Cisco Systems Inc Earnings - Q4 2025 Analysis & Highlights
Cisco Systems delivered record Q2 FY2026 results driven by robust AI infrastructure demand and campus networking momentum, with strong order growth across all customer segments and geographies, while managing industry-wide memory cost pressures through pricing actions and supply chain optimization.
Key Financial Results
Total revenue reached $15.3 billion, up 10% year-over-year, with record Q2 revenue positioning Cisco for its strongest fiscal year yet.
Product revenue was $11.6 billion, up 14% year-over-year, driven by robust demand for AI infrastructure and campus networking solutions.
Services revenue was $3.7 billion, down 1% year-over-year.
Non-GAAP earnings per share (EPS) was $1.04, up 11% year-over-year, demonstrating operating leverage with EPS growing faster than revenue.
Non-GAAP net income was $4.1 billion, up 10% year-over-year.
Total product orders grew 18% year-over-year, with strong growth across all geographic segments and customer markets.
Non-GAAP gross margin was 67.5%, down 120 basis points year-over-year, primarily driven by negative impacts from mix and higher memory costs, partially offset by productivity improvements.
Non-GAAP operating margin was 34.6%, above the high end of guidance range.
Business Segment Results
Networking posted growth of 21%, the standout performer, driven by AI infrastructure and campus refresh with double-digit growth in campus switching, data center switching, wireless, service provider routing, enterprise routing, and compute.
Security was down 4%, reflecting declines in prior generation products and the transition in Splunk business from on-premise deals to cloud subscriptions, partially offset by growth in new and refreshed products.
Collaboration posted solid growth of 6%, led by double-digit growth in devices, as well as growth in CPaaS, Webex, and Cloud Contact Center.
Enterprise product orders were up 8% year-over-year in Q2, with strength across the entire networking portfolio.
Public sector orders were up 11% year-over-year, with double-digit growth across all geographies.
Service provider and cloud product orders accelerated in Q2, growing 65%, driven by triple-digit order growth across hyperscalers.
Telco and cable customer orders were up almost 20% on a combined basis.
Networking product orders reached more than 20% growth in Q2, marking the sixth consecutive quarter of double-digit growth.
Industrial IoT portfolio continued strong demand with double-digit growth for seven consecutive quarters.
AI infrastructure orders from hyperscalers totaled $2.1 billion in Q2, compared to $1.3 billion in Q1, and equal to total orders taken in all of fiscal year 2025.
Acacia reported its strongest quarter-to-date with triple-digit growth in bookings.
Splunk continued to win new customers in Q2, reaching 500 new logos for the first half of fiscal year 2026, and is on track to add 1,000 new logos for the year.
New and refreshed security products (Secure Access, XDR, Hypershield, AI Defense, and refreshed firewalls) saw over 1,000 new customers in Q2, representing more than 100% growth quarter-over-quarter, bringing total net new customers since launch to roughly 4,000.
Secure Access booked over 2.5 million users in Q2 with more than 50% of added customers being new logos.
Capital Allocation
Total capital returned to shareholders in Q2 was $3 billion, comprised of $1.6 billion for quarterly cash dividend and $1.4 billion of share repurchases.
Year-to-date capital returned totaled $6.6 billion.
Dividend increase announced of $0.01 to $0.42 per quarter, demonstrating commitment to returning a minimum of 50% of free cash flow annually to shareholders.
Share repurchase program has $10.8 billion remaining.
Operating cash flow was $1.8 billion, down 19% due to final transition tax payment of $2.3 billion from the 2017 Tax Cuts and Jobs Act and continued investments to meet growing demand for AI infrastructure.
Total cash, cash equivalents and investments ended Q2 at $15.8 billion.
Industry Trends and Dynamics
Legacy infrastructure was not designed for the performance, speed, and security needs of AI, creating a significant market opportunity for Cisco.
Memory price increases across the market are being addressed through Cisco's proactive strategies including price increases, revised contractual terms with channel partners and customers, and leveraging industry-leading supply chain position.
Hyperscaler demand remains strong and non-linear, with less than a handful of major customers placing large orders.
Enterprise AI adoption is in early stages with use cases around quant, fraud detection, video analytics, and agentic AI across financials, manufacturing, pharmaceuticals, and retail.
Campus networking refresh is ramping faster than prior product launches across enterprise switching, enterprise routing, wireless, and industrial IoT platforms.
Data center switching has shown double-digit growth six of the last eight quarters, demonstrating continued enterprise investment in private data centers.
Wi-Fi 7 adoption accelerated with 80% sequential growth.
Sovereign and neocloud opportunities are emerging, with Cisco seeing strong interest from European customers in sovereign critical infrastructure portfolio designed for air-gapped, on-premise environments.
Competitive Landscape
Silicon One architecture positions Cisco in an exclusive group of silicon providers delivering over 100 terabits per second switching speeds, with programmability putting Cisco's silicon in a class of its own.
Optics portfolio is described as number one in the world and well-received by customers.
Silicon diversity is valued by hyperscalers, with customers seeking multiple silicon providers to avoid lock-in.
Programmability and power efficiency are key differentiators in Cisco's systems compared to competitors.
Cisco's supply chain position and operating scale help the company negotiate favorable terms and secure supply better than peers to manage memory cost dynamics.
Cisco is the network standard in enterprise AI deployments, particularly when partnering with NVIDIA.
Macroeconomic Environment
Tariff assumptions in Q3 and fiscal year 2026 guidance assume current tariffs and exemptions remain in place through the end of fiscal 2026, unchanged from prior guidance.
Memory cost inflation is an industry-wide dynamic that Cisco believes it can manage better than peers through pricing, contractual adjustments, and supply chain leverage.
Customer understanding of pricing pressures is evident, with customers recognizing industry-wide dynamics and continuing strategic technology investments without deferral.
Growth Opportunities and Strategies
AI infrastructure opportunity with hyperscalers is expected to exceed $5 billion in orders and recognize over $3 billion in AI infrastructure revenue from hyperscalers in FY 2026, not including recently announced P200 and G300 products or new optics solutions.
Beyond hyperscalers, Cisco has a separate AI opportunity across neocloud, sovereign, and enterprise customers with $350 million in AI orders taken in Q2 and a growing pipeline exceeding $2.5 billion.
Silicon One chip shipments reached one millionth in Q2, with plans to deploy Silicon One architecture across high-performance networking systems by fiscal year 2029.
G300 chip with 102.4 terabit per second capability was introduced at Cisco Live Amsterdam, with four new systems powered by G300 launched.
New pluggable optics announced include 1.6 terabit per second OSFP and 800 gig LPO, both built with Cisco's silicon photonics technology.
Joint venture with AMD and HUMAIN announced to deliver up to 1 gigawatt of AI infrastructure by 2030, with Phase 1 planning to build out 100 megawatts in Saudi Arabia.
Campus networking refresh represents a multi-year, multi-billion dollar opportunity with new next-generation switching, routing, and wireless products ramping faster than prior launches.
AI-native security solutions including Secure Access, XDR, Hypershield, and AI Defense are driving new customer acquisition with over 1,000 new customers in Q2.
AI Defense can now scan models and repositories for vulnerabilities and provide an AI bill of materials for centralized governance.
SASE semantic inspection engine can evaluate the intent of agentic interactions and block sophisticated context-dependent threats.
AgenticOps operating model for AI-driven IT enables autonomous troubleshooting, continuous optimization, and trusted validation.
Internal AI adoption with over 90% of customer experience support cases touched by AI and automation, and majority of product developers using AI coding assistance.
NVIDIA partnership engagement increased 70% sequentially in field engagements, with focus on networking and security in enterprise AI factory solutions.
Financial Guidance and Outlook
Q3 FY2026 revenue guidance: $15.4 billion to $15.6 billion.
Q3 non-GAAP gross margin guidance: 65.5% to 66.5%.
Q3 non-GAAP operating margin guidance: 33.5% to 34.5%.
Q3 non-GAAP EPS guidance: $1.02 to $1.04.
Q3 non-GAAP effective tax rate assumption: approximately 19%.
Full year FY2026 revenue guidance: $61.2 billion to $61.7 billion.
Full year FY2026 non-GAAP EPS guidance: $4.13 to $4.17.
Gross margin improvement expected as price increases and contractual term adjustments with partners and customers take effect over time.
Software growth expected to improve in FY 2027, which will help gross margins.
EPS growth expected to continue exceeding revenue growth through FY 2026, with operating leverage driving profitability.
Recurring revenue metrics show total RPO of $43.4 billion, up 5%, with product RPO growing 8% and long-term portion at $11.8 billion, up 11%.
Total ARR ended quarter at $31 billion, an increase of 3%, with product ARR growth of 6%.
Total subscription revenue was $7.8 billion, representing 51% of Cisco's total revenue.
Total software revenue was $5.8 billion, up 2%.
Advanced purchase commitments increased $1.8 billion in the last 90 days and are up 73% year-over-year, with a big chunk around memory.
Product Innovation and Technology
Silicon One programmability enables adaptation to a wide range of use cases and network infrastructure designs, differentiating Cisco from competitors.
800-gig coherent optics and transponder shipments are ramping significantly with growth in both 400-gig and 800-gig coherent optics.
Cisco 8000 and Nexus 9000 102.4 terabit systems offer flexible air-cooled options for traditional data center architectures and liquid-cooled options for ground-up facilities.
800-gig LPO delivers greater power savings and efficiency for AI scale-out.
Refreshed firewall products launched in the last 120 days with third consecutive quarter of double-digit unit growth.
Campus switching business was up close to double-digits on orders with strong demand for next-generation switching, routing, and wireless products.
