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:
- Cash Management: 9 of 25 (unchanged from October)
- Growth: 0 of 25 (unchanged)
- Profitability: 12 of 25 (unchanged)
- Value: 1 of 25 (unchanged)
- Overall: 23 of 100 (unchanged)
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 Management | 23 Jan 2010 | 24 Oct 2009 | 24 Jan 2009 | 5-Yr Avg |
| Current Ratio | 3.5 | 3.4 | 2.8 | 2.6 |
| LTD/Equity | 36.6% | 25.7% | 17.3% | 18.8% |
| Debt/CFO (years) | 1.9 | 1.2 | 0.5 | 0.6 |
| Inventory/CGS (days) | 31.9 | 32.1 | 31.2 | 41.7 |
| Finished Goods/Inventory | 61.3% | 65.2% | 64.0% | 57.0% |
| Days of Sales Outstanding (days) | 32.6 | 31.2 | 33.8 | 33.2 |
| Working Capital/Revenue | 84.8% | 78.7% | 55.3% | 48.5% |
| Cash Conversion Cycle Time (days) | 44.8 | 42.8 | 45.0 | 50.2 |
| Gauge Score (0 to 25) | 9 | 9 | 14 | 13 |
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.
| Growth | 23 Jan 2010 | 24 Oct 2009 | 24 Jan 2009 | 5-Yr Avg |
| Revenue growth | -10.2% | -13.7% | 5.0% | 9.1% |
| Revenue/Assets | 51.6% | 54.6% | 67.8% | 70.1% |
| Operating Profit growth | 3.5% | 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) | 0 | 0 | 5 | 10 |
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.
| Profitability | 23 Jan 2010 | 24 Oct 2009 | 24 Jan 2009 | 5-Yr Avg |
| Operating Expenses/Revenue | 77.1% | 78.3% | 76.1% | 74.5% |
| ROIC | 40.6% | 39.2% | 48.1% | 49.1% |
| Free Cash Flow/Invested Capital | 45.7% | 52.3% | 72.2% | 63.9% |
| Accrual Ratio | 13.9% | 7.9% | 8.7% | 7.1% |
| Gauge Score (0 to 25) | 12 | 12 | 13 | 15 |
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.
| Value | 23 Jan 2010 | 24 Oct 2009 | 24 Jan 2009 | 5-Yr Avg |
| P/E | 22.2 | 24.8 | 12.4 | 20.8 |
| P/E vs. S&P 500 P/E | 1.3 | 1.1 | 0.7 | 1.2 |
| PEG | 6.3 | 6.4 | 1.0 | 1.7 |
| Price/Revenue | 3.8 | 4.1 | 2.4 | 4.2 |
| Enterprise Value/Cash Flow (EV/CFO) | 13.9 | 13.5 | 5.7 | 12.3 |
| Gauge Score (0 to 25) | 1 | 1 | 23 | 10 |
| 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.
| Overall | 23 Jan 2010 | 24 Oct 2009 | 24 Jan 2009 | 5-Yr Avg |
| Gauge Score (0 to 100) | 23 | 23 | 66 | 49 |
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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