Computer networking giant Cisco Systems Inc.’s shares took a nosedive in after-hours trading today as it warned of challenges in its supply chain in the coming months, despite beating Wall Street’s expectations in its third-quarter financial results.

The company reported a profit before certain costs such as stock compensation of 83 cents per share on revenue of $12.8 billion, up 7% from a year ago. That ended five straight quarters of revenue declines.

Wall Street was expecting Cisco to report earnings of 82 cents per share on revenue of $12.56 billion.

Cisco Chief Executive Chuck Robbins (pictured) said the company had delivered a great quarter, seeing “strong demand” across its business. “We are confident in our strategy and our ability to lead the next phase of the recovery as our customers accelerate their adoption of hybrid work, digital transformation, cloud, and continued strong uptake of our subscription-based offerings,” he added.

Cisco’s biggest business, its Infrastructure Platforms segment, which includes sales of its networking hardware, pulled in $6.83 billion in sales, up 6% from a year ago. The Applications segment, which includes its Webex video calling software, added an additional $1.43 billion in revenue, up 5%. Security revenue rose 13%, to $876 million, bringing the company’s total product revenue to $9.139 billion, up 6%. Services revenue rose 8% year-over-year, to $3.66 billion.

Analyst Patrick Moorhead of Moor Insights & Strategy noted that Cisco saw its best order growth in a decade, delivering an excellent quarter overall.

“More impressive is that the company is on track for $14 billion in software annual run rate and 81% of software as a subscription,” Moorhead said. “I think it is safe to say that the company is ‘back’ with non-COVID-related infrastructure and that’s a very good sign long-term.”

But although Cisco’s long-term prospects are looking good, company officials warned in a lively conference call with analysts that it’s facing some difficult supply chain challenges which will likely hurt its earnings potential in the short term.

Cisco Chief Financial Officer Scott Herren said the challenges involve higher freight costs and unit costs for computer chips and memory that are necessary to ensure it can ship its products to customers.

For the fourth quarter, Cisco is guiding earnings of between 81 and 83 cents per share on revenue growth of 6% to 8%. Wall Street analysts had forecast earnings of 85 cents per share on revenue growth of 5.5%.

Cisco’s stock fell more than 5% after-hours as investors reacted to the news.

Robbins said the supply chain challenges were reflected in this guidance, and added that the company is confident it can work through this as it has already put in place revised agreements with many of its key suppliers. “We believe these actions will enable us to optimize our access to critical components including semiconductors and take care of our customers by fulfilling their demand as quickly as possible,” he told analysts.

Herren said Cisco has managed to lock in both supply and pricing with some of its key component providers, and that has been built into the margin guidance. He added that the supply chain issues will likely remain until the end of the calendar year.

Robbins said that if the company concludes that any of these costs increases will be more sustained, it will consider some “strategic price increases” wherever it must. “That work is already underway,” he said. “There’s already some decisions that we’ve made. It’s a pretty dynamic situation.”

Charles King, an analyst with Pund-IT Inc., told SiliconANGLE that investors generally dislike uncertainties, especially ones that can impact production costs and product pricing. Hence the big after-hours sell-off.

“The great danger for the company and its shareholders is that those challenges may create openings for competitors, like Dell and Lenovo, which have enjoyed stable supply chain performance despite the volatility of the past year,” King explained. “The essential message from Cisco is that shareholders should take a wait-and-see approach and trust the company’s leadership to hold things together, Clearly, some aren’t willing to follow that advice.”

The supply chain uncertainties mean it’s unclear if Cisco will be able to register any revenue growth for its full fiscal year, said Constellation Research Inc. analyst Holger Mueller. He said the company did well to get back on a growth path in the previous quarter, but noted that it still trails by roughly a half-billion dollars over nine months. So it will need a very strong fourth-quarter performance, he said.

“Cisco was able to grow again in the critical Americas market, which remains its most profitable region, so we’ll have to wait and see,” Mueller added. “Overall it will come down to how well Cisco can manage the post-COVID supplier challenge from both a volume and a cost perspective.”

Cisco had a busy quarter on the product front, releasing a new line of computer servers based on Intel Corp.’s new 3rd Gen Intel Xeon Scalable processors and an upgraded family of Silicon One semiconductors used in next-generation 5G network switches and routers.

The company made a string of acquisitions late in the quarter too, buying vulnerability analytics startup Kenna Security Inc. earlier this month. That came just days after it acquired Socio Labs Inc., a venture-backed startup that provides software for organizing virtual conferences and managing related tasks. Also in May, it bought a company called Sedona Systems Ltd. that sells tools used to monitor computer network health and simulate changes.

Photo: Cisco Pics/Flickr