Cisco Gives Tepid Margin Forecast, Marring Upbeat Outlook

Cisco gave a weaker-than-expected forecast for profitability in the current quarter, spurring concerns that mounting memory-chip prices are taking a toll on the company. Adjusted gross margin, which measures the percentage of sales left over after deducting production costs, will be 65.5% to 66.5% in the period that runs through April, the company said in a statement Wednesday. Analysts had estimated 68.2% on average. The outlook overshadowed an upbeat sales forecast — fueled by growing artificial intelligence revenue — sending the shares tumbling in late trading. Bloomberg Intelligence Senior Hardware and Networking Analyst Woo Jin Ho joins Bloomberg Businessweek Daily to discuss. He speaks with Carol Massar and Tim Stenovec. Like the broader tech industry, Cisco is contending with a shortage of memory chips. The company is the largest maker of networking equipment and uses the components in a range of products. Cisco also has had to spend money to rejigger its gear to better handle AI demands.

Chief Executive Officer Chuck Robbins said on a conference call that Cisco is navigating the memory crunch. It has raised prices and is revising contracts with customers, he said. It’s also negotiating “favorable terms” with suppliers.

“Overall, we feel confident in our ability to manage this industrywide dynamic better than our peers,” Robbins said.

The shares fell about 7% in late trading after the report was released. Cisco’s stock gained 30% last year.

The company’s sales outlook was a highlight. Revenue will be $15.4 billion to $15.6 billion in the current period, easily beating the Wall Street estimate of $15.2 billion. Excluding some items, earnings will be roughly $1.03 a share, compared with a projection of $1.02.

AI has become a lucrative market for Cisco — but also one with growing competition. Traditional networking companies like Broadcom Inc. and Hewlett Packard Enterprise Co., which acquired Juniper Networks, are also trying to benefit from the flood of spending on hardware for developing and running AI models.

“Cisco is uniquely positioned to deliver the trusted infrastructure needed to securely and confidently power the AI era,” Robbins said in the statement. He expects $5 billion in fiscal 2026 AI orders from so-called hyperscalers, the world’s largest data center operators.

In the fiscal second quarter, which ended Jan. 24, Cisco sales increased 10% to $15.3 billion. Profit amounted to $1.04 a share, excluding some items. Analysts had predicted revenue of $15.1 billion and earnings of $1.02 a share.

AI infrastructure orders from hyperscalers totaled $2.1 billion in the period, the company said. San Jose, California-based Cisco posted $1.3 billion in such sales in the prior quarter.

The company boosted its 2026 forecast, calling for sales of as much as $61.7 billion and earnings of up to $4.17 a share. The range previously topped out at $61 billion for sales and $4.14 for profit.

Beyond tightening margins, Cisco faces some other challenges. It’s been coping with the delay of federal contracts after the US government shutdown — and efforts to cut public-sector spending in general.

In a bid to diversify, Robbins has focused on security products and added monitoring software by acquiring Splunk Inc. for $28 billion in 2024. Yet the security unit “continues to trail peers,” Raymond James analyst Simon Leopold said in a note before the earnings report. Cisco’s security revenue missed analysts’ estimates in the second quarter.

--------

Watch Bloomberg Radio LIVE on YouTube

Weekdays 7am-6pm ET

Follow us on X

Subscribe to our Podcasts:

Bloomberg Daybreak

Bloomberg Surveillance

Bloomberg Intelligence

Balance of Power

Bloomberg Businessweek

Listen on Apple CarPlay and Android Auto with the Bloomberg Business app:

Apple CarPlay

Android Auto

Visit our YouTube channels:

Bloomberg Podcasts

Bloomberg Television

Bloomberg Originals