AI Fuels Cisco’s Revenue Surge, but Rising Memory Costs Squeeze Margins

Cisco beat revenue and earnings expectations on booming AI demand, yet shrinking margins from soaring memory prices sent its stock sliding after hours.

Artificial intelligence is increasing Cisco Systems' business, but investor optimism is being dampened by the high cost of memory. On Wednesday, the networking company reported $15.35 billion in sales for the second quarter of its fiscal year, which was 10 percent higher than the previous year and higher than the $15.11 billion analysts had predicted.

Shareholders, however, were more concerned about Cisco's declining profit margins. After-hours trading saw a 6.9 percent decline in shares to $79.67. In the second quarter, Cisco's gross margin dropped 1.2 percentage points to 67.5. In the current quarter, the company expects that margin will continue to decline, falling between 65.5% and 66.5%.

According to Chief Financial Officer Mark Patterson, the primary cause of the compressed margins is rising memory prices. He claimed that an important part of the 73% increase in Cisco's purchase commitments over the last ninety days is due to memory costs.

Companies in IT services have been struggling with rising memory costs as supply has been strained by the growing demand from AI data centers. Cisco executives told analysts on a call on Wednesday that the company has increased prices and may make more changes if expenses keep going up. Also, management is negotiating conditions with suppliers and updating contracts with customers.

They're going to control what they can control, Patterson said. Cisco's sales are rising due to AI. Cisco stated that throughout the quarter, hyperscaler orders for AI infrastructure increased to $2.1 billion. The company, which is based in San Jose, California, recorded a profit of $3.18 billion, or 80 cents per share, for the quarter that ended on January 24. This is an increase from 2.43 billion dollars, or 61 cents per share, during the same time the previous year.

FactSet notes that adjusted per-share earnings, after removing some one-time events, were $1.04, higher than the $1.02 analysts had predicted. Cisco began selling its Silicon One G300 AI chip on Tuesday. Also, it reported that in the second quarter, it closed acquisitions of NeuralFabric and EzDubs, two AI software companies.