Cisco (CSCO) Stock Drops on Disappointing Revenue Outlook Despite Earnings Beat

TLDR

• Cisco beat Q2 estimates with $1.04 EPS and $15.3B revenue but shares dropped 5% after-hours
• Full-year revenue guidance of $61.2-$61.7B missed Street expectations by over $2B
• Networking revenue surged 21% to $8.29B on AI infrastructure demand
• Gross margin of 67.5% fell short as memory chip prices squeezed profitability
• Company launched Silicon One G300 AI chip and expects $5B+ in AI orders this fiscal year

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Cisco Systems delivered a solid second-quarter earnings beat but investors weren’t impressed. Shares fell 5% in after-hours trading as full-year revenue guidance came in well below Wall Street’s expectations.

The networking company reported adjusted earnings of $1.04 per share, topping analyst estimates of $1.02 per share. Revenue reached $15.3 billion, beating the $15.11 billion forecast.

But the celebration was short-lived. Cisco’s full-year revenue outlook of $61.2 billion to $61.7 billion fell more than $2 billion short of Wall Street’s $63.9 billion target.

Cisco Systems, Inc., CSCO

The networking segment carried the quarter. Revenue hit $8.29 billion, crushing the $7.9 billion estimate and jumping 21% year-over-year. Companies racing to build AI infrastructure drove the surge.

Security revenue disappointed. The segment generated $2.02 billion, missing the $2.11 billion estimate and dropping 4% from last year.

Margin Pressure from Memory Chip Costs

The bigger issue showed up in the margins. Adjusted gross margin landed at 67.5%, below the 68.14% expectation.

Memory chip prices are the problem. AI spending has created a global shortage of these processors, pushing costs higher. Since Cisco products depend heavily on memory chips, rising prices are eating into profits.

Barclays analysts said they didn’t anticipate this level of margin weakness. They pointed to the mix of optics and AI switches as potential factors.

CEO Chuck Robbins told investors the company has raised prices and is reworking customer contracts. But the margin hit is already showing in the results.

Guidance Creates Investor Concern

Third-quarter guidance came in roughly in line with expectations. Cisco projects earnings of $1.02 to $1.04 per share on revenue of $15.4 billion to $15.6 billion. Analysts wanted $1.03 per share and $15.19 billion.

The full-year outlook is where Cisco lost investors. The company expects earnings of $4.13 to $4.17 per share, matching Wall Street’s $4.13 estimate. But that revenue gap of over $2 billion caught attention.

Cisco shares have climbed 37% over the past year. The stock hit a record high in December for the first time since March 2000, just before the dot-com crash.

AI Push Continues

The rally stems from Cisco’s role in AI hardware buildout. While software stocks struggle with AI disruption fears, hardware companies are attracting investor dollars.

Raymond James analyst Simon Leopold noted tech investors are seeking AI hardware alternatives to challenged software names. He rates the stock Market Perform.

Cisco launched the Silicon One G300 AI chip this week. William Blair analyst Sebastien Naji said the move shows Cisco wants to capture the full AI market with products spanning silicon to software.

Robbins emphasized Cisco’s position to deliver infrastructure for the AI era. The company now expects AI orders to exceed $5 billion for the fiscal year, up from earlier projections. That demand keeps the networking business strong despite margin headwinds from chip costs.

For the current quarter, Cisco anticipates ongoing pressure from memory prices but expects strong demand for systems and optics to continue driving growth in the networking segment.

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