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Cisco Systems Inc Earnings - Analysis & Highlights for Q2 2025
Overview
PositivesNegativesOutlook
- Revenue and EPS were above the high end of the guidance ranges, with solid margins and operating cash flow.
- Campus switching orders were up double digits, and the company expects its campus switching portfolio and Wi-Fi 7 access points to gain traction with increasing return-to-office policies.
- The company is starting to see growth in AI orders from enterprise customers as the large market opportunity starts to open up.
- The company is investing organically and inorganically in its innovation pipeline, and recently acquired Deeper Insights to expand its Customer Experience team's technology footprint and engineering talent.
- The company's positive top-line performance was supported by strong demand for its technology, generating double-digit growth in annualized recurring revenue, remaining performance obligations, and subscription revenue, which accounted for 56% of total revenue in Q2.
- Networking was down 3%, with growth in wireless and switching offset by a decline in servers.
- Non-GAAP operating margin is expected to be in the range of 33% to 34%, and non-GAAP EPS is expected to range from $0.90 to $0.92.
- Gross margin is expected to be in the range of 67% to 68% for Q3 and is expected to settle in that range for the full year.
- The company continues to invest organically and inorganically in its innovation pipeline.
- The company has accounted for the added cost, driven by the increased tariffs on China and the proposed tariffs on Mexico and Canada, in its guidance.
- The company expects to see more and more cross-selling sales incentives that will continue to accelerate.
Q&A Highlights from Cisco Systems Inc Earnings Call Q2 2025
- Analyst asked about the strength of the company's data center business and how it is affecting the campus portfolio.
- The company saw strong demand across geographies, segments, and portfolios, with double-digit growth in the Nexus portfolio and the data center switching. The company also saw good performance in the campus, with double-digit demand for campus switching, enterprise routing, and wireless. Additionally, the company saw solid demand in the webscale performance with five out of the six growing over 100% year-over-year, and two of the six growing over 50% year-over-year.
- The company saw strong demand across geographies, segments, and portfolios, with double-digit growth in the Nexus portfolio and the data center switching. The company also saw good performance in the campus, with double-digit demand for campus switching, enterprise routing, and wireless. Additionally, the company saw solid demand in the webscale performance with five out of the six growing over 100% year-over-year, and two of the six growing over 50% year-over-year.
- Analyst asked about the company's enterprise customers investing in AI and how meaningful it is for the business.
- The company is seeing enterprise customers beginning to invest in AI-driven infrastructure, but they are still in the early days of understanding their use cases. The company is starting to see some spending on specific AI-driven infrastructure, and they believe that the opportunity for AI is an order of magnitude higher than what they've seen in training today. The company is innovating and building capabilities to put themselves in a better position to be a real beneficiary as this continues to accelerate.
- The company is seeing enterprise customers beginning to invest in AI-driven infrastructure, but they are still in the early days of understanding their use cases. The company is starting to see some spending on specific AI-driven infrastructure, and they believe that the opportunity for AI is an order of magnitude higher than what they've seen in training today. The company is innovating and building capabilities to put themselves in a better position to be a real beneficiary as this continues to accelerate.
- Analyst asked about the company's gross margin guide for Q3 and how it is affected by the proposed tariffs.
- The company's gross margin guide for Q3 is 67% to 68%, and the step-down from Q2 is due to the cost of the proposed tariffs, including the 10% in China, the 25% on Canada and Mexico, and the steel and aluminum tariffs. The company has built a supply chain team that has mitigated their exposure to tariffs by about 80% over the years, and they have game-planned several scenarios and steps they could take depending on what actually goes into effect. The company has not yet mitigated the impact of the tariffs, but they have built the cost of goods sold into their guide.
- The company's gross margin guide for Q3 is 67% to 68%, and the step-down from Q2 is due to the cost of the proposed tariffs, including the 10% in China, the 25% on Canada and Mexico, and the steel and aluminum tariffs. The company has built a supply chain team that has mitigated their exposure to tariffs by about 80% over the years, and they have game-planned several scenarios and steps they could take depending on what actually goes into effect. The company has not yet mitigated the impact of the tariffs, but they have built the cost of goods sold into their guide.
- Analyst asked about the impact of tariffs on customer demand and the company's mitigation strategies.
- The company is not seeing any evidence of customer pulling demand ahead due to tariffs. The tariff environment is fluid, and it will be difficult for customers to decide what to do until the actual tariff regime is in place. The company plans to mitigate the impact of tariffs by making changes to the supply chain and considering price as a lever.
- The company is not seeing any evidence of customer pulling demand ahead due to tariffs. The tariff environment is fluid, and it will be difficult for customers to decide what to do until the actual tariff regime is in place. The company plans to mitigate the impact of tariffs by making changes to the supply chain and considering price as a lever.
- Analyst asked about the company's expectations for AI orders to convert into revenue, specifically if it will happen in fiscal 2025 or fiscal 2026.
- The company has seen strong AI orders, including systems, silicon, optics, and optical systems, with half being in silicon and systems. The company has invested heavily in resources for silicon development and has seen positive results in increasing yield. The revenue from these orders is expected to begin ramping up in the second half of the year, consistent with the company's previous statements.
- The company has seen strong AI orders, including systems, silicon, optics, and optical systems, with half being in silicon and systems. The company has invested heavily in resources for silicon development and has seen positive results in increasing yield. The revenue from these orders is expected to begin ramping up in the second half of the year, consistent with the company's previous statements.
- Analyst asked about the penetration of the 6,500 large customers that Cisco and Splunk are jointly targeting and any further bundling plans.
- Charles H. Robbins stated that it's still early in the process, and they are continuing to make progress. They have seen the benefit of the portfolio coming together with large customers doing broad-based, what they call, WPAs and that are inclusive of Splunk. They also have seen wins with the Splunk team leading a deal that expanded the Cisco footprint. They expect to see more cross-selling sales incentives that will accelerate the penetration.
- Charles H. Robbins stated that it's still early in the process, and they are continuing to make progress. They have seen the benefit of the portfolio coming together with large customers doing broad-based, what they call, WPAs and that are inclusive of Splunk. They also have seen wins with the Splunk team leading a deal that expanded the Cisco footprint. They expect to see more cross-selling sales incentives that will accelerate the penetration.
- Analyst asked about the comparison between systems and silicon sales, and how they're looking at it.
- Richard Scott Herren stated that systems are the general method of consumption, and actual raw silicon sales are still very small as a percentage of the total business.
- Richard Scott Herren stated that systems are the general method of consumption, and actual raw silicon sales are still very small as a percentage of the total business.
- Analyst asked about the large number of project announcements over the last couple of weeks, especially from the white box ODM space, and how Cisco is thinking about the risks and alternatives.
- Charles H. Robbins stated that Enterprise has had four quarters of continued recovery, with Q2 being up 29% over Q1. He believes that the slower growth in Q2 is due to the fact that Q1 had a bunch of big deals, and they expect to see continued growth in the coming quarters. He also mentioned that they are seeing success in the webscale space, and if they are chosen in that space, they will have a good opportunity to play in other emerging opportunities as well.
- Charles H. Robbins stated that Enterprise has had four quarters of continued recovery, with Q2 being up 29% over Q1. He believes that the slower growth in Q2 is due to the fact that Q1 had a bunch of big deals, and they expect to see continued growth in the coming quarters. He also mentioned that they are seeing success in the webscale space, and if they are chosen in that space, they will have a good opportunity to play in other emerging opportunities as well.
- Analyst asked about where Cisco is seeing Ethernet gain momentum in the Enterprise segment, specifically regarding cluster size, use cases, and verticals.
- Charles H. Robbins explained that the company is not seeing large clusters of Ethernet in the enterprise segment. Instead, enterprises are building smaller clusters for training their models or renting space from major GPU providers. The infrastructure they are building is to support inferencing, and the company believes that their partnership with NVIDIA and the HyperFabric stack will lead to networking equipment being combined with NVIDIA GPUs in the future.
- Charles H. Robbins explained that the company is not seeing large clusters of Ethernet in the enterprise segment. Instead, enterprises are building smaller clusters for training their models or renting space from major GPU providers. The infrastructure they are building is to support inferencing, and the company believes that their partnership with NVIDIA and the HyperFabric stack will lead to networking equipment being combined with NVIDIA GPUs in the future.
- Analyst asked about the 51.2T silicon and how it relates to AI orders being tied to switch and Silicon One silicon.
- Charles H. Robbins clarified that the 51.2T silicon is enterprise-focused and based on the Nexus portfolio, which is Silicon One-based. The company is developing multiple silicon architectures based on customer use cases, such as deep buffers or low latency applications. The team is already working on subsequent chips that will continue to crank up the speeds in data centers. On the campus side, the company continues to see switching infrastructure growth, and Wi-Fi 7 is expected to see a full transition in the next two to three quarters.
- Charles H. Robbins clarified that the 51.2T silicon is enterprise-focused and based on the Nexus portfolio, which is Silicon One-based. The company is developing multiple silicon architectures based on customer use cases, such as deep buffers or low latency applications. The team is already working on subsequent chips that will continue to crank up the speeds in data centers. On the campus side, the company continues to see switching infrastructure growth, and Wi-Fi 7 is expected to see a full transition in the next two to three quarters.
- Analyst asked about the customer lead times and the return to normal ordering patterns.
- The company's lead times have not been extended, and the demand they are seeing is a normalization of ordering.
- The company's lead times have not been extended, and the demand they are seeing is a normalization of ordering.
- Analyst asked about the size of the telco segment and the level of adoption of AI among customers.
- The company has a large telco customer base, and they are seeing good demand from telco customers as they prepare for increased demand driven by AI. They are also seeing European operators planning for AI edge applications and delivering AI as a service.
- The company has a large telco customer base, and they are seeing good demand from telco customers as they prepare for increased demand driven by AI. They are also seeing European operators planning for AI edge applications and delivering AI as a service.