Opinion: Cisco blames China lockdowns for its forecast cut, but there could be deeper issues

Cisco Systems Inc. executives spent much of Wednesday afternoon blaming China’s COVID-related shutdowns for a $1 billion shortfall in revenue guidance, but the tech lead changer could show bigger problems.

cisco csco,
reported third-quarter financial results that showed flat sales and earnings that were mostly in line with Wall Street expectations, but the company’s guidance dragged its shares another 14% lower on Thursday. In his call with investors, executives widely discussed product delays due to the inability to source power supplies and many other components from China.

Executives said their guidance was 100% related to their supply issues and said there was no demand impact in their fourth-quarter fiscal guidance. These supply issues should impact hardware sales as Cisco struggles to source the components needed to complete and ship the devices.

Cisco executives said the company had a $2 billion software backlog, but also attributed it to hardware that is yet to ship. Cisco also wrote off some software costs in Russia, where it had to shut down due to the war in Ukraine.

However, some analysts on Thursday noted that the company’s supply chain issues are more problematic than those of its peers like Arista Networks because Cisco hasn’t diversified its supply chain as much. Neither Arista ANET,
nor Juniper Networks JNPR,
had an equally big problem in their most recent quarters ended March 31 due to increased diversification.

Analysts sought more details, including an explanation of the overall demand situation, as several tech companies have announced spending cuts – including job cuts – in recent weeks as fears mount over the state of the broader economy and the stock market takes a huge tumble.

One analyst asked what Cisco executives are hearing from customers, “because it seems like there’s bad news everywhere.” But Chief Executive Chuck Robbins stuck to his talking points — digital transformation can’t be stopped, Shanghai will reopen on June 1 Reopened in June and Cisco will be fine.

“I think COVID has changed everything about how our customers think about technology,” Robbins said. “They will be very cautious about stopping key projects that give them differentiation, capabilities, or modernization of their infrastructure, or that support hybrid work, or ensure they don’t fall behind their competitors.”

Analysts also noted that Cisco had very strong product growth in the last few quarters before the company’s price hikes. “Cisco conducted three rounds of price increases that we claim encouraged customers to place orders sooner than they otherwise would have done,” Simon Leopold, an analyst at Raymond James, said in a note. “Customers worry about long lead times and need to order earlier than usual. Order growth comparisons are becoming more difficult, so we continue to expect order growth and revenue growth to continue to converge.” He added that he feared investors were overreacting to the slowdown.

The longer Cisco’s supply issues keep it from shipping hardware — and software, if that’s really the root cause — the fewer these talking points will land. It may be too early to tell how the recent shift in macroeconomic sentiment and the market slump will affect any tech company, but Cisco’s forecast should set off some alarms for the near term and possibly beyond. Opinion: Cisco blames China lockdowns for its forecast cut, but there could be deeper issues

Brian Lowry

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