Cisco CEO ‘Fairly Optimistic’ of Defusing Trade War Before 25% Tariffs Kick In
Cisco saw “immaterial” impact in its Q1 ended Oct. 27 from the 10 percent Trade Act 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, said CEO Chuck Robbins on a Wednesday 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.
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Robbins knows of “only a handful of customers” that now plan to step up Cisco purchases to beat the 25 percent tariffs scheduled to take effect Jan. 1, he said. 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,” said Chief Financial Officer Kelly Kramer. 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 5-7 percent revenue growth and 4-5 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, she said.
Robbins hasn’t had a single “conversation with any customer around the tariffs at this point,” he said. Now that the midterms 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 G20 summit later this month in Argentina (see 1811090055 or 1811090029), “I remain fairly optimistic” that defusing the U.S.-China trade war “has become a top priority for the administration,” said Robbins. “We're hopeful that they will come to some agreement before we move to anything more significant,” he said of the 25 percent tariffs.
Though there's “a lot of unknown, depending on what tariffs do,” the “underlying strength in the macro gives us good confidence” in Cisco’s forecast for Q2 revenue growth and gross-margin improvement, said Kramer. Assuming the 25 percent tariffs “do cut in,” Cisco will “honor quotes” already in the system, rather than hike prices on those orders, she said.
On any new orders not taking the 25 percent tariffs into account, it “will take a while” before any new price hikes take effect, because Cisco will sell down “inventory that has been brought in at the lower cost,” said Kramer. If the tariffs take effect at 25 percent, “the real, full, big impact” will be in Q3 ending in late April, she said. Cisco shares closed 5.5 percent higher Thursday at $46.77.