Cisco $CSCO ( ▼ 1.21% ) shares are dropping even after the networking giant delivered a beat and raise second quarter. The culprit is not revenue. It is margins.
Analysts say a sharp spike in memory chip prices is squeezing profitability and overshadowing otherwise solid results.
Margin Warning Steals the Spotlight
Cisco guided for non GAAP gross margins of about 66% in the third quarter, down roughly 150 basis points sequentially. Management cited elevated memory price inflation and a higher mix of hardware as key drivers of the contraction.
William Blair flagged the margin guide as the main issue, while Barclays noted that stronger revenue and accelerating AI orders are not translating into meaningful EPS growth given the gross margin pressure.
Zero Lead Time on Memory Costs
Citi highlighted that Cisco $CSCO was hit by memory price increases with effectively zero lead time. That makes it harder to quickly adjust pricing and protect margins.
Management said it is working to build more flexibility into customer contracts so it can pass along higher memory costs faster in the future.
Pricing Power Put to the Test
Evercore ISI pointed out that Cisco expects to offset some of the memory and mix headwinds through price increases and other cost levers. The key question is whether customers will absorb those hikes in a competitive AI infrastructure market.
For now, investors appear focused less on the revenue beat and more on whether memory inflation becomes a persistent drag on Cisco $CSCO’s profitability.