Cisco Faces Supply Chain Challenges with Increased Prices and Backlog

Ongoing supply chain challenges have resulted in significant price increases for Cisco, alongside the largest backlog the company has ever experienced. Client reactions to these adjustments have positively influenced the networking giant's financial performance.

Cisco's total product orders soared by 33% in the first fiscal quarter of 2022, as reported by company executives during a recent earnings call. However, analysts expressed concern about the sustainability of this trend, given that some of the demand is fueled by clients pre-ordering technology to mitigate supply chain delays.

This September, Cisco raised prices to counteract the increased costs of components and logistics. With component shortages and shipping delays, many products shipped this quarter were from existing inventory. CFO R. Scott Herren emphasized that Cisco's financial performance does not yet fully capture the effects of these price increases and logistical challenges.

During the earnings call, Cisco's leadership and analysts had differing views on the implications of the historic backlog and price hikes for the company’s future profitability. Herren noted that revenues are expected to remain stable as orders at higher price points are processed in the coming months. He acknowledged customer frustrations over extended lead times but indicated that rising supplier prices are being passed to end customers without harming long-term demand for Cisco products.

In contrast, analysts agreed that the unprecedented demand partly results from clients' heightened awareness of ongoing supply chain issues, leading them to pre-order their technology. As a result, a decline in product orders may be anticipated later this year.

Cisco CEO Chuck Robbins pointed out that larger clients, especially cloud service providers, have pre-ordered significantly, resulting in a 200% growth for Cisco in that area. However, this trend is not mirrored in other customer segments, such as commercial clients, which grew by 46%.

Much of the quarter's top performance stemmed from acquisitions like ThousandEyes, which saw triple-digit growth, and Acacia, which recorded an 18% increase due to a new 1.2 Tbps pluggable module. Various market segments, including Wi-Fi 6, cloud security, zero trust, and SaaS, all registered single or modest double-digit growth. Despite Cisco's focus on transitioning to software and subscriptions, these revenues grew by a modest 1%.

Moving forward, Cisco anticipates a slowdown in revenue growth from 8% last quarter to between 4.5% and 6.5% for the current quarter. The total revenue for the period ending October 30 was $12.9 billion, falling short of Wall Street's consensus estimates. Adjusted net income increased by 8% to reach $3.5 billion.

The combination of disappointing forecasts and continuing supply chain disruptions led to a decrease in Cisco's stock price, dropping approximately $5 per share after the earnings announcement.

On a related note, Cisco and Intel recently launched a new telemetry product, Intel Connectivity Analytics, which aims to monitor Wi-Fi connectivity and wireless resources. This free tool compiles data on various aspects, including client make, connection paths, and driver versions, providing IT teams with comprehensive insights into connectivity issues.