16 September 2008

CSCO: Financial Analysis through July 2008 (Update)

We previously posted an analysis of the Cisco System's preliminary results for the fourth quarter of the 2008 fiscal year, which ended 26 July.  Cisco has now submitted a 10-K Annual Report to the SEC for the fiscal year.  GCFR readers will most interested in the 10-K's Exhibit 13.1, which includes the financial statements and management's discussion of the results.

Cisco Systems, Inc. (CSCO), the proud plumber of the Internet, has a commanding position in the market for enterprise networking products and services, such as routers

The 10-K didn't change our earlier evaluation of Cisco's Income Statement for the fourth quarter.  The actual figures and our expectations for the quarter matched almost exactly.

The additional data in the 10-K resulted in only minor changes to the gauge scores, as shown below. 

Most GCFR gauges of Cisco's performance were improved by the fourth quarter results.  The Overall Gauge, now at a very good 62 of the 100 possible points, is into attractive territory. This could be an indication that Cisco shares, which are off 17 percent this calendar year, do not adequately reflect the company's value.

The 10-K includes much information about the company's operational performance and financial standing.

For example, Cisco spent only $412 million to acquire other companies in fiscal 2008. In the prior two years, Cisco spent $4.2 billion and 7.4 billion, respectively.

Footnoted.org discovered in Cisco's 10-K statements about slowdowns in customers' capital expenditures and an investigation in Brazil.

We continued to be intrigued by Cisco's purchase of Nuova Systems, Inc., which developed technologies for enterprise data centers.  Cisco first bought approximately 80 percent of Nuova in August 2006.  Earlier this year, Cisco exercised an option to purchase the remaining 20 or so percent.  The selling shareholders, which included several former Cisco execs, will receive up to three payments, to be made between fiscal years 2010 and 2012, with the amounts determined by an undisclosed formula. 

Cisco originally indicated that the potential payout for the remaining interests in Nuova would be between $10 and $578 million.  The latest 10-K states that Cisco recorded a charge of $277 million (up from $246 million three months ago) for these payments.  The amount can be adjusted as high as $678 million, $100 million more than the amount first cited.  Since Nuova had 76 employees in August 2006, the total charge to Cisco will be between $3.6 and $8.9 million per Nuova employee.

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