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Sigh. I just keep waffling on Cisco Systems (Nasdaq: CSCO).

Just typing out loud, here is what is going through my head:

• I think the biggest risk is poor use of the company’s cash stores. I was hoping a larger
dividend payment would be a catalyst for the dissolving of this risk (handcuffs against
huge – poor – acquisitions, if you will), but $0.06 won’t meaningfully impact
management’s spending plans. I can’t seem to allay my fears her without a leap of
faith, and since I don’t know Cisco that well, I’m having trouble blindly having faith
in Chambers & Co. (I am mildly reassured given that the company has a board committee
dedicated to acquisitions – I like the apparent checks and balances.)

• In related matters, I fully understand that top brass is going to get paid. This is a
top tech firm that needs good people. And I applaud that, generally, pay ebbs and flows
with company performance. But pay is tied to the absolute level of revenue and operating
income, which creates incentives for growth, not incentives for profitable growth,
innovation, protecting the core markets, or crushing the competition. This
reignites my fears that Cisco’s cash may not find its best use.

• I have trouble wrapping my head around the company’s competitive advantages. Yes,
it has a huge installed base. Yes, it has historically been viewed as “best in show.”
But it sells capital equipment (one off sales) – am I wrong in seeing that it doesn’t
meaningfully benefit from recurring revenue? I’m having a tough time assessing customer
switching costs and general customer captivity in the face of all the success competitors
are having. It’s Cisco’s core routing and switching business that is under attack, so some
customer switching is clearly happening. I’m not sure where the inflection point is
that made switching economical, but we appear to be near such a point. Disturbingly,
I haven’t heard Cisco say that this ain’t cool – it should be on the warpath defending its
core markets.

• I love cheap – but cheap isn’t a reason alone to buy shares. With that said, it’s pretty e
asy to see that CSCO is priced for near zero growth. My back of the envelope Earnings Power
Valuation gets me to $16-$18 per share at a 9% cost of capital.

Luckily Cisco is sufficiently hated that I'm being given time to wrap my hands around these isses. But I haven't been making much progress lately. Any thoughts out there?

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