Cisco Systems, Inc.

Welcome to Cisco's first quarter in fiscal year 2026 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 Badri, head of investor relations. Sir, you may begin.

Good afternoon, everyone. This is Sammy 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 discussions today will include forward-looking statements, including our guidance for the second quarter and fiscal year 2026. These statements are subject to risks and uncertainty details in our SEC filings, particularly our most recent 10-K report, 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, Sammy. Thank you all for joining us today. We had a strong start to fiscal 26 with Q1 revenue and earnings per share both coming in above the high end of our guidance ranges. We delivered record Q1 revenue, putting Cisco on track to deliver our strongest year yet as indicated in our guidance for the full year. In Q1, total revenue increased 8% year-over-year with product revenue up 10% driven by robust demand for our 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 10% as we continue to grow earnings faster than revenue. We delivered solid margins and cash flows allowing us to return $3.6 billion in capital to our shareholders through dividends and share repurchases, representing 125% of free cash flow in Q1. Additionally, we generated solid growth in annualized recurring revenue and remaining performance obligations, both of which continue to provide a strong foundation for our future performance in FY26 and beyond. Cisco's strong start to Fiscal 26 is a testament to the critical role of secure networking and the strength of our portfolio as organizations look to deploy AI across their businesses. That said, we know many customers still have a lot of work to do to ensure they have the modern, scalable, secure networking infrastructure to support their AI goals. According to our 2025 Global AI Readiness Index, only one-third of organizations feel their IT infrastructure can accommodate the needs of their planned AI projects, which creates a massive opportunity for Cisco. With our industry-leading networking portfolio, powered by Silicon One, AI native security solutions, and operating systems, we are well positioned today to provide the critical infrastructure for the AI era. Now let me comment on the strong demand we saw in Q1. Overall, total product orders grew 13% year-over-year, with growth across all geographies and customer markets. Enterprise product orders were up 4% year-over-year in Q1, on top of mid-teens growth excluding Splunk a year ago, with strength in our campus switching and wireless solutions. Public sector orders were up 12% year-over-year, with growth across all geographies and cohorts, including U.S. Federal. Product orders from service provider and cloud customers continue to be very strong, up 45% year-over-year, driven by high double-digit order growth in hyperscalers, even on a tough triple digit growth comparison from Q1 of FY25. Demand from telco customers was also strong in Q1, with orders growing more than 25% year over year. Now some color on demand from a product perspective. Networking product orders accelerated to high teens growth in Q1, marking the fifth consecutive quarter of double digit growth, driven by hyperscale infrastructure, enterprise routing, campus switching, wireless, industrial IoT, and servers. Within our campus networking portfolio, we are seeing very strong demand for switching, routing, and wireless products, indicating that enterprise customers are investing in the connectivity needed for AI deployments. As early catalyst switching generations like the 4K and 6K near end of support, we see growing demand for our CAT 9K series. Additionally, all of our next generation solutions, including smart switches, secure routers, and Wi-Fi 7 wireless products, are ramping faster than in prior product launches. This marks the beginning of a multi-year, multi-billion dollar refresh opportunity. We're also seeing consistent progress across our industrial IoT portfolio, including new ruggedized equipment with orders growing more than 25% year-over-year in Q1. We expect this demand to increase, 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 in Q1 total $1.3 billion, balanced between silicon-1 systems and optics, marking a significant acceleration in growth and demonstrating our strength for advanced AI use cases. We expect to recognize roughly $3 billion in AI infrastructure revenue from hyperscalers in fiscal year 26. As these hyperscale customers look to extend AI clusters across their infrastructure, we see robust demand for Acacia's market-leading, coherent, pluggable optics, offering significant cost and power savings. All hyperscalers are now customers of these products. In Q1, we also announced our latest Cisco 8223 router powered by our Silicon 1 P200 chip. This first to market 51.2 terabits per second fixed Ethernet routing system is designed for the intense AI workload traffic between data centers. With Silicon 1's unmatched scalability, power efficiency, and programmability, we can provide the performance and speed across data centers that would have previously only been possible within a data center with a switching infrastructure. Demand for silicon-1 continues to grow, and we expect to ship our one millionth chip in Q2 of fiscal year 26. Product orders for AI use cases beyond hyperscaler training are also gaining traction, with orders for data center systems including switching and compute growing double digits in Q1 as customers prepare their networks for inferencing and agentic workflows. we see a growing pipeline in excess of $2 billion for our high-performance networking products across Sovereign, NeoCloud, and enterprise customers. To capture this opportunity, we continue to make progress both within our own portfolio and across our strategic partnerships. We recently announced an expansion of our partnership with G42 in the UAE to power, connect, and secure G42's large-scale AI clusters featuring AMD GPUs. Other strategic partnerships in the region, including Humane and Stargate UAE, are progressing as planned. We also lost our sovereign critical infrastructure portfolio for European customers to operate in their own air-gapped on-prem physical environments. This includes our networking and collaboration products enhanced by security and observability. In addition, Cisco announced an expansion of our NVIDIA partnership and our new N9100 switch based on Spectrum X silicon. We are now the first NVIDIA partner to offer networking compliant with their cloud reference architecture. The N9100, available in the second half of fiscal year 26, will provide the operational consistency and flexibility needed for sovereign and neocloud providers to build and manage AI at scale. We are also delivering new capabilities and features for Cisco Secure AI Factory with NVIDIA, announced in Q3 of fiscal year 25. These advancements strengthen our commitment to high performance, secure and trusted AI infrastructure globally. We expect Cisco's AI opportunity across sovereign NeoCloud and enterprise customers to ramp in the second half of fiscal year 26. Now shifting to security. We continue to see order growth for our new and refreshed products, which comprise around one-third of our security portfolio and includes Secure Access, XDR, HyperShield, AI Defense, and our refreshed firewalls. Nearly 3,000 customers have purchased the new product since launch, and we saw mid-teens growth in demand for our next-generation firewalls in Q1. This growth was partially offset by a decline in our prior-generation platforms. We continue to see strong performance from Splunk, closing one of our largest Splunk deals to date in Q1, enabled by joint Cisco and Splunk sales engagement. Splunk's ARR and product RPO grew double digits as we saw a notable change in how customers consumed Splunk offerings in Q1, with a shift to more cloud subscriptions and fewer on-premise deals. Revenue for cloud subscriptions is recognized ratably, whereas product revenue for on-prem deals is recognized on delivery. While this shift negatively impacted security revenue growth in Q1, it is purely a timing issue. We are actually pleased to see more cloud subscriptions for Splunk as they enable greater adoption and expansion and allow us to deliver innovation faster to enable customers to unlock value from AI. Now let me comment on some of our recent innovations. As we look at the AI opportunity, we see customer use cases growing across training, inferencing, and connectivity. with secure networking increasingly critical as workloads move from the data center to end users, devices, and agents at the edge. As mentioned last quarter, agents are transforming network traffic from predictable bursts to persistent high-intensity loads with agentic AI queries generating up to 25 times more network traffic than chatbots. Instead of pulling data to and from the data center, AI workloads require models and infrastructure to be closer to where data is created and decisions are made, particularly in industries such as retail, healthcare, and manufacturing. This is why we introduced Cisco Unified Edge last week, an industry-first converged platform for the network edge, integrating compute, networking, and storage into a single system. Unified Edge enables real-time inferencing for agentic and physical AI workloads, so enterprises can confidently deploy and manage AI at scale. We also announced Cisco Data Fabric in September, a Splunk powered architecture to unify and manage machine data across various sources, allowing enterprises to build AI models with their previously unused proprietary data. As always, these innovations are designed to further Cisco's platform advantage, where every new technology investment compounds the value of a customer's existing investment. To summarize, We are seeing strong demand across all customer markets and geographies as well as expanded opportunities as our customers power their AI use cases from the data center to the edge. We continue to innovate at unprecedented scale to build AI-ready data centers, power future-proof workplaces, and create a foundation of digital resilience. And our strong performance is fueling our capital allocation model, returning significant value to our shareholders while positioning our business for Cisco's strongest year yet in fiscal 26, as indicated in our guidance. Now I'll turn it over to Mark for more detail on the quarter and our outlook.

Thanks, Chuck. We delivered a strong quarter to launch our new fiscal year, with revenue, operating margin, and earnings per share all above the high end of our guidance, coupled with solid gross margin and operating cash flow. For the quarter, total revenue was $14.9 billion, up 8% year over year. Non-GAAP net income was $4 billion, up 9%, and non-GAAP earnings per share was $1, up 10%, demonstrating continuing operating leverage with non-GAAP earnings growing faster than revenue. Looking at our Q1 revenue in more detail, total product revenue was $11.1 billion, up 10%, and service revenue was $3.8 billion, up 2% year-over-year. Networking was the standout with growth of 15% with strength across the portfolio led by high double digit growth in service provider routing, which was largely driven by revenue from AI infrastructure. Data center switching and enterprise routing also contributed double digit growth and campus switching had growth in the high single digits. Security was down 2% reflecting declines in prior generation products, and a shift to cloud subscriptions in our Splunk business that Chuck referenced, partially offset by growth in SecureFirewall, Duo, and SASE. Collaboration was down 3%, reflecting declines in devices and WebEx. Observability was up 6%, primarily driven by growth in ThousandEyes. Looking at our recurring metrics, total RPO was $42.9 billion, up 7%, Product RPO grew 10%, of which the long-term portion was 11.8 billion, up 13%. Total ARR ended the quarter at 31.4 billion, an increase of 5%, with product ARR growth of 7%. Total subscription revenue was 8 billion and represented 54% of Cisco's total revenue. Total software revenue was up 3%, to 5.7 billion. Q1 product orders were up 13% year over year. Product orders were up across all geographic segments, with the Americas up 16%, EMEA up 8%, and APJC up 13%. Product orders were also up across all customer markets, with service provider and cloud up 45%, public sector up 12%, and enterprise up 4%. Total non-GAAP gross margin came in at 68.1%, down 120 basis points year over year, but coming in slightly above the midpoint of our guidance range. Non-GAAP product gross margin was 67.2%, down 170 basis points, driven by negative impacts from mix and pricing, partially offset by productivity improvements. Non-GAAP services gross margin was 70.7% up 40 basis points. We continue our focus on enhancing profitability and driving financial discipline with non-GAAP operating margin at 34.4% above the high end of our guidance range. Our non-GAAP tax rate was 19% for the quarter. Shifting to the balance sheet, we ended Q1 with total cash, cash equivalents, and investments of $15.7 billion. Operating cash flow was $3.2 billion, down 12% due to investments to meet growing customer demand for AI infrastructure. From a capital allocation perspective, we returned $3.6 billion to our shareholders during the quarter, comprised of $1.6 billion for our quarterly cash dividend and $2 billion of share repurchases, with $12.2 billion remaining under our share repurchase program. To summarize, we had a solid start to fiscal 2026, with top and bottom line performance exceeding our expectations, driven by strong order growth and margins, all demonstrating the power of our innovation engine to drive strong top line growth, as well as operating leverage to fuel profitability. 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 discipline 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, please note our Q2 and fiscal year 2026 guide assumes current tariffs and exemptions remain in place through the end of fiscal 2026. These assumptions remain unchanged from our prior guidance with the exception of the China fentanyl tariff being reduced from 20% to 10%. Looking ahead, you can expect us to continue our focus on durable growth with financial discipline, driving operating leverage and continued capital returns. For fiscal Q2, our guidance is as follows. We expect revenue to be in the range of $15 billion to $15.2 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 33.5% to 34.5%. Non-GAAP earnings per share is expected to range from $1.01 to $1.03. 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 $60.2 billion to $61 billion. Non-GAAP earnings per share is expected to range from $4.08 to $4.14. Sammy, let's now move into the Q&A.

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

Thank you. Erin Rakers with Wells Fargo. Your line is open.

Yeah, thanks for taking a question and congrats on the quarter. I guess I want to dive a little bit deeper into the AI orders. Obviously, you know, tracking to, I think that was a $3 billion number in fiscal 26 from the web scale vertical. So maybe start there, you know, as we think about, you know, the diversity that Cisco is seeing in the web scale opportunity, how has that evolved? And have you guys been engaged in deepening kind of super spine or even scale across opportunities? in the web scale vertical. And then as a follow-up on the enterprise side, you know, I think the number was 2 billion pipeline. I think the slide deck says 200 million on orders this last quarter. How do we expect that to progress through this fiscal year? Thank you.

Thanks, Aaron. So let me, I want to just clarify the $3 billion number that we gave out was a revenue number from the hyperscale AI infrastructure in the fiscal year. I would say that the $1.3 billion were new orders that we took during the quarter from the same customers that we measured last year, and it's the same products that we measured last year. So it's definitely apples to apples first and foremost. What we expect from an orders perspective this year is that we will – We're expecting at least two times the orders that we received in fiscal year 25 from that same set of customers. So we see a lot of solid pipeline throughout the rest of the year. And the use cases, we see it expanding. Obviously, we've been selling networking infrastructure under the training models. We've been selling scale out. We launched the P200 base router that will begin to address some of the scale across opportunities. We clearly have seen great success with our pluggable optics. All of the hyperscalers now are officially customers of our pluggable optics, so we feel like that's a great opportunity. They not only plug into our products, but they can be used with other companies' products with our competitors or white boxes. So that's been good. We've also begun to see inferencing use cases where we're also winning there. I'd say that the other thing that we saw in Q1 is that we had four of the major hyperscalers who grew triple digits during the quarter. And we had four meaningful use case wins during the quarter, one from each of those four, so across four different hyperscalers. So the momentum continues with the silicon. Your second question relative to the enterprise, what we said was that the neocloud sovereign cloud enterprise pipeline basically for the rest of our fiscal year for so for the next three quarters exceeds $2 billion. We booked 200 million in Q1. And so that provides incremental opportunity for us as we look to the future. And that's through the end of our fiscal year. Thank you.

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

Thank you. Mita Marshall with Morgan Stanley. Your line is open.

Great. Thanks. Maybe just following up on Erin's question, just in terms of kind of some of that strength that you're seeing, you know, is the kind of upside that you're seeing to some of these AI orders coming from kind of scale across strengthening, or is it just coming from deepening engagement? Because I guess our view is that scale across has strengthened throughout the quarter, so just kind of want to get a sense of if that is something you've picked up on as well. And then just as a follow-up question, just any commentary around DRAM pricing has certainly become more elevated, just how you guys are thinking about that in terms of the gross margin. Thanks.

Thanks, Mita. I would say that the scale across opportunity is emerging, and we obviously announced the 51.2 terabit router that will help us go after that opportunity. I'd say in general, most of what we saw in Q1 was just a deepening of existing use cases. We wanted the four new ones, but candidly, there wasn't a ton of new orders from them during the quarter. So those are all yet to be recognized. But we think the scale across opportunity will continue to grow and evolve. And again, we saw a pretty meaningful acceleration in pluggable optics, which is a really solid business for us and gives us yet another opportunity to to pursue with these customers. On the DRAM question, Mark, I'll pass that one to you.

Yeah, so I would just say, you know, across memory as well as PCB and optics, we've noticed, you know, a bit of a tightening of supply. On the memory side, we've seen what you all have all seen as well, and that's pretty significant price increases as well. Both of those, in terms of the supply as well as the pricing, though, are both included and considered in our updated guide for the Q2 as well as the year.

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

Thank you. Tal Leone with Bank of America. Your line is open.

Hello. Great quarter. It's hard for me to ask a tough question in a great quarter, but I'm going to do it anyway, with your permission. If I remove a billion from last year revenues, which were the AI back end, and I remove $3 million from the guidance for next year, the rest of the business, which is the majority, $55 billion base for last year, is only growing 3.6%. Why don't we see greater growth with what we have, Wi-Fi and campus and security? Why don't we see more than 3.5% growth for the rest of the business?

Hey, Tal, it's a good question, and you're always allowed to ask tough ones. So I'm just going to point out on the orders front for Q1, and then I'm going to let Mark talk a little bit about the P&L. Just to be clear, if you normalize out the hyperscaler growth in Q1, the rest of the business grew 9% from an orders perspective. So that's not a data point we've given you. I wanted you to have that. And then, Mark, you want to touch on?

Yeah, Tal, thanks for the question, Tal. You know, I would say we're 90 days into the year. We've got a very good start, as you've seen in the order growth rates and the momentum that we're building. But as we get into the second half of the year, we're seeing much, much more difficult comps. I mean, the comps in Q1, Q2 a year ago were minus six and plus nine. The comps as you get into Q3 and Q4 are plus 11 and plus eight on the top line. So, you know, much, much tougher comps there, but I do follow your math and that sounds about right.

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

Thank you. Ben writes us with Milius Research. Your line is open.

Hey, how are you guys doing? Hey, Chuck, I wanted to talk about one of your comments around the multi-year nature of the cycles. I know you guided for the year, so I mean, we're good with that, but can you just elaborate a little bit more on that? What are you seeing that gives you the confidence to talk about multi-year cycles, maybe highlight the the key ones you're thinking about a little more, and what made you say that comment, which was particularly interesting. Thanks so much.

Yeah, thank you, Ben. I think when we look at the refresh opportunity, if you recall, we announced a new suite of products in our enterprise routing space. We announced new Wi-Fi 7 portfolio, and we announced a new suite of campus switches. What we saw is, I think if you think about the CAT 4K and the CAT 6K install base just coming to end of support, that's one factor that's driving it. We saw as we ramp this launch of these new products, all three of those product families are ramping faster than they have in historical launches. So that leads us to believe that customers are actually aggressively moving on this. And I think the other is, It indicates that customers are still very focused on modernizing their network infrastructure in the enterprise in preparation for inferencing and AI workloads. These things are always multi-year, Ben. When we launched at Catalyst 9K in 2017, that transition just kept going for five, six, seven years. And so that's just typically what we see when these things move. And the fact that they're ramping faster than what we've seen in the past would indicate there's a lot of interest in these portfolios. The last thing I would say is that these new switching platforms, which truly enable security to be fused deeply into the network, is a message that's resonating with our customers, particularly as they look to agentic workflows in the future. They realize they can't port this traffic off to a firewall, they're going to have to be applying security policies in the network as the traffic moves, and I think that's another consideration that they're preparing for.

Thank you, Ben. I also want to remind analysts to ask a question and a follow-up question at the same time. Michelle, we can move to the next analyst.

Thank you, sir. James Fish with Piper Sandler. Your line is open.

Hey, guys. Good stuff on the networking side. I guess, how far along or what's the penetration of Silicon One into the product portfolio now? And as a standalone product, what are you guys seeing as why Silicon One is starting to gain some of that traction with the hyperscalers and what it can do versus the custom solutions that are being talked about as well as Broadcom's latest chips? And just as a follow-up, why is it now that Splunk is starting to see some of those –

greater shifts to cloud at this point and any sense of the impact it had on the security number this quarter thanks guys yeah jim so on the uh silicon we are uh we think in by the end of fiscal 29 so we think in another two and a half years we'll have that fully rolled we'll have silicon one fully rolled across the entire portfolio so that's the intent it's in some of our data center switching products going to enterprise it's obviously in the hyperscaler products And I think it's a combination of performance, programmability, and low power consumption. And I think the other thing is that they enjoy having multiple sources and they really enjoy the custom engagements that we have with them to really look at their unique requirements for each. I think that's really what's changed the... the trajectory for us with these, with these customers. And I mean, for those of you who are on these calls five, six, seven years ago, you remember, I kept telling you that we hadn't, we hadn't done well here. We hadn't done well here. And then our intent was to do so. And I'm really proud of what the teams have accomplished on the security stuff, Jim, I'm glad you picked up the, the, uh, the revenue issue. As I said, in my prepared comments on Splunk and then Mark, I'll let you talk a little bit about the implications, but We just saw a pretty meaningful mix shift during the quarter to cloud. I think the prior quarter it was somewhere roughly 50-50, and I think it was down to the on-prem was only about a third of the revenue. So we expected more of a 50-50 kind of mix because that's what we had seen. And at the end of the day, it's actually quite positive, as I said, because it allows us to drive adoption with our customers, expansion, as well as deliver innovation real-time because it's cloud-tethered. So from a long-term perspective, it's good. In the quarter, it was obviously a one-time timing issue on the revenue front. If you look at all the dynamics on the order side, things are generally the way they were the prior quarter. We saw positive order growth in our new and refreshed products. We saw the same drag from our prior generation products, although that number is getting smaller. And then we saw double-digit ARR, double-digit RPO on the product side as it relates to Splunk. So on the demand side, There's not a lot to worry about. We just had the one-time revenue issue associated with this recognition with a 606 accounting. So Mark, anything to add?

Yes. So if you look at this transition that we're seeing on the Splunk side, as you mentioned, Chuck, it's a good thing. Despite the timing difference that you will see based on ASC 606 and the revenue recognition based on on-prem versus cloud, We expect to actually recognize more revenue over time. So when we look at the cloud offers, they're stickier than the on-prem offers. Customers are actually able to adopt the technology faster, adopts features faster, et cetera. And so it's a good thing. What you are seeing, and I think a better measure of the health of the business of Splunk is really to look at ARR and RPO. Both of those grew in the double digits for the quarter. Again, while we're disappointed with the timing a little bit in the quarter, overall, it's actually a really good thing for us.

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

Thank you. David Vogt with UBS. Your line is open.

Great. Thanks, guys, for taking my questions. One may be tough to start just to pivot to campus. I think in the deck in your prepared remarks, you talked about the next-gen solutions ramping faster than prior product launches. Can you kind of give us a sense for like what's driving that? Is it a competitive? Is it just better for competitive products? Are you seeing disruption from some of the smaller players like number two and number three in the marketplace given sort of the dynamics in that sort of integration there? Just more color there would be helpful. And then along those lines, maybe when you think about sort of the campus market, I do know you mentioned in the prepared remarks there's a lot of end-of-life product out there. Um, how do you think about that? And as it relates to sort of some of those customers, I think are government customers, if not public sector customers, but in the context of what's going on actually in DC right now. So, you know, is that part of the strategy going forward is to upgrade those soon as money starts to, uh, free up and get dispersed and just kind of trying to marry the two sort of, um, markets here, both campus and government kind of what's going on there.

Yeah. Thank you, David. I'd say on the, on the campus, it's, it's a lot of what I said before. I think it's, um, It's the end of sales stuff, the Cat 4K, Cat 6K, older Wi-Fi. And so we see in these early days of it, we see slightly faster adoption than we've seen historically with these launches. As it relates to number two and number three, there's clearly been some confusion in the marketplace, particularly around Wi-Fi. We've been talking about that for several quarters. And so I think that's... I think that's been positive for us. I can't give you any specifics relative to whether that's a big part of it now. And the other two things I think they're driving it are AI preparation and this belief that security does ultimately have to be in the network. And we're the only ones who have both security and networking. You've seen some of our competitors announce partnerships with security vendors. And those are hard to pull off. I mean, it's hard to get the level of integration you're going to need to have when you don't own each of the technologies. So we feel like we're well positioned there. So we think all of those things are having an impact on various customers. As it relates to the government, you know, we were pleased last quarter that our U.S. federal business, despite the shutdown, grew high single digits. From an orders perspective, we thought that was quite positive. We're optimistic that the vote happens today and that the government reopens and we don't have to talk about this much more. But as it relates to the end of support stuff that happens to be in the, particularly in the federal government, there is a lot of discussion and a lot of pressure beginning to build on ensuring that that equipment gets updated just from a cyber risk perspective and a hygiene perspective. So we would expect that there'll be some upside from that as they get back and begin working again and reopening the government.

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

Thank you. Sam and Chatterjee with JP Morgan. Your line is open.

Hi. Thanks for taking my questions. Chuck, maybe both questions on the AI front itself. Firstly, on optical, you talked about the strong growth you're seeing in Acacia. Could you just talk about optical more broadly in terms of the demand you're seeing inside the data center versus outside the data center in terms of like pull through from scale across, etc.? ? and what how your how is this goes participating in both of those aspects and then for the follow-up for the i heard you say twice the number of orders in terms of ai orders from the same customer group uh in fiscal 26 and the sovereign customers it looks like you are progressing on the engagement but haven't seen orders as much yet so that would be sort of upside to that number i just want to clarify that the sovereigns aren't included as those orders come through in that sort of four billion number that you're highlighting for all those. Thank you.

Yes, Samik, thank you. On the optics side of AI, we're participating in both. We're blessed to have great solutions in both inside the data center and then outside the data center, DCI scale across. I think we'll continue to innovate there. As I said, we now are selling our pluggable optics to all of the hyperscalers, all the major hyperscalers. and i think that we'll we'll continue to have we'll continue to see great opportunities across both of those and again it's a it's a really large market uh that is meaningful even uh even on par with sort of the switching side of it so we're pleased to be in both both sides of it on the uh order front yeah what my comment was is that we expect this year that we would be at least 2x the orders that we saw from the hyperscale customers last year. And that's the same, same products that we measured last year and the same customers that we measured last year. So no change, uh, on the. Neocloud sovereign cloud enterprise. There's those, those, that upside where I said we had $2 billion plus of pipeline for the balance of the year. None of that is included in that two X number that I quoted. So you had that exactly right.

And maybe just to add, check on the sovereign side. The early phases of the sovereign build-out are really not material to this year's guide as well.

Yeah, and I would say that, as you all know, Sammy, there's export licenses that have to be attained in many of these cases, and so we're still working through that. So we expect some of that stuff will really start flowing in probably the second half of our fiscal year, but to Mark's point, it's not a material part of the guide this year.

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

Michael Eng with Goldman Sachs. Your line is open.

Hey, good afternoon. Thanks for the question. I just have two. First, you know, the G42 partnership, you know, looked like it was a full rack solution using AMD chips. I was just wondering if you have some sort of kind of preferred partnership with AMD. Should we see, you know, more of that as we head out through the year? you know, how important is that combination of compute and networking as RAC solutions potentially get more important? And then second, I wanted to ask about some of the channel partner program changes that are supposed to kick off next year. Any feedback or comments just on the drivers of that change and, you know, what you expect to, you know, be the result on the business going forward? Thank you.

Yeah, thanks, Michael. Yeah, we're really pleased with the G42 partnership. I was over there again a couple weeks ago. And you're right, the first announcement is with AMD. And I would say what we believe is that there are going to be multiple GPU providers, particularly in the world of inferencing. You're going to continue to see an expansive portfolio of GPUs and XPUs. And what we want to do is participate as a connectivity layer across as many of those as we possibly can. And so that would, you know, we work very closely with AMD. We've been very close with them on the G42 opportunity, and we continue to talk to them about other opportunities that are occurring around the world. So my anticipation is we'll have as many ecosystem partnerships as we possibly can. On the partner program, I'll make some comments, and then, Mark, if you want to, because I actually – Most of you know that 25 years ago, I helped build the program in our partner and build our partner's strategy. And I think that what this really is, is it's a recognition of the growth opportunities ahead of us and how do we align our programs so that our teams are incented, our partner teams are incented in the same way to go after these growth opportunities that we see in the future. And I'd say we had our partner summit last week, our annual partner summit, and the partners were generally positive. We've launched tools to help them assess the monetary impact of the new program versus their old program. Does it get better? Does it hurt you? And if it's hurting you, how can you adjust your sales strategy or your go-to-market strategy to actually increase your performance in the program? And I think we have a new worldwide partner leader, Tim Coogan, who's very well trusted by the partners. They know him really well. And, uh, you know, every time we do one of these major changes, we, we know there's a lot, there's a reasonable chance that we missed something along the way. And our commitment to them is that if we miss something, we'll fix it. And, uh, we've got a long history of doing that. And so I think in general, the partners feel pretty good about it and they feel good about the fact that we're going to continue to adapt the program to make sure it drives our growth priorities and helps them have a profitable journey alongside us. Yeah.

Chuck, maybe just to add three things, you know, I think one. The new partner program is really about simplification. We've had a number of different rewards and incentive programs. This really tries to streamline that and bring that together. Secondly, the new program rewards partners for not only portfolio breadth, but the depth of expertise, and I think that's a really important thing. Then lastly, it gets them laser focused on what really matters, what truly matters, and that's campus refresh, AI, security, and then premium services. All in all, I'd say, you know, while there's always some concerns, as you mentioned, whenever you do something new, I think it's being accepted quite well.

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

Thank you. Amit Daryani with Evercore ISI. Your line is open.

Thanks a lot for taking my question. I have two as well. I guess first, on the $3 billion of AI sales in fiscal 26 that you both talked about, Is there a way to think about how much of that do you think is optics versus systems? And do you see the overall margin of AI really being comparable to the corporate averages? That's the first one. The second one, Chuck, security revenue was down 2%. And I thought I'd hold you on the legacy pressure and the mix shift that you folks are having on the cloud side. Can you just talk about what do you think normalized security growth could look like once this mix stabilizes? Sort of square that against the prior guide of mid-teens you've had on the security side. That would be helpful. Thanks a lot. Yep.

I'm going to let Mark take the revenue and the margin one, then I'll come back to the security one, Mark.

Yeah, happy to. So when you look at it, you know, certainly we've got a broad portfolio and a range of margin, if you will, across, and we've always had that, whether it's across geographies, it's across technologies that we sell, it's across customer markets, et cetera. I think what you're seeing right now is strong margins, 68.1% for Q1. We're pleased with that. In the guide that we gave you as well, you can see that both Q2 as well as the full year for 26, that we're expecting to grow the bottom line faster than the top line. So a real focus on leverage and profitable growth, if you will. I would just tell you that optics, you know, web scale, service provider, our true enterprise, core portfolio, et cetera, that's all part of the mix and all part of the guide that we gave you.

And then a minute on the security front at negative 2%. Yeah, first and foremost, I just want to reiterate, we still are committed to the mid-teens long-term guide on revenue for security. I've talked a lot about the fact, and by the way, none of us are happy about where we are right now. Let me be clear about that. But I think, you know, we think that it'll continue to accelerate through the year and it'll come out of the year at a much higher rate. And then I think the normalization of this sort of mix shift is probably going to take us four quarters to get to where the year-over-year comparisons are sort of apples to apples on the mix side. So that's how I think about it. We're going to just give you as much transparency as we possibly can. The other thing I would tell you is that we don't need security to materially improve from here. to hit the guide for Q2 or the year that we've given you. We've sort of baked that in.

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

Thank you. Carl Ackerman with BNP Paribas. Your line is open.

Yes, thank you. I have two as well. For my first question, I guess, Chuck, how much of the incremental $1 billion in revenue in fiscal 26 is coming from an earlier than expected enterprise campus refresh versus AI growth? And then separately for my follow-up, maybe for Mark, have you been able to secure enough capacity, or are you constrained in any way from fulfilling a doubling of AI orders among Hyperscale customers this year?

Thank you. I am, on the first one, I think you're referring to the incremental $1 billion being the increase in our guide from last time on the year. And I'd say it's a combination of those two things. I mean, if you look at the The hyperscale growth of orders is certainly going to be meaningful, but when you look at the larger business that we're talking about that was ordered, we're up 9% in Q1, I think it'd be a mix. I don't know that it would have an exact number of marks to go through.

We're seeing strength clearly on both sides. As far as whether we've been able to secure the capacity, if you will, and the supply If you just look at, uh, we always think the best measure is to look at sort of inventory plus advanced purchase commitments on a combined basis. If you look at that for the quarter, uh, just in the last 90 days, we're up almost a billion dollars and a year over year, we're up 38%, about 3 billion plus. So we, um, we are making those advanced purchase commitments and making sure that we can secure. the supply and the inventory that we need to meet the accelerating demand that we're seeing in hyperscale.

Thank you, Carl.

Michelle, can we take the next analyst?

Thank you. Antoine Squibin with New Street Research. Your line is open, sir.

Hi. Thank you very much for taking my question. I'd love to follow up about the Cisco Unified Edge. How large do you think that opportunity can be, you know, relative to the large-scale multi-gigawatt cloud data centers? And I think you mentioned, you know, use cases in retail, healthcare, manufacturing, if you can double-click on each of them. And what's the preferred deployment strategy for edge AI compute? Do you think that's more an opportunity for players with edge assets, you know, like CDNs or operators? Or do you think that's more something enterprises will deploy on-prem? And maybe as a follow-up, so is Cisco planning to participate to the scale-up opportunity, and will that be material, and what partnerships would you be forming to do that? Thank you.

Thanks, Antoine. So, yeah, the Unified Edge product is something we're really excited about. As we all know, when you're really trying to do real-time inferencing in a retail environment when a customer is there and you're trying to learn something or gain knowledge very critical information at that moment in time, you're going to have to push that inferencing to the edge and you can't send the data back and forth to a data center. So we think this unified edge over time is going to have huge applicability, retail, restaurant chains, healthcare, and it's a unique thing that we can put together because we own all of those technologies. And so I'm proud again of the team for coming across together across all of our business units and actually seeing the need to deliver that product and delivering it. We'll see how it scales and ramps, but I think it's something that's going to be very interesting to our customers. Years and years ago, we had branch solutions that had integrated compute, et cetera, and integrated security. And I think this is sort of, it's the revitalization of that kind of technology at the edge. From a deployment strategy perspective, I'd say it's all of the above. I think you could see CDN players. I think it is something that hopefully The carriers and the telcos who have these distributed pops that are very close to these customers can offer this as a consumption service. I think customers will also choose to put it on-prem. In certain cases, every customer has a different perspective. If I go to your second question on the scale-up opportunity, if you look at the slide that we had in our prepared notes on our silicon one roadmaps, we did have a scale-up silicon offering on the right side of that slide. We have talked a bit about our future ability to participate in a scale-up. We do believe that that's going to transition to a version of Ethernet, and it's our intent to play in that market. So you should expect to see something from us over time, for sure.

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

Thank you. Simon Leopold with Raymond James. Your line is open.

Thanks for taking the question. I've got the two as well. One is I want to understand what's sort of motivating the customers in this campus refresh. And where I'm coming from is we had the sort of backlog flush after the pandemic. So 2023 was a phenomenal year for your campus business. And so I assume the embedded base is relatively young. So help me understand sort of the motivation or why you're succeeding here. And the second question is, we've heard that other governments, international governments, state and local governments, have picked up more of the slack with the federal challenges you saw earlier this year. Could you unpack what you're seeing, particularly on the international governments? Thank you.

Yes, Simon. So on the campus side, I think the reality is that the I think the size of that install base and how much of it was actually flushed in 2023 is probably overestimated. I mean, it was a big move, granted. But if you look at the amount of end-of-support equipment that our teams have identified, it's billions and billions and billions of dollars of install base that is pre-Cat 9K. So not only it didn't get upgraded to Cat 9K, it didn't get upgraded in the 2023 push period. So all of that is still out there, and I think that's part of what we're seeing. On the other government's front, we see dynamics in Europe where, from a defense perspective and from a geopolitical perspective, we see lots of investment happening in public sector in Europe. We see it in the UK and Germany. We obviously saw U.S. federal growing strongly, even though it was closed. The government was closed, but public sector globally has been strong for several quarters in a row, and we anticipate that given the push for general sovereignty around the world, not just data sovereignty and tech sovereignty, but overall sovereignty, we would expect that to continue.

Yes, Simon, I would just add to your point. I think you were alluding to this. All three of our geographies grew in public sector. But the bulk of the strength or the greatest strength that we saw was actually outside the U.S. and kind of in the mid to upper teens in EMEA and APJC. So good strength there.

Thank you, Simon. Michelle, can we move to the last and final analyst in the queue?

Thank you, sir. Ben Bolin with Cleveland Research. Your line is open.

Good afternoon, everyone. Thanks for getting me in. Bigger picture question for you. Chuck, when you look at the current AI build-out, how do you think about this relative to the late 90s with respect to the Internet build-out? And interested in your thoughts in durability, sustainability, integrity, just how you're contemplating and thinking about all these orders and the optionality going forward.

Yeah, thanks, Ben. I think this is a common question that we get, particularly since we live through it. I think there's a few differences. I think that the speed at which this transition is moving is even faster than what it was, I think, at the turn of the century and in the dot-com days. I also think that the companies that are investing in this are massive, strong balance sheet, strong cash flow, profitable companies. And that's a lot of the spend is coming from companies that are incredibly strong, who view this as existential, right? And so, there aren't as many companies that are making bets that don't have business models. I mean, there's clearly going to be winners and losers, but I think there's such a concentration of spend from highly profitable strong balance sheet, strong cashflow companies. I think that's a big difference. And I think the pace at which this is moving is meaningfully different. Uh, I, I think just to, to be determined, uh, sort of the impact on society and the impact on business relative to what we saw in the, in, in the, at the turn of the century around 2000. But, uh, it is, uh, the pace is, the pace is what's hugely different for me. Uh, so it's, um, It's an area we're really excited about, so thanks for the question, Ben.

Thank you, Ben. I'm going to hand it over to Chuck for some closing remarks on our conference call.

Let me just start by saying how proud I am of our team, how hard they've worked to get to these results. I think the innovation that our teams are delivering is at an all-time high. The commitment and the focus on listening to our customers and delivering the technology that they need right now is fantastic. I think the last 12 to 18 months, the real emergence of the importance of the network in this AI wave is very clear, and that's what we do best. So driving a lot of innovation in the network, I think, at a time where the network is becoming more important is huge. It's just the beginning. We have momentum with the hyperscalers. We see the growing opportunity across enterprise, sovereign, and neocloud. We've got this multi-year, multi-billion-dollar network refresh opportunity. And again, with what I think is an unmatched innovation pipeline, as well as an acceleration of our global partnerships. And it really does position us for the strongest fiscal year we've ever had. So we have a lot of confidence. We have a lot of excitement. And I want to just once more thank the teams for everything they do. And then, Sammy, I'll turn it back over to you.

Thank you, Chuck. Cisco's next quarterly call, which will outline our second quarter fiscal year 2026 results, will be on Wednesday, February 11th, 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. We thank you very much for joining the call today.

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