Cisco (CSCO) Q2 FY2026 Earnings Call Transcript

Date: February 11, 2026 | Source: Motley Fool (Motley Fool Transcribing)

---

Charles Robbins (Chair and Chief Executive Officer, Cisco): Thanks, Sami, and thank you all for joining us today. Q2 was a very strong quarter with revenue and earnings per share both growing double digits and coming in above the high end of our guidance ranges. We delivered record revenue in Q2, putting Cisco on track to deliver our strongest year yet as indicated in our guidance for the full year. In Q2, total revenue growth accelerated to 10% year-over-year with product revenue up 14%, driven by robust demand for AI infrastructure and Campus networking solutions. Our strong top line performance, combined with operating efficiencies and solid execution by our teams contributed to non-GAAP EPS growth of 11%, which continued to grow faster than revenue.

This strong performance allowed us to return $3 billion in capital to shareholders in the quarter, bringing the total value returned year-to-date to $6.6 billion. Today, we also announced an increase to Cisco's dividend, demonstrating our commitment to returning value to shareholders through consistent capital returns. Our innovation engine is firing on all cylinders, and our commitment to customers has never been stronger.

Our strong first half of FY '26 demonstrates both the power of our portfolio and the fundamental role we play in this once-in-a-generation transition. With our industry-leading networking portfolio powered by Silicon One, AI native security solutions and operating systems, Cisco is well positioned to provide the critical infrastructure needed for the AI era. I'd also like to address the recent significant increases in memory prices across the market. Leveraging our industry-leading supply chain team, we are proactively implementing 3 key strategies: First, we have already announced price increases, and we'll continue to monitor market trends and make additional adjustments as necessary. Second, we are revising contractual terms with channel partners and customers to address evolving component prices. Third, Cisco's operating scale and industry-leading position help us negotiate favorable terms and secure supply to fulfill current and future demand. Overall, we feel confident in our ability to manage this industry-wide dynamic better than our peers.

Now let me comment on the strong demand we saw in Q2. Overall, total product orders grew 18% year-over-year, even on top of double-digit growth in Q2 fiscal year '25. Excluding hyperscalers, product orders were up 10% year-over-year, demonstrating the broad-based demand we see for our technology globally. Enterprise product orders were up 8% year-over-year in Q2 with strength across our entire networking portfolio. Public sector orders were up 11% year-over-year with double-digit growth across all geographies. Product orders from service provider and cloud customers accelerated in Q2, growing 65%, driven by triple-digit order growth across hyperscalers. We also saw continued growth from telco and cable customers in Q2 with orders up almost 20% on a combined basis.

Growth in networking product orders continued to accelerate, reaching more than 20% in Q2 and marking the sixth consecutive quarter of double-digit growth driven by service provider routing, data center switching, campus switching, wireless, servers and industrial IoT products. Within our Campus networking portfolio, we are seeing strong demand for our next-generation switching, routing and wireless products, which continue to ramp faster than prior product launches. We continue to see strong demand for our industrial IoT portfolio, which has now grown double digits for 7 consecutive quarters. This demand is driven by onshoring of manufacturing to the United States, the increase of AI workloads at the network edge and the emergence of physical AI.

AI infrastructure orders taken from hyperscalers totaled $2.1 billion in Q2 compared to $1.3 billion just last quarter and equal to the total orders taken in all of fiscal year '25, marking another significant acceleration in growth across our silicon, systems and optics. We shipped our 1 millionth Silicon One chip in Q2 and plan to deploy our Silicon One architecture across our high-performance networking systems by fiscal year '29. Just this week at Cisco Live Amsterdam, we introduced our 102.4 terabit per second G300 chip, positioning Cisco in an exclusive group of silicon providers delivering over 100 terabits per second switching speeds. In addition, we launched 4 new systems powered by G300.

The Cisco 8000 and Nexus 9000 102.4 terabit systems offer flexible air-cooled options for traditional data center architectures as well as liquid cooled option designed for the latest ground-up facilities. We also announced 2 new pluggable optics, a 1.6 terabit per second OSFP and an 800-gig LPO, both built with Cisco silicon photonics technology. Acacia reported its strongest quarter to date with triple-digit growth in bookings. All major hyperscalers are deploying its market-leading coherent pluggable optics. We see growth in both 400-gig and 800-gig coherent optics and transponder shipments with 800-gig pluggables ramping significantly.

Given the strong demand for our Silicon One systems and optics, we now expect to take AI orders in excess of $5 billion and to recognize over $3 billion in AI infrastructure revenue from hyperscalers in FY '26. Beyond hyperscalers, we have a separate AI opportunity across neocloud, sovereign and enterprise customers. We took $350 million in AI orders from these customers in Q2 and have a growing pipeline in excess of $2.5 billion for our high-performance AI infrastructure portfolio. In Q2, we announced plans to form a joint venture with AMD and HUMAIN to deliver up to 1 gigawatt of AI infrastructure by 2030. This joint venture expects to begin operations this calendar year with a plan to build out 100 megawatts in Saudi Arabia as Phase 1 of the project.

In Q2, we continued to see order growth across our new and refreshed products, which represent roughly 1/3 of our security portfolio and include Secure Access, XDR, Hypershield, AI Defense and refreshed firewalls. Excluding the refreshed firewalls, over 1,000 new customers purchased these products in Q2, representing more than 100% growth quarter-over-quarter and bringing the total of net new customers since launch to roughly 4,000. We have also seen 3 consecutive quarters of double-digit growth in the number of firewalls ordered.

Turning to Splunk. We saw a similar trend in Q2 as seen in Q1 with continued acceleration to cloud subscriptions and fewer on-premise deals. While this shift is creating a drag on revenue growth, which we expect to continue in the second half of fiscal year '26, cloud subscriptions enable greater adoption, expansion and faster delivery of innovation to customers. Splunk also continued to win new customers in Q2, reaching 500 new logos for the first half of fiscal year '26 and is on track to add 1,000 new logos for the year.

At Cisco Live Amsterdam this week, we unveiled major AI defense and SASE advancements. AI Defense can now scan models and repositories for vulnerabilities and provide an AI bill of materials for centralized governance. In Cisco SASE, we launched a new semantic inspection engine that can evaluate the intent of Agentic interactions and block sophisticated context-dependent threats. Currently, over 90% of customer experience support cases are touched by AI and automation. To summarize, we see strong demand for our solutions across all customer markets and geographies, solidifying Cisco's role in providing the critical infrastructure needed for this once-in-a-generation transition.

Mark Patterson (Chief Financial Officer, Cisco): Thanks, Chuck. We delivered another strong quarter with record revenue in Q2 and both operating margin and earnings per share coming in above the high end of our guidance. For the quarter, total revenue was $15.3 billion, up 10% year-over-year. Non-GAAP net income was $4.1 billion, up 10% and non-GAAP earnings per share was $1.04, up 11%, demonstrating continuing operating leverage with non-GAAP earnings per share growing faster than revenue. Looking at our Q2 revenue in more detail. Total product revenue was $11.6 billion, up 14% and services revenue was $3.7 billion, down 1% year-over-year. Networking was again the standout with growth of 21%, driven by AI infrastructure and campus refresh.

We saw double-digit growth in campus switching, data center switching, wireless, service provider routing, enterprise routing and compute. Security was down 4%, reflecting similar dynamics discussed last quarter with declines in prior generation products and the transition in our Splunk business from an on-prem deal 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.

Looking at our recurring metrics. Total RPO was $43.4 billion, up 5%. Product RPO grew 8%, of which the long-term portion was $11.8 billion, up 11%. Total ARR ended the quarter at $31 billion, an increase of 3% with product ARR growth of 6%. The subscription revenue -- total subscription revenue was $7.8 billion and represented 51% of Cisco's total revenue. Total software revenue was $5.7 billion, up 2%. Q2 product orders were up 18% year-over-year. Product orders were up double digits across all geographic segments with the Americas up 23%, EMEA up 11% and APJC up 15%. Product orders were also up across all customer markets with service provider and cloud up 65%, public sector up 11% and enterprise up 8%.

Total non-GAAP gross margin came in at 67.5%, down 120 basis points year-over-year. Non-GAAP product gross margin was 66.4%, down 130 basis points, primarily driven by negative impacts from mix and higher memory costs, partially offset by productivity improvements. Non-GAAP services gross margin was 70.9%, down 70 basis points. We continue our focus on enhancing profitability and driving financial discipline with non-GAAP operating margin at 34.6%, above the high end of our guidance range. Our non-GAAP tax rate was 19% for the quarter.

We ended Q2 with total cash, cash equivalents and investments of $15.8 billion. Operating cash flow was $1.8 billion, down 19% due to the final transition tax payment of $2.3 billion from the 2017 Tax Cuts and Jobs Act and continued investments to meet growing overall demand as well as specifically for AI infrastructure. From a capital allocation perspective, we returned $3 billion to our shareholders during the quarter, comprised of $1.6 billion for our quarterly cash dividend and $1.4 billion of share repurchases with $10.8 billion remaining under our share repurchase program. Given the confidence we have in our business and the strength of our ongoing cash flows, today, we announced that we are raising our dividend by $0.01 to $0.42 per quarter. This dividend increase demonstrates our commitment to returning a minimum of 50% of free cash flow annually to our shareholders.

Turning to guidance. Please note, our Q3 and fiscal year 2026 guide assumes current tariffs and exemptions remain in place through the end of fiscal 2026. Looking ahead, for fiscal Q3, our guidance is as follows: we expect revenue to be in the range of $15.4 billion to $15.6 billion. We anticipate non-GAAP gross margin to be in the range of 65.5% to 66.5%. Non-GAAP operating margin is expected to be in the range of 33.5% to 34.5%. Non-GAAP earnings per share is expected to range from $1.02 to $1.04. We are assuming a non-GAAP effective tax rate of approximately 19%. Cisco is positioned for its strongest year ever as indicated in our guidance for fiscal year 2026, which is as follows: we expect revenue to be in the range of $61.2 billion to $61.7 billion. Non-GAAP earnings per share is expected to range from $4.13 to $4.17. Sami, let's now move into the Q&A.

Questions & Answers

Amit Daryanani (Evercore ISI): I guess my 2 questions, maybe the first one, you folks obviously have very solid momentum on the AI side with a $5 billion AI target for fiscal '26. Can you just help us think about the mix between Silicon One versus Optics in the book? And then really, as you think about some of the newer products like the G300 and the P200 on the Silicon One side, do you see these opening up incremental markets or workloads for Cisco? And then maybe on a follow-up, Mark, you just touched on the gross margin decline in April. I assume it's all memory related, but would love to just understand what's happening there. And if you feel like that's a trough on the gross margin and memory issues or not.

Charles Robbins (Chief Executive Officer, Cisco): Amit, thank you very much for the question. So on the AI infrastructure side, the $5 billion that we now have raised our estimates to during fiscal 2026 does not include any of the recently announced P200 products, nor G300, also neither of the Optics solutions that we announced this week at Cisco Live EMEA. We talked about this past quarter, the mix was 60% systems, 40% optics. And I think that's been reasonably consistent over the last few quarters. P200 and G300 are not in the $5 billion expected for fiscal '26.

Mark Patterson (Chief Financial Officer, Cisco): Yes. Thanks, Amit. And I'll take the gross margin question. So really, as you look at the Q3 guide, there's 2 primary things at work. One is mix and the other is memory prices, as you mentioned. We're going to control what we can control. We've already announced price increases. We're going to stay very close to that and adjust as needed going forward. Secondly, there's some Ts and Cs with partners and customers that we're going to adjust to really bolster our position there. Thirdly, it's really leaning into our financial strength and our world-class supply chain. If you look at it, it's evidenced by our advanced purchase commitments that just in the last 90 days are up $1.8 billion. If you look at it on a year-over-year basis, they're up about 73%. A big chunk of that is around memory.

Tal Liani (Bank of America Securities): I have 2 questions. The first one is, when I look at product revenue growth, the entire outperformance came from networking, which grew 21.1%. Can you drill down and tell us how the various segments of networking grew? And where did the outperformance come from? The second one is I can back out your 4Q guidance. And when I look at the sequential growth from Q3 to Q4, it's only 1.4%. So normally, it's 5%, 6%. This is a seasonally strong quarter. So why is it so low? Is it just conservatism?

Mark Patterson (Chief Financial Officer, Cisco): Yes. So thanks, Tal. Really, across networking, we're seeing strength, frankly, across the entire portfolio from the Campus to the data center, to the manufacturing floor in terms of our IoT offerings as well. You're seeing very strong growth. Again, we talked about data center switching being 6 out of the last 8 quarters, double-digit growth. On your second part of the question, if you look at it, the product revenue typically is kind of down mid-single digits quarter-over-quarter, and we were up 5%. And as you look at Q3, really the typical seasonality is kind of low single digits. And that's right where we are despite the fact that we had a huge Q2 in terms of year-over-year growth, 14%. So we feel pretty good about the Q3.

Aaron Rakers (Wells Fargo): I guess I want to go more into the architecture stuff, Chuck. As we think about the AI networking opportunity and the traction that you've been seeing, I'm curious of your updated thoughts on how you view scale up as an opportunity for Cisco. What have you been doing? When does that start to maybe materialize if you see that as a large opportunity? And as my second question, I'm curious, given the traction you're seeing in the neoclouds and the sovereign opportunities, just maybe an update of the relationship, the engagement you've had with NVIDIA and how much that started to become maybe a driver outside of the hyperscalers?

Charles Robbins (Chief Executive Officer, Cisco): Yes. Thanks, Aaron. So we haven't made any announcements on scale up. I think in the past, I've said we do plan to participate in it, and we expect in the future to have products and revenue from scale-up, but haven't announced anything. On the enterprise, sovereign and neocloud space, the sovereign side, there's really no real need nor expectation for meaningful impact in FY '26. And so we don't need that to actually accelerate for the guide that we've provided. It's purely upside. And then the neoclouds, I'd say, are generally the same. We expect the ramp to begin in the second half, but really be FY '27. As it relates to NVIDIA, we had a quarter where we really began to see the acceleration of the engagements. We track the number of engagements we have in the field with NVIDIA. And while it was not a massive number leading up, we increased it by 70% from sequentially.

Meta Marshall (Morgan Stanley): Maybe building on that last question, just kind of the coming out of that AI Summit, clearly talking to a lot of customers. Just where are you seeing or how evolved is that enterprise appetite for investment? Or when do you think that enterprise AI story takes off more? And then maybe just a second question, just in terms of the price increases, any demonstrable kind of change to demand or forward ordering that you saw as a result of that?

Charles Robbins (Chief Executive Officer, Cisco): I'll take the first. On the enterprise side, what we're seeing is early use cases around things like quant, fraud detection, video analytics. We're seeing it across financials, manufacturing, pharmaceuticals. If you look at our data center switching business, which is enterprise focused, we've had double-digit order growth 6 out of the last 8 quarters, and we still had positive growth in the other 2. So we continue to see meaningful investment in private data centers to support these applications.

Mark Patterson (Chief Financial Officer, Cisco): Yes. Meta, on the second part of your question, around pull forwards, we really didn't see anything in the quarter that would point us to evidence that there were any significant pull forwards there at all. We looked at the typical things in terms of linearity in the quarter. We had good double-digit growth as we move through the entire quarter. And we actually saw the pipeline begin to build really in the out quarters rather than being pulled forward. In terms of the price increase and whether or not it sort of lands with customers, I would say as you talk to customers, they understand it. They understand this is industry-wide. And I don't have talked to any customers that are really willing to delay or defer any sort of strategic investments.

David Vogt (UBS): I have a 2-parter around the order numbers. So one, I appreciate the strength that you guys reported in AI orders. But it certainly sounds like the over $5 billion of order numbers sounds a bit conservative given the momentum that you're seeing in sort of the CapEx programs that have been announced over the last couple of weeks. So maybe if you could talk to why that number is only moving up to in excess of $5 billion. And then along those lines, I think you also mentioned that you're only going to recognize over $3 billion in AI-related revenue this year. And I think previously, you had said about $3 billion. So does that suggest that the timing from a revenue recognition perspective shifts into fiscal '27 and gives you more visibility from an AI infrastructure revenue perspective next year?

Charles Robbins (Chief Executive Officer, Cisco): On the AI orders and the $5 billion, the thing to really remember about these customers is they're nonlinear. It's quite lumpy. There's less than a handful of these major customers that are placing these orders. So we're giving you that number based on the pipeline we see. Clearly, our teams will be working to make that number as big as they possibly can, but that's what we see today. During Q2, we actually won 3 new use cases across these major players. So we won 1 Optics and 2 on the system side.

Mark Patterson (Chief Financial Officer, Cisco): Yes. And David, just on the revenue question, these customers plan well in advance, which has its advantages to it. You're seeing orders converting to revenue. You're seeing a continued ramp as we move through the year. And you're spot on in terms of giving us better visibility on some of the revenue rec that we would look at into '27 that will continue to follow on.

Samik Chatterjee (JPMorgan): Maybe one on AI Optics and one on non-AI. For the AI part, Chuck, you talked about the new products you're launching in Optics or the pluggable optics. Particularly a big focus this year is CPO and sort of support for that in the infrastructure. Any thoughts on how Cisco plans around addressing the CPO functionality? And then for my non-AI part, just trying to get a sense of what you're seeing on the order front for campus and whether the end of life of Cat4K and 6K is a tailwind to your campus orders?

Charles Robbins (Chief Executive Officer, Cisco): Thanks, Samik. On the CPO, we absolutely believe it's going to happen. We don't believe it's actually imminent right now. If you recall, we actually demonstrated this technology 2 years ago or more. And so we have the technology to build it, and we will as customers want it. But today, they want choice. We did announce the 800-gig LPO, which gives customers huge power savings, greater efficiency for AI scale out. On the Campus, the enterprise switching, enterprise routing, the wireless and the industrial IoT platforms, all 4 of them, the transition is ramping faster in all 4 of those areas than the prior transitions that we've seen historically at Cisco. We're in the top of the first inning. So this thing is just getting started. Wi-Fi 7 was up 80% sequentially. Our campus switching business was up close to double digits on orders.

Karl Ackerman (BNP Paribas): First, I understand that security was weaker as Splunk transitioned from perpetual licenses to SaaS. However, could you speak to the order rates and new product demand traction of your security portfolio? And just as my follow-up, I noticed you indicated that your $5 billion of AI orders does not include your G300 or the 100 terabit switch portfolio. But more broadly, can you talk about the order rates you are seeing for your 51 terabit and 100 terabit data center switch portfolio?

Charles Robbins (Chief Executive Officer, Cisco): On the security update, there's really 3 key points. Number one, we talked about the Splunk transition that has a short-term revenue headwind with the accounting treatment of on-prem versus cloud. The second thing is on the new products, and these are products that largely didn't exist 3 years ago. This is everything from Secure Access to XDR to AI Defense to Hypershield. We had 1,000 new customers of those products during the past quarter, and it was up 100% sequentially. There's 4,000 customers who have bought one of those products since we built them. On the refreshed firewalls, we had our third consecutive quarter of double-digit unit growth. Where that would lead us is as we exit Q4 this year, the organic Cisco security portfolio will be growing revenue close to double digits as we exit. On the $5 billion and the 51.2 product, we're selling as much as we can build at this point. We see demand across a couple of major customers that are literally asking for as much as they can get. We're seeing huge acceleration in the 800-gig optics. We're seeing huge acceleration in the Acacia portfolio.

Michael Ng (Goldman Sachs): I have 2 as well. First, I was wondering if you could just talk a little bit about the EBIT margin outperformance in the quarter. Was that driven by cost savings? Is that a mix benefit as you do more with hyperscale customers? And then second, I wanted to just revisit the comments around the April quarter gross margins. And I know you talked a little bit about that just being timing. Is the implication that you'll just take more pricing over the coming quarters to kind of recover a lot of that commodity cost inflation?

Mark Patterson (Chief Financial Officer, Cisco): So thanks, Michael. So I'll take the first one just on the op inc percentage. As you pointed out, 34.6% for us is actually the highest in 4 quarters. So even though you saw a little bit of margin decline on a quarter-over-quarter basis and certainly year-over-year, we're just continuing to execute very well. And you saw that in the fact that EPS and top line both grew double digits, but the EPS line actually exceeded the top line. And then in terms of the timing, I think the measures that we talked about in terms of price increases and then some of the Ts and Cs that we're going to be modifying with our partners and customers, those just take a little bit of time to run through. So you'll start to see that over time.

Pierre Ferragu (New Street): So Chuck, can you give us a sense of how your commercial momentum is evolving on the cloud, like on the AI front? So you mentioned a couple of use cases you won with large customers on hyperscale. So what can you tell us about a typical use case where you make a difference where really you beat your main competition? And then as you're expanding into the new cloud opportunities, the broader market, what do the dynamics look there?

Charles Robbins (Chief Executive Officer, Cisco): Thanks, Pierre. So on the first one, how do we win? First of all, our Optics portfolio is really just well received and is, I'd say, #1 in the world. We have the best Optics portfolio that our customers want. And we just need to increase capacity to actually continue to deal with more and more demand there. On the system side and the silicon side, we've talked a lot over the years about their desire to have silicon diversity. So that's a starting point for why they're interested in us being successful. But then our systems, I think there's 2 big differentiators for us. There's programmability of the silicon and then there's just the power efficiency that we're building into it. On the enterprise side, there's opportunity across AI factory with NVIDIA, so with GPUs. But what we really focus on and what we're most interested in is networking and security. And by and large, we are the network standard, particularly when we're partnering with NVIDIA in the enterprise right now. We think bundling our security solutions like AI Defense in these AI factory solutions is a good opportunity for us as we go forward.

James Fish (Piper Sandler): Just on the campus side, going back to a couple of questions here and trying to bridge it all together. You guys have talked about the refresh opportunity historically as more your fiscal '27, but now you're starting to say it's ongoing. I get it, Chuck, first inning of a Braves game for you, right? But what's changed? And then why wouldn't customers, especially in the enterprise, start pulling in their orders here given the pricing increases that they know are coming. These are smart buyers.

Charles Robbins (Chief Executive Officer, Cisco): Yes. Okay. Thanks, Jim. So first of all, I think we are seeing a ramp in an acceleration. Many of these customers learned from COVID and they recognize that in these major times of transition, they don't want to ever be stuck with technology that's not modern. And as they look at the architectures that are required for Agentic AI, the security architecture, the network architecture, the latency requirements, all of that is leading them to look at making sure that their infrastructure is modernized. I would say that on the core networking side, the memory content is not quite as high as what you'd see in compute platforms. And so the price increases are more nominal than they are in sort of the compute systems. So do I think customers will try to buy ahead in some cases, perhaps, but I don't think it's going to be a big trend in the networking side of our business.

Charles Robbins (Chief Executive Officer, Cisco): First, I want to thank all of you for being with us today. We're proud of the performance, especially in the core. I think it's important to really think about 2 big areas of momentum opportunity for us, and we're very early in all of these. First of all, with the hyperscalers and the AI build-outs, the Silicon One architecture, the new innovation that we announced this week, the new use cases that we won during the quarter. We obviously see a growing opportunity with enterprise sovereign and the neoclouds in AI. And then this beginning of this campus refresh, as I said, feels like the top of the first inning. It's a multiyear, multibillion-dollar opportunity for us. So I have a high degree of confidence that we're going to deliver our strongest fiscal year yet.

Ahmed Sami Badri (VP, Head of Investor Relations, Cisco): Thank you, Chuck. Cisco's next quarterly call, which will outline our third quarter fiscal year 2026 results will be on Wednesday, May 13, 2026, at 1:30 p.m. Pacific Time, 4:30 p.m. Eastern Time. This concludes today's call.