09 March 2010

CSCO: Financial Gauge Analysis for the January 2010 Quarter

This post provides updated Cash Management, Growth, Profitability and Value metrics and our Financial Gauge scores for Cisco Systems (NASDAQ: CSCO).  The metrics were calculated using data in Cisco's financial reports, including the latest earnings announcement and the formal 10-Q report.

We have already examined the Income Statement for fiscal 2010's second quarter, which ended 23 January 2010.  Cisco Systems earned $0.30 per share, on a GAAP basis, in this quarter, up 23 percent from $0.26 in the second quarter of the previous year.  On a non-GAAP basis, Cisco's earnings rose from $0.32 to $0.40 per share. 

Cisco Systems, the proud plumber of the Internet, has a dominant position in the market for enterprise networking products and services.  Additional background information about Cisco and the business environment in which it is currently operating can be found in the look-ahead.

The latest quarterly results produced the following changes to the gauge scores:

A statistical rarity: all gauges unchanged.

The 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 Management23 Jan 201024 Oct 200924 Jan 20095-Yr Avg
Current Ratio3.
Debt/CFO (years)
Inventory/CGS (days)31.932.131.241.7
Finished Goods/Inventory61.3%65.2%64.0%57.0%
Days of Sales Outstanding (days)32.631.233.833.2
Working Capital/Revenue84.8%78.7%55.3%48.5%
Cash Conversion Cycle Time (days)44.842.845.050.2
Gauge Score (0 to 25)991413

In the January 2010 quarter, Cisco added another $4.3 billion to the $35.4 billion in Cash and Short-term Investments it had at the end of the October quarter.  Working Capital -- the difference between Current Assets and Current Liabilities -- rose in the last three months from $31.5 billion to $35.7 billion, an amount that seems excessive.  The increase can also be seen in the higher Current Ratio.

The growth of the cash hoard was aided by the issuance in November of $5 billion in new debt Long-term Debt increased to $15.2 billion, up from $10.3 billion in October and $6.35 billion in January 2009.

Cisco is using some cash to repurchase its common shares.  Cisco bought 63 million shares for $1.5 billion during the last quarter.  In the first six months of fiscal 2010, the company repurchased 139 million shares for $3.3 billion. 

Cisco will also use about $3.4 billion to complete its purchase Norway's Tandberg (OSL: TAA), with exact amount depending on the exchange rate for the Norwegian kroner.

Although the Inventory level, measured in days of Cost of Goods Sold, came down slightly in the January quarter, the higher level relative to the year-earlier value weighed on the gauge score.  However, it was balanced by the reduction in the proportion of Finished Goods in the total Inventory, which could be a sign that sales were greater than management expected.

The small drop in Days of Sales Outstanding relative to its year-earlier amount is modestly encouraging.

Growth23 Jan 201024 Oct 200924 Jan 20095-Yr Avg
Revenue growth-10.2%-13.7%5.0%9.1%
Operating Profit growth3.5%3.9%12.9%6.9%
CFO growth-36.2%-26.0%16.5%6.3%
Net Income growth-19.0%-28.9%-7.2%4.8%
Gauge Score (0 to 25)00510
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 zero-point Growth gauge score is the result of falling Revenue, Cash Flow from Operations, and Net Income, on a trailing-year basis, coupled with the much lower Revenue/Assets ratio.

The rates of decline appeared to lessen in the January quarter, with the exception of Cash Flow.

Profitability23 Jan 201024 Oct 200924 Jan 20095-Yr Avg
Operating Expenses/Revenue77.1%78.3%76.1%74.5%
Free Cash Flow/Invested Capital45.7%52.3%72.2%63.9%
Accrual Ratio13.9%7.9%8.7%7.1%
Gauge Score (0 to 25)12121315

An upward trend in Operating Expenses as a percentage of Revenue reversed course in the latest quarter.

Returns on capital remain in all-star territory, but they have weakened.  Big increases in the Accrual Ratio can be warning about the quality of earnings.

Value23 Jan 201024 Oct 200924 Jan 20095-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)13.913.55.712.3
Gauge Score (0 to 25)112310
Share Price ($)$22.97$24.17$15.89-

A share price 45 percent higher than January 2008, while Revenue, Cash Flow from Operations, and Net Income all declined by double-digit percentages was not going to please the Value gauge.

Overall23 Jan 201024 Oct 200924 Jan 20095-Yr Avg
Gauge Score (0 to 100)23236649

The latest quarter's results did not move any of the gauges.  The key operating figures will need to start increasing year-over-year before the scores improve materially.

Full disclosure: Long CSCO at time of writing.

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