Opinion: Cisco blames China lockdown for cutting its forecast, but may be there

Cisco Systems Inc. Executives spent most of Wednesday afternoon blaming COVID-related shutdowns in China for the 1 billion deficit in its revenue forecast, but technology could show Belvedere a more widespread problem.

Cisco CSCO,
-13.73%
Financial reported third-quarter financial results showing flat revenues and earnings that were largely in line with Wall Street expectations, but the company’s forecast pulled its shares down another 14% on Thursday. In his call with investors, executives discussed product delays due to the inability to get power supplies and many other components from China.

Executives said their forecasts were 100% related to their supply problems, saying demand had no effect on their fiscal fourth-quarter guidance. Problems with this supply will affect hardware sales, as Cisco struggles to get the tools needed to complete the equipment and deliver it.

Cisco executives say the company has $ 2 billion backlog of software, but it also blames hardware that still can’t ship. Cisco also wrote some software costs in Russia, where it had to suspend operations due to the war in Ukraine.

But some analysts noted Thursday that the company’s supply-chain problems were more problematic than those of its rival, such as Arista’s network, because Cisco did not diversify its supply chain. Arista is not ANET,
-1.43%
Not Juniper Network JNPR,
-3.52%
Their latest quarter, which ended March 31, was a big problem due to further diversification.

Analysts have sought more details, including an explanation of the overall demand situation, as in recent weeks a number of technology companies have announced spending cuts – including job cuts – raising concerns about the state of the overall economy and a huge upheaval in the stock market.

One analyst asked what Cisco executives were hearing from customers, “because it looks like bad news wherever you look.” Chief executive Chuck Robbins is stuck on his talking points, however – the digital transformation cannot be stopped, Shanghai will reopen on June 1 and Cisco will be fine.

“I think Covid has changed everything about how our customers think about technology,” Robbins said. “They’re going to be very prudent about shutting down key projects that support their differences, capabilities or modernization of their infrastructure or hybrid work or ensure they’re not lagging behind their competitors.”

Analysts also noted that Cisco had a very strong product growth in the recent quarter before the company’s price increase. Simon Leopold, an analyst at Raymond James, said in a note, “Cisco has implemented a three-point price increase that we encourage customers to place otherwise.” “Customers are worried about the long lead time and have to place orders earlier than usual. It will be more difficult to compare the increase in orders, so we still hope that the increase in orders and the increase in revenue will be more combined. ” He added that he feared investors would react excessively to the recession.

Problems with Cisco’s delivery keep it away from shipping hardware – and software, if that’s the real reason – there are fewer points to talk about. It may be too early to say how recent changes in macroeconomic sentiment and market downturns will affect every technology company, but Cisco’s forecast could send some alarms in the near future and possibly beyond.

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