Expensed options would have halved Cisco profits


22 November 2002 First-quarter net profits at Cisco Systems would have been 60% lower if the US networking equipment giant had been required to account for its stock options as an expense, the company has revealed.

The disclosure, made in a regulatory filing to the Securities and Exchange Commission, the US financial markets regulator, is the first time that Cisco has broken out stock option expenses on a quarterly basis.

Cisco said that a reported profit of $618 million (€617.7m) would have fallen to about $250 million (€249.9m) – a drop of some $368 million (€367.8m) – for the quarter ended 26 October 2002.

The scale of the fall serves as a reminder of how much the high-tech industry stands to lose if regulators change the way options are accounted for as part of sweeping reforms in the wake of the Enron and WorldCom scandals.

Many leading lights in the IT industry have campaigned against a mandate in recent months, including Andy Grove, Intel’s co-founder and chairman, Todd Bradley, Palm’s CEO, and Bernard Liautaud, Business Objects’ CEO.

The absence of a precise method for accurately measuring the cost of options, they argue, will actually make it harder for investors to judge the value and performance of a particular company.

Cisco says that the options it granted for the year ended July 2001 were valued at $3.3 billion (€3.3bn). Twelve months later, using the same model, those options would have been valued at $131 million (€130.9m), because of the fall in Cisco’s share price.

In the company’s recent regulatory filing, it calculated expenses using the so-called Black-Scholes option pricing model.

Some analysts accused Cisco of deliberately choosing a pricing method that tends to grossly overstate the size of expenses – in order to emphasise its point. “I don’t think [the filing] carries so much value,” Raj Srikanth, a Deutsche Bank analyst, told Reuters. “To some extent, it assumes that all the options outstanding will get exercised.”

Meanwhile, expensing stock options is not the only corporate policy that the IT industry has been reluctant to adopt. Few technology companies have ever issued a dividend to their shareholders, and earlier this week Cisco shareholders overwhelming rejected a proposal to pay a quarterly divided for the first time in the company’s history.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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