Problem with VMWare FCF?

I am seeing a huge drop in FCF for VMWare a few months ago. This is not recognized in VMW earnings slides as they claim $3.6 billion in free cash flow. I can’t find a reason why the P123 FCF would take such a nasty turn. I believe it must be a database error.

Steve


In the final quarter of last fiscal year, the company paid a $11 billion special dividend. That wiped out their free cash flow and then some. I didn’t go into the details but that is what is going on.

Portfolio123, like AAII and others, subtracts both dividends paid and capital expenditures from operating cash flow to arrive at free cash flow, which explains the one-time VMWare negative free cash flow (which is reflected only in that quarter’s numbers–the most recent quarter shows healthy free cash flow again).

There are other possible formulas if you disagree with Portfolio123. According to the CFA, if you want TTM free cash flow, you use OperCashFlTTM - CapExTTM ; if you want free cash flow to the firm, you use OperCashFlTTM - CapExTTM + 0.85*IntExpTTM (I’m using 0.85 in place of (1 - T) assuming that companies are paying 15% in taxes, but you can use a lower number if you think the tax rate should be based on higher numbers); for free cash flow to equity, OperCashFlTTM - CapExTTM + DbtTotQ - DbtTotPYQ . Many people use [code]

  • CashFrInvestTTM
    [/code] rather than [code]

P123 could ease the confusion over FCF by adding FCF to Equity (FCFE) and FCF to Firm (FCFF) to the function library. I think they both have commonly accepted definitions.

Thanks Yuval - I see the dividend now.
Steve

That’s not a bad idea at all, but I’ve seen at least a dozen different formulae for these. There’s controversy over whether you should deduct capex, maintenance capex, or capex plus acquisitions. There’s controversy over what tax rate you should use to multiply for interest expense. There’s controversy over whether you add back new debt to FCFE. A lot of people use figures from the income statement and balance sheet rather than from the cash flow statement. You’ll find entirely different D&A figures in the income statement and the cash flow statement, for instance. Many people start with NOPAT rather than EBIT. Some folks use change in working capital in place of the changes in receivables and payables and inventory that the cash flow statement uses. It’s a hornet’s nest.

I might also point out that free cash flow is probably the most unreliable of all value measures in terms of its variability. Using a pretty wide universe of over 4,000 stocks, the median absolute percentage deviation of EPS over the last five years is 58%, while the same of free cash flow is 73%. I rely a lot on free cash flow measures in my own analysis of stocks, but it’s a damn mercurial measure.

I’m reading the current FCF as a FCFE with an adjustment for dividends. Of the various forms for FCFE found in CFA Equity Asset Valuation, tax-rate, non-cash charges and/or fixed capital investments are used. So P123 must have made decision about those issues already. If you guys are still looking for subjects to blog about, maybe the definitive guide to FCF and its implementation could be one.

Walter