Cisco Systems, Inc. (CSCO.US) debuted its AI business with a "report card": Q4 performance exceeded expectations, but the AI business guidance is "very conservative," while traditional business remains the main revenue driver.

AI networking leader Cisco Systems, Inc. (CSCO.US) released its fourth-quarter earnings report on Wednesday after the market closed, reporting a year-on-year sales increase of 18% to $17.3 billion, surpassing analysts' average expectation of $16.8 billion. Excluding certain items, the earnings per share were $1.22, higher than the expected $1.17. Cisco Systems, Inc. anticipates that sales related to AI data center construction will reach $7.5 billion in the current fiscal year, a forecast that disappointed investors. Over the past year, the world's largest networking equipment supplier has secured $9.3 billion in AI-related orders, but the market was hoping for higher performance delivery. As of the time of publication, Cisco Systems, Inc. shares dropped 4.04% in after-hours trading. According to a statement released by Cisco Systems, Inc. on Wednesday, AI business sales are expected to account for about 10% of total revenue for fiscal year 2027 (expected to be between $72.2 billion and $73.4 billion). This is the first time Cisco Systems, Inc. has provided a full-year AI revenue forecast, and analysts are questioning how this figure aligns with the $4 billion in AI-related orders received for the quarter ending July 25. UBS Group AG (UBS) analyst David Vogt expressed during Cisco Systems, Inc.'s quarterly earnings conference call, "This, to me, seems very, very conservative." After closing at $123.88 during regular trading hours in New York, the stock fell about 4% in after-hours trading. The stock has risen nearly 25% over the past three months, as investors anticipated that its AI strategy would drive sales growth. Cisco Systems, Inc. is facing high expectations from the market, which believes it will benefit from the global wave of AI system data center construction. The company has been restructuring its business to compete for more contracts in the AI boom while also facing heightened competition from rivals such as Broadcom Inc. (AVGO.US) and Hewlett Packard Enterprise Co. (HPE.US). Cisco Systems, Inc. CEO Chuck Robbins stated during the call that the company achieved about $4 billion in AI revenue in fiscal year 2026, despite total orders exceeding $9 billion during the same period. "These are non-linear orders, large in scale, typically placed long in advance," he described the AI sales guidance as "a good and prudent forecast for the full year." The conservative tone of the AI business guidance overshadowed Cisco Systems, Inc.'s better-than-expected outlook for first-quarter sales and profits. Revenue for the quarter ending in October is projected to be between $18 billion and $18.2 billion, while market compilations show an average analyst expectation of $16.8 billion; excluding certain items, earnings per share are expected to be between $1.32 and $1.34, also significantly above expectations. Despite focusing on AI data center supply, Cisco Systems, Inc.'s sales still heavily rely on traditional business. Earlier this year, the company announced a restructuring to further focus on the AI market and estimated that related layoffs would incur up to $1 billion in severance costs and other one-time expenses. In the fourth quarter, Cisco Systems, Inc. security business sales reached $2.23 billion, a 14% year-on-year increase. Cisco Systems, Inc. Chief Financial Officer Mark Patterson stated that the ability of AI models to identify and exploit network vulnerabilities is increasingly strengthening, which will drive further growth in the security business. "From this perspective, it will prompt enterprises to shift budgets from other areas within the organization to the IT department to actually conduct this work," he said.