Cisco's Challenging Fiscal Year Ahead

Cisco Systems Inc. recently achieved its strongest annual revenue growth in the past decade. However, the company's outlook for this fiscal year is considerably less optimistic, despite early progress in the field of artificial intelligence. Even with the potential benefits of AI, Cisco may struggle to maintain its current trajectory.

In its fiscal fourth quarter report, Cisco exceeded expectations with a 16% rise in revenue, resulting in an annual growth rate of 11%. Unfortunately, the company presented a grim forecast for the upcoming fiscal year. The projected revenue growth ranges from stagnant to a modest increase of around 2%.

Cisco's management clarified that comparing fiscal years 2023 and 2024 could be misleading due to catch-up orders placed in 2023 to address supply constraints. They also highlighted that some telecommunications customers are still adapting to the infrastructure they recently purchased.

Additionally, executives shared that there are currently $500 million worth of orders for AI-related equipment. These orders mainly originate from undisclosed hyperscaler companies. However, it remains uncertain how much of this $500 million will be realized in fiscal year 2024 versus fiscal year 2025. As networking technology continues to evolve and customers gradually adopt it, the timeline for implementation remains ambiguous.

According to Cisco, their 800-gigabyte ethernet networks have the potential to provide superior performance compared to Infiniband technology for computing-intensive AI training. However, the executives hinted at the need for patience from investors as these advancements unfold.

The Significant Impact of AI on Networking Infrastructures

Introduction

In a recent conference call, Cisco's CEO, Chuck Robbins, expressed his belief that the real impact of AI on networking infrastructures will become evident as customers transition from Infiniband to ethernet. He anticipates this impact to be strongly felt by late 2024 or even into 2025.

Transitioning from Infiniband to Ethernet

Robbins highlighted the gradual shift from Infiniband to ethernet as a crucial factor in unlocking the potential of AI in networking infrastructures. As customers become more comfortable with this transition, the true power of AI will start to manifest. This transformation is expected to have a significant impact on the industry.

Building AI Infrastructure

CFO Scott Herren emphasized that AI infrastructure is still in its early stages of development. Drawing parallels to a decade ago when AWS and Azure were initially building out their systems, he explained that Cisco is now offering flexible options for customers. They have the choice to opt for networking components, custom chips, or complete systems, giving them the necessary flexibility to adapt to their specific needs.

Expanding AI Capabilities

Aside from providing core components for AI infrastructure, Cisco has been embedding AI technology into its products for several years. Its dedication to incorporating AI has resulted in valuable features such as noise cancellation during Webex video calls and proactive security threat warnings for IT administrators.

Learning from Past Mistakes

While Cisco acknowledges the lessons learned from the cloud-computing buildout of the past, they anticipate that reaping the benefits of their AI strategy may still require time. As a result, investors are advised to manage their expectations, understanding that the path ahead may involve a slower journey compared to the company's recent strong growth.

In conclusion, Cisco is positioning itself at the forefront of AI integration in networking infrastructures. With a strategic focus on delivering tailored solutions and embedding AI capabilities into their products, the company is well-prepared for the future of AI-driven technology.