Cisco Q3 Earnings Preview: AI, Splunk Synergies, and Margin Headwinds in Focus

Cisco Systems (CSCO) will report fiscal third-quarter 2025 results after the bell on May 14, with Wall Street watching closely for signs of accelerating growth in AI-driven infrastructure demand and updates on its Splunk integration. While the company is coming off a better-than-expected Q2 print, questions remain about long-term revenue growth, gross margin trajectory under new tariffs, and whether Cisco can evolve meaningfully beyond its legacy hardware identity.

Expectations and Guidance

Consensus estimates call for Q3 revenue of $14.05 billion, up 10.6% year-over-year, and adjusted EPS of $0.92, a 5% y/y increase. That aligns well with the company’s guidance of $13.9–$14.1 billion in revenue and non-GAAP EPS of $0.90–$0.92. Analysts expect adjusted operating income of $4.7 billion and an adjusted gross margin of around 68%, though Citi notes there may be upside due to tariff impact delays.

Cisco has guided for a 67–68% gross margin and 33–34% operating margin in Q3, and reiterated its full-year outlook for revenue of $56–$56.5 billion and EPS of $3.68–$3.74, suggesting a modest acceleration from FY2024. This quarter’s guidance also reflects anticipated cost pressures from U.S. tariffs on imports from China and Mexico.

Key Drivers to Watch

AI infrastructure demand is expected to remain a top narrative, with the company already logging $700 million in AI orders through the first half of FY2025 and guiding to $1 billion in AI bookings for the full year. Investors will also be looking for updates on the Nvidia collaboration, particularly the integration of Cisco’s Silicon One chips into Nvidia’s Spectrum-X networking platform—a deal that could expand Cisco’s presence in hyperscale data centers.

Another area to watch is Splunk, the $28 billion acquisition that closed in March 2024. The quarter will include a full reporting cycle with Splunk, and analysts will seek details on early integration efforts, cross-sell synergies, and ARR growth. Security revenue was 15% of Cisco’s total in Q2, up meaningfully from 6–7% prior to the deal, and the company reported product orders up 11% excluding Splunk—further evidence of traction.

Q2 Recap and Year-over-Year Context

Last quarter, Cisco posted adjusted EPS of $0.94, topping estimates by three cents, while revenue rose 9.4% to $13.99 billion, also ahead of consensus. Product revenue grew 11% to $10.23 billion, and service revenue climbed 5.6% to $3.76 billion. Key segment results included:

• Networking: $6.85 billion, up 11.5% y/y
• Security: $2.11 billion, up ~9%
• Collaboration: $996 million, down slightly from $1.01 billion
• Observability: $277 million, up from $260.8 million

Remaining performance obligations surged 16% y/y to $41.27 billion, highlighting growing long-term visibility, especially in subscriptions and recurring software sales. Margins were strong, with adjusted gross and operating margins of 68.7% and 34.7%, respectively.

Comparing Q2 to this quarter's consensus expectations, growth is projected to remain steady, with slightly lower y/y expansion in EPS and continued double-digit revenue growth—though partly driven by the Splunk contribution. If Cisco hits the high end of Q3 guidance, it would mark back-to-back quarters of revenue acceleration for the first time in over two years.

Government and DoD Exposure

Cisco has significant exposure to U.S. federal spending, but the actual proportion of revenue tied to federal agencies is modest. The Department of Defense is the company's primary public-sector customer, but federal revenue overall makes up less than 10% of sales. With ongoing DOGE initiatives and budget negotiations in flux, the market will likely scrutinize any commentary about federal procurement headwinds, particularly for advanced networking or security solutions.

That said, Cisco was recently selected to join Humain’s Saudi Arabian AI infrastructure alliance and announced AI security initiatives with G42, signaling a growing international posture. Analysts also see Cisco as a value play in the cybersecurity space, with upside from its pivot toward ARR-based revenues and Splunk-powered observability.

Valuation and Market Position

Cisco trades at 17x forward earnings, with fiscal 2025 EPS growth expected to be flat and revenue growth under 1%, per current projections. Still, multiple analysts including Citi and Bank of America have Buy ratings, citing AI and security tailwinds. Targets range from $68 to $80, based on 18–20x FY2026 EPS.

For long-time shareholders, Cisco remains a frustrating underperformer—it hasn’t reclaimed its 2000 highs despite positive execution under CEO Chuck Robbins. But with $17 billion in buyback capacity and a rising dividend, it also provides steady return potential. If AI momentum continues and Splunk delivers, 2025 could represent a turning point in Cisco’s growth narrative.