Cisco Bets Its Strongest Year Yet on AI Build‑Outs and a Campus Super‑Cycle

AI Infrastructure Becomes the Growth Engine

Cisco’s second-quarter numbers read like a company being pulled into a new epoch by its core markets rather than dragging itself there. Revenue reached a record $15.3bn, up 10 per cent year on year, while non‑GAAP earnings per share rose 11 per cent to $1.04, outpacing the top line and landing above the high end of guidance. For a business long typecast as a mature networking incumbent, these are not the figures of a firm in gentle decline.

The story behind the headline, however, is sharply skewed: AI infrastructure and core networking are doing the heavy lifting. CEO Chuck Robbins described fiscal 2026 as shaping up to be Cisco’s “strongest year yet”, and the contours of that strength are increasingly clear.

Hyperscale AI demand is the centrepiece. In the quarter, Cisco booked $2.1bn of AI infrastructure orders from hyperscalers, up from $1.3bn just three months earlier and equal to all of fiscal 2025’s AI orders in one go. On the back of that surge, management has lifted its full‑year expectation for AI infrastructure orders from hyperscalers to “in excess of $5bn”, and now expects to recognise more than $3bn of related revenue in fiscal 2026.

This is not, importantly, a one‑product story. Cisco says roughly 60 per cent of recent AI infrastructure orders were for systems and 40 per cent for optics, with the mix “reasonably consistent” over recent quarters. The company crossed the milestone of its one‑millionth Silicon One chip shipped in the quarter, and is targeting deployment of Silicon One across its high‑performance networking portfolio by fiscal 2029.

At Cisco Live Amsterdam this week, the group unveiled the 102.4Tbps G300 switching chip and four new systems based on it, including air‑ and liquid‑cooled Cisco 8000 and Nexus 9000 platforms aimed squarely at AI data centres. New pluggable optics — a 1.6Tbps OSFP and an 800G LPO module based on Cisco silicon photonics — round out the stack. Meanwhile, the Acacia coherent optics business reported its strongest quarter yet, with triple‑digit bookings growth as all major hyperscalers ramp both 400G and 800G coherent pluggables.

Investors should note a subtle nuance in the guidance: none of the recently announced P200 and G300 Silicon One parts, nor the new optical modules, are included in the “> $5bn” AI orders target for this year. In other words, today’s AI outlook is based on an installed portfolio; future design wins on the latest silicon are optionality, not yet baked into the numbers.

Beyond the hyperscalers, Cisco is sketching the outline of a broader AI franchise. Neocloud, sovereign and enterprise customers contributed $350m of AI orders in the quarter, with a pipeline now in excess of $2.5bn for high‑performance AI infrastructure. A planned joint venture with AMD and HUMAIN, targeting up to 1GW of AI infrastructure by 2030 starting with a 100MW phase in Saudi Arabia, underscores the company’s interest in sovereign and regionally controlled builds. In Europe, the group is leaning into “air‑gapped” sovereign infrastructure offerings aimed at clients hypersensitive to privacy and regulatory constraints.

For now, management is clear that neither sovereign nor neocloud AI demand needs to materialise meaningfully in fiscal 2026 to hit current guidance. That makes any acceleration in those segments more of a 2027‑and‑beyond lever.

Core Networking: A Super‑Cycle in the Making

Underneath the AI headlines, the more prosaic but financially powerful driver is a broad‑based networking upturn. Product revenue grew 14 per cent year on year to $11.6bn, while services slipped 1 per cent. Networking revenue — the heart of Cisco — expanded 21 per cent, fuelled by both data‑centre and campus spending.

Cisco delivered its sixth consecutive quarter of double‑digit growth in networking product orders, which were up more than 20 per cent in Q2. That strength cut across service provider routing, data centre switching, campus switching, wireless, servers and industrial IoT. Data centre switching has logged double‑digit order growth in six of the past eight quarters; the other two were still positive. Wi‑Fi 7 orders jumped 80 per cent sequentially.

Geographically, product orders were robust: the Americas rose 23 per cent, EMEA 11 per cent and APJC 15 per cent. By customer segment, service provider and cloud orders leapt 65 per cent, supported by triple‑digit hyperscaler orders. Public sector orders grew 11 per cent, while enterprise was up 8 per cent.

The more intriguing storyline for long‑term investors is the emerging campus networking refresh. Cisco is now explicitly framing this as a “multiyear, multibillion‑dollar” opportunity at what Robbins calls “the top of the first inning”. Demand is being shaped by a confluence of factors: an ageing installed base of Catalyst platforms approaching end‑of‑support; heightened cyber‑security awareness around unsupported hardware; and the far greater security, latency and operational requirements of agentic AI workloads in branches, factories and offices.

Across enterprise switching, enterprise routing, wireless and industrial IoT, Cisco says the new platforms are ramping faster than the previous generation transitions. Orders for campus switching were close to double‑digit growth in the quarter; industrial IoT has posted double‑digit growth for seven quarters running, aided by onshoring of manufacturing, AI at the network edge and what Cisco brands “physical AI”.

This campus story, unlike AI at the hyperscalers, is diversified across tens of thousands of customers rather than a handful, which tends to make the revenue arc more predictable. It also leans more heavily on the company’s historic strengths in switching and routing, where it remains the de facto standard in many enterprises.

Margin Pressure Meets Financial Discipline

Amid the exuberant growth in networking and AI, the costs of feeding that opportunity are beginning to show up in the margin line. Total non‑GAAP gross margin came in at 67.5 per cent, down 120 basis points from a year earlier. Product gross margin at 66.4 per cent fell 130 basis points, with CFO Mark Patterson pointing to two main culprits: mix shift toward lower‑margin hardware and higher memory prices.

This is not a Cisco‑specific issue. Memory pricing has risen sharply across the industry, hitting any vendor with large dynamic memory content in its platforms. Robbins said Cisco is pursuing three strategies to offset the shock: previously announced and potentially further price increases; revised contractual terms with channel partners and customers to account for component price volatility; and scale‑driven purchasing leverage via its supply chain, evidenced by a 73 per cent year‑on‑year increase in advanced purchase commitments, with a sizeable chunk tied to memory.

Importantly for investors parsing the earnings algorithm, the company says it remains committed to growing EPS faster than revenue, even through this component‑cost cycle. It delivered that in Q1 and Q2 and has structured its full‑year guidance with the same principle in mind. Operating discipline is clearly part of the story: non‑GAAP operating margin rose to 34.6 per cent, the highest in four quarters, even as gross margins compressed modestly.

Operating cash flow was $1.8bn, down 19 per cent year on year, but here the noise is largely tax‑related: Cisco made its final $2.3bn transition‑tax payment under the 2017 US Tax Cuts and Jobs Act. The company ended the quarter with $15.8bn in cash and investments, and returned $3bn to shareholders, split between $1.6bn in dividends and $1.4bn of buybacks. The quarterly dividend has been nudged up by a cent to $0.42, with management reiterating its intention to return at least 50 per cent of free cash flow annually.

Security: New Products Up, Legacy Drag and Splunk Transition Down

If there is a notable soft spot in Cisco’s portfolio, it is security. Segment revenue declined 4 per cent year on year, reflecting a familiar pattern: new and refreshed offerings are growing, but not yet fast enough to outweigh declines in legacy products and the accounting effects of Splunk’s ongoing business model transition.

Roughly one‑third of the security portfolio is now composed of these new and refreshed products: Secure Access (its SASE entry point), XDR, Hypershield, AI Defense and updated firewalls. Excluding the refreshed firewall line, more than 1,000 new customers bought one or more of these products in the quarter, more than doubling the sequential pace and bringing total net new customers since launch to roughly 4,000. Cisco has also seen three consecutive quarters of double‑digit growth in firewall units ordered, and has just launched new high‑end firewall platforms.

The more intractable headwind is Splunk’s transition from on‑premise licensing to cloud subscriptions. Cisco reports ongoing acceleration of Splunk cloud subscriptions and a robust new logo count — 500 additions in the first half, with 1,000 targeted for the year — but acknowledges this mix shift is a drag on reported revenue growth in the near term. Management expects that drag to persist into the second half of fiscal 2026, although it argues the cloud model will ultimately support deeper customer adoption and higher expansion rates.

The internal target, set out by Robbins, is for the “organic” Cisco security business — excluding the Splunk accounting effect — to be growing revenue at close to double digits exiting the fiscal year. That gives investors a rough yardstick to track whether the underlying security engine is, in fact, recovering even as the reported top line lags.

At the same time, Cisco is busily lacing AI throughout its security and networking portfolio. At Cisco Live Amsterdam, it rolled out enhancements to AI Defense, now able to scan AI models and code repositories for vulnerabilities and generate an “AI bill of materials” for governance teams. Within SASE, a new semantic inspection engine is designed to interpret the intent of agentic interactions and block more context‑dependent threats.

Guidance: Strongest Year Framed, with AI Upside Optional

The formal guidance ties these disparate strands together. For fiscal Q3, Cisco expects revenue between $15.4bn and $15.6bn, non‑GAAP gross margin in a relatively wide 65.5–66.5 per cent band to account for memory and mix, non‑GAAP operating margin of 33.5–34.5 per cent, and EPS of $1.02–$1.04. The non‑GAAP tax rate is guided to 19 per cent.

For the full fiscal 2026 year, management forecasts revenue of $61.2–$61.7bn. On the bottom line, non‑GAAP EPS is projected at $4.13–$4.17, consistent with the pledge to drive operating leverage even as commodity cost headwinds bite. The guidance assumes no change to current tariff regimes or exemptions through the year.

Underneath those aggregates, the composition of growth is shifting decisively. Hardware is resurgent, driven by both AI infrastructure and what appears to be an early‑stage campus refresh super‑cycle. Software and subscriptions are ticking upwards more modestly for now — ARR is $31bn, up 3 per cent, with product ARR up 6 per cent — but should benefit as Splunk’s transition matures. Total remaining performance obligations stand at $43.4bn, up 5 per cent, with long‑term product RPO growing 11 per cent to $11.8bn.

There are, naturally, uncertainties. Hyperscaler demand is described as “nonlinear” and “lumpy”, and the AI revenue stream is still heavily concentrated in a few large buyers. Memory pricing is an external variable that will take time to fully pass through to Cisco’s pricing and contractual structures. And the security portfolio remains a work in progress, rebuilding growth in the face of self‑inflicted transition dynamics.

Yet the tone from the top is notably confident, even understated. Cisco is not promising that AI will transform its economics overnight; rather it is presenting investors with a layered thesis: a hyperscale AI wave beginning to crest, a diversified campus and industrial upgrade cycle just getting started, and a software and security transition that may turn from drag to tailwind as fiscal 2026 rolls into 2027.

For investors used to thinking of Cisco as a bellwether of corporate capex rather than a beneficiary of structural shifts, this quarter’s numbers — and, more importantly, the guidance and product cadence underlying them — suggest the company is once again strategically central to how digital infrastructure is being built. The question now is whether it can keep converting that centrality into sustained operating leverage as the AI era unfolds.