Cisco Systems (NASDAQ:CSCO) executives said they are seeing strong and broad-based demand, highlighted by accelerating product orders and momentum in both hyperscale AI infrastructure and a multi-year campus refresh cycle, during a Morgan Stanley conference discussion featuring CFO Mark Patterson and Martin Lund, EVP of Hardware and Silicon One Systems.
Demand trends: “very balanced” growth, with hyperscale a key driver
Patterson said Cisco’s fiscal Q2 product orders accelerated to 18% growth, calling the demand environment “really strong” and “very balanced.” Excluding hyperscale, he said orders would have still grown 10% globally.
Management emphasized two “massive, multi-billion dollar opportunities” it said are progressing well:
- AI infrastructure: Patterson said Cisco took $2.1 billion in new orders from hyperscalers, describing that 90-day performance as matching what the company did across all of the prior year.
- Campus refresh: He said campus networking saw strong growth overall, and that wireless, routing, and campus switching are moving to new platforms faster than prior generation launches.
Gross margin pressures: memory inflation and mix shift
Patterson said gross margin pressure reflected two primary factors: sharply rising memory prices and mix changes tied to faster growth in hardware versus software. He described memory price increases as occurring at an “unprecedented” pace and outlined mitigation actions Cisco can control.
Those actions include:
- Price updates: Patterson said a new price increase would take effect “on Monday,” with particular focus on compute and higher-memory products across the portfolio.
- Tightening terms and conditions: He said Cisco is reducing the time between announcing a price increase and its effective date, and tightening policies around honoring previously issued quotes for an additional 30 days.
- Supply commitments: Patterson said Cisco’s advanced purchase commitments increased $1.8 billion over the last 90 days, driven by demand acceleration—particularly hyperscale—and the need to secure memory supply.
On mix, Patterson said Cisco’s hardware business grew more than 20% in Q2, while software was “a little bit softer,” particularly in security. He noted that hardware carries “very good margins,” but not as high as software. As an example of mix impact, he said if security revenue had grown mid-single digits in Q2 instead of declining 4%, gross margin would have been one point higher.
Operating margin focus and profitability priorities
Despite fluctuations in gross margin, Patterson said Cisco is prioritizing profitability and operating margin performance. He noted the company has guided operating margin of 33.5% to 34.5% for recent quarters, including Q3, and said Q2 delivered Cisco’s highest operating margin in four quarters despite gross margin headwinds.
Patterson also said Cisco is focused on EPS growth outpacing top-line growth, stating that dynamic was present in the first half of fiscal 2026 and in the company’s full-year fiscal 2026 guide.
Software, subscriptions, and security: transition headwinds and new-product traction
Patterson said software and subscriptions remained “a little over 50%” of Cisco’s business in Q2, and he highlighted continued growth in ARR and RPO. He said Cisco has $43 billion of RPO, which he said supports predictability and durable growth.
On security, Patterson said the largest revenue headwind has been the transition associated with Splunk customers moving from on-premises deployments to cloud, which changes revenue recognition from upfront to ratable recognition over the contract term. He characterized that shift as positive longer term, citing faster feature delivery, easier adoption, and higher longer-term revenue potential than on-prem.
Excluding Splunk, Patterson said Cisco is seeing “really good momentum” in security, but that it will take time to translate into reported revenue due to ratable offers and legacy headwinds. He pointed to products including Hypershield, Secure Access, XDR, and AI Defense, saying those offers added 1,000 new customers in Q2—double the number in Q1. He said the company expects organic security to be “approaching double digits” by fiscal year-end when setting aside the Splunk transition, while acknowledging progress is taking longer than desired.
Hyperscaler relationships and Silicon One’s positioning
Asked how Cisco rebuilt hyperscaler relationships, Patterson cited acquisitions including Leaba and Acacia and the hiring of industry talent, including Lund and his team. Lund said Cisco made a strategic shift from treating hyperscalers like “a big enterprise” to meeting them where they want to buy—ranging from branded systems to white-box designs using Cisco silicon, or even components and silicon alone.
Lund described hyperscale customer expectations as extremely demanding, saying doing business with hyperscalers is “like going to final exams every day.” He emphasized that reliability and rapid escalation response are critical at hyperscale scale.
Discussing product development, Lund referenced Cisco’s Silicon One chips, including a “G200” and “P200,” and said only a few companies globally can design comparable solutions. He said Cisco’s approach centers on systems and networking expertise, which he argued is increasingly important as AI infrastructure emphasizes data movement and network uptime.
On Silicon One architecture, Lund said Cisco uses a unified architecture for switching and routing, with a programmable engine that can use P4 microcode to change forwarding behavior after deployment. He said this programmability can help Cisco adapt to rapidly changing AI networking requirements without redesigning chips.
Lund also said Cisco has stated it has adoption with hyperscalers in “five out of six” and sees opportunity across multiple roles, including scale-out and scale-across.
On co-packaged optics, Lund said the transition is expected to happen but will take time, citing customer considerations around business models, vendor concentration, and operational realities. He noted Luxtera’s silicon photonics technology as relevant and said Cisco demonstrated a co-packaged optics solution in 2023, though he said the company has not announced a product.
In closing remarks on capital allocation, Patterson said there was “no real change” in policy, adding that Cisco aims to build more internally while remaining opportunistic with M&A when it can create differentiation, add a “moat,” or accelerate time to market.
About Cisco Systems (NASDAQ:CSCO)
Cisco Systems, Inc is a global technology company that designs, manufactures and sells networking hardware, software and telecommunications equipment. Its core business focuses on enabling enterprise and service-provider networks through products such as routers, switches, network security appliances and wireless systems. Over time Cisco has broadened its portfolio to emphasize software-defined networking, cybersecurity, cloud infrastructure and edge computing solutions that help organizations build and manage modern IT environments.
In addition to hardware, Cisco offers a growing range of software platforms and subscription services for network management, security, analytics and collaboration.
