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Thursday, November 11, 2010 3:52 AM

Congratulations to Cisco Insiders for Dumping 6,620,750 Shares, 60% of Holdings in 6 Month; Cisco CEO Whines about Taxes; Is Chambers Worth a Dime?

Mish Moved to MishTalk.Com Click to Visit.

Cisco was hit in afterhours trading on Wednesday following a rare revenue warning. Futures are down but dip-buying strength has been so insane lately that one must wonder if there will be any follow through.

Regardless of what the stock does, the huge warning may portend the end of the ramp in capital spending on technology by corporations. If so, what's left of the recovery (if anything) is all on the backs of consumers.

While pondering that grim setup, please consider Cisco Forecasts Fall Short of Estimates; Shares Slide

Cisco Systems Inc., the largest maker of computer networking equipment, forecast sales and profit for this quarter that fell short of analysts’ estimates, sending the shares down as much as 15 percent in late trading.

“There’s no reason to think that that’s going to reverse quickly,” said the San Francisco-based analyst, who still advises buying the stock. “This is kind of a deteriorating situation.”

The company is seeking other ways to reward investors. Cisco said in September it will initiate its first dividend, starting in the fiscal year that began last month. The size and timing of the payout will depend on tax laws and repatriation policy, because much of Cisco’s cash is abroad.

Tax Laws

Chambers, 61, has said that he wants to bring at least $30 billion in cash back to the U.S. and that tax laws make it too expensive to do so. He’s called for a tax repatriation break, saying Cisco will increase its U.S. headcount by 10 percent if a favorable law is passed.
Spare Me The Whine

I am not a fan of corporate taxes. However, I am less of a fan of allowing giant corporations send jobs and cash overseas, then beg for a repatriating holiday, lather-rinse-and-repeat.

I talked about this exact setup on November 1, in Tax Avoidance by Google and Apple, Corporate Cash, Job Creation During Schumpeterian Depressions.

Google pays a tax rate of 2.4% thanks to tax laws. That happens via strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich”. Meanwhile, small businesses in the US get hit with 35% corporate tax rates, and may pay high state tax rates on top of that.

The equitable thing to do is treat small businesses and giant corporations alike. If anything, and to help bring jobs and cash back to the US, taxes on profits held in the US ought to be lower than profits held overseas. That would have Cisco moving that cash back to the US in a hurry, and not to the disadvantage of small businesses either.

Whatever the tax rates is, it ought to be fair and equitable. On this score, granting special breaks to companies holding cash overseas just increases the likelihood that future cash and hiring will be overseas, regardless of what nonsense Chambers spews about increasing headcount here.

Flashback 10/30/07: Cisco to triple headcount in India to 10K by 2010
John Chambers said Monday that Cisco plans to scale-up its headcount in India to 10,000 by 2010, reports the Rediff news. Cisco currently employs about 3,000 there. In December, the company selected India as the site for its Cisco Globalization Center East. The campus in Bangalore, which will house the 3,000 employees, will be inaugurated today. In addition to increasing headcount, Chambers said that Cisco will shift 20 percent of its upper management staff, across all functions, to India. It will pour $1.1 billion into the area, too. The investment is slated to include $750 million on research and development, $150 million on Cisco capital, $100 million on venture capital, $100 million on expanding customer support and $50 million on campus in Bangalore.
Now Cisco want to bring $30 billion back to the US, saving the company as much as $10.5 billion in taxes, while it will increase its US workforce (type and quality of employees is unspecified) by a few thousand workers IF a "favorable law is passed".

Two years from now, rest assured those hires (if any) will be laid off in some corporate restructuring plan.

Cash Cow - Who has the Cash?

In case you are wondering where the cash is, company by company, please consider Cash Cow: Who has the Cash, Who has the Debt, by Sector and Company

With that out of the way let's return to the main theme.

Cisco Order Slippage

The Wall Street Journal reports Cisco Stock Falls as CEO Cites Order Slippage
Cisco Systems Inc. reported solid quarterly results but then disappointed investors with a bearish forecast that called into question the strength of technology spending, citing weakening orders from U.S. cable-TV operators and government agencies.

The news sent shares of the Internet-equipment giant tumbling almost 14% in after-hours trading on the Nasdaq Stock Market. Cisco said it expects revenue to rise only 3% to 5% in the current quarter and 9% to 12% in the current fiscal year—below the 12% to 17% annual revenue growth the company has said is its longer-term aim.

John Chambers, Cisco's chief executive officer, said orders from cable operators were off 35% in the quarter from a year ago. He added that orders from state governments in the U.S. fell 25% from a year earlier and 48% from the prior quarter.

"We are obviously not projecting growth as fast as we would like over the next several quarters," said Mr. Chambers, whose quarterly remarks are closely watched as a barometer of corporate tech spending. The "air pockets" Cisco hit "surprised us, quite candidly," he said.
The Cable Surprise

In a twist of unpublished fate, on Wednesday morning I received an Email from "Cable Guy" who wrote ...
Hello Mish

My cable customers are dropping services left and right. The only way we can get them to take multiple services is by discounting the **** out of them. And my company has not shown a profit in the last 3 quarters.

Customers are dropping or cutting back cable services because they cannot afford them anymore.

I hope you can point out how deflation is occurring in spite of the printing of money and how it is affecting consumer behavior to make this a long ride down.

Cable Guy
Over 500,000 People Quit Cable Last Quarter

Please consider Over 500,000 People Quit Cable Last Quarter
Ryan Lawler at GigaOm added up the numbers and reports over 500,000 subscribers canceled cable in the last quarter. He looked at the subscription numbers reported from four of the five largest cable companies.

While it's bleak for cable companies, it doesn't necessarily mean people are giving up on pay TV.

Verizon, DirecTV, and AT&T combined added 820,000 new subscribers in the last quarter.
I got that link from "Cable Guy" and I asked him about the expansion at Verizon, DirecTV, and AT&T.

He responded "Dish and Direct are just undercutting (intro offers) to pull TV viewers. However, they will lose customers as soon as the intro is out and they raise prices. Verizon and AT&T's increased share is for internet. "

"Cable Guy" also has a pizza delivery business and sells pizzas at night, attempting to make ends meet. He notes "I have not raised prices for 4 years! I can't. But my costs of doing business has gone up by 30%."

NFIB Report Shows Lack of Sales Still #1 Problem of Small Businesses

Cable Guy's (Pizza Guy's) experiences are exactly what the NFIB reports on small businesses for months on end.

I talked about that in NFIB Report Shows Lack of Sales Still #1 Problem of Small Businesses, Inflation Barely Registers
Seasonally adjusted, the net percent of owners raising prices was a net negative five percent, a six point increase from September. Plans to raise prices rose five points to a net seasonally adjusted 12 percent of owners. However, most plans to raise prices have been frustrated by the recession and weak sales during the past few years.


Reports of positive earnings trends posted a seven point improvement in October, registering a net negative 26 percent. Still, far more owners report that earnings are deteriorating quarter on quarter than rising.
Surprise, Surprise, Surprise

I graciously send a tip of the hat to Gomer Pyle.

Nonetheless, I feel obliged to point out that if anyone was surprised by the Cisco announcement it certainly was not Cisco insiders.

Cisco Insiders Sell 6,620,750 Buy 0 Shares in Last Six Months

Inquiring minds are taking a peak at Cisco Systems, Inc. Insider Transactions

Insiders bailed hand over fist. In fact, they sold 60% of their holdings!

But hey who could possibly have known? Then again, it appears with Cisco, it's always a good time to sell.

CEO Chambers' Transactions

  • Sep 16, 2010 CHAMBERS JOHN T Officer 285,000 Direct Acquisition (Non Open Market) at $0 per share.
  • Aug 18, 2010 CHAMBERS JOHN T Officer 243,178 Direct Automatic Sale at $22.50 per share. $5,471,505
  • May 18, 2010 CHAMBERS JOHN T Officer 22,273 Direct Option Exercise at $20.53 per share. $457,264
  • May 18, 2010 CHAMBERS JOHN T Officer 22,273 Direct Automatic Sale at $25 per share. $556,825
  • May 17, 2010 CHAMBERS JOHN T Officer 1,000,000 Direct Option Exercise at $16.01 per share. $16,010,000
  • May 17, 2010 CHAMBERS JOHN T Officer 1,250,000 Direct Automatic Sale at $24.61 per share. $30,762,500
  • Mar 5, 2010 CHAMBERS JOHN T Officer 1,800,000 Direct Option Exercise at $16.01 - $20.53 per share. N/A
  • Mar 5, 2010 CHAMBERS JOHN T Officer 1,800,000 Direct Automatic Sale at $25 per share. $45,000,000

I went through all recent insider transactions and stripped out those of CEO John Chambers. To highlight one example, on May 17, Chambers exercised a right to buy and immediately sold (and then some), 1 million shares netting a mere $14,752,500.

Bear in mind, that is a single transaction.

To show just how deserving Chambers is, please consider the following chart.

Cisco Monthly Chart

click on chart for sharper image

Chambers became CEO of Cisco in January 1995. If you bought and held then, congratulations you were a winner for 3+ years or so. Then for the next 11 years you watched Chambers makes hundreds of millions cashing out options while you made nothing.

Share Buybacks Masked Dilution

Please consider Share Repurchases + Hoarding Cash = Stock Price Underperformance by Joseph Levy on Seeking Alpha.
Cisco Systems, Inc. (CSCO) - The company has not paid any cash dividends to shareholders and currently has no plans to do so in the future. [Mish Note: Cisco has announced unspecified dividend plans as mentioned above] In the five fiscal years ending July 2010 they repurchased 1.631 billion of its shares paying out $37.931 billion, or an average price of $23.26.

Had CSCO repurchased just enough shares to cover all new stock issues (for acquisitions, employee purchases, exercise of stock options, etc) during the five fiscal years ending July 2010, they could have used the remaining stock repurchases funds ($13.6 billion) to pay cash dividends to shareholders. Additionally there was a cash buildup of $23.8 billion from the end of July 2005 ($16.055 billion) to the end of July 2010 ($39.861 billion). Thus, shareholders could have been paid cash dividends totaling approximately $37.4 billion or just under $6.00 per share (average annual dividend rate of approximately $1.20) over the five year period ending July 2010.

Does John Chambers and the Cisco Board believe the current stock price would be $6.00 lower today had this shareholder friendly program (paying cash dividends) been implemented instead of the actual stock repurchases made in conjunction with a cash hoarding policy? A 5% annual cash dividend yield over the last five fiscal years surely would have resulted in Cisco’s shares trading higher than its current stock price. Additionally, long term investors would have been rewarded with an additional $6.00 per share in cash dividends. While most eminent CEO’s and Boards of Directors give lip service to the mantra “enhancing shareholder value” I don’t believe Cisco has accomplished this by repurchasing their shares, hoarding their cash and electing not to pay cash dividends to shareholders.
What's the Point?

In a February 2009 post, Brad Reese on NetworkWorld provides additional figures dating back to 2002 and asks Cisco stock repurchases ... what's the point?

Shareholder Rape

What's the point? It should be obvious. Cisco gets to pretend it is increasing shareholder value while corporate insiders get to dump massive numbers of shares over the years.

It's as if the company exists for the primary reason of granting insiders options to sell shares which the company "graciously" repurchases while waving a flag of "increasing shareholder value".

This is nothing more than shareholder rape.

Chambers Not Worth a Dime

Public companies are owned by shareholders. Officers control day-to-day operations but the goal of the corporation (and therefore the goal of the CEO), is to increase shareholder value.

By that measure (increasing shareholder value), Chambers has been worthless for over 10 years. However, the fact that he has taken out 10's of millions of dollars in stock options proves he is a magician.

Magicians are obviously worth every penny, because no one seems to care.

Former Countrywide CEO Angelo Mozilo, was a tremendous magician, perhaps one of the best ever. Mozilo cashed out over $1 billion worth of stock options and shares while running Countrywide to virtual bankruptcy.

In the wake of the collapse, Mozilo was accused of fraud. In a travesty of justice Countrywide CEO Mozilo settles with SEC for $67.5M
Countrywide CEO Angelo Mozilo has agreed to a $67.5 million settlement to avoid trial on fraud and insider trading charges that alleged he profited from risky mortgages he signed off on before the collapse of the housing market.
After taking out $1 billion, a mere $67.5 million fine was quite the Houdini escape act in and of itself.

The kicker is "$25 million of Mozilo's restitution will come from an escrow fund the company set up to cover shareholder litigation and Mozilo has no obligation to pay the remaining amount, according to the settlement agreement."

Excuse me for asking the obvious, but what the hell is the point of fining someone $42.5 million if the settlement requires no obligation to pay?

Is this a great country (for corporate insiders) or what?

Mike "Mish" Shedlock
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