Cisco CEO ‘Fairly Optimistic’ About Defusing Trade War Before 25% Tariffs Kick In

Cisco saw “immaterial” impact in its Q1 ended Oct. 27 from the 10 percent Section 301 tariffs that took effect Sept. 24 on $200 billion worth of Chinese imports, because the tariffs kicked in with only a month to go in the quarter, CEO Chuck Robbins said on a Nov. 14 earnings call. Though Cisco hiked prices on Chinese-sourced goods in Q1 to cover the higher tariff costs, it “saw absolutely no demand change” between the week before and the week after the price increases took effect, he said.

Robbins said knows of “only a handful of customers” that for now plan to step up Cisco purchases to beat the 25 percent tariffs scheduled to take effect Jan. 1. That doesn’t mean there isn’t “stuff outside that we don’t see, but in general, we do not view this as a broad-based issue and our momentum from the first week of the quarter to the last week of the quarter was incredibly consistent,” he said. Cisco argued unsuccessfully in September for tariff exclusions on 10 classifications of goods it imports from China, including servers, printed circuit board assemblies, hard drives, smart cards and other components.

Cisco is “actively working” with its supply chain to “mitigate” as much of the tariffs’ higher costs as possible, “and we've made progress,” Chief Financial Officer Kelly Kramer said. Where the company was unable to absorb the higher costs, “we passed on the price impact just for the products impacted, versus broad-based” price hikes across all product lines, she said: “We were very specific and surgical where we applied it.” Cisco is basing its forecast of 5 percent to 7 percent revenue growth, and 4 percent to 5 percent gross-margin improvement in Q2 ending Jan. 26 on the “underlying strength” of the information technology “environment,” not on any “pull-ins” of customers trying to beat the 25 percent tariffs.

Robbins hasn’t had a single “conversation with any customer around the tariffs at this point,” he said. Now that the midterm elections are over and “we've begun to hear some positive, at least, headlines” that President Donald Trump will dine with Chinese President Xi Jinping during the G-20 summit later this month in Argentina, “I remain fairly optimistic” that defusing the U.S.-China trade war “has become a top priority for the administration,” Robbins said. “We're hopeful that they will come to some agreement before we move to anything more significant,” he said of the 25 percent tariffs.