Cisco Touts Its Ethernet for AI

Cisco (Nasdaq: CSCO) reported solid quarterly and year-end results last night, with management touting the strength of the AI market while announcing half-a-billion dollars in orders for high-speed Ethernet switches to assist in AI processing.

You read that right: Cisco sees it future in a version of Ethernet augmented with Cisco Silicon One ASICs that is designed to compete with InfiniBand in high performance computing (HPC) environments for AI. During the earnings conference call, CEO Chuck Robbins stated:

“[T]he acceleration of AI will fundamentally change our world and create new growth drivers for us…. Cisco's ASIC design and scalable fabric for AI position us very well to build out the infrastructure that hyperscalers and others need to build AI ML clusters. This is a huge opportunity for Cisco, and we are laser-focused on leading and winning in this space. As a result of our innovation in this area, we expect Ethernet will lead in connecting AI workloads over the next five years.”

Ethernet vs. InfiniBand

Robbins cited the work undertaken by the Ultra Ethernet Consortium, which includes Cisco archrival Arista Networks (NYSE: ANET), to deliver a new version of Ethernet for AI workloads in HPC environments. This is in direct opposition to InfiniBand, the current preferred network technology for HPC, which is offered by NVIDIA (Nasdaq: NVDA). While there will continue to be “a lot of InfiniBand around,” Robbins said, he thinks that by 2025, hyperscalers will “shift to more of an Ethernet-based infrastructure.”

Robbins also said he already sees evidence of traction for Cisco’s strategy:

“In June, we launched our next-generation Silicon One switching ASICs to support large-scale GPU clusters for AI and ML workloads. We are seeing early success in hyper-scale Ethernet AI fabric deployments. To date, we have taken orders for over half a billion dollars for AI Ethernet fabrics. We are also piloting 800-gig capabilities for AI training fabrics.”

Robbins said the new orders include the switching ASICs and were made by “Tier 1 hyperscalers.”

If there was a downside last night, it was that Cisco continues to face lower revenues from security than it would like. For the quarter, end-to-end security product growth was flat; for the year, it was up 4%. Robbins stated:

“[S]ecurity remains a top priority…. [W]e are extending our security portfolio with deep telemetry, AI, and identity threat capabilities. Given our installed base of 300,000 Cisco security customers, we believe we have the opportunity to accelerate revenue growth in security over the next few quarters.”

Solid Financials, Lower Guidance

For the three months ended July 29, Cisco reported sales of $15.203 billion, up 16% year-over-year (y/y) and adjusted earnings per share of $1.14 (up 37% y/y) on net income of $4.7 billion (up 36% y/y). For its fiscal 2023, Cisco reported revenue of $57 billion (up 11% y/y). Adjusted annual EPS was $3.89 (up 16% y/y) on net income of $16 billion (up 13%).

Cisco guidance for the first quarter of its fiscal 2024 is for revenue of $14.5 billion to $14.7 billion and for the full year $57 billion to $58.2 billion with adjusted EPS of $4.01 - $4.08.

That guidance drew mixed responses from analysts. Mike Genovese of Rosenblatt Securities wrote in a note today:

“Cisco's 1Q24 guidance was above consensus, but the FY24 revenue outlook was below and EPS was inline. Cisco is braced for revenue deceleration as backlog drawn down slows, but the margin outlook was incrementally upbeat. We are maintaining our Neutral rating on CSCO, and introducing FY25 EPS at $4.20.”

George Notter of Jefferies was a bit more upbeat:

“For fiscal 2024, our revenue estimate goes down from $58.709B to $57.633B. On the bottom line, our fiscal 2024 EPS projection remains $4.05/share. Our newly initiated revenue and EPS projections for fiscal 2025 are $59.504B and $4.25, respectively. We continue to rate the shares a Buy.”

As of this afternoon, Cisco shares were trading at $55.09, +2.13 (+4.03%).

Futuriom Take: Cisco printed solid results for its quarter and fiscal 2023. Its projections on AI seem realistic, given that it’s sold $500,000 worth of Ethernet fabric switches to hyperscaler customers. Further, there is broad support in the industry for Ethernet as a high-speed HPC networking competitor to InfiniBand. It’s likely that Cisco can reap rewards in this area.