Cisco (CSCO) Stock Falls on Revenue Guidance Despite Q2 Earnings Beat

TLDR

• Cisco Systems beat Q2 earnings expectations with $1.04 per share versus $1.02 estimate and revenue of $15.3 billion versus $15.11 billion forecast
• Networking segment revenue jumped 21% year-over-year to $8.29 billion, driven by strong AI hardware demand
• Stock fell 5% in after-hours trading despite earnings beat due to disappointing full-year revenue guidance of $61.2-$61.7 billion versus Wall Street’s $63.9 billion estimate
• Adjusted gross margin of 67.5% missed expectations of 68.14% as rising memory chip prices weigh on profitability
• Company launched Silicon One G300 AI chip and expects AI orders to exceed $5 billion for fiscal year

Cisco Systems beat Wall Street’s earnings expectations for its fiscal second quarter but still saw shares drop 5% in after-hours trading. The reaction highlights how even solid results can disappoint when guidance falls short of investor hopes.

The networking giant posted adjusted earnings of $1.04 per share for the quarter, beating analyst estimates of $1.02 per share. Revenue came in at $15.3 billion, topping the $15.11 billion forecast. Not bad at all.

But investors weren’t buying it. The problem? Full-year revenue guidance that came in well below expectations.

Cisco Systems, Inc., CSCO

Networking Strength Meets Margin Pressure

Cisco’s networking segment delivered the standout performance. Revenue hit $8.29 billion for the quarter, crushing Wall Street’s $7.9 billion estimate. That’s a 21% jump from the prior year, fueled by companies rushing to build out AI infrastructure.

Security revenue told a different story. The segment brought in $2.02 billion, slightly below the $2.11 billion estimate and down 4% year-over-year.

The bigger concern emerged in the margins. Adjusted gross margin landed at 67.5%, missing expectations of 68.14%. Memory chip prices are the culprit here.

Global AI spending has created a memory chip shortage. Prices have spiked as a result. Since Cisco’s products rely heavily on these chips, the cost increases are eating into profitability.

Barclays analysts noted they didn’t expect memory prices to cause this much pain. They suggested the mix of optics and AI switches might also be dragging on margins.

CEO Chuck Robbins addressed the issue directly. He told investors the company has already raised prices and is renegotiating customer contracts. Still, the damage to margins is visible in the numbers.

Guidance Gap Spooks Investors

For the current quarter, Cisco expects earnings between $1.02 and $1.04 per share on revenue of $15.4 billion to $15.6 billion. That’s in line with or slightly above analyst estimates of $1.03 per share and $15.19 billion.

The full-year outlook is where things get messy. Cisco projects earnings of $4.13 to $4.17 per share on revenue of $61.2 billion to $61.7 billion.

Wall Street wanted $4.13 per share on revenue of $63.9 billion. That’s a gap of over $2 billion on the revenue line. Investors noticed.

Cisco stock has been on a tear, up 37% over the past 12 months. Shares hit a record high in December, marking the first time since March 2000 that the stock reached such levels. That was just before the dot-com crash wiped out much of its value.

The recent rally stems from Cisco’s position in the AI hardware buildout. While software stocks have struggled on fears that AI could disrupt the sector, hardware companies like Cisco have attracted investor attention.

Raymond James analyst Simon Leopold noted that tech investors are seeking AI hardware as an alternative to challenged software stocks. He rates the stock as Market Perform without a price target.

Cisco announced Tuesday it launched the Silicon One G300 AI chip. William Blair analyst Sebastien Naji wrote that the move shows Cisco wants to capture the entire AI market. The company is building a complete product stack from silicon to optics, hardware, and software.

Robbins said in the earnings release that Cisco is uniquely positioned to deliver the infrastructure needed for the AI era. The company expects AI orders to exceed $5 billion for the current fiscal year, up from previous estimates. That demand continues to drive the networking segment’s strong performance despite margin headwinds.

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