Cisco Systems, Inc. (CSCO) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call highlights strong financial performance, product development, and a robust market strategy, particularly in AI infrastructure. The Q&A section reveals positive sentiment from analysts, with no significant concerns raised. The shareholder return plan, including dividends and share repurchases, is favorable. Despite some margin decline, the overall guidance remains optimistic, with expected revenue growth and EPS improvement. The new partnership with NVIDIA and AI opportunities further bolster the outlook, leading to a positive sentiment rating for the stock's two-week performance.
Key Financial Performance
Total Revenue $15.3 billion, up 10% year-over-year. Growth driven by strong demand for AI infrastructure and Campus networking solutions.
Non-GAAP Net Income $4.1 billion, up 10% year-over-year. Reflects strong operating efficiencies and execution.
Non-GAAP Earnings Per Share (EPS) $1.04, up 11% year-over-year. Growth faster than revenue due to operating leverage.
Total Product Revenue $11.6 billion, up 14% year-over-year. Driven by AI infrastructure and campus refresh.
Services Revenue $3.7 billion, down 1% year-over-year. No specific reasons mentioned for the decline.
Networking Revenue Growth of 21%, driven by AI infrastructure and campus refresh.
Security Revenue Down 4% year-over-year. Decline in prior generation products and transition in Splunk business from on-prem deals to cloud subscriptions, partially offset by growth in new and refreshed products.
Collaboration Revenue Growth of 6%, led by double-digit growth in devices and growth in CPaaS, Webex, and Cloud Contact Center.
Total RPO (Remaining Performance Obligations) $43.4 billion, up 5% year-over-year. Product RPO grew 8%, with the long-term portion up 11%.
Total ARR (Annual Recurring Revenue) $31 billion, up 3% year-over-year. Product ARR grew 6%.
Subscription Revenue $7.8 billion, representing 51% of total revenue.
Total Software Revenue $5.7 billion, up 2% year-over-year.
Product Orders Up 18% year-over-year. Growth across all geographic segments and customer markets, with service provider and cloud up 65%, public sector up 11%, and enterprise up 8%.
Non-GAAP Gross Margin 67.5%, down 120 basis points year-over-year. Impacted by mix and higher memory costs, partially offset by productivity improvements.
Non-GAAP Product Gross Margin 66.4%, down 130 basis points year-over-year. Impacted by mix and higher memory costs.
Non-GAAP Services Gross Margin 70.9%, down 70 basis points year-over-year.
Operating Cash Flow $1.8 billion, down 19% year-over-year. Decline due to final transition tax payment and investments to meet demand, especially for AI infrastructure.
Capital Returned to Shareholders $3 billion in Q2, including $1.6 billion in dividends and $1.4 billion in share repurchases.
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Operating Highlights
AI infrastructure and Campus networking solutions: Product revenue grew by 14% year-over-year, driven by robust demand for AI infrastructure and Campus networking solutions. AI infrastructure orders from hyperscalers totaled $2.1 billion in Q2, marking significant growth.
Silicon One and AI capabilities: Cisco shipped its 1 millionth Silicon One chip and introduced the G300 chip with 102.4 terabit per second speeds. New systems powered by G300 and pluggable optics were launched, enhancing AI infrastructure.
Security products: New and refreshed security products, including Secure Access and AI Defense, saw over 1,000 new customers in Q2, representing 100% growth quarter-over-quarter.
Global demand for networking products: Product orders grew 18% year-over-year, with double-digit growth across all geographies. Service provider and cloud orders grew 65%, driven by hyperscalers.
Industrial IoT portfolio: Demand for industrial IoT products grew double digits for the seventh consecutive quarter, driven by onshoring of manufacturing and AI workloads at the network edge.
Operational efficiencies: Non-GAAP EPS grew 11%, faster than revenue, supported by operating efficiencies. Cisco returned $3 billion to shareholders in Q2 and raised its dividend.
Cost management strategies: Cisco implemented price increases and revised contractual terms to address rising memory prices, leveraging its supply chain scale to secure favorable terms.
AI-focused joint venture: Cisco announced a joint venture with AMD and HUMAIN to deliver up to 1 gigawatt of AI infrastructure by 2030, starting with 100 megawatts in Saudi Arabia.
Sovereign critical infrastructure: Cisco is developing sovereign critical infrastructure solutions for European customers to address privacy, data governance, and regulatory compliance concerns.
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Risk or Challenges
Legacy infrastructure challenges: Legacy infrastructure was not designed for the performance, speed, and security needs of AI, posing a challenge for AI adoption and execution.
Memory price increases: Significant increases in memory prices across the market could impact costs and profitability. Cisco is addressing this through price adjustments, revised contractual terms, and leveraging its supply chain scale.
Decline in prior generation security products: Declines in prior generation security products are offsetting growth in new and refreshed products, impacting overall security revenue.
Transition to cloud subscriptions in Splunk business: The shift from on-premise deals to cloud subscriptions in the Splunk business is creating a drag on revenue growth, which is expected to continue in the second half of fiscal year 2026.
Higher memory costs impacting gross margins: Non-GAAP product gross margin was negatively impacted by higher memory costs and unfavorable product mix.
Regulatory and compliance concerns for AI adoption: Concerns over privacy, data governance, and regulatory compliance are top of mind for customers, especially in sovereign solutions for critical infrastructure.
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Guidance & Outlook
Revenue Guidance for Q3 FY 2026: Expected revenue to be in the range of $15.4 billion to $15.6 billion.
Non-GAAP Gross Margin for Q3 FY 2026: Anticipated to be in the range of 65.5% to 66.5%.
Non-GAAP Operating Margin for Q3 FY 2026: Expected to be in the range of 33.5% to 34.5%.
Non-GAAP Earnings Per Share for Q3 FY 2026: Expected to range from $1.02 to $1.04.
Revenue Guidance for FY 2026: Expected revenue to be in the range of $61.2 billion to $61.7 billion.
Non-GAAP Earnings Per Share for FY 2026: Expected to range from $4.13 to $4.17.
AI Infrastructure Revenue from Hyperscalers in FY 2026: Expected to recognize over $3 billion in AI infrastructure revenue from hyperscalers.
AI Orders in FY 2026: Expected to take AI orders in excess of $5 billion.
AI Opportunity Beyond Hyperscalers: Pipeline in excess of $2.5 billion for high-performance AI infrastructure portfolio from neocloud, sovereign, and enterprise customers.
Dividend Increase: Raised dividend by $0.01 to $0.42 per quarter, demonstrating commitment to returning a minimum of 50% of free cash flow annually to shareholders.
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Shareholder Return Plan
Capital Returned to Shareholders in Q2: $3 billion
Total Value Returned Year-to-Date: $6.6 billion
Dividend Increase: Announced an increase to Cisco's dividend, demonstrating commitment to returning value to shareholders through consistent capital returns.
New Dividend Amount: $0.42 per quarter, increased by $0.01.
Share Repurchases in Q2: $1.4 billion
Remaining Under Share Repurchase Program: $10.8 billion
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Key Q&A
Q:Can you explain the mix between Silicon One and Optics in the AI infrastructure book and whether new products like G300 and P200 open new markets for Cisco?
A:The $5 billion AI target for fiscal '26 does not include the recently announced P200 and G300 products or the new Optics solutions. The mix in the past quarter was 60% systems and 40% optics, which has been consistent. These products will help sell next-generation solutions to existing and new customers, including neoclouds and sovereign clouds.
Q:What is causing the gross margin decline in April, and is it expected to be a trough?
A:The decline is due to mix and memory prices. Cisco is addressing this through price increases, adjusting terms with partners and customers, leveraging financial strength, and focusing on profitability. Advanced purchase commitments for memory have increased significantly, and the company is focused on growing EPS faster than revenue.
Q:What drove the 21.1% growth in networking product revenue, and why is Q4 sequential growth only 1.4%?
A:Growth was strong across the portfolio, including campus, data center, and IoT offerings. Data center switching saw double-digit growth in 6 of the last 8 quarters. Sequential growth in Q4 is low due to seasonality and the nonlinear nature of the hyperscaler business, which creates uncertainty.
Q:Is the gross margin expected to improve in Q4, and what is driving the EPS guidance?
A:Gross margin is expected to improve due to timing and measures like price increases. EPS guidance reflects financial discipline and profitability focus, with software growth expected to contribute in FY '27.
Q:What is Cisco's updated view on the AI networking opportunity and its relationship with NVIDIA?
A:Cisco plans to participate in scale-up opportunities but has not announced products yet. Sovereign and neocloud opportunities are expected to ramp in FY '27. Engagements with NVIDIA have increased by 70% sequentially, and early success is being seen in joint efforts.
Q:What is the enterprise appetite for AI investment, and has there been any change in demand due to price increases?
A:Enterprise AI investment is focused on use cases like fraud detection, video analytics, and retail applications. There has been no significant pull-forward in demand due to price increases, and customers understand the industry-wide pricing dynamics.
Q:Why is the AI order target set at $5 billion, and does the revenue recognition shift to FY '27?
A:The $5 billion target reflects the nonlinear and lumpy nature of hyperscaler orders. Revenue recognition is expected to shift into FY '27, providing better visibility for AI infrastructure revenue.
Q:What is Cisco's plan for addressing CPO functionality in optics, and what are the trends in campus networking orders?
A:Cisco believes CPO will happen but is not imminent. Customers currently prefer differentiation between optics and silicon. Campus networking orders are seeing strong momentum, with Wi-Fi 7 up 80% sequentially and campus switching orders close to double digits.
Q:What is the outlook for Cisco's security portfolio and AI-related data center switches?
A:New security products are gaining traction, with 1,000 new customers in the past quarter. Refreshed firewalls have seen double-digit unit growth for three consecutive quarters. Demand for 51.2 terabit data center switches is strong, with customers asking for as much as Cisco can build.
Q:What is driving the EBIT margin outperformance, and how will gross margins evolve?
A:EBIT margin outperformance is due to financial discipline and profitability focus. Gross margins are expected to improve over time as price increases and adjusted terms take effect.
Q:What are the dynamics of Cisco's commercial momentum in AI and neocloud opportunities?
A:Cisco wins in AI due to its leading optics portfolio, silicon diversity, programmability, and power efficiency. In the enterprise and neocloud space, Cisco is the network standard, particularly in partnership with NVIDIA.
Q:What is driving the campus refresh opportunity, and why is there no significant pull-forward in orders?
A:The campus refresh is driven by the need for modernized infrastructure for AI and cybersecurity risks associated with outdated equipment. Price increases in networking are nominal, and there is no significant pull-forward in orders.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the specific reasons for the $5 billion AI order target being potentially conservative, as well as the exact timing and scale of revenue recognition shifts into FY '27. Additionally, there was limited detail on the specific competitive dynamics in AI-related use cases and neocloud opportunities.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI Defense
AI FY
AI Summit
AI agent
AI assistant
AI era
AI infrastructure
AI order
Amsterdam
Cisco AI
Cisco silicon
Today
acceleration
adoption
advancement
air
demand product
efficiency
engine
excess AI
generation transition
gig
governance
hand
infrastructure AI
infrastructure portfolio
logo
network edge
networking portfolio
option
order digit
order excess
order hyperscalers
organization
plan
product launch
product security
supply chain
system Cisco
terabit
track
trend
trust
venture
week Cisco
CSCO Transcript
Cisco Systems, Inc. (CSCO) Q2 2026 Earnings Call Transcript
Positive2-11
The earnings call highlights strong financial performance, product development, and a robust market strategy, particularly in AI infrastructure. The Q&A section reveals positive sentiment from analysts, with no significant concerns raised. The shareholder return plan, including dividends and share repurchases, is favorable. Despite some margin decline, the overall guidance remains optimistic, with expected revenue growth and EPS improvement. The new partnership with NVIDIA and AI opportunities further bolster the outlook, leading to a positive sentiment rating for the stock's two-week performance.
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Positive11-12
Cisco's earnings call highlights strong AI-related growth, strategic partnerships, and product innovation. Despite a decline in operating cash flow, the company is investing in AI infrastructure and returning significant capital to shareholders. The Q&A section reveals confidence in AI orders, multiyear product cycles, and a shift to cloud services. Although there are challenges, such as increased DRAM pricing and a one-time revenue timing issue, the overall sentiment is positive due to optimistic guidance, strategic partnerships, and a strong AI demand outlook.
CSCO Slides
CSCO Report
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