Cisco delivered a robust Q2 FY2026, with revenue growing 10% year-over-year to $15.3 billion and Non-GAAP EPS increasing 11% to $1.04, driven by a 14% surge in product revenue. Performance was led by a 21% increase in Networking revenue, fueled by record AI infrastructure orders of $2.1 billion and the early stages of a multi-year campus networking refresh. Despite strong top-line growth, Non-GAAP gross margins compressed 120 basis points to 67.5% due to higher memory costs and product mix, though operating discipline allowed operating margins to exceed guidance at 34.6%. The company raised its full-year revenue outlook to $61.2B-$61.7B and EPS to $4.13-$4.17, while increasing its dividend and returning $3 billion to shareholders in the quarter.
| Metric | Value | Change |
|---|---|---|
| Total Revenue | $15.3 billion | +10% YoY |
| Product Revenue | $11.6 billion | +14% YoY |
| Non-GAAP EPS | $1.04 | +11% YoY |
| Product Orders | N/A | +18% YoY |
| Non-GAAP Gross Margin | 67.5% | -120 bps YoY |
| Non-GAAP Operating Margin | 34.6% | Highest in 4 quarters |
| AI Infrastructure Orders (Q2) | $2.1 billion | vs $1.3B prior quarter |
| Networking Revenue | N/A | +21% YoY |
| Security Revenue | N/A | -4% YoY |
| Operating Cash Flow | $1.8 billion | -19% YoY |
Cisco is aggressively positioning itself as a primary infrastructure provider for the AI era, moving beyond traditional networking into high-performance AI clusters. The company reported a massive acceleration in AI infrastructure orders from hyperscalers, hitting $2.1 billion in Q2 alone (up from $1.3B in Q1), prompting a raise in the full-year AI order outlook to over $5 billion. This is supported by the shipment of the 1 millionth Silicon One chip and the launch of the G300 chip capable of 102.4 terabits per second. Management indicated that these new products (G300, P200) are not yet included in the current FY26 guidance, suggesting significant upside potential for FY27.
The Campus networking refresh cycle is officially underway and ramping faster than previous generations. Management described this opportunity as being in the 'top of the first inning' with a 'multiyear, multibillion-dollar refresh opportunity' driven by the end-of-support for Catalyst 9000 series and the need for infrastructure that supports Agentic AI. Orders for campus switching were up double digits, and Wi-Fi 7 orders grew 80% sequentially. This indicates a durable, multi-year growth driver beyond the volatile hyperscaler demand.
Cisco is actively managing industry-wide inflationary pressures through pricing power and supply chain scale. In response to significant increases in memory prices, Cisco has implemented price increases, is revising contractual terms with partners, and is leveraging its 'world-class supply chain' to secure supply. Management noted that advanced purchase commitments are up 73% year-over-year, with a significant portion dedicated to memory. This strategy aims to protect margins despite commodity cost inflation.
The Security business is undergoing a significant transition, prioritizing newer, cloud-native platforms over legacy hardware. While total Security revenue declined 4% due to the Splunk transition to cloud subscriptions (which creates a short-term revenue headwind) and declines in legacy products, the new portfolio (Secure Access, XDR, Hypershield) is gaining traction with over 1,000 new customers in Q2. Management expects the organic security portfolio to return to double-digit growth by the exit of FY26, signaling a successful pivot to higher-value software.
Gross margin compression remains a primary concern, falling 120 basis points year-over-year to 67.5%. Management attributed this to a 'negative mix' of hyperscaler business and 'higher memory costs.' While they expect to recover some of this through pricing, the guidance for Q3 implies a further sequential decline in gross margin (65.5%-66.5%), suggesting the margin pressure is not fully transitory and may persist as the company scales lower-margin AI hardware.
The 'nonlinear' and 'lumpy' nature of hyperscaler demand introduces significant execution risk and forecasting difficulty. Management acknowledged that the AI order book relies on a handful of customers, and timing can shift rapidly. While Q2 saw $2.1B in orders, the guidance for Q3 implies a significant sequential slowdown in product revenue (typical seasonality is down mid-single digits, but the magnitude of AI volatility is a new variable).
Operating cash flow decreased 19% year-over-year to $1.8 billion, driven by a one-time tax payment and increased inventory investments to support AI demand. While the tax payment is non-recurring, the need to build inventory for AI ramps represents a working capital drag. Furthermore, the transition of Splunk from on-premise licenses to cloud subscriptions is creating a 'drag on revenue growth' that is expected to continue into the second half of the fiscal year, masking the underlying performance of the security segment.
Overall: Management exhibited a high degree of confidence and enthusiasm regarding the company's strategic positioning in the AI era, frequently using superlatives like 'strongest quarter' and 'firing on all cylinders.' Chuck Robbins was assertive about Cisco's ability to capture market share in AI infrastructure, while Mark Patterson maintained a disciplined, financially prudent tone, acknowledging margin headwinds but emphasizing the company's ability to manage costs and pricing.
Confidence: HIGH - Management consistently exceeded guidance highs, raised full-year targets, and provided specific, aggressive metrics for AI orders (>$5B). Robbins explicitly stated confidence in navigating industry-wide memory inflation better than peers, and Patterson highlighted 'highest in 4 quarters' operating margins.
$15.4 billion - $15.6 billion
$1.02 - $1.04
$61.2 billion - $61.7 billion
$4.13 - $4.17
In excess of $5 billion
Over $3 billion
Hedging & Uncertainty: Management generally used direct and confident language ('We delivered,' 'We expect,' 'We are raising'), but employed hedging when discussing the timing of new market opportunities and the duration of margin pressures. Phrases like 'I don't think it's actually imminent right now' regarding CPO technology, and 'I think that will improve as we move forward' regarding margins, indicate uncertainty on specific timelines. However, regarding the AI cycle, Robbins was emphatic, using 'once-in-a-generation transition' to minimize doubt about the strategic necessity of their investments.
Our innovation engine is firing on all cylinders. - Charles Robbins, Chair and CEO
We are raising our dividend... demonstrating our commitment to returning value to shareholders. - Mark Patterson, CFO
Top of the first inning... This thing is just getting started. - Charles Robbins, Chair and CEO
We feel confident in our ability to manage this industry-wide dynamic better than our peers. - Charles Robbins, Chair and CEO
Legacy infrastructure was not designed for the performance, speed and security needs of AI. - Charles Robbins, Chair and CEO
We're focused on growing EPS faster than revenue. - Mark Patterson, CFO
Analyst Sentiment: Analysts were highly engaged, focusing heavily on the sustainability of AI demand, the specific mix of AI products (Optics vs. Systems), and the trajectory of gross margins amidst rising memory costs. There was skepticism regarding the conservative nature of the $5B AI order target given recent momentum.
Management Responses: Management was defensive but firm on gross margins, attributing declines to mix and memory while insisting on their ability to price for inflation. They were expansive on AI product roadmaps (Silicon One, Optics) but cautious about putting specific numbers on 'future' products like CPO or Scale-up networking until they are closer to market.
AI Infrastructure Mix: Analysts probed the breakdown between Optics and Systems within the $5B AI order book. Management confirmed a 60/40 split (Systems/Optics) and noted that new products like G300 are not yet included in the FY26 numbers.
Gross Margin Pressure: Multiple questions focused on the 120bps decline and Q3 guide. Management attributed this to memory costs and mix, assuring that price increases and contract revisions would mitigate this over time.
Campus Refresh: Analysts sought confirmation that the enterprise refresh is real. Management emphasized 'top of the first inning' and faster ramps than previous cycles, noting that customers are modernizing for Agentic AI.
Splunk Transition: Questions regarding the security decline. Management explained the shift from on-prem to cloud subscriptions creates a revenue headwind but positions the company for long-term growth.
Cisco is successfully executing a strategic pivot to become a dominant player in AI infrastructure, evidenced by accelerating hyperscaler orders and a robust product roadmap (Silicon One, G300). The core networking business is entering a multi-year refresh cycle driven by AI readiness, providing a durable growth engine beyond volatile AI build-outs. While gross margins face near-term pressure from memory costs and mix, management's aggressive pricing actions and operational discipline (EPS growing faster than revenue) mitigate this risk. The raised guidance for FY2026 and the dividend increase signal strong confidence in the earnings power of this portfolio transition.
Management indicated that AI infrastructure build-outs by hyperscalers are accelerating significantly, with Q2 orders equaling the total of FY25. This suggests a sustained capex cycle driven by the need for 'performance, speed and security' that legacy infrastructure cannot handle.
Significant increases in memory prices are impacting the entire industry. Cisco views this as a manageable dynamic through pricing and scale, but it represents a near-term inflationary headwind for hardware margins.
Enterprise demand is solidifying, driven by the need to refresh aging infrastructure (end-of-life Catalyst products) and prepare private data centers for AI workloads. Orders excluding hyperscalers grew 10%.