Q4 2025 Earnings Call Transcript

Welcome to Cisco Systems, Inc.'s Fourth Quarter and Fiscal Year 2025 Financial Results Conference Call. At the request of Cisco Systems, Inc., today's conference is being recorded. If you have any objections, you may disconnect. Now I would like to introduce Sami Badri, Head of Investor Relations. Sir, you may begin.

Good afternoon, everyone. This is Sami Badri, Cisco Systems, Inc.'s Head of Investor Relations. I'm joined by Chuck Robbins, our Chair and CEO, and Mark Patterson, our CFO. Cisco Systems, Inc.'s earnings press release and supplemental information, including GAAP to non-GAAP reconciliation, 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 will 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 discussion today will include forward-looking statements, including our guidance for the first quarter and fiscal year 2026. These statements are subject to risks and uncertainties detailed in our SEC filings, particularly our most recent 10-Ks 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 Systems, Inc. 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 had a strong close to fiscal 2025, delivering revenue and gross margin at the high end of our guidance ranges for the fourth quarter. Continued operating leverage across our business produced strong profitability, with earnings per share above the high end of our guidance. In addition, we generated solid growth in annualized recurring revenue, remaining performance obligations, and subscription revenue, which provides a strong foundation for our future performance.

The profitable growth of our business continues to produce strong cash flows, supporting our commitment to deliver consistent capital returns. In Q4, we returned $2.9 billion in capital to our shareholders through share repurchases and dividends, bringing the total return in fiscal 2025 to $12.4 billion in value or 94% of free cash flow, surpassing the $12.1 billion Cisco Systems, Inc. returned to shareholders in fiscal 2024. Overall, our FY 2025 performance has established a solid foundation as we turn our focus to delivering Cisco Systems, Inc.'s strongest year yet in fiscal year 2026, as indicated in our guidance.

As we move into the next phase of AI with agents autonomously conducting tasks alongside humans, the capacity requirements of the network will be compounded to accommodate both unprecedented levels of network traffic and an increasing threat landscape. According to our survey of IT networking leaders, 97% of businesses believe they need to upgrade their networks to successfully deploy AI. Having refreshed almost our entire product portfolio with industry-leading networking systems powered by Silicon One, AI-native security solutions, and software operating systems, Cisco Systems, Inc. is well-positioned to provide the critical infrastructure needed for the AI era.

Now let me comment on the demand we saw in Q4, starting with record AI infrastructure orders received from web scale customers. These orders exceeded $800 million in the quarter, bringing the total for fiscal year 2025 to over $2 billion, more than double our original $1 billion target stated in Q4. This demonstrates the undeniable capability and relevance of our technology for multiple back-end use cases with some of the most technologically advanced customers. Overall, total product orders in Q4 grew 7% year over year, with solid growth across all geographies despite a complex environment, demonstrating the valuable outcomes we continue to deliver for customers worldwide.

As typical for the fourth quarter, we closed several very large deals with major enterprises. Enterprise product orders were up 5% year over year in Q4, across different industries that are compounding the value of their investments by leveraging the full breadth of our technology platforms. We have a slide in our earnings presentation that highlights both the breadth of Cisco Systems, Inc.'s reach through 8-figure or larger deals and the versatility of solutions tailored to our customers' needs. Public sector orders were down 6% year over year in Q4 compared with a very strong fourth quarter FY 2024 when orders grew double digits year over year.

That said, overall public sector demand grew sequentially in line with normal seasonality. Product orders from service provider and cloud customers continue to be very strong, up 49% year over year, driven by triple-digit order growth in web scale for the fourth consecutive quarter, with four out of the top six web scale customers each growing orders in the triple digits. In fact, two web scale customers each placed total orders of over $1 billion for networking, security, collaboration, and observability in FY 2025. Demand from telco and cable customers was also strong in Q4, with orders growing more than 20% year over year.

Now some color on demand for our core networking and security solutions. Networking product orders grew double digits in Q4, marking the fourth consecutive quarter of double-digit growth driven by web scale infrastructure, switching, enterprise routing, industrial IoT, and servers. There is strong interest from customers in the new family of Cisco Systems, Inc. Cat 9K smart switches, along with a completely refreshed lineup of highly secure routers, wireless access points, and industrial IoT devices, which are purpose-built for the AI-ready campus and branch.

Our new smart switches are powered by Silicon One and deliver enhanced performance, quantum secure networking, and radically simplified cloud-native and AI-driven operations, all supporting the new realities as AI changes how we work and collaborate. The introduction of our new switches marks the beginning of a major refresh cycle opportunity for Cisco Systems, Inc.'s large installed campus switching base. Orders for our industrial IoT portfolio, comprised of ruggedized catalyst products, grew double digits for the fifth consecutive quarter. And we see solid demand signals continuing into FY 2026 as countries around the world are committing to US domestic investments as part of their trade agreements.

As more strategic infrastructure and manufacturing is brought onshore to the United States, Cisco Systems, Inc. is well-positioned to help connect and protect these capital-intensive investments at scale. As I mentioned earlier, the AI infrastructure orders we received from web scale customers were once again exceptionally strong, exceeding $800 million in the quarter. As expected, the product mix of these orders was more than two-thirds in systems, with the remainder in optics. In the enterprise specifically, while still early, AI orders are ramping, and we have a growing pipeline in the hundreds of millions as these customers look to Cisco Systems, Inc. to provide simple, scalable, and secure solutions for the AI era.

Our expanding partnership with NVIDIA also positions us to deliver on these new demands with completed integrations of Cisco Systems, Inc. Nexus switches with NVIDIA Spectrum X architecture, offering low latency, high-speed networking for AI clusters. Additionally, the Cisco Systems, Inc. Secure AI factory with NVIDIA provides a trusted blueprint for building secure, AI-ready data centers for enterprises, sovereign cloud providers, and newly emerging neo-cloud providers.

We also see the opportunity with neo-cloud providers ramping, with several large deals in Q4 not included in the previously mentioned AI infrastructure orders. Our newly forged Middle East strategic partnerships, including Humane, G42, and Stargate UAE, are all progressing as planned, and we expect the sovereign AI opportunity to build momentum in 2026. We believe Cisco Systems, Inc. will be a core system provider for these significant AI training and inference cluster build-outs and integral to their development and eventual hyperscaling. As we look holistically at the AI opportunity for Cisco Systems, Inc., we frame it into three distinct but connected pillars.

First, AI training infrastructure for web scale customers. Combinations of our Cisco Systems, Inc. 8K, Silicon One, optics, and optical systems are being deployed by the largest web scalers. We expect demand for these technologies from neo-cloud providers and sovereign customers to increase in fiscal year 2026. Second, AI inference and enterprise clouds. Our accelerated innovation in hardware and software, coupled with our NVIDIA partnership, is designed to simplify, accelerate, and de-risk AI infrastructure deployments for the enterprise.

And third, AI network connectivity. Customers are leveraging Cisco Systems, Inc. platforms to help modernize, secure, and automate their network operations to prepare for the pervasive deployment of AI agents and applications. As we move towards agentic AI and the demand for inferencing expands to the enterprise and end-user networking environments, traffic on the network will reach unprecedented levels. Network traffic will not only increase beyond the peaks of current chatbot interaction but will remain consistently high with agents in constant interaction.

We have a slide illustrating this new traffic model in our earnings presentation available on our website. As agents gain autonomous decision-making and action capabilities, security will be even more critical to ensure they operate reliably and safely. As a trusted partner for enterprises, hyperscalers, neo-cloud, and sovereign cloud providers alike, Cisco Systems, Inc. has the opportunity to lead this generational transition in networking and security and provide the critical infrastructure needed for the AI era. Now shifting to security.

We recorded mid-single-digit growth in orders in Q4. Splunk and Cisco Systems, Inc. synergies delivered a 14% year-over-year increase in new logos for Splunk in Q4, demonstrating the benefit of our cross-selling motions and joint innovation. Our new and refreshed products, including secure access XDR, HyperShield, and AI Defense, also continue to ramp and added 750 new customers collectively in the quarter. The vast majority of our new HyperShield enterprise customers are bundling with our N9300 smart switch, which enables them to embed security directly into the fabric of the network. We believe that agentic AI can only be secured by fusing security deep into the network and that only Cisco Systems, Inc. can deliver this capability.

Now I'd like to comment on our accelerating innovation pipeline. At Cisco Live US in June, we delivered our largest innovation payload to date, announcing over 20 new customer-centric offerings across our portfolio to help our customers build AI-ready data centers and future-proof their workplaces with a foundational layer of digital resilience. You can see the full list of product launches in our slide deck, but I'd like to highlight our agentic ops are already resonating with customers. Cisco Systems, Inc.

AI Canvas is a revolutionary generative user interface for real-time collaboration between network and security teams, optimized for both human and agent interaction. Powered by Cisco Systems, Inc.'s advanced deep network model LLM, AI Canvas unifies real-time telemetry across various platforms to radically simplify IT operations and accelerate troubleshooting. All of our new innovations introduced in FY 2025, spanning core networking products based on Cisco Systems, Inc. Silicon One, advanced security technologies, and unified management tools, are designed on a foundation of AI, further enhancing Cisco Systems, Inc.'s platform advantage, where every technology does not just add value by itself but compounds the value of our customers' existing investments.

We continue to use GenAI and agentic systems across our customer experience organization, with things like services as code and AI agents for end-product support, renewals, and adoption. Today, over two-thirds of support cases are touched by AI and automation, which increases the proportion of complex cases we can solve within one day. We're also seeing increased usage of Cisco Systems, Inc.'s own proprietary AI internally, with more advanced use cases emerging across engineering, sales, operations, and our people policy and purpose organization, resulting in meaningful productivity gains for our teams.

To summarize, we are seeing clear demand for our technology across customer markets in addition to expanded opportunities as we move towards agentic AI. We are innovating faster than ever before, making AI foundational in our designs, fusing security deep into our networking products, and providing operational simplicity for our customers. And our strong performance is fueling our capital allocation model, returning significant value to our shareholders while positioning our business for success in fiscal 2026. Before I close, I'd like to once again thank Scott Herren for his leadership and partnership over the last five years.

Scott has been instrumental in driving our transition to more software and recurring revenue, which has driven greater predictability for our business and increased shareholder value. We wish you all the best in your retirement. I'd also like to take a moment to thank our teams for their hard work to close out the year, for executing with urgency as one Cisco Systems, Inc., and most importantly, for their unfailing focus on delivering valuable outcomes for our customers. Now I'll turn it over to Mark for more detail on the quarter and our outlook.

Thanks, Chuck. We delivered a strong quarter with revenue and non-GAAP gross margin and operating margin at the high end of our guidance range and earnings per share above the high end of our guidance, coupled with solid operating cash flow. For the quarter, total revenue was $14.7 billion, up 8% year over year. Non-GAAP net income was $4 billion, up 12%, and non-GAAP earnings per share was 99¢, up 14%, demonstrating good operating leverage with EPS growth outpacing revenue growth.

Before we dive into the details, it's worth reiterating as a reminder that we had a full thirteen-week contribution from Splunk in Q4 FY 2024 last year, so our reported year-over-year growth rates are fully comparable this quarter. Looking at our Q4 revenue in more detail, total product revenue was $10.9 billion, up 10%. Services revenue was $3.8 billion, flat year over year. Networking was up 12%, with growth across most of the portfolio led by double-digit growth in Internet infrastructure and enterprise routing, as well as solid growth in switching, partially offset by a decline in servers.

Security was up 9%, primarily driven by growth in our offerings from Splunk and SASE. Collaboration was up 2%, driven by solid growth in devices. Observability was up 4%, led by strong growth in Splunk and ThousandEyes. Looking at our recurring metrics, total RPO was $43.5 billion, up 6%.

Product RPO grew 8%, and total short-term RPO was $21.7 billion, up 4%. Total ARR ended the quarter at $31.1 billion, an increase of 5%, with product ARR growth of 8%. Total subscription revenue increased 3% to $7.9 billion and represents 54% of Cisco Systems, Inc.'s total revenue. Total software revenue was up 5%, at $5.6 billion, with software subscription revenue also up 5%.

Q4 product orders were up 7% year over year. Looking at our product orders across geographic segments, the Americas was up 5%, EMEA was up 10%, and APJC was up 7%. In our customer markets, service provider and cloud was up 49%, enterprise was up 5%, and public sector was down 6%. Total non-GAAP gross margin came in at 68.4%, up 50 basis points year over year, coming in at the high end of our guidance range.

Non-GAAP product gross margin was 67.5%, up 50 basis points, driven by productivity improvements. Non-GAAP services gross margin was 70.8%, also up 50 basis points. Our total gross margin included a small impact from tariffs, which was slightly favorable compared to our estimate that was included in our guidance. We continue our focus on profitability and financial discipline, with non-GAAP operating margin at 34.3%, at the high end of our guidance range.

Our non-GAAP tax rate was 18.1% for the quarter. Shifting to the balance sheet, we ended Q4 with total cash, cash equivalents, and investments of $16.1 billion. Operating cash flow was $4.2 billion, up 14%, primarily driven by our revenue and earnings growth. From a capital allocation perspective, we returned $2.9 billion to shareholders during the quarter, comprised of $1.6 billion for our quarterly cash dividend and $1.3 billion of our share repurchases, with $14.2 billion now remaining under our share repurchase program.

Turning to the full fiscal year, revenue was $56.7 billion, up 5%. Total non-GAAP gross margin was 68.7%, up 120 basis points. On the bottom line, non-GAAP net income was $15.2 billion, flat year over year. Non-GAAP earnings per share was $3.81, which was up 2%.

Operating cash flow was $14.2 billion, up 30% compared to FY 2024. Cash flow growth from the full year was positively impacted by some large tax payments in early FY 2024 that did not repeat in FY 2025. We returned $12.4 billion in value to our shareholders through cash dividends and share repurchases. This was comprised of $6.4 billion in quarterly cash dividends and $6 billion of share repurchases. We increased our dividend for the fourteenth consecutive year in FY 2025, reinforcing our confidence in the strength and stability of our ongoing cash flows. To summarize, we had a solid fiscal quarter and year, with top and bottom-line performance meeting and exceeding our expectations, driven by strong order growth and margins.

For the full fiscal 2025, we delivered record non-GAAP operating income and margin, demonstrating our ability to provide operating leverage while driving strong top-line growth. 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 disciplined 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, while we have some clarity on tariffs, we are still operating in a complex environment. Our Q1 and fiscal year 2026 guide assumes current tariffs and exemptions remain in place through the end of fiscal 2026. These include the following: China at 30%, partially offset by an exemption for semiconductors and certain electronic components; Mexico at 25%; and Canada at 35% for the components and products that are not eligible for the current USMCA exemptions. Other countries reverted to country-specific reciprocal rates, but largely offset by an exemption for semiconductors and certain electronic components.

And finally, a small impact from tariffs on copper, steel, and aluminum in retaliatory tariffs. We will continue to leverage our world-class supply chain team to help mitigate the impact of tariffs where appropriate through the flexibility and agility we have built into our operations over the last few years. The size and scale of our supply chain provide us with some unique advantages as we support our customers globally. Looking ahead, you can expect us to continue our focus on durable growth, financial discipline, driving operating leverage, and continued capital returns.

Our fiscal Q1 guidance is as follows: We expect revenue to be in the range of $14.65 billion to $14.85 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% to 34%. Non-GAAP earnings per share is expected to range from 97¢ to 99¢.

We are assuming a non-GAAP effective tax rate of approximately 19%. For fiscal year 2026, our guidance is as follows: We expect revenue to be in the range of $59 billion to $60 billion. Non-GAAP earnings per share is expected to be in the range from $4 to $4.06. Sami, let's now move into the Q&A.

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

Thank you. Aaron Rakers with Wells Fargo. You may go ahead.

Yeah. Thanks for taking the question. I guess my first question is, looking at your guidance and given the commentary around the AI opportunity and reflective of sovereign starting to kick in, into the second half of the fiscal year. Just kind of taking the midpoint, it would seem to assume you've got some deceleration of growth from, call it, six and a half, 7%.

You guided for fiscal first quarter to about four and a half percent going into the remaining three quarters. I'm curious, does that reflect conservatism? Is there any change in the demand environment that you're factoring in? I'm just kind of curious how we bridge maybe that deceleration through the remaining quarters of the fiscal year.

Hey, Aaron. Thanks. So let me just say that the AI opportunity is clearly one that we have been pleased with our execution on. And as we look out at you, I think the dynamic that you're talking about is strictly connected to just year-over-year comp later in the year.

I don't think it's got it hasn't it's not meant to signal any change in demand or anything that we think. I think, you know, one of the questions that I expect is, does the campus refresh begin to kick in and should that be a big revenue driver in next fiscal year? You know, if you think about the campus, the Cat 9K is in year eight of this transition. So it's it and lots of customers will take a lot of time to evaluate that and look at those products before they begin to deploy them.

So we think that's gonna kick in next year as well. And we're pleased with the progress we made on AI. But I think the annual progression is really related to comps. Mark, do you have anything to add?

No. I think that's right, Chuck. You know, you have to think back as well in prior year other than Q4, that's the first quarter that really was apples to apples in terms of having Splunk in the prior year. So some of the growth rates, you know, before Q4 were obviously higher than they would be otherwise.

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

Meta Marshall with Morgan Stanley. You may go ahead.

Great. Thanks. Appreciate the question. Maybe a couple for me.

Just one, how are you looking at security and business maybe in particular? You know, you're now anniversarying Splunk as you guys just mentioned, but just kind of how are you looking at growth outlook there as you have some kind of new products and old products cascading in? And then maybe second, just new CFO priorities. Would be great to kind of level set.

Thanks.

Alright. Why don't I cover security? And, Mark, you can obviously cover CFO priorities. Meta, thanks for the questions.

I would say that I am more optimistic about security coming out of the last quarter, and I'll tell you why. Last quarter, I explained to all of you that we really have two sets of products. We have the set that is new and refreshed, and that's the SASE, XDR, HyperShield, AI Defense, as well as our refreshed firewall portfolio. And then we have the area of older products that are not huge investment areas for us right now or kind of the long tail of the life cycle.

And if you look at those new products, and new and refreshed, again, including our refreshed firewalls, we saw order growth during the quarter in excess of 20%. So they continue to have widespread adoption. Perhaps the metric that I think will give you more confidence here is if you take out US Federal, which had a tough year as we all know, rest of world security order growth in Q4 was up double digits. So we're really seeing this ramp, and I think I said on the last call, it's happening slower than I had anticipated.

A lot of it's because this stuff is ratable. But I feel good about where we are. We have 80 new HyperShield customers, you know, largely connected to this new smart switch, so that strategy is working. And I would say that we had 480 plus new SSE customers during the quarter.

So that's, you know, our secure services edge is really getting good traction. What I would say is based on how we see this stuff evolving, I would see the growth rate continuing to improve as we get through the fiscal year this year. So that's the story on security. Mark, you wanna take the second quarter?

Thanks, Meta, for your question. First off, I just wanna thank Scott, been certainly a good partner for many years and for the work that he's done with Cisco Systems, Inc., and in particular, I think helping us make that transition to software and subscription. You know, I've been with the company now twenty-five years in a variety of roles and responsibilities, and I think as I look ahead, we have significant opportunity, whether it's in AI infrastructure, in the web scale space now in the nascent but growing enterprise AI opportunity. Obviously, neo-clouds and the sovereign AI build-out happening.

Also, you look to cybersecurity and how we've improved our hand there with Splunk. And then the campus refresh that we've got ahead of us, which will be multiyear. Yeah. I think we've got great opportunity, and what I really wanna do is make sure that we're funded for success.

And we're looking at those opportunities for what do we need to do to be successful. I also think in terms of expectations of me, you know, you can expect that I will be focused on durable, profitable growth. Obviously, you know, financial discipline and transparency. And really just returning value to the shareholders.

Thanks.

Thanks. I wanna add one more thing, Meta, on the security front that I failed to mention. Another positive thing that happened during the quarter, we've had two consecutive quarters now relative to Splunk. You recall, one of the big things that we thought we could do is bring them new customers by cross-selling Splunk into customers they had not been in.

And in Q3 and Q4, we had over 300 new logos for Splunk, new customers that bought Splunk for the first time. So that strategy seems to be working, teams are doing a really good job there, which is another reason I have confidence in the security strategy this year.

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

Thank you. Simon Leopold with Raymond James. You may go ahead.

Thank you very much for taking the question. First one, wanted to ask about this idea of pull forward. I appreciate customers may not communicate their rationale and reason for placing particular orders. But I'm concerned that particularly in the federal vertical with potential budget cuts and enterprises worried about the implications from tariffs may have accelerated some of the orders, therefore, pulling them from the later quarters?

And then as my follow-up, I'm wondering if you could talk about your expectations over the longer term for the composition of the AI business. We've got the two-thirds, one-third split between systems and optics. And I'm wondering how you expect that to trend, or is this an expected steady state? Thank you.

Thanks, Simon. I'll make a couple of comments on the pull forward, and Mark, you can give some data points on why we're pretty confident that hasn't happened at scale. You know, we've looked at there's lots of metrics that we look at here. And I talk to customers constantly.

We talk to our field teams constantly. And I haven't heard one instance in the last six months of a single customer who said, I'm gonna order this now before price increases occur. Not that we're increasing prices. We haven't announced anything like that.

But I'm just saying that's the theory that you're putting forward. So I'm not suggesting that it hasn't happened somewhere, but I would have heard it if it was pervasive. Mark?

Yeah. Just to add maybe a few data points. You know, certainly, we talk to many channel partners. Also look at our typical linearity from month one, two, three, etcetera.

That all look good. We have, on many of our products, we have software that gets activated once it's shipped. One of the things we look at is really that time from shipment to activation. It does see if that is stretched out at all.

It did not as well. We also look at ship dates, you know, requested from customers. And if those are sliding, then that might be an indication that they don't really want gear yet, but they wanted to get an order in early. Didn't see any issue there either.

And then really, you know, just, of course, we looked at pipeline pull forwards and nothing unusual there either. So we're pretty confident that we haven't seen any indication of any pull forwards. Thanks. And, Simon, on your second question, the AI business composition specifically in the back-end networks today of the cloud providers, I don't see anything that would indicate a massive shift there.

Based on the conversations we're having with them. I haven't heard anything that would lead me to believe that that shift changes meaningfully.

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

Thank you. Samik Chatterjee with JPMorgan. You may go ahead, sir.

Yep. Great. Thank you for taking my question. Maybe, Chuck, if I can sort of ask more on the networking cycle here, particularly that there was a period of time that you went through a digestion with customers and then you started to see the recovery in the networking cycle.

There's been two quarters of solid growth on front. As you think about next year or fiscal 2026, how do you sort of see that growth sustaining particularly if we sort of put aside the new upgrades, in relation to Cat 9K flat upgrades that you're looking at? Like, where are customers in terms of their intent to upgrade legacy infrastructure? And basically, what I'm trying to get to is at the Investor Day, you had talked about 2% to 5% being the range of networking through the medium term, and where do you think you'll land on that front in fiscal 2026?

Thank you.

Thanks, Samik. I think that, you know, if you step back, there's two things going on. There's this AI revolution that we can talk about, and then there's the refresh opportunity. And if you think about the AI revolution, what we are seeing, and we've seen this with transitions over the last decade or so, we tend to see these things begin first in the cloud providers, which we're clearly seeing the AI play in the cloud providers.

Then we see it shift into the enterprise or wait well, we see it shift from the back end in this case, from the back end to the front end, we believe that will occur as enterprises start using more of these services. Then enterprises will also build out inferencing as we know on-prem in addition to that. And we're even seeing the telco business actually pick up as they're actually telling us they're increasing their network capacity and they're modernizing their infrastructure in preparation for AI. So we think that AI is going to drive network modernization across all of these segments.

And then you have the campus upgrade, which we really haven't started yet. And if you think about what the comment I made earlier, we've got routing refresh. We've got a lot of new technology in our data center networking business, which, by the way, grew mid-teens orders last fiscal year in the enterprise. We have Wi-Fi 7, which grew triple digits year over year.

So we're seeing good uptake there, and we got the new campus products. But the new campus switching again, we're in year eight of the Cat 9K. And, honestly, if you look at products that were pre-Cat 9K that are still installed in our customer base, they're tens of billions of dollars of installed bases there that we can go after. So we think that all of that leads us to feel very confident about maintaining the range that we provided at Analyst Day on core networking.

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

Thank you. Michael Ng with Goldman Sachs. You may go ahead.

Hey, good afternoon. Thank you for the question. I just have two as well. First on AI, I was wondering if you could talk about the greater than $2 billion AI orders this year, did that translate into revenue in the year?

And how should we think about that translating into revenue for next? And then second, just on networking, was wondering if you could talk a little bit about, you know, the orders in the quarter by subsegment, campus and data center switching, wireless, routing, and any kind of notable inflections that you would call out in any of those product categories? Thank you.

Sure, Michael. Let me take some comments first on the wanna go on and just give clarity on the web scale business and what it looked like, and then Mark can talk about the revenue in FY 2025 related to their AI infrastructure orders. So I just wanna make sure everybody understands our web scale business. First of all, we sell technology into the back end.

We sell technology into the front end or the traditional cloud networks. And we sell our enterprise portfolio to these customers as well. And if you look at our entire portfolio, these customers in aggregate grew triple digits four quarters in a row from an orders perspective. We had four of them that grew triple digit in Q4 by themselves, and as I said in my prepared remarks, had two of these customers across the portfolio that placed orders in excess of $1 billion each in fiscal year 2025. So if you think back five years ago when we were talking about our strategy in this play in the space, this was definitely not the case.

So we feel good about the progress we've made. And then I think you understood on the AI infrastructure, we had greater than $800 million in during the quarter. We have greater than $2 billion on the year more than double our original target. Mark, you wanna talk a little bit about the revenue?

Sure. Yeah. In terms of revenue and shipments related to those AI orders, those really just progressed and ramped like we expected during FY 2025. So for the full year, we recognized right about a billion dollars in revenue related to those.

So we recognized roughly a billion dollars of revenue on the AI back-end orders that we've taken from the customers during fiscal year 2025.

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

Thank you. Amit Daryanani with Evercore. You may go ahead.

Yep. Good afternoon, everyone. Thanks for taking my question. I have two as well.

And, you know, Chuck, maybe just on the AI side that you were talking about that a little bit here. Can you just touch on AI adoption by enterprises? And how do you really think that opportunity on the enterprise side shape up given I think, Silicon One is the only partner Silicon that NVIDIA is supporting right now. So this well, how big do you think this enterprise opportunity is and when you start to see revenues or orders flow into that?

And then my follow-up, maybe just continuing on to the prior answer you've pushed out, how much revenue contribution are you embedding in fiscal 2026 from AI given the $2 billion order that you have this year? Thank you.

Yeah, Amit. Good question. So on the side, what we saw orders, and these are orders that are really sort of network and AI GPU related. I think, in our remarks, we talked about earlier that they're about half and half, and we saw a few hundred million that moved through, and we have hundreds of millions in the pipeline right now for enterprise.

I'd say that, you know, there's a lot of pilots going. There's a lot of work going on with customers who are piloting different applications in retail environments, etcetera. So we think it'll start to ramp, and then we think that you'll see AI applications ramp, and then the second half of the year, we think you're gonna see agentic proof of concepts become more, I'd say, pervasive, and that's gonna require, obviously, network connectivity, network capacity, low latency, and candidly, we're gonna have to put security into the fabric of the network because as we talked about earlier, these agentic workflows, they're gonna be in constant communication whether you think about general agents or you think about robotics, the importance of the low latency connectivity is gonna be huge.

And the security is gonna be huge. And the only way to do both of those is to fuse security into the core of the network. So that's our plan. That's why we're working so hard on what we're working on.

In the NVIDIA space, I'd say a lot of the developments going on. I would just say we I don't believe we've seen the meaningful benefit of that partnership yet. And we've got some good development that's been completed. We got a lot of milestones that are gonna be done in the next few months, and we think that as the enterprise really begins to ramp up, that partnership and our portfolio, we think we'll be in good shape to help them out.

On the revenue contribution from fiscal year 2026 relative to AI, I would just say that we don't really guide by specific parts of the technology. But, you know, given that we had a billion in FY 2025, you can probably extrapolate out what we'll do in 2026 because we got the backlog, and we'll have the new orders that we take down during the year.

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

Thank you. Tal Liani with Bank of America. You may go ahead, sir.

Yes. Hi, guys. Two questions. I'll ask them both together.

Service revenues, kind of 25% of revenues, flat this quarter. And if you look at the trend line over the last five quarters, the growth decelerated from six and a half percent to five and a half to two two and a half, now zero. What are the trends in service revenues, and what should we expect going forward? That's question number one.

And question number two is, the networking growth. It's driven by spending and investments by cloud. How much risk is there that this year is a phenomenal year for spending and trends would slow down next year just because Oracle is not gonna grow again another 150%, and Meta is not gonna grow again another, you know, 70, 80%, etcetera. So what's the sustainability of these growth rates in your view?

Thanks.

Yeah. Hey, Tal. It's Mark. Thanks for the question.

I think I'll take the service one, then I'll let Chuck answer your second question. So on the services, you know, if you go back a year ago and even a little bit longer ago, you saw a lot of professional services that we did. Really helping our customers and our partners frankly, working hand in hand to implement a lot of that gear that we had shipped. If you remember all that excess backlog that we sort of unloaded on our customers, if you will, we were helping do that.

So that drove, you know, nice growth in our services business for a while. What we usually do see, as you know, is services usually trails or sort of follows on to what's happening in product, for instance. So as we saw, you know, networking growth of 12% this quarter, would expect that, you know, you'll start to see services pick up as it revenue on services is ratable. So we do expect that that will improve as we go into FY 2026.

And then on the risk issue, you know, all I could say, Tal, is that we see the same CapEx year-over-year growth numbers that you see. And I think the aggregate number is like 50%. Up. So I don't feel like AI is a fleeting trend.

I do understand your question, but I think, you know, we're operating off the demand signals we're getting from those customers and what they're signaling relative to how they're spending CapEx.

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

Thank you. Ben Reitzes with Melius Research. You may go ahead, sir.

Hey. Hey. Thanks. Chuck, I mean, I think some folks were trying to get at this in an earlier question, but, you know, security I mean, your execution and switching and the AI stuff is obviously better than expected, but the security was pretty well below the street.

And has to accelerate pretty significantly to get to your 15% to 17% growth for security plus observability long-term target. I mean, is that still the right way to think of that business, Chuck? Is that where you think you can at least end the year? And if not, is it worth rethinking that it's a high single-digit grower?

Just wondering on that. And then I have a quick follow-up. Well, that's enough.

Ben, do you wanna ask your one now, Ben. We're writing them down. So

Oh, okay. Well, I was just on the I was wondering, you know, on the humane and some of these sovereigns, you know, you mentioned the NVIDIA deal so much. But on one of them, you're working with AMD. I'm just wondering, you know, how with regard to your partnering outside of NVIDIA the AI land, how much is that a focus? And, you know, is that something that you're able to do as well?

Yeah. So first of all, you know, I gave you the data earlier when I was talking about security, and I talked about the fact that ex-Fed, you know, we saw security orders grow in double digits, which is pretty positive compared to where we've been. And these new and refreshed products that I talked about that included secure access XDR, HyperShield, AI Defense, new firewalls and identity, which is super important these days in agentic, the refreshed identity portfolio. Saw that growing in excess of 20%, and that's currently about two-thirds of the organic security portfolio.

So through the year, what you're gonna see is that just continue to become a bigger and bigger part so that the third that's sort of the legacy stuff will have a lower impact will continue to have a lower and lower negative impact on that as we get through the year. So to answer your question directly, number one, I don't think we should change those ranges. Number two, do I believe we'll exit the year at it? I think we're gonna exit the year either near it or at a on a path to get there pretty soon after that.

That's first. On the humane and on the sovereign side, we are working very closely with AMD on a couple of those, and you should assume that, you know, we will have a very, very tight partnership with them as well. So that we're primarily so that we can deliver highly integrated solutions to these customers as we work with them going forward. So Lisa and I talk fairly regularly.

As you all know, she used to be on our board, so we have a great relationship. And you should assume that we'll have a tight partnership where we need to deliver outcomes for these customers.

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

James Fish with Piper Sandler. You may go ahead, sir.

Hey. Thanks for the questions here, guys. I know Chuck asked about this a little bit earlier. Is there a way to think about for every dollar of Cat 9K refresh how many dollars are kind of coming off of the other solutions, be it wireless LAN firewall that they're security products.

And just to follow-up on the last question here, anniversarying Splunk. Are you guys thinking about your own use of capital given, you know, big M&A in security once again? I'm surprised I'm the first one asked about this given in the CyberArk deal. How are you thinking about that identity and privileged access space given you're gonna have more AI to AI or machine to machine interactions occurring in the future?

Yes. So, Mark, feel free to comment. But I don't think there's a way to really correlate I didn't completely understand that first question about the correlation.

Yeah. I think he's asking, can you correlate the Cat 9K to sort of other campus devices around it, if you will. It actually sounds like a great idea. I'd love for that model.

But, there's so many other, you know, new devices that we launched as well, if you will. I mean, the smart routers, the smart switches, but also new Wi-Fi access points, etcetera. So it's definitely something that we'll take a look at, but I don't think it's that easy, if you will.

So on the second one, Mark, let's talk about capital. And how you how we plan to use it or nothing's really changed, and I'll talk about identity.

Yeah. So if you look at FY 2025, first off, we returned $12.4 billion to the shareholders. So 94% of our free cash flow. You look at it going forward, and probably important for you to hear this from me too, you know, number one, the first priority is just to support the growth of the business.

Secondly, is to support the dividend, obviously, which we have been increasing each year for some time. Another is just to really offset dilution. Would be the third priority. And then fourth, I'd just say being opportunistic on how we can additionally bring value to our shareholders.

And then specifically on identity in relation to the announced acquisition, I think it's the that actually underscores what we've known for ten plus years, which is the importance of identity. In Zero Trust architectures. It's a core pillar of our platform strategy. It's not an add-on.

We have great leadership in this space, a lot of deep knowledge and innovation with Duo and ICE, strategic acquisitions like Duo and Orc that we already have on board. Q4 Duo growth was off the charts. With a lot of the new capabilities that the teams have built in for the customers as customers just today look at zero trust architectures relative to their employees. But we're already working on agentic identity, which is something that's really important.

And I think that, you know, the good news for us is we don't have to wait for an acquisition to close. We have a lot of great talent that's already working on this. And, again, I think the advantage that we're gonna have here with identity and agentic security is that you're gonna have to do it real time. And we are the only company that has networking and security and identity specifically within security, so we think that gives us an advantage.

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

Thank you. David Vogt with UBS. You may go ahead, sir.

Great. Thanks, guys, for taking my questions. I have two as well. So, Chuck, I recognize you don't guide to specific product growth.

But if I think about your order intake, it's been averaging at least kind of roughly 50% on average for SP. If I use that as a proxy in fiscal 2026, it looks like, you know, AI could add, you know, about two points of revenue growth to sort of the networking business. In '26. And is that kind of the right way to frame it, the rest is really the recovery or maybe the refresh cycle in campus and strengthen enterprise? And then, Mark, my second question for you is I appreciate all the detail on the tariff impact.

I appreciate that in the slide. But can you help us frame from a gross margin impact, is it a 50 basis point headwind in your guide for fiscal '26 based on where current tariff rates are and how you're thinking about it for the full year?

Yeah. Let me answer the first one, and then Mark can talk about tariffs. I mean, on the I think you're generally in the ballpark I think. I don't know specifically how many points, but we do expect both sides to be contributing pretty meaningfully.

And I think that think we did an analysis of our overarching growth in Q4 if you normalize that web, it made a one-point differential. I think so. I think you're close.

Yeah. As far as tariffs, they were really a small impact in Q4 as well as for FY 2025. And, you know, rather than sizing the dollar amount, what I really wanted to do was give you the assumptions that underpin the guide and really reinforce that, the components that are part of that certainly China at 30% with the continuing offset by the exemption for the semiconductors and certain electronic components. Mexico at 25%, Canada at 35%, and those are only for the components that do not qualify under USMCA. Then other countries, going back to their reciprocal rates that are largely offset by those exemptions for semiconductors and electronic components plus some small tariffs related to steel aluminum, and copper.

So really just wanted to make sure you knew the exact assumptions that are into the guide.

Yeah. It's very difficult to include anything that hasn't been announced yet because it's such a dynamic environment.

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

Thank you. Karl Ackerman with BNP Paribas. You may go ahead, sir.

Yes. Thank you. Two for me as well, and I'll ask them at the same time. Within your fiscal 2026 outlook, I was hoping you could rank all of the segments that give you the most conviction in hitting the target that you laid out?

Second, Chuck, you indicated that Silicon One should grow as a portion of your Nexus smart switches over time. And I was hoping you could discuss whether Silicon One can represent half your switch ASICs in the next three years. Thank you.

It's a great question. So if I rank order the segments, I'd say I still remain very optimistic on SP. Probably secondly, enterprise, and probably third, public sector. But I would like to comment on public sector and give you another give you all another data point.

Our overall order growth or bookings growth of 7%. If you take out federal, the rest of the world grew at 10%. So we saw good performance outside of federal. When we think about federal in fiscal year 2026, just to put it in perspective, our teams are forecasting a return to growth for federal during this fiscal year.

Now it's not gonna be the same low it's not gonna be as high of growth as we saw a decline, so we'll still be below FY 2025 levels. But the good news is they're forecasting growth, so that's better. I still think I would stack rank them service provider enterprise and service provider including cloud, obviously. Then enterprise and public sector.

On the Nexus portfolio, so you've got I think we, you know, we've got the 800 gig Nexus product that is Silicon One based. We've got the smart switches that will be Silicon One based. So it's our intent to actually drive this as fast as we possibly can. And I think your assumption is not too far off.

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

Thank you. Atif Malik with Citi. You may go ahead.

Hi. It's Adrienne Colby for Atif. Thank you for the question. The EMEA orders accelerated in the quarter, and I was hoping you could provide some color there. And also wanted to just circle back on the sovereign AI opportunities about your expectations in terms of order flow and revenue recognition there. Thank you.

Great. So if you look at EMEA, we saw 10% overall orders. Enterprise was up in the mid-teens. Public sector, roughly flat.

SP in the mid-teens. We saw strength in the UK, Germany, Saudi, SP was strong. Security was strong. Little, you know, obviously flat in public sector.

We'd like to see it a little better. And I think they're in Europe, I think we see opportunities. There's a couple things going on. Number one, there's a lot of focus on sovereignty and a lot of focus on building out their own tech stack and tech solutions.

In many cases, they are very keen on having on-prem solutions like think on-prem Splunk or on-prem Webex from a sovereignty and geopolitical perspective, that's just where they're going. So we think the opportunity there and the defense spending and everything else, we think that will continue to be a good opportunity for us in Europe. In that space, obviously, in Europe, Middle East, Africa, we've got the couple of sovereigns that we've announced. And we have not taken any orders from them yet.

We've been in the planning phases with them. They're obviously working through getting the licenses for the GPUs. And we sort of expect that's gonna I would lean towards looking for that even the order flow to be sort of middle year into the second half. And then revenue would follow.

Thank you, Adrienne.

Michelle, can we move to the final question from the analyst queue?

Thank you. Sebastien Naji with William Blair. You may go ahead.

Yeah. Thank you for squeezing me in. My first question is on the back-end AI network opportunity, but maybe a little longer term. There's a lot of chatter from your main silicon competitor about new chips are gonna enable Ethernet for scale-up connectivity, so within the racks.

I wanted just to ask what your expectations are for Ethernet and scale-up going forward. And if we should expect new Silicon One announcements tailored to that opportunity. And then my second question is just on the campus network. You announced the integration of Meraki and Catalyst platforms at Cisco Live, and I think the reactions have been generally pretty positive.

But I'm wondering if you expect this to shift behavior in hardware purchases at all. So could we see, for example, outside strength in Meraki and slower demand for Catalyst or vice versa? The next two years?

Yeah. Two great questions. So I think, on the back-end side, as I've said before, the two in the networking side, the two areas where the value is really derived is either in the silicon or in the software. And so given that many of these folks are using a lot of their own operating systems, you have to have silicon to play in the first place.

So the good news is we do. When you look at this scale-up opportunity, in the back end of the hyperscalers and many in most cases, they're not using the clusters with the scale-up inside the cluster. They're using native connectivity within the clusters and then between clusters. And we think there that that probably remains the predominant play.

We're seeing the desire for some of these clusters in neo-clouds, etcetera, because they're easy. But there's still a connectivity layer, obviously, between the clusters. From a scale-up perspective, we think over time, that opportunity could shift to more of an Ethernet variant, which would give us, obviously, an easy way to play. We've got road maps that we're on that haven't been announced yet, but I think downstream, if that occurs, we could definitely play in that space.

On the Meraki catalyst question, I actually think the opposite is actually what you would see is you'd see more openness to Catalyst because of the cloud management the simple cloud management. I think there's 35 million devices now being managed by the cloud. And so, it just gives customers choice. It rationalizes the hardware down to a single platform that you can run either mode.

You can run it on-prem or you can run it cloud-managed, and I think that's a big benefit for our customers as we go forward.

Thank you, Sebastien. I'm gonna now hand it over to Chuck for some closing remarks.

Yeah. I wanna thank everybody for joining today and, again, reiterate my thanks to our team for all their great work in Q4 and fiscal 2025. We really did set a solid foundation for fiscal year 2026. Mark, welcome. We're excited about your first earnings and what's ahead. I'm happy to I'm really excited about working with you.

Obviously, we see good demand for our technology. We see great things working across a lot a great portion of our portfolio. AI is clearly a major tailwind. The web scale momentum, the emergence of the enterprise, sovereign, and the neo-cloud opportunities, we've got the agentic phase coming along.

I feel good about where we are. I feel good about the performance. We still have to continue to execute. And we feel really good that we've got the business positioned for success in 2026. There are certainly a lot of dynamics in a very complex world that we're all managing on a daily basis.

But based on what we can control, we feel really good about it. I wanna thank you for being with us once again. And, Sami, I'll turn it back over to you.

Thanks, Chuck. Cisco Systems, Inc.'s next quarterly call, will outline our first quarter FY 2026 results, will be on Wednesday, 11/12/2025, at 01:30 PM Pacific, 04:30 PM Eastern time. This concludes today's call. If you have any further questions, please feel free to contact the Cisco Systems, Inc. Investor Relations department. We thank you very much for joining the call today.

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