Cisco Systems Inc. posted second-quarter financial results that beat Wall Street’s expectations today, but investors punished the company after it offered soft guidance for the current quarter.

The networking giant reported adjusted earnings of $1.04 per share, beating the analysts’ consensus estimate of $1.02 per share, while revenue increased by about 10% from a year earlier, to $15.35 billion, ahead of the $15.12 billion forecast. The higher sales enabled Cisco to grow its bottom line, as the company reported net income of $3.18 billion at the end of the quarter, up from $2.43 billion in the same period one year earlier.

Cisco’s results were decent enough, but the market reacted badly to what was perceived as relatively weak guidance for the current quarter. The company said it’s looking for third-quarter earnings of between $1.02 and $1.04 per share, matching the Street’s target of $1.03. It’s also targeting revenue in a range of $15.4 billion to $15.6 billion, just ahead of the $15.19 billion consensus estimate.

Investors were clearly looking for a more forecast, as Cisco’s stock plummeted more than 7% in the extended trading session.

Shareholders have been hoping that Cisco would leverage its strength in the enterprise networking market to play a more prominent role in the artificial intelligence boom, which has helped to accelerate the growth of chipmakers and many other data center infrastructure providers. But while the company has seen some progress in AI, it’s not growing at anything like the rate of some of its peers.

During the quarter, Cisco reported receiving $2.1 billion worth of AI infrastructure orders from hyperscalers such as Amazon Web Services Inc., Microsoft Corp. and Google LLC, which are building out the vast majority of AI data center capacity. That helped its core networking revenue to grow by 21% from a year earlier to $8.3 billion, ahead of the Street’s forecast of $7.9 billion.

However, the company faces a significant challenge in AI networks from rivals including Nvidia Corp., which not only manufactures AI processors, but also networking technologies like InfiniBand and Spectrum-X to go along with them. Another major rival is Arista Networks Inc., which has captured significant market share among hyperscalers due to its focus on high-speed, software-based networks. It will report earnings results on Thursday.

Cisco is striving to compete with these rivals, and it did make significant progress during the quarter. For instance, it recently announced a partnership with Advanced Micro Devices Inc. to supply the networking infrastructure for a huge data center project in Saudi Arabia. In addition, it announced a new networking switch during the quarter that contains an Nvidia chip.

On a conference call with analysts, Cisco Chief Executive Chuck Robbins (pictured) said he’s anticipating an increase in revenue from so-called “neoclouds” during the second half of the company’s fiscal year. Neoclouds are smaller, younger companies such as CoreWeave Inc. and Nebius Group N.V., which offer dedicated infrastructure for AI workloads. According to Robbins, revenue from these players will start gearing up this year, with their impact expected to become more pronounced during fiscal 2027.

Constellation Research analyst Holger Mueller said Cisco did well to find growth on both its top and bottom lines. But he said investors may have questions about why Cisco’s core competency of networking is driving all of that growth, and not its newer bets in security and application observability, where it has invested billions of dollars. “As for the networking side, the concerns are why North America is not growing very fast, as this should be one of its biggest growth engines with all of the AI infrastructure spending there,” Mueller said. “Instead, most of the growth was in the EMEA region.”

Investors may also have concerns over the widely publicized shortage of memory chips, which has driven up prices, and Robbins sought to address this on the call with analysts. Memory chip makers such as Samsung Electronics Co. Ltd. and Micron Technologies Inc. have been unable to keep up with surging demand for these products, which are essential for AI data centers. To deal with this, he said Cisco has announced a number of price hikes and adjusted its contracts with channel partners.

“Do I think customers will try to buy ahead in some cases? Perhaps,” Robbins said. “But I don’t think it’s going to be a big trend in the networking side of our business.”

Although Cisco’s earnings guidance was a tad disappointing, the company did increase its full-year forecast. It’s now targeting earnings of between $4.13 and $4.17, up from an earlier range of $4.08 to $4.14 per share, ahead of the Street’s forecast of $4.12. It also increased its revenue forecast to a range of $61.2 billion to $61.7 billion, up from prior guidance of $60.2 billion to $61 billion. That’s more or less in line with the analyst consensus of $60.74 billion.

Despite today’s after-hours slump, Cisco remains one of the best performing technology stocks so far this year, and is still up just over 11% in the year to date. The broader S&P 500 index has gained just over 1% in the same period.

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