Cisco Systems (CSCO) on Wednesday reported fiscal third-quarter earnings that edged by estimates while revenue missed Wall Street targets. The company’s outlook came in well below expectations as China’s Covid lockdown worsened supply chain issues, causing CSCO stock to crash.
The tech giant reported results after the market close. CSCO stock plunged 15.5% to 40.85 in extended trading on the stock market today.
It also said fourth-quarter revenue would decline by 1% to 5.5%, becoming the latest U.S. company to outline a hit from Beijing’s “Zero COVID” policy that has worsened supply-chain snags and hurt demand amid rising inflation.
“This quarter strikes me as nothing more than a stubbed toe,” CFRA analyst Keith Snyder told Reuters.
“While the guidance is disappointing, it is understandable given these headwinds. The revenue performance in the upcoming quarters is less dependent on demand and more dependent on supply availability.”
Cisco’s revenue was roughly flat year over year in the quarter, which ended on April 30, according to a statement. In the previous quarter, revenue grew by 6%. The quarter spanned 13 weeks, one fewer than the year-ago quarter. Net income rose 6% to $3.04 billion.
The war between Russia and Ukraine reduced revenue by about $200 million, and it added $5 million to Cisco’s cost of sales in the quarter and $62 million in operating expenses. Covid-19 lockdowns in China also exacerbated component shortages, CEO Chuck Robbins said on a conference call with analyst
For the fiscal fourth quarter, Cisco called for 76 cents to 84 cents in adjusted earnings per share and a year-over-year decline in revenue of 1% to 5.5%.
Analysts polled by Refinitiv had been looking for earnings of 92 cents per share on $13.87 billion in revenue, or a growth of about 6%. The guidance range is wider than usual because of the increasingly complex environment, Robbins said.
Cisco said its Secure, Agile Networks segment, which includes data-center networking switches, contributed $5.87 billion in revenue. That represents 4% growth, and it’s lower than the $6.09 billion consensuses among analysts polled by StreetAccount.
Cisco’s Internet for the Future unit, which contains routed optical networking hardware the company picked up through its 2021 Acacia Communications acquisition, contributed $1.32 billion, up 6% and below the $1.44 billion StreetAccount consensuses.
The Collaboration segment that includes Webex kicked in revenue of $1.13 billion, down 7% and in line with the StreetAccount consensus of $1.13 billion.
China Covid Lockdown
Cisco’s product order growth had been a bright spot in the three previous quarters. Product order growth slowed to 8% in the April quarter versus 33% in its fiscal second quarter.
“While Covid lockdowns in China and the war in Ukraine impacted our revenue in the quarter, the fundamental drivers across our business are strong and we remain confident in the long term,” Chief Executive Chuck Robbins said in the earnings release. China has closed factories amid the spread of new Covid variants.
Both Chief Financial Officer Scott Herren and Robbins said that the forecast disappointment is “100% supply”. Robbins told analysts the company is sitting on a record backlog and record inventory.
Robbins explained that since the company’s fiscal quarter ended in April, it is experiencing a whole quarter of lockdowns in China as opposed to companies with quarters that ended in March. When China locked down Shanghai starting on March 27, it threw a monkey wrench into Cisco’s ability to get components.
“We’re talking really about the Shanghai situation, so we had $200 million from Russia, and then we had $300 million that was completely attributed to our inability to get power supplies out of China,” Robbins said. “That’s the simplicity of what caused the problem.”
“In Shanghai, there are lots of components that go into our power supply, so we’re not able to get those components,” Robbins explained. “Shanghai now is saying they are going to open up June 1.”