Cisco Stock Price Drops 8.4% on Gross Margin Compression

Cisco Systems' stock price dropped sharply after the company reported its fiscal fourth-quarter results. The stock closed at $112.90 on August 17, but had fallen to $113.47 by August 19, an 8.4% decline from its previous close.

This was the largest single-day drop for Cisco's stock in years, and it occurred despite the company beating expectations on revenue and earnings per share. Revenue came in at $17.25 billion, a 2.52% beat over consensus estimates, while non-GAAP earnings per share were $1.22, a 4.3% beat.

The decline was largely due to a compression of the company's gross margin, which fell to 66.3% from 68.4% in the prior year period. This was driven by a shift towards more AI-driven hardware sales, which carry lower margins than traditional campus switching and software products.

However, Cisco also guided to higher operating expense leverage, with non-GAAP operating margin expected to reach 35.5% to 36.5% in the first quarter of fiscal 2027. This suggests that the company is expecting to absorb the impact of the gross margin compression through cost savings.

Looking ahead to full-year fiscal 2027, Cisco guided to revenue of $72.2 billion to $73.4 billion and non-GAAP EPS of $5.05 to $5.11, implying operating income near $25.5 billion. This would represent a 16% increase in operating income on a 15% revenue increase.