Financial Report Preview | Cisco (CSCO.US) is about to hand over the “AI transformation” key questionnaire, and the focus is on network business

The Zhitong Finance App learned that Cisco Systems (CSCO.US), the world's largest network equipment manufacturer, will release financial results for the fourth quarter and full year of the 2026 fiscal year after the market on August 12 (Wednesday). Driven by the wave of AI infrastructure construction, this 40-year-old internet giant is undergoing the deepest restructuring of growth logic since the Internet bubble — AI network orders from hyperscale cloud service providers have been drastically raised from the previously anticipated 5 billion US dollars to about 9 billion US dollars, almost doubling. Wall Street analysts expect Cisco's Q4 revenue to reach $16.85 billion, up 14.9% year over year; adjusted earnings per share are $1.17, up 18.2% year over year.

From “selling switches” to “selling AI networks”: a transformation that is being realized

Over the past year, Cisco's stock price has accumulated a cumulative increase of more than 64%, far exceeding the 18.9% increase in the S&P 500 index and the 39.3% return of the technology sector ETF. Behind this increase is the market's repricing of the Cisco AI narrative from “doubt” to “confirmation.”

In the financial report for the third fiscal quarter on May 13, Cisco handed over report cards with revenue of US$15.84 billion (up 12% year over year) and adjusted earnings of US$1.06 per share, both of which exceeded market expectations. However, what actually sparked a sharp rise of nearly 17% in stock prices after the market was the company's aggressive increase in AI infrastructure orders. Cisco drastically raised the forecast for AI infrastructure orders from hyperscale customers in FY2026 from $5 billion to about $9 billion, an increase of 80%. By the end of the third fiscal quarter, Cisco had received a total of 5.3 billion US dollars in orders for AI infrastructure and hyperscale cloud vendors.

This jump in order size means that Cisco's competitiveness in the AI network market is moving from “proof of concept” to “large-scale deployment.” Cisco expects to confirm approximately $4 billion in AI infrastructure revenue in fiscal year 2026, and the annual revenue guidance has been raised to $62.8 billion to $63 billion.

Q4 Expectations: Internet business is the biggest highlight, AI order guidance may exceed expectations

The market's expectations for Cisco Q4 are already quite adequate. Analysts expect networking revenue to reach $9.7 billion, up 27.1% year over year; total product revenue is expected to be US$13.06 billion, up 20% year over year; and service revenue is expected to be US$3.79 billion.

Expectations for each business segment:

Product revenue: expected to be US$13.06 billion, up 20% year on year;

Network business: estimated at US$9.7 billion, up 27.1% year-on-year - AI-driven data center switching and routing is the biggest growth engine;

Security business: estimated at US$2.04 billion, up 4.7% year on year;

Observability business: estimated at US$277 million, up 6.9% year on year;

Collaboration business: estimated to be US$1.04 billion, up 0.3% year over year;

Service revenue: Expected to be US$3.79 billion, the same as the previous year.

UBS predicted in the August 4 research report that Cisco's Q4 revenue and profit will both exceed expectations, and that network business revenue may exceed its forecast of 9.6 billion US dollars, corresponding to a 26% year-on-year increase. UBS pointed out that industry research and feedback from hyperscale cloud service providers showed that demand for AI infrastructure continued to strengthen in the past three months, providing upward support for network revenue and product orders. UBS expects Q4 product orders to increase by about 29% year over year, and believes that adjusted earnings per share are expected to reach $1.19, higher than the market consensus of $1.17.

Citi raised the target price of Cisco from $112 to $139 on August 6. The bank believes that Cisco will benefit from the expanding AI network market. Q4 revenue is expected to increase 7% year-on-year to US$14.6 billion, with earnings of $0.98 per share at the upper limit of the company's guidance range.

FY2027 outlook: AI revenue points to $6 billion, market anticipates “surprise in conservative guidance”

For the upcoming 2027 fiscal year, the market's focus has shifted from Q4 data to full-year guidance. Cisco management is used to giving conservative guidance and making gradual increases over the course of the year, and the market generally expects this model to continue in the new fiscal year.

UBS expects Cisco to provide guidance on revenue of 68 billion to 69 billion US dollars for the 2027 fiscal year, driven by incremental AI revenue of more than 2 billion US dollars, bringing total AI revenue to more than 6 billion US dollars. UBS also expects the adjusted earnings per share guide for the 2027 fiscal year to be $4.78 to $4.84, which is basically in line with market consensus.

Earlier in the fiscal third quarter conference call, Cisco CFO Mark Paterson made it clear that it is “reasonable” for AI revenue from hyperscale customers to reach at least $6 billion in fiscal year 2027. This means that Cisco's AI revenue will grow another 50% from the $4 billion fiscal year 2026.

Morningstar (Morningstar) gave a more aggressive forecast in the latest research report released on August 4: Cisco's AI revenue is expected to reach 8 billion US dollars in the 2027 fiscal year, far higher than the current management guidance of 6 billion US dollars. Morningstar analysts believe that Cisco's practice of giving conservative guidance and gradual increases throughout the year means there is room for AI revenue to significantly exceed expectations.

At the AI product level, Cisco launched the Silicon One G300 switch chip using a 3nm process in February this year, which provides 102.4 Tbps switching performance and is specially designed for AI clusters. Shipments of the G300-driven N9000 and 8000 series systems are scheduled to begin in the second half of 2026. This product, which directly competes with Broadcom's Tomahawk 6 series, is seen as a key pawn in establishing Cisco's technological leadership in the field of AI network chips.

Safety business: a more critical “silent variable” than AI

While AI narratives are dominating all the headlines, a business segment overlooked by the market is becoming a key variable in testing the success of Cisco's fundamentals.

Security business challenges: Splunk, which was acquired by Cisco in 2024 for approximately $28 billion, is shifting its customers from early licensing deals to a distributable cloud subscription model, continuing to reduce current revenue. The decline in previous-generation safety products also continues to offset the growth of new product lines.

Timeline for improvements: Cisco executives have given an unusually specific timeline — by the second quarter of fiscal year 2027, comparison benchmarks will be “more normalized” and the core security business “has begun to see some improvements.” CEO Chuck Robbins said in May that the organic safety business should “achieve close to double-digit revenue growth by the end of this fiscal year.”

The August 12 earnings report will be a key point in testing this commitment. As TIKR analysts said, “The reported revenue has not shown any growth, which is why the rise in data for this sector in the fourth fiscal quarter will turn this story from management guidance into evidence.”

Risk Warning: Gross Margin Pressure and Tariff Uncertainty

Cisco's transformation to AI has not been without resistance. UBS anticipates that rising component costs in Q4 will limit the expansion of gross margin to around 66%. Citi, on the other hand, warned in an August 7 research report that the increase in Cisco's stock price may be limited, and Wall Street's expectations for the campus equipment renewal plan “seem a bit too high.”

Tariff policies are also an uncertain factor facing Cisco. Paterson said during the fiscal third quarter conference call that the performance guidelines assume that the current tariff policy will continue until the end of 2026, and the company will continue to use the supply chain team to help mitigate the impact of tariffs under appropriate circumstances.

Additionally, in May, Cisco announced that it would cut nearly 4,000 employees (less than 5% of the global workforce) as part of a restructuring plan to shift investment into artificial intelligence and related growth areas. Although this restructuring was interpreted by the market as a positive sign, it also reflected the transformation pressure faced by traditional businesses.