Cisco's Q1 2026: Contradictions Emerge on AI Orders, Growth Projections, Revenue Timing, Networking Growth Contribution, and Tariff Impact

Date of Call: February 12, 2025

Financials Results

• Revenue: $14.9B, up 8% YOY
• EPS: $1.00 non-GAAP per share, up 10% YOY
• Gross Margin: 68.1% non-GAAP, down 120 bps YOY
• Operating Margin: 34.4% non-GAAP, above the high end of guidance

Guidance:

• Q2 revenue expected $15.0B–$15.2B.
• Q2 non-GAAP gross margin expected 67.5%–68.5%.
• Q2 non-GAAP operating margin expected 33.5%–34.5%.
• Q2 non-GAAP EPS expected $1.01–$1.03; assumed non-GAAP tax rate ~19%.
• FY26 revenue expected $60.2B–$61.0B; FY26 non-GAAP EPS $4.08–$4.14.
• Guidance assumes current tariffs/exemptions remain in place; China tariff reduced to 10%.

Business Commentary:

• Revenue and Earnings Growth:
• Cisco reported total revenue of $14.9 billion for Q1, up 8% year-over-year, with non-GAAP earnings per share growing 10%.

• The growth was driven by strong demand for AI infrastructure and campus networking solutions, as well as robust execution in product and geographic markets.

• AI Infrastructure Orders:

• Cisco's AI infrastructure orders from hyperscalers reached $1.3 billion in Q1, with expectations to recognize $3 billion in AI infrastructure revenue from hyperscalers in fiscal year '26.

• This expansion is due to Cisco's strong performance in selling networking infrastructure to support AI training and inferencing use cases.

• Networking Product Demand:

• Networking product orders grew 13% year-over-year, with significant contributions from hyperscale infrastructure, enterprise routing, and campus switching.

• The demand is driven by hyperscale infrastructure, enterprise routing, and campus switching, highlighting Cisco's strong performance in these areas.

• Security Segment Dynamics:

  

• Cisco's security revenue was down 2%, reflecting a shift towards cloud subscriptions instead of on-premise deals, impacting revenue recognition.
• Despite the shift, Cisco anticipates long-term growth as cloud subscriptions are considered more sticky and enable faster innovation delivery.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management highlighted "record Q1 revenue," results "above the high end of our guidance ranges," non‑GAAP EPS growth of 10%, strong order momentum (product orders +13% YOY) and returning $3.6B (125% of free cash flow), supporting a positive tone on demand and execution.

Q&A:

• Question from Aaron Rakers (Wells Fargo): Can you expand on the diversity and evolution of web‑scale AI orders and how the enterprise $2B pipeline may progress through the year?
  Response: Cisco clarified the $3B is FY26 hyperscaler AI revenue target, $1.3B were Q1 orders, and they expect at least 2x the hyperscaler orders vs FY25 from the same customers with a >$2B neo‑cloud/sovereign/enterprise pipeline for the year.

• Question from Meta Marshall (Morgan Stanley): Is the AI upside coming from scale‑across or deepening engagement, and how should we think about DRAM pricing impact on gross margin?
  Response: Management said Q1 was mainly deepening existing use cases (scale‑across is emerging) and noted memory/PCB/optics supply tightness and price increases are incorporated into Q2 and full‑year guidance.

• Question from Tal Liani (Bank of America): Excluding AI, why is the rest of the business growing only ~3.6% and why not faster given strengths in WiFi, campus and security?
  Response: Cisco said normalized out hyperscalers the rest‑of‑business orders grew ~9% in Q1 and cautioned that tougher year‑ago comps in H2 will moderate growth comparisons.

• Question from Benjamin Reitzes (Melius Research): What underpins your view of multiyear cycles for refresh opportunities?
  Response: Management pointed to faster‑than‑historical ramps of new enterprise routing, WiFi‑7 and campus switches, large end‑of‑support bases (Cat4k/6k), and multiyear refresh patterns as the basis for multiyear cycles.

• Question from James Fish (Piper Sandler): How broadly is Silicon One penetrating the portfolio and why is it gaining hyperscaler traction; also, why is Splunk shifting to cloud now and its impact on security revenue?
  Response: Cisco expects full Silicon One rollout by end of FY29 citing performance, programmability and power advantages and custom engagements; Splunk mix shifted to cloud (timing hit on security revenue) but ARR/RPO grew double‑digits and is positive long term.

• Question from David Vogt (UBS): What's driving faster ramp of next‑gen campus products and how does government demand factor in?
  Response: Drivers include end‑of‑support refresh, market confusion benefiting Cisco in WiFi, AI preparation and integrated security; U.S. federal and international public sector demand was strong and should resume upside as governments reopen.

• Question from Samik Chatterjee (JPMorgan): How is optical demand splitting inside vs outside data centers and are sovereign orders included in the hyperscaler 2x commentary?
  Response: Cisco participates in both inside‑DC and DCI scale‑across optics (pluggable optics sold to all hyperscalers); the expected 2x hyperscaler orders excludes the >$2B neo‑cloud/sovereign pipeline, and sovereign builds are not material to this year's guide.

• Question from Michael Ng (Goldman Sachs): Does the G42 partnership imply a preferred AMD relationship and what will partner program changes do to the business?
  Response: Cisco said G42 uses AMD initially but will support multiple GPU/XPU partners, and the partner program changes simplify incentives, reward breadth/depth and align partners to growth priorities (campus refresh, AI, security, premium services).

• Question from Amit Daryanani (Evercore ISI): Of the $3B AI sales, how much is optics vs systems and will AI margins be comparable; what is normalized security growth once mix stabilizes?
  Response: CFO noted a range of margins across portfolio and that Q1 margins and the guide reflect mix including optics/systems; CEO reiterated commitment to mid‑teens long‑term security revenue growth and expects mix normalization over ~4 quarters.

• Question from Karl Ackerman (BNP Paribas): How much of the incremental $1B guide lift is campus refresh vs AI, and can you secure capacity to double hyperscaler AI orders?
  Response: Management said it's a mix of both campus refresh and AI; they increased inventory plus advanced purchase commitments (up nearly $1B in the quarter and ~38% YoY, ~$3B+) to secure supply for hyperscaler demand.

• Question from Antoine Chkaiban (New Street Research): How large is the Unified Edge opportunity across retail, healthcare and manufacturing and will Cisco participate in scale‑up silicon?
  Response: Cisco views Unified Edge as broadly applicable to retail, restaurants, healthcare and manufacturing with varied deployment (CDNs, carriers, on‑prem); they plan to participate in scale‑up silicon over time per the Silicon One roadmap.

• Question from Simon Leopold (Raymond James): What's motivating the campus refresh success and are international governments picking up slack?
  Response: Cisco said much pre‑Cat9k installed base remains out of support so refresh demand is large; public sector strength is notable internationally (EMEA/APJC mid‑to‑upper‑teens) and supports ongoing demand.

• Question from Benjamin Bollin (Cleveland Research): How do you view durability and sustainability of the AI build‑out versus late‑90s internet?
  Response: Management believes this AI cycle is faster and driven by large, profitable companies making existential investments, implying durable demand though outcomes will vary across players.

Contradiction Point 1

AI Orders and Growth Expectations

It involves differing expectations regarding the growth and timing of AI orders, which impacts investor perceptions of Cisco's strategic positioning and future revenue potential.

Can you provide more details on AI orders for web-scale opportunities and enterprise pipelines? - Aaron Rakers (Wells Fargo)

20251113-2026 Q1: We expect at least 2 times the orders from hyperscaler customers in fiscal year '26. - Charles Robbins(CEO)

Why isn't AI networking growing faster, and can you update on data center versus campus exposure? - Jim Fish (Piper Sandler)

2025Q3: AI infrastructure hasn't flowed through revenue yet, and we're seeing double-digit growth in data center versus campus. - Chuck Robbins(CEO)

Contradiction Point 2

AI Orders and Growth Prediction

It involves differing predictions about the growth of AI orders, which are critical for understanding future revenue expectations.

Can you provide more details on AI orders for web-scale opportunities and enterprise pipelines? - Aaron Rakers (Wells Fargo)

20251113-2026 Q1: We expect at least 2 times the orders from hyperscaler customers in fiscal year '26. - Charles Robbins(CEO)

Can you elaborate on the $2 billion AI orders and their revenue impact, and provide details on networking order growth by subsegment? - Michael Ng (Goldman Sachs)

2025Q4: AI orders totaled over $800 million in Q4 with $2 billion in FY '25. - Charles Robbins(CEO)

Contradiction Point 3

AI Infrastructure and Revenue Flow

This contradiction highlights the inconsistencies in Cisco's communication regarding the timing and flow of AI infrastructure revenue, which is crucial for understanding the company's ability to capitalize on AI market opportunities.

Can you provide more details on AI orders for web-scale clients and enterprise pipelines? - Aaron Rakers (Wells Fargo)

20251113-2026 Q1: AI infrastructure orders from hyperscalers totaled $1.3 billion in Q1, with expectations for $3 billion in fiscal year '26. - Charles Robbins(CEO)

Why isn't AI networking growing faster, and can you update on data center versus campus exposure? - Jim Fish (Piper Sandler)

2025Q3: AI infrastructure hasn't flowed through revenue yet. - Chuck Robbins(CEO)

Contradiction Point 4

Contribution of AI to Networking Growth

It involves differing explanations of how AI orders contribute to overall networking growth, which is crucial for understanding Cisco's growth strategy.

Can you elaborate on AI orders for web-scale clients and enterprise pipelines? - Aaron Rakers (Wells Fargo)

20251113-2026 Q1: AI infrastructure orders from hyperscalers totaled $1.3 billion in Q1, with expectations for $3 billion in fiscal year '26. - Charles Robbins(CEO)

Can you discuss the $2 billion AI orders' revenue impact and detail networking order growth by subsegment? - Michael Ng (Goldman Sachs)

2025Q4: AI orders for Cisco are expected to drive meaningful growth across our business. - Mark Patterson(CFO)

Contradiction Point 5

Impact of Tariffs on Financials

This contradiction involves differing explanations of how tariffs affect Cisco's financials, which is vital for investors to assess the company's ability to manage external economic pressures.

Is the AI orders growth driven by a broader customer base or deeper client engagement? Also, how is DRAM pricing impacting gross margins? - Meta Marshall (Morgan Stanley)

20251113-2026 Q1: DRAM pricing and supply tightening are included in our updated guidance for Q2 and the year. - Mark Patterson(CFO)

What is the nature of the $600M AI orders, and can you quantify the impact of tariffs on Q4? - Andrew Spinola (UBS)

2025Q3: Tariffs are included in our guide, with China at 30%, Mexico/Canada at 25%, and reciprocal tariffs after July 9. - Scott Herren(CFO)