Cisco (CSCO) Q1 2026: AI Infrastructure Orders Double, Powering Multi-Year Networking Refresh
Cisco’s Q1 marked a decisive acceleration in AI infrastructure demand, with hyperscaler orders doubling year-over-year and broad-based strength across networking and public sector segments. The shift to cloud-based Splunk consumption and surging campus refresh activity signal a pivotal transformation in Cisco’s revenue mix and long-term opportunity set. Management’s guidance embeds robust AI momentum, but normalization in security and legacy segments remains a key watchpoint for forward investors.
Summary
- AI Demand Surges: Hyperscaler and enterprise AI infrastructure orders are accelerating, driving a step-change in Cisco’s growth outlook.
- Campus and Public Sector Reinvigorate Core: Next-gen networking, campus switching, and public sector demand fuel multi-year refresh cycles.
- Security and Cloud Shift Remain in Transition: Splunk cloud adoption and legacy drag are reshaping near-term revenue recognition and margin dynamics.
Performance Analysis
Cisco delivered a record Q1 with total revenue up 8% and product revenue up 10%, propelled by robust AI infrastructure and campus networking demand. Networking revenue led the portfolio, rising 15%, with hyperscaler AI infrastructure orders reaching $1.3 billion and a full-year revenue target of $3 billion from this vertical. Service revenue growth was more modest at 2%, reflecting the ongoing shift toward subscription and software models.
Recurring revenue and backlog metrics also strengthened, with remaining performance obligations (RPO) up 7% and annualized recurring revenue (ARR) up 5%. Notably, product RPO grew 10%, and product ARR grew 7%, signaling sustained demand visibility. Gross margin contracted 120 bps year-over-year to 68.1%, as mix and component cost pressures offset productivity gains. Operating margin remained strong at 34.4% on disciplined spend and operational leverage, with non-GAAP EPS growth of 10% outpacing the top line. Capital returns were aggressive, with $3.6 billion returned to shareholders, representing 125% of free cash flow.
- Hyperscaler AI Orders Double: Orders from hyperscaler and cloud customers surged 45%, with the AI pipeline expected to remain robust through FY26.
- Campus and Public Sector Strength: Campus networking, public sector, and industrial IoT all posted double-digit growth, reinforcing Cisco’s core franchise.
- Security and Collaboration Lag: Security revenue declined 2% due to legacy product drag and Splunk’s shift to cloud subscriptions; Collaboration fell 3%.
Underlying demand for next-gen networking, AI infrastructure, and public sector remains a durable tailwind, but the transition in security and shifting revenue recognition from Splunk cloud adoption are key drivers of near-term volatility.
Executive Commentary
"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."
Chuck Robbins, Chair and CEO
"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... 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."
Mark Patterson, Chief Financial Officer
Strategic Positioning
1. AI Infrastructure as a Growth Engine
AI infrastructure, including Silicon One-powered systems and Acacia optics, has become Cisco’s primary growth lever. The company expects to recognize $3 billion in AI infrastructure revenue from hyperscalers in FY26, with orders from these customers already doubling year-over-year. All major hyperscalers are now customers for Cisco’s pluggable optics, and the product pipeline for sovereign, neocloud, and enterprise AI deployments exceeds $2 billion for the next three quarters. This positions Cisco at the center of the global AI buildout, with multi-year demand visibility and expanding use cases in both training and inferencing.
2. Multi-Year Campus and Public Sector Refresh
The end-of-life cycle for legacy switching (CAT 4K, 6K) and new product launches (CAT 9K, Wi-Fi 7, smart switches) are fueling a multi-year campus refresh cycle. Ramp rates for these next-gen products are outpacing prior launches, driven by customer urgency to modernize for AI workloads and embedded security. Public sector, including U.S. federal and international government, is a key participant, with “billions and billions” in pre-CAT 9K installed base still to be upgraded. Onshoring of manufacturing and edge AI workloads are further boosting industrial IoT demand.
3. Security and Cloud Transition in Flux
Security revenue declined 2% as legacy product drag and Splunk’s shift to cloud subscriptions altered revenue recognition timing. While next-gen security products (Secure Access, XDR, HyperShield, AI Defense) are growing, the transition is expected to take four quarters to normalize. Splunk’s cloud ARR and RPO are growing double digits, but near-term revenue is pressured as cloud subscriptions are recognized ratably. Management remains committed to mid-teens long-term security growth, but near-term results will be lumpy.
4. Platform and Ecosystem Expansion
Cisco continues to invest in platform capabilities and ecosystem partnerships, including the launch of Unified Edge for real-time edge inferencing and the expansion of NVIDIA and AMD partnerships. The company is broadening its participation across GPU and XPU vendors, aiming to be the connectivity layer for AI workloads regardless of underlying compute. Channel program changes are designed to align partner incentives with AI, security, and campus refresh priorities, streamlining rewards and focusing on expertise depth.
5. Operational Discipline and Capital Allocation
Disciplined spend management and operational leverage are supporting margin stability and robust capital returns. Cisco increased inventory and purchase commitments by nearly $1 billion in Q1 (up 38% YoY) to secure AI supply, while still returning 125% of free cash flow to shareholders. Management is prioritizing profitable growth and maintaining flexibility to support both innovation investment and shareholder returns.
Key Considerations
Cisco’s Q1 results highlight the company’s transformation into an AI and cloud-centric infrastructure provider, but also reveal critical transition zones within security and legacy product lines. Investors must weigh the durability of AI-driven growth against the normalization period for security and the potential for margin volatility from shifting mix and input costs.
Key Considerations:
- AI Pipeline Visibility: Doubling of hyperscaler AI orders and $2B+ enterprise/sovereign pipeline provide multi-quarter demand visibility.
- Campus Refresh Cycle: Faster adoption rates for next-gen networking signal a multi-year upgrade opportunity, especially in public sector and industrial IoT.
- Security Normalization Required: Cloud shift in Splunk and legacy drag will weigh on near-term security revenue; normalization expected over four quarters.
- Gross Margin Sensitivity: Mix, DRAM, PCB, and optics cost inflation are partially offset by productivity, but ongoing component price pressure is embedded in guidance.
- Capital Allocation Balance: Aggressive buybacks and dividends continue, but inventory build for AI demand constrains near-term free cash flow.
Risks
Key risks include the pace and durability of AI infrastructure demand, especially if hyperscaler spending slows or use cases shift. Security revenue normalization remains a watchpoint, as legacy drag and Splunk’s transition could weigh on reported growth. Component cost inflation and supply chain constraints, especially in memory and optics, may pressure margins if not offset by pricing or mix. Tariff and regulatory uncertainties, particularly on export licenses for sovereign AI deployments, could delay revenue recognition.
Forward Outlook
For Q2, Cisco guided to:
- Revenue of $15.0–$15.2 billion
- Non-GAAP gross margin of 67.5%–68.5%
- Non-GAAP operating margin of 33.5%–34.5%
- Non-GAAP EPS of $1.01–$1.03
For full-year 2026, management maintained guidance:
- Revenue of $60.2–$61.0 billion
- Non-GAAP EPS of $4.08–$4.14
Management highlighted sustained AI infrastructure demand, a multi-year campus refresh, and continued security transition. Tariff assumptions remain unchanged except for a reduction in the China fentanyl tariff.
Takeaways
Cisco’s Q1 underscores a strategic inflection as AI infrastructure, networking refresh, and public sector demand drive a new growth cycle, while security and cloud transitions introduce short-term volatility. Investors should monitor AI order durability, security normalization, and capital allocation discipline as the company navigates this transformation.
- AI and Networking Lead: Multi-billion AI pipeline and campus refresh cycles position Cisco for durable growth, with broad customer and geographic participation.
- Security and Cloud in Transition: Splunk cloud adoption and legacy product drag will pressure reported security growth through FY26, but ARR and RPO trends are positive.
- Margin and Mix Watchpoints: Gross margin is sensitive to mix, cost inflation, and supply chain dynamics, but operational discipline and capital returns remain priorities.
Conclusion
Cisco’s Q1 2026 results reflect a company in strategic transition, with AI infrastructure and networking refresh cycles driving robust growth, while security and cloud transitions reshape the revenue base. Execution on AI, normalization in security, and disciplined capital allocation will determine the durability of Cisco’s new growth trajectory.
Industry Read-Through
Cisco’s results confirm that AI infrastructure demand is accelerating, with hyperscaler and enterprise customers driving multi-year networking and optical upgrades. Vendors with exposure to AI data center, edge, and public sector networking are likely to benefit from similar refresh cycles, while those reliant on legacy security or on-prem software may face near-term volatility as cloud adoption shifts revenue recognition. Component suppliers in memory, optics, and PCB remain in a favorable pricing environment, but must navigate supply constraints and customer inventory builds. Industry participants should watch for further consolidation of demand among major hyperscalers and the emergence of edge AI as a new infrastructure battleground.