Cisco warns of up to $720m sales loss: Blames China lockdown, Russia pullout

Share price collapses 19% as COVID-19 policy hits supply chain

Cisco Systems surprised Wall Street by warning investors that the Shanghai lockdown and the war in Ukraine will eradicate any revenue growth prospects in its current – and final – quarter of 2022.

The world's largest networking vendor estimates that turnover for its Q4 ending in mid-summer will decline by between 1 percent to 5.5 percent year-on-year, meaning a drop of $131 million to $720 million.

Chuck Robbins, chairman and chief executive at Cisco, addressed questions from nervous analysts on a conference call, telling them enterprise spending was holding firm and other factors had shaped its financial guidance.

"Our Q4 guidance incorporates a wider than usual range, taking into account the revenue impact of the war in Ukraine and the continuing uncertainty related to the China COVID lockdowns.

"Given this uncertainty, we're being practical about the current environment and erring on the side of caution in terms of our outlook.

"When we look at Q4 and you think about the Shanghai lockdown and what we've heard, because in Shanghai, there are lots of components that go into our power supplies. So we're not able to get those components. Shanghai now is saying they're going to open up June 1," Robbins added.

Competition for port and airport capacity is expected rot be intense and that combined with efforts to get hold of raw materials mean that Cisco, and its peers, will be challenged on multiple fronts.

Robbins said Cisco has worked on mitigations including "redesigning 100 products to give us component diversity." He expects to see improvements in Q1 of Cisco's fiscal 2023. "We need to get through the next 90 days."

Wall Street wasn't impressed and Cisco's share price fell 19 percent following publication of the profits and loss results. Robbins said its trading in the quarter is "less dependent on demand and more dependent on the supply availability in this increasingly complex environment."

This addressed some anxiety – given the geopolitical tensions along with dramatic inflation rises – that business will look to spend less on technology.

"We continue to see strong demand resulting in record backlog," he said. Later in the call he added: "There is no reflection of demand issue in our Q4 guide."

The Chinese government locked down Shanghai in late March, impacting Cisco and other major hardware brands, including Apple, which warned last month that supply chain pressures will hurt its sales by up to $8 billion over the course of its current quarter.

According to Robbins, Cisco's decision to cease operations in Russia cost it "$200m" in Q3, and a further $300 million in lost sales was "completely attributed to our inability to get power supplies out of China.

"That's the simplicity of what caused the problem. As an example, we had 11,000 PCB assemblies built, we couldn't get power supplies for because of the lockdown. That's a simple fact of what happened in Q3."

As for Cisco's Q3 – the three months ended 30 April – it reported revenue of $12.835 billion, flat year on year. It recorded a net profit of $3 billion versus $2.8 billion the year previous after lopping off some operating expenses.

Product revenues grew 3 percent to $9.448 billion and Services fell 8 percent to $3.387 billion. The drop was simply because Cisco had fewer days in the latest Q3 than a year ago.

The Secure, Agile Networks division grew 4 percent to $5.869 billion on the back of datacenter and campus switching and wireless hardware. Enterprise routing was down "driven by edge and access was slightly offset by strength in SD-WAN," said CFO Scott Herren.

The Cisco 8000 edge platform family, the 400 gig solution, helped fuel a 6 percent rise in sales of the Internet for the Future division to $1.324 billion. End-to-end security grew 7 percent to $938 million and Optimized Applications Experiences up 8 percent to $183 million.

The Collaboration unit, which houses meetings, calling and contact center products, declined 7 percent to $1.132 billion.

The industry has lived with the distorting effect of COVID-19 for years, with the impact felt far and wide by nearly all hardware vendors. It doesn't appear as things will be entirely resolved for quite some time. ®

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