Cisco plunges after China lockdowns, Ukraine wreck forecast

CISCO Systems tumbled as much as 19 per cent in late trading after warning of a sales decline in the current quarter and slashing its annual forecast, blaming disruptions stemming from Chinese lockdowns and the Ukraine war.

Sales will dip 1 to 5.5 per cent in the period ending in July, the company said Wednesday (May 18) in a statement. Analysts had predicted growth of nearly 6 per cent, according to data compiled by Bloomberg. Cisco's earnings forecast also was short of Wall Street predictions.

Makers of tech equipment have already been struggling with chip shortages, and supply snags triggered by China's Covid-19 lockdowns and the Ukraine conflict have only added to their woes. Cisco, the biggest maker of computer-networking equipment, has struggled to fill all the orders it's been given.

"While Covid lockdowns in China and the war in Ukraine impacted our revenue in the quarter, the fundamental drivers across our business are strong and we remain confident in the long term," chief executive officer Chuck Robbins said in the statement.

Like many tech companies, Cisco began cutting ties with Russia after that country invaded Ukraine earlier this year. The company said Wednesday that stopping doing business in Russia and its ally Belarus cost it about US$200 million in revenue during the fiscal third quarter. Historically the region, including Russia, Belarus and the Ukraine, has accounted for about 1 per cent of total sales.

Cisco shares tumbled as low as US$39 in late trading. The stock had fallen 24 per cent to US$48.36 this year through the close Wednesday.

On a conference call with Cisco executives, analysts questioned whether the weak guidance indicates that customers are concerned about their own future growth and cutting spending budgets.

Robbins insisted that the company's problem is purely supply-related and that demand remains robust. That said, Cisco doesn't expect shortages to be resolved in the current quarter.

The inability to get power supplies out of China cost it US$300 million in revenue in the third quarter. And even when China ends lockdowns, dealing with logistics will mean that the problem isn't solved, the company said.

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"Even though these top-line numbers don't look good, there's a very simple explanation," Robbins said on the call. "Customers are not signalling any real shift at this point. There's no reflection of demand issues in our guidance."

Even so, the report was a stark contrast from 3 months ago, when Cisco said that orders rose more than 30 per cent 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.

Under Robbins, Cisco has been trying to spur growth with updated hardware, as well as new services and software. The hope is to make the longtime king of networking gear less dependent on one-time equipment sales.

The latest outlook marks a setback in that push. Excluding certain items, earnings will be 76 US cents to 84 US cents a share in the period, Cisco said. That compares with an average estimate of 92 US cents.

For the year, revenue will grow 2 to 3 per cent, the company said, compared with a previous prediction of as much as 6.5 per cent.

Revenue in the 3 months ended in April, was US$12.8 billion, little changed from a year ago. Earnings per share, minus certain items, was 87 US cents. Analysts had projected a profit of 86 US cents on sales of US$13.3 billion on average. BLOOMBERG