing the company. Both are valid and we both actually included changes in net working capital as is appropriate. On the contrary, I believe John is in complete agreement with me (or rather I am in complete agreement with John) that the net changes in the working capital account do not belong in the free cash flow calculation. I can get a good proxy for free cash flows by taking net income and adding back depreciation, amortization, and investments in PP&E. Yes, you John and I are complete agreement on your statement above. But then you unexplicably go on to say: Brealy & Myers directly contradict your assertion that net working capital should not be included in free cash flow Sorry, those two assertions above, both of which you attributed to your Brealy & Meyers readings, are directly contradictory. What John did was add those changes back to net income, whereas I just left them in operating cash flows, which is to say we did the exact same thing. If you did the same thing, why did you get two results 100% apart? Let me clarify. If sales continue to go up, but A/R remains the same, then wouldn't you say that the business is getting more efficient at collecting? Yes, but this still does not make this change in AR, or lack of change in this case, belong in the free cash flow calculation. John is to be commended for putting up with such endearing terms and expressions as "hogwash", "ridiculous", "distortion" and "conclusions not based on facts" in such good humuor in light of the outstanding accuracy of his assertions during this debate. He must be mellowing.<ggg> Best regards, Huey