Cisco (CSCO) Q1 2027 Earnings Call Transcript

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DATE

Thursday, Nov. 12, 2026

CALL PARTICIPANTS

• Head of Investor Relations - Ahmed Sami Badri
• Chair and Chief Executive Officer - Charles Robbins
• Chief Financial Officer - Mark Patterson

TAKEAWAYS

• Revenue -- $18.5 billion, representing 24% year-over-year growth driven by broad infrastructure investment for agentic AI.
• Non-GAAP EPS -- $1.40, a 40% increase year over year reflecting strong operating leverage.
• AI Infrastructure Revenue Guidance -- $9 billion for fiscal year 2027, raised from a previous target of $7.5 billion due to increased visibility in hyperscaler deployments.
• Total Product Orders -- grew 21% year over year, with double-digit growth across all geographies and customer markets.
• Networking Revenue -- $11.1 billion, up 43% year over year driven by triple-digit growth in AI infrastructure and double-digit growth in data center switching.
• Security Revenue -- $2.1 billion, a 7% increase reflecting growth in Splunk and firewall products.
• Collaboration Revenue -- $1.1 billion, up 8% due to double-digit growth in devices and Contact Center platforms.
• Non-GAAP Gross Margin -- 65.6%, down 250 basis points year over year as hardware revenue growth outpaced software and services.
• Operating Cash Flow -- $4.4 billion, increasing 36% year over year driven by higher net income and revenue growth.
• Remaining Performance Obligations (RPO) -- $46.2 billion, an 8% increase year over year with product RPO rising 7%.
• Annual Recurring Revenue (ARR) -- $32.7 billion, up 4% year over year as the company scales its subscription business.
• Hyperscale Revenue Mix -- expected to reach 12% of total revenue in fiscal year 2027, compared to 6% in fiscal year 2026.
• Fiscal Year 2027 Revenue Guidance -- $74.8 billion to $75.8 billion, representing approximately 19% growth based on the updated range.
• Fiscal Year 2027 Non-GAAP EPS Guidance -- $5.47 to $5.53, representing an expected 27% growth rate over the prior year.
• Capital Returns -- $3.7 billion returned to shareholders in the first quarter, including $1.7 billion in dividends and $2 billion in share repurchases.
• Firewall Product Orders -- grew over 30% for the third consecutive quarter as the company refreshed its security portfolio.
• Service Provider and Cloud Orders -- increased 47% year over year, showing broad-based demand from telcos and hyperscalers.
• Enterprise Product Orders -- up 15% year over year, reflecting early stages of a campus networking refresh cycle.
• Non-GAAP Operating Margin -- 37.8%, representing an all-time high for the company.
• Software Revenue -- $6.1 billion, an 8% increase representing 33% of total revenue.
• Headcount -- declined by a low single-digit percentage, contributing to a projected 19% increase in revenue per employee.
• Q2 Fiscal Year 2027 Revenue Guidance -- $18 billion to $18.2 billion.
• Q2 Fiscal Year 2027 Non-GAAP EPS Guidance -- $1.34 to $1.36.

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RISKS

• Patterson reported that non-GAAP product gross margin was 63.7%, down 350 basis points, "primarily driven by higher hardware mix and elevated memory costs."
• Patterson stated, "The biggest one there is probably optics," when discussing potential supply chain constraints for meeting fiscal year targets.

SUMMARY

Cisco Systems, Inc. (NASDAQ:CSCO) reported record first-quarter performance for fiscal year 2027, highlighting what management described as the early stages of a multiyear networking supercycle driven by agentic AI. The company reported its strongest top-line and bottom-line growth rates in over 15 years, prompting an increase in full-year guidance for both revenue and earnings. Management stated that hyperscalers are actively deploying Cisco architectures across production environments to extend AI workloads. The company is also seeing accelerated demand from neocloud, sovereign, and enterprise customers for AI infrastructure, with significant growth in Nexus data center switches. Operationally, the company is driving higher efficiency, expecting revenue per employee to grow 19% as it maintains disciplined expense management while scaling for AI demand.

• Management reported that Cisco has secured 18 AI design wins over the last five quarters, covering scale-out and scale-across architectures for hyperscalers.
• CEO Robbins noted that the company is in the early stages of a campus refresh, stating, "of the switching we sold only 9% was really coming from the new portfolio."
• The company announced plans with NVIDIA to develop the Ultra-Dense Small Form Factor Pluggable (USFP) optical module, designed to deliver fourfold bandwidth density.
• Robbins stated that the integration of Silicon One into the entire enterprise networking portfolio is on track for completion by fiscal year 2029.
• Management highlighted the expansion of Sovereign Critical Infrastructure into Canada, following an initial launch in Europe a year ago to address intensifying data sovereignty concerns.
• Cisco IQ has reached more than 17,000 customers, nearly doubling quarter over quarter, while visibility expanded to 23 million devices.
• The company is integrating Anthropic's Claude Mythos cybersecurity model into its AI Defense platform to provide automated, continuous stress testing of enterprise AI systems.

INDUSTRY GLOSSARY

• Agentic AI: AI systems designed to operate autonomously as agents to perform specific tasks or coordinate complex responses.
• Silicon One: Cisco's unified silicon architecture designed to provide high performance and power efficiency across service provider and web-scale networks.
• USFP (Ultra-Dense Small Form Factor Pluggable): A next-generation optical module specification intended to increase bandwidth density and power efficiency.
• Claude Mythos: A cybersecurity-focused large language model developed by Anthropic and integrated into Cisco security solutions.
• Hyperscaler: Large-scale cloud service providers, such as Amazon Web Services, Microsoft Azure, and Google Cloud, that require massive data center infrastructure.
• RPO (Remaining Performance Obligations): The total value of future revenue under contract that has not yet been recognized.
• ARR (Annual Recurring Revenue): A metric used to track the value of recurring revenue streams, typically from software subscriptions.
• LDOS (Last Day of Support): The date after which a manufacturer no longer provides technical support or updates for a specific hardware or software product.
• Neoclouds: Specialized cloud providers focused on specific workloads, often providing GPU-heavy infrastructure for AI training and inference.

Full Conference Call Transcript

Operator: Welcome to Cisco's First Quarter Fiscal Year 2027 Financial Results Conference Call. At the request of Cisco, 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.

Ahmed Sami Badri: Good afternoon, everyone. This is Sami Badri, Cisco's Head of Investor Relations, and I'm joined by Chuck Robbins, our Chair and CEO; and Mark Patterson, our CFO. Cisco's earnings press release and supplemental information, including GAAP to non-GAAP reconciliations are available on our Investor Relations website. Today's call is also being live streamed on YouTube, LinkedIn and X. Following this call, we will also make the recorded webcast and slides available on the website. Throughout today's call, we'll 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-on-year basis, unless stated otherwise.

Please note that our discussion today will include forward-looking statements, including our guidance for the second quarter and fiscal year 2027. These statements are subject to risks and uncertainties detailed in our SEC filings, particularly our most recent 10-K report, 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 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.

Charles Robbins: Thanks, Sami, and thank you all for joining us today. I'm pleased to report that Cisco delivered an impressive start to fiscal '27. We're executing against our strategy, and seeing growing demand as customers invest in the infrastructure they need for the AI or SI era. What gives me the greatest confidence is not just the results we're seeing today but also the opportunities we see ahead. In Q1, we delivered record quarterly revenue of $18.5 billion, up 24% year-over-year and record non-GAAP earnings per share of $1.40, up 40% year-over-year. These are our strongest top and bottom line growth rates in over 15 years.

We are demonstrating strong operating leverage and enhanced earnings power with earnings growing faster than revenue. As a result of this strong performance, we are significantly increasing our fiscal year '27 guidance, which Mark will cover shortly. Our profitable growth generates robust cash flows and fuels consistent capital returns to our shareholders. In Q1, we returned $3.7 billion in value through dividends and share repurchases, representing 95% of free cash flow. Our strong start to fiscal year '27 demonstrates the criticality of networking and security together as agentic AI accelerates. As customers look to manage increasing traffic costs and threats, they are turning to Cisco for our networking expertise, security and observability solutions and services.

They trust us to help scale, secure and optimize their environments for the agentic AI era ahead. The depth and breadth of our portfolio enables us to support our customers however they choose to deploy AI, whether in the public cloud, through neoclouds or sovereign clouds, on-premise, or at the edge. We believe we are still early in the networking super cycle driven by AI deployments with enterprise adoption just beginning. In Q1, we saw strong demand with total product orders growing 21% year-over-year on top of 13% growth a year ago. We saw strong demand excluding hyperscalers with product orders up 14% year-over-year on top of 9% growth a year ago.

We also saw double-digit growth across all geographies and customer markets. Enterprise product orders in Q1 were up 15% year-over-year on top of 4% growth a year ago with double-digit growth across all geographies and in networking and security. Public sector orders were up 13% year-over-year on top of 12% growth a year ago. We saw double-digit public sector growth in the Americas and APJC as well as in networking, security and collaboration. Product orders from service provider and cloud customers continue to be broad-based, growing 47% year-over-year. This is on top of 44% growth a year ago with triple-digit growth in APJC and double-digit growth in the Americas and EMEA.

We continue to see healthy demand from telcos with orders up approximately 20% year-over-year in Q1 on top of 24% growth a year ago. Turning to demand across our product categories. Networking product orders grew 28% in Q1, delivering our 9th consecutive quarter of double-digit growth. In fact, we saw double-digit growth across every product family, service provider routing, compute, enterprise routing, wireless, data center switching and campus switching. These broad-based results support our view that we are in the early stages of a multiyear, multibillion-dollar networking super cycle, as I referenced earlier, and we are executing with focus and urgency to capture this incremental opportunity.

Overall, our hyperscaler business continues to show strong momentum with AI infrastructure revenue projected to grow to $9 billion in fiscal year '27, more than double fiscal year '26 levels. Hyperscalers are now deploying our scale across networking architecture and production environments as they extend coordinated AI workloads across data centers. This architecture combines our Silicon One P200 deep-buffered systems, market-leading Acacia coherent optics and open line systems with multi-rail optical systems coming soon. Together, these products provide a single unified compute fabric with deep programmability and embedded security. In Q1, we secured 3 new AI design wins, 2 were for our P200 powered systems and data center interconnect and scale across use cases.

The third was for 1.6 Terabit Optics for scale-out use case. In addition to hyperscaler demand, we saw accelerated growth in AI infrastructure orders from neocloud, sovereign and enterprise customers in Q1, with Nexus data center switches tagged for AI deployments up 47% year-over-year. During the quarter, we announced a new partnership with Supermicro, which expands our Secure AI factory with NVIDIA. By integrating Supermicro's high-density, liquid and air cooled compute into an NVIDIA cloud partner-compliant full stack architecture, we're delivering more efficient end-to-end infrastructure for massive AI workloads. As agentic AI expands, security threats have become more complex and conversations around sovereignty are intensifying.

Our focus is delivering trusted sovereign solutions to help customers scale their data center build-outs with confidence. During the quarter, together with AMD and HUMAIN, we announced that AMD GPU-based AI infrastructure built on Silicon One based systems is now in production in Saudi Arabia. This enables HUMAIN to offer GPU as a service across training and inference use cases. To meet our customers' evolving needs, we also introduced our Sovereign Critical Infrastructure portfolio in Europe a year ago. This portfolio spans networking, security, compute, collaboration and observability and can be configured for on-premise, air-gapped environments. In Q1, we expanded to Canada with additional countries to follow, giving government agencies and critical infrastructure providers more control, choice, security and resilience.

Customers are also focused on modernizing their workplaces for humans and agents. We continue to see robust demand for our campus networking solutions in Q1 with 14% year-over-year growth in product orders. Our next-generation portfolio continues to ramp faster than prior product launches and we believe we are still very early in this refresh cycle. Orders for our industrial IoT portfolio grew approximately 50% year-over-year in Q1 and have now grown at double-digit rates for 10 consecutive quarters. Now shifting to security. Orders excluding Splunk were up in the mid-teens. Within our security platform, orders for firewalls grew over 30% for the third consecutive quarter.

Cisco AI Defense is helping customers guard against unmanaged AI use across the enterprise and is protecting more than 2 trillion tokens per month. Our work with Workday Agent Passport, ServiceNow and DefenseClaw with NVIDIA OpenShell demonstrates how we're expanding our ecosystem and building trust into the use of agents in daily operations. Earlier this week, we announced that we are integrating Anthropic's Claude Mythos cybersecurity model into Cisco AI Defense for adaptive AI red teaming. This provides automated, continuous testing across enterprise systems, empowering defenders to stress test AI systems with frontier adversary reasoning. Turning to Splunk. The platform is helping solve some of the most pressing challenge organizations face in the AI era.

A Splunk study found that urgency to deploy agents is outpacing enterprise's ability to monitor and secure them. With Splunk, we deliver a common data platform that enables customers to monitor and enforce guardrails on agent behavior while also helping them understand and manage tokenomics. This gives them greater confidence and predictability as they look to optimize both the business value and the cost of AI. In collaboration with a leading hyperscaler, Splunk is exploring how AI agents can help security teams investigate threats and coordinate responses more efficiently while keeping analysts in control. This builds on our strategy to strengthen secure operations as threats grow more complex. We'll have more to share later this month.

Now on to our innovation. We are focused on 4 often overlapping objectives: number one, simplifying network operations; number two, scaling infrastructure for agentic AI; number three, reimagining security and trust for agentic AI; and four, delivering intelligent workplace experiences. Last quarter, we highlighted Cisco Cloud Control as a breakthrough in simplifying operations. Since launch, more than 6,000 customers have signed up and can increase productivity by accessing multiple Cisco and partner products through a single user interface. We are building integrations within the platform, including AI Canvas, Cisco IQ and the recently launched Cisco Model Foundry.

Cisco IQ now has more than 17,000 customers, nearly doubling quarter-over-quarter and visibility into 23 million devices, accelerating vulnerability tracking from days to minutes. To scale infrastructure and improve the efficiency of AI factories, we recently announced plans with NVIDIA to develop the Ultra-Dense Small Form Factor Pluggable or USFP optical module. We expect USFP to deliver 4x the bandwidth density and 1.3x the power efficiency of current models. We also plan to create an open industry USFP specification to drive adoption. Our advances in security and trust are ongoing as we continue to introduce resilient and quantum-safe innovations.

We've expanded support for Live Protect across more of our campus networking portfolio, extended quantum readiness to WiFi 7 access points and plan to provide quantum-safe communications across most of our core portfolio by the end of this calendar year. We continue to develop intelligent workplace experiences recently launching Claude Managed Agents and Dialog, an agentic harness in Webex. Our teams continue to drive this work forward through innovation, productivity and commitment to leveraging AI tools. At the start of fiscal '27, we provided an AI agent for every employee. We expect to continue accelerating AI adoption, helping our employees execute. Now I'll turn it over to Mark for more detail on the quarter and our outlook.

Mark Patterson: Thanks, Chuck. I'm proud to report that we delivered another record quarter, exceeding the high end of our guidance across revenue, operating margin and EPS, while also delivering strong operating cash flow. For the quarter, total revenue of $18.5 billion was an all-time high, up 24% year-on-year. Non-GAAP operating margin rose to 37.8% and non-GAAP earnings per share was $1.40, up 40% year-over-year, demonstrating continued operating leverage. Total product revenue was $14.7 billion, up 32% year-over-year, and services revenue was $3.9 billion, up 1% year-over-year. Product revenue growth was led by networking accelerating to 43% year-over-year growth with broad strength across the portfolio led by triple-digit growth in AI infrastructure and double-digit growth in data center switching and campus networking.

Security delivered a strong quarter, up 7%, reflecting growth in Splunk, network security and SASE. Collaboration was up 8% with double-digit growth in devices and growth in Contact Center. Turning to our recurring metrics. Total RPO was $46.2 billion, up 8%, with product RPO up 7%. Total ARR ended the quarter at $32.7 billion, an increase of 4%, with product ARR also up 4%. Total subscription revenue represented 44% of Cisco's total revenue. Total software revenue was $6.1 billion, up 8%. Q1 product orders were up 21% year-over-year with a broad based strength across geographies, technologies and customer markets. All geographies saw double-digit growth, with the Americas up 18%, EMEA up 12% and APJC up 57%.

Across customer markets, growth was led by service provider and cloud up 47%. We also saw strength in enterprise and public sector, which were up 15% and 13%, respectively. Total non-GAAP gross margin came in at 65.6%, slightly above the midpoint of our guide and down 250 basis points year-over-year as hardware revenue growth significantly outpaced software and services revenue growth. Non-GAAP product gross margin was 63.7%, down 350 basis points, primarily driven by higher hardware mix and elevated memory costs, partially offset by productivity improvements and price increases. Non-GAAP services gross margin was 72.9%, up 220 basis points.

As hardware continues to increase as a percentage of our overall revenue mix and with hyperscaler revenue expected to more than double year-over-year in FY '27, we are driving record scale and profitability in our business. In FY '27, we expect AI hyperscale revenue to represent 12% of total revenue, up from 6% in FY '26. At the same time, total headcount has declined by a low single-digit percentage, driving an expected revenue per employee increase of approximately 19% based on our updated FY '27 guidance. The acceleration of these outsized growth opportunities balanced with financial discipline enables us to increase our operating margin from 34.8% in FY '26 to an expected 36% in FY '27.

Our non-GAAP tax rate was 18.5% for the quarter. Shifting to the balance sheet. We ended Q1 with total cash, cash equivalents and investments of $15.8 billion. Operating cash flow was $4.4 billion, up 36%, driven by strong revenue growth and net income. From a capital allocation perspective, we returned $3.7 billion to our shareholders during the quarter, comprised of $1.7 billion for our quarterly cash dividend and $2 billion through share repurchases. There is $6.1 billion remaining under our share repurchase program. We remain focused on making strategic investments in organic innovation to capitalize on the significant growth opportunities we see ahead as well as complementary M&A opportunities.

In Q1, we closed the acquisition of WideField Security to accelerate our Splunk Agentic SOC and help stop identity threats at machine speed. These investments continue to be underpinned by our commitment to disciplined spend management. It is this powerful combination that continues to strengthen the robust earnings power of our business, support strong cash flow and enable us to return significant value to our shareholders. In summary, we achieved record performance for the quarter, with top and bottom line results that exceeded our expectations. This performance reflects our accelerated pace of innovation across our portfolio, strong order momentum and disciplined expense management.

Looking ahead, you can expect us to remain focused on delivering durable growth and maintaining financial discipline while driving operating leverage and continued capital returns. Turning to guidance. For fiscal Q2, our guidance is as follows: We expect revenue to be in the range of $18 billion to $18.2 billion. We anticipate non-GAAP gross margin to be in the range of 65% to 66%. Non-GAAP operating margin is expected to be in the range of 36% to 37%. Non-GAAP earnings per share is expected to range from $1.34 to $1.36. We are assuming a non-GAAP effective tax rate of approximately 18.5%.

Our raised guidance for fiscal year '27 is as follows: We expect revenue to be in the range of $74.8 billion to $75.8 billion. Non-GAAP earnings per share is expected to range from $5.47 to $5.53. Sami, let's now move into the Q&A.

Ahmed Sami Badri: Thank you, Mark. [Operator Instructions] Operator, can I move to the first analyst in the queue.

Operator: Amit Daryanani with Evercore ISI.

Amit Daryanani: Congrats on some really impressive numbers. I guess maybe to start with, you folks are raising your fiscal '27 AI revenue target to $9 billion from, I think it was $7.5 billion last quarter. Could you spend a little bit of time on what's changed in the 90 days? Is it just larger deployments of existing customers or you have better visibility with TSMC in terms of allocation? I'd love to understand like what's getting better? Is there any skew in Silicon One versus optics that would be helpful.

And then my follow-up, really, Mark, on your side, the back half guide implies revenues will actually accelerate really well to like [ $19.2 ] billion run rate versus the $18.1 billion in Q2. But I think EPS uptick in the back half is a bit more muted at above $1.38. Can you just talk about the puts and takes in the back half that's happening under the revenue line, that would be really helpful.

Charles Robbins: Amit, this is Chuck. I'll take the first one. Thank you, and thank you for the kind words. Teams are doing a fantastic job. I think on the $9 billion, I think it's being 90 days in, having a little more clarity. We had solid order growth in Q1. And we're just further along in the year. And so I think it's nothing more than just continued strength in the flow from the -- from those customers and 90 days more visibility that gave us the confidence to raise it from $7.5 billion to $9 billion. Mark, on the second one?

Mark Patterson: Yes. Sure, Amit. Just to give you a little bit of color. Obviously, second half, we do have a tougher compares and a little bit less visibility than we would have in Q2 anyway. But overall, I think if you kind of just take a step back, FY '26 was a record year for us on both the revenue side as well as EPS and growing the top line 12% and the bottom line, 14%. And both of those with our updated guide, you're seeing significant acceleration. So the top line moving from 12% all the way up to 19% and the bottom line moving from 14% growth to 27% growth.

So really strong operating leverage and really good acceleration off of what was a record year last year.

Operator: Ben Reitzes with Melius Research.

Benjamin Reitzes: It's a pleasure to be speaking with you and some nice results here. Chuck, could you talk about your exposure to the neocloud space and whether that's in the AI revenues that you're guiding to? And there are some folks that think that, that could decelerate as they try to see what their funding situation is like throughout the year? And wondering what your exposure is there? And then just overall, with regard to the campus cycle. My follow-up is with regard to where are we in it? Is there -- why would it decelerate here in terms of the campus upgrades given all the security concerns that are out there?

Just a little more color around where we are in that cycle. That would be great.

Charles Robbins: Thank you, Ben. So I would say, I would characterize our neocloud exposure to being relatively immaterial. We certainly have business with them. But we've been very conservative relative to the credit situations. And to answer the second part of that question, the neoclouds, we do not include in our AI revenue. That's simply the hyperscalers. Secondly, on the campus cycle, I think you're right. We saw very strong results across the enterprise networking portfolio this quarter, I think double digits across all of the networking, all the networking categories. In the campus switching side, I believe that we are -- in the quarter, we saw of the switching we sold only 9% was really coming from the new portfolio.

And so again, we see this being very early. I think your assumption relative to the impact of Mythos and some of the upgrade stuff, I think, are quite accurate. We don't anticipate any meaningful change and likely just more customers looking at modernization for bandwidth reasons relative to their rollout of agentic as well as just security issues and modernization relative to the post Mythos era.

Operator: Tal Liani with Bank of America.

Tal Liani: I hope you can hear me. I have 2 questions. First, Chuck, you said in the prepared remarks that this is a multiyear. We're at the beginning of a multiyear cycle. And the question is what gives you the confidence to say the alternative would be this is just a cycle, we're at the peak of a cycle, et cetera. I'm just giving kind of the alternative view. So what gives you the confidence to think that this is a multiyear cycle, and this is not just a peak cycle of sending by hyperscalers? And the second question that is -- we speak a lot about campus.

But can you talk about the readiness or the deployment of enterprise networks for AI? Meaning, are you seeing enterprises preparing for AI, updating networks? Or what are your expectations on that front?

Charles Robbins: Thank you, Tal. So we do think it's a multiyear cycle, and we think that it's obviously billions of dollars. And let me give you 5 drivers that I think are the key to why I have a high degree of confidence around the sustainability of this growth. First is the hyperscale success. We've had 18 AI design wins in the last 5 quarters. And obviously, we raised the AI guide to $9 billion, more than double what it was last year. So that's the first that we expect to continue. The second is the campus network refresh and modernization. We saw -- we've seen double-digit order growth multiple quarters.

We're still in the very early stages, less than 10% on the transition. So that's the second big driver. The third and somewhat connected to that, but more broad is the post Mythos opportunity. We're beginning to hear customers that are attributing orders to early Mythos implications. We heard it in Europe as an example, with service providers relative to the managed services CPE that they're needing to upgrade for their customers. But -- and while customers want to move fast, they want to do this right. So they're taking the appropriate time to plan to design the right architecture because they know if they're going to go through doing this, they got to get the architecture exactly right.

So that's the third. The fourth is sovereign infrastructure. We all know that countries around the world, beginning in Europe are looking for infrastructure that they feel like they have operational control over. And we are fortunate that we're one of the few companies that has maintained a robust on-premise portfolio. So we're able to deliver. We announced a year ago Sovereign Critical Infrastructure for Europe. We expanded and launched it for Canada. I recently preannounced it in India, and we'll continue to roll it out around the world. In addition to the work we're doing with the sovereign cloud providers like HUMAIN, G42 and other sovereign nations.

The fifth and final one is this acceleration we're seeing of the hybrid data center architecture with our enterprise customers. So our enterprise customers will be running AI applications in the cloud, but they're also investing heavily in private data centers. They want to run open-weight and open source models in their own data center. They want to train on their own data in their own data centers. And that's why we've seen 9 out of the last 11 quarters, we've seen double-digit order growth in our enterprise data center networking business. So we feel like each of these areas, all 5 of these are each are multiyear, multibillion.

And they're all -- they all feel like they're in relatively early stages. So that's what gives us the confidence on the sustainability. And I think on the readiness of the enterprise for AI. I think it's a lot of what I just described as well as a real focus on agentic security, agentic identity, agentic observability as well as just the new security architecture that's needed for the AI era. And so I was at one of the major banks in New York just a few hours ago before earnings and we had a long discussion about this very topic. And I think that's generally what we see going on.

Operator: Meta Marshall with Morgan Stanley.

Meta Marshall: Just a couple of questions. Just in terms of the strength in the Asia Pac orders this quarter. I assume kind of most of that is due to the sovereign clouds. But I just wanted to kind of get any further detail there. And then just on the security business and kind of what you're seeing there in terms of the Splunk business? I know we've had some license to subscription transitions, if you could just kind of give an update as to where we are there and kind of the impact of that to the security growth.

Charles Robbins: Thanks, Meta. I'd say APJC did show incredible growth, and it was very balanced. If you look across the segments, we had enterprise in excess of 30%, public sector in excess of 70%, service provider and cloud in triple digits. So it was -- and it was all theaters, all architectures, all segments. And again, I think to your point, it was sovereign demand, public sector demand, telco investment and great performance in the campus networking side. And so we see them also focused on the LDOS -- or the Last Day of Support opportunity in some of the post-Mythos refresh early activity. As it relates to -- what was the second question again?

Mark Patterson: Security.

Charles Robbins: Yes, security. Sorry. I'll let Mark talk a little bit about the Splunk numbers, but we actually saw some really good signs this quarter on the security front. So the first is that our core Cisco Security, ex Splunk, order growth was 15%, which is the best it's been in probably 3 years. We saw the firewall business, which is something the teams worked hard on refreshing and really becoming competitive again. We saw the third consecutive quarter in excess of 30% growth. And then our Zero Trust secure access portfolio. This is a product that didn't exist 3 years ago. We now have 5,400 customers. We added almost 800 more customers in Q1.

And that is -- that's a technology that is Zero Trust, and there's also an element of it that is AI defense-related. And at the AI defense layer, we're now protecting 2 trillion tokens per month. And we're approaching 500 customers have that AI Defense. And so we're seeing good activity there. We're using Splunk as a platform for AI security. And we're also seeing customers really buy into the security and networking coming together on monitoring workloads, east-west traffic segmentation with technologies like Hypershield and Live Protect. And so we see a lot of good positive momentum in the security front. Mark, do you want to talk about Splunk and just the data there?

Mark Patterson: Yes. And just to add one data point to the Asia Pac question that you had. We saw really good strength in several countries, actually within Asia. Japan, really strong. China, Singapore, Korea and then Australia is part of that as well, and they had a really good quarter, too. So really good breadth in terms of the overall growth.

And on the security front, I think as we exited last year and we gave you the outlook for this year, we said that Q1 to really expect kind of low single-digit revenue growth and that Splunk would turn positive and begin to improve as we move through the year as well as the overall security number to really improve as we went through the year. So I'd say with the 7% that we posted in Q1, I think we're at a really a little bit above the expectations that we set out for the year. And we feel good about turning the corner on both of those and starting to see improved growth as we move through the year.

Operator: Joseph Cardoso with JPMorgan.

Joseph Cardoso: For the first one, I wanted to just get a temperature check on the supply side of things. I think over the last couple of quarters, you sounded pretty confident around your ability to secure what you need and then some probably -- and was just curious with a couple of more months of visibility under the belt, any change on that front, particularly around things around silicon, memory and whether you're seeing anything tightening? And then as the second question, and maybe this is piggybacking off of Amit's earlier question. Gross margins are holding up much better than envisioned even relative to the 2 -- or looking at the 2Q guide there.

I was hoping you can maybe help bridge between pricing cost and mix behind that. And then as we think about the larger AI target for the year, any way to think about gross margin progression through fiscal '27 and how we should be thinking about the exit run rate and the puts and takes?

Mark Patterson: Yes. Let me take the first one, and then I may get you to just repeat the second one real quick. The first one just around supply. We feel really good. The team has done a great job in really leveraging our financial strength. And looking all up and down the supply chain, whether it's silicon, it's PCBs, it's power supplies, it's memory and optics as well and really engaging where we need to in terms of long-term strategic supply agreements. You saw a new multiyear memory agreement that we entered into this quarter. So a big increase, obviously, in our advanced purchase commitments as a result.

We're seeing not a lot of issues at all really in terms of supply. The biggest one there is probably optics. And I think that we see that improving here over the next quarter. But overall, I feel really good about the supply that we have and the ability to meet not only the raised guide for the year, but I think that if demand turns out to be stronger, we can probably meet that as well. So and the second one, I'm sorry...

Charles Robbins: He was asking, he said gross margins are holding up better than perhaps what we expected. What are the contributors to staying or...

Mark Patterson: Yes. I think -- so we still have the same headwinds in terms of component prices and mix is the big thing in terms of hardware growth just in general, really outpacing the software growth that you're seeing. I think that for the year, most of the expectations were for a gross margin number at just under -- just shy of the 65%, and we're comfortable with that for the full year.

Operator: Simon Leopold with Raymond James.

Simon Leopold: First one, I wanted to ask was you guys have shown some real progress with the AI back-end success. Within the systems value, can you give us a rough idea of the mix between top of rack, switching in the spine versus the routing used for scale across? Rough order of magnitude split is all I'm looking for. And then as a follow-up, I'm just wondering if you could update us on how much of your growth has come from price changes versus unit growth? I know it's not precise, but also rough idea of that would be appreciated.

Charles Robbins: Yes, I'll take the first one, and then Mark, you can take the second one. We don't -- I don't have the breakdown exactly between those technologies. I think the way I would think about it is in the last 5 quarters, we've had 18 design wins and we've had them across scale-out architectures, both systems and then scale across and systems as well as optics. We talked about in the prepared remarks, 2 wins with the P200 for scale-across and then a 1.6 Terabit scale-out optics win. And so we just -- we're actually active in all the places that you mentioned. We just haven't given those numbers at that level of detail.

So Mark, do you want to talk about gross margin?

Mark Patterson: And maybe just to reiterate, we've talked about just the split between optics and systems being roughly 50-50. That will vary in any given quarter, but that continues to be sort of what we're seeing. In terms of the price versus unit and Simon, I appreciate that you mentioned it, it's certainly an imperfect science. But I think that the estimate that we gave you a quarter ago was that we expected revenue to be impacted about 5 points for the full year. I think that's probably a pretty good estimate still for the year.

Operator: David Vogt with UBS.

David Vogt: So maybe, Chuck, the first question. I know you don't want to be on this AI order treadmill. But just by doing some really quick math, it looks like we had a little bit of a sequential downtick in AI orders taken from hyperscalers in the quarter. I know the industry is somewhat lumpy and not linear. Can you maybe talk to kind of how you're seeing that develop as the year progress and characterize kind of like the effect of your conversation? Because I think later in the deck, you talked about potential wins for not only P200, but G200, G300 and other programs.

So I'd just love to kind of get your thoughts on how those conversations are progressing? And I'll give Mark my follow-up quickly. Maybe just a follow-up to Simon's question. I just kind of think your AI revenue guide. It looks like incremental growth coming from AI revenue today is about 2 points faster than we thought 90 days ago and pricing is relatively the same. Is it sort of the assumption that campus is kind of that incremental driver that kind of rounds out the upside to the outlook versus 90 days? Is that the right way to think about kind of the moving parts in the revenue guide?

Charles Robbins: Yes, David, on the AI order front, I'd say, on a year-over-year basis, we saw really nice growth. And I think if you look back at last year, I don't remember the exact number, but it was $1 billion and some change in year 1 -- in first quarter, and then we ended up $9.3 billion as it escalated during the year. So while I don't expect there's normal linearity in this business at all. I think you're right, it's going to be lumpy, and there's going to be some quarters that are going to be big, others that are going to be smaller.

And that's why we made the decision just to go to the revenue side so that it's just cleaner. And we don't get into these gyrations about what -- how many orders did you take in week 7 of Q1. Some color around the different technologies. Obviously, the P200 is being very successful. We've had lots of wins with the G200 in the scale-out space, as we talked about. I will say that we've begun to ship the G300 now, and it's now in labs, which is a really good sign for us, and we feel really good about that. And obviously, we continue to have more wins in the optics space.

The design win we had this quarter at the 1.6 Terabit optic was a client side win. And it was our first client side optics win at this particular hyperscaler. So we feel good about the continued progress that we make in that space.

Mark Patterson: Yes. David, just coming back to you on the numbers. So we've taken our guide up to 19% on the top line. About 8 points of that growth is attributable to hyperscale and 11 points then would be attributable to our ex hyperscale or more sort of our core business. So if you break down the overall guide, we raised by $2.5 billion. $1.5 billion of that was hyperscale and $1 billion was our core sort of ex hyperscale business. And in terms of what's driving it, you mentioned campus, but it's much broader than that. It's not just campus.

I think if you look at really all of the product families within networking, for example, every one of them grew double digits this past quarter. So we also saw double-digit growth across every region and double-digit growth across every market -- customer market as well. So it's broad-based and the core continues to do quite well.

Operator: Karl Ackerman with BNP Paribas.

Samuel Feldman: This is Sam Feldman on for Karl Ackerman. So we believe that Silicon One is primarily integrated into your AI products, while enterprise products rely on external silicon. First, has there been any change in thinking to the fiscal '29 integration time line? And then second, what does the $9 billion of AI sales imply with respect to your mix of internal silicon?

Charles Robbins: Okay. I would -- let me answer the first one, and I'm not sure I know the answer to the second one. So on the first one, we do have now Silicon One that has begun to be implemented in portions of our enterprise networking portfolio, in the fiscal year '29 target of having all of it converted is still on track. So we feel good about where we're headed with that. On the second question. You asked the split between Silicon One revenue and non-Silicon One revenue. Obviously, in the hyperscaler space, in the $9 billion, that's other than optics, it's 100% Silicon One-based platforms.

Operator: Gianni Conti with Deutsche Bank.

Gianmarco Conti: Congrats on the quarter. Perhaps one on P200 and scale-across. You won 3 P200 scale-across design wins with several hyperscalers. My question is, what's the catalyst to Silicon One winning those sockets? And how big could scale-across become as the model gets larger?

Charles Robbins: Thank you, Johnny. I think that it's about performance, it's about power consumption, and it's -- and I think that's it. I mean it's really about performance and power . And the -- and also there's just this whole focus on diversity of silicon inside the space. And I'd say if you want to talk about the size of this market, we did a study, and we think that bandwidth requirements are going to increase 14x in this space. So the TAM is quite large and continues to grow. So we see this as a great opportunity and we're really optimistic and pleased with the number of wins that we're getting with the P200.

Mark Patterson: Yes. And the other thing I'd just add is I think as you look at our offering, it's probably the most complete offering in the industry with silicon, the Acacia optics, optical, multi-rail to come in calendar '27. So I think we do a really -- we really measure up quite well here.

Operator: Atif Malik with Citi.

Adrienne Colby: It's Adrienne Colby for Atif Malik. I wanted to ask about the optics side of the business. I know in the past, you've talked about Acacia at about $1 billion or a little bit above that order run rate, didn't know if you could talk to if that's expanding. And then hoping to get a little bit of an update on the timing of Cisco's newer multi-rail line system? And also timing around the USFP product.

Mark Patterson: Yes. So thanks, Adrienne, for the question. I think on the optics side, yes, we see this as a really sizable opportunity for us and seeing a ton of growth there. We actually had a $1 billion quarter, just last quarter on the optic side. So it's growing substantially. Q1 was a record Q1 for us as well and really see the demand increasing there as we move forward.

Charles Robbins: And the USPF (sic) [ USFP ] platform is still a couple of years out, probably a few years out. And the multi-rail system, as I think Mark mentioned earlier, is the first few months of calendar '27.

Operator: Ben Bollin with Cleveland Research.

Benjamin Bollin: Could you talk about what we should expect from services. It's kind of come off its lows, but really not intensifying or accelerating. Any thoughts on when and how that gets better. And then as a follow-up, a little bit of a bigger picture question. It does seem like there's some high-level thoughts that raw material capacity adds are happening in the kind of picks and shovels raw material side of things, but maybe the volume of data center shells that come online into 2027, I guess, 2028 and beyond. Maybe there's more questions there.

Curious how you think about the potential imbalance where maybe we are in an oversupply situation from a raw material perspective and don't have anywhere to put that stuff in 2028 and beyond.

Mark Patterson: Yes, I'll take the first one. Ben, thanks for the question. So on the services piece, we've seen a significant uptick in hardware revenue. Hardware revenue actually grew over 50% for Q1. And the thing with services is it's ratable. And our hyperscalers don't attach a lot of services as well. So -- but what you're going to see is that business is going to continue to improve. We broke into the positive territory this quarter. I'd look for that to have some continued improvement as we move through the year.

Charles Robbins: And on the demand side, from a data center perspective and especially as we get out to '28 and beyond, I actually don't foresee. I think the geopolitical side of it is going to get worked out. And I think that -- I think given the demand that we see today, these data centers are going to get built. And so I don't think we don't feel like there's much risk on the resources side and anything that would surprise us relative to the data center build out over the next 2 years.

Operator: Michael Ng with Goldman Sachs.

Michael Ng: First, for Mark, I was just wondering if you could -- just provide a little bit more color around the margin outlook for the second quarter and for the full year. I think it was better than expectations despite the growing hardware and hyperscale mix. So what's been coming in better? And then, Chuck, just as a follow-up, I was just wondering if you were seeing any early signs of demand shifting outside of the United States for data center AI networking, just given the results of the midterms and the risk of capacity becoming harder to originate in the U.S.

Mark Patterson: Michael, so I'll take the first one. Yes. I think that the 2 big factors, obviously, impacting gross margin are the component cost increases that we've been seeing. There's a lot of efforts to combat that, including some of the price increases that you've seen, but also these long-term agreements that we're entering into to get supply and in some cases, prices as well, and then there's the mix. But offsetting that is really a number of productivity improvements that we've had around memory as well as just the scale and efficiency that we're able to drive at this much higher revenue level than we've seen in the past.

I actually think that gross margins are pretty much right on target. We were just slightly above the midpoint of our guide for Q1. And I think that most have expectations of full year gross margin of just shy of 65%. And I think that's a reasonable expectation. I think that we should be right on there.

Charles Robbins: And then Michael, on the data center question that you have, we have not seen a shift of demand that we expected in the United States to go outside the country as of yet. And I candidly don't expect that to be the case. I think you've got a combination of -- you still have plenty of states that have not declared moratoriums, you have -- obviously, you've got to have the energy right in those states.

But we've also seen some of the -- at least one of the governors has come out and said that they're open to data center builds, they just need to be done in the right way with concern and commitments to the community, concerns and commitment to maintaining energy costs and things of that nature. I think this is too important to our country, and it's too important to the industry. It will get resolved. And I think that the last thing we want is for data centers to end up being built outside the United States. And I think that's how this will end up. But obviously, there's a lot of political dynamics in it right now.

But thank you for the question.

Ahmed Sami Badri: Thank you, Mike. I'm going to hand it over to Chuck for some closing remarks.

Charles Robbins: Yes, I just want to thank everyone for joining us today. And I want to reinforce just how confident I am in Cisco's future and candidly the sustainability of the performance that we've seen. We're executing really well against our strategy. The teams are doing a great job. We're delivering strong results. And we're seeing the investments that we've made over the past several years, in some cases, a decade, they're translating into real momentum. The other thing I would point out is that this business is more efficient and has greater scale than anything I've seen.

If you just look at our revenue based on the guide we put up today and you go back 2 years, we're going to generate $19 billion in incremental revenue, and we're going to do that with less headcount than we had at the beginning, 2 years ago. And so the efficiency that we're seeing is just unprecedented and the teams are doing an incredible job of scaling the business and also driving productivity. I also gained a lot of confidence from what I'm hearing from our customers and our partners. We're truly in the very early stages of a multiyear networking super cycle, and we're confident in our ability to continue capturing the opportunity that it represents for Cisco.

I believe we have the right strategy, we have the innovation, the right team, and we're focused on translating that into sustained profitable growth. I want to thank our teams for their continued execution and thank our customers, partners and shareholders for their trust. And Sami, I'll turn it back over to you.

Ahmed Sami Badri: Thank you, Chuck. Cisco's next quarterly call, which will outline our second quarter fiscal year 2027 results, will be on Wednesday, February 10, 2027, at 1:30 p.m. Pacific Time, 4:30 PM Eastern time. This concludes today's call. If you have any further questions, please feel free to contact the Cisco Investor Relations department. And we thank you very much for joining the call today.

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