May 15, 2019 / 8:20 PM / a month ago

Cisco beats earnings target, says has cushioned supply chain from tariffs

(Reuters) - Cisco Systems Inc reported better-than-expected quarterly earnings on Wednesday and gave an upbeat sales forecast for the current period, saying that minimal sales exposure to China and changes to its supply chains have helped cushion the blow of U.S.-China trade dispute.

FILE PHOTO: The logo of U.S. networks giant Cisco Systems is seen at their headquarters in Issy-les-Moulineaux, near Paris, France, April 3, 2018. REUTERS/Philippe Wojazer/File Photo

The United States raised tariffs on $200 billion worth of Chinese imports to 25% last week, prompting China to increase duties on $60 billion of U.S. goods in retaliation on Monday.

Analysts have been worried about the impact of the trade war on Cisco’s traditional business of selling switches and routers because some are made in China.

However, the company said it had been working for six months to change its supply chain and that it expects minimal impact at this point.

“We still have some manufacturing happening in China. But we’ve greatly, greatly reduced our exposure working with our supply chain and our suppliers,” Chief Financial Officer Kelly Kramer said on a post-earnings conference call.

Shares of the Dow component rose 2.5% to $53.75 in extended trading.

Chief Financial Officer Kelly Kramer said only about 3% of Cisco’s overall revenues come from China, shielding it from slowing economic growth there that has caused slower sales for tech companies such as Apple Inc . She told Reuters that some Cisco products still face tariffs even after the company moved manufacturing lines for some U.S.-bound products and found alternative sources for some parts.

“We still have products that are being tariffed, but we are reducing the size of that pie,” she said. “We can take some pricing actions to account for the cost.”

The company has been betting on its newer business such as cyber security and software as it looks to counter any impact from slowing sales of routers and switches.

Sales in the company’s security business, which offers firewall protection and breach detection systems, rose 21% to $707 million, beating estimates of $670.4 million.

Revenue in its software business rose 9% to $1.43 billion, but fell short of estimates of $1.52 billion.

Revenue in its infrastructure platform business, which includes switches and routers, rose 5% to $7.55 billion. Analysts had expected revenue of $7.47 billion, according to IBES data from Refinitiv. That business is expected to get a boost from 5G communication networks, but Cisco executives said they do not expect an impact until 2020.

The company forecast fourth-quarter revenue growth of 4.5% to 6.5%, implying $13.33 billion at the mid-point, and adjusted profit of 80 cents to 82 cents per share. Analysts were expecting a profit of 81 cents per share and revenue of $13.29 billion.

“The results continue to be consistent. They were pretty much in line which is a relief to investors given all the negative macro news,” Elazar Advisors analyst Chaim Siegel said.

Net income rose to $3.04 billion, or 69 cents per share, in the third quarter ended April 27 from $2.69 billion, or 56 cents per share, a year earlier.

On an adjusted basis, the company earned 78 cents per share. Analysts were expecting Cisco to earn 77 cents per share.

Total revenue rose about 4% to $12.96 billion, beating estimates of $12.89 billion.

Reporting by Akanksha Rana in Bengaluru and Stephen Nellis in San Francisco; Editing by Anil D'Silva and Richard Chang

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