Cisco Continues Its Startup Acquisition Journey Despite Cost Challenges

The networking hardware maker reported earnings last week, with earnings coming in better than expected but guidance came in slightly below what analysts had expected. With its startup acquisition engine humming, Cisco Systems Inc CSCO bought its way to global success as it acquired more than 30 startups over the last four years, two during this quarter, making a total of 229 over its life.

Fiscal Fourth Quarter

Earnings for the quarter that ended on July 31^st amounted to 84 cents per share, exceeding Refinitiv estimate of 82 cents. Cisco generated revenue of $13.13 billion, also topping the expectation of $13.03 billion as it grew approximately 8% YoY, slightly higher than 7% YoY growth it had in the previous quarter. Gross margin narrowed to 63.6% from prior quarter's 63.9%.

During the quarter, Cisco continued its start-up acquisition journey with Kenna Security and Socio Labs, which produces event software but it did not disclose the terms.

Segments

The Infrastructure Platforms segment that sells ethernet switches and routers for data centers and therefore, contributes the most revenue to the sales table contributed $7.55 billion which is a 13% YoY increase.

The applications segment that includes sales Webex video-calling products generated $1.34 billion, dropping 1% and coming in below the Street estimate of $1.46 billion.

On the other hand, security revenue rose 1% to $823 million, but it still missed the $904.7 million consensus.

Challenges

Cisco's CEO Chuck Robbins expects supply challenges and the impact of higher costs to persevere in the first half of the fiscal year ahead, and potentially even in the second half. This is barely a surprise as Cisco indicated back in May that these constraints seem to be in its cards by the end of 2021.

The circumstances revolving around the supply are forcing the company to raise prices for some of its products as it is forced to approach brokers for extra supply and even go to second sources, raising its expenses. The CFO, Scott Herren, expects these extra costs to narrow down the adjusted gross margin to approximately 63.8% in the undergoing, fiscal first, quarter, down from 65.5% in the just reported, fiscal fourth quarter.

Guidance

The company expects adjusted fiscal first-quarter earnings in the range between 79 cents to 81 cents in, along with a revenue growth between 7.5% to 9.5%. Cisco also broke tradition by providing guidance for the 2022 fiscal year, guiding for adjusted earnings per share to be in the range between $3.38 to $3.45 on 5% to 7% revenue growth.

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