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Cisco forecasts growth from software shift, but chip prices pressure profits By Reuters


© Reuters. FILE PHOTO. A man walks under the Cisco logo during the Mobile World Congress, Barcelona (Spain), February 25, 2019. REUTERS/Sergio Perez/File Photo

By Stephen Nellis and Sinéad Carew

(Reuters) – Cisco Systems Inc (NASDAQ:) on Wednesday forecast that within four years, about half its revenue will come from software and other recurring sales, but its chief financial officer told Reuters high chip prices in its hardware business will keep pressuring overall profits.

Cisco, the world’s largest manufacturer of networking equipment for data centers and corporate campuses is now shifting towards selling recurring subscriptions to software such as WebEx collaboration services and cybersecurity services.

Cisco shared its belief that subscriptions will increase from the 44% it received for fiscal 2021, which ended on July 31, to half of fiscal 2025.

Cisco projected fiscal 2025 revenues at $62.9 billion with a midpoint value of $62.9 million. It stated that it anticipates an annual compound growth rate between 5% and 7%. Cisco forecast the same rate of growth for adjusted profits and targeted a $4.07 share price in fiscal 2025.

Cisco shares were 0.5% lower at $57.56 on the day. James Fish, a Piper Sandler analyst said that while Cisco’s outlook suggests that profits will remain flat, Wall Street is hoping that Cisco’s move to software will bring about margin growth.

Scott Herren, Cisco’s Chief Financial Officer said that the software business has higher margins than the hardware. However, some subscription revenue can also be generated from services with lower margins.

Herren explained that the global shortages of computing chips, memory chips, power supplies, and other parts will impact gross margins for Cisco’s hardware business. Cisco predicts the growth will be continued.

Herren spoke to Reuters about the component shortages. “Those price hikes will be with us long-term,” Herren stated in an interview. “We are Taiwan Semiconductor Manufacturing Co customers, and they made an all-encompassing price hike of anywhere between 8% to 20 percent. This is what we are responsible for.”

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