Optical/IP Networks

CFRA Hits Cisco

The Center for Financial Research and Analysis (CFRA) released a report this week that suggests that Cisco Systems Inc.'s (Nasdaq: CSCO) most recent quarter was much worse than it first appeared.

It’s bad enough that the networking titan missed earnings expectations for the first time in more than six years. But a copy of the CFRA report, obtained by Light Reading from a source (the CFRA declined to provide Light Reading with a copy), shows that disappointment with Cisco could have been much worse.

The CFRA's six-page analysis points out that Cisco's reported pro forma earnings of 18 cents a share -- a penny lower than Wall Street's expectations -- was actually $0.1760 per share rounded up. Indeed, Cisco was only $0.0011 a share away from an even bigger embarrassment.

Such observations might be old news to some, but it does make Cisco's projected revenue growth of 40 percent for fiscal 2001 seem a hard mark to hit. That estimate, it's worth noting, is itself much lower than the 50 percent to 60 percent range Cisco had given late last year (see Cisco Misscos!).

Cisco also received a bit of help because its effective tax rate --the ratio of tax paid in a tax year to taxable income -- has been at 28 percent since October 2000, the report states. If Cisco's effective tax rate had been at 30 percent (as it was from January 2000 to October 2000), Cisco would have had to shave some $36 million ($0.01 per share) from its fiscal Q2 earnings.

More worrisome is that Cisco's inventories are on the rise while its revenue growth and gross margins are lower than they've been in at least a year. The CFRA, which is an independent financial research organization, notes that Cisco now has 90 days worth of sales in inventory (DSI), up from 75 days last quarter and 41 days for Q2 2000.

The implications of such inventory buildups in systems vendors span the industry, analysts say. First, it means Cisco will be buying less from its suppliers. Second, it means service providers have obviously cut spending more (and faster) than previously thought.

As several analysts have noted, service providers with less to spend may hold out for good deals from equipment vendors. When they do this, companies such as Cisco will take a hit on gross margins. This is because the cost of the components used to make some systems was set at a time when components were scarce and demand was exceptional.

As if there aren't enough investor worries about Cisco, the CFRA report also brings up Cisco’s practice of pooling accounting, where it makes acquisitions and only records the costs of the acquired firm’s assets, not the price paid for the acquired firm.

“CFRA believes that CSCO may have obtained a boost to reported revenue and earnings growth…as a result of the Company’s decision to refrain from restating financial results to reflect the operations of certain acquisitions,” it states.

Citing the July 2000 issue of Barron’s, the Economist recently reported that, for the fiscal year ending July 2000, Cisco’s accounting allowed it to do $16 billion worth of acquisitions while only reporting $134 million in costs.

If its acquisitions via pooling have indeed given Cisco an earnings boost, it reinforces a sobering thought about Cisco’s most recent quarter: It may have been much worse than it looked.

Cisco officials did not respond to requests for comment.

-- Phil Harvey, senior editor, Light Reading http://www.lightreading.com
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More_LightReading_Junk 12/4/2012 | 8:53:35 PM
re: CFRA Hits Cisco Wow, LightReading has shown it's complete bias against Cisco by publishing this junk. This is not new information (pooling of interests accouting) and you actually made a point of "how close" Cisco was to missing their quarter by a penny more if they brought in .0011 of a penny less?! Oh give me a break - you guys need to get real jobs.

Seriously, when I saw this article headline I thought - jeez, did Cisco do something illegal or are they being investigated? Well no, of course not, just more Light Reading junk.
abarbier 12/4/2012 | 8:53:33 PM
re: CFRA Hits Cisco Yep! More junk! The news has not even appeared on
yahoo finance or thestreet.com.
Has anybody seen a positive article about Cisco
since march 00? Pls forward it to me!
58 12/4/2012 | 8:53:32 PM
re: CFRA Hits Cisco if you're going to knock pooling accounting, at least make a note that every other US company who qualifies for it uses it as well. its a way to offset the artificially drastic EPS effect on acquiring companies when purchasing companies with little measurable assets. M&A in the technology industry has been unique for the high price tags placed on companies with small book values. this is why most companies try to use pooling accounting, otherwise the earnings drag over several large acquisitions would be render their EPS numbers practically useless as measures of operating performance.

cisco is not alone in using pooling accounting, they just happen to be extremely good at qualifying for it, unlike many of their competitors.
aa 12/4/2012 | 8:53:29 PM
re: CFRA Hits Cisco Has anybody seen any positive news on OJ !

So whats the point?

There's a reason for no positive news.
And that is - its a hyped stock. Its
a great company but nowhere as great as
the stock implies. Its worth oh! maybe
15$ at best.
mudd 12/4/2012 | 8:53:28 PM
re: CFRA Hits Cisco In my my View Cisco is a very weak company. The company does not have the capability and the talent to produce new products and technologies. It has not been able to integrate the companies that it acquired. There are close to 15 thosand employees now involved in the mere maintenance work. Of many companies, Cisco has the weakest workforce in the country.

Its propoganda machinery and its false product and marketing misinformation has created chaos in the industry.
montana 12/4/2012 | 8:53:26 PM
re: CFRA Hits Cisco The CFRA just announced that if it weren't for wings planes couldn't fly. In a related announcement, LR indicated that it is no longer safe to fly because if planes lacked wings they would fall from the sky.

Cisco is not the first company to round up its earnings number and as already posted not the only one to do pooling accounting--pooling is part of how the game is played. Current accounting standards have no way to represent on the balance sheet of an early stage company the market value of breakthrough technology or first to market status. when cisco bought cerent folks thought the price was crazy, now given the remarkable success of the deal people believe that Cisco got a bargain.

LR, instead of focussing on the edges of Cisco's performance why not tell us whether the company can play a prominent role in the future of optical networking or is Ciena the next Cisco?
woof 12/4/2012 | 8:53:25 PM
re: CFRA Hits Cisco The ability to pool, allows acqisition of hot products at above bookvalue, which makes startup employees rich men and women upon vesting. Something, I imagine, near and dear to many readers of LR.
LR needed to brandish a magnifying glass, to stretch for a column on Cisco's books and Generally Accepted Accounting Practices. Meanwhile the market leader for optical, Nortel NT, just guided the street to $-0.04 for Q1 (rev from +.16). Hey LR, no magnifying glass needed there.
spd 12/4/2012 | 8:53:24 PM
re: CFRA Hits Cisco This is an example of the many articles on LR
that have clearly completely crossed the
boundary of objective journalism.
Scott Clavenna's technical articles are about
the only saving grace of this site for me.

Even if one grants that some of the articles
may be intended to cut through the hype which
is prevalent all across the industry (and thats
a good thing), the articles are often so
hurriedly put together without doing all the research that they achieve the reverse result of creating more false and irresponsible information.

Further LR needs to address the accusation of
biased reporting which in my opinion is now
sounding very valid.

Here's a prediction: this article will stay
much longer on the front page (atleast 2-3 days) than the average LR article (they always let the
most ridiculous and irresponsible articles
against pet targets like Cisco and Zaffire
hang on for the longest time on the main page).

IMHO each LR writer should disclose their equity holdings to address the accusations of biased reporting.
Also all financial relationships, equity
holdings and advertising revenues of the
site should be disclosed in some form from time
to time (but of
of course they are not likely to have the guts
to do that). Its almost like they are trying
to achieve two ends with this kind of journalism

a. Create more controversy and attract more
traffic to the site.

b. Engage in selective and irresponsible
slander of certain companies/individuals
perhaps for their own vested interests.

With the content often being completely
incorrect as well as the kind of slant
that they give to articles with headlines like
"Cisco *misscos*", "Zaffire *zapped*" is
pathetic at a minimum and more realistically
deserving of a lawsuit. To write off the hard
work of all the employees of these companies
with an attitude more appropriate in a college
rag leaves a very sour taste in the reader's

If LR is not careful it will soon become the "anti-optical-networking-site"
(i.e. go there to read what is NOT true!).
dwdm 12/4/2012 | 8:53:23 PM
re: CFRA Hits Cisco Please enough of this junk. As far as I'm
concerned, Cisco is one of the only companies
out there with a good long term future. While
the entire economy is slowing down, and almost
every major company and dot com is loosing
money, Cisco managed to report a 55% growth over
the same quarter last year. This is worth
reporting instead of the junk in this article.
I haven't even mentioned that it is debt free,
plays in almost every sector of the communication
industry, whether it is LAN L2 switching, or
L3 switching, or core routers, or ATM, or frame
relay or optical etc etc etc.

I'm investing in Cisco stock!
optical_watch 12/4/2012 | 8:53:23 PM
re: CFRA Hits Cisco ever worked at Lucent ??
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