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Supply chain issues mean backlog, price increases for Cisco

Cisco product orders were up 33% in its most recent fiscal quarter. Supply chain issues, rising prices and historic backlog could threaten that growth's longevity.

Ongoing supply chain snarls have led to a series of price increases at Cisco, as well as the largest backlog the company has ever seen. Customer reaction to the changes have boosted the networking giant's balance sheet.

Cisco's total product orders were up 33% in the first fiscal quarter of 2022, company executives reported on an earnings call Wednesday. Financial analysts on the call expressed wariness about the longevity of this trend, as some part of the growth is driven by clients pre-ordering their technology to work around supply chain delays.

In September, Cisco increased prices to offset both the rising cost of individual components and the rising logistical costs of procuring those components. Component unavailability and shipping delays mean that most of what was shipped this quarter came from stockpiled product and components. CFO R. Scott Herren stressed that Cisco's balance sheet doesn't yet fully reflect the higher prices or shipping delays.

Cisco leadership and financial analysts on the call seemed of two minds about what the historic backlog and price increases mean for the future of the company's balance sheets. Herren said revenues will remain steady as orders at the higher price point work their way through the backlog in the second half of the year. He acknowledged that customers are frustrated by ballooning lead times, but he said increasing supplier-side prices across the industry are simply being passed to end customers and won't negatively impact demand for Cisco products in the long term.

Analysts, on the other hand, concurred that the historically high demand was at least in part the result of clients, increasingly aware of ongoing supply chain issues, pre-ordering their tech. If this is the case, product orders are expected to drop off later in the year.

Cisco CEO Chuck Robbins acknowledged that some of their larger clients -- for instance, cloud providers, among whom Cisco realized 200% growth -- pre-ordered for the coming quarters. Cisco executives maintained they weren't seeing the same behavior in other segments, such as commercial clients, which grew by 46%.

Many of this quarter's top performers were acquisitions, such as ThousandEyes, which saw triple-digit growth, and Acacia, which was up 18% after releasing a 1.2 Tbps pluggable module. Market segments, including Wi-Fi 6, cloud security, zero trust and SaaS, all grew in the single or modest double digits. Software and subscription revenues each rose by a more modest 1%, despite Cisco's ongoing focus on shifting the business model toward those markets.

Going forward, Cisco expects revenue growth to slow from 8% last quarter to between 4.5% and 6.5% in the current quarter. Total revenue for the period ended Oct. 30 was $12.9 billion, less than Wall Street analysts' consensus estimate. Adjusted net income rose 8% to $3.5 billion.

The combination of disappointing guidance and ongoing supply chain issues led Cisco stock to drop by roughly $5 per share following the earnings call.

In other news, Cisco and Intel on Monday released a new telemetry product, Intel Connectivity Analytics, to monitor Wi-Fi connectivity and wireless resources. The free tool aggregates data such as client make and model, connection path and driver version to provide IT with unified insight into connectivity issues. The tool can be accessed through Cisco Catalyst 9800 series wireless controllers version 17.6 or higher or the Meraki dashboard.

Madelaine Millar is a news writer covering network technology at TechTarget. She has previously written about science and technology for MIT's Lincoln Laboratory and the Khoury College of Computer Science, as well as covering community news for Boston Globe Media. She is a class of '21 graduate of Northeastern University, and originally hails from Missoula, Montana.

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