Cisco Is Struggling But It Will Ride Out of the Storm

On Wednesday, Cisco Systems Inc CSCO reported its fiscal first-quarter results that disappointed Wall Street. The computer networking reported revenue short of analyst estimates as well as a weaker than expected guidance. All in all, the report revealed it is struggling with higher costs of components that are weighing down the company's gross margin.

Fiscal First Quarter Results

For the quarter that ended on October 30^th, 2021, revenue amounted $12.90 billion and Cisco made a net income of $3 billion. Revenue grew 8% and net income expanded 37% compared to last year's comparable quarter. According to Refinitiv, analysts expected adjusted earnings of 80 cents per share and Cisco at least topped that estimate as it made 82 cents per share. But as for revenue, analysts expected it to be a bit more, $12.98 billion to be exact.

Robbins stated that the company has been facing supply constraints and that it is taking active steps to deal with shortages. The company has significantly increased its logistics costs to get the components where they are most needed and deliver its products to customers who are frustrated with lead times for receiving products. Although management has thoughtfully raised prices to offset the impact of higher prices and additional work involved, the benefits of these actions are not immediate and will be seen in the coming quarters. In an interview with Barron, CEO Chuck Robbins stated that both revenues and margins would have been higher if the company has been able to fix its logistics setbacks.

A New Structure of Product Categories

As discussed on the company's Investor Day on September 15^th, 2021, Cisco is reporting revenue in a new way by highlighting some smaller parts of the business as of this quarter.

The largest category within the new framework, Secure, Agile Networks grew 10% and generated $5.97 billion in revenue. The segment includes data center networking switches.

The Internet for the Future segment expanded 46% and brought in revenue of $1.37 billion generated by routed optical networking, public 5G, silicon and optics products.

On the other hand, Hybrid Work category fell 7% as it generated $1.11 billion. The segment includes Webex collaboration products that were showcased during the quarter. The Webex Hologram is basically a meeting in augmented reality with holograms of participants.

Guidance

For the undergoing second fiscal quarter, per-share earnings are expected to be between 80 cents and 82 cents, excluding some items, with revenue growing annually 4.5% to 6.5%.

Third and fourth fiscal quarter will be impacted by supply challenges but their results will be boosted by the company's price increases.

As for the full fiscal year, the company provided a forecast for adjusted earnings per share to be in the range within $3.38 and $3.45 with revenue growing 5% to 7%.

The Outlook Verdict

Cisco's stock is getting crushed due to supply chain problems that are troubling almost every business on the planet. Its result make it a poster child of what can happen to a technology company's business amid the storm caused by chip shortages and global shipping challenges. It cannot get enough chips, power supplies, and substrates to produce the supply to meet the demand. Its backlog is the highest it has ever been.

But Cisco is positioned itself in augmented reality near you and it is continuing to see huge demand for its wares. Orders increased 33% from a year ago, accelerating from July's quarter growth of 31% growth. That included order growth of 200% from cloud providers, 66% from telecom service providers and 30% growth from enterprise customers.

Strong increases in orders gives confidence about its growth in coming years, as supply chain issues will eventually fade and IT deployments are expected to accelerate due to the undergoing digital transformation.

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