So, Cisco (NASDAQ:CSCO) reported earnings Wednesday night. Sales down 8%. Profits down 21%. Stock ... up 3%. Somebody want to tell me how that works?

One wish -- denied
Before the announcement, I voiced a single request of Cisco -- that the company control its operating costs and allow its continued gross margin strength to translate into better profit margins farther down the income statement. As you can guess from the larger-than-revenues decline in profits, Cisco failed to deliver.

To the contrary, as revenues dove, total operating costs actually rose 1% to make up 43.5% of revenues (versus 39.7% in the year-ago quarter), helping depress operating profits margins nearly 500 basis points.

Adding insult to injury, a TheStreet.com report on Cisco's post-earnings conference call took management to task for its new policy of using the firm's cash hoard to finance sales to Cisco customers. TheStreet reminded investors of what happened the last time Cisco joined peers such as Alcatel-Lucent (NYSE:ALU) in underwriting their customers' excesses, suggesting that history might repeat itself. Which would be bad news indeed for Cisco shareholders.

But here's the good news
Today isn't 2000. Yes, eight years ago, Cisco helped to pour fuel on a telecom build-out fire, and its profits quickly went up in smoke. However, IT cuts are demanding tech companies to come up with innovative solutions to keep revenue growing. Microsoft (NASDAQ:MSFT) recently extended an engineering and sales partnership with EMC (NYSE:EMC), the parent company of VMWare (NYSE:VMW), despite the fact they compete head to head in the growing virtualization field. The rationale being that the agreement can save their clients money and keep money flowing in despite budget cutbacks.

Likewise, financing can be a tool to keep revenue coming in from solvent clients who are simply being cautious and facing budget cuts. Think of it as a form of bridge financing. I don't see any evidence that vendor financing is hurting the business. To the contrary, days sales outstanding held steady in Q2, indicating that the company is still collecting from customers despite any new financing arrangements. Far from pushing product on unwilling customers and offering generous finance terms to induce purchases, Cisco is making money hand-over-fist.

Free cash flow amounted to $5.3 billion in the first half of the year, up about 8% over fiscal H1 2008. Run-rate that out, and by year-end we could see Cisco generate well over $10 billion in free cash flows.

Valuation
Which brings me to my final point. Assuming Cisco keeps doing what it's done so far this year, the stock now sells for just nine times my estimate of this year's cash flow. Not bad for a business that analysts insist will be an 11% grower over the next five years. In fact -- and I apologize for repeating myself here -- Cisco looks downright dirt cheap.

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Fool contributor Rich Smith owns no shares of any company named above. Microsoft is a Motley Fool Inside Value recommendation. VMware is a Motley Fool Rule Breakers selection. The Motley Fool has a disclosure policy.