Cisco's Gross Margin Contracts Sequentially: Is Growth Getting Harder?

Cisco Systems’ CSCO gross margin has contracted sequentially over the trailing four quarters. In the second quarter of fiscal 2026, CSCO reported a non-GAAP gross margin of 67.5% compared with 68.1% in the first quarter of fiscal 2026, 68.4% in the fourth quarter of fiscal 2025 and 68.6% in the third quarter of fiscal 2025.

On a year-over-year basis, fiscal second quarter gross margin contracted 120 basis points (bps). Non-GAAP product gross margin was 66.4%, down 130 bps, 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 bps year over year.

Cisco now expects third-quarter fiscal 2026 gross margin to be 65.5-66.5%, indicating a sequential decline of 150 bps. This reflects the negative impact of high memory costs and an unfavorable mix of AI-related revenues. Cisco expects increased pricing and cost discipline to improve gross margin in the near term.

Cisco expects a positive third-quarter fiscal 2026 performance, with total revenues between $15.4 billion and $15.6 billion, non-GAAP operating margin in the range of 33.5-34.5% and non-GAAP earnings in the range of $1.02 to $1.04 per share. For fiscal 2026, the company expects total revenues in the range of $61.2 billion to $61.7 billion and non-GAAP earnings in the range of $4.13 to $4.17 per share. Cisco expects to take AI orders in excess of $5 billion and to recognize more than $3 billion in AI infrastructure revenues from hyperscalers in fiscal 2026.

CSCO Suffers From Tough Competition

Cisco is facing stiff competition from the likes of Fortinet FTNT and Okta OKTA.

Fortinet's AI-powered security operations business is accelerating rapidly. The company’s dominant 50%+ firewall market share and extensive innovation portfolio of 1,400 global patents, including 500 AI-related innovations, are expected to remain key growth drivers. This is expected to drive gross margin. Fortinet now expects first-quarter 2026 non-GAAP gross margin to be in the range of 80-81% compared with 79.6% reported in the fourth quarter of 2025.

Okta benefits from strong demand for its new products, including Identity Governance, Privileged Access, Device Access, Fine Grained Authorization, Identity Security Posture Management and Identity Threat Protection with Okta AI. The company expects revenues between $3.17 billion and $3.19 billion for fiscal 2027, indicating year-over-year growth of 9%.

CSCO Share Price Performance, Valuation & Estimates

Cisco shares have returned 2.2% year to date, outperforming the broader Zacks Computer and Technology sector’s 6% decline.

CSCO Stock’s Price Performance

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The CSCO stock is trading at a premium, with a trailing 12-month price/book of 6.45X compared with the Zacks Computer Networking industry’s 6.19X. Cisco has a Value Score of F.

CSCO Stock Is Overvalued

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The Zacks Consensus Estimate for third-quarter fiscal 2026 earnings is currently pegged at $1.03 per share, unchanged over the past 30 days, suggesting 7.3% growth from the figure reported in the year-ago quarter.

Cisco Systems, Inc. Price and Consensus

Cisco Systems, Inc. price-consensus-chart | Cisco Systems, Inc. Quote

Cisco currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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