Demand for Cisco products rises during pandemic recovery

Cisco reported higher product demand and sales as massive COVID-19 vaccination efforts in the U.S. led companies to prepare for an economic recovery.

Cisco reported revenue growth of 7% in its third fiscal quarter, as companies entering the recovery phase of the pandemic drove product demand to the highest it's been in nearly a decade.

The U.S. economic recovery buoyed by the nation's massive Covid-19 vaccination effort contributed to revenue increases across Cisco's customer and product segments. The company expected the sales momentum to continue in the current quarter, forecasting revenue growth between 6% and 8% year over year.

Revenue in the quarter ended May 1 increased to $12.8 billion as net income rose 4% to $3.5 billion, Cisco reported Wednesday. Product orders across customer segments rose to a near decade high of 10%.

The public sector, service provider and small and medium-size business segments grew by 11%, 17% and 16%, respectively. Even the enterprise segment, which had declined for a string of quarters, showed improvements with product orders flat.

Revenue from each of Cisco's product categories grew significantly. Infrastructure platforms, including data center and campus software, switches and routers, rose 6%, following a 3% drop the previous quarter. The category is Cisco's largest revenue driver.

Applications, including UC and collaboration products, increased 5%, while security rose by 13%.

Chuck Robbins, CEO, CiscoChuck Robbins

Cisco, which analysts see as a global bellwether in tech spending, recorded significant revenue growth within U.S. industries hit hardest during the pandemic. The company had double-digit revenue growth in the hospitality and retail segments, CEO Chuck Robbins said. Even cruise lines were buying technology to resume operations.

"We think that is definitely a sign that we're on the road to recovery," he told financial analysts during an earnings call.

Robbins said companies were buying technology for projects that they had placed on hold during the pandemic. Also, businesses have started modernizing their infrastructures in preparation for future calamities. That includes investing in infrastructure to support the migration of workloads to public clouds like AWS, IBM and Microsoft Azure.

Cisco's gross margin slipped in the quarter, and the company expected it to fall further in the current period due to higher component costs. The forecast drove Cisco stock down 5.6% in after-hours trading, MarketWatch reported.

The ongoing chip shortage has forced Cisco to pay higher prices for silicon to guarantee supply, said Cisco CFO Scott Herren. Other contributing factors included higher freight costs and expedite fees.

Cisco expected the high supply chain costs to continue through the rest of the year.

Despite the higher expenses, Cisco did not raise prices for most products. However, the company was watching closely the possibility of inflation having an impact on prices. Economists have said that higher inflation is a possibility because of government spending to bolster the U.S. economy during the pandemic.

Cisco did not see inflation or supply chain costs as a long-term problem. However, the company could raise prices if conditions changed.

"We have made some decisions on certain products that we will be making price increases on," Robbins said. "We're looking surgically at the rest of the portfolio based on where we have costs that we believe are going to be sustained."

Antone Gonsalves is news director for the Networking Media Group. He has deep and wide experience in tech journalism. Since the mid-1990s, he has worked for UBM's InformationWeek, TechWeb and Computer Reseller News. He has also written for Ziff Davis' PC Week, IDG's CSOonline and IBTMedia's CruxialCIO, and rounded all of that out by covering startups for Bloomberg News. He started his journalism career at United Press International, working as a reporter and editor in California, Texas, Kansas and Florida. He can be found on Twitter at @AntoneG.

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