CHICAGO: Concerns about networking giant Cisco Systems Inc.'s slowing deferred revenue
growth were raised on Wednesday by a research firm, but several analysts dismissed the
report as old news.
"Based on a review of (Cisco's) January-quarter earnings release, we are concerned
with a slowing of the company's deferred revenue growth and drop in its book-to-bill
ratio," the Center for Financial Research and Analysis Inc. (CFRA) said in a report
released on Wednesday.
The Rockville, Maryland-based research firm, which analyzes public companies' financial
data for money managers, brokerages, accounting and insurance firms, does not discuss
reports when they are released.
Cisco has repeatedly said it takes a conservative approach with its accounting
practices and several analysts have said the company has done nothing illegal and the
January-quarter results were strong.
"We believe these issues have been well discussed and that the report does not
appear to illuminate any new issues," Lehman Brothers analyst Tim Luke said Wednesday
in a research note. He reiterated his "strong buy" rating on Cisco's stock.
Cisco's stock closed up 26 cents, or 1.5 percent, at $17.52 in trading on Nasdaq.
Issues of accounting have taken on greater importance for investors since Enron Corp.'s
implosion.
Enron ranked as the world's biggest energy trader before its complex web of financing
and accounting transactions used to artificially improve the company's reported profits
came to light last autumn. After the transactions came to light, Enron's stock plummeted
and the company filed for bankruptcy.
CFRA was not the first to raise concerns about Cisco's results, as Dresdner Kleinwort
Wasserstein analyst Ariane Mahler last week and Tuesday released reports raising questions
about Cisco's aggressive accounting, which she said were used to boost financial results.
She has the stock rated "sell" and has a $13 price target.
Several analysts, however, disagreed, saying Cisco has no accounting problems and
posted strong results in the quarter.
In several reports last year, CFRA raised concerns about Cisco's rising receivables and
inventory, declining gross profit margin, increased reliance on nonoperating income,
weakening operating cash flows, and changes in accounting policies.
In its Wednesday report, CFRA pointed to Cisco's slowing growth rate on its balance
sheet of deferred revenues -- sales from previous quarters not booked until the end
customer accepts delivery of a product.
"There's nothing of substance in it," Shawn Campbell, analyst with Northern
Trust Corp.'s asset management arm, said of the report.
CFRA also said the company's product book-to-bill ratio -- orders shipped versus goods
accounted for as revenue -- fell below one in the January quarter from above one in the
previous quarter. Typically, analysts prefer a company's book-to-bill ratio to be above
one, but several analysts were less concerned about Cisco's ratio, since the company tends
to ship quickly.
CFRA said Cisco has become increasingly reliant on interest income from its cash and
short-term investments, which totaled about $21 billion at the end of the January quarter.
CFRA said interest and other income accounted for about 2 cents of Cisco's income before
items of 9 cents a share.
Lehman's Luke said he expects Cisco's deferred revenue to grow on an absolute basis in
the next quarter.
He pointed out Cisco's January-quarter revenues came in above expectations, and added
that even subtracting the 2 cents for interest and other income, Cisco's results still
would have topped analysts' expectations of 5 cents.