by June 18, 2001 0 comments

Cisco’s record write off Many observers dropped their jaw when Cisco Systems announced a record $4 billion charge against profits to cover the cost of lay-offs and writing down unsold inventory. But according to a close friend who has been chief financial officer at a dozen Silicon Valley high-tech companies, starting with CAD/CAM pioneer Calma in the earlier 1980s, Cisco is simply employing one of the oldest tricks in the high-level accounting business. “On Wall Street, there is little or no difference between having a little bit bad quarter or a horrible quarter. Your stock will go down equally much. So you might as well throw everything but the kitchen sink into the bad quarter and make it as bad as you can,” he said.

Of the $2.5 billion charge to write off unsold inventory, stuff worth millions has been sitting around for years. It ranges from unsold products, obsolete chips and disk drives, and even old office furniture. Not to mention all the junk Cisco has inherited from the 60-plus companies it has acquired over the past three years–stuff to write off when the time is right.

Since Cisco hasn’t had a bad quarter, ever, and the company needed to show maximum quarterly profits to support its magical rise on Wall Street, there was no need to write off any of that old stuff off. Now that the tables have turned and Cisco’s stock has crashed back onto Earth, it’s time to write off these billions of dollars worth of worthless old junk. “And since the write-off charge can be used against future taxable profits, Cisco will be able to handsomely improve its quarterly results,” he said.

He further speculated that Cisco would probably not spend all of the $1.6 billion it is taking out, to pay off the 8,500 laid-off employees. After all, that would amount to nearly $200,000 per worker. Chances are, a few hundred million dollars will be left over. That money, he explained is usually stashed away some place safe and is used in future quarters to help prop-up profits, a few pennies per share in order to meet or beat market forecasts, when the real numbers short.

HP makes some risky bets

Hewlett-Packard appears willing to place a major bet on the next-generation Itanium chip. HP is betting that the chip will not suffer the kind of deadly bugs and delays that caused its predecessor to be ‘dead-on-arrival.’ To date, the 64-bit processor architecture has proven too big a technology pill to swallow for Intel. While development has shifted to the second-generation chip, it remains to be seen if Intel can get the chip out in time. Because of the critical role these high-end servers play in an enterprise, the tolerance for flaws is much smaller than for desktop processors. And customers will be far more skeptical in buying into the Itanium hype once the chip is launched. All that adds up to a high-stakes bet as HP has all but taken itself out of the Intel-based high-end server market by canceling plans to resell a Unisys line of Xeon-based machines. But then again, making risky bets is what appears to be HP’s mode of operation these days. It has bet that a complete outsider can turn HP around, that Web appliances will become a major source of revenue for the company and that it can achieve a high sales growth level
in 2001.

So far, HP is 0-for-1, as it bet and lost an $18 billion gamble to acquire the Pricewaterhouse Cooper consulting company. In view of the market conditions, the bold 2001 sales growth forecast will probably make that 0-for-2, perhaps even 0-for-3.

Paul Swart runs the Silicon Valley News Service (SVNS)

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