Cisco Rings a Worrisome Bell

Cisco Systems CSCO -13.73%

nothing if unreliable. Rare disappointments tend to be painful.

The tech heavyweight best known for networking and security gear and software said on Wednesday that its revenue for the third fiscal quarter ended April 30 was flat from last year in $12.8 billion. That’s about 4% below Wall Street’s consensus forecast, according to FactSet, and it’s only the second time in at least five years that the company’s revenue has surpassed analyst expectations. And that’s not the only bad news: The midpoint of Cisco’s forecast for the current quarter implies about $12.7 billion in revenue, 8% below Wall Street’s target.

The revelations sent Cisco’s stock price down nearly 14% on Thursday, the stock’s worst single-day drop since February 2011, when another disappointing report sent the stock down 14 percent. %.

The difference this time is that the shock seems to have nothing to do with demand. Cisco’s product backlog actually grew by about $1 billion in the second quarter, while product revenue was reported to have only grown by about $95 million during that time. During the company’s earnings press conference Wednesday, CEO Chuck Robbins blamed disappointing sales and the overall outlook for two factors — stopping business in Russia after that country’s invasion. into Ukraine and the shutdown of Covid in China. This has limited the availability of critical components that are already in short supply. Mr. Robbins noted that the lack of power supply alone cost the company about $300 million in revenue for the quarter.

There are signs that China’s harsh shutdowns may begin to ease in areas like Shanghai, but Cisco is not recovering quickly. The company said it was experiencing restrictions on about 350 components, and Robbins predicted “a lot of competition in port capacity and airport capacity” as limited areas of China open up. “We just believe we won’t be able to catch up on this in Q4, which is what drives the direction for Q4.”

Long seen as a focal point for enterprise technology demand, Cisco’s results and forecasts paint a more worrisome picture of supply. Shares of other companies that sell IT hardware such as Hewlett Packard Enterprise, HP and Dell also saw significant declines on Thursday.

The shutdowns in China didn’t begin in earnest until late March, leaving many tech companies with fiscal quarters ending by that time. And the effect could extend beyond hardware businesses that depend on China as a manufacturing base.

Mark Moerdler, Bernstein’s software analyst, wrote on Wednesday that IT equipment shortages can affect even software-focused businesses, “because a cloud company doesn’t may charge for cloud services until they are able to provide them.”

Cisco may not be the only tech giant coming up.

Write letter for Dan Gallagher at dan.gallagher@wsj.com

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Edmund DeMarche

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