Cisco, the world's largest networking equipment manufacturer, reported double-digit growth in both revenue and earnings for the previous fiscal quarter, with revenue reaching a new all-time quarterly high. The company also raised its guidance for the current fiscal year. However, a weak gross margin forecast for the upcoming quarter worried investors, suggesting that while artificial intelligence (AI) demand boosts revenue, related expenditures may be eroding profitability.

Following the announcement on Wednesday, February 11th, Cisco's stock, which had closed down over 0.8% for the day, extended its losses in after-hours trading, falling more than 7%. Despite being a beneficiary of the AI boom, with its stock up approximately 30% year-to-date in 2025, the market reaction was negative.

In terms of operational quality, Cisco's gross margin remained broadly stable in the last quarter, and its operating margin exceeded expectations, both landing at the high end of the company's previously provided range. Concurrently, the company announced a 2% increase in its quarterly dividend to $0.42 per share. Signals from the demand side were more positive. Cisco disclosed that product orders grew 18% year-over-year, with accelerated growth across all regions. Orders for Networking-related products accelerated to over 20% year-over-year growth. Regarding AI, Cisco stated that AI infrastructure orders from hyperscale cloud providers reached $2.1 billion, indicating "significant acceleration."

Despite this, the earnings report did not alleviate market caution, as reflected in the stock price. Factors potentially suppressing a stock rebound include a decline in service revenue, pressure on certain business lines, and guidance pointing towards lower margins and tariff uncertainties.

**AI Demand Drives Better-Than-Expected Results and Order Acceleration**

For the second fiscal quarter ended January 24, 2026, Cisco's total revenue increased approximately 10% to a record $15.3 billion, surpassing analyst expectations of $15.12 billion. Non-GAAP adjusted earnings per share (EPS) grew 10.6% to $1.04, also beating the expected $1.02. Product revenue for Q2 was $11.64 billion, up 14% year-over-year and above the expected $11.29 billion. Service revenue was $3.71 billion, down 1% year-over-year, slightly below the expected $3.84 billion. Quarterly profit reached $3.18 billion, higher than the $2.43 billion reported a year earlier.

Cisco CEO Chuck Robbins stated, "Cisco is uniquely positioned to provide the trusted infrastructure necessary to power the AI era with confidence and security." The company began offering its own Silicon One G300 AI chip and completed acquisitions of AI software firms NeuralFabric and EzDubs during the quarter. Orders often provide a better indicator of marginal changes in corporate IT spending compared to recognized revenue. Cisco's disclosures showed: - Product orders increased 18% year-over-year, with growth accelerating in all regions. - Networking product order growth exceeded 20%. - AI infrastructure orders from hyperscale cloud providers totaled $2.1 billion, indicating a clear acceleration in AI-related demand within Cisco's metrics.

Orders from hyperscalers reflect surging demand for Cisco's core networking products driven by the AI infrastructure investment boom. A surge in data center investment, fueled by tech companies' need for AI computing infrastructure, is creating robust demand for Cisco's switches and routers. Strong order data suggests that hardware and infrastructure budgets have not significantly contracted, supported by dual drivers of AI data centers and campus network upgrades. It also raises expectations for sustained product revenue in subsequent quarters. However, strong orders do not automatically translate to profit elasticity. AI-related infrastructure and large project deliveries often involve more competitive bidding and complex delivery schedules, leading markets to question whether changing order structures might pressure gross margins and if accompanying service/subscription revenue can keep pace.

**Full-Year Revenue Guidance Raised at Least 1%; Current Quarter Outlook Tops Expectations**

Regarding other guidance, Cisco now expects full fiscal year 2026 revenue between $61.2 billion and $61.7 billion, raising the low end of its previous $60.2-$61.0 billion guidance by nearly 1.7% and the high end by over 1.1%. The company forecasts full-year adjusted EPS of $4.13 to $4.17, raising the low end of the prior $4.08-$4.14 range by over 1.2% and the high end by over 0.7%. This overall guidance exceeded Wall Street expectations, as analysts had projected full-year revenue of $60.8 billion and EPS of $4.13. For the third fiscal quarter, Cisco anticipates revenue between $15.4 billion and $15.6 billion, easily surpassing the Wall Street consensus of $15.18 billion. Adjusted EPS is forecast at approximately $1.03, largely in line with the analyst estimate of $1.02. This revenue guidance highlights Cisco's growth potential amid the AI wave. Enterprise customers are expected to ensure their campus networks are "AI-ready," as infrastructure preparation is crucial for AI-era workloads and modernizing switching, wireless, and IoT systems.

**Third-Quarter Margin Guidance Declines Instead of Rising**

Despite the optimistic revenue outlook, Cisco's gross margin forecast for the current quarter disappointed the market. Cisco expects adjusted gross margin for Q3 to be between 65.5% and 66.5%, representing a year-over-year decline of 2.1 to 3.1 percentage points, a larger drop than in the previous quarter. In Q2, Cisco's non-GAAP gross margin was 67.5%, down 1.2 percentage points from 68.7% a year earlier. Analysts had expected a mean Q3 gross margin of 68.2%, which would have been a slight increase from the 68.6% reported a year ago. Analysis suggests that with Q2 margins and earnings already at a relatively strong level, the market's focus shifted more easily to the next quarter's ability to maintain that performance. Cisco specifically noted that its EPS and margin guidance incorporate estimates for tariff impacts based on current trade policies. Given the strong Q2 results and orders, the guidance for a lower gross margin range and the explicit inclusion of tariff impacts likely prompted the market to adopt a more cautious pricing framework for short-term trading. This is considered a key factor behind the expanded after-hours stock decline. Commentary indicates that Cisco is increasing spending to develop new AI products, while the tech industry also contends with the threat of memory chip shortages, which is driving up costs. AI has become a lucrative market for Cisco, but competition is intensifying. Traditional networking firms like Broadcom and HPE, which acquired Juniper Networks, are also vying for a share of the spending surge on hardware for developing and running AI models.