Cisco Earnings Call: AI Surge Fuels Growth Outlook

Cisco ((CSCO)) has held its Q2 earnings call. Read on for the main highlights of the call.

Cisco’s latest earnings call struck a notably upbeat tone, with management highlighting record revenue, double‑digit product growth and EPS beating guidance. Executives balanced this optimism with candid discussion of margin pressure from rising memory costs, a shifting product mix and Splunk’s cloud transition, but reiterated strong confidence in multiyear AI and FY26 targets.

Record Revenue and EPS Outperformance

Cisco reported quarterly revenue of $15.3 billion, up 10% year over year, driven by strength across its core portfolio. Non‑GAAP net income rose 10% to $4.1 billion and EPS climbed 11% to $1.04, with both profit metrics topping the high end of guidance and underscoring solid operating leverage.

Networking and Product Engine Power Growth

Product revenue jumped 14% to $11.6 billion, with networking the star performer. Networking products grew 21% on the back of AI infrastructure, campus refreshes, switching, wireless, routing and servers, and networking orders rose more than 20%, marking a sixth straight quarter of double‑digit networking growth.

Broad‑Based Order Strength Across Regions

Underlying demand looked healthy, with total product orders up 18% year over year and 10% excluding hyperscalers. Orders grew across regions, led by the Americas at plus 23%, EMEA at 11% and APJC at 15%, while service provider and cloud orders surged 65% and telco and cable neared 20% growth.

AI Infrastructure Surge and Silicon One Milestones

AI infrastructure momentum accelerated, as hyperscaler AI orders reached $2.1 billion in the quarter, up from $1.3 billion and matching the prior full‑year total. Cisco shipped its one‑millionth Silicon One chip, launched a 102.4Tbps G300 device and new systems, and now expects AI orders above $5 billion with more than $3 billion in hyperscaler AI revenue in FY26.

Security Portfolio Gains Despite Revenue Drag

Cisco’s revamped security lineup showed strong customer uptake even as reported security revenue declined 4% year over year. New and refreshed products, about one‑third of the portfolio, added more than 1,000 new customers in Q2 and roughly 4,000 since launch, while Secure Access surpassed 2.5 million users and firewall units posted a third consecutive quarter of double‑digit growth.

Recurring Revenue and Software Mix Expand

The company continued to deepen its recurring base, with total remaining performance obligations rising to $43.4 billion, up 5%. Long‑term product RPO grew 11%, total ARR reached $31 billion with product ARR up 6%, subscription revenue hit $7.8 billion or 51% of total sales, and software revenue increased 2% to $5.7 billion.

Capital Returns and Dividend Boost

Shareholder payouts remained a key pillar of Cisco’s story, with $3.0 billion returned in the quarter via $1.6 billion in dividends and $1.4 billion in buybacks. Year to date the company has sent $6.6 billion back to investors, lifted its quarterly dividend by a cent to $0.42 and still has $10.8 billion left under its share repurchase authorization.

Margin Discipline and Supply Commitments

Operational execution remained tight, as Cisco delivered a 34.6% non‑GAAP operating margin, above the high end of its guidance range. Management highlighted operating leverage with EPS growing faster than revenue and noted that advanced purchase commitments rose about $1.8 billion in 90 days, up roughly 73% year over year, securing key components for AI demand.

AI Adoption and Internal Productivity Gains

On the customer front, Splunk added 500 new logos in the first half and is on pace to reach 1,000 by FY26, supporting Cisco’s observability and security ambitions. Internally, most product developers are now using AI coding tools and more than 90% of support cases touch AI or automation, helping resolve complex issues faster and lifting customer satisfaction to record levels.

Strategic Partnerships and New AI Ventures

Cisco is also deepening its ecosystem reach, announcing plans for a joint venture with AMD and HUMAIN to deliver up to 1 gigawatt of AI infrastructure by 2030, starting with a 100‑megawatt phase in Saudi Arabia. Management cited a 70% sequential increase in engagements with NVIDIA, underscoring Cisco’s push to sit at the center of next‑generation AI build‑outs.

Gross Margin Pressure from Memory and Mix

Despite strong top‑line growth, profitability at the gross margin level tightened as total non‑GAAP gross margin fell 120 basis points to 67.5%. Product gross margin slipped 130 basis points to 66.4%, hurt by unfavorable mix and sharply higher memory costs, and guidance for Q3 points to further near‑term margin pressure.

Security Revenue and Splunk Transition Weigh

Cisco flagged that its reported security revenue is under pressure as legacy offerings decline and Splunk shifts from on‑premises perpetual licenses to cloud subscriptions. Management expects this transition to continue dragging on growth into the second half of FY26 even as new cloud‑based and AI‑driven security products gain traction with customers.

Services and Cash Flow Headwinds

Services revenue slipped 1% year over year and cash generation was temporarily muted, with operating cash flow down 19% to $1.8 billion. Executives attributed this mainly to a large final transition tax payment tied to prior tax law changes and stepped‑up investments needed to meet surging AI infrastructure demand.

Component Price Volatility and Supply Actions

A wave of memory price inflation across the industry is pressuring hardware margins and complicating deal economics. Cisco is responding with targeted price increases and contract changes, along with expanded supply commitments, but warned of some near‑term disruption as customers and suppliers adjust to the new terms.

Concentrated and Lumpy Hyperscaler Demand

The AI boom is a key growth driver but brings concentration risk, as a small set of hyperscalers accounts for a large share of AI orders and revenue. Management emphasized that the more than $5 billion AI order outlook is based on today’s pipeline and could prove conservative, yet acknowledged that order timing will remain uneven and visibility imperfect.

Margin Guidance and Seasonality Uncertainty

Looking ahead to Q3, Cisco signaled that gross and operating margins will compress from Q2 levels, reflecting ongoing cost and mix headwinds. Executives also pointed to nonlinear demand and seasonal uncertainty tied to hyperscaler order patterns, suggesting quarterly performance could be choppy even as the multiyear trajectory remains intact.

AI Revenue Recognition Timing

While AI orders are ramping quickly, some associated revenue will be recognized over a longer horizon as large customers stage deployments. Management indicated it already has visibility into certain AI deals extending into FY27, meaning part of the pipeline may shift beyond FY26 even as the overall AI opportunity expands.

Guidance and Long‑Term Outlook

For Q3, Cisco guided revenue to $15.4–$15.6 billion, a non‑GAAP gross margin of 65.5%–66.5%, operating margin of 33.5%–34.5% and EPS of $1.02–$1.04 with a 19% tax rate. For FY26, it projects revenue between $61.2 billion and $61.7 billion and EPS of $4.13–$4.17, while targeting AI orders above $5 billion, more than $3 billion in hyperscaler AI revenue and at least half of free cash flow returned to shareholders.

Cisco’s earnings call painted a picture of a company leaning hard into AI and networking while navigating near‑term margin and cash flow bumps. For investors, the key takeaway is that robust demand, expanding recurring revenue and disciplined capital returns are offsetting cyclical and mix‑related pressures, leaving the longer‑term growth story largely intact.