Cisco returns to growth but disappoints on earnings guidance

Key Points
  • Cisco returned to growth partly thanks to an extra week in the quarter.
  • Supply chain challenges caused the company to forecast a narrower adjusted gross margin.

In this article

In this image released on May 2, 2021, from left, Cisco CEO Chuck Robbins and Chief Public Affairs, Communications and Sustainability Officer of Coca-Cola Company Bea Perez speak onstage during Global Citizen VAX LIVE: The Concert To Reunite The World at SoFi Stadium in Inglewood, California.
Kevin Winter | Getty Images

Cisco shares fell 6% in extended trading on Wednesday after the data center networking hardware maker said it expects this quarter's earnings to be lower than analysts had expected. The company revealed the news in its earnings report for the quarter ended May 1, its fiscal third quarter.

Here's how the company did:

  • Earnings: 83 cents per share, adjusted, vs. 82 cents per share as expected by analysts, according to Refinitiv.
  • Revenue: $12.80 billion, vs. $12.56 billion as expected by analysts, according to Refinitiv.

Cisco reversed a five-quarter streak of revenue declines, posting nearly 7% growth year over year, although the quarter included 14 weeks, rather than 13 in the year-ago period.

With respect to guidance, Cisco said it sees 81 cents to 83 cents in adjusted earnings per share and 6% to 8% revenue growth for the fiscal fourth quarter. Analysts had expected 85 cents in adjusted earnings per share and $12.82 billion in revenue, which implies 5.5% growth.

In the fiscal third quarter Cisco's top segment, Infrastructure Platforms, which includes sales of networking switch hardware, delivered $6.83 billion, which was up 6% and above the FactSet consensus estimate of $6.77 billion.

The Applications segment that includes Webex video-calling products contributed $1.43 billion in revenue, up 5% and just under than the $1.44 billion FactSet consensus.

Cisco has been enduring supply chain challenges, along with automakers and other businesses.

"The good news, and this is reflected in our guidance, is that we are confident we will work through this as we have already put in place revised arrangements with several of our key suppliers," Cisco CEO Chuck Robbins said on a conference call with analysts. "We believe these actions will enable us to optimize our access to critical components including semiconductors and take care of our customers by fulfilling their demand as quickly as possible."

The supply conditions impacted the adjusted gross margin for the fiscal fourth quarter as Cisco continues to incur expenses -- including higher freight and unit costs for chips and memory -- to make sure it gets products to customers, said Scott Herren, the company's finance chief.

"I think the supply chain issues will stay with us at least through from what I can see at least through the end of this calendar year," Herren said.

The revenue guidance would have been higher were it not for the current supply dynamics, Robbins said.

"You can extrapolate with the growth rate we saw on the product side and then with the corresponding guide that our backlog is certainly increasing, so if we had the capacity to ship, we would, but we just don't have it," Robbins said.

In the quarter Cisco closed its $4.5 billion acquisition of networking hardware maker Acacia Communications and the $730 million acquisition of cloud communications software company IMImobile. Cisco also committed to delivering the majority of its portfolio as a service.

Not including Wednesday's after-hours move, Cisco shares have risen about 17% since the start of the year, compared with a 9% rise for the S&P 500 index over the same period.

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