Hyperscaler demand for AI infrastructure is off the scale. Good news for Cisco CEO Chuck Robbins

As the party winds down at Cisco Live in Amsterdam, there was other business to be dealt with back home yesterday as Cisco turned in strong quarterly numbers that pointed to just how strong the AI infrastructure buying frenzy is from hyperscalers.

Cisco reported record revenue of $15.3 billion, up 10% year-on-year, with net income of $3.2 billion.  Revenue by geographic segment was: Americas up eight percebt, EMEA up 15%, and APJC also eight percent. In terms of product sectors, growth in Networking was up 21%, and Collaboration six percent, while Security was down four percent and observability was flat.

Product orders from service provider and cloud customers accelerated in Q2, growing 65% and driven by triple-digit order growth across hyperscalers. Total AI Infrastructure orders taken from hyperscalers came to $2.1 billion, with CEO Chuck Robbins pointing to “two big areas of momentum opportunity for us”, each of which are at an early stage:

First of all, with the hyperscalers and the AI build-outs, the Silicon One architecture, the new innovation that we announced this week, the new use cases that we won during the quarter. We obviously see a growing opportunity with enterprise sovereign and the neoclouds in AI.

AI, of course

While all eyes have been on Amsterdam this week, last week, Cisco hosted its AI Summit gathering of AI visionaries and geopolitical experts to explore the economic, societal and business impacts of AI. Robbins cited some learnings from this:

While it was clear that expectations for adoption and execution are high, one major challenge still exists: legacy infrastructure was not designed for the performance, speed and security needs of AI...With our industry-leading networking portfolio powered by Silicon One, AI native security solutions and operating systems, Cisco is well positioned to provide the critical infrastructure needed for the AI era.

As for Cisco’s own use of AI, the ‘dogfood’ is being chowed down more and more, said Robbins:

We continue to make AI advancements internally with expanded use cases in Q2 across nearly every organization. Today, the majority of our product developers are using AI coding assistance and working alongside agents, which help us innovate faster across our portfolio.

Currently, over 90% of customer experience support cases are touched by AI and automation, enabling us to resolve a greater proportion of complex cases within one day and contributing to our highest ever customer satisfaction scores. Additional use cases across sales, security and trust, supply chain and corporate functions are also providing significant cost savings and efficiency gains.

Demand

The customer demand overall is out there, he argued, and the disruptive factors in the market are in fact sharpening buyer focus:

I think we are seeing a ramp in an acceleration. Many of these customers learned from COVID and they recognize that in these major times of transition, they don't want to ever be stuck with technology that's not modern. As they look at the architectures that are required for agentic AI, the security architecture, the network architecture, the latency requirements, all of that is leading them to look at making sure that their infrastructure is modernized. So that, combined with the fact that there's been a lot of learnings over the last couple of years about equipment that's passed last day of support and the cybersecurity risks that are associated with that, that’s another thing that's leading them to do so.

On the enterprise side, what we're seeing is early use cases around things like quantum, fraud detection, video analytics. We're seeing it across financials, manufacturing, pharmaceuticals. I also see examples in retail where they're leveraging agents on mobile devices and retail to help their staff do a better job engaging with their customers.

The way this is playing out is becoming clearer, he said:

We're seeing a combination of both investment in cloud-based architectures as well as on-prem. I think if you look at our data center switching business, which is enterprise-focused, we've had double-digit order growth 6 out of the last eight quarters, and we still had positive growth in the other two. So we continue to see meaningful investment in private data centers to support these applications.

We are seeing strong interest from European customers in our sovereign critical infrastructure portfolio designed to operate in air gapped on-prem environments giving organizations control over sensitive data and critical infrastructure. As AI adoption accelerates, concerns over privacy, data governance and regulatory compliance are top of mind for our customers, making sovereign solutions an essential foundation for building digital trust.

Pricing

All that said, while buyer intent may be there, budget pressures are eternal and recent price increases clearly don’t help. Robbins response to this is to point to what he calls “significant increases in memory prices” that is a major contributing factor here. Cisco is reacting with a pro-active three-pronged strategy he said:

First, we have already announced price increases and will continue to monitor market trends and make additional adjustments as necessary. Second, we are revising contractual terms with channel partners and customers to address evolving component prices. Third, Cisco's operating scale and industry-leading position help us negotiate favorable terms and secure supply to fulfill current and future demand. Overall, we feel confident in our ability to manage this industry-wide dynamic better than our peers.

And customers do understand that costs have increased and will be passed on to some degree or another, he added:

I had lunch with one of our absolute biggest customers yesterday here on our campus and we had a very detailed discussion about the different dynamics that are happening in this space and the pricing pressure. They completely understood and are going to work with us to make sure that the entire partnership actually continues to work for both of us. It's an industry-wide issue, customers get it, and while they may not like it, they understand that it's a dynamic that we're all dealing with.

My take

I can’t do better than one of my colleagues who summed up Cisco by saying, “You see, there are companies that are making a profit from AI”.

Onwards!