Cisco's AI Networking Demand Surges Ahead of Q4 Earnings

Cisco's AI networking demand is looking stronger than expected according to UBS, a global investment bank. The company's latest industry checks show that demand for AI infrastructure has improved over the past three months.

This bodes well for Cisco's Q4 revenue and profit performance, even if its gross margin stays near 66%. UBS cites feedback from hyperscalers and newer cloud providers as evidence of faster spending on AI infrastructure. This is important because Cisco sells networking gear that connects and moves data inside AI data centers.

The demand for high-end optical components such as pluggables and systems is expected to remain strong, with over $1 billion in Acacia orders last quarter being a notable example. However, UBS also notes that persistently high component costs may cap gross margin around 66%, limiting the company's profit growth.

This means that while Cisco's revenue may beat expectations, its earnings per share (EPS) may not grow as much as investors hope. The post-earnings reaction is likely to depend on management's comments about margins and incremental profitability, rather than just whether it tops UBS's revenue forecast of $16.77 billion and adjusted EPS forecast of $1.16.