CSCO earnings call transcript, November 11, 2026

Welcome to Cisco's first quarter fiscal year 2020. K27 Financial Results conference call. At the request of Cisco, today's conference is being recorded. If you have any objections, you may disconnect. Now, I would like to introduce Sammy Baudry, Head of Investor Relations. Sir, you may begin.

Thanks, Sammy, and thank you all for joining us today. I'm pleased to report that Cisco delivered an impressive start to fiscal 27. We're executing against our strategy. and seeing growing demand as customers invest in the infrastructure they need for the AI, or SI, era. What gives me the greatest confidence is not just the results we're seeing today, but also the opportunities we see ahead. In Q1, we delivered record quarterly... ...revenue of $18.5 billion, up 24% year-over-year, and record non-gap earnings per share of $1.40, up 40% year-over-year. These are our strongest top and bottom line growth rates. ...in over 15 years. We are demonstrating strong operating leverage and enhanced earnings power with earnings growing faster than revenue. As a result of this strong performance, we are significantly increasing our Fiscal Year 27 guidance. ...which Mark will cover shortly. Our probable growth generates robust cash flows and fuels consistent capital returns to our shareholders. In Q1, we returned $3.7 billion in value through dividends and share repurchases representing... ...95% of free cash flow. Our strong start to fiscal year 27 demonstrates the criticality of networking and security together as Agentic AI accelerates. As customers look to manage increasing traffic, costs... ...and threats. They are turning to Cisco for our networking expertise, security and observability solutions, and services. They trust us to help scale, secure, and optimize their environments for the Agentic AI era ahead.

Thanks, Chuck.

Thank you, Mark.

Ahmet Dharanani with Evercore ISI. Your line is open. Ahmet Dharanani, thanks a lot.

Good afternoon, everyone, and congrats on some really impressive numbers. I guess maybe the I guess it's a little bit. To start with, you know, you folks are raising your fiscal 27 AI revenue target to $9 billion from I think it was $7.5 billion last quarter. Could you spend a little bit of time on what's changed in the 90 days? Is it just larger deployments of existing customers or you have better visibility with TSA? You can see in terms of allocation, look and decide what's getting better. If there's any SKU in silicon one versus optics, that'd be helpful. And then my follow-up really, Mark, on your side, the back half guide implies revenues will actually accelerate really well to like $19.3 billion. run rate versus the $18.1 in Q2. But I think the EPS uptake in the back half is a bit more muted at $1.38. Can you just talk about the puts and takes in the back half that's happening under the revenue line? That'll be really helpful. Thanks and congrats again.

Hey, this is Chuck.

Thank you, Ahmed.

Ben writes us with Milius Research. Your line is open, sir. Yeah.

Hey, guys.

Thanks. It's a pleasure to be speaking with you and some nice results here. Chuck, could you talk about your exposure to the neocloud space and whether that's in the AI revenues you're guiding to? And, you know, there's some. Folks that think that that could decelerate, you know, as they try to see what their funding situation is like throughout the year and wondering what your exposure is there. And then just overall with regard. To the campus cycle. My follow up is with with regard to where are we in it. You know, is there is a why would it decelerate, you know, from here in terms of the campus up. Grades, given all the security concerns that are out there, just a little more color around where we are in that cycle. That would be great. And thanks again, guys.

Thank you, Ben.

So I would say I would I would. characterize our neocloud exposure to being relatively immaterial. We certainly have business with them, but we've been very conservative relative to credit situations and chances. The second part of that question, the neoclouds we do not include in our AI revenue. That's simply the hyperscalers. Secondly, on the campus cycle, I think you're right. We are... You know, we saw very strong results across the enterprise networking portfolio this quarter. I think double digits across all of networking, all the networking categories. In the campus switching side, I believe that we are... In the quarter, we saw of the switching we sold, only 9% was really coming from the new portfolio. And so, again, we see this being very early. And I think your assumption relative to the impact of... Mythos and some of the upgrade stuff, I think, are quite accurate. We don't anticipate any meaningful change and likely just more customers looking at modernization for bandwidth reasons relative to their... rollout of agentic, as well as just security issues and modernization relative to the post-Mythos era.

Thank you, Ben.

Michelle, can we move to the next analyst in queue? Tally... Yanni with Bank of America. Your line is open.

Hi, guys.

I hope you can hear me. I have two questions. First, Chuck, you said in the prepared remarks that this is a multi-year word. Beginning of a multi-year cycle. And the question is, what gives you the confidence to say? And, you know, the alternative would be this is just a cycle where at the peak of a cycle, et cetera. I'm just giving kind of the alternative. So what gives you the confidence to think that this is a multi-year cycle, and this is not just peak cycle of spending by hyperscalers. And the second question that is, we speak a lot about campus, but can you talk about the readiness or the deployment of enterprise networks for AI? Meaning, are you seeing enterprises preparing for AI, updating networks, or what are your expectations? on that from? Thanks.

Thank you, Tal.

So, we do think it's a multi-year cycle, and we think that it's obviously billions of dollars. And let me give you five. There are five drivers that I think are the key to why I have a high degree of confidence around the sustainability of this growth. First is the hyperscale success. We've had 18 AI design wins in the last five quarters, and obviously we raised the AI guy. 9 billion more than double what it was last year. So that's the first that we expect to continue. The second is the campus network refresh and modernization. We saw we've seen double digit order growth multiple quarters. We're still in the very early stages, less than 10% on the transition. So that's the second big driver. The third and connected to that, but more broad is the post mythos opportunity. We're beginning to hear customers that are attributing orders to early mythos implications. We heard it in Europe, as an example, with service providers relative to the managed services, CPE, that they're needing to upgrade for their customers. But, and while customers want to move fast, they want to do this right. So they're taking the appropriate time to plan, to design the right architecture, because they know if they're going to go through doing this, they got to get the architecture. That's exactly right. So that's the third. The fourth is sovereign infrastructure. We all know that countries around the world, beginning in Europe, are looking for infrastructure that they...

feel like they have operational control over. And we're fortunate that we're one of the few companies that has maintained a robust on-premise portfolio. So we're able to deliver, we announced a year ago, sovereign critical infrastructure for... expanded and launched it for Canada. I recently pre-announced it in India and will continue to roll it around, roll it out around the world. In addition to the work we're doing with sovereign cloud providers like Humane, G42 and other... Sovereign Nations. The fifth and final one is this acceleration we're seeing of the hybrid data center architecture with our enterprise customers. So our enterprise customers will be running AI applications... ...in the cloud, but they are also investing heavily in private data centers. They want to run open weight and open source models in their own data center. They want to train on their own data in their own data center. And that's why we've seen nine out of the last 11 quarters, we've seen double digit order growth in our enterprise data center networking business. So we feel like each of these areas, all five of these are each or multi-year. multi-billion and they're all, they all feel like they're in relatively early stages. So that's what gives us the confidence on the sustainability. And I think on the readiness of the enterprise for AI, I think it's a lot of what I just described. As well as a real focus on agentic security, agentic identity, agentic observability, as well as just the new security architecture that's needed for the AI era.

And so I will. I was at one of the major banks in New York just a few hours ago before earnings, and we had a long discussion about this very topic. And I think that's generally what we see going on.

Thank you, Tal.

Michelle, can we move to the next analyst in queue? Thank you. Mita Marshall with Morgan Stanley. Your line is open. Great. Thanks. Just a couple of questions. Just in terms of the strength in the Asia-Pac orders this quarter, I assume kind of most of that is due to the Sovereign Clouds, but just wanted to kind of get any further detail there. And then just on the security business and kind of what you're seeing there in terms of the Splunk business. I know we've had some license to subscription transitions. If you could just kind of give an update as to where we are there and kind of the impact of that to the security growth. Thanks.

Thanks, Mita.

I'd say APJC did show incredible growth and it was very balanced. If you look across the segments, we had enterprise in excess of 30 percent, public sector in excess of 70. Service product on cloud in triple digits. It was all theaters, all architectures, all segments. Again, I think to your point, it was sovereign demand, public sector demand, telco investment. Great performance in the campus networking side. And so we see them also focused on the last day of support opportunity and some of the post-mythos refresh early activity. As it relates... What was the second question again? Security. Oh yeah, security. Sorry. I'll let Mark talk a little bit about the Splunk numbers, but we actually saw some really good signs this quarter on the security front. So the first is that our core Cisco security, ex Splunk, order growth was 15%, which is the best it's been in probably three years. We saw the firewall business. Which is something the teams worked hard on refreshing and really becoming competitive again. We saw the third consecutive quarter in excess of 30% growth. And then our zero trust secure access portfolio. This is a product that didn't exist three years ago. We now have 5,400 customers. We added almost 800 more customers in Q1. And that's a technology that is zero trust. And there's also an element of... of it that is AI defense related. And at the AI defense layer, we're now protecting 2 trillion tokens per month. And we're approaching 500 customers that have AI defense. And so we're seeing good activity there.

We're using Splunk as a platform for AI security. And we're also seeing customers really buy into the security and networking coming together on monitoring work. Explodes east-west traffic segmentation with technologies like Hypershield and LiveProtect. And so we see a lot of good positive momentum in the security front. Mark, you want to talk about Splunk and just the data? Yeah, and just to add one data. Point to the AsiaPAC question that you had. You know, we saw really good strength in several countries actually within Asia. Japan, really strong. China, Singapore, Korea, and Australia is part of that as well. And they had a really good. So really good breadth in terms of the overall growth. And then on the security front, you know, I think as we exited last year and we gave you the outlook for this year, we said that, you know, one to really expect kind of low single digit revenue growth and that Splunk would turn positive and begin to improve as we move through the year, as well as the overall security number to really improve. as we went through the year. So I'd say with the 7% that we posted in Q1, I think we're at a really, really a little bit above the, the expectations that we set out for, for the year. And we feel good about, you know, turning the corner on both of those and, and starting to see improved growth as we. move through the year.

Thank you, Mita.

Michelle, can we move to the next analyst in queue? Thank you. Joseph Cardoso with JP Morgan. Your line is open, sir.

Hey, good afternoon, gentlemen, and thanks for the questions here. For the first one, I wanted to just get a temperature check on the supply side of things. I think over the last couple of quarters, you've sounded pretty confident around your ability to secure what you need and then some probably. I was just curious, with a couple more months of visibility on the bell, any change on that? On particularly around things around silicon memory and whether you're seeing anything tightening. And then as the second question, and maybe this is piggybacking off of Amit's earlier question, you know, gross margins are holding up much better than envisioned even relative to the two are looking at the two. guide there. I was hoping you can maybe help bridge between pricing, cost, and mix behind that. And then as we think about the larger AI target for the year, any way to think about gross margin progression through fiscal 27, and how we should be thinking about the exit run rate and the puts and takes. Thank you. Yeah, let me take the first one. And I may get you to just repeat the second one real quick. I got it for you. The first one just around supply, we feel really good. You know, the team's done a great job in really leveraging our financial strength and looking all up and down the supply chain, whether it's silicon. It's PCBs, it's power supplies, it's memory and optics as well, and really engaging where we need to in terms of long-term strategic supply agreements. You saw a new multi-year memory.

We entered into this quarter, so a big, big increase, obviously, in our advanced purchase commitments as a result. We're seeing, you know, not a lot of issues at all, really, in terms of supply, the biggest one there. There's probably optics, and I think that we see that improving here over the next quarter, but overall feel really good about the supply that we have and the ability to meet not only the raised guide for the year, but I think that if demand turns out to be stronger, we can. probably meet that as well. And the second one, I'm sorry. He was asking, he said gross margins are holding up better than perhaps were expected. What are the contributors to stay in? Yeah, I think, I think, so we still have. The same, you know, headwinds in terms of component prices and mix is the big thing in terms of hardware growth, just in general, really outpacing. The software growth that you're seeing, I think that for the year, most of the expectations were for a gross margin number at just under, just shy of the 65 percent. we're comfortable with that for the full year.

Thank you, Joe.

Michelle, can we move to the next analyst in queue? Thank you. Simon Leopold with Raymond James. Your line is open. Thank you.

Thank you very much for taking the questions. First one I wanted to ask was, you guys have shown some real progress with the AI backend success. Within the systems value, can you give us a rough idea of the mix between top of rack? Switching in the spine versus the routing used for scale across. Rough order of magnitude split is all I'm looking for. And then as a follow-up, I'm just wondering if you could update us on how much of your growth has come from price changes versus unit growth. I know it's not precise, but also a rough idea of that would be appreciated. Thank you.

Yeah, I'll take the first one, then, Mark. You can take the second one. We don't, I don't have the breakdown exactly between those technologies. I think the way I would think about it is in the last five quarters, we've had 18 design wins and we've had them across, you know, scale out architectures, both systems and then. Scale across in systems as well as optics. We talked about in the prepared remarks, two wins with a P200 for scale across and then a 1.6 terabit scale out optics win. And so we're actually active in all the places that you mentioned. We just haven't given those numbers at that level of detail. So Mark, you want to talk about the gross margin? And maybe just to reiterate, you know, we've talked about just the split between. Optics and systems being roughly 50-50. That'll vary on any given quarter. But that continues to be sort of what we're seeing. You know, in terms of the price versus unit, and Simon, appreciate that you mentioned it. It's certainly an imperfect science. But I think that the estimate that we gave you a quarter ago was that we expected revenue to be impacted about five points for the full year. I think that's probably a pretty good estimate still for the year.

Thank you, Simon.

Michelle, can we move to the next annals? Thank you. David Vogt with UBS. Your line is open, sir. Great.

Thanks, guys, for taking my questions. So, maybe check the first question. I know you don't want to be on this AI order treadmill, but just. By doing some really quick math, it looks like we had a little bit of a sequential downtick in AI orders taken from hyperskills in the quarter. I know the industry is somewhat lumpy and not linear. Can you talk to kind of how you're seeing that develop as the year progresses and characterize kind of like the depth of your conversations? I think later in the deck, you talked about potential wins for not only T200, but T200, T300, and other programs. So just love to kind of get your thoughts on how those conversations are progressing. And I'll give Mark my follow up quickly. No, Mark, maybe just a follow up to Simon's question. I'll just kind of take your AI revenue guide. It looks like, you know, the incremental growth coming from AI revenue today is about two points faster than we thought 90 days ago, and pricing is relatively the same. Is it sort of the assumption that... Campus is kind of that incremental driver that kind of rounds out the upside to the outlook versus 90 days ago. Is that the right way to think about kind of the moving parts and the revenue guide? Thank you. Yeah, David, on the AI order front, I'd say... On a year-over-year basis, we saw really nice growth. And I think if you look back at last year, I don't remember the exact number, but it was a billion and some change in first quarter. And then we ended up at 9.3 billion.

escalated during the year. So while I don't expect there's normal linearity in this business at all, I think you're right. It's going to be lumpy and there's going to be some quarters that are going to be big, others that are going to be smaller. And that's why we made the decision. just to go to the revenue side so that it's just cleaner. And we don't get into these gyrations about how many orders did you take in week seven of Q1. Some color around the different technologies. Obviously the P200 is being very successful. We've had lots of wins with the G200 in the scale out space as we talked about. I will say that we've begun to ship the G300 now and it's now in labs. Which is a really good sign for us. We feel really good about that and obviously we continue to have more wins in the optics space. The design win we had this quarter at the 1.6 terabit optic was a client side win and it was our first client side optics win. at this particular hyperscaler so we feel we feel good about the continued progress that we make in that space. Yeah David just coming back to you on the numbers. So you know we we've taken our guide up to. 19% on the top line about eight points of that growth is is attributable to hyperscale and 11 points then would be attributable to our x hyperscale or more sort of. core business so if you break down you know the overall guide we raised by two and a half billion 1.5 billion of that was hyperscale and a billion dollars was our core sort of x hyperscale business.

And in terms of what's driving it you know you mentioned campus but it's much broader than that it's not just campus. I think if you look at really all of the product families within networking for example. Every one of them grew double digits this past quarter. So we also saw double digit growth across every region and double digit growth across every market customer market as well. So it's broad based and the core. continues to do quite well.

Thank you, David.

Michelle, can we move to the next annals? Thank you. Thank you. Carl Ackerman with BNP Paribas. Your line is open, sir.

Hi, this is Sam Feldman.

Michelle, can we move to the next analyst in queue? Thank you. Atav Malik, LaCity, your line is open.

Hi, it's Adrienne Colby for Atav Malik.

Thank you for the question.

I wanted to ask about the optic side of the business. I know in the past you've talked about Acacia at about a 1 billion or a little bit above that order run rate. Didn't know if you could talk to if that's expanding and then hoping to get a little bit of an update on the timing of Cisco's newer multi-rail line system and also timing around the USSP product. Thank you. Yeah, so thanks, Adrian, for the question. I think on the optics side... Yeah, we see this as a really sizable opportunity for us and seeing a ton of growth there. We actually had a billion-dollar quarter just last quarter. On the optics side. So it's growing substantially. Q1 was a record Q1 for us as well and really see the demand increasing there as we move forward.

And the USPF platform is still a couple years out, probably a few years out. And the multi-rail system, as I think Mark mentioned earlier, is a multi-rail system. First, first, first few months of calendar 27.

Thank you, Adrian.

Michelle, can we move to the next analyst in queue? Thank you. Ben Boland with Cleveland Research. Your line is open, sir. Thanks.

Good afternoon, everyone. I appreciate you taking the question. Could you talk about what we should expect from services? It's kind of come off its lows, but really... Not intensifying or accelerating. Any thoughts on when and how that gets better? And then as a follow-up, a little bit of a bigger picture question. It does seem like there's some high-level thoughts that raw material... Capacity ads are happening in the kind of picks and shovels or material side of things, but maybe the volume of data center shells that come online into 2027, well, I guess 2028 and beyond. Maybe there's more questions there. Curious how you think about the potential... a potential imbalance where maybe we are in an oversupply situation from a raw material perspective and don't have anywhere to put that stuff in 2028 and beyond. Thanks. Yeah, I'll take the first one, Ben.

Thanks for the question.

So... On the services piece, you know, we've seen a significant uptick in hardware revenue. Hardware revenue actually grew over 50% for Q1. And the thing with services is it's ratable. And our hardware scalers don't attach a lot of services as well. But what you're going to see is that business is going to continue to improve. We broke into the positive territory this quarter. I'd look for that to have some continued improvement. As we move through the year and on the on the demand side from a data center perspective, and especially as we get out to 28 and beyond, I actually don't foresee. I think the geopolitical side of it's going to give work. And I think that I think given the demand that we see today, these data centers are going to get built. And so I don't think we we don't feel like there's much risk on the. On the resources side and anything that would surprise us relative to the data center build out over the next two years.

Thank you, Ben.

Michelle, can we move to the final analyst question? Thank you. Michael Ng with Goldman Sachs. Your line is open, sir.

Hi, good afternoon.

Thanks for the question.

First, for Mark, I was just wondering if you could just provide a little bit more color around the margin out. Look for the second quarter and for the full year. I think it was better than expectations despite, you know, the growing hardware and hyperscale mix. So, you know, what's been coming in better. And then, Chuck, just as a follow up. I was just wondering if you were seeing any early signs of demand shifting outside of the United States for data center AI networking, just given, you know, the results of the midterms. And the risk of capacity becoming harder to originate in the U.S. Thank you.

Hey, Michael.

So I'll take the first one. Yeah, I think that, you know, the two big factors, obviously. Impacting gross margin or the component costs increases that we've been seeing. There's a lot of efforts to combat that, including some of the price increases that you've seen, but also these long-term agreements that we're entering into to get. Supplying, in some cases, prices as well. And then there's the mix. But offsetting that is really a number of productivity improvements that we've had around memory, as well as just the scale and efficiency that we're able to drive. This much higher revenue level than we've seen in the past. I actually think that gross margins are pretty much right on target. You know, we were just slightly above the midpoint of our guide for Q1. And I think that most have expectations of a full year gross margin of just shy of 65%. And I think that's a reasonable expectation. I think that we should be. You know, right on there. And then, Michael, on the data center question that you have, we have not seen a shift of demand that we expected in the United States to go outside the country as of yet. And I candidly. Don't expect that to be the case. I think you've got a combination of you still have, you know, plenty of states that have not declared moratoriums. You have obviously you've got to have the. Energy. Right in those states, but we've also seen some of the. At least one of the governors has come out and said that they're open to data center bills. They just need to be done in the right way with.

Concern and commitments to the community, concerns and commitment to maintaining energy costs and things of that nature. And I think this is too important to our country and it's it's too important to the industry. It'll get. Resolved. And I think that the last thing we want is for for data centers to end up being built outside the United States. And I think that's I think that's how this will end up. But obviously, there's a there's a lot of political dynamics in it right now. So. But thank you for the question.

Thank you, Mike.

I'm going to hand it over to Chuck for some closing remarks.

Yeah, I just want to thank everyone for joining us today. And I want to reinforce just how confident I am in Cisco's future and candidly, the sustainability of the. performance that we've seen. We're executing really well against our strategy. The teams are doing a great job. We're delivering strong results. And we're seeing the investments that we've made over the past several years, in some cases, a decade. They're translating into real momentum. The other thing I would point out is that this business is more efficient and has greater scale than anything I've seen. If you just look at our revenue based on the guide we put up today, and you go back two years. We're going to generate $19 billion in incremental revenue, and we're going to do that with less headcount than we had at the beginning two years ago. And so the efficiency that we're seeing is just unprecedented, and the teams are doing an incredible job. of scaling the business and also driving productivity. I also gained a lot of confidence from what I'm hearing from our customers and our partners. We are truly in the very early stages of a multi-year networking super cycle, and we're confident in our ability to continue. capturing the opportunity that it represents for Cisco. I believe we have the right strategy. We have the innovation, the right team, and we're focused on translating that into sustained profitable growth. I want to thank our teams for their continued execution and thank our customers, partners, and shareholders.

This concludes today's call.

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