(Bloomberg) — Cisco Systems Inc. shares fell after the company said its profitability is being squeezed by the cost of securing components needed to meet a surge in orders driven by a rebound in spending on computer networks.
The biggest maker of gear that’s the backbone of the internet gave an optimistic revenue forecast helped by what it called the strongest demand in a decade. But its profit projection was below Wall Street estimates after the company chose to “endure short-term pain” to make sure it has enough chips to meet its order obligations, Chief Executive Officer Chuck Robbins said.
Like many other companies, Cisco is feeling the pinch of a shortage of semiconductors available to meet rising demand as chunks of the world economy rebound from the worst of the pandemic-driven recession. Cisco is paying more per component and having to fork out fees to expedite shipments.
“We had a couple of choices, we could say ‘no’ and our customers would suffer and we suffer over the next few years because we lose share to those who say ‘yes,’” Robbins said in an interview. “We’re feeling more momentum than we have in a long time and I didn’t feel like that was the right decision for the company. We decided to take it on the chin.”
Chief Financial Officer Scott Herren said he expects those shortages will last until the end of 2020. Absent the constraints, Cisco’s revenue projections would have been higher.
Cisco shares fell more than 5% in extended trading, after closing at $52.47. The stock had rallied more than 17% this year.
Sales in the fiscal fourth quarter will rise 6% to 8% from a year earlier, the company said Wednesday in a statement. That indicates revenue of $12.9 billion to $13.1 billion, compared with an average analyst projection of $12.8 billion. Profit excluding certain items in the period will be 81 to 83 cents a share, shy of the average analyst estimate of 85 cents, according to data compiled by Bloomberg.
The profitability squeeze overshadowed commentary and an earnings report from the company that provided strong evidence the economy is rebounding from the low point of 2020.
Sales in the fiscal third quarter totaled $12.8 billion, an increase of 7% from a year earlier. Profit, minus certain items, was 83 cents a share, beating the average estimate by a penny.
Under Robbins, Cisco is trying to recast itself as a provider of networking services and software. While revenue is increasing from those newer offerings, Cisco still gets the majority of sales from hardware. Software revenue grew 5%, security was up 13%, and infrastructure platforms – gear such as switches and routers – expanded 6% from a year earlier.
Lead times, or the amount of time between placing an order and getting it filled, are on the rise for the semiconductor industry. Many companies are more willing to give chipmakers longer-term commitments and pay upfront.
(Updates with comments from CEO in the fourth paragraph.)
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