Cisco Systems, Inc. Common Stock (DE) 2026 Q4 Earnings Call

Sir, you may begin. 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. Today's call is also being live-streamed on YouTube, LinkedIn, and X. Following this call, we'll also make the recorded webcast and slides available on our 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, and all comparisons will be made on a year-over-year basis unless stated otherwise. Please note that our discussion today will include forward-looking statements, including our guidance for the first quarter and fiscal year 2027.

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 delivered a very strong close to fiscal 2026, making it a record year for Cisco, with revenue exceeding $63 billion and growing 12% year-over-year. In fact, in FY 2026, we delivered the highest revenue, operating margin, and earnings per employee in 30 years, demonstrating excellent execution from our teams and the increasingly critical role our technology has in the AI era. In FY 2027, we expect all these metrics to continue to improve as indicated in our guidance, demonstrating outstanding productivity and earnings power. We believe the accelerating adoption of agentic AI is fueling a networking super cycle. As customers look to manage increasing traffic and costs, they are investing in Cisco's networking stack for inferencing across cloud, on-premise, and edge environments.

At the same time, the rise of agentic AI is expanding the threat landscape, driving demand for our security and observability solutions to help monitor agent behavior and mitigate evolving threats. This presents a unique opportunity for Cisco, and we believe we're only at the beginning of this super cycle. Turning to Q4, we delivered record revenue of $17.3 billion in the quarter, up an impressive 18% year-over-year, with product revenue up 24% year-over-year. Our record top-line performance, combined with operating efficiencies, resulted in non-GAAP EPS growth of 23% in Q4 and 14% for the full year. This demonstrates strong operating leverage, with the bottom line growing faster than the top line for both the quarter and the full year. The profitable growth of our business continues to produce strong cash flows, supporting our commitment to deliver consistent capital returns.

In Q4, we returned $3.2 billion in capital to our shareholders through share repurchases and dividends, bringing the total return in fiscal 2026 to $12.7 billion in value, or 99% of free cash flow. Our results are a testament to the trust we built with our customers and our commitment to deliver the outcomes needed as they navigate this period of accelerating technological change. Now some color on demand. We saw strong momentum and broad-based demand for our technology globally, with total product orders up 35% year-over-year in Q4 and hyperscale orders up triple digits. Excluding hyperscale, product orders were up 25%. Enterprise product order growth accelerated to 21% year-over-year in Q4, with double-digit growth in every product category and geography.

Public sector order growth also accelerated to 30% year-over-year, with continued momentum in EMEA and APJC and accelerated growth in the Americas, driven by U.S. federal. Product orders from service provider and cloud customers grew 95% year-over-year, with four of the top hyperscalers each growing AI infrastructure orders in the triple digits. We also saw increasing strength in telco in Q4, with orders growing over 30% year-over-year. Now turning to product demand. Networking product orders grew 40% in Q4, driven by triple-digit growth in service provider routing and Acacia optics and double-digit growth in data center switching, compute, campus switching, wireless enterprise routing, and industrial IoT products. Q4 marked the eighth consecutive quarter of double-digit growth for our networking portfolio overall, supporting our view that we are in a multi-year, multi-billion dollar networking super cycle.

It is also worth noting that more than half of our customers purchase both campus and data center networking solutions, demonstrating our differentiated platform approach, where new technology investments compound the value of existing investments. Moving to AI infrastructure for hyperscalers. We took $4 billion in orders in Q4, bringing the total for FY 2026 to $9.3 billion, approximately 4.5 times our fiscal year 2025 total. The mix of these orders in both Q4 and FY 2026 was approximately 60% Silicon One-based systems and 40% optics. Our Acacia business had another very strong quarter with over $1 billion in orders in Q4. And to date, we have shipped over 850,400 gig and over 75,800 gig coherent pluggable optics. As AI workloads become increasingly distributed across clusters and facilities, we believe demand for this technology will remain strong, and I'm incredibly proud of our market leadership in this space.

We won three new design wins with hyperscalers in Q4. One of these was for our Silicon One P200 powered system for scale-across, bringing our total to three scale-across design wins for the P200 since launch, each with a separate hyperscaler, and we have already received orders for these in Q4. We believe this is only the beginning of the scale-across motion. As AI models grow in complexity and size, hyperscalers need to connect or scale-across multiple data centers due to physical and power limitations in a single data center. Power efficiency, reliability, and scale are critical in ensuring distributed GPUs function as if they were in the same location. Given these requirements, Cisco is well-positioned with our P200 powered systems, market-leading optics, open line systems, and coming soon, multi-rail optical systems to provide hyperscalers the technology needed for these complex use cases.

The additional hyperscale design wins in Q4 were for a scale-out use case with our G200 power system and one for a managed optical fiber network, which leverages our line system technology and enables the use of our digital coherent optics directly in third-party equipment. The optical win is strategic as it positions Cisco as an alternative supplier to an incumbent competitor and has the potential to disrupt traditional delivery of managed optical fiber networks. Additionally, we have line of sight to multiple AI design wins expected over the next six months across our G300, G200, and P200 Silicon One chip designs, as well as for optics. As I've said before, our success with hyperscalers can be attributed to Silicon One, the industry's most scalable and programmable architecture for a wide range of use cases and infrastructure designs.

Notably, we plan to roll out Silicon One comprehensively across our high-performance networking systems by fiscal year 2029, which gives us greater control over our supply chain and innovation pipeline. Importantly, our control of the silicon systems and software will enable us to develop more performance secure networking, reinforcing our competitive differentiation, and positioning us for market share gains. Overall, our hyperscale business continues to show great momentum with AI infrastructure revenue projected to grow to $7.5 billion in fiscal year 2027, supported by demand growth and market share gains. For perspective, in FY 2026, approximately 6% of our total revenue was from AI infrastructure for hyperscalers, up from less than 2% in FY 2025. In addition to the hyperscaler demand, we took over $400 million in AI infrastructure orders from Neocloud, sovereign, and enterprise customers in Q4, bringing the total for the year to over $1 billion.

We had a new design win in Q4 with a major Neocloud provider for our G200 powered system for a scale-out use case. In Enterprise, Nexus switch orders tagged for AI deployments were up more than 85% sequentially. As these customers look to scale AI economically, there is increasing focus on managing token consumption, selecting the right model and the right location for each workload. We believe on-premise AI infrastructure will become an important option for enterprise customers as they look to optimize both the business value and cost of AI. Enterprises need GPU clusters on-premise and at the edge with low latency, high bandwidth networking, and built-in security, observability, and automation, all of which Cisco can provide in a co-design, vertically integrated stack.

Regardless of how or where customers choose to deploy AI, whether in the public cloud, through neocloud or sovereign clouds, on-premise or at the edge, we believe Cisco will benefit because of the unmatched depth and breadth of our portfolio and our expertise in each scenario. As we look at overall enterprise demand, we see customers investing in infrastructure across their environments. In Q4, overall data center networking orders grew more than 35% year-over-year. Notably, a leading U.S. global bank placed an order for 1,000 Cisco Data Center Smart Switches, replacing a major networking competitor and a major firewall competitor, transitioning to a secure networking architecture which only Cisco can provide. Customers are also focused on modernizing their workplaces, and we continue to see strong demand for campus networking solutions with 20% year-over-year growth in product orders in Q4.