Cisco's third quarter accounts receivable explained

Cisco 3rd Quarter 2008 Channel Stuffing
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

5 Year Cisco 3rd Quarter 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


Further Analysis: 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?

Contact Brad Reese
http://www.BradReese.Com

  
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