Cisco swallows $125m charge to remediate clock component fault

Networking vendor's bottom line hit in Q2 as it deals with the fallout of malfunctioning products and the cost of memory spirals

Cisco saw its net profit shrink by a quarter as sales of its core networking products plummeted in a tricky second fiscal quarter. During Q2 the vendor also had to deal with some "dramatic increases" in component prices while managing the expensive fallout from issues with malfunctioning products.

For the three months to 28 January 2017 Cisco's global turnover dropped 2.9 per cent year on year to $11.58bn (€10.9bn). Its two biggest product groups saw sizeable declines, with switching sales down five per cent to $3.3bn, and routing revenue dropping 10 per cent to $1.8bn. Cisco's datacentre business also took a hit, with sales falling four per cent annually to $790m.

There was better news in its collaboration unit, which grew four per cent to $1.06bn, and its wireless arm, which saw revenue increase three per cent to $632m. Services revenue rose 4.9 per cent year on year to $3.09bn while security provided by far the biggest bright spot, growing 14 per cent to post a quarterly turnover tally of $528m.

From a geographic perspective, EMEA revenue was flat at $3.07bn, while sales in both the Americas and Asia-Pacific, Japan, and China fell three per cent to $6.66bn and $1.86bn, respectively.

Cisco's Q2 net income nosedived 25.4 per cent to $2.35bn, as profit was hurt by a number of factors related to components, including a hefty one-off charge.

Earlier this month a fault was discovered in a clock-signal component used in Cisco technology, which reportedly causes some products to deteriorate and fail over time. In Q2 the vendor set aside $125m to deal with "the expected remediation costs for anticipated failures in future periods". In an investor conference call, transcribed by Seeking Alpha, Cisco chief financial officer Kelly Kramer claimed that the vendor is working with affected clients to tackle the issue head on.

"We always, and continue to, stand by our customers through any situations like this," she said. "This is very proactive. This is a failure rate that will happen over time, but we're working with our customers to work through that."

And margins were further challenged in Q2 by a rise in the cost of memory components.

"We are facing a significant cost increase to our memory costs, our DRAM memory costs that we're paying," said Kramer. "It's a very tight supply right now, and we're seeing dramatic increases there. So, that's hurting us quite a bit as well."