Silicon One: The Chip Cisco Chose to MakeNarrow moat

Cisco Systems (CSCO) — moat facet

Designing its own chips got Cisco back into the hyperscalers' data centres, and cost it 3.6 points of product margin in a year.

Cisco's return to the largest data centres rests on a decision to design its own networking chips. Its 10-K says its high-performance systems are "predominantly powered by Cisco Silicon One"1, and the growth in networking was "primarily driven by our AI Infrastructure solutions, which include Cisco Silicon One based systems and optics"2.

Product gross margin bridge, FY2025 to FY2026 (points)+1.1Productivity+0.2Pricing-3.6Product mix+0.9Amortisation+0.8Suppliersettlement+0.1OtherCisco Form 10-K FY2026; 63.7% to 63.2%
Mix took more than productivity gave.

Owning the silicon lets Cisco sell to customers who want to build their own systems. Broadcom's pages in this collection note that Cisco also sells its switch chips to other vendors, which makes it a competitor to its former chip suppliers.

The chip has a cost in margin. Product gross margin fell from 63.7% to 63.2% in fiscal 20263. Mix alone cost 3.6 points, "primarily due to higher Networking revenue", offset by 1.1 points of productivity, 0.9 points from lower amortisation, 0.8 points from the absence of the prior year's supplier settlement and 0.2 points of pricing4. Hyperscaler systems sell at lower margins than enterprise equipment.

Silicon One also required inventory: inventories rose to $5.7 billion from $3.2 billion, which Cisco attributes to "increased demand for our Cisco Silicon One and the impact of higher memory prices"5.

The chip also connects the old business to the new. The same Silicon One family runs in Cisco's routers and switches6, so the engineering Cisco pays for serves both the hyperscalers and the enterprise and carrier customers of its installed base. A vendor on merchant chips spreads that cost across a supplier's customers; Cisco spreads it across its own product lines.

Owning the chip is a real capability; it is also an expensive one. If mix pushes the product gross margin, 63.2% in fiscal 20267, below 62%, the AI business will be buying revenue with margin.

Moat trajectory: Widening

Silicon One systems drove networking growth; mix cost 3.6 pts of margin.

The number that tests this moat
Reported
Product gross margin, full year
63.2% (FY2026), mix effect -3.6 points

What the hyperscaler mix costs; a fall below 62% would mean revenue is being bought with margin.

Source: Cisco Form 10-K, FY2026 ↗
⚠ Threats to the moat
⚠ THREAT 01
Memory Costs Inside Every Switch
About five points of Cisco's latest quarterly growth came from raising prices to pass on memory costs.
References
  1. ReportedIts 10-K says its high-performance systems are "predominantly powered by Cisco Silicon One", and the growth in networking was "primarily driven by our AI Infrastructure solutions, which include Cisco Silicon One based systems and optics".
    Cisco Systems Form 10-K for fiscal 2026 (year ended 25 July 2026) - Item 1 business: products, strategy, employees and sales. — FY2026 · publ. 2 September 2026 · source ↗
  2. ReportedIts 10-K says its high-performance systems are "predominantly powered by Cisco Silicon One", and the growth in networking was "primarily driven by our AI Infrastructure solutions, which include Cisco Silicon One based systems and optics".
    Cisco Systems Form 10-K for fiscal 2026 (year ended 25 July 2026) - Item 1 business: products, strategy, employees and sales. — FY2026 · publ. 2 September 2026 · source ↗
  3. ReportedProduct gross margin fell from 63.7% to 63.2% in fiscal 2026.
    Cisco Systems Form 10-K for fiscal 2026 (year ended 25 July 2026) - Item 7 MD&A: revenue by product category and segment, and gross margins. — FY2026 · publ. 2 September 2026 · source ↗
  4. ReportedMix alone cost 3.6 points, "primarily due to higher Networking revenue", offset by 1.1 points of productivity, 0.9 points from lower amortisation, 0.8 points from the absence of the prior year's supplier settlement and 0.2 points of pricing.
    Cisco Systems Form 10-K for fiscal 2026 (year ended 25 July 2026) - Item 7 MD&A: revenue by product category and segment, and gross margins. — FY2026 · publ. 2 September 2026 · source ↗
  5. ReportedSilicon One also required inventory: inventories rose to $5.7 billion from $3.2 billion, which Cisco attributes to "increased demand for our Cisco Silicon One and the impact of higher memory prices".
    Cisco Systems Form 10-K for fiscal 2026 (year ended 25 July 2026) - financial statements and notes: balance sheet, cash flow, commitments, customers and acquisitions. — FY2026 · publ. 2 September 2026 · source ↗
  6. ReportedThe same Silicon One family runs in Cisco's routers and switches, so the engineering Cisco pays for serves both the hyperscalers and the enterprise and carrier customers of its installed base.
    Cisco Systems Form 10-K for fiscal 2026 (year ended 25 July 2026) - Item 7 MD&A: revenue by product category and segment, and gross margins. — FY2026 · publ. 2 September 2026 · source ↗
  7. ReportedIf mix pushes the product gross margin, 63.2% in fiscal 2026, below 62%, the AI business will be buying revenue with margin.
    Cisco Systems Form 10-K for fiscal 2026 (year ended 25 July 2026) - Item 7 MD&A: revenue by product category and segment, and gross margins. — FY2026 · publ. 2 September 2026 · source ↗
Sources
Generated September 25, 2026