Cisco will absorb rising cost by itself, supply chain shortage may continue this year

US network equipment manufacturer Cisco said on Wednesday that the tight supply chain sweeping through the manufacturing industry will have an impact on the company’s current quarterly profit margins.

Although Cisco’s third-quarter financial performance exceeded expectations, the warning caused its stock price to plummet by nearly 6% in after-hours trading. The shortage of semiconductors has made it difficult for many manufacturers to obtain a sufficient supply of key components, pushing up product prices and pushing up the cost of the entire supply chain.

Other companies have also been affected by the shortage of parts supply, especially the automotive industry. However, since Cisco’s fiscal quarter ends one month later than most companies, the company’s announcement still allows the outside world to understand the recent stress situation.

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Cisco warned that because the company will absorb the cost increase on its own, its current quarter’s gross margin maybe 1.5 percentage points lower than the previous three months. In addition, its revenue for the quarter will increase by 6% to 8%, which is higher than Wall Street’s expectations, but still lower than expected in the case of sufficient parts supply.

Cisco CFO Scott Herren (Scott Herren) said the company must pay higher prices to ensure the supply of chips and key components in the coming months. Their “expedited fees” will also rise sharply. This part of the cost refers to the cost of air freight in order to ensure a sufficient supply of key components to keep the production line running.

Cisco CEO Chuck Rubbins (Chuck Rubbins) mainly chose to absorb the rising costs on his own, instead of raising product prices. But he also said that if the cost increase continues, the company will also “have no alternative but to consider strategic price increases.”

Cisco CEO said that due to the relief of the epidemic and the company’s business focus shifting to higher-margin software and service businesses, they should have achieved a stronger business recovery during this period, but they were hit by a shortage of parts.

The extreme pressure of chip shortages has caused various companies to stock up on key parts and products. Some analysts, therefore, questioned that Cisco’s own sales might have been artificially pushed up. Robbins said that the company did not see the “red flags” of customers stocking up in advance, but he also added: “We agree that there are some early red flags now.”