Cisco Posts Record AI Orders Amid Margin Pressure

Cisco Systems reported fourth-quarter fiscal 2026 non-GAAP earnings of $1.22 per share, a 23% year-over-year increase that exceeded consensus estimates by 4.27%. Total revenues climbed 18% to $17.252 billion, with product revenues growing 24% year over year. According to data from GN markets/earnings, the company’s product orders surged 35% annually, while annualized recurring revenue reached $32.1 billion, indicating sustained demand across its core portfolio.

Despite the top-line growth, shares have declined by 5.3% since the report release, underperforming the S&P 500. The stock’s recent lag suggests investors remain cautious about the sustainability of growth rates and margin trends heading into the next reporting period. The market’s reaction highlights a focus on operational execution rather than just headline revenue figures.

AI Infrastructure Drives Networking Growth

Networking revenues jumped 28% year over year to $9.791 billion, powered by triple-digit growth in AI infrastructure. Cisco secured $4 billion in hyperscaler AI orders in the quarter, bringing fiscal 2026 total orders to $9.3 billion, roughly 4.5 times the previous fiscal year’s level. The order mix consisted of approximately 60% Silicon One-based systems and 40% optics, reflecting a strategic push into high-performance computing hardware.

The company also added three new hyperscaler design wins, covering scale-across and scale-out systems as well as optical line technology. Beyond hyperscalers, AI infrastructure orders from neocloud, sovereign, and enterprise customers exceeded $400 million in the quarter, totaling $1.3 billion for fiscal 2026. Data center networking orders increased by more than 35%, while campus networking orders advanced 20%, with Wi-Fi 7 accounting for over half of total wireless orders.

Security and Software Revenue Expansion

Security revenues rose 14% to $2.226 billion, with the entire portfolio, including Splunk, recording double-digit order growth. Firewall orders increased by more than 30%, and over 1,500 customers adopted newer offerings such as Secure Access, XDR, Hypershield, and AI Defense. Collaboration revenues advanced 12% to $1.167 billion, while Observability revenues grew 6% to $275 million, demonstrating broad-based demand across the software segment.

Total software revenues increased 11% year over year to $6.183 billion, with subscription revenues now representing 48% of total company revenues. This shift toward recurring revenue streams provides a stable foundation for future growth, even as hardware cycles fluctuate. The company’s remaining performance obligations totaled $46.7 billion, up 7% annually, signaling strong forward-looking demand for both products and services.

Margin Dynamics and Cash Flow

Non-GAAP gross margin declined 210 basis points to 66.3% due to a higher hardware mix and increased memory costs. Product gross margin fell 270 basis points to 64.8%, partly offset by productivity gains and price increases. However, non-GAAP operating margin expanded to 35.9% from 34.3%, as operating expenses grew only 5% to $5.243 billion, resulting in better operating leverage despite the gross-margin pressure.

Operating cash flow increased 27% year over year to $5.386 billion. Cisco returned $3.161 billion to shareholders through buybacks and dividends, maintaining a robust balance sheet with $15.918 billion in cash, cash equivalents, and investments. This financial position supports continued investment in AI infrastructure and strategic acquisitions, positioning the company for long-term growth in the networking and security sectors.