It's been an interesting few days since I posted my commentary on Cisco's third-quarter results.
Yours truly pointed out that Cisco's 3rd Qtr 2008 accounts receivable increase was $20 million more than the corresponding increase in net sales when compared to the Cisco 3rd Qtr 2007, and questioned if this indicated that Cisco is channel stuffing (in fact, I'll admit, I did more than question, I more-or-less insisted).
My interpretation of the third-quarter results was based on Cisco's financial reports and was not based on evidence from specific channel partners.
Last night, the Cisco Director of Corporate Communications met with yours truly and Network World editor-in-chief John Dix to discuss the issue.
Cisco did not take exception to any of the data, but argued with my interpretation of those numbers. The spokesperson insisted channel stuffing is impossible at Cisco because the company doesn't book revenue until it leaves the reseller, and said the increase in accounts receivable compared to the increase in net sales is explained by long-term service contracts in which revenue shows up on the books over many quarters.
Because I lack first-hand accounts, and because Cisco has offered an alternative explanation, I have agreed to tone down my opinion.
Am editing this original post and any subsequent comments to remove direct accusations of channel stuffing, while leaving the numbers, the analysis and all the other comments up for you to make up your own minds.
Official response from Cisco:
Cisco Statement on Recent Network World Blog Post
5 Year Comparison Cisco 3rd Qtr Financial Numbers (In Millions)
| Cisco 3rd Qtr for the Year | 2008 | 2007 | 2006 | 2005 | 2004 |
| Net Sales Increase | $925 | $1,544 | $1,135 | $567 | $1,002 |
| Accounts Receivable Increase | $945 | $258 | $739 | $701 | $383 |
| Days sales outstanding in accounts receivable (DSO) |
39 | 33 | 36 | 33 | 27 |
5 Year Cisco 3rd Quarter (In Red) Stock Chart
According to the Cisco 3rd Qtr 2008 earnings call transcript, no explanation was given for the reason the increase in accounts receivable was $20 million more than the corresponding increase in net sales when compared to the Cisco 3rd Qtr 2007.
Why?
The single mention of accounts receivable in the earnings transcript:
| Moving on to accounts receivable, we ended the quarter at $4.2 billion which was flat from Q2. |
At the end of Q3, day sales outstanding or DSO was 39 days the same as was in Q2.
Both Q2 and Q3 include the effect of several large multi-year service agreements, which has increased the DSO in each quarter by three to four days.
Cisco 3rd Qtr 2008 Earnings Call Transcript
What is most alarming to yours truly, is how Wall Street Analysts could ignore such a huge red flag.
Related story:
Is Cisco Unloading To Pump Up The Numbers?
Official response from Cisco:
Cisco Statement on Recent Network World Blog Post
5 Year Comparison Cisco 4th Qtr Financial Numbers (In Millions)
| Cisco 4th Qtr for the Year | 2008 | 2007 | 2006 | 2005 | 2004 |
| Net Sales Increase | - | $1,449 | $1,403 | $655 | $1,224 |
| Accounts Receivable Increase | - | $686 | $1,087 | $391 | $474 |
| Days sales outstanding in accounts receivable (DSO) |
- | 38 | 38 | 31 | 28 |
5 Year Comparison Cisco 3rd Qtr Financial Numbers (In Millions)
| Cisco 3rd Qtr for the Year | 2008 | 2007 | 2006 | 2005 | 2004 |
| Net Sales Increase | $925 | $1,544 | $1,135 | $567 | $1,002 |
| Accounts Receivable Increase | $945 | $258 | $739 | $701 | $383 |
| Days sales outstanding in accounts receivable (DSO) |
39 | 33 | 36 | 33 | 27 |
5 Year Comparison Cisco 2nd Qtr Financial Numbers (In Millions)
| Cisco 2nd Qtr for the Year | 2008 | 2007 | 2006 | 2005 | 2004 |
| Net Sales Increase | $1,392 | $1,811 | $566 | $664 | $685 |
| Accounts Receivable Increase | $1,257 | $371 | $259 | $238 | $933 |
| Days sales outstanding in accounts receivable (DSO) |
39 | 31 | 35 | 34 | 34 |
5 Year Comparison Cisco 1st Qtr Financial Numbers (In Millions)
| Cisco 1st Qtr for the Year | 2008 | 2007 | 2006 | 2005 | 2004 |
| Net Sales Increase | $1,370 | $1,634 | $579 | $870 | $256 |
| Accounts Receivable Increase | $327 | $749 | $550 | $404 | $279 |
| Days sales outstanding in accounts receivable (DSO) |
33 | 34 | 33 | 27 | 25 |
Can YOU provide a good explanation as to why Cisco's 3rd Qtr 2008 increase in accounts receivable was $20 million more than the corresponding increase in net sales when compared to the previous Cisco 3rd Qtr 2007?
Brad Reese cofounded BradReese.Com Cisco Refurbished, which enables affordable Cisco networks globally by assuring customer satisfaction with guaranteed one year warranties on both Cisco Repair as well as Refurbished Cisco.
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Will we see this from other vendors too?
Amazing, Brad. Great find.
I just wonder if we'll see the same thing happen with other vendors, forcing the channel to take on the load in the short term.
The other possibility is the channel's ability to pay. Many channel providers selling Cisco operate on razor thin margins and as customers are slow to pay, so might the channel be slow to pay Cisco.
I wrote some more about this http://www.networkworld.com/community/node/27626.
Mitchell Ashley
Converging Network, LLC
Personal blog: http://theconvergingnetwork.com
Personal podcast: http://www.clickcaster.com/ss
Cisco shareholders
Hi Mitchell,
This is not good news for Cisco shareholders.
Will other vendors stuff their channels?
If it tempted Cisco, am sure it will tempt other vendors too.
Sincerely,
Brad Reese
http://www.BradReese.Com
Cisco AR Deficit
Is Cisco stuffing their channels or are they engaged in some more "creative" financing arrangements?
Recently Cisco won a large deal in Florida deferring payments on their equipment for 48 months. Are we seeing a resurgence of creative Cisco financing that we saw in 2000-2002?
As a large Cisco shop we intend to get the same 70% discount and payment deferments as this company received...so should everyone else.
Cisco's Official Response
Here is the official response, which Cisco posted to our official news blog this afternoon.
URL:http://blogs.cisco.com/news/2008/05/cisco_statement_on_recent_netw.html
Text: On Thursday May 8 a blog entry posted on Network World accused Cisco of a practice known as “channel stuffing” based on the financial information we presented in our Q3 FY ’08 earnings call. Given this serious and inaccurate claim, Cisco felt it was important to present some detailed facts that refute these allegations.
First, Cisco employs conservative policies regarding revenue recognition. For example, in our distribution channel, Cisco does not recognize revenue until product leaves our channel partner, effectually removing any possibility of recognizing revenue before it’s sold to the end customer.
Second, as we said on our quarterly call, “…Q2 and Q3 include the effect of several large multi-year service agreements, which has increased the DSO (days sales outstanding) in each quarter by three to four days.” This would be sufficient to increase accounts receivable if recorded at the end of the quarter and is not related to inventory or channel partners.
Finally, it’s important to put the scope of the amount in question in proper context. From a financial perspective, $20 million represents 0.2% of our Q3 FY ‘08 sales, which were $9.8 billion.
Cisco has always acted openly and transparently in disclosing financial information, a fact consistently recognized by the investment community.
Pretty weak official statement from Cisco
Yours truly received the following email message regarding the official Cisco statement:
Pretty weak, you don't stuff the channel with hardware but you pad revenue with maintenance agreements, how wise the Cisco man is.
Sincerely,
Brad Reese
http://www.BradReese.Com
Brad Reese email
Do you have a clue what you are talking about? If you are a Cisco share holder why would you write such garbage. You should be ashamed of your self.
Grab a ticket and get in line
Hi Rob,
Garbage is a very profitable business, just ask:
Wayne Huizenga
If you believe that yours truly does not have a clue, please guide me in the right direction.
Unfortunately Rob, as far as being ashamed of yours truly, you'll just have to grab a ticket and get in line with the many others before you.
Sincerely,
Brad Reese
http://www.BradReese.Com
Really Brad??
Brad,
Are you kidding me? You are trying to alarm the world based on $20mil? Just in case you missed the rest of the call while you were focusing on $20m, the company did $9.8B, the $20m you think investors should be alarmed about represent 1/5 of 1 percent of revenue. Do you realize that $20mil could just be one deal? That is probably the yearly quota of just 1 Cisco sales person.
I don't think the sky is quite falling yet.
No Kidding
No kidding that you certainly missed the point.
Cisco Accounts Receivable INCREASED $20 million MORE than Net Sales INCREASED!
The Cisco 3rd Qtr 2008 Net Sales INCREASE was $619 million LESS than the Cisco 3rd Qtr 2007 Net Sales INCREASE.
Simultaneously, Cisco 3rd Qtr 2008 Accounts Receivable INCREASED $687 million MORE than the Cisco 3rd Qtr 2007 Accounts Receivable INCREASE.
Comparing year-over-year the Cisco Net Sales INCREASE declined by $619 million, yet the Cisco Accounts Receivable INCREASE was $687 million more when compared year-over-year.
How does one get a Net Sales decline of $619 million and a simultaneous Accounts Receivable increase of $687 million?
The Cisco 3rd Qtr 2008 is classic channel stuffing at its finest!
Cisco shareholders should be extremely concerned.
Sincerely,
Brad Reese
http://www.BradReese.Com
Channel Stuffing ???
So explain to us Brad how Cisco can stuff the channel when resellers can NOT stock equipment? They resell and do not act as a Distributor. $20M is a bump in the road for Cisco. The channels are more than likely taking longer to pay Cisco as their customers are changing the terms on NET from 30-45 days to like 60-90 days NET payment.
You are suggesting that Cisco is asking partners to submit orders with no customer order to back it up.
I think you're reading way too much into this than what it's worth to the stockholders of the company.