Cisco Systems, Inc. (CSCO) Earnings

Management highlights

### Overall Financial & Demand Performance - Q3 2026 delivered record revenue and non-GAAP EPS that both grew double digits and came in above the high end of prior guidance ranges, driven by accelerating momentum and strong operational execution. - Non-GAAP EPS grew 10% YoY, with cost mitigation initiatives successfully offsetting industry-wide memory price increases. - Total product orders grew 35% YoY; excluding hyperscaler orders (which grew triple digits), product orders were up 19% YoY, demonstrating broad-based global demand. ### AI Infrastructure and Product Innovation - Hyperscaler AI infrastructure orders year-to-date hit $5.3 billion, exceeding the full-year FY26 expectation of $5 billion with one quarter remaining. Full-year FY26 hyperscaler AI orders are now expected to reach ~$9 billion, 4.5x the FY25 total. - Acacia coherent pluggable optics had its strongest ever quarter, and is on track to grow over 200% YoY in FY26; Cisco has shipped far more 400G and 800G coherent pluggables than any other competitor. - Q3 secured 5 new hyperscaler design wins: 2 for optics, 3 for systems, including the first two wins for Silicon One P200 and G200 powered AI systems. - Non-hyperscaler AI infrastructure orders (Neocloud, Sovereign, Enterprise) hit $300 million in Q3, with $900 million year-to-date and a $3 billion growing pipeline; enterprise Nexus switch orders for AI deployments grew almost 50% sequentially. - Campus and wireless modernization is accelerating: Wi-Fi 7 orders grew double digits sequentially, making up 50% of wireless mix in Q3, with a projected 3x traffic increase over 3 years driving a multi-year, multi-billion dollar refresh opportunity. - New security innovations for AI: launched open source Defense Claw for safe agent deployment, zero trust access for AI agents, announced acquisitions to add agentic identity and behavior monitoring, and launched new AI-native SOC and observability capabilities. Cisco is collaborating across the industry on AI cybersecurity initiatives including Project Glasswing, Anthropic's Cloud Mythos testing, and OpenAI's Trusted Access for Cyber. - Cisco IQ AI-powered services engine is generally available with over 250 customers onboarded; internal AI assistant Circuit has near-universal employee adoption with over 8 million quarterly interactions, accelerating product development. - Launched a working research prototype of the Cisco Universal Quantum Switch for quantum information routing over standard fiber, accelerating development of the future quantum ecosystem. ### Strategic and Operational Updates - Announced a restructuring plan to reallocate resources to high-growth priority areas: silicon, optics, security, and AI, building from a position of strength. Total pre-tax charges are expected to reach up to $1 billion, with $450 million recognized in FY26 and the remainder in FY27. - Non-GAAP gross margin came in at 66%, down 260 bps YoY; non-GAAP product gross margin was 64.3%, down 330 bps primarily from mix and higher memory costs, partially offset by productivity improvements; non-GAAP services gross margin was 71.6%, up 30 bps YoY. - Non-GAAP operating margin hit 34.2%, driven by strong execution and operational efficiency. Operating cash flow was $3.8 billion, down 7% YoY due to increased investments to meet AI infrastructure demand. Returned $2.9 billion to shareholders in Q3 ($1.7B dividends, $1.3B share repurchases), with $9.6 billion remaining under the repurchase program.

Guidance

- **Q4 FY26 Guidance**: Revenue is expected to be in the range of $16.7 billion to $16.9 billion, representing ~14.5% YoY growth. Non-GAAP gross margin is expected to be 65.5% to 66.5%. Non-GAAP operating margin is expected to be 34% to 35%. Non-GAAP EPS is expected to be $1.16 to $1.18. The non-GAAP effective tax rate is assumed to be approximately 19%. - **Full Year FY26 Guidance**: Revenue is expected to be in the range of $62.8 billion to $63 billion. Non-GAAP EPS is expected to be $4.27 to $4.29. - Management expects that AI infrastructure revenue recognized from hyperscalers will be approximately $4 billion in FY26, with at least $6 billion of AI infrastructure revenue expected to be recognized in FY27. Excluding AI hyperscale, management expects the rest of the portfolio to grow in line with Cisco's long-term model (4% to 6% total company growth) in FY27. Guidance assumes current tariffs and exemptions remain in place through the end of FY26. Management confirms gross margins have stabilized, with the Q4 and full year FY26 guidance midpoint holding at 66%, matching Q3 results.

Segment performance

Total company revenue was a record $15.8 billion, up 12% year-over-year (YoY). - **Product**: Total product revenue of $12.1 billion, up 17% YoY. Product revenue represents 76.6% of total revenue. Networking led growth at 25% YoY, driven by AI infrastructure and campus refresh, with double-digit growth across campus switching, data center switching, wireless, and service provider routing. Security product revenue was flat YoY: growth in new/refreshed products was offset by declines in legacy products and the Splunk on-premise-to-cloud transition. Collaboration product revenue was down 1% YoY, with declines in WebEx partially offset by device growth. - **Services**: Total services revenue of $3.7 billion, down 1% YoY. Services revenue represents 23.4% of total revenue; the decline was primarily driven by timing of service contract start dates. - **Recurring revenue metrics**: Total RPO was $43.5 billion, up 4% YoY, with product RPO up 6% YoY. Total ARR ended the quarter at $31.2 billion, up 2% YoY, with product ARR up 4% YoY. Total subscription revenue was $7.8 billion, representing 49% of total revenue. Total software revenue was $5.7 billion, up 1% YoY. - **Order performance by segment**: Total product orders grew 35% YoY. Americas orders up 35% YoY, EMEA up 39% YoY, APJC up 25% YoY. By customer segment: service provider and cloud orders grew 105% YoY; public sector orders up 27% YoY; enterprise orders up 18% YoY. AI infrastructure orders from hyperscalers were $1.9 billion in Q3, up from $600 million YoY. Acacia optics orders exceeded $1 billion in Q3, its strongest quarter ever. Enterprise data center switching orders grew over 40% YoY; campus networking orders grew over 25% YoY (record); wireless orders grew over 40% YoY (record); industrial IoT orders grew double digits for the 8th consecutive quarter.

Risks & headwinds

- Forward-looking statements, including all guidance, are subject to material risks and uncertainties that could cause actual results to differ materially, as detailed in Cisco's recent SEC filings. - Higher memory and component costs continue to create gross margin pressure, partially offset by price increases, product redesigns, and supply chain investments. - The ongoing Splunk transition from on-premise to cloud subscriptions creates a near-term drag on revenue growth, with the magnitude of the drag next year dependent on how quickly the cloud mix shifts. - Supply chain tightness across wafers, substrates, memory, and other components remains an industry-wide challenge, though Cisco has taken steps to secure supply and build inventory. - There is limited visibility into the timing and magnitude of large hyperscaler AI orders, which are inherently nonlinear and can create quarterly volatility.

Analyst Q&A

• Q: The Q4 guidance implies accelerating double-digit revenue growth. Is this growth durable, or is it pull-forward? Additionally, what is the value proposition of Silicon One for hyperscalers and how large can this opportunity scale? /

  A: Management separates AI hyperscale growth from the rest of the portfolio. For FY27, it is reasonable to expect at least $6 billion in AI hyperscale revenue, with the balance of the portfolio growing in line with Cisco's long-term 4% to 6% total growth model. Two P200 Silicon One design wins were secured in Q3, and a third was won early in Q4, the first for Scale Across AI use cases. Owning custom silicon is a massive differentiator for Cisco with hyperscalers, and also gives the company much more control over its supply chain and delivery certainty to customers.

• Q: Non-AI order growth hit 19% YoY, but the broader non-AI economy has not improved much. Is this growth driven by customers pulling forward purchases due to supply concerns, and is it sustainable? /

  A: The primary driver of acceleration is enterprises modernizing their networks to support AI inferencing and agentic applications, which require low-latency high-performance networks, leading to over 40% YoY order growth in enterprise data center switching. Modest pull-forward did occur, but three data points confirm it was very small: only 4 to 5 percentage points of the 9 percentage point Q3 acceleration came from price increases, there was no incremental Q4 pipeline pulled into Q3 versus last year, and the Q4 pipeline remains healthy and grew throughout Q3 with no degradation. Lead times for traditional networking are not extreme today.

• Q: The competitor landscape notes tightening supply and customer decommits. How is Cisco positioned on supply chain, and what drives the large expected Q4 jump in AI orders? /

  A: Cisco's custom Silicon One design gives end-to-end control of the supply chain, and the company has secured all required silicon supply through calendar 2026, with ongoing negotiations for 2027. More than 20 active programs are reducing memory utilization across the portfolio, and Cisco has secured long-term supply agreements, invested in strategic inventory, and increased inventory and advanced purchase commitments by $6.7 billion in 90 days (up 48% sequentially). No decommits have been seen in the core business. The large Q4 AI order jump is due to the inherent nonlinearity of this business, driven by strong demand for Silicon One systems and Acacia optics, with mostly scale-out orders contributing. Early small orders from the new Q3 Scale Across design wins will start in Q4, but meaningful volume will not come until FY27.

• Q: How is the security portfolio progressing, particularly the legacy/new product split and Splunk transition going into FY27, and how does AI hardware growth mix impact gross margins? /

  A: The organic Cisco security portfolio improved meaningfully in Q3: double-digit growth in new/refreshed products (especially firewalls) continued, and the drag from legacy products was smaller than in the first half of FY26. Management remains on track to approach double-digit organic security revenue growth by the end of FY26. For Splunk, the cloud mix continued to shift 2 to 3 percentage points higher in Q3, and the magnitude of the transition drag in FY27 will depend on how quickly the mix stabilizes. Mix shift to growing hardware is the largest factor behind gross margin headwinds ahead of memory, but Cisco's hardware margins are healthy, and productivity improvements and scale are helping to stabilize overall gross margins at the guided 66% level.