Cisco Systems Inc (CSCO) — Q4 2025 Earnings Call Transcript

Good afternoon, everyone. This is Sami Badri, Cisco's Head of Investor Relations, and I'm joined by Chuck Robbins, our Chair and CEO; and Mark Patterson, our CFO. Cisco's earnings press release and supplemental information, including GAAP to non-GAAP reconciliations, are available on our Investor Relations website. Following this call, we will also make the recorded webcast and slides available on the website. Throughout today's call, we'll be referencing both GAAP and non-GAAP financial results. We will discuss product results in terms of revenue and geographic and customer results in terms of product orders unless stated otherwise. All comparisons will be made on a year-over-year basis. Please note that our discussion today will include forward-looking statements, including our guidance for the first quarter and fiscal year 2026. These statements are subject to risks and uncertainties detailed in our SEC filings, particularly our most recent 10-K and 10-Q reports, which identify important risk factors that could cause actual results to differ materially from those contained in our forward-looking statements. With respect to guidance, please also see the slides and press release that accompany this call for further details. Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. Now I'll turn it over to Chuck.

Thanks, Sami, and thank you all for joining us today. We had a strong close to fiscal '25, delivering revenue and gross margin at the high end of our guidance ranges for the fourth quarter. Continued operating leverage across our business produced strong profitability with earnings per share above the high end of our guidance. In addition, we generated solid growth in annualized recurring revenue, remaining performance obligations, and subscription revenue, which provides a strong foundation for our future performance. The profitable growth of our business continues to produce strong cash flows, supporting our commitment to deliver consistent capital returns. In Q4, we returned $2.9 billion in capital to our shareholders through share repurchases and dividends, bringing the total return in fiscal '25 to $12.4 billion in value or 94% of free cash flow, surpassing the $12.1 billion Cisco returned to shareholders in fiscal '24. Overall, our FY '25 performance has established a solid foundation as we turn our focus to delivering Cisco's strongest year yet in fiscal year '26 as indicated in our guidance. As we move into the next phase of AI with agents autonomously conducting tasks alongside humans, the capacity requirements of the network will be compounded to accommodate both unprecedented levels of network traffic and an increasing threat landscape. According to our survey of IT networking leaders, 97% of businesses believe they need to upgrade their networks to successfully deploy AI. Having refreshed almost our entire product portfolio with industry-leading networking systems powered by Silicon One, AI-native security solutions, and software operating systems, Cisco is well positioned to provide the critical infrastructure needed for the AI era. Now let me comment on the demand we saw in Q4, starting with record AI infrastructure orders received from webscale customers. These orders exceeded $800 million in the quarter, bringing the total for fiscal year '25 to over $2 billion, more than double our original $1 billion target stated in Q4 of fiscal year '24. This demonstrates the undeniable capability and relevance of our technology for multiple back-end use cases with some of the most technologically advanced customers. Overall, total product orders in Q4 grew 7% year-over-year with solid growth across all geographies despite a complex environment, demonstrating the valuable outcomes we continue to deliver for customers worldwide. Enterprise product orders were up 5% year-over-year in Q4. As typical for the fourth quarter, we closed several large deals with major enterprises across different industries who are compounding the value of their investments by leveraging the full breadth of our technology platforms. We have a slide in our earnings presentation that highlights both the breadth of Cisco's reach through 8-figure or larger deals and the versatility of solutions tailored to our customers' needs. Public sector orders were down 6% year-over-year in Q4 compared with a very strong fourth quarter in FY '24 when orders grew double digits year-over-year. That said, overall public sector demand grew sequentially in line with normal seasonality. Product orders from service providers and cloud customers continue to be very strong, up 49% year-over-year, driven by triple-digit order growth in webscale for the fourth consecutive quarter, with 4 out of the top 6 webscale customers each growing orders in the triple digits. In fact, two webscale customers each placed total orders of over $1 billion for networking, security, collaboration, and observability in FY '25. Demand from telco and cable customers was also strong in Q4 with orders growing more than 20% year-over-year. Now some color on demand for our core networking and security solutions. Networking product orders grew double digits in Q4, marking the fourth consecutive quarter of double-digit growth, driven by webscale infrastructure, switching, enterprise routing, industrial IoT, and servers. There is strong interest from customers in the new family of Cisco Cat9k smart switches along with a completely refreshed lineup of highly secure routers, wireless access points, and industrial IoT devices, which are purpose-built for the AI-ready campus and branch. Our new smart switches are powered by Silicon One and deliver enhanced performance, quantum secure networking, and radically simplified cloud-native and AI-driven operations, all supporting the new realities as AI changes how we work and collaborate. The introduction of our new switches marks the beginning of a major multiyear refresh cycle opportunity for Cisco's large installed campus switching base. Orders for our industrial IoT portfolio comprised of ruggedized catalyst products grew double digits for the fifth consecutive quarter, and we see solid demand signals continuing into FY '26, as countries around the world are committing to U.S. domestic investments as part of their trade agreements. As more strategic infrastructure and manufacturing is brought onshore to the United States, Cisco is well positioned to help connect and protect these capital-intensive investments at scale. As I mentioned earlier, the AI infrastructure orders we received from webscale customers were once again exceptionally strong, exceeding $800 million in the quarter. As expected, the product mix of these orders was more than two-thirds in Systems with the remainder in Optics. In the enterprise specifically, while still early, AI orders are ramping and we have a growing pipeline in the hundreds of millions as these customers look to Cisco to provide simple, scalable, and secure solutions for the AI era. Our expanding partnership with NVIDIA also positions us to deliver on these new demands with completed integrations of Cisco Nexus switches with NVIDIA's Spectrum-X architecture, offering low latency, high-speed networking for AI clusters. Additionally, the Cisco Secure AI factory with NVIDIA provides a trusted blueprint for building secure AI-ready data centers for enterprises, sovereign cloud providers, and newly emerging Neocloud providers. We also see the opportunity with Neocloud providers ramping with several large deals in Q4, not included in the previously mentioned AI infrastructure orders. Our newly forged Middle East strategic partnerships, including HUMAIN, G42, and Stargate UAE, are all progressing as planned, and we expect the sovereign AI opportunity to build momentum in the second half of fiscal year '26. We believe Cisco will be a core system provider for these significant AI training and inference cluster build-outs and integral to their development and eventual hyperscaling. As we look holistically at the AI opportunity for Cisco, we frame it into three distinct but connected pillars. First, AI training infrastructure for webscale customers. Combinations of our Cisco 8K, Silicon One, optics, and optical systems are being deployed by the largest web scalers, and we expect demand for these technologies from Neocloud providers and sovereign customers to increase in fiscal year '26. Second, AI inference and enterprise clouds. Our accelerated innovation in hardware and software, coupled with our NVIDIA partnership, is designed to simplify, accelerate, and derisk AI infrastructure deployments for the enterprise. And third, AI network connectivity. Customers are leveraging Cisco platforms to help modernize, secure, and automate their network operations to prepare for pervasive deployment of AI agents and applications. As we move towards Agentic AI and the demand for inferencing expands to the enterprise and end-user networking environments, traffic on the network will reach unprecedented levels. Network traffic will not only increase beyond the peaks of current chatbot interaction, but will remain consistently high with agents in constant interaction. We have a slide illustrating this new traffic model in our earnings presentation available on our website. As agents gain autonomous decision-making and action capabilities, security will be even more critical to ensure they operate reliably and safely. As a trusted partner for enterprises, hyperscalers, Neocloud, and sovereign cloud providers, Cisco has the opportunity to lead this generational transition in networking and security, and provide the critical infrastructure needed for the AI era. Now shifting to security. We recorded mid-single-digit growth in orders in Q4. Splunk and Cisco synergies delivered a 14% year-over-year increase in new logos for Splunk in Q4, demonstrating the benefit of our cross-selling motions and joint innovation. Our new and refreshed products, including Secure Access, XDR, Hypershield, and AI Defense, also continue to ramp and added 750 new customers collectively in the quarter. The vast majority of our new Hypershield enterprise customers are bundling with our N9,300 smart switch, which enables them to embed security directly into the fabric of the network. We believe that Agentic AI can only be secured by fusing security deep into the network and that only Cisco can deliver this capability. Now I'd like to comment on our accelerating innovation pipeline. At Cisco Live U.S. in June, we delivered our largest innovation payload to date, announcing over 20 new customer-centric offerings across our portfolio to help our customers build AI-ready data centers and future-proof their workplaces with a foundational layer of digital resilience. You can see the full list of product launches in our slide deck, but I'd like to highlight our AgenticOps, which are already resonating with customers. Cisco AI Canvas is a revolutionary generative user interface for real-time collaboration between network and security teams, optimized for both human and agent interaction. Powered by Cisco's advanced deep network model LLM, AI Canvas unifies real-time telemetry across various platforms to radically simplify IT operations and accelerate troubleshooting. All of our new innovations introduced in FY '25, spanning core networking products based on Cisco Silicon One, advanced security technologies, and unified management tools, are designed on the foundation of AI, further enhancing Cisco's platform advantage, where every technology doesn't just add value by itself, but compounds the value of our customers' existing investments. We continue to use GenAI and Agentic systems across our customer experience organization with things like services as code and AI agents for in-product support, renewals, and adoption. Today, over two-thirds of support cases are touched by AI and automation, which increases the proportion of complex cases we can solve within one day. We're also seeing increased usage of Cisco's own proprietary AI application internally with more advanced use cases emerging across engineering, sales, operations, and our people policy and purpose organization, resulting in meaningful productivity gains for our teams. To summarize, we are seeing clear demand for our technology across customer markets in addition to expanded opportunities as we move towards Agentic AI. We are innovating faster than ever before, making AI foundational in our designs, fusing security deep into our networking products, and providing operational simplicity for our customers. And our strong performance is fueling our capital allocation model, returning significant value to our shareholders while positioning our business for success in fiscal '26. Before I close, I'd like to once again thank Scott Herren for his leadership and partnership over the last 5 years. Scott has been instrumental in driving our transition to more software and recurring revenue, which has driven greater predictability for our business and increased shareholder value. We wish you all the best in your retirement. I'd also like to take a moment to thank our teams for their hard work to close out the year for executing with urgency as One Cisco and, most importantly, for their unfailing focus on delivering valuable outcomes for our customers. Now I'll turn it over to Mark for more detail on the quarter and our outlook.

Thanks, Chuck. We delivered a strong quarter with revenue and non-GAAP gross margin and operating margin at the high end of our guidance range and earnings per share above the high end of our guidance, coupled with solid operating cash flow. For the quarter, total revenue was $14.7 billion, up 8% year-over-year. Non-GAAP net income was $4 billion, up 12%, and non-GAAP earnings per share was $0.99, up 14%, demonstrating good operating leverage with EPS growth outpacing revenue growth. Before we dive into the details, it's worth reiterating as a reminder that we had a full 13-week contribution from Splunk in Q4 FY '24 last year. So our reported year-over-year growth rates are fully comparable this quarter. Looking at our Q4 revenue in more detail, total product revenue was $10.9 billion, up 10%. Services revenue was $3.8 billion, flat year-over-year. Networking was up 12%, with growth across most of the portfolio, led by double-digit growth in Internet infrastructure and enterprise routing as well as solid growth in switching, partially offset by a decline in servers. Security was up 9%, primarily driven by growth in our offerings from Splunk and SASE. Collaboration was up 2%, driven by solid growth in devices. Observability was up 4%, led by strong growth in Splunk and ThousandEyes. Looking at our recurring metrics, total RPO was $43.5 billion, up 6%, and Product RPO grew 8%, and total short-term RPO was $21.7 billion, up 4%. Total ARR ended the quarter at $31.1 billion, an increase of 5% with product ARR growth of 8%. Total subscription revenue increased 3% to $7.9 billion and represents 54% of Cisco's total revenue. Total software revenue was up 5% at $5.6 billion, with software subscription revenue also up 5%. Q4 product orders were up 7% year-over-year. Looking at our product orders across geographic segments, the Americas was up 5%, EMEA was up 10%, and APJC was up 7%. In our customer markets, service provider and cloud was up 49%, enterprise was up 5%, and public sector was down 6%. Total non-GAAP gross margin came in at 68.4%, up 50 basis points year-over-year, coming in at the high end of our guidance range. Non-GAAP product gross margin was 67.5%, up 50 basis points, driven by productivity improvements. Non-GAAP services gross margin was 70.8%, also up 50 basis points. Our total gross margin included a small impact from tariffs, which was slightly favorable compared to our estimate that was included in our guidance. We continue our focus on profitability and financial discipline with non-GAAP operating margin of 34.3% at the high end of our guidance range. Our non-GAAP tax rate was 18.1% for the quarter. Shifting to the balance sheet, we ended Q4 with total cash, cash equivalents, and investments of $16.1 billion. Operating cash flow was $4.2 billion, up 14%, primarily driven by our revenue and earnings growth. From a capital allocation perspective, we returned $2.9 billion to shareholders during the quarter comprised of $1.6 billion for our quarterly cash dividend and $1.3 billion of our share repurchases with $14.2 billion now remaining under our share repurchase program. Turning to the full fiscal year, revenue was $56.7 billion, up 5%. Total non-GAAP gross margin was 68.7%, up 120 basis points. On the bottom line, non-GAAP net income was $15.2 billion, flat year-over-year. Non-GAAP earnings per share was $3.81, which was up 2%. Operating cash flow was $14.2 billion, up 30% compared to FY '24. Cash flow growth from the full year was positively impacted by some large tax payments in early FY '24 that did not repeat in FY '25. We returned $12.4 billion in value to our shareholders through cash dividends and share repurchases. This was comprised of $6.4 billion in quarterly cash dividends and $6 billion of share repurchases. We increased our dividend for the 14th consecutive year in FY '25, reinforcing our confidence in the strength and stability of our ongoing cash flows. To summarize, we had a solid fiscal quarter and year with top and bottom line performance beating and exceeding our expectations, driven by strong order growth and margins. For the full fiscal 2025, we delivered record non-GAAP operating income and margin, demonstrating our ability to provide operating leverage while driving strong top line growth. We remain focused on making strategic investments in innovation to capitalize on the significant growth opportunities we see ahead. This will continue to be underpinned by disciplined spend management. And it's this powerful combination that continues to fuel strong cash flow and our ability to return significant value to our shareholders. Turning to guidance. While we have some clarity on tariffs, we are still operating in a complex environment. Our Q1 and fiscal year 2026 guide assumes current tariffs and exemptions remain in place through the end of fiscal 2026. These include the following: China at 30%, partially offset by an exemption for semiconductors and certain electronic components; Mexico at 25% and Canada at 35% for the components and products that are not eligible for the current USMCA exemptions. Other countries reverted to country-specific reciprocal rates, but largely offset by an exemption for semiconductors and certain electronic components. And finally, a small impact from tariffs on copper, steel, and aluminum and retaliatory tariffs. We will continue to leverage our world-class supply chain team to help mitigate the impact of tariffs where appropriate. Through the flexibility and agility we have built into our operations over the last few years, the size and scale of our supply chain provides us with some unique advantages as we support our customers globally. Looking ahead, you can expect us to continue our focus on durable growth with financial discipline in driving operating leverage and continued capital returns. Our fiscal Q1 guidance is as follows: we expect revenue to be in the range of $14.65 billion to $14.85 billion. We anticipate non-GAAP gross margin to be in the range of 67.5% to 68.5%. Non-GAAP operating margin is expected to be in the range of 33% to 34%. Non-GAAP earnings per share is expected to range from $0.97 to $0.99. We are assuming a non-GAAP effective tax rate of approximately 19%. For fiscal year '26, our guidance is as follows: we expect revenue to be in the range of $59 billion to $60 billion. Non-GAAP earnings per share is expected to be in the range from $4 to $4.06. Sami, let's now move into the Q&A.

Thank you, Mark. Before we start the Q&A portion of the call, I would like to remind analysts to ask one question and a single follow-up question. Michelle, can we move to the first analyst in the queue?

My first question is regarding your guidance, particularly in light of the AI opportunity and the impact of sovereign initiatives starting in the second half of the fiscal year. Looking at the midpoint, it seems to imply a slowdown in growth from about 6.5% to 7%. Your guidance suggests a fiscal first quarter growth of around 4.5% for the next three quarters. I'm wondering if this indicates a conservative approach. Is there any change in demand that you are considering? I'm interested in understanding how we can connect this projected slowdown over the remaining quarters of the fiscal year.

Thank you, Aaron. I want to emphasize that we are satisfied with our performance in the AI space. The situation you mentioned is primarily related to year-over-year comparisons as we move forward. It does not indicate any shift in demand or concerns on our part. One question I anticipate is whether the campus refresh will start to have an impact and if it will significantly contribute to revenue next fiscal year. As for the campus, the Cat9k has been in its transition for eight years, and many customers will need time to assess and adopt those products before rolling them out. We believe that will also start to have an effect next year. We're pleased with our advancements in AI. However, the yearly trends are mainly tied to comparisons. Mark, do you want to add anything?

No, I think that's right, Chuck. You have to think back as well in prior year, other than Q4, that's the first quarter that really was apples-to-apples in terms of having Splunk in the prior year. So some of the growth rates before Q4 were obviously higher than they would be otherwise.

Thank you, Aaron. Michelle, we can move to the next analyst.

Great. Maybe a couple for me. Just one, how are you looking at security and business maybe in particular, you've now anniversaried at Splunk as you guys just mentioned, but just kind of how are you looking at the growth outlook there as you have some kind of new products and old products cascading in? And then maybe second, just new CFO priorities would be great to kind of level set.

I will now discuss security, and Mark will address CFO priorities. I'm feeling more optimistic about security following the last quarter for a few reasons. Previously, I mentioned that we have two categories of products: the new and refreshed ones, which include SASE, XDR, Hypershield, AI Defense, and our updated firewall portfolio, and the older products that aren't significant investment areas for us at the moment, representing the long tail of the product life cycle. Looking at the new and refreshed products, particularly the firewalls, we experienced over 20% order growth last quarter, indicating strong adoption. Additionally, if we exclude the challenging U.S. Federal market, security order growth globally in Q4 was in double digits. We are experiencing a ramp-up, albeit slower than I expected, mainly because these things unfold over time. Nonetheless, I am confident about our progress. We gained 80 new Hypershield customers, primarily linked to our new smart switch strategy, which is proving effective. Furthermore, we added over 480 new SSE customers during the quarter, demonstrating the solid traction of our Secure Services Edge. Based on these developments, I anticipate the growth rate will continue to improve as we advance through this fiscal year. That's the update on security. Mark, would you like to address the second question?

Sure. Thanks, Meta, for your question. First off, I just want to thank Scott, been certainly a good partner for many years and for the work that he's done with Cisco in particular, I think, helping us make that transition to software and subscription. I've been with the company now 25 years in a variety of roles and responsibilities. And I think as I look ahead, we have significant opportunity, whether it's in AI infrastructure, in the webscale space, now in the nascent but growing enterprise AI opportunity. Obviously, Neoclouds and the sovereign AI build-out happening. Also, you look to cybersecurity and how we've improved our hand there with Splunk and then the campus refresh that we've got ahead of us, which will be multiyear. I think we've got great opportunity. And what I really want to do is make sure that we're funded for success. And we're looking at those opportunities for what do we need to do to be successful. I also think in terms of expectations of me, you can expect that I will be focused on durable profitable growth, obviously, financial discipline and transparency and really just returning value to the shareholders.

I want to mention one more point about Meta regarding security that I overlooked. An encouraging development that occurred during the quarter is that we have now seen two consecutive quarters of progress with Splunk. If you remember, we believed we could gain new customers by cross-selling Splunk to those they hadn't served before. In the third and fourth quarters, we welcomed over 300 new customers who purchased Splunk for the first time. This approach appears to be effective, and the teams are performing excellently in this regard, which further reinforces my confidence in our security strategy for this year.

Meta, thank you for the question. Michelle, we can move to the next analyst.

First one, I wanted to ask about this idea of pull forward. I appreciate customers may not communicate their rationale, reasons for placing particular orders. But I'm concerned that particularly in the federal vertical, with potential budget cuts and enterprises worried about the implications from tariffs may have accelerated some of the orders, therefore, pulling them from the later quarters. And then as my follow-up, I'm wondering if you could talk about your expectations over the longer term for the composition of the AI business. We've got the two-thirds, one-third split between systems and optics, and I'm wondering how you expect that to trend? Or is this an expected steady state?

Thanks, Simon. I’ll share a few thoughts on the pull forward, then Mark can provide some insights on why we are confident that it hasn’t occurred on a large scale. We have been analyzing various metrics and I frequently communicate with our customers and field teams. In the last six months, I haven’t encountered a single customer who mentioned intending to place an order now to avoid potential price increases. It's important to note that we haven't announced any price hikes. I'm just pointing out that this is the theory being discussed. While it’s possible it has occurred somewhere, I believe I would have heard about it if it were widespread. Mark?

Yes. To add a few data points, we've engaged with many channel partners. Our typical month-to-month performance looks positive. For several of our products, software gets activated once shipped, so we monitor the time from shipment to activation to see if it has been delayed, and it hasn't been. We also examine customer-requested ship dates, and if those are moving later, it could indicate that they aren't ready for the equipment but wanted to place their orders early; however, we haven't observed any issues there. Furthermore, we reviewed pipeline pull forwards, and nothing unusual has come up in that regard. Therefore, we're quite confident that we haven't noticed any evidence of pull forwards.

Regarding your second question about the AI business composition, particularly in the back-end networks of cloud providers, I don't believe there's any indication of a significant shift based on our discussions with them. I haven't heard anything that suggests such a shift is occurring in a meaningful way.

Thank you, Simon. Michelle, we can move to the next analyst.

Yes, great. Maybe, Chuck, if I can sort of ask you more on the networking cycle here, particularly that there was a period of time that you went through a digestion with customers, and then you started to see the recovery in the networking cycle. There's been 2 quarters of solid growth on that front. As you think about next year or fiscal '26, how do you sort of see that growth sustaining, particularly if we sort of put aside the new upgrades in relation to Cat9k upgrades that you're looking at? Like where are customers in terms of their intent to upgrade legacy infrastructure? And basically, what I'm trying to get to is at the Investor Day, you had talked about 2% to 5% being the range of networking through the medium term. And where do you think you land on that front in fiscal '26?

Thanks, Samik. If we take a step back, we can identify two key factors at play: the AI revolution and the refresh opportunity. With the AI revolution, we've observed that shifts typically start with cloud providers, and we are clearly witnessing this trend in their operations. Next, we anticipate this will transition into enterprises, moving from backend to frontend usage as they adopt these services more extensively. Furthermore, enterprises will also enhance their on-premise inferencing capabilities. We're even noticing growth in the telco sector as they inform us of increased network capacity and infrastructure modernization efforts in anticipation of AI developments. We believe AI will drive network modernization across all sectors. Additionally, we have the campus upgrade still on the horizon. Regarding the comment I made earlier, we have routing refresh ongoing and significant new technology in our data center networking business, which, by the way, saw mid-teens growth in orders last fiscal year within the enterprise segment. WiFi 7 experienced triple-digit growth year-over-year, indicating strong customer adoption. Moreover, with new campus products being rolled out, we are now in the eighth year of the Cat9k. If we consider the legacy products that predate the Cat9k, there are still tens of billions of dollars of installed base opportunities for us to pursue. All these elements contribute to our confidence in maintaining the growth range we communicated at Analyst Day regarding core networking.

Thank you, Samik. Michelle, we can move to the next analyst.

I have two questions. First, regarding AI, could you explain the over $2 billion in AI orders this year? Did that convert into revenue for the year, and how should we anticipate it translating into revenue next year? Second, on networking, could you provide insights into the orders this quarter by subsegment, such as campus and data center switching, wireless, and routing, and highlight any notable trends in those product categories?

Sure, Michael. Let me clarify our webscale business first, and then Mark can discuss the revenue related to their AI infrastructure orders for fiscal year '25. I want to ensure everyone understands our webscale business. We provide technology for both the backend and frontend of traditional cloud networks, and we also sell our enterprise portfolio to these customers. Overall, these customers have experienced triple-digit growth in orders for four consecutive quarters. In Q4 alone, four of these customers achieved triple-digit growth. Additionally, as mentioned in my prepared remarks, two of these customers placed orders exceeding $1 billion each in fiscal year '25. Reflecting on our strategy in this space five years ago, the scenario was quite different. We are pleased with the progress we've made. Regarding AI infrastructure, we received over $800 million in orders for the quarter, totaling more than $2 billion for the year, which is more than double our original target. Mark, would you like to discuss the revenue a bit more?

Sure. Yes. In terms of revenue and shipments related to those AI orders, those really just progressed and ramped like we expected during FY '25. So for the full year, we recognized right about $1 billion in revenue related to those.

So we recognized roughly $1 billion of revenue on the AI back-end orders that we've taken from the webscale customers during fiscal year '25.

Thank you, Michael. Michelle, we can move to the next analyst.

I have two as well. And Chuck, maybe just on the AI side, as you were talking about that a little bit here. Can you just touch on AI adoption by enterprises and how do you really think that opportunity on the enterprise side shape up given I think Silicon One is the only partner Silicon that NVIDIA is supporting right now? So can you talk about how big do you think this enterprise opportunity is? And when do you start to see revenues or orders flow into that? And then my follow-up, maybe just continuing on to the prior answer for Chuck, how much revenue contribution are you embedding in fiscal '26 from AI given the $2 billion order that you had this year?

Yes, Amit, that's a great question. On the enterprise side, we observed a significant number of orders, primarily related to networking and AI GPU technologies. As mentioned earlier, these orders are roughly evenly split. We experienced a few hundred million dollars in transactions and currently have hundreds of millions in the enterprise pipeline. There are numerous pilot programs in progress, with customers testing various applications in retail environments and more. We anticipate a ramp-up in AI applications, and in the second half of the year, we expect to see Agentic proof-of-concepts becoming more widespread. This will necessitate enhancements in network connectivity, capacity, and low latency, alongside the integration of security into the network's core, given that these Agentic workflows require constant communication. This applies to both general agents and robotics, highlighting the crucial need for low-latency connectivity and robust security. Our strategy is to embed security within the network framework, which is why we are focusing our efforts in this area. Regarding our partnership with NVIDIA, there has been significant development, but we have yet to fully realize the substantial benefits of this collaboration. Several milestones are set to be achieved in the coming months, and we believe as enterprise demand increases, this partnership and our product offerings will be poised to support that growth. While we do not provide specific revenue guidance by technology segment for fiscal year '26, considering we achieved $1 billion in fiscal year '25, you can estimate our performance for '26 based on our existing backlog and new orders secured throughout the year.

Thank you, Amit. Michelle, can we move to the next analyst?

I have two questions that I will ask together. First, service revenues, which account for approximately 25% of total revenues, were flat this quarter. Over the last five quarters, growth has decelerated from 6.5% to 5.5% to 2.5%, and now to 0%. What are the trends in service revenues, and what should we anticipate moving forward? My second question concerns networking growth, which is influenced by cloud investment spending. What risks exist that this year will be a peak year for spending, and that trends may slow down next year, especially considering that Oracle is unlikely to grow another 150% and Meta may not see another 70% to 80% growth? What is your perspective on the sustainability of these growth rates?

Tal, it's Mark. So thanks for the question. I think I'll take the service one, and then I'll let Chuck answer your second question. So on the services, if you go back a year ago and even a little bit longer ago, you saw a lot of professional services that we did, really helping our customers and our partners, frankly, working hand-in-hand to implement a lot of that gear that we had shipped. If you remember, all that excess backlog that we sort of unloaded on our customers, if you will, we were helping do that. So that drove nice growth in our services business for a while. What we usually do see, as you know, as services usually trails or sort of follows on to what's happening in product, for instance. So as we saw networking growth of 12% this quarter, I would expect that you'll start to see services pick up as revenue on services is ratable. So we do expect that, that will improve as we go into FY '26.

And then on the risk issue, all I could say, Tal, is that we see the same CapEx year-over-year growth numbers that you see. And I think the aggregate number is like 50% up. So I don't feel like AI is a fleeting trend. I do understand your question, but I think we're operating off the demand signals we're getting from those customers and what they're signaling relative to how they're spending CapEx.

Thank you, Tal. Michelle, we can move to the next analyst.

Chuck, I mean, I think some folks were trying to get at this in an earlier question. But security, I mean, your execution in switching and the AI stuff is obviously better than expected, but the security was pretty well below the street, and it has to accelerate pretty significantly to get to your 15% to 17% growth for security plus observability long-term target. I mean is that still the right way to think of that business, Chuck? Is that where you think you can at least end the year? And if not, is it worth rethinking that it's a high single-digit grower? Just wondering on that. And then I have a quick follow-up.

Do you want to ask the second now? Ben, we're writing them down, so.

I was curious about HUMAIN and some of the sovereigns, particularly regarding the NVIDIA deal. You've mentioned that often, but I also see you're collaborating with AMD. I'm interested in how much you are focusing on partnerships outside of NVIDIA in the AI space, and whether that's something you can pursue as well.

Yes. First, I shared the data earlier regarding security. I mentioned that excluding Fed, security orders grew in double digits, which is quite encouraging compared to our previous performance. The new and refreshed products I discussed include Secure Access, XDR, Hypershield, AI Defense, new firewalls, and identity solutions, which are particularly significant right now. Our refreshed identity portfolio, Agentic, has seen growth exceeding 20%, and it currently constitutes about two-thirds of our organic security offerings. Throughout the year, we expect this segment to expand further, which will diminish the impact of our legacy products as we progress. To directly address your question, I believe we should maintain those ranges, and I anticipate we will finish the year either near those figures or on a trajectory to achieve them shortly thereafter. Regarding HUMAIN and the sovereign side, we are closely collaborating with AMD on several projects, and you can expect a very strong partnership with them to provide highly integrated solutions for our customers moving forward. Lisa and I communicate fairly regularly, and given her past role on our Board, we have a solid relationship, which supports our commitment to delivering results for these customers.

Thank you, Ben. Michelle, we can move to the next analyst.

I know, Chuck, Meta asked about this a little bit earlier. Is there a way to think about for every dollar of Cat9k refresh, how many dollars are kind of coming off of the other solutions, be it wireless LAN, firewall, other security products, and just to follow-up on the last question here, anniversary-ing Splunk. How are you guys thinking about your own use of capital given big M&A and security? Once again, I'm surprised I'm the first one to ask about this given the CyberArk deal. And how are you thinking about that identity and privileged access space, given you're going to have more AI to AI or machine-to-machine interactions occurring in the future?

Yes. So Mark, feel free to comment. But I don't think there's a way to really correlate. I didn't completely understand that first question about the correlation.

Yes. I think he's asking, can you correlate the Cat9k to sort of other campus devices around it, if you will; it actually sounds like a great idea. But there are so many other new devices that we launched as well, if you will. I mean the smart routers, the smart switches, but also new WiFi access points, etc. So it's definitely something that we'll take a look at, but I don't think it's that easy, if you will.

So on the second one, Mark, let's talk about capital and how we plan to use it, or nothing's really changed, and I'll talk about identity.

Yes. So if you look at FY '25, first off, we returned $12.4 billion to the shareholders, so 94% of our free cash flow. As you look at it going forward and probably important for you to hear this from me too. Number one, the first priority is just to support the growth of the business. Secondly is to support the dividend, obviously, which we have been increasing each year for some time. Another is just to really offset dilution, which would be the third priority. And then fourth, I'd just say being opportunistic on how we can additionally bring value to our shareholders.

Regarding identity in connection with the announced acquisition, it highlights what we have understood for over a decade: the critical nature of identity and Zero Trust architectures. This forms a fundamental part of our platform strategy rather than being an additional feature. We have strong leadership in this area, along with significant knowledge and innovation from Duo and ICE, and strategic acquisitions like Duo and Oort that are already integrated. In Q4, Duo's growth was exceptional, driven by the new capabilities our teams have developed for customers as they increasingly focus on Zero Trust architectures for their employees. We're also actively developing an Agentic identity, which is crucial. The good news is that we do not need to wait for the acquisition to be finalized; we already have talented individuals working on this. Furthermore, our unique advantage lies in our ability to handle identity and Agentic security in real time, as we are the only company that combines networking, security, and identity specifically in the realm of security. This positions us favorably in the market.

Thank you, Jim. Michelle, we can move to the next analyst.

I have two as well. So Chuck, I recognize you don't guide to specific product growth. But if I think about your order intake as being averaging at least kind of roughly 50% on average for SP, and if I use that as a proxy in fiscal '26, it looks like AI could add about 2 points of revenue growth to sort of the networking business in '26. And is that kind of the right way to frame it? And the rest is really the recovery or maybe the refresh cycle in campus and strength in enterprise? And then, Mark, my second question for you is I appreciate all the detail on the tariff impact; I appreciate that in the slide, but can you help us frame from a gross margin impact? Is it a 50 basis point headwind in your guide for fiscal '26 based on where current tariff rates are and how you're thinking about it for the full year?

Yes. Let me address the first question, and then Mark can discuss tariffs. I think you are generally correct; while I can't specify the exact number of points, we do anticipate significant contributions from both sides. We conducted an analysis of our overall growth in Q4, and even when excluding the web, it accounted for about a 1 point difference. So, you are close.

Yes. As far as tariffs, they were really a small impact in Q4 as well as for FY '25. And rather than sizing the dollar amount, what I really wanted to do is give you the assumptions that underpin the guide and really reinforce that the components that are part of that certainly, China at 30% with the continuing offset by the exemption for the semiconductors and certain electronic components; Mexico at 25%; Canada 35%, and those are only for the components that do not qualify under USMCA. And then other countries going back to the reciprocal rates that are largely offset by those exemptions for semiconductors and electronic components plus some small tariffs related to steel, aluminum, and copper. So really just wanted to make sure you knew the exact assumptions that are into the guide.

Yes, it's very difficult to include anything that hasn't been announced yet because it's such a dynamic environment.

Thank you, David. Michelle, we can move to the next analyst.

Two for me as well, and I'll ask them at the same time. Within your fiscal '26 outlook, I was hoping you could rank order of the segments that give you the most conviction in hitting the target that you laid out. Second, Chuck, you indicated that Silicon One should grow as a portion of your Nexus smart switches over time. And I was hoping you could discuss whether Silicon One can represent half of your switch ASICs in the next 3 years.

That's a great question. If I were to rank the segments, I would say I'm still very optimistic about service providers, followed by enterprise, and then public sector. Regarding the public sector, I'd like to point out that our overall order growth or bookings growth is 7%. Excluding federal, the rest of the world grew by 10%, showing strong performance outside of federal. Looking ahead to fiscal year '26, our teams are anticipating a return to growth for federal this fiscal year. However, it won't match the high growth rates we've seen before, and we will still be below fiscal year '25 levels. The positive takeaway is that growth is forecasted, which is encouraging. So, in terms of my ranking, I would go with service providers first, including cloud, then enterprise, and lastly public sector. On the Nexus portfolio, we have the 800-gig Nexus product based on Silicon One, along with smart switches also based on Silicon One. We aim to accelerate this process as much as possible, so your assumption is not too far off.

Thank you, Karl. Michelle, can we move to the next analyst?

It's Adrienne Colby for Atif. The EMEA orders accelerated in the quarter, and I was hoping you could provide some color there. And I also wanted to just circle back on the sovereign AI opportunities about your expectations in terms of order flow and revenue recognition there.

In the EMEA region, we experienced a 10% increase in overall orders. Our enterprise sector grew in the mid-teens while the public sector remained roughly flat, and the SP segment also saw a mid-teens increase. We noted strong performance in the U.K., Germany, and Saudi Arabia. The security segment showed good strength, though the public sector is still flat and we would like to see improvements there. In Europe, we see potential opportunities driven by a focus on sovereignty and the development of local technology solutions. Many entities are interested in on-premises solutions, such as on-prem Splunk and WebEx, citing sovereignty and geopolitical considerations. Therefore, we believe we have a good opportunity in Europe, especially with ongoing defense spending. In the EMEA region, we've announced a couple of sovereign initiatives but have not yet received any orders; we are in the planning stages as they secure licenses for the GPUs. We expect that order flow could start in the middle of the year and revenue would follow thereafter.

Thank you, Adrienne. Michelle, can we move to the final question from the analyst queue.

My first question is on the back-end AI network opportunity, but maybe a little bit more longer term. There's a lot of chatter from your main silicon competitor about new chips that are going to enable Ethernet for scale-up connectivity. So within the racks, I wanted just to ask what your expectations are for Ethernet and scale up going forward and if we should expect new Silicon One announcements tailored to that opportunity? And then my second question is just on the campus network. You announced the integration of Meraki and Catalyst platforms at Cisco Live, and I think the reactions have been generally pretty positive. But I'm wondering if you expect this to shift behavior in hardware purchases at all. So could we see, for example, outside strength in Meraki and slower demand for Catalyst or vice versa in the next few years?

Yes, those are two excellent questions. Regarding the back-end side, as I've mentioned before, the primary sources of value in networking come from either silicon or software. Many users rely on their own operating systems, which means having silicon is essential. The good news is that we have that capability. When examining the scale-up opportunity in the back end, most hyperscalers are not utilizing clusters with internal scale-up; they prefer native connectivity within and between clusters. We believe this trend will likely dominate. There's interest in specific clusters like Neocloud due to their simplicity, but a connectivity layer remains crucial. From a scale-up standpoint, we anticipate that over time, the opportunity may transition toward an Ethernet variant, which would be advantageous for us. We are developing roadmaps that have yet to be disclosed, but if this transition happens, we are well-positioned to engage in that market. As for the Meraki and Catalyst inquiry, I believe the opposite will occur; there will be greater acceptance of Catalyst due to the ease of cloud management. Currently, there are around 35 million devices managed through the cloud, providing customers with options and streamlining hardware to a unified platform that can function both on-premises and via cloud management. I see this as a significant advantage for our customers moving forward.

Thank you, Sebastien. I will now hand it over to Chuck for some closing remarks.

Thank you everyone for joining us today. I want to express my gratitude to our team for their outstanding efforts in the fourth quarter and fiscal year '25, which has laid a strong foundation for fiscal year '26. Mark, it's great to have you here for your first earnings call, and we're looking forward to what’s ahead. I’m genuinely excited to work with you. We are seeing strong demand for our technology and positive developments across much of our portfolio. Artificial intelligence is undeniably a significant advantage for us, along with the momentum in webscale, the growth of the enterprise, sovereign opportunities, and Neocloud. We have the Agentic phase progressing well, and I'm optimistic about our current position and performance. We need to keep executing, but we are confident that we're setting the stage for success in '26. While we navigate a complex world with various dynamics daily, we feel positive about what we can control. Thank you once again for joining us, and Sami, I'll turn it back to you.

Thanks, Chuck. Cisco's next quarterly call, which will outline our first quarter FY '26 results will be on Wednesday, November 12, 2025 at 1:30 p.m. Pacific, 4:30 p.m. Eastern Time. This concludes today's call. If you have any further questions, please feel free to contact the Cisco Investor Relations department, and we thank you very much for joining the call today.