Cisco Systems, Inc. (CSCO) Earnings

Management highlights

- Overall Financial and Operational Performance * Delivered record results for Q4 FY26 and full FY26, with 18% YoY Q4 revenue growth and 12% full year revenue growth, and bottom-line growth outpacing top-line growth, demonstrating strong operating leverage. * Returned $3.2 billion to shareholders in Q4 and $12.7 billion (99% of full year free cash flow) for FY26, marking the 15th consecutive year of dividend increases. * Achieved highest revenue, operating margin, and earnings per employee in 30 years for FY26, reflecting strong execution and productivity. - AI-Driven Demand and Networking Super Cycle * Management believes the accelerating adoption of agentic AI has created a multi-year, multi-billion dollar networking super cycle, driven by increased traffic for AI inferencing across cloud, on-premise and edge environments, and expanded cyber threat exposure that increases demand for security and observability solutions. * Total Q4 product orders grew 35% YoY: hyperscale orders grew triple digits, enterprise orders accelerated to 21% YoY, public sector orders grew 30% YoY, service provider and cloud orders grew 95% YoY, and telco orders grew over 30% YoY. * Hyperscale AI infrastructure orders reached $4 billion in Q4, bringing full FY26 orders to $9.3 billion (4.5x FY25 total). Cisco won 3 new hyperscale design wins in Q4, and has line of sight to multiple additional design wins over the next 6 months. AI infrastructure revenue for hyperscalers is projected to reach $7.5 billion in FY27. * Non-hyperscale AI infrastructure orders (from NeoCloud, Sovereign and enterprise customers) reached over $400 million in Q4, bringing full FY26 total to over $1 billion, with enterprise Nexus switch orders for AI deployments up over 85% sequentially. - Product Segment Momentum * Networking portfolio has delivered 8 consecutive quarters of double-digit order growth, with Q4 networking orders up 40% YoY: data center networking orders grew over 35% YoY, campus networking orders grew 20% YoY, Wi-Fi 7 represented over 50% of total wireless orders in Q4, and industrial IoT orders have grown double digits for 9 consecutive quarters. * Security portfolio delivered double-digit Q4 order growth overall: core security products added over 1,500 new customers in Q4 (6,400 net new total since launch), firewall orders grew over 30% YoY, and Cisco is positioned to support customers with post-quantum cryptography compliance for quantum computing risk mitigation. Splunk exceeded its full year target of 1,000 new logos, added 280 new logos in Q4, and achieved the highest number of competitive wins in any FY26 quarter. * Collaboration delivered its best quarterly performance in 7 years, with double-digit Q4 order growth and 40% YoY growth in video devices. - Innovation and Internal Productivity * Launched Cisco Cloud Control, a unified management platform for all Cisco products with AI-powered insights; nearly 4,500 enterprises have signed up since launch, delivering significant productivity gains for network troubleshooting and operations. * Launched Antares, a family of open-weight small language models for cybersecurity vulnerability detection, and resilient infrastructure services with AI-powered autonomous protection, which now has over 8,600 customers. * Internal adoption of generative AI has dramatically improved operational efficiency: 145,000 support cases were resolved fully by AI with no human intervention in FY26, and Cisco's internal AI assistant handled over 75 million prompts in Q4. * Plans to fully roll out Silicon 1 across all high performance networking systems by FY29, to gain more control over supply chain, innovation, and security, reinforcing competitive differentiation.

Guidance

- Fiscal Q1 FY27 Guidance: * Expected total revenue: $18.0 billion to $18.2 billion, implying ~21% YoY growth * Expected non-GAAP gross margin: 65% to 66% * Expected non-GAAP operating margin: 35.5% to 36.5% * Expected non-GAAP EPS: $1.32 to $1.34 * Assumed non-GAAP effective tax rate: ~18.5% - Full Fiscal Year 2027 Guidance: * Expected total revenue: $72.2 billion to $73.4 billion, implying ~15% YoY growth at the midpoint * Expected non-GAAP EPS: $5.05 to $5.11, implying ~17% YoY growth at the midpoint * Hyperscale AI infrastructure revenue is projected to reach $7.5 billion, with core business (ex-AI) expected to grow ~10% YoY * Security is expected to grow to high single digits YoY, up from low single digits in FY26 * Services revenue is expected to return to low single-digit growth in FY27, up from flat growth in FY26 * Full year non-GAAP operating margin is expected to be ~35%, a new company high watermark, despite gross margin pressure from higher hardware mix, as operating expense scales slower than revenue growth

Segment performance

For Q4 FY26: Total revenue was $17.3 billion, up 18% YoY. Product revenue was $13.5 billion, up 24% YoY, representing 78% of total revenue; Services revenue was $3.8 billion, flat YoY, representing 22% of total revenue. By product segment: Networking revenue grew 28% YoY, driven by triple-digit growth in AI infrastructure, double-digit growth in data center switching and sustained growth in campus networking; Security revenue grew 14% YoY, with strength across Splunk, network security and SASE, representing approximately 8% of total revenue; Collaboration revenue grew 12% YoY, with solid growth in WebEx, devices and contact center. For full FY26: Total revenue was a record $63.3 billion, up 12% YoY. Non-GAAP operating margin was 34.8%, up 40 bps YoY; Non-GAAP net income was $17.2 billion, up 13% YoY; Non-GAAP EPS was $4.33, up 14% YoY. AI infrastructure for hyperscalers contributed ~6% of total FY26 revenue, up from less than 2% in FY25. Total recurring RPO was $46.7 billion, up 7% YoY; Total ARR was $32.1 billion, up 3% YoY; Subscription revenue represented 48% of total revenue; Total software revenue was $6.2 billion, up 11% YoY.

Risks & headwinds

- Forward-looking statements, including all guidance, are subject to risks and uncertainties that could cause actual results to differ materially from projections, as detailed in Cisco's most recent SEC filings. * Higher memory and component costs create ongoing gross margin pressure, particularly as the high-growth AI infrastructure business has a higher hardware mix than Cisco's traditional portfolio. * Customer IT budgets may face pressure from sustained inflationary environments, which could impact enterprise spending on network modernization. * While Cisco has secured adequate supply to meet FY27 guidance, ongoing tightness in global component supply chains could create constraints if demand exceeds current projections.

Analyst Q&A

• Q: 15% FY27 revenue growth implies 10% core growth ex-AI, far above Cisco's prior 4-6% long-term model. What drives this durable growth, and what is the opportunity for Cisco's Silicon 1 and optics in the scale across AI use case? /

  A: The multi-year networking super cycle is driven by broad-based refresh demand across customer segments: hyperscaler AI expansion, telco infrastructure build-out for AI-driven inter-data center traffic, enterprise network modernization to support AI and prepare for end-of-support product (Mythos) and quantum security risks, with all product categories undergoing concurrent refresh. For scale across, AI-driven inter-data center traffic is ~14x higher than traditional DCI traffic. Cisco is uniquely positioned with three already won design wins (with orders received in Q4) for its P200 powered systems, market leading optics, and upcoming multi-rail systems, creating massive growth opportunity.

• Q: Why is gross margin guided lower, and why is revenue growth slower than recent strong order growth for networking? Is guidance conservative? /

  A: Gross margin has a slight headwind in FY27 because the high-growth AI opportunity has a much higher hardware mix than Cisco's traditional business, and higher memory costs impact hardware margins. Operating margin, which is a better indicator of overall profitability, is guided to a new company record of ~35% because incremental AI growth requires minimal incremental operating expense, driving strong operating leverage. Guidance includes some conservatism due to much harder year-over-year comparables in the second half of FY27, following strong growth in the second half of FY26. Q1 revenue is in line with historical linearity, at ~25% of full year revenue, matching Cisco's 3-year average.

• Q: What is driving the recent improvement in security growth, and how are enterprises thinking about on-prem vs cloud AI deployment today? /

  A: Q4 14% security growth included a one-time boost from large, longer-duration on-prem Splunk deals; longer term, Splunk will return to a 2/3 cloud, 1/3 on-prem mix, and core Cisco security new product momentum continues to improve, with 6,400 net new customers and 30% YoY firewall growth. For enterprise AI deployment, drivers of on-prem investment include token cost optimization, data security, and data sovereignty all pushing customers to choose mixed architectures, with customers selecting deployment models per use case. Regardless of whether customers choose cloud, on-prem, or edge deployment, Cisco benefits: cloud deployments drive networking demand, and on-prem deployments drive additional growth in enterprise private data center networking, which has seen over 35% YoY order growth in Q4.

• Q: Why is AI revenue guidance conservative given $9.3 billion in FY26 AI orders, and how have customers accepted recent networking price increases? /

  A: Large AI hyperscale orders are placed well in advance of delivery, so revenue recognition is spread across time, and $7.5 billion is a prudent full-year revenue target for FY26. Price increases contributed ~5 percentage points to Q4 revenue growth, and are expected to contribute 4-5 percentage points in FY27. Price increases are single-digit, targeted specifically at high-memory hardware products to offset memory cost pressures, and customers broadly understand it is an industry-wide issue, so acceptance has been good. Cisco is also driving internal efficiency gains, including 50% memory utilization reduction for Wi-Fi 7, to offset cost increases without needing broader price hikes.

• Q: Is the 95% YoY growth in service provider and cloud orders a slowdown from last quarter's 105%, and what is the outlook for AI orders in FY27? /

  A: The minor pullback in aggregate growth is just a comparison effect from the prior year's comp, as all four top hyperscalers delivered triple-digit order growth in Q4, hitting the $4 billion quarterly order target. Telco order growth accelerated to 30% YoY from 9% last quarter, which is a positive reflection of broad-based super cycle demand, as telcos build infrastructure to support AI inter-data center traffic. In FY27, Cisco will provide regular updates on design wins and orders, but expects orders to be meaningfully higher in FY27 than the $9.3 billion recorded in FY26, with a formal annual revenue target of $7.5 billion.