Boring Portfolio

Cisco 10-K Summary
...for short attention spans

by Greg Markus (TMF Boring)

ANN ARBOR, Mich. (Sept. 28, 1998) -- Stocks closed mixed Monday, with the Dow and the S&P 500 gaining ground but the Nasdaq and Russell 2000 index of smaller stocks falling moderately. The Boring Portfolio gained 0.54% with daily winners and losers tied at four apiece. The Borefolio was paced by a 5% advance in shares of Carlisle Companies (NYSE: CSL), to $38 5/8, on above-average trading volume.

Buried amidst a slew of press releases from Cisco Systems (Nasdaq: CSCO) today was a notice that The Kid is introducing a new wide-area network (WAN) switch that, as I read it, calls and raises the bets made by start-ups such as Juniper Networks and Ipsilon in the high-stakes poker game of who can make (and, let's not forget, sell) the leading entrant in the rapidly-growing niche market for very fast IP switch-routers (swouters?).

Cisco's IGX 8450 switch reportedly represents a new class of IP+ATM switches that integrates Cisco's IOS software-based routing, Asynchronous Transfer Mode (ATM) Quality of Service (QoS), and carrier-class reliability in a single device. With this arrangement, customers can benefit from all the traditional WAN applications while also readying themselves for the next generation of IP-based applications.

Cisco will also offer an expansion shelf that can be added to any IGX 8400 series switch allowing customers to add new IP+ATM features as needed. The IGX 8450 will be available before year-end 1998 with a list price of $22,000. The expansion shelf will be available in early 1999 with a base price of $15,000.

Cisco's stock eased $3/16 Monday to close at $66 1/4.

As noted here Friday, Cisco just filed with the SEC its 10-K annual statement for the fiscal year ending this past July. In keeping with the Borefolio's tradition of presenting radically abridged versions (1, 2, 3) of Cisco-relevant articles and documents, we present tonight our highly unauthorized...

Cisco 10-K Summary for Short Attention Spans

Business Overview

Cisco is worldwide leader in networking for Internet. Internet changing the way we work, live, play, learn, eat, sleep.

Whatever you need, we got. Routing; switching (bought Catalyst for LAN and StrataCom for WAN, thankyouverymuch); access (servers, dial-up, DSL, cable modems, whatever); SNA/LAN (legacy mainframe); Internet services (firewalls, various other stuff); Cisco IOS Software (aka, "the ultimate weapon," "the franchise"). To satisfy customers' needs, Cisco will either: develop it in-house, partner with someone else, resell someone else's product, or buy another company.

Risks and Uncertainties. Acquisitions are risky. Partnerships are risky. Life is risky, especially in the Internet world. Cisco is moving into the telco space. Way risky. Lucent, Nortel, Ericsson... all bi-i-ig!. Plus, there's Y2K, the Euro, earthquakes, floods, God knows what else.

Customers. Big corporations (enterprise), ISPs and telcos (service providers), and small/medium biz.

Employees. 15,000: 3,000 in manufacturing, service and support; 6,300 in sales and marketing; 4,500 in engineering; 1,200 in finance and administration. HQ is in San Jose, 21 buildings on 448 acres. Leased. Good deal. Also Research Triangle. Go 'heels. Go Devils.

Manufacturing. Cisco makes some stuff but outsources a ton of it. Very smart. Thrifty.

Patents. Patents, copyrights, trademarks, trade secrets, the whole nine yards. Lucent sued us in June. We sued back. Nyah-nyah.

Executive Officers. Alphabetically: Larry Carter (CFO), John Chambers (Team Captain), Gary Daichendt (Exec VP, Worldwide Ops), Judy Estrin (new CTO), Ed Kozel (Sr. VP and old CTO), Don Listwin (Exec VP, heir apparent), Mario Mazzola (Sr. VP, Enterprise customers), Carl Redfield (Sr. VP, Manuf. & Logistics). Board Chair, John Morgridge; richer than Croesus.

Accountant. PricewaterhouseCoopers. Catchy name, huh? Big 6 now Big 4... or 3?

Employee Stock Options and Bonuses. Lots. If Cisco does well, employees make big bucks. Exec's cash bonuses depend on their boss's evaluations, company's revenue growth, profit growth, growth relative to competitors, and customer satisfaction scores.

Overview of FY98 Results

Did $8.5 billion in sales in FY98, up 31%. Mostly due to sales of high-end switches, access servers, Internet and intranet access products, and increased services. Router biz slowing.

International sales were 41% of total in FY98, down from 44% in '97 and 48% in '96. Slower growth in Asia, esp. Japan and Korea. Probably still weak there in FY99, ex-China.

Gross margins increased slightly to 65.5%. But as the company has said all along, do not -- repeat NOT -- expect that to continue. That's not how technology works. Got it? Good.

Research & Development. Spent just over $1 billion on R&D, up 46%. That's 12.1% of sales versus 10.8% last year. And that doesn't count $594 million spent for "in-process R&D" -- i.e., buying small companies for their technology and engineers. Bought DAGAZ, LightSpeed, WheelGroup, NetSpeed, CLASS Data. You wanna integrate data, voice, video? Then you gotta invest. Spend money to make money. You don't like that? Go buy Cabletron (NYSE: CS) stock.

Sales and marketing expense was 18.5% of sales versus 18.0% in FY97. Rolling out end-to-end strategy and service provider coverage costs bucks, too. General and administrative expense dropped a tenth to 3.1% of sales. Way cheap. Selling stuff via the Web helps cut costs.

Net interest and other income totaled $193 million. Established Cisco Systems Foundation and donated approximately $2 million and stock valued at around $72 million. We can afford it.

Diluted EPS in FY98 (adjusted for the latest 3-for-2 split) was $0.84, up 24% from FY97's $0.68, ex various, uh, one-time items.

Balance Sheet Overview

Cash and equivalents, short-term investments, and other investments totaled $5.2 billion at July 25, 1998, a gain of $2.6 billion from last year. Five-point-two billion dollars. Like I said, we can afford it.

Although sales grew by 31.3%, accounts receivable increased only 10.9%. Days Sales Outstanding (DSO) decreased to 49 days from 60 days at the end of last FY. Be impressed.

Inventories increased 42.1%. You can bet that someone will nit-pick us on this, but we needed to ramp up product as we move into new business lines. Everybody wants their stuff yesterday.

At July 25, 1998, Cisco had a line of credit totaling $500 million. Didn't need it; don't use it.

Total assets: $8.9 billion. Shareholder equity: $7.1 billion. Long-term debt: zero, zip, zilch, nada.

"The Company's management believes that its current cash and equivalents, short-term investments, line of credit, and cash generated from operations will satisfy its expected working capital and capital expenditure requirements through fiscal 1999." (A bit of dry wit from the folks on Tasman Drive.)

Cash Flow Statement

Net cash provided by operating activities was $2.9 billion, or double FY97's $1.44 billion. Yup, double. D&A was $327 million. Cap ex was $415 million.

That's it. A regular ATM machine -- and I don't mean "asynchronous transfer mode."

FoolWatch -- It's what's going on at the Fool today.

09/28/98 Close

Stock  Change    Bid 
 ANDW  -  1/8   14.00 
 CGO   +  5/8   28.19 
 BGP   -  1/4   26.31 
 CSL   +1 13/16 38.63 
 CSCO  -  3/16  66.25 
 FCH   +  3/16  24.31 
 PNR   -  1/2   30.56 
 TBY   +  1/16  6.19 
                   Day   Month    Year  History 
         BORING   +0.54%  15.21% -10.47%  12.66% 
         S&P:     +0.38%   9.52%   8.06%  68.70% 
         NASDAQ:  -0.25%  16.01%  10.75%  67.08% 
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  225 Cisco Syst    23.96     66.25   176.55% 
   2/28/96  400 Borders Gr    11.26     26.31   133.76% 
   8/13/96  200 Carlisle C    26.32     38.63    46.72% 
    3/5/97  150 Atlas Air     23.06     28.19    22.24% 
   4/14/98  100 Pentair       43.74     30.56   -30.13% 
   11/6/97  200 FelCor Sui    37.59     24.31   -35.32% 
   5/20/98  400 TCBY Enter    10.05      6.19   -38.40% 
   1/21/98  200 Andrew Cor    26.09     14.00   -46.34% 
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  225 Cisco Syst  5389.99  14906.25  $9516.26 
   2/28/96  400 Borders Gr  4502.49  10525.00  $6022.51 
   8/13/96  200 Carlisle C  5264.99   7725.00  $2460.01 
    3/5/97  150 Atlas Air   3458.74   4228.13   $769.39 
   4/14/98  100 Pentair     4374.25   3056.25 -$1318.00 
   5/20/98  400 TCBY Enter  4018.00   2475.00 -$1543.00 
   1/21/98  200 Andrew Cor  5218.00   2800.00 -$2418.00 
   11/6/97  200 FelCor Sui  7518.00   4862.50 -$2655.50 
                              CASH   $5750.59 
                             TOTAL  $56328.72