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Cisco beats earnings target, says has cushioned supply chain from tariffs

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Cisco Systems reported better-than-expected quarterly earnings on Wednesday and gave an upbeat sales forecast for the current period, saying that minimal sales exposure to China and changes to its supply chains have helped cushion the blow of US-China trade dispute.

[BENGALURU] Cisco Systems reported better-than-expected quarterly earnings on Wednesday and gave an upbeat sales forecast for the current period, saying that minimal sales exposure to China and changes to its supply chains have helped cushion the blow of US-China trade dispute.

The United States raised tariffs on US$200 billion worth of Chinese imports to 25 per cent last week, prompting China to increase duties on US$60 billion of US goods in retaliation on Monday.

Analysts have been worried about the impact of the trade war on Cisco's traditional business of selling switches and routers because some are made in China.

However, the company said it had been working for six months to change its supply chain and that it expects minimal impact at this point.

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"We still have some manufacturing happening in China. But we've greatly, greatly reduced our exposure working with our supply chain and our suppliers," chief financial officer Kelly Kramer said on a post-earnings conference call.

Shares of the Dow component rose 2.5 per cent to US$53.75 in extended trading.

Ms Kramer said only about 3 per cent of Cisco's overall revenues come from China, shielding it from slowing economic growth there that has caused slower sales for technology companies such as Apple.

She told Reuters that some Cisco products still face tariffs even after the company moved manufacturing lines for some US-bound products and found alternative sources for some parts.

"We still have products that are being tariffed, but we are reducing the size of that pie," she said. "We can take some pricing actions to account for the cost."

The company has been betting on its newer business such as cyber security and software as it looks to counter any impact from slowing sales of routers and switches.

Sales in the company's security business, which offers firewall protection and breach detection systems, rose 21 per cent to US$707 million, beating estimates of US$670.4 million.

Revenue in its software business rose 9 per cent to US$1.43 billion, but fell short of estimates of US$1.52 billion.

Revenue in its infrastructure platform business, which includes switches and routers, rose 5 per cent to US$7.55 billion. Analysts had expected revenue of US$7.47 billion, according to IBES data from Refinitiv. That business is expected to get a boost from 5G communication networks, but Cisco executives said they do not expect an impact until 2020.

The company forecast fourth-quarter revenue growth of 4.5 per cent to 6.5 per cent, implying US$13.33 billion at the mid-point, and adjusted profit of 80 US cents to 82 US cents per share. Analysts were expecting a profit of 81 US cents per share and revenue of US$13.29 billion.

"The results continue to be consistent. They were pretty much in line which is a relief to investors given all the negative macro news," Elazar Advisors analyst Chaim Siegel said.

Net income rose to US$3.04 billion, or 69 cents per share, in the third quarter ended April 27 from US$2.69 billion, or 56 cents per share, a year earlier.

On an adjusted basis, the company earned 78 cents per share. Analysts were expecting Cisco to earn 77 cents per share.

Total revenue rose about 4 per cent to US$12.96 billion, beating estimates of US$12.89 billion.

REUTERS