Cisco’s purchase commitments have increased sharply.
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One of the interesting elements of last week’s Cisco Systems earnings call was the disclosure that the company has been taking aggressive steps to ensure it has enough parts to meet customer demand amid supply chain issues. In short, Cisco has been throwing its money around, paying up to move to the front of the line with key suppliers.
Cisco saw 10% order growth in the latest quarter, the fastest growth rate in nearly a decade. But the rising demand happens to come in an environment of tightening parts supplies, making it tough for Cisco to meet demand.
The evidence of Cisco’s strategy to obtain the parts it needs is clear in the company’s 10-Q filing for the April quarter. The filing shows that as of the end of the quarter, Cisco (ticker: CSCO) had total purchase commitments of $9.8 billion, up 114% from the January quarter. That includes commitments to be paid in the next 12 months of $6.5 billion, up 62% sequentially.
Meanwhile, the company’s raw materials balance has increased to $723 million at quarter end, from $527 million at the end of the January quarter, and $380 million at the end of the October quarter. Total inventory at quarter end was $1.579 billion, up from $1.436 billion last quarter, and $1.303 billion two quarters ago.
What the quarterly filing vividly demonstrates is the power of a strong balance sheet in the current environment. Cisco—and no doubt other deep-pocketed players—can muscle their way to the front of the queue to make sure they can deliver goods to customers. Here’s how Cisco describes it in the filing:
“When facing component supply-related challenges we have increased our efforts in procuring components in order to meet customer expectations, which in turn contributes to an increase in purchase commitments. Increases in our purchase commitments to shorten lead times could also lead to excess and obsolete inventory charges if the demand for our products is less than our expectations. If we fail to anticipate customer demand properly, an oversupply of parts could result in excess or obsolete components that could adversely affect our gross margins.”
Wells Fargo analyst Aaron Rakers also pointed out in a research note on Wednesday, that, on a combined basis, purchase commitments plus total inventory are up 89% over the last quarter, and 40% higher than their previous peak in the 2018 third quarter.
Cisco also warned when reporting earnings last week that increased component and freight costs are going to eat into gross margins in the July quarter by a point or two—and CEO Chuck Robbins cautioned that the tight component supply will last at least through the end of calendar 2021.
On Wednesday, Cisco shares slipped 0.8% to $52.91.
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