Cisco Wins Over AI Customers With Merchant Silicon And Optics

Cisco Systems reported $15.84 billion in revenue for the third quarter of fiscal 2026, a 12 percent year-over-year increase, driven by sales of merchant silicon and optical transceivers to AI customers. The company now projects over $9 billion in AI orders from hyperscalers and cloud builders this fiscal year, up from an earlier estimate of $5 billion. Cisco’s net income rose 35.4 percent to $3.37 billion, as it continues to sell both chips and complete systems to a customer base of 90,000 organizations.

connect Cisco Wins Over AI Customers With Merchant Silicon And Optics We are all full aware of what the hyperscalers, cloud builders, and AI model builders are all doing to build out their datacenter infrastructure to support their AI aspirations. But it is hard to get a sense of what regular enterprises, service providers, governments, academic institutions, neoclouds, and sovereigns – who will eventually represent maybe half of total AI spending – are doing. So we have to use the sales of the traditional original equipment manufacturers as a kind of proxy. Depending on the OEM, there are a fair amount of sales of chips or systems to hyperscalers and cloud builders in the mix. IBM has basically none, Hewlett Packard Enterprise, Dell, and Lenovo quite a bit more, and Supermico has most of its sales to handful of very large companies and is more like an ODM. Cisco Systems is somewhere in the middle, selling plenty of AI stuff to hyperscalers and cloud builders but also selling AI wares into its vast UCS system customer base, which numbers 90,000 unique customers worldwide after 17 years of being a system OEM. Teasing out hyperscaler and cloud builder sales is tricky, and not the least of which because Cisco sells both chips and optics to customers that build their own systems as well as complete systems for those who don’t want to do that because they are not at a sufficient scale for that to make sense. Let’s pick apart the Cisco numbers for the third quarter of fiscal 2026 just the same. In the quarter ended in April, Cisco’s overall revenues were $15.84 billion, up 12 percent year on year. Operating income rose by 23.7 percent to $3.96 billion, and net income was up 35.4 percent to $3.37 billion. Like everyone else in the world, Cisco wants to cut its overhead costs, and it is using AI as an excuse to do layoffs. We have our doubts how much this reduction of around 4,000 people from Cisco’s workforce has to do with AI. It seems like every company is looking to trim their coronavirus pandemic fat in human resources, and AI provides air cover to do so as well as an impetus for retained employees to figure out ways to make AI useful real quick now. . . . In early 2024, Cisco had about 85,000 employees and has reduced its headcount by 13,750 people in four rounds of layoffs over the past year and a half. One round was very small, at about 150 people. Cisco is still largely a product peddler, but services is creeping up ever so slowly to have a slightly larger share of the revenue pie at the company. But don’t get too excited – the change to services revenue streams is relatively glacial, from around 20 percent way back in 2009 when we first started tracking the company’s finances to just under 25 percent in the trailing twelve months. Some of that is due to Cisco being successful selling merchant switch and router ASICs to hyperscalers and cloud builders as well as its Acacia optical transceivers. It isn’t so much that services is not growing, but rather product sales have just hooked an exponential curve. As the third quarter came to a close, Cisco had a revenue backlog of $43.5 billion, essentially unchanged from Q2 F2026, and it had $16.64 billion of cash and equivalents in the bank. Like other OEMs, Cisco likes to talk about AI orders but not AI revenues. Well, IBM actually just stopped talking about even AI orders, and probably because it is mostly a services play for Big Blue unless it starts counting Power Systems and Z mainframe revenues as AI just because its processors have native matrix math accelerators. Here is a handy chart that Cisco made showing its to hyperscalers, by which Cisco means hyperscalers and cloud builders as we use these terms here at The Next Platform. Take a gander: As fiscal 2026 was getting going, Cisco was projecting that it would have north of $5 billion in AI orders from hyperscalers and cloud builders this fiscal year, and this is now being updated to $9 billion. If you do the math on that, this implies that Cisco will book $3.7 billion in AI orders to hyperscalers and cloud builders in its fourth quarter of fiscal 2026 ending in July. In the third quarter, AI product orders to hyperscalers and cloud builders were up by 2.1X to $1.9 billion. Product orders by other customers were up a more subdued 19 percent, but that is nothing to cry about. All told, product orders rose by 35 percent year on year. Enterprise orders were up 18 percent, public sector orders rose by 27 percent, with service providers more than doubling while telcos were up 9 percent. Telcos are only just beginning to catch the AI wave, apparently. Of these $9 billion in AI orders, Chuck Robbins, Cisco’s chief executive officer, said about $4 billion of that will be recognized in the current fiscal year, and added later in the call with Wall Street that it should recognize at least $6 billion in AI revenues from hyperscalers. The Acacia pluggable optical transceiver business had over $1 billion in orders and is on track to triple its order book this year, and added that Cisco has shipped over 750,000 400 Gb/sec units and over 40,000 800 Gb/sec units, which he said exceeds the shipment levels of the next biggest supplier. Wouldn’t it be funny if some hyperscalers and cloud builders want to use Cisco transceivers with Arista Networks or Nvidia switches? On the Silicon One P200 front for scale across networks linking together AI datacenters https://www.nextplatform.com/connect/2026/02/10/cisco-doubles-up-the-switch-bandwidth-to-take-on-ai-scale-out-and-eventually-scale-up/4092125 , Robbins said that Cisco has five design wins with hyperscalers and cloud builders. Robbins said that Cisco had $300 million in AI infrastructure orders – servers, switches, and such – from neocloud, sovereign, and enterprise customers in the third quarter, with triple digit growth in all three quarters so far this fiscal year, with a pipeline of $3 billion. In my model, AI system orders were up 112 percent to $880 million, and Acacia optics orders rose by 5.4X to just a tad over $1 billion. Add it all up, and Cisco had $2.2 billion in orders for AI stuff in Q3 2026. Enterprise datacenter switching orders – Nexus switchery – was up by more than 40 percent, and have grown by double digits in the past seven of nine quarters. Two years ago, the GenAI boom started to hit enterprise customers, forcing them to carefully consider the front end networks and systems that will feed into AI systems. Campus and branch networks are also going to feel the heat from AI workloads, and Cisco just did a survey of 3,500 IT people responsible for the networks at their companies and 93 percent say they don’t just have to upgrade the front end networks linking their enterprise platforms, they are going to have to upgrade campus and branch networks, too. It is important to remember that some of this growth is for price changes as the costs of GPU accelerators, CPUs, DRAM memory, and flash storage have gone bonkers in recent months. To give a hint about how this helps Cisco’s numbers, Mark Patterson, Cisco’s chief financial officer, said on the call with Wall Street that outside of the hyperscalers and cloud builders, order growth was 10 percent in Q2 and 19 percent in Q3. Of that incremental sequential 9 percent growth in business, about half came from increased shipments and the other half came from price increases. The Networking group, which has servers, switches, and routers as well as merchant silicon and optics all mashed up, had $8.82 billion in sales up 24.7 percent year on year. I know this other stuff is important to Cisco customers, but it either lives outside of the datacenter or far above in the stack. As always, we try to figure out what the “real” Cisco datacenter business is, extracting out campus and branch networking and other things in the Networking group that are outside the glass house. More of a steel warehouse these days, really. My model suggests that this real datacenter business at Cisco weighs in at $7.93 billion in Q3 2026 and had $1.96 billion in operating income, about 24.7 percent of sales. This is a very respectable datacenter platform business, and there is no reason to believe it will not get bigger.