Cisco Guides $7.5B AI Revenue for 2027, but Margin Pressure Spooks Market

Cisco Systems delivered its strongest close to fiscal 2026 on Wednesday, with fourth-quarter revenue rising 18% year-over-year to a record $17.3 billion and full-year revenue climbing 12% to a record $63.3 billion. Management guided fiscal 2027 revenue to grow about 15% at the midpoint, marking a second straight year of accelerating growth after the company grew 5% in fiscal 2025. CEO Chuck Robbins attributed the momentum directly to artificial intelligence, stating on the earnings call: "We believe the accelerating adoption of agentic AI is fueling a Networking Supercycle."

Yet despite this outlook, Cisco shares fell 8.4% on Thursday, closing at about $113. The market's hesitation centers not on growth but on profitability. The reason becomes clear in the margin data. Non-GAAP gross margin declined 210 basis points year-over-year to 66.3% in the fourth quarter, with product gross margin falling 270 basis points to 64.8%. Management attributed the decline primarily to a higher hardware mix and memory costs. The pressure is not expected to ease: for the fiscal first quarter, Cisco guided gross margin to 65% to 66%, below the 66.3% it just reported.

The AI infrastructure business has grown from a sliver to a substantial revenue driver. In fiscal 2026, Cisco took $9.3 billion of AI infrastructure orders from hyperscalers (the giant cloud companies building AI data centers), including $4 billion in the fourth quarter alone. Orders from customers beyond hyperscalers—smaller AI-focused clouds, governments, and enterprises—topped $1 billion for the year. AI infrastructure revenue accounted for about 6% of Cisco's total revenue in fiscal 2026, up from less than 2% in fiscal 2025. Management now expects that business to reach $7.5 billion in fiscal 2027, or roughly a tenth of the $72.2 billion to $73.4 billion it guided for total revenue. In two years, the business will have gone from a sliver to about a tenth of total revenue, if guidance holds.

The challenge is that AI infrastructure is predominantly physical equipment. Fiscal 2026 hyperscaler orders ran roughly 60% Silicon One-based systems and 40% optics—both hardware products that carry lower margins than Cisco's software offerings. Software revenue was $6.2 billion in the fourth quarter, up just 11%, far outpaced by the hardware wave. Despite the margin pressure, Cisco's bottom line has so far absorbed the impact. Non-GAAP earnings per share rose 23% in the fourth quarter to $1.22 and 14% for the full year to $4.33. Management guided fiscal 2027 earnings per share of $5.05 to $5.11, up about 17% at the midpoint—faster than revenue. The offset is operating efficiency: full-year non-GAAP operating margin expanded 40 basis points to 34.8%.

Cisco's order book suggests the $7.5 billion AI revenue guidance is backed by real demand. The company won three new hyperscaler design wins in the fourth quarter, and total product orders rose 35% year-over-year in that period, with networking product orders growing 40%—the eighth consecutive quarter of double-digit growth for that portfolio. At about $113, the stock trades at roughly 22 times the midpoint of fiscal 2027 earnings guidance, down from about 24 times before the sell-off. Cisco also returned $12.7 billion to shareholders in fiscal 2026 through dividends and buybacks and raised its dividend for the 15th consecutive year, reflecting management confidence in the business. However, as hardware becomes an increasingly larger portion of the revenue mix, investors remain cautious about whether gross margin can stabilize or if further erosion lies ahead.