Cisco Systems (NASDAQ:CSCO) is one of the 11 best communication equipment stocks according to hedge funds. On February 10, Cisco Systems (NASDAQ:CSCO) announced Silicon One G300, which is a 102.4 Tbps switching silicon designed for large-scale AI cluster buildouts. The management stated: “The Cisco Silicon One G300 will power new Cisco N9000 and Cisco 8000 systems that push the frontier of AI networking in the data center. The systems feature innovative liquid cooling and support high-density optics to a ...

Financial Data and Key Metrics Changes - In Q2, total revenue grew by 10% year-over-year, reaching $15.3 billion, with product revenue up 14% at $11.6 billion, while services revenue decreased by 1% to $3.7 billion [5][20] - Non-GAAP net income was $4.1 billion, up 10%, and non-GAAP earnings per share (EPS) was $1.04, up 11%, indicating operating leverage with EPS growth outpacing revenue growth [20][24] - Total remaining performance obligations (RPO) increased by 5% to $43.4 billion, with product RPO growing by 8% [22] Business Line Data and Key Metrics Changes - Networking revenue grew by 21%, driven by AI infrastructure and campus refresh, with double-digit growth across campus switching, data center switching, wireless, service provider routing, and enterprise routing [20][21] - Security revenue declined by 4%, impacted by the transition of Splunk from on-premise to cloud subscriptions, although new and refreshed products showed growth [22][82] - Collaboration revenue increased by 6%, led by growth in devices and cloud contact center solutions [22] Market Data and Key Metrics Changes - Product orders grew by 18% year-over-year, with service provider and cloud orders up 65%, public sector orders up 11%, and enterprise orders up 8% [8][23] - Orders from hyperscalers totaled $2.1 billion in Q2, marking significant growth compared to previous quarters [11] - Geographic product orders saw the Americas up 23%, EMEA up 11%, and APJC up 15% [23] Company Strategy and Development Direction - Cisco is focused on capitalizing on the AI infrastructure opportunity, with a target of over $5 billion in AI orders for fiscal 2026, emphasizing the importance of its Silicon One architecture [12][14] - The company is committed to returning value to shareholders, increasing its dividend to $0.42 per quarter, and returning $3 billion in capital during the quarter [6][24] - Cisco is enhancing its security portfolio with new products and has seen significant customer adoption, indicating a strategic pivot towards AI-driven solutions [15][82] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating industry-wide challenges, including rising memory prices, by implementing price increases and adjusting contractual terms [8][32] - The company anticipates continued strong demand for its solutions across all customer markets and geographies, positioning itself as a critical player in the AI transition [18][19] - Guidance for Q3 expects revenue between $15.4 billion and $15.6 billion, with a full-year revenue forecast of $61.2 billion to $61.7 billion [26] Other Important Information - Cisco's operating cash flow was $1.8 billion, down 19% due to tax payments and investments in AI infrastructure [24] - The company shipped its 1 millionth Silicon One chip and introduced new high-performance systems at Cisco Live Amsterdam [11][12] Q&A Session Summary Question: AI momentum and product mix - The company clarified that the $5 billion AI target does not include recently announced products like P200 and G300, with a consistent mix of 60% systems and 40% optics [29][31] Question: Gross margin decline - Management acknowledged that the gross margin decline was primarily due to product mix and memory prices, with plans to manage these through price adjustments and contractual revisions [32][33] Question: Networking revenue growth - Networking growth was attributed to strong performance across all segments, with double-digit growth in data center switching and campus networking [38][40] Question: Order rates and seasonality - The company noted that typical seasonality shows mid-single-digit declines in Q2 product revenue, but they experienced a 5% increase, indicating strong performance [40] Question: AI orders and revenue recognition - Management indicated that AI orders are nonlinear and subject to variability, with revenue recognition expected to ramp up in fiscal 2027 [66][70] Question: Security portfolio performance - The company reported strong adoption of new security products, with significant customer growth, despite short-term revenue headwinds from the Splunk transition [82][84]

Financial Data and Key Metrics Changes - Cisco reported record revenue of $15.3 billion for Q2 2026, representing a 10% year-over-year increase. Non-GAAP net income was $4.1 billion, also up 10%, with non-GAAP earnings per share (EPS) at $1.04, reflecting an 11% increase [4][18]. - Total product revenue reached $11.6 billion, up 14%, while services revenue decreased by 1% to $3.7 billion year-over-year [18]. - Non-GAAP gross margin was 67.5%, down 120 basis points year-over-year, with product gross margin at 66.4%, down 130 basis points due to mix and higher memory costs [20][21]. Business Line Data and Key Metrics Changes - Networking revenue grew by 21%, driven by AI infrastructure and campus refresh initiatives, with double-digit growth in campus switching, data center switching, wireless, service provider routing, and enterprise routing [18][19]. - Security revenue declined by 4%, impacted by the transition from on-premise to cloud subscriptions in the Splunk business, although new and refreshed products showed growth [19][80]. - Collaboration revenue increased by 6%, led by growth in devices and cloud contact center solutions [19]. Market Data and Key Metrics Changes - Total product orders grew by 18% year-over-year, with service provider and cloud orders up 65%, public sector orders up 11%, and enterprise orders up 8% [6][20]. - Orders from hyperscalers for AI infrastructure reached $2.1 billion in Q2, marking significant growth compared to previous quarters [10][12]. - Product orders excluding hyperscalers increased by 10% year-over-year, indicating broad-based demand across global markets [6][7]. Company Strategy and Development Direction - Cisco is focused on capitalizing on the AI infrastructure opportunity, with a target of over $5 billion in AI orders for fiscal 2026, emphasizing the importance of its Silicon One architecture and AI-native security solutions [12][17]. - The company is committed to returning value to shareholders, as demonstrated by a $3 billion capital return in Q2 and a dividend increase [4][22]. - Cisco is enhancing its supply chain strategies to manage rising memory costs and is proactively adjusting pricing and contractual terms with partners [6][30]. Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in Cisco's ability to navigate industry-wide challenges, including rising memory prices, and highlighted strong demand for its technology amid a significant transition to AI [5][6][17]. - The company anticipates continued growth in AI infrastructure and expects to recognize over $3 billion in AI-related revenue from hyperscalers in FY26 [12][67]. - Cisco's guidance for Q3 2026 includes expected revenue between $15.4 billion and $15.6 billion, with non-GAAP EPS projected between $1.02 and $1.04 [24]. Other Important Information - Cisco's total remaining performance obligations (RPO) were $43.4 billion, up 5%, with total annual recurring revenue (ARR) at $31 billion, an increase of 3% [19][21]. - The company is seeing strong interest in its Sovereign critical infrastructure portfolio, which is designed for secure data management in air-gapped environments [12][13]. Q&A Session Summary Question: AI orders and product mix - The $5 billion AI target does not include recently announced products like the P200 and G300. The mix is approximately 60% systems and 40% optics [26][28]. Question: Gross margin decline - The decline is attributed to product mix and memory prices. Cisco is implementing price increases and adjusting terms with partners to manage these costs [30][31]. Question: Networking revenue growth - Networking growth is strong across all segments, with double-digit growth in data center switching and campus networking. Seasonality is expected to follow typical patterns [34][35]. Question: Security portfolio performance - New security products are gaining traction, with significant growth in new customer acquisitions. The transition to cloud subscriptions is impacting short-term revenue [78][80]. Question: AI infrastructure and customer engagement - Engagements with NVIDIA have increased significantly, and Cisco is seeing early success in the enterprise AI market [50][51].

Core Insights - Cisco has introduced the Silicon One G300, a 102.4 Tbps switching silicon aimed at enhancing AI networking capabilities in data centers [3][5] - The new Cisco N9000 and Cisco 8000 systems, powered by the G300, are designed to support massive AI cluster buildouts with improved efficiency and reliability [3][10] - Innovations include liquid cooling and high-density optics, which contribute to a nearly 70% improvement in energy efficiency [7][14] Product Features - The Silicon One G300 features Intelligent Collective Networking, which enhances network utilization by 33% and reduces job completion time by 28% compared to non-optimized path selection [6] - The new systems support gigawatt-scale AI clusters and are designed for various customer types, including hyperscalers and enterprises [7][10] - Cisco's Nexus One provides a unified management plane, simplifying operations and enabling faster deployment of AI networks [11][15] Performance and Efficiency - The G300's architecture allows for high-performance, programmable networking, which is crucial for maximizing GPU utilization and ensuring reliable data movement [4][7] - The introduction of 1.6T OSFP optics and 800G Linear Pluggable Optics (LPO) significantly enhances bandwidth connectivity while reducing power consumption by 50% [14] - The liquid-cooled systems achieve the same bandwidth previously requiring six older systems, showcasing a leap in performance and efficiency [14] Ecosystem and Partnerships - Cisco collaborates with key technology partners like AMD, Intel, and NVIDIA to deliver optimized infrastructure for AI workloads [16][18] - The integration of Cisco's networking solutions with partners' technologies aims to enhance performance and interoperability across diverse environments [17][19] - Cisco's approach addresses the growing demand for scalable, energy-efficient AI infrastructure as adoption expands beyond hyperscalers [18][19]

Summary of Cisco Systems FY Conference Call Company Overview - **Company**: Cisco Systems (NasdaqGS: CSCO) - **Date of Conference**: December 10, 2025 Key Industry Insights - **AI Infrastructure**: Cisco has seen significant growth in AI-related orders and revenues, with a target of $1 billion for FY 2025, which was exceeded with over $2 billion recognized in revenue. Orders from top hyperscalers reached $1.3 billion in Q1 FY 2026, with expectations to double that to over $4 billion for the year and triple revenue to $3 billion [16][18]. - **Hyperscaler Demand**: The company reported strong demand from four different hyperscalers, each growing over 100% year-over-year in Q1 FY 2026. This indicates a broadening customer base and successful design wins across multiple use cases [26][27]. - **Optics Market**: Cisco holds a market share of over 25% in the hyperscale optics space, supplying to nearly 400 service providers globally. The optics segment is experiencing strong growth alongside the systems segment [30]. Financial Performance - **Order Growth**: Total order growth was up 13%, with a 9% increase when excluding the web scale business. The enterprise and public sector segments showed strong performance [50]. - **Revenue Recognition**: The shift towards cloud offerings has resulted in a timing difference in revenue recognition, with cloud revenues being ratable over the contract life, leading to more revenue in later quarters [69][70]. Product Development and Strategy - **Silicon One**: This product is a key differentiator for Cisco, providing advantages in supply chain management and cost efficiency. The company aims to deploy Silicon One across all networking products by FY 2029 [110]. - **Campus Refresh Opportunity**: Cisco is in the early stages of a multi-billion dollar campus refresh opportunity, driven by aging equipment and the need for upgrades related to AI and security [51][52]. Competitive Landscape - **Market Position**: Cisco remains a dominant player in the networking space despite increased competition from HP and Juniper. The merger of these competitors has created confusion in the market, which Cisco is capitalizing on [56][58]. Security and Observability - **Security Business**: Cisco's security business is expected to take longer to reach double-digit growth due to the drag from prior generation products. However, new products are gaining traction, with 3,000 new customers in the last 18 months [67][68]. - **Observability Growth**: The observability segment is experiencing good growth, although it remains a smaller part of the overall business [82]. Federal Government Dynamics - **Public Sector Performance**: Cisco has seen double-digit growth in the public sector outside the U.S., particularly in defense spending. The U.S. federal government segment is stabilizing with mid-single digit growth expected [90][92]. Margin and Profitability Outlook - **Operating Margins**: Cisco reported strong operating margins at 68.1%. The company is focused on maintaining profitability while managing a diverse portfolio of products [98][99]. Conclusion - Cisco Systems is positioned for continued growth in AI infrastructure, optics, and campus refresh opportunities, while navigating a competitive landscape and evolving customer needs. The company is committed to enhancing its product offerings and maintaining strong financial performance.