Cisco’s strong demand has met with headwinds

This week a network provider and technology leader Cisco announced its earnings for the third quarter of fiscal year 22. The company reported revenue of $ 12.8 billion, missing consensus estimates of more than $ 500 million.

Revenues were essentially equal (+ 0.3%) on an annual basis. Cisco reported EPS without GAAP of $ 0.87, surpassing the street by a penny. Total gross profit was 65.7%, which was the highest level of Cisco’s guidelines.

The gross margin of the product was 65.3%, down 80 basis points due to continuing higher costs for components related to supply constraints, as well as delivery and logistics costs. Cisco also made a slight assessment of its Q4. The average point of his guidelines is $ 12.7 billion, well behind the consensus estimate of $ 13.9 billion. This represents an annual decline of 1% to 5.5%.

The most worrying indicator was the growth of orders, which fell to 8%, compared to 30% + for the last three quarters. During the quarter, Cisco ceased operations in Russia and Belarus, contributing to the decline, but if this number is canceled, order growth is only 10%.

The orders were somewhat mixed in the segments, with the company having the largest scope. In this segment, order growth fell to 0% after reaching a 12-year high of 37%. Other segments of trade, the public sector and the service provider were much more resilient, with orders growing by 16%, 11% and 17% respectively.

The supply chain creates big winds

The main culprit for the current Cisco problem is obviously supply chain problems. Many of Cisco’s components come from China, which still has widespread COVID blocking, which limits the production of parts that Cisco needs.

Cisco is one of the best managed companies in the world and perhaps the best in terms of the supply chain, but if the components are not available, there is nothing to do but wait. During the call, Cisco CFO Scott Heron said that “we are currently seeing limits in the fourth quarter to approximately 350 critical components, out of a total of 41,000 unique component part numbers.”

While 350 is a small percentage of the total, the switch router, security devices and other products need them all. I spoke to the head of one of Cisco’s competitors, and he repeated the same disappointment, noting that sometimes it’s part of $ 2 that supports a $ 10,000 product – but it’s still needed.

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Cisco has a huge business

This paints a somewhat bleak picture for Cisco, but a closer look at the numbers reveals a much different story. The most notable number behind Cisco is currently $ 15 billion, up 10% consecutively and 115% year-over-year.

To get an idea of ​​the size of this number, consider that the total annual revenue for Arista, Juniper and Extreme is about $ 7 billion, which makes Cisco 2 times behind. This shows that there is really no problem with the demand for Cisco and the sheer lag is holding it back. During the conversation, CEO Chuck Robbins said, “While the quarter has clearly not gone as expected, demand remains strong and the foundations of our business are strong.” He added: “We remain confident in our long-term growth and the opportunities we have.”

His comments reflect my research and recent conversations with IT leaders. The web is the basis for digital transformation. Businesses are implementing technologies such as The Internet of Thingsmobility, video, peripheral computing, machine learning and cloud – and they all depend on the network.

Businesses already understand that they need a stable and secure network to modernize their operations. I believe that if there were no problems with the supply chain – or at least less, as there are always some limitations – the network industry would have undergone the greatest refresh since the birth of the Internet.

Supply chain problems require better planning

What’s next for Cisco and its colleagues? I believe that this is more uncertain in the short and medium term. In fact, during a conversation with the investor, Robbins mentioned the typical seasonality that Cisco sees when it said, “Every season is currently out of the window with the current situation and what we saw when looking for orders.”

My advice to clients is to plan 18-24 months and receive orders earlier. This period will be a time of implementation of at least two years and maybe more. As I mentioned, the network is now critical, and waiting for supply problems to go away will only leave your company even more so. By 2024, things may return to “normal”, but we will probably see an uneven path by then.

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