In Focus

Cicso's Wilting Roses

When I was in college, the cheerleaders decided to sell roses for Valentines Day. The thought was that everyone would buy a rose for their schnookums, and the cheerleaders would make a profit off every rose sold. (The girls needed new saddle shoes.) They'd been doing this every Valentines Day since the school's inception. Year over year, sales had increased by approximately 10%. But the last two years, sales had increased by 30%. This was due largely to an expanded campus and an increased student population. The girls were anticipating the same sales growth for the coming year, but, since they were desperate for the new clodhoppers, they bought 40% more roses than the year before. They were going to peddle those pricklers until their hands bled. This was going to be the year of all years for the "Be My Valentine" Rose Sale.

Things got a little thorny. No one had anticipated that the guys' wrestling team was going to be selling carnations. Their sales slogan was, "Carnations last longer, and so does your love." To make matters worse, the carnations were a dollar cheaper than the roses. The wrestlers were using their profits to throw a huge party at the Delta House. Everyone who bought a carnation got a free beer.

The cheerleaders also forgot to figure in the fact that enrollment had reached full capacity last year. The student body was the same size as it was then, so there were no new faces to try and peddle pricklers to. Woops. That meant that they would have to try and sell 40% more roses to a student body that had grown 0%.

The last thing the cheerleaders forgot to incorporate into the big picture was that tuition had increased by 20% over the last year. Every student had to dig deeper into their pockets to even afford to stay in school. This was the first tuition increase in the past five years, and the students were feeling it. The free beer at the Delta House was looking pretty good.

The flowers arrived, and the cheerleaders had exactly 24 hours to put on their best sales smiles and unload them. The War of the Roses was about to begin. At every turn the girls were getting the same response, "I don't have that much money this year, and I can't afford the rose. I'm going to buy a carnation from the wrestling team for a lot less. Besides, carnations last longer." The wrestling team was rolling over with joy as they sold out their quota for a keg in an hour. The cheerleaders were down for the count.

On February 15th, the girls had 50 dozen un-returnable roses. They didn't make a cent on their rose sale. Matter of fact, they lost $600 dollars.

So what does this have to do with anything? First, it was my feeble attempt at remembering my college days and keggers at Delta House. (I bought five carnations and gave the flowers to my mother.) But second, it reminds me of what is happening over at the network equipment maker, Cisco Systems (CSCO).

This past year, Cisco was an over-zealous cheerleader. Because of the previous years' sales growth, they thought their 30% - 50% increase would continue. They kept buying and producing at this incredible pace without stopping to look at the marketplace. Was enrollment full? Was somebody else selling a cheaper flower? Was cash flowing among customers as freely as it was the past few years?

Woops.

All of sudden, customers like Nortel were answering Cisco's executives' calls with, "We are going to have to hold off this year on buying any new networking equipment," or "We've found something a little cheaper elsewhere," or "It's just not in our budget, so we will have to go without." It was called an economic slowdown, just short of the word recession.

What went wrong?

I'll tell you what went wrong. Greed, and a blind desire for new saddle shoes. Cisco was so focused on trying to stay ahead of market demand and keep competitors from stealing any of their customers, that they didn't stop to smell the roses. They didn't look at their inventory and the decreasing demand for it. The part that really irritates me as an investor is, not only were they overzealous in their hopes, but they literally guaranteed us that their sales were going to increase by 30% - 50% per year. They told the world that this pace would continue. Everything in the Cisco kid's life was great and there was no end to the prosperity. The stock market was on the ride of its life.

Woops.

This past quarter, Cisco ended up taking a 2.5 billion dollar loss due to all the networking equipment that nobody wanted. Networking equipment is like a rose on February 15th. Who wants it when its day is done? Who wants to buy last year's technology? Nobody.

The Chicks will be investing $1500 into the market this June 4th. We are looking at ten new companies but also have the option of reinvesting in an already held company. We own Cisco and my job is to suggest whether or not Cisco is worthy of our reinvestment. What do you think? Do you think it was prudent for Cisco's management team to see their business only through rose-colored glasses? How responsible was it for them to guarantee investors a growth pace that no one in history has ever been able to keep? Do we really want to reinvest in a company that had to take a loss for a TWO AND A HALF BILLION dollar "Woops"?

At the moment, Cisco is going through some major restructuring. They have slashed 8,500 jobs and are cutting costs at every corner. This is a good thing, but why wasn't this foreseen before they had 50 dozen wilting roses? The prickly peddlers' hands are bleeding, and the question is, do we wait until they heal, or get in while they're still nursing the wound?

Anyone know which company is offering the free beer?