Cisco Predicts Profit Squeeze on Higher Supply Costs
(Bloomberg) -- Cisco Systems Inc., the biggest maker of computer networking equipment, gave a lukewarm profit forecast for the fiscal year, saying earnings are being squeezed by the higher costs of parts and supply chain challenges that surfaced during the pandemic.
Earnings, excluding some items, will be $3.38 to $3.45 a share in the fiscal year ending next July, the San Jose, California-based company said Wednesday in a statement. Analysts, on average, projected $3.41 a share. Revenue will increase 5% to 7% from this year, compared with estimates for a 5% gain, according to data compiled by Bloomberg.
Order growth in the July quarter rose to the highest in a decade, but the company said earlier this year that profit would be constrained by the higher cost of procuring parts. Like many other equipment makers, Cisco is feeling the pinch of a shortage of semiconductors that has increased the price of components and fees to expedite shipments.
Chief Executive Officer Chuck Robbins is trying to reposition the company as a provider of networking services delivered over the internet and a seller of software. The company still gets the bulk of its revenue from the expensive switches and routers that are the backbone of computer networks and direct internet traffic.
Robbins said that the company had been prudent in setting its goals for next year based upon availability of supply.
Component shortages at the level the Cisco is currently facing would have wiped out revenue growth if the company was still as reliant as it once was on hardware sales, Robbins said in an interview. The company’s shift to software and services is allowing it to keep expanding, he said.
In a conference call after the results, Robbins was asked why profit growth wasn’t keeping up with the pace of sales, even as he said orders jumped 31% in the fiscal fourth quarter, the best year-over-year growth in a decade.
“It’s overwhelmingly driven by the component costs and the contract manufacturing costs,” Robbins said.
Cisco shares fell about 1.5% in extended trading, after closing at $55.15 in New York. The stock has gained 23% this year.
During Covid-19 lockdowns, Cisco suffered slower demand for its hardware from corporations that cut spending on in-house equipment while most of their employees were working remotely. Cisco’s software and services that support a more distributed work environment helped make up for some of that shortfall.
Robbins said Cisco gained sales in the past quarter as companies adjusted to the changing conditions and sought to modernize their equipment to deal with a hybrid workplace.
“We are well positioned to help our customers accelerate their digital transformation,” he said in the statement.
Cisco said sales in the current quarter ending in October will increase 7.5% to 9.5% from a year earlier. Profit, excluding certain items, will be 79 to 81 cents a share. Analysts estimated 81 cents.
Fiscal fourth-quarter revenue increased 8% to $13.1 billion, beating estimates. Profit, minus certain items, was 84 cents a share, compared with an average estimate of 83 cents.
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