It's ‘$64,000 Question’ When Cisco Can Clear Its Record Order Backlog: CFO

Cisco’s revenue growth was “solid” in its fiscal Q1 ended Oct. 30, rising 8% year over year to $12.9 billion, but growth was hindered by the supply constraints that are “affecting our technology peers and nearly every other industry,” said CEO Chuck Robbins on a Wednesday call. “Our product orders were extremely strong and balanced across our markets, but we are constrained in what we can build and ship to our customers.”

The company has been taking “multiple steps to mitigate the supply shortages and deliver products to our customers,” including paying “significantly higher logistics costs to get the components where they are most needed,” said Robbins. It’s also working on “modifying our designs” to use alternative suppliers where possible, he said. “We are doing this at a breadth and scale that is significantly greater than most in our industry.”

Cisco “thoughtfully raised prices” to offset the impact of higher costs from suppliers that are crimping its gross margins, but “the benefits are not immediate and will be recognized over the coming quarters,” said Robbins. Customer feedback to Cisco’s price hikes “varies” by account, said Robbins. “Most customers are very understanding. They are super-frustrated with the lead times.” Many Cisco customers “are doing the same thing to their customers, so this is a whole inflationary trend that we see across the entire economy,” said the CEO.

The company experienced “some deterioration” in its “supply chain component availability” in the first half of fiscal Q1, “and then we saw it stabilize in the second half, so that was good,” said Robbins. There likely will be “some slight improvement” in the second half of the fiscal year ending late July, but “we don't expect a lot of it,” he said. “That's our current belief based on what we know today.”

When Cisco’s supply mitigation measures might begin to clear its order backlog is “the $64,000 question,” said Chief Financial Officer Scott Herren. “It's not just one commodity that's constrained,” he said. “Then you have to overlay on that the snarled logistics position that we find ourselves in, really across all lanes, whether it’s ocean or air or trucking.”

Cisco’s order backlog “is at an all-time high for our company,” said Robbins. “It's never been higher.” Cisco can’t estimate the volume of fiscal Q1 revenue it left on the table due to its inability to fill orders “because it's impossible to calculate,” he said. Herren said Cisco is optimistic the backlog “will turn into revenue over time.”

The company is guiding revenue growth 4.5% to 6.5% year over year for fiscal Q2 ending late January, said Herren: “There's no question that the Q2 guide is impacted by the supply chain -- the component supply issues that are putting a headwind on what we can get pushed out the door.”

Enabling employees to work from anywhere is “a key trend in front of us,” said Robbins.This is much broader than meetings. “It's about the holistic capabilities to support a highly distributed workforce that require new infrastructure architectures, observability and security.” Many companies “are in the process of defining their hybrid work strategy,” he said.