Widespread component supply shortages may be severe enough to limit Cisco's revenue upside

Longer product lead times may give an advantage to Cisco's competitors.

By Brad Reese on Tue, 12/15/09 - 12:01am.

In his research note today, Matthew Robison - Wedbush Securities' Senior Vice President of Communications Technology Equity Research, remarked:

"Manufacturing and sourcing was not a topic of discussion during last week’s analyst meeting and staff associated with this aspect of the company did not seem to be available at the event. Supply constraints were downplayed when we inquired."

That's interesting in my opinion, because long product lead times and supply chain shortages were discussed and were most certainly an "issue" during Cisco's most recent earnings call, for example:

Cisco F1Q10 (Qtr End 10/24/09) Earnings Call Transcript:

Frank Calderoni - Cisco CFO: "We are seeing some product lead time extensions stemming from supplier constraints based upon labor and other actions taken during the downturn."

John Chambers - Cisco CEO: "In terms of the quarter, we made good progress during the quarter on our lead time issues and we need to bring them down further this next quarter, and it varies by product category."

Robison continued in his research note:

"Supply constraints appear to be increasingly widespread: Cisco managed through supply challenges last quarter, but industry feedback indicates shortages have become more widespread, now involving passive and electromechanical components like connectors, as well as active components such as integrated circuits and fiber optic transceivers. Feedback from the field indicates demand pull from consignment inventory is inconsistent. We think this pattern reflects temporary supply relief or supply challenges with different components having effect at different times."

Robison added:

"Shortages seem to be mostly oriented towards data center upgrades (switching): Our checks indicate switching product lines are most effected at Cisco, especially rack switches with 10 Gigabit per second uplinks, like the Catalyst 4900 switching family, but we are also hearing of long lead times for Nexus 7000 and older Catalyst 6500 switches. For certain products it appears the company is quoting delivery times well into next quarter."

Robison concluded:

"No change to our forecast, but we think conditions may be severe enough to limit potential for revenue upside: Though the company’s procurement power generally ensures favorable pricing, uneven manufacturing flow could have negative implications on cost variance. Such developments could be offset by a trend towards price increases or less discounting, but we have not yet seen indications of such behavior. We could also see mix shift towards other products that may be higher margin; however, we believe bookings for switching products were strong last quarter, so such mix shift may not be fully reflected until next quarter, if it occurs. Manufacturing and sourcing was not a topic of discussion during last week’s analyst meeting and staff associated with this aspect of the company did not seem to be available at the event. Supply constraints were downplayed when we inquired. Guidance is for sequential revenue growth of 2-5%, our estimate which is slightly below consensus, is 3.1%. While the lead times that we understand are being quoted limit our positive bias for the top line and may give a bit of opportunity for peers, for now we expect front loaded shipments this quarter and good visibility for the April quarter."

What's your take, have you experienced product lead time issues with Cisco?

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