Storage chip price hikes become a "profit killer"! Cisco (CSCO.US) earnings surpass expectations, but stock drops 7%. High AI order growth can't offset cost pressures.

TechCrunch Finance APP has learned that on Wednesday, Eastern Time, networking equipment giant Cisco (CSCO.US) announced its second fiscal quarter earnings report ending January 24. Despite quarterly results and full-year revenue guidance exceeding market expectations and demonstrating growth driven by artificial intelligence (AI) business, the company’s stock fell sharply in after-hours trading due to modest profit forecasts for the current quarter and significantly lower profit margin guidance than analysts predicted.

The earnings report shows that Cisco’s second fiscal quarter revenue increased 10% year-over-year to $15.3 billion, compared to the market expectation of $15.1 billion. Net profit rose from $2.43 billion in the same period last year to $3.18 billion, with adjusted earnings per share of $1.04, beating the market forecast of $1.02.

Driven by strong demand for AI infrastructure, Cisco’s core networking business has accelerated growth. In the second quarter, AI infrastructure orders from hyperscale data center providers reached $2.1 billion, a significant increase from $1.3 billion in the previous quarter. The company’s core networking revenue grew 21% year-over-year to $8.3 billion, surpassing analyst estimates of $7.9 billion.

Although industry competition is intensifying—traditional network equipment providers like Broadcom (AVGO.US) and HPE (HPE.US), which acquired Juniper Networks, are also trying to benefit from the hardware investment boom needed to develop and operate AI models.

However, CEO Chuck Robbins stated that the company is in a “unique position to provide trusted infrastructure for the AI era” and expects AI orders from hyperscale data centers to reach $5 billion in the full fiscal year 2026. This quarter, Cisco announced a partnership with AMD (AMD.US) to participate in AI infrastructure projects in Saudi Arabia and launched new network switches equipped with Nvidia (NVDA.US) chips.

Regarding revenue growth from “new cloud” providers (referring to younger service providers compared to established cloud giants like Amazon (AMZN.US) and Microsoft (MSFT.US)), Robbins said he expects this to start showing in the second half of this fiscal year and become more prominent in fiscal 2027.

Profit Margin Warning Sparks Market Concerns

However, the market was not impressed with this earnings report. Cisco expects adjusted earnings per share for the third fiscal quarter to be between $1.02 and $1.04, only matching the midpoint of the market expectation of $1.03. More concerning was the company’s guidance for adjusted gross margin, which is expected to be between 65.5% and 66.5%, significantly below the analyst consensus of 68.2%.

After the earnings release, Cisco’s stock dropped more than 7% in after-hours trading. The stock gained a total of 30% last year.

Like the entire tech industry, Cisco also faces challenges from shortages of storage chips. As the world’s largest network equipment manufacturer, Cisco relies on such components across multiple product lines. The company has also had to invest in upgrading equipment to better meet AI application demands.

Robbins admitted during an analyst call that rising storage chip prices are impacting hardware manufacturers’ cost structures. The strong demand for Nvidia graphics processing units (GPUs) has squeezed supply chains, forcing many device makers, including Cisco, to cope with rising component costs.

Robbins said Cisco has taken price increases and is adjusting contract terms with channel partners while negotiating more favorable pricing with suppliers. “Overall, we are confident we can better handle this industry-wide challenge than our peers,” he emphasized.

Jake Behan, head of capital markets at Direxion, commented, “Strong demand and revenue acceleration are the two highlights for Cisco this quarter, but profit margin compression undoubtedly dampens this performance. How quickly Cisco can convert backlog orders into actual revenue will be a key focus for the market in the second half.”

Beyond profit margin pressures, Cisco faces other challenges: delays in federal contracts due to the U.S. government shutdown, and widespread public sector budget cuts, which also impact the company’s business. Additionally, although Cisco spent $28 billion acquiring Splunk in 2024 to strengthen its security and monitoring software business, Raymond James analyst Simon Leopold noted in a pre-earnings report that Cisco’s security division still lags behind its peers. In the second quarter, Cisco’s security revenue failed to meet analyst expectations.

Sales outlook remains one of the few bright spots in the quarterly guidance: revenue is expected to be between $15.4 billion and $15.6 billion, surpassing Wall Street’s forecast of $15.2 billion.

Looking ahead to the full fiscal year 2026, Cisco has raised its earnings guidance. The company now expects full-year revenue between $61.2 billion and $61.7 billion, representing approximately 8.5% growth, with adjusted earnings per share of $4.13 to $4.17. This outlook exceeds previous estimates of $60.2 billion to $61 billion in revenue and $4.08 to $4.14 in EPS, and also surpasses analyst forecasts of $60.74 billion in revenue and $4.12 in EPS.