Cisco lifts AI outlook, posts record Q2 results

Cisco Systems reported a record second quarter of fiscal 2026, with total revenue of $15.3 billion, up 10% year over year. Product revenue grew 14% to $11.6 billion while services revenue declined 1% to $3.7 billion. Non‑GAAP net income rose 10% to $4.1 billion and non‑GAAP EPS increased 11% to $1.04, outpacing revenue growth and reflecting operating leverage.

Networking remained the standout business, with revenue up 21% year over year and double‑digit gains across campus switching, data‑center switching, wireless, service‑provider routing, enterprise routing and compute. Collaboration revenue grew 6%, led by double‑digit growth in devices and gains in CPaaS, Webex and Cloud Contact Center. Security revenue fell 4% amid declines in legacy products and the ongoing shift at Splunk from on‑premise licenses to cloud subscriptions.

Total product orders increased 18% year over year, including 23% growth in the Americas, 11% in EMEA and 15% in APJC. By customer segment, service provider and cloud orders rose 65%, public sector 11% and enterprise 8%. Cisco said the strong order performance positions the company for continued growth through the remainder of fiscal 2026.

AI infrastructure was a key growth driver in the quarter. Orders from hyperscalers reached $2.1 billion, up from $1.3 billion in the prior quarter and equal to the total taken in all of fiscal 2025. Given this momentum, Cisco now expects to take more than $5 billion in AI infrastructure orders and recognize over $3 billion in AI revenue from hyperscalers in fiscal 2026. Management noted that these figures do not include contribution from newly announced Silicon One P200 and G300 products or recently introduced optics.

Beyond the largest cloud providers, Cisco booked $350 million in AI infrastructure orders from neocloud, sovereign and enterprise customers in Q2 and reported a pipeline exceeding $2.5 billion. The company also announced a planned joint venture with AMD and HUMAIN to deliver up to 1 gigawatt of AI infrastructure by 2030, beginning with a 100‑megawatt build‑out in Saudi Arabia.

At its recent AI Summit and Cisco Live Amsterdam, the company highlighted growing enterprise AI use cases in areas such as quantitative analytics, fraud detection, video analytics and retail agent support. Data‑center switching orders in the enterprise have delivered double‑digit growth in six of the last eight quarters, which Cisco linked to ongoing investment in private data centers to support these workloads.

Cisco continues to expand its Silicon One and optics portfolio for high‑performance AI networks. The company shipped its 1 millionth Silicon One chip in Q2 and plans to deploy the architecture across its high‑performance networking systems by fiscal 2029. In Amsterdam, Cisco introduced the 102.4 terabit‑per‑second G300 switch chip, placing it among a small group of silicon providers offering switching speeds above 100 terabits per second.

Four new systems powered by G300 were launched, including Cisco 8000 and Nexus 9000 102.4 Tbps platforms with both air‑cooled options for traditional data centers and liquid‑cooled options for new AI‑focused facilities. Cisco also unveiled two new pluggable optics: a 1.6 Tbps OSFP and an 800G LPO module built on its silicon photonics technology. Acacia, Cisco’s coherent optics business, reported its strongest quarter to date with triple‑digit booking growth and broad hyperscaler adoption of 400G and 800G coherent pluggables.

Management said recent design wins added three new AI use cases at major hyperscalers, and that demand for 51.2 Tbps and forthcoming 102.4 Tbps systems is constrained more by production capacity than by customer appetite.

In security, Cisco reported continued growth in its new and refreshed offerings, which now represent roughly one‑third of the portfolio. Products such as Secure Access, XDR, Hypershield and AI Defense added over 1,000 new customers in Q2, doubling sequentially and bringing cumulative new customers since launch to about 4,000. Firewall orders marked a third consecutive quarter of double‑digit unit growth, supported by the launch of new high‑end models.

Splunk, acquired in 2023, is seeing revenue headwinds as customers transition from on‑premise deals to cloud subscriptions, a mix shift Cisco expects to weigh on growth in the second half of fiscal 2026. However, Splunk added 500 new customers in the first half and is on track to add 1,000 new logos this year, with management emphasizing that cloud subscriptions support broader adoption and faster innovation.

Cisco also reported broad internal use of AI. Most product developers now use AI coding assistants, over 90% of customer support cases are touched by AI and automation, and additional use cases in sales, supply chain and corporate functions are delivering cost and efficiency benefits.

Total non‑GAAP gross margin in Q2 was 67.5%, down 120 basis points year over year, pressured by product mix and higher memory costs. Product gross margin fell 130 basis points to 66.4%, while services gross margin declined 70 basis points to 70.9%. Cisco has responded to rising memory prices with list‑price increases, contract term adjustments and higher advance purchase commitments, which rose $1.8 billion sequentially and 73% year over year, with a large portion tied to memory.

Non‑GAAP operating margin reached 34.6%, the highest in four quarters and above guidance, supported by expense discipline. Operating cash flow was $1.8 billion, reflecting a $2.3 billion final transition tax payment under the 2017 U.S. Tax Cuts and Jobs Act and continued investment in AI infrastructure supply. Cisco returned $3 billion to shareholders in the quarter via $1.6 billion in dividends and $1.4 billion in share repurchases, and raised its quarterly dividend by $0.01 to $0.42 per share.

For fiscal Q3 2026, Cisco guides revenue to $15.4–$15.6 billion, non‑GAAP gross margin of 65.5%–66.5%, operating margin of 33.5%–34.5%, and EPS of $1.02–$1.04. For the full fiscal year, it expects revenue of $61.2–$61.7 billion and non‑GAAP EPS of $4.13–$4.17, reiterating that fiscal 2026 is on track to be its strongest year on record.