Before getting into the details, we will take a step back to introduce the subject of today's analysis.
Cisco's earnings rose 27 percent in fiscal 2010, which ended in July, from $6.13 billion to $7.77 billion. Revenue increased 11 percent, from $36.1 billion to $40.0 billion. Fiscal 2010 included a 53rd week.
The market value of the company has fallen from approximately $120 billion to under $100 million, on a fully diluted basis, in the last couple of months.
In 2011, Cisco initiated its first cash dividend, $0.06 per share per quarter, to shareholders.
Cisco categorizes its products as Routers, Switches, Advanced technologies, and other. Switches generated the most Revenue in fiscal 2010, $13.6 billion, which was 42 percent of net product sales.
Revenue from product sales was supplemented by $7.6 billion in Revenue from services in fiscal 2010. Service revenue was 19 percent of total Revenue in fiscal 2010.
The company's business segments for financial data reporting are defined by geographic region or "theaters": United States and Canada, European Markets, Emerging Markets, Asia Pacific, and Japan. The U.S./Canada segment provided 54.3 percent of fiscal 2010's Total Revenue.
Cisco has long been a serial acquirer, insatiably gobbling up companies of all sizes. In 2010, Cisco's two largest acquisitions were Tandberg, for $3.3 billion, and Starent Networks, for $2.6 billion.
Cisco's Balance Sheet in January 2011 listed nearly $40 billion in Cash and Short-term Investments, which would seem to be an adequate war chest for further acquisitions. However, much of this cash is believed to be overseas.
Gartner has predicted $3.5 trillion will be spent on Information Technology in 2011, up 5.1 percent from last year. However, in a separate announcement, the well-known researcher was less sanguine about spending on Enterprise Information Technology, forecasting a modest 3.1 percent rise in 2011. Gartner commented that EIT spending growth would be "timid and at times lackluster" during the next five years.
Tepid industry spending would test Cisco's frequent assertion that its revenue can expand over the long term at a rate between 12 and 17 percent per year.
In a major diversification effort, Cisco introduced in 2009 the Unified Computing System for large data centers. Since the UCS platform includes computer servers, storage systems [from EMC], and networking gear, the UCS puts Cisco into direct competition with heavyweights Hewlett-Packard (HPQ), IBM, and others. HP responded by challenging Cisco on its home turf when it acquired 3Com.
Cisco has also branched out into home entertainment, tablet computers (the Cius), video camcorders, and smart grid technology. Cisco might be satisfied if these products merely increases the demand for enterprise network infrastructure.
Now we turn to the financial gauges. The latest quarterly results produced the following changes to the scores:
- Cash Management: 9 of 25 (down from 11 in October)
- Growth: 15 of 25 (down from 17)
- Profitability: 17 of 25 (up from 15)
- Value: 13 of 25 (up from 11)
- Overall: 54 of 100 (up from 51)
Current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary. Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.
|Cash Management||29 Jan 2011||30 Oct 2010||23 Jan 2010||5-Yr Avg|
|LTD to Equity||26.6%||27.3%||36.6%||23.9%|
|Days of Sales Outstanding (days)||38.5||36.5||32.6||34.1|
|Cash Conversion Cycle Time (days)||51.0||47.5||44.8||48.2|
|Gauge Score (0 to 25)||9||11||9||13|
The Cash Management gauge lost two points, falling below the 10-point threshold, primarily because of changes to the Inventory metrics.
The company's hoard of Cash and Short-term Investments totaled $40.3 billion, a record high amount, on 29 January. Working Capital -- the difference between Current Assets and Current Liabilities -- is now $33.6 billion, which is also near a record high. Neither acquisitions, nor share repurchases, have diminished this stockpile of liquid funds.
Cisco has commented that tax considerations limit its ability to repatriate the earnings of overseas subsidiaries.
In the first six months of the current fiscal year, Cisco spent $4.3 billion to repurchase 202 million of the company's shares, at an average price of $21.27 per share. These purchases, which reduce shareholders' equity, have not boosted the market price of the the shares.
More of Cisco's cash will be returned to investors when the company pays its first cash dividend.
Long-term Debt, which got as high as $15.2 billion when Cisco issued $5 billion in new debt last November, is now down to $12.2 billion. In addition, Cisco has $3.1 billion in obligations due to mature in the next year. Total debt remained steady at 1.5 years of Cash Flow from Operations.
|Growth||29 Jan 2011||30 Oct 2010||23 Jan 2010||5-Yr Avg|
|Operating Profit Growth||-0.7%||1.6%||1.4%||4.1%|
|Net Income Growth||24.9%||38.3%||-19.0%||2.2%|
|Gauge Score (0 to 25)||15||17||0||9|
Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters. The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
The Growth gauge experienced a minor setback after two quarters of significant increases.
Revenue growth flattened out at 19 percent, nothing to sneeze at, on a trailing-year basis. More worrisome was that Revenue in the January 2011 quarter was only 6 percent greater than in the quarter that ended in January 2010.
Revenue as a percentage of total assets diminished after previous rises.
The trailing-year growth rates for Cash Flow from Operation and Net Income are robust, although the latter showed signs of moderating.
Operating income, over a longer period, is not yet showing the kind of growth rate one expects from a company with Cisco's ambitions.
|Profitability||29 Jan 2011||30 Oct 2010||23 Jan 2010||5-Yr Avg|
|Free Cash Flow/Invested Capital||48.8%||51.0%||45.7%||63.2%|
|Gauge Score (0 to 25)||17||15||12||14|
The Profitability Gauge added to its healthy 15-point score. The gauge benefited from big decline in the Accrual Ratio.
The increase in Operating Expenses per Revenue dollar (i.e., a lower Operating Margin) is a disappointment.
The Return on Invested Capital and Free Cash Flow to Invested Capital ratios both slipped slightly in the last quarter, but they remained more robust than they were one year earlier.
|Value||29 Jan 2011||30 Oct 2010||23 Jan 2010||5-Yr Avg|
|P/E vs. S&P 500 P/E||1.0||1.1||1.2||1.2|
|Enterprise Value/Cash Flow (EV/CFO)||8.8||10.2||13.9||11.3|
|Gauge Score (0 to 25)||13||11||1||9|
|Share Price ($)||$20.93||$22.86||$22.97||-|
The Price/Earnings multiple is no longer sky high.
The Price-to-Sales Ratio and the EV/CFO ratio are also both relatively low for Cisco, which is a positive factor for the Value gauge.
Cisco's current share price today is near $17. At this price, the Value gauge would soar to a very appealing 19 of the 25 possible points. Nine more points would be tacked onto the Overall gauge score.
|Overall||29 Jan 2011||30 Oct 2010||23 Jan 2010||5-Yr Avg|
|Gauge Score (0 to 100)||54||51||23||45|
Two of the four category gauges improved during the January quarter, and two weakened. None of the changes were greater than two points.
Since the Value gauge is double-weighted, it was able to lift the Overall score. The score is more than double what it was one year ago.
Today's lower stock price would bring the score up to 63, a very good result. However, the lower price also reflects investor concerns about the potential for weaker growth.
Full disclosure: Long CSCO at time of writing.