Cisco's Profit Warning: Chip Costs Hit Hard

Cisco Systems Inc. has issued a profit forecast that has raised concerns among investors, indicating that escalating memory chip prices are impacting its bottom line. The company projected an adjusted gross margin of 65.5% to 66.5% for the current quarter, falling below the 68.2% estimated by analysts.

This outlook overshadowed a strong sales forecast, which is being bolstered by increasing revenue from artificial intelligence. Cisco, a major networking equipment manufacturer, is contending with a widespread shortage of memory chips. The company is actively managing this challenge by increasing prices and renegotiating customer contracts.

CEO Chuck Robbins expressed confidence in Cisco's ability to navigate the industrywide dynamic better than its peers. While shares experienced a dip in late trading following the report, the company's sales outlook for the current period is projected to reach $15.4 billion to $15.6 billion. Cisco also anticipates substantial AI orders from hyperscalers, reaching $5 billion by fiscal year 2026.

In its fiscal second quarter, which concluded on January 24, Cisco reported a 10% increase in sales, reaching $15.3 billion. Profit, excluding certain items, was $1.04 per share. The company has also revised its 2026 forecast upward, now expecting sales as high as $61.7 billion and earnings up to $4.17 per share.

Beyond chip-related challenges, Cisco has also been dealing with delays in federal contracts and a general effort to cut public-sector spending. The company's strategic acquisition of Splunk Inc. for $28 billion in 2024 aims to diversify its offerings, though its security unit has shown slower growth compared to competitors.