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Cisco revenue depressed by China lockdowns, supply woes

COVID-related lockdowns around China prevented Cisco from getting critical components, leading to a projected decline in revenue.

Cisco forecasted a significant sales decline in the current quarter, blaming COVID lockdowns in China that severely disrupted its supply chain.

On Wednesday, the company warned that revenue for the quarter ending July 31 would fall 1% to 5.5%. The estimate was well below the 6% growth estimates of Wall Street analysts, Bloomberg reported. Cisco stock fell 13% in Thursday morning trading.

The COVID lockdowns began in late March, affecting dozens of cities across China. China's shutdown of Shanghai, the country's largest shipping port, stopped Cisco from receiving hundreds of critical components, executives said.

The company's guidance stemmed solely from supply chain constraints, Cisco CFO Scott Herren said during an earnings call with analysts. Customer demand remained unchanged from before the lockdown when Cisco reported revenue growth.

"There is no demand impact in our Q4 guide," Herren said. "[It's] 100% supply."

For example, Cisco's inability to get power supply components out of China prevented the company from manufacturing 11,000 printed circuit board assemblies, Cisco CEO Chuck Robbins said. The missing parts had a $300 million impact on revenue.

Shanghai officials expect the city to reopen June 1, Robbins said, but that won't immediately resolve Cisco's supply problems. He did not expect the component shortage to start easing until the fiscal first quarter beginning in August, as Chinese ports work through their shipment backlogs.

About 350 critical product components out of Cisco's roughly 41,000 were unavailable, Herren said. Higher shipping and component costs lowered Cisco's gross product margin by 0.8% to 64.1% in the previous quarter.

Cisco redesigned more than 100 products during the past nine months to diversify its component suppliers and mitigate the shortage. Nevertheless, the company reported a $15 billion product backlog, including $2 billion in software orders.

Companies across the networking industry reported record backlogs this year because of supply chain issues. In April, Juniper Networks' backlog sat at $1.8 billion, and Extreme Networks had a record backlog of $425 million.

Cisco's revenue for the previous quarter, which ended April 30, was flat at $12.8 billion. The company's decision to cease operations in Russia and its ally Belarus after the former invaded Ukraine lowered sales by 2%, Robbins said. The two countries account for 1% of the company's total revenue.

Cisco's enterprise sales were flat in the April quarter, but revenue from small and midsize companies -- which Cisco classifies as commercial sales -- grew by 19%. Service provider revenue rose by 8%, and public-sector revenue increased by 4%.

Cisco lowered its forecast for the current fiscal year, which ends July 31. It expects revenue to rise 2% to 3%, instead of as much as 6.5%.

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 Sciences, as well as covering community news for Boston Globe Media.

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