Cisco Q2 Earnings: Beat the Street, But the Stock Dropped

Cisco delivered a clear earnings beat for its fiscal second quarter, with adjusted EPS of $1.04 and revenue of $15.3 billion. This topped analyst forecasts of $1.02 and $15.11 billion, respectively. The core business showed strength, with total revenue growing 10% year-over-year and the networking segment surging 21% on demand for AI infrastructure and campus refreshes.

Yet the market's reaction was muted, even negative. The stock fell 0.87% in after-hours trading to $85.92. The drop signals that investors were looking past the beat to the forward view, where guidance met expectations rather than exceeding them. This caution reflects a broader tech sector sentiment amid economic uncertainty.

The standout growth driver was networking, which saw a 21% surge fueled by AI infrastructure orders that reached $2.1 billion for the quarter. This acceleration highlights the ongoing enterprise shift toward AI and network modernization, providing a clear near-term growth engine for the company.

AI Orders and the FY26 Revisions

The standout growth driver was AI infrastructure, where orders hit $2.1 billion in Q2. This acceleration led Cisco to raise its full-year AI orders forecast to exceed $5 billion, a major upward revision that signals intense hyperscaler demand. The company also expects over $3 billion in AI infrastructure revenue for FY26, showing the commercial ramp is well underway.

To reflect this momentum, Cisco raised its full-year financial guidance. The company now projects fiscal year 2026 revenue between $61.2 billion and $61.7 billion and non-GAAP EPS of $4.13 to $4.17. This revision is a direct result of the accelerating AI pipeline and strong product order growth, which rose 18% year-over-year.

The scale of the AI push is underscored by hardware milestones. Last quarter, Cisco shipped its 1 millionth Silicon One chip, highlighting the volume being deployed. This physical delivery of AI silicon is the tangible flow that underpins the revised revenue and order forecasts, turning strategic positioning into measurable financial impact.

The Flow Check: Margin Pressure and Capital Returns

The financial flow shows a company investing heavily for growth while maintaining strong capital returns. Product orders rose 18% year-over-year, indicating robust near-term demand visibility. Yet this expansion came with a cost: non-GAAP gross margin fell 120 basis points due to higher memory costs, a direct headwind pressuring product profitability as Cisco scales its AI infrastructure push.

To balance this, Cisco returned significant capital to shareholders. The company returned $3 billion to shareholders in the quarter and raised its quarterly dividend to $0.42 per share. This dual strategy of reinvesting in growth and returning cash provides a clear signal of financial strength and confidence in its cash-generating ability.

The trade-off is clear. While margin pressure from component costs is a near-term friction, the scale of AI orders and the commitment to shareholder returns suggest management sees a path to higher profitability down the line. The key will be whether the revenue growth from AI infrastructure can outpace these cost headwinds.