Cisco Systems Inc (CSCO) — Q2 2026 Earnings Call Transcript

Good afternoon, everyone. This is Sami Badri, Cisco's Head of Investor Relations. 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 third 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. Q2 was a very strong quarter with revenue and earnings per share both growing double digits and coming in above the high end of our guidance ranges. We delivered record revenue in Q2, putting Cisco on track to deliver our strongest year yet as indicated in our guidance for the full year. In Q2, total revenue growth accelerated to 10% year-over-year with product revenue up 14%, driven by robust demand for AI infrastructure and Campus networking solutions. Our strong top line performance, combined with operating efficiencies and solid execution by our teams contributed to non-GAAP EPS growth of 11%, which continued to grow faster than revenue. This strong performance allowed us to return $3 billion in capital to shareholders in the quarter, bringing the total value returned year-to-date to $6.6 billion. Today, we also announced an increase to Cisco's dividend, demonstrating our commitment to returning value to shareholders through consistent capital returns. Our innovation engine is firing on all cylinders, and our commitment to customers has never been stronger. Last week, Cisco hosted its AI Summit, gathering AI visionaries and geopolitical experts to explore the economic, societal and business impacts of AI. While it was clear that expectations for adoption and execution are high, one major challenge still exists. Legacy infrastructure was not designed for the performance, speed and security needs of AI. Our strong first half of FY '26 demonstrates both the power of our portfolio and the fundamental role we play in this once-in-a-generation transition. With our industry-leading networking portfolio powered by Silicon One, AI native security solutions and operating systems, Cisco is well positioned to provide the critical infrastructure needed for the AI era. I'd also like to address the recent significant increases in memory prices across the market. Leveraging our industry-leading supply chain team, we are proactively implementing 3 key strategies: First, we have already announced price increases, and we'll continue to monitor market trends and make additional adjustments as necessary. Second, we are revising contractual terms with channel partners and customers to address evolving component prices. Third, Cisco's operating scale and industry-leading position help us negotiate favorable terms and secure supply to fulfill current and future demand. Overall, we feel confident in our ability to manage this industry-wide dynamic better than our peers. Now let me comment on the strong demand we saw in Q2. Overall, total product orders grew 18% year-over-year, even on top of double-digit growth in Q2 fiscal year '25. Excluding hyperscalers, product orders were up 10% year-over-year, demonstrating the broad-based demand we see for our technology globally. Enterprise product orders were up 8% year-over-year in Q2 with strength across our entire networking portfolio. Public sector orders were up 11% year-over-year with double-digit growth across all geographies. Product orders from service provider and cloud customers accelerated in Q2, growing 65%, driven by triple-digit order growth across hyperscalers. We also saw continued growth from telco and cable customers in Q2 with orders up almost 20% on a combined basis. Now some color on demand from a product perspective. Growth in networking product orders continued to accelerate, reaching more than 20% in Q2 and marking the sixth consecutive quarter of double-digit growth driven by service provider routing, data center switching, campus switching, wireless, servers and industrial IoT products. Within our Campus networking portfolio, we are seeing strong demand for our next-generation switching, routing and wireless products, which continue to ramp faster than prior product launches. We are delivering AI native capabilities across these products, including weaving security into the fabric of the network and modernizing the operational stack of Campus networks. These new capabilities, combined with an installed base representing tens of billions of dollars across early catalyst generations nearing end of support, underpin the multi-year, multibillion-dollar refresh opportunity for Cisco. We continue to see strong demand for our industrial IoT portfolio, which has now grown double digits for 7 consecutive quarters. This demand is driven by onshoring of manufacturing to the United States, the increase of AI workloads at the network edge and the emergence of physical AI. AI infrastructure orders taken from hyperscalers totaled $2.1 billion in Q2 compared to $1.3 billion just last quarter and equal to the total orders taken in all of fiscal year '25, marking another significant acceleration in growth across our silicon, systems and optics. We shipped our 1 millionth Silicon One chip in Q2 and plan to deploy our Silicon One architecture across our high-performance networking systems by fiscal year '29. Just this week at Cisco Live Amsterdam, we introduced our 102.4 terabit per second G300 chip, positioning Cisco in an exclusive group of silicon providers delivering over 100 terabits per second switching speeds. In addition, we launched 4 new systems powered by G300. The Cisco 8000 and Nexus 9000 102.4 terabit systems offer flexible air-cooled options for traditional data center architectures as well as liquid cooled options designed for the latest ground-up facilities. Silicon One's programmability puts Cisco silicon in a class of its own, capable of adapting to a wide range of use cases and network infrastructure designs. We also announced 2 new pluggable optics, a 1.6 terabit per second OSFP and an 800-gig LPO, both built with Cisco silicon photonics technology, delivering greater efficiency and reliability in high-performance AI infrastructure. Acacia reported its strongest quarter to date with triple-digit growth in bookings. All major hyperscalers are deploying its market-leading coherent pluggable optics for data center interconnect and scale across use cases. We see growth in both 400-gig and 800-gig coherent optics and transponder shipments with 800-gig pluggables ramping significantly. Given the strong demand for our Silicon One systems and optics, we now expect to take AI orders in excess of $5 billion and to recognize over $3 billion in AI infrastructure revenue from hyperscalers in FY '26. Beyond hyperscalers, we have a separate AI opportunity across neocloud, sovereign and enterprise customers. We took $350 million in AI orders from these customers in Q2 and have a growing pipeline in excess of $2.5 billion for our high-performance AI infrastructure portfolio. We continue to develop our strategic partnerships to capture this opportunity. In Q2, we announced plans to form a joint venture with AMD and HUMAIN to deliver up to 1 gigawatt of AI infrastructure by 2030. This joint venture expects to begin operations this calendar year with a plan to build out 100 megawatts in Saudi Arabia as Phase 1 of the project. We are seeing strong interest from European customers in our sovereign critical infrastructure portfolio designed to operate in air-gapped on-prem environments, giving organizations control over sensitive data and critical infrastructure. As AI adoption accelerates, concerns over privacy, data governance and regulatory compliance are top of mind for our customers, making sovereign solutions an essential foundation for building digital trust. Now shifting to Security. In Q2, we continued to see order growth across our new and refreshed products, which represent roughly 1/3 of our security portfolio and include Secure Access, XDR, Hypershield, AI Defense and refreshed firewalls. Excluding the refreshed firewalls, over 1,000 new customers purchased these products in Q2, representing more than 100% growth quarter-over-quarter and bringing the total of net new customers since launch to roughly 4,000. We have also seen 3 consecutive quarters of double-digit growth in the number of firewalls ordered. For Secure Access specifically, we booked over 2.5 million users in Q2 and more than 50% of added customers were new logos. As the adoption of AI tools grow and Agentic AI increases at the network edge, we expect to see continued momentum in our SASE business, including Secure Access and SD-WAN. As mentioned in prior quarters, growth in our new and refreshed portfolio continues to be offset by a decline in our prior generation portfolio. Turning to Splunk. We saw a similar trend in Q2 as seen in Q1 with continued acceleration to cloud subscriptions and fewer on-premise deals. While this shift is creating a drag on revenue growth, which we expect to continue in the second half of fiscal year '26, cloud subscriptions enable greater adoption, expansion and faster delivery of innovation to customers. So overall, we are pleased with this transition. Splunk also continued to win new customers in Q2, reaching 500 new logos for the first half of fiscal year '26 and is on track to add 1,000 new logos for the year. We are accelerating our innovation across our offerings, both for and with AI. At Cisco Live Amsterdam this week, we unveiled major AI defense and SASE advancements to help secure organizations as AI agents enter the workforce. AI Defense can now scan models and repositories for vulnerabilities and provide an AI bill of materials for centralized governance. In Cisco SASE, we launched a new semantic inspection engine that can evaluate the intent of Agentic interactions and block sophisticated context-dependent threats. We are also making AgenticOps the operating model for AI-driven IT to enable autonomous troubleshooting, continuous optimization and trusted validation. We are deploying AI agents to work hand-in-hand with human administrators within our product dashboards, AI assistant and AI Canvas. We continue to make AI advancements internally with expanded use cases in Q2 across nearly every organization. Today, the majority of our product developers are using AI coding assistants and working alongside agents, which help us innovate faster across our portfolio. Currently, over 90% of customer experience support cases are touched by AI and automation, enabling us to resolve a greater proportion of complex cases within 1 day and contributing to our highest ever customer satisfaction scores. Additional use cases across sales, security and trust, supply chain and corporate functions are also providing significant cost savings and efficiency gains. To summarize, we see strong demand for our solutions across all customer markets and geographies, solidifying Cisco's role in providing the critical infrastructure needed for this once-in-a-generation transition. The value of our innovation is exemplified by Silicon One, which positions Cisco for the broadest range of AI deployments, even the most technologically challenging. And with over 40 years of customer trust and global scale, Cisco is committed to leading in the AI era to drive breakthrough innovation, manage complexity and risk and deliver faster business outcomes to customers globally. Now I'll turn it over to Mark for more detail on the quarter and our outlook.

Thank you, Chuck. We had another impressive quarter with record revenue in Q2, surpassing our expectations for both operating margin and earnings per share. Our total revenue was $15.3 billion, reflecting a 10% increase from last year. Non-GAAP net income reached $4.1 billion, also up 10%, while non-GAAP earnings per share stood at $1.04, up 11%, illustrating our ongoing operational efficiency with earnings per share growing at a faster rate than our revenue. Breaking down our Q2 revenue further, total product revenue hit $11.6 billion, up 14%, and services revenue was $3.7 billion, a slight decline of 1% year-over-year. Networking performed particularly well with a 21% growth, driven by advancements in AI infrastructure and campus upgrades. We observed double-digit growth across various sectors including campus switching, data center switching, wireless, service provider routing, enterprise routing, and compute. However, security revenue fell by 4% due to the same factors discussed last quarter, including declines in older products and a shift in our Splunk business model from on-premises to cloud subscriptions, though this was partially mitigated by growth in new and updated products. Collaboration grew by 6%, buoyed by strong performance in device sales and growth in CPaaS, Webex, and Cloud Contact Center. Turning to our recurring metrics, total remaining performance obligations amounted to $43.4 billion, up 5%, with product remaining performance obligations increasing by 8% and the long-term portion reaching $11.8 billion, up 11%. Total annual recurring revenue finished the quarter at $31 billion, a 3% increase, with product recurring revenue growth at 6%. Total subscription revenue was $7.8 billion, accounting for 51% of Cisco's overall revenue. Software revenue was $5.7 billion, up 2%. Product orders rose by 18% year-over-year, with double-digit increases across all geographical segments: the Americas up 23%, EMEA up 11%, and APJC up 15%. Orders also increased across all customer markets, with service provider and cloud orders up 65%, public sector up 11%, and enterprise up 8%. Our non-GAAP gross margin was recorded at 67.5%, a decrease of 120 basis points from last year. The non-GAAP product gross margin came in at 66.4%, down 130 basis points due to mix issues and higher memory costs, somewhat offset by productivity gains. Non-GAAP services gross margin was 70.9%, down 70 basis points. We remain committed to enhancing profitability and maintaining financial discipline, achieving a non-GAAP operating margin of 34.6%, which exceeds our guidance range. Our non-GAAP tax rate stood at 19% for the quarter. Regarding our balance sheet, we concluded Q2 with total cash, cash equivalents, and investments of $15.8 billion. Our operating cash flow was $1.8 billion, down 19% due to the final transition tax payment of $2.3 billion stemming from the 2017 Tax Cuts and Jobs Act and ongoing investments to satisfy rising demand, particularly for AI infrastructure. In terms of capital allocation, we returned $3 billion to shareholders in the quarter, which included $1.6 billion for our quarterly cash dividend and $1.4 billion for share repurchases, with $10.8 billion remaining in our repurchase program. Given our confidence in the business and the robustness of our cash flows, we have decided to increase our dividend by $0.01 to $0.42 per quarter, affirming our commitment to returning at least 50% of free cash flow to shareholders annually. To sum up, we experienced another quarter where both top-line and bottom-line results exceeded expectations, driven by strong order growth and solid margins, showcasing our innovation engine's capability to deliver significant top-line growth and profitability. We are focused on making strategic investments in innovation to seize the substantial growth opportunities ahead, underpinned by our commitment to disciplined spending management. This powerful combination continues to support strong cash flow and our ability to offer substantial value to shareholders. Now, turning to guidance, our Q3 and fiscal year 2026 projections assume that current tariffs and exemptions remain unchanged through the end of fiscal 2026, consistent with prior guidance. Looking forward, we will maintain our emphasis on sustainable growth, with fiscal discipline supporting operational efficiency and ongoing capital returns. For fiscal Q3, we anticipate revenue to be between $15.4 billion and $15.6 billion. We expect non-GAAP gross margin to range from 65.5% to 66.5%, non-GAAP operating margin to be between 33.5% and 34.5%, and non-GAAP earnings per share to fall between $1.02 and $1.04, with an assumed non-GAAP effective tax rate of approximately 19%. Cisco is on track for its strongest year yet, as reflected in our guidance for fiscal year 2026, which forecasts revenue between $61.2 billion and $61.7 billion and non-GAAP earnings per share to range from $4.13 to $4.17. Sami, let’s now proceed with the Q&A.

Thank you, Mark. Operator, can we move to the first analyst in the queue?

I guess my 2 questions, maybe the first one, you folks obviously have very solid momentum on the AI side with a $5 billion AI target for fiscal '26. Can you just help us think about the mix between Silicon One versus Optics in the book? And then really, as you think about some of the newer products like the G300 and the P200 on the Silicon One side, do you see these opening up incremental markets or workloads for Cisco? Or is it more about deepening your existing relationship? I'd love to just kind of understand that side. And then maybe on a follow-up, Mark, you just touched on the gross margin decline in April. I assume it's all memory related, but would love to just understand what's happening there. And if you feel like that's a trough on the gross margin and memory issues or not.

Amit, thank you very much for the question. So on the AI infrastructure side, the $5 billion that we now have raised our estimates to during fiscal 2026 does not include any of the recently announced P200 products, nor G300, also neither of the Optics solutions that we announced this week at Cisco Live EMEA. We talked about this past quarter, the mix was 60% systems, 40% optics. And I think that's been reasonably consistent over the last few quarters. Your final question about whether these open up new markets, I think these will allow us to continue to sell next-generation solutions across our existing customer base, and I think it will continue to help us gain traction with the neoclouds, the sovereign clouds, et cetera, help us get the scale across technologies out and continue to sell these solutions to existing customers as well as new customers. But just to reiterate, P200 and G300 are not in the $5 billion expected for fiscal '26.

Thank you, Amit. I'll address the gross margin question. As we consider the Q3 guidance, there are two main factors at play: the product mix and memory prices, which you pointed out. First, I want to highlight the strong growth in hardware across both our existing and newly introduced platforms, which are accelerating much more quickly than past launches. Regarding memory, we're going to manage what we can. Chuck mentioned that we have already announced price increases, and we will closely monitor this and make adjustments as necessary moving forward. We also have some terms and conditions with partners and customers that we will modify to enhance our position. Additionally, we are leveraging our financial strength and our excellent supply chain. This is reflected in our advanced purchase commitments, which have increased by $1.8 billion in the last 90 days and are up about 73% year-over-year, largely driven by memory. Finally, we are concentrating on what we can control, emphasizing financial discipline and profitability, aiming to grow earnings per share faster than revenue. You saw evidence of this in Q1, Q2, and it's also reflected in our full-year FY '26 guidance. While we don't provide guidance for Q4, it is evident in the implied Q4 guidance as well.

I have two questions. First, when examining product revenue growth, the entire outperformance came from networking, which increased by 21.1%. Could you provide more details on this? You mentioned orders earlier; can you elaborate on revenue growth? How did the different networking segments perform, and where did the outperformance originate? My second question relates to your guidance for the fourth quarter. When I analyze the sequential growth from Q3 to Q4, it only shows 1.4%. Typically, we would expect around 5% or 6%, especially in what is a seasonally strong quarter. Why is this growth expectation so low? Is it simply a matter of conservatism, or is there a concentration of growth anticipated in the next two quarters?

Yes. So thanks, Tal. Really, across networking, we're seeing strength, frankly, across the entire portfolio from the Campus to the data center, to the manufacturing floor in terms of our IoT offerings as well. So you're seeing very strong growth. Again, we talked about data center switching being 6 out of the last 8 quarters, double-digit growth. It was double-digit growth this quarter. You're seeing strengthening again in the campus and a move to these new platforms that's faster than previous launches. And I think your second part of the question was really just around seasonality. Is that right?

Yes, sequential seasonality.

Yes, sequential. So if you look at it, the product revenue typically is kind of down mid-single digits quarter-over-quarter, and we were up 5%. And as you look at Q3, really the typical seasonality is kind of low single digits. And that's right where we are despite the fact that we had a huge Q2 in terms of year-over-year growth, 14% and also seasonally a very strong quarter in Q2 as well. So we feel pretty good about the Q3.

Yes. One other comment, Tal, I'd make on that is that I think with the nonlinear nature of the hyperscaler business, it creates a little bit of uncertainty relative to our historical numbers that you're so used to seeing.

I want to ask the gross margin in a different way. Backing into the EPS guidance, it seems like EPS is a little higher than where the Street is in the fourth quarter, maybe a couple of pennies. And that would imply that the gross margin is expected to trough and get better? Or is that just due to operating margin? And then I was wondering if you could address that. I think the first question talked about the trough. But if I look at the guidance that way, something is getting a little better on the operating margin line. Is that from cost cutting or gross margin in the fourth quarter? And then I have a follow-up.

Yes, thanks, Ben. So on gross margin, certainly, a lot of what we talked about relative to what we can control and some of the memory price increases that we've seen, some of that is just timing. So we think that, that will improve as we move forward. And then certainly, we're not here to talk about FY '27. But as you get into FY '27, we think that software growth will improve as well, and that will certainly help us.

You had a second question, I think, Ben. Okay.

Ben, we can catch up with you afterward.

I guess I want to go more into the architecture stuff, Chuck. As we think about the AI networking opportunity and the traction that you've been seeing, I'm curious of your updated thoughts on how you view scale up as an opportunity for Cisco. What have you been doing? When does that start to maybe materialize if you see that as a large opportunity? And as my second question, I'm curious, given the traction you're seeing in the neoclouds and the sovereign opportunities, just maybe an update of the relationship, the engagement you've had with NVIDIA and how much that started to become maybe a driver outside of the hyperscalers?

Thank you, Aaron. We haven't made any announcements regarding scale-up yet. In the past, I've mentioned our plans to participate and our expectations for future products and revenue from it, but no specifics have been shared. So, I would say stay tuned for updates. Regarding our work in the enterprise, sovereign, and neocloud sectors, there's no significant expectation for the sovereign side to impact FY '26. We don’t need that to accelerate for our guidance; any positive movement would just be additional upside. The neoclouds are expected to ramp up starting in the second half, but mainly in FY '27. As for NVIDIA, we've seen a notable increase in our engagements with them recently. We monitor the number of these engagements, and we’ve experienced a 70% sequential increase, which is encouraging. We had Jensen speak at our AI Summit, highlighting the strength of their GPU and compute capabilities alongside our networking and security solutions, which signifies the partnership's potential. We are beginning to see early successes, and I believe that momentum will continue to grow.

Building on the last question, following the AI Summit and discussions with many customers, how developed is the enterprise's interest in making investments? When do you expect the enterprise AI narrative to gain more traction? Additionally, regarding the price increases, did you notice any significant changes in demand or forward orders as a result?

I'll take the first part and you can handle the second. Regarding the AI Summit, the diverse representation we've gathered signifies the strong partnerships we've established and the role we are expected to play within the ecosystem. We are very enthusiastic about this and have received much positive feedback. In terms of enterprise applications, we are observing initial use cases in areas such as quantitative analysis, fraud detection, and video analytics across sectors like finance, manufacturing, and pharmaceuticals. There are also examples in retail, where mobile device agents are being utilized to enhance staff engagement with customers. This development reflects a blend of investments in both cloud-based architectures and on-premises solutions. Our data center switching business, which targets the enterprise segment, has experienced double-digit order growth in 6 of the last 8 quarters, with positive growth also noted in the remaining 2 quarters. This indicates ongoing significant investment in private data centers to support these applications.

On the second part of your question regarding pull forwards, we didn’t observe anything in the quarter that indicates significant pull forwards. We analyzed the usual metrics for linearity throughout the quarter and saw good double-digit growth as we progressed. We checked for any pipeline pull forwards from future quarters and didn’t find any evidence of that. We also looked at software activations and conducted channel checks. The pipeline actually seems to be building in the later quarters instead of being pulled forward, which is encouraging. Regarding the price increase and its acceptance among customers, I believe they understand it since it’s an industry-wide situation. I haven’t encountered any customers who are inclined to delay or defer their strategic investments in technology, and we haven’t seen any concerns on that front.

I would just add that Mark and I had lunch with one of our biggest customers yesterday on our campus, and we had a detailed discussion about the various dynamics occurring in this space and the pricing pressure. They completely understood and are committed to ensuring that our partnership continues to benefit both parties. Customers recognize that this is an industry-wide issue. While they may not be pleased about it, they acknowledge it's a situation we are all facing together.

I think, frankly, also a lot of them understand that we'll probably be able to manage this a lot better than some of our peers, too. So we'll get through this together.

I have a 2-parter around the order numbers. So one, I appreciate the strength that you guys reported in AI orders. But it certainly sounds like the over $5 billion of order numbers sounds a bit conservative given the momentum that you're seeing in sort of the CapEx programs that have been announced over the last couple of weeks. So maybe if you could talk to why that number is only moving up to in excess of $5 billion. I think you said in the past it would double the prior year. And then along those lines, I think you also mentioned that you're only going to recognize over $3 billion in AI-related revenue this year. And I think previously, you had said about $3 billion. So does that suggest that the timing from a revenue recognition perspective shifts into fiscal '27 and gives you more visibility from an AI infrastructure revenue perspective next year on top of the growth that you're seeing here in '26?

Mark, I'll take the orders and you can focus on the revenue. Thanks, David, for the questions. Regarding the AI orders and the $5 billion, it's important to understand that these customers are nonlinear and the orders can be quite unpredictable. There are only a few major customers placing these orders, which is why we're providing that number based on the current pipeline. Our teams will work hard to increase that number, but this is what we see today. I also want to mention that in Q2, we secured three new use cases with these major players: one in optics and two on the system side. We are still identifying new opportunities, and hopefully, this will lead to better numbers in the future, David.

Yes. And David, just on the revenue question, these customers plan well in advance, which has its advantages to it. You're seeing orders converting to revenue. I think that you're seeing a continued ramp as we move through the year. And you're spot on in terms of giving us better visibility on some of the revenue rec that we would look at into '27 that will continue to follow on.

Maybe one on AI Optics and one on non-AI. For the AI part, Chuck, you talked about the new products you're launching in Optics or the pluggable optics that you've launched recently. Particularly a big focus this year is CPO and sort of support for that in the infrastructure. So any thoughts or insights in terms of how Cisco plans around sort of addressing the CPO functionality, particularly, are you seeing customers sort of look at that as part of your roadmap? Are they looking for Cisco to have that as part of their roadmap in optics? And then for my non-AI part, just trying to get a sense of what you're seeing on the order front for campus in the sense that we see your networking orders did accelerate, but when we strip out AI from it, what are the trends you're seeing on that order front for ex AI in networking and whether the end of life of Cat4K and 6K just to put that in context in terms of how much of a tailwind that is to your campus orders?

Thank you, Samik. Regarding the CPO, we absolutely believe it will happen, but it's not imminent at this moment. We demonstrated this technology over two years ago and have the capability to build it as customers express interest. Currently, customers prefer choice, and many want to differentiate between Optics and silicon to avoid being locked into a single vendor, which limits their options. We announced the 800-gig LPO, which offers significant power savings and greater efficiency for AI scale-out, and we will continue to innovate in that area. On the enterprise networking side, let me provide some insights. When we examine enterprise switching, enterprise routing, wireless, and industrial IoT platforms, all four transitions are accelerating faster than previous transitions we've witnessed at Cisco. However, we are still in the early stages. There's plenty of opportunity ahead. Our network products have seen double-digit growth for the past six consecutive quarters, and data center switching has experienced double-digit growth in six of the last eight quarters. Additionally, Wi-Fi 7 grew 80% sequentially, and our campus switching business saw nearly double-digit growth in orders. We're observing considerable momentum and enthusiasm from customers eager to upgrade.

Yes. To add to that, Chuck, I want to emphasize that if we examine the 18% bookings growth, excluding web scale, we still achieved a notable 10% year-over-year growth. This indicates a very strong quarter from an order perspective. Additionally, all three geographies we monitor saw double-digit growth and accelerated their growth from Q1 just 90 days ago. Overall, it was a very strong quarter.

Yes, I have two questions as well. First, I understand that security was weaker as Splunk transitioned from perpetual licenses to SaaS. However, can you speak to the order rates and new product demand for your security portfolio that may indicate a potential recovery in your security offerings for the rest of '26? And for my follow-up, Chuck, I noticed you mentioned that your $5 billion in AI orders does not include your G300 or the 100 terabit switch portfolio. More broadly, could you discuss the order rates for your 51 terabit and 100 terabit data center switch portfolio, as there seems to be increasing demand in that area?

Thank you, Karl. Regarding the security update, I have three key points to mention. First, we discussed the Splunk transition, which is causing a short-term revenue challenge due to the accounting differences between on-prem and cloud. Second, we've seen strong traction with our new products, which largely didn’t exist three years ago, including Secure Access, XDR, AI Defense, and Hypershield. Last quarter, we acquired 1,000 new customers for these products, marking a 100% sequential increase, indicating robust customer adoption. In total, 4,000 customers have purchased these products since their introduction. Lastly, our refreshed firewalls have achieved double-digit unit growth for the third consecutive quarter, with new high-end models launched in the past four months. As we approach the end of Q4 this year, we expect the organic Cisco security portfolio to approach double-digit revenue growth. While the portfolio is slightly behind our expectations for the year, its performance is solid despite being overshadowed by the Splunk accounting situation. Regarding the $5 billion in AI orders, we are maximizing our production capabilities, with major customers requesting as much as they can obtain. We're also experiencing significant demand growth in 800-gig optics and the Acacia portfolio. The demand is strong, and we need to keep increasing our capacity to meet it.

Yes. I believe that in addition to the demand, we are also making significant progress with each of these hyperscalers across our portfolio, along with achieving additional design wins this quarter.

I have 2 as well. First, I was wondering if you could just talk a little bit about the EBIT margin outperformance in the quarter. Was that driven by cost savings? Is that a mix benefit as you do more with hyperscale customers? And then second, I wanted to just revisit the comments around the April quarter gross margins. And I know you talked a little bit about that just being timing. Is the implication that you'll just take more pricing over the coming quarters to kind of recover a lot of that commodity cost inflation? Or is that a timing comment around just the mix of AI revenue perhaps? Just would love your general thoughts on that.

Yes. So thanks, Michael. So I'll take the first one just on the op inc percentage. As you pointed out, 34.6% for us is actually the highest in 4 quarters. So even though you saw a little bit of margin decline on a quarter-over-quarter basis and certainly year-over-year, we're just continuing to execute very well. And you're seeing us be very financially prudent in our expenditures and just really determined to drive profitability, and you saw that in the fact that EPS and top line both grew double digits, but the EPS line actually exceeded the top line. And then in terms of the timing, I think the measures that we talked about in terms of price increases and then some of the Ts and Cs that we're going to be modifying with our partners and customers, those just take a little bit of time to run through. So you'll start to see that over time.

Apologies, I was on mute. Yes. Chuck, can you give us an update on how your commercial momentum is progressing in the cloud, especially concerning AI? You mentioned some successful use cases with large hyperscale customers. Can you share what a typical use case looks like where you can significantly outperform your main competitors? How do you achieve that? As you expand into new cloud opportunities and the broader market, what are the dynamics like? Is it a similar use-case-focused competitive environment? Are you seen as a secondary source for your clients, or do they prefer Cisco as their primary provider for networking solutions related to AI?

Thanks, Pierre. In response to the first question about how we win, our Optics portfolio is highly regarded and I believe it's the best in the world. We have the optimal Optics portfolio that our customers are looking for, and we need to increase our capacity to meet growing demand. Regarding the system and silicon sides, we've previously discussed the importance of silicon diversity to our clients, which is one reason they're eager for us to succeed. Our systems have two major differentiators: the programmability of the silicon and the power efficiency we incorporate. Our business approach and the strong partnerships we foster are also valued by our clients, which strengthens their desire to work with us further. Now, about neocloud.

Yes, on the enterprise side, there's opportunity across AI factory with NVIDIA, so with GPUs. But what we really focus on and what we're most interested in is networking and security in addition to strategically where we need to position the GPUs. But by and large, we are the network standard, particularly when we're partnering with NVIDIA in the enterprise right now. So that's what we see happening. And again, we think bundling our security solutions like AI Defense and those sorts of technologies in these AI factory solutions is a good opportunity for us as we go forward.

Regarding the campus side, I want to address a few questions and connect the dots. You've previously mentioned the refresh opportunity as more of a fiscal '27 event, but now it seems to be ongoing. I understand, Chuck, that you're just getting started, but what's behind this shift? Moreover, why aren't customers, particularly in the enterprise sector, placing their orders now in light of the price increases they anticipate? These are savvy buyers. It brings to mind the supply chain issues from a few years back, where we began to notice a rush of orders.

Yes, thanks, Jim. First of all, I believe we are witnessing an increase in activity. I’m not certain if this is what you were referring to, but I would like to clarify a few points. Many customers have learned from the COVID experience and understand that during significant transitions, they do not want to be stuck with outdated technology. As they assess the requirements necessary for Agentic AI, including the security architecture, the network architecture, and latency needs, they are focusing on ensuring their infrastructure is modernized. Additionally, there have been valuable lessons learned over the past couple of years regarding equipment that has reached its end-of-support date and the cybersecurity risks it poses. This concern is well recognized and is motivating customers to upgrade. On the core networking side, the memory requirements are not as high as those in compute platforms, which means price increases are less significant compared to what some of our competitors are experiencing with larger portions of their offerings. While I believe some customers may attempt to place orders ahead in certain cases, I don’t anticipate this becoming a major trend in the networking segment of our business. Furthermore, UCS constitutes a smaller percentage of our business compared to how it is represented by some of our peers.

All right. Thank you, Jim. I want to hand it over to Chuck for some closing remarks following the Q&A.

First, I want to thank all of you for being with us today. I also want to express my appreciation for our team. I’m very proud of their accomplishments and the hard work they’ve put in. The results we are sharing today reflect the culmination of several years of effort. We are committed to continuing to deliver innovation to our customers, and our teams are dedicated to this mission. We are particularly proud of our performance, especially in our core areas. It’s important to focus on two major areas where we see momentum opportunities, and we are just at the beginning of these. Firstly, there are the hyperscalers and AI build-outs, along with the Silicon One architecture and the new innovations we announced this week, which include new use cases we gained during the quarter. We see growing opportunities with enterprise sovereign and neoclouds in AI. Additionally, the start of this campus refresh feels like the beginning of a long journey. This represents a multi-year, multi-billion dollar opportunity for us. Therefore, I am very confident that we will achieve our strongest fiscal year yet. Once again, I want to thank our teams, and I appreciate all of you for joining us. Sami, I will hand it back to you.

Thank you, Chuck. Cisco's next quarterly call, which will outline our third quarter fiscal year 2026 results will be on Wednesday, May 13, 2026, at 1:30 p.m. Pacific Time, 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.