Cisco's AI Boom Masks Near-Term Margin Pressure
Cisco Systems has reported a significant expansion of its AI order book, with expectations for $9 billion in hyperscaler AI orders and $4 billion in revenue for fiscal year 2026. This growth comes despite a decline in gross margins, which fell to 66% in the third quarter of fiscal year 2026 from 68.6% a year earlier.
The company's management has attributed the margin pressure to a heavier product mix and higher memory costs. However, Cisco's record revenue of $15.8 billion and non-GAAP operating margin of 34.2% in the third quarter suggest that the company is still delivering strong results despite the margin compression.
The AI cycle is expected to reward vendors that can ship high volumes of infrastructure while expanding operating leverage, according to analysts. Cisco's ability to post record operating margin alongside lower gross margin suggests that mix headwinds are not overwhelming the broader model.