Cisco's $15B backlog: China COVID worries, impact of war in Ukraine

On Cisco's news of flat Q3 revenue the company and competitors Juniper, Arista and others take a stock hit.

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Global uncertainties created by ongoing COVID closures and the war in Ukraine continues to impact business for Cisco and its networking competitors.

Cisco’s 3Q earnings announced this week show another round of backlog growth—this time to $15 billion with an additional $2 billion in software backlog and a $200 million earnings hit from the company pulling business from Russia over its invasion of Ukraine. Overall quarterly revenue of $12.8B was flat year-over-year while total product revenue was up 3%.

Two big factors affected Q3 earnings the most, according to Cisco CEO Chuck Robbins. "The first is the war in Ukraine which resulted in us ceasing operations in Russia and Belarus and had a corresponding revenue impact,: he said. "The second relates to COVID-related lock down in China, which began in late March. These lockdowns resulted in an even more severe shortage of certain critical components."

“Historically, Russia, Belarus and Ukraine collectively have represented approximately 1% of our total revenue,” Cisco CFO Scott Herren told analysts on the earnings call. 

As for the China situation, Shanghai now says it will open up June 1, Robbins said, but it’s still uncertain when supplies will start flowing again. Even when they do, he thinks the supply routes will be congested. “We believe that there’s going to be lots of competition for ports capacity, airport capacity” Robbins said.

Supply chain shortages also continue to plague others, including Arista Networks and Extreme Networks

Herren said Cisco sees constraints going into fourth quarter on roughly 250 critical components out of a total of 41,000 unique component parts. “Our supply-chain team is aggressively pursuing multiple options to close those shortages.” Herren said. “We’re working those shortages every day, and every day some of them get resolved, and then every day a couple more will come on to that list,” Herren said.  

“We believe that our revenue performance in the upcoming quarters is less dependent on demand and more dependent on the supply availability in this increasingly complex environment,” Robbins added.

With the gloomy forecast, Cisco’s stock price dropped some 19% and apparently hurt some of its competitors stock numbers Wednesday afternoon. Arista’s dropped 6%, Juniper’s fell 10%, Ciena about 9%, and F5 more than 3% after the close of regular trading, according to CNBC. Arista and Juniper have both reported sizeable product backlogs in recent weeks.

Some good news

Robbins said Cisco continues to see strong demand in its web-scale business. “We’re also extremely pleased with the traction of our 400 Gig solutions, including the Cisco 8000 which is the fastest growing SP routing platform in Cisco’s history. In addition, our Silicon One portfolio, plus optics in our Acacia portfolio of optical-networking products also continue to perform well,” Robbins said.  

Service-provider routing, wireless security and SD WAN products are also solid performers, Robbins said.

“While the quarter clearly did not play out as expected, demand remains solid, and the fundamentals of our business are strong,” Robbins said.

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