(Bloomberg) – Cisco Systems Inc. has spooked investors by warning that Chinese shutdowns and other supply disruptions will wipe out sales growth in the current quarter, reigniting broader worries about tech spending in a faltering economy.
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The outlook sent Cisco shares down as much as 19% late in the session and weighed on shares of other networking companies, dealing another blow to an already struggling sector. Even before Cisco’s latest plunge, its stock had fallen 24% this year.
The question for much of Wall Street was whether Cisco’s forecast meant customers were cutting spending, but the networking equipment giant said supply issues — not a drop in expenses – were the main problem.
“Even though these numbers don’t look good, there’s a very simple explanation,” chief executive Chuck Robbins said on a conference call with analysts. “Customers are not reporting any real changes at this stage. There is no reflection on demand issues in our advice.
Cisco is the largest manufacturer of machines that power corporate networks and form the backbone of the Internet. Investors view its outlook as an indicator of corporate spending on infrastructure, which is why the sudden change was particularly shocking.
The company had predicted growth in the current quarter of around 6%. He said Wednesday that sales would actually decline 1% to 5.5% in the period ending in July. Cisco’s earnings forecast was also lower than Wall Street’s forecast.
Cisco shares fell as low as $39 late in the session. This followed a 4.4% decline in regular trading on Wednesday, taking the stock to $48.36.
Other networking-related companies saw their shares tumble after hours following Cisco’s report. Juniper Networks Inc. fell 9.6%, Broadcom Corp. by 4.3% and Ciena Corp. by 12%.
Covid-19 lockdowns in China have upended supply lines, hitting companies ranging from Apple Inc. to Texas Instruments Inc. Wider chip shortages and the war in Ukraine have also created disruptions for Cisco and its peers.
Like many tech companies, Cisco began cutting ties with Russia after that country invaded Ukraine earlier this year. The company said Wednesday that shutting down operations in Russia and its ally Belarus cost it about $200 million in revenue during the fiscal third quarter. Historically, the region, which includes Russia, Belarus and Ukraine, has accounted for around 1% of total sales.
During the conference call with Cisco executives, analysts questioned whether the weak forecast indicated that customers were worried about their own future prospects and had begun to cut spending.
Robbins insisted that demand remains robust. That said, the company does not expect the supply shortages to be resolved in the current quarter.
The inability to obtain power supplies from China cost Cisco $300 million in revenue in the third quarter, executives said. And even when the lockdowns end in China, the problem won’t be solved right away.
The tone of the report was a stark contrast to three months ago, when Cisco said orders rose more than 30% for a third consecutive quarter. Since then, investors have become more concerned that inflation and fears of slowing economic growth will make customers more cautious. In the last quarter, the company said its orders rose 8%.
Although this is a much slower rate of expansion, it shows strong growth for a company the size of Cisco, according to Edward D. Jones & Co. analyst David Heger.
“I would be more worried if that order number was flat or down,” Heger said.
Cisco has a policy of not canceling its orders within 45 days of the ship date, according to chief financial officer Scott Herren. Small customers, who tend to be the quickest to tighten their spending budgets, increased their orders by 19%. The growth and low overall cancellation rate gives the company confidence that there are no underlying demand issues, Herren said in an interview.
Under Robbins, Cisco attempted to drive growth with updated hardware, as well as new services and software. The hope is to make the longtime king of network equipment less dependent on one-time equipment sales.
The latest outlook marks a setback in this push. Excluding certain items, earnings will be 76 cents to 84 cents per share during the period, Cisco said. This compares to an average estimate of 92 cents.
For the year, revenue will rise 2% to 3%, the company said, compared to a previous forecast of up to 6.5%.
Revenue for the three months ended April was $12.8 billion, little change from a year ago. Earnings per share, less certain items, were 87 cents. Analysts had forecast a profit of 86 cents on sales of $13.3 billion on average.
But without signs that orders are really slowing, Wall Street could overreact to Cisco’s numbers, Heger said.
“Barring a big drop in demand, it looks like the market is overcompensating,” he said.
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